<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 11, 1998
REGISTRATION NO. 333-58641
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1 TO
PREFERRED STOCK EXCHANGE ON
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
CONCENTRIC NETWORK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 4813 65-0257497
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
10590 NORTH TANTAU AVENUE
CUPERTINO, CA 95014
(408) 342-2800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
HENRY R. NOTHHAFT
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
CONCENTRIC NETWORK CORPORATION
10590 NORTH TANTAU AVENUE
CUPERTINO, CA 95014
(408) 342-2800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
DAVID J. SEGRE, ESQ.
PAUL B. SHINN, ESQ.
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
(650) 493-9300
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=============================================================================================
PROPOSED
MAXIMUM PROPOSED
OFFERING MAXIMUM
AMOUNT PRICE AGGREGATE AMOUNT OF
TITLE OF CLASS OF TO BE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) UNIT(2)(3) PRICE(2)(3) FEE(1)
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<S> <C> <C> <C> <C>
13 1/2% Series B Senior Redeemable
Exchangeable Preferred Stock due 295,000
2010................................ shares $1,000 $150,000,000 $44,250
=============================================================================================
</TABLE>
(1) Includes 145,000 shares of 13 1/2% Series B Senior Redeemable Exchangeable
Preferred Stock due 2010 that may be issued as dividends on the 13 1/2%
Series B Senior Redeemable Exchangeable Preferred Stock due 2010. No
additional registration fee is payable in respect thereof. The
registration fee was paid in connection with the Company's initial filing.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f) under the Securities Act of 1933, as amended, as
the market value of securities to be cancelled in the exchange.
(3) Based on bid price of $1,000 per share of Series A Preferred (as defined)
at close of business on June 30, 1998. There was no ask price for the
Series A Preferred on such date.
----------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
$150,000,000
[CONCENTRIC LOGO]
OFFER TO EXCHANGE
13 1/2% SERIES B SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK DUE 2010
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR ALL OUTSTANDING
13 1/2% SERIES A SENIOR REDEEMABLE EXCHANGEABLE
PREFERRED STOCK DUE 2010
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON SEPTEMBER 9, 1998, UNLESS EXTENDED.
Concentric Network Corporation, a Delaware corporation ("Concentric" or the
"Company") hereby offers upon the terms and subject to the conditions set
forth in this Prospectus (the "Prospectus") and the accompanying Letter of
Transmittal (the "Letter of Transmittal") (the offering pursuant to the
Prospectus together with the Letter of Transmittal are herein referred to as
the "Exchange Offer") to exchange up to an aggregate of 150,000 shares of its
13 1/2% Series B Senior Redeemable Exchangeable Preferred Stock due 2010 (as
defined in Company's Certificate of Designation as filed with the Delaware
Secretary of State) (herein the "Series B Preferred") (capitalized terms
followed by the parenthetical remark "(as defined)" and not otherwise defined
herein shall have the meanings given to them in the Certificate of
Designation) for up to 150,000 shares of the Company's outstanding 13 1/2%
Series A Senior Redeemable Exchangeable Preferred Stock, due 2010 (herein the
"Series A Preferred"). The terms of the Series B Preferred are substantially
identical in all material respects to those of the Series A Preferred, except
that the Series B Preferred (i) will have been registered under the Securities
Act of 1933, as amended (the "Securities Act"), and therefore will not be
subject to certain restrictions on transfer applicable to the Series A
Preferred and (ii) will not be entitled to registration or other rights under
the Registration Rights Agreement (as defined) including the provision in the
Registration Rights Agreement for payment of Liquidated Damages (as defined)
upon failure by the Company to consummate the Exchange Offer or the occurrence
of certain other events. See "Description of Preferred Stock." The Series B
Preferred will be issued pursuant to and the holders thereof (herein the "New
Holders") will be entitled to the rights, preferences and privileges inuring
to the Series B Preferred as set forth in the Certificate of Designation. In
the event that the Exchange Offer is consummated, any Series A Preferred which
remain outstanding after consummation of the Exchange Offer and the Series B
Preferred issued in the Exchange Offer will vote together as a single class
for purposes of determining whether Holders of the requisite percentage of
shares of Preferred Stock (as defined below) have taken certain actions or
exercised certain rights under the Certificate of Designation. See
"Description of Series B Preferred" and "The Exchange Offer." Holders of
Series A Preferred are referred to herein as "Existing Holders" and Existing
Holders together with New Holders are referred to herein collectively as
"Holders". The Series B Preferred together with the Series A Preferred are
referred to herein collectively as the "Preferred Stock".
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED
TO EXISTING HOLDERS ON OR ABOUT AUGUST 11, 1998.
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH EXISTING HOLDERS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE LETTER OF TRANSMITTAL. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
August 11, 1998
<PAGE>
(continuation of cover page)
On June 8, 1998, the Company issued 150,000 shares of Series A Preferred
(the "Offering"). The Series A Preferred were issued pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. The Series B Preferred
are being offered hereunder in order to satisfy certain obligations of the
Company under the Registration Rights Agreement by and among the Company and
Bear, Stearns & Co., Inc., First Union Capital Markets, CIBC Oppenheimer, UBS
Securities LLC and Libra Investments, Inc. as the initial purchasers (the
"Initial Purchasers") of the Series A Preferred. The Exchange Offer is
intended to satisfy the Company's obligations under the Registration Rights
Agreement. Once the Exchange Offer is consummated, the Company generally will
have no further obligations to register any of the Series A Preferred not
tendered by Existing Holders for exchange. See "Risk Factors--Consequences to
Non-Tendering Holders of Series A Preferred."
Each share of Preferred Stock will have a liquidation preference of $1,000
per share. Dividends on the Preferred Stock will accrue at a rate of 13 1/2%
per annum of the liquidation preference thereof and will be payable quarterly
in arrears on March 1, June 1, September 1, and December 1 of each year (each
a "Dividend Payment Date"), commencing on September 1, 1998. Dividends will be
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 Preferred Stock (including fractional shares)
having an aggregate liquidation preference equal to the amount of such
dividends. The Preferred Stock will be redeemable at the option of the
Company, in whole or in part, at any time on or after June 1, 2003, at the
redemption prices set forth herein, plus accumulated and unpaid dividends and
Liquidated Damages (as defined), if any, 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 Preferred Stock from the net proceeds
of one or more Public Equity Offerings (as defined) or one or more sales of
its Common Stock (as defined) (other than Disqualified Stock (as defined)) to
one or more Strategic Investors (as defined). The Preferred Stock is subject
to mandatory redemption at its liquidation preference, plus accumulated and
unpaid dividends and Liquidated Damages, if any, on June 1, 2010 out of any
funds legally available therefor. Upon a Change of Control (as defined), the
Company will be required, subject to certain conditions and after the Existing
Senior Notes Maturity Date (as defined), to offer to purchase all outstanding
shares of the Preferred Stock at a price equal to 101% of the Liquidation
Preference thereof plus accumulated and unpaid dividends and Liquidated
Damages, if any, to the date of purchase, or, if such offer to purchase cannot
be made, to reset the dividend rate on the Preferred Stock so that, after such
reset, the Preferred Stock would have a market value of 101% of the
Liquidation Preference thereof. See "Description of the Preferred Stock."
The Preferred Stock will rank (i) senior to all Junior Securities (as
defined); (ii) on a parity with any Parity Securities (as defined); and (iii)
junior to each class of Senior Securities (as defined). In addition, the
Preferred Stock will rank junior in right of payment to all indebtedness and
other obligations of the Company and its subsidiaries. As of March 31, 1998,
the Preferred Stock would have been junior in right of payment to
approximately $195.0 million of total indebtedness and other obligations of
the Company and its subsidiaries. Following the Offering, the Company will
have the ability to issue additional shares of Preferred Stock in lieu of
paying cash dividends through June 1, 2003. See "Description of Preferred
Stock--Ranking."
On any scheduled Dividend Payment Date, subject to certain conditions, the
Company may, at its option, exchange, in whole but not in part, all of the
shares of Preferred Stock then outstanding for the Company's 13 1/2% Senior
Subordinated Debentures due 2010 (the "Exchange Debentures"). See "Description
of Preferred Stock--Exchange."
Interest on the Exchange Debentures will accrue at a rate of 13 1/2% per
annum and will be payable semi-annually in arrears on June 1 and December 1 of
each year, commencing on the first such date after the issuance date of the
Exchange Debentures. Interest on the Exchange Debentures 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 Exchange Debentures will be
redeemable at the option of the Company, in whole or in part, at any time on
or after June 1,
ii
<PAGE>
2003 at the redemption prices set forth herein, plus accrued and unpaid
interest and Liquidated Damages, if any, 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 aggregate principal amount of Exchange Debentures
originally issued from the net proceeds of one or more underwritten public
offerings of its Common Stock or one or more sales of its Capital Stock (other
than Disqualified Stock) to one or more Strategic Investors. Upon a Change of
Control, the Company will be required, subject to certain conditions and after
the Existing Senior Notes Maturity Date, to offer to each holder of Exchange
Debentures to purchase all or any part of such holder's Exchange Debentures at
a price equal to 101% of the aggregate principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if any to the date of purchase,
or, if such offer to purchase cannot be made, to reset the interest rate on
the Exchange Debentures so that, after such reset, the Exchange Debentures
would have a market value of 101% of the aggregate principal amount thereof.
See "Description of the Exchange Debentures." The Preferred Stock and the
Exchange Debentures are sometimes referred to herein as the "Securities."
If the date of an Event of Default (as defined) occurs on or prior to the
Existing Senior Notes Maturity Date, the remedies of holders of the Exchange
Debentures will be limited as set forth in this paragraph. Upon the
acceleration of any Designated Senior Debt by the holders thereof, the
interest rate payable with respect to the Exchange Debentures will be
increased by one-half of one percent per annum for the 90-day period following
such Event of Default, which rate will further increase by one-half of one
percent per annum with respect to each subsequent 90-day period during which
such Event of Default is continuing (or any other Event of Default is
occurring while such initial Event of Default is continuing), up to a maximum
aggregate increase in interest rate of two percent (2%) per annum. Any
interest rate increase effected pursuant to the foregoing shall only be
effective during such time that an Event of Default is continuing and prior to
the Existing Senior Note Maturity Date. Subsequent to the Existing Senior
Notes Maturity Date, the Trustee and holders of the Exchange Debentures will
have customary remedies upon the occurrence of an Event of Default. See
"Description of the Exchange Debentures--Events of Default."
The Series B Preferred generally will be issued in the form of Global
Certificates (as defined) which will be deposited with, or on behalf of, the
Depositary (as defined) and registered in its name or in the name of a nominee
of the Depositary. Beneficial interests in the Global Certificates
representing the Series B Preferred will be shown on, and transfers thereof
will be effected through, records maintained by DTC and its participants. See
"Book-Entry; Delivery and Form."
The Company will accept for exchange any and all Series A Preferred which
are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City
time, on September 9, 1998 (the "Exchange Offer Registration Statement", which
term shall encompass all amendments, exhibits, annexes and schedules thereto),
unless extended by the Company in its sole discretion (the "Expiration Date").
The Expiration Date will not in any event be extended to a date later than
September 23, 1998 (30 business days after effectiveness of the Exchange Offer
Registration Statement). Tenders of Series A Preferred may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date. In the
event the Company terminates the Exchange Offer and does not accept for
exchange any Series A Preferred with respect to the Exchange Offer, the
Company will promptly return the Series A Preferred to the Existing Holders.
The Exchange Offer is not conditioned upon any minimum principal amount of
Series A Preferred being tendered for exchange, but is subject to certain
events and conditions that may be waived by the Company and to the terms and
provisions of the Registration Rights Agreement.
The Company is making the Exchange Offer in reliance on the position of the
staff of the Division of Corporation Finance (the "Staff") of the Securities
and Exchange Commission (the "Commission") as set forth in the Staff's Exxon
Capital Holdings Corporation no-action letter (available May 13, 1988) (the
"Exxon Capital No-Action Letter"), Morgan Stanley & Co. Incorporated no-action
letter (available June 5, 1991) (the "Morgan Stanley No-Action Letter"),
Shearman & Sterling no-action letter (available July 2, 1993) (the "Shearman &
Sterling No-Action Letter"), and other interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letter addressing such matters and there can be no assurance that
the Staff would make a similar determination with respect to the Exchange
Offer as it has in such
iii
<PAGE>
interpretive letters to third parties. Based on these interpretations by the
Staff, and subject to the two immediately following sentences, the Company
believes that Series B Preferred issued pursuant to this Exchange Offer in
exchange for Series A Preferred may be offered for resale, resold and
otherwise transferred by such New Holder (other than a New Holder who is a
broker-dealer) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Series B
Preferred are acquired in the ordinary course of such New Holder's business
and that such New Holder is not participating, and has no arrangement or
understanding with any person to participate, in a distribution (within the
meaning of the Securities Act) of such Series B Preferred. However, any
Existing Holder who (i) is an "affiliate" of the Company (within the meaning
of Rule 405 under the Securities Act), (ii) does not acquire such Series B
Preferred in the ordinary course of its business, (iii) intends to participate
in the Exchange Offer for the purpose of distributing Series B Preferred, or
(iv) is a broker-dealer who purchased such Series A Preferred directly from
the Company, (a) will not be able to rely on the interpretations of the Staff
set forth in the above-mentioned interpretive letters, (b) will not be
permitted or entitled to tender such Series A Preferred in the Exchange Offer
and (c) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or other transfer of such
Series A Preferred unless such sale is made pursuant to an exemption from such
requirements. In addition, as described below, if any broker-dealer holds
Series A Preferred acquired for its own account as a result of market-making
or other trading activities and exchanges such Series A Preferred for Series B
Preferred (a "Participating Broker-Dealer"), then such Participating Broker-
Dealer may be deemed a statutory "underwriter" within the meaning of the
Securities Act and must deliver a prospectus meeting the requirements of the
Securities Act in connection with any resales of such Series B Preferred. See
"Plan of Distribution".
Each Existing Holder who wishes to exchange Series A Preferred for Series B
Preferred in the Exchange Offer will be required to represent that (i) it is
not an affiliate of the Company, (ii) any Series B Preferred to be received by
it are being acquired in the ordinary course of its business, and (iii) it has
no arrangement or understanding with any person to participate in a
distribution (within the meaning of the Securities Act) of such Series B
Preferred. Each broker-dealer that receives Series B Preferred for its own
account pursuant to the Exchange Offer must acknowledge that it acquired the
Series A Preferred for its own account as a result of market-making activities
or other trading activities (and not directly from the Company) and must agree
that it will deliver a prospectus meeting the requirements of the Securities
Act in connection with any resale of such Series B Preferred. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. Based on the position
taken by the Staff in the interpretive letters referred to above, the Company
believes that Participating Broker-Dealers may fulfill their prospectus
delivery requirements with respect to the Series B Preferred received upon
exchange of such Series A Preferred with a prospectus meeting the requirements
of the Securities Act, which may be the prospectus prepared for an exchange
offer so long as it contains a description of the plan of distribution with
respect to the resale of such Series B Preferred. Accordingly, this
Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer during the period referred to below in
connection with resales of Series B Preferred received in exchange for Series
A Preferred where such Series A Preferred were acquired by such Participating
Broker-Dealer for its own account as a result of market-making or other
trading activities. Subject to certain provisions set forth in the
Registration Rights Agreement, the Company shall use its best efforts to keep
the Exchange Offer Registration Statement continuously effective, supplemented
and amended to the extent necessary to ensure that it is available for sales
of Series B Preferred by Participating Broker-Dealers, and to ensure that the
Exchange Offer Registration Statement conforms with the requirements of the
Act and the policies, rules and regulations of the Commission as announced
from time to time, for a period expiring approximately 180 days from the date
on which the Exchange Offer Registration Statement is declared effective. See
"Plan of Distribution." Any Participating Broker-Dealer who is an affiliate of
the Company may not rely on such interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. See "The Exchange Offer--Resales of
Series B Preferred."
Each Participating Broker-Dealer who surrenders Series A Preferred pursuant
to the Exchange Offer will be deemed to have agreed, by execution of the
Letter of Transmittal, that, upon receipt of notice from the Company
iv
<PAGE>
of the occurrence of any event or the discovery of any fact which makes any
statement contained or incorporated by reference in this Prospectus untrue in
any material respect or which causes this Prospectus to omit to state a
material fact necessary in order to make the statements contained or
incorporated by reference herein, in light of the circumstances under which
they were made, not misleading or of the occurrence of certain other events
specified in the Registration Rights Agreement, such Participating Broker-
Dealer will suspend the sale of Series B Preferred pursuant to this Prospectus
until the Company has amended or supplemented this Prospectus to correct such
misstatement or omission and has furnished copies of the amended or
supplemented Prospectus to such Participating Broker-Dealer or the Company has
given notice that the sale of the Series B Preferred may be resumed, as the
case may be.
The Series B Preferred will be a new issue of securities for which there
currently is no established trading market. Although the Initial Purchasers
have informed the Company that they currently intend to make a market in the
Series B Preferred, they are not obligated to do so, and any such market
making may be discontinued at any time without notice. As the Series A
Preferred were issued and the Series B Preferred are being issued to a limited
number of institutions who typically hold similar securities for investment,
the Company does not expect that an active public market for the Series B
Preferred will develop. Accordingly, there can be no assurance as to the
development, liquidity or maintenance of any market for the Series B
Preferred. The Series A Preferred have been approved for trading in The Portal
Market. The Company does not currently intend to apply for listing of the
Series B Preferred on any securities exchange or for quotation through the
Nasdaq Stock Market. See "Risk Factors--Restrictions on Resale; Absence of
Public Market for the Series A Preferred."
Any Series A Preferred not tendered and accepted in the Exchange Offer will
remain outstanding and will be entitled to all the same rights and will be
subject to the same limitations applicable thereto under the Certificate of
Designation (except for those rights which terminate upon consummation of the
Exchange Offer). Following consummation of the Exchange Offer, the Existing
Holders will continue to be subject to the existing restrictions upon transfer
thereof and the Company will have no further obligation to such Existing
Holders (except for limited instances involving Existing Holders that are not
eligible to participate in the Exchange Offer) to provide for registration
under the Securities Act of the Series A Preferred held by them. To the extent
that Series A Preferred are tendered and accepted in the Exchange Offer, an
Existing Holder's ability to sell untendered Series A Preferred could be
adversely affected. See "Summary--Certain Consequences of a Failure to
Exchange Series A Preferred" and "Risk Factors".
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF SERIES A PREFERRED ARE URGED TO READ THIS PROSPECTUS
AND THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO
TENDER THEIR SERIES A PREFERRED PURSUANT TO THE EXCHANGE OFFER.
The Company has agreed to pay all expenses of the Exchange Offer. See "The
Exchange Offer--Fees and Expenses."
The Company will not receive any cash proceeds from the issuance of the
Series B Preferred offered hereby. No dealer-manager is being used in
connection with this Exchange Offer. See "Use of Proceeds" and "Plan of
Distribution."
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SERIES B PREFERRED OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE
EXCHANGE NOTES TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO
MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY
v
<PAGE>
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
UNTIL NOVEMBER 10, 1998 (90 DAYS AFTER COMMENCEMENT OF THE EXCHANGE OFFER),
ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS
IN CONNECTION WITH SUCH TRANSACTION.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 pursuant to the Securities Act, and the rules and regulations promulgated
thereunder, covering the Series B Preferred offered hereby (the "Exchange
Offer Registration Statement"). This Prospectus does not contain all the
information set forth in the Exchange Offer Registration Statement. For
further information with respect to the Company and the Exchange Offer,
reference is made to the Exchange Offer Registration Statement. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document referred to are necessarily incomplete. With respect to each such
contract, agreement or other document filed as an exhibit to the Exchange
Offer Registration Statement, reference is made to the exhibit for a more
complete description of the document or matter involved, and each such
statement shall be deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy and information statements
and other information with the Commission. Copies of such materials can be
obtained by mail from the Public Reference Section of the Commission, at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, such reports, proxy and information statements and other
information can be inspected and copied at the public reference facility
referenced above and at the SEC's regional offices at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World
Trade Center, Suite 1300, New York, New York 10048. The Commission maintains a
web site (http:www.sec.gov) that contains reports, proxy and information
statements and other information regarding Company, such as the Company, that
file electronically with the Commission. In addition, for so long as any of
the Notes remain outstanding, the Company has agreed to make available to any
prospective purchaser of the Notes or beneficial owners of the Notes, in
connection with the sale thereof, the information required by Rule 144A(d)(4)
under the Securities Act. The Common Stock of the Company is traded on the
Nasdaq National Market. Reports of the Company may also be inspected at the
offices of the Nasdaq National Market, Nasdaq Operations, 1735 K Street, N.W.
Washington, D.C. 20006. Any such request and requests for the agreements
summarized herein should be directed to Peter Bergeron, Secretary, at the
Company's principal executive offices, 10590 N. Tantau Road, Cupertino,
California 95014, telephone number (408) 342-2800.
vi
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PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information, including "Risk Factors" and
the Financial Statements and Notes thereto, appearing elsewhere in this
Prospectus. Certain terms used in this Prospectus are defined in the Glossary
of Terms beginning on page G-1.
THE COMPANY
Concentric provides tailored, value-added Internet Protocol ("IP") based
network services for businesses and consumers. To provide these services, the
Company utilizes its low/fixed latency, high-throughput network, employing its
advanced network architecture and the Internet. Concentric's service offerings
for enterprises include virtual private networks ("VPNs"), dedicated access
facilities ("DAFs"), remote access services and Web hosting services. These
services enable enterprises to take advantage of standard Internet tools such
as browsers and high-performance servers for customized data communications
within an enterprise and between an enterprise and its suppliers, partners and
customers. These services combine the cost advantages, nationwide access and
standard protocols of public networks with the customization, high performance,
reliability and security of private networks. Among the current enterprise
customers are Acer America Corporation, Inc. ("Acer"), Intuit, Inc. ("Intuit"),
Netscape Communications Corporation ("Netscape"), Microsoft Corporation
("Microsoft") and WebTV Networks, Inc., a subsidiary of Microsoft ("WebTV").
Concentric's service offerings for consumers and small office/home office
customers include local Internet dial-up access and applications hosting
services.
Industry analysts expect the market size for both value-added IP data
networking services and Internet access to grow rapidly as businesses and
consumers increase their use of the Internet, intranets and privately managed
IP networks. According to industry analyst Forrester Research, Inc., the total
market for these services is projected to grow from $6.2 billion in 1997 to
approximately $49.7 billion in the year 2002, with approximately $27.9 billion
in the enterprise market segment and $21.8 billion in the consumer market
segment.
In addition to strong network performance capabilities, the Company believes
that several factors distinguish its ability to provide value-added network
services. These factors include: (i) excellent service quality; (ii) rapid
development time and flexibility in meeting custom applications requirements;
(iii) responsive customer support and effective account management, available
24 hours per day, seven days per week through the Company's 170 customer
service personnel; and (iv) the Company's technical expertise in devising cost-
effective network solutions for customers.
The Concentric network employs an advanced, geographically dispersed ATM and
frame relay backbone, SuperPOPs in 16 major metropolitan areas and 138
secondary and tertiary POPs in other cities, allowing dial-up network access in
the U.S. and Canada. In addition, the Company can provide analog dial-up, frame
relay, fractional T-1, T-1 and DS3 access to the network. The Concentric
network is engineered and managed to provide superior quality of service,
balancing several key performance criteria. The Company provides guaranteed
levels of service for DAFs to enterprise customers, and targets performance
benchmarks for connection success rates, latency levels and throughput for all
of its service offerings.
The Company was incorporated in Florida in 1991 under the name Engineered
Video Concepts, Inc., changed its name to Concentric Research Corporation in
1992 and commenced network operations in 1994. In 1995, the Company changed its
name to Concentric Network Corporation and reincorporated into Delaware in
1997. Unless the context otherwise requires, "Concentric" and the "Company"
refer to Concentric Network Corporation. The address of the Company's principal
executive offices is 10590 N. Tantau Avenue, Cupertino, CA 95014, and its
telephone number at that address is (408) 342-2800.
Concentric Network Corporation, The Concentric Network, Concentric
RemoteLink, ConcentricView, ConcentricHost, FlexChannel, FullChannel, Powered
by Concentric Network, and PremierConnect are among the trademarks of the
Company. This Offering Memorandum contains other product names, trade names and
trademarks of the Company and of other organizations.
1
<PAGE>
THE EXCHANGE OFFER
Securities Offered.......... 150,000 shares of 13 1/2% Series B Senior
Redeemable Exchangeable Preferred Stock due 2010,
par value $1.00 per share, plus any additional
shares issued from time to time in lieu of cash
dividends (the "Series B Preferred").
The Exchange Offer.......... One share of Series B Preferred in exchange for
each share of 13 1/2% Series A Preferred Senior
Redeemable Exchangeable Preferred Stock due 2010,
par value $1.00 per share issued by the Company
in June 1998 (the "Series A Preferred"). As of
the date hereof, 150,000 shares of Series A
Preferred are outstanding. The Company will issue
the Series B Preferred to New Holders on or
promptly after the Expiration Date.
Based on an interpretation by the Staff set forth
in no-action letters issued to third parties, the
Company believes that Series B Preferred issued
pursuant to the Exchange Offer in exchange for
Series A Preferred may be offered for resale,
resold and otherwise transferred by such New
Holder (other than any such New Holder which is
an affiliate of the Company or is a broker-dealer
which acquired such Series A Preferred directly
from the Company) without compliance with the
registration and prospectus delivery provisions
of the Securities Act, provided that such Series
B Preferred are acquired in the ordinary course
of such New Holder's business and that such New
Holder does not intend to participate and has no
arrangement or understanding with any person to
participate in the distribution of such Series B
Preferred. Each Participating Broker-Dealer that
acquired such Series A Preferred as a result of
market making or other trading activity and that
receives Series B Preferred for its own account
pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection
with any resale of such Series B Preferred. See
"Plan of Distribution."
Any Existing Holder who (i) is an affiliate of
the Company, (ii) does not acquire such Series B
Preferred in the ordinary course of its business,
(iii) tenders in the Exchange Offer with the
intention to participate, or for the purpose of
participating, in a distribution of the Series B
Preferred, or (iv) is a broker-dealer which
acquired such Series A Preferred directly from
the Company, could not rely on the position of
the Staff enunciated in the Exxon Capital No-
Action Letter, the Morgan Stanley No-Action
Letter or similar no-action letters and, in the
absence of an exemption therefrom, must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection
with the resale of the Series B Preferred.
Failure to comply with such requirements in such
instance may result in such Holder incurring
liability under the Securities Act for which the
Holder is not indemnified by the Company.
No federal or state regulatory requirements must
be complied with or approval obtained in
connection with the Exchange Offer, other than
registration requirements under the Securities
Act.
2
<PAGE>
Expiration Date.............
The Exchange Offer will expire at 5:00 p.m., New
York City time, on September 9, 1998 (20 business
days after effectiveness of the Exchange Offer
Registration Statement), unless the Exchange
Offer is extended by the Company in its sole
discretion, in which case the term "Expiration
Date" means the latest date and time to which the
Exchange Offer is extended.
Accumulated Dividends on
the Series B Preferred and
the Series A Preferred......
Each share of Series B Preferred will be entitled
to dividends from the most recent date to which
dividends have been paid on the Series A
Preferred or, if no such payment has been made,
from September 1, 1998. Holders of the Series A
Preferred whose Series A Preferred are accepted
for exchange will not receive accumulated
dividends on such Series A Preferred for any
period from and after the last Dividend Payment
Date to which interest has been paid or duly
provided for on such Series A Preferred prior to
the original issue date of the Series B Preferred
or, if no such dividends have been paid or duly
provided for, will not receive any accumulated
dividends on such Series A Preferred, and will be
deemed to have waived the right to receive any
dividends on such Series A Preferred accrued from
and after such Dividend Payment Date or, if no
such dividends have been paid or duly provided
for, from and after June 8, 1998.
Conditions to the Exchange The Exchange Offer is subject to certain
Offer....................... customary conditions, which may be waived by the
Company. See "The Exchange Offer--Conditions."
Procedures for Tendering
Series A Preferred.........
Each Existing Holder wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein, and
mail or otherwise deliver the Letter of
Transmittal, or such facsimile, together with the
Series A Preferred and any other required
documentation to the Exchange Agent (as defined)
at the address set forth in the Letter of
Transmittal. Persons holding Series A Preferred
through the Depositary (initially the Depository
Trust Company ("DTC")) and wishing to accept the
Exchange Offer must do so pursuant to DTC's
Automated Tender Offer Program ("ATOP"), by which
each tendering participant will agree to be bound
by the Letter of Transmittal. By executing or
agreeing to be bound by the Letter of
Transmittal, each Existing Holder will represent
to the Company that, among other things, the
Existing Holder or the person receiving such
Series B Preferred, whether or not such person is
the Existing Holder, is acquiring the Series B
Preferred in the ordinary course of business and
that neither the Existing Holder nor any such
other person has any arrangement or understanding
with any person to participate in the
distribution of such Series B Preferred within
the meaning of the Securities Act.
3
<PAGE>
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Series A Preferred are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender should contact such
registered Existing Holder promptly and instruct
such registered Existing Holder to tender on such
beneficial owner's behalf. If such beneficial
owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and
executing the Letter of Transmittal and
delivering its Series A Preferred, either make
appropriate arrangements to register ownership of
the Series A Preferred in such owner's name or
obtain a properly completed bond power from the
registered Existing Holder. The transfer of
registered ownership may take considerable time.
Guaranteed Delivery
Procedures.................. Existing Holders who wish to tender their Series
A Preferred and whose Series A Preferred are not
immediately available or who cannot deliver their
Series A Preferred, the Letter of Transmittal or
any other documents required by the Letter of
Transmittal to the Exchange Agent (or comply with
the procedures for book-entry transfer) prior to
the Expiration Date must tender their Series A
Preferred according to the guaranteed delivery
procedures set forth in "The Exchange Offer--
Guaranteed Delivery Procedures."
Withdrawal Rights........... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration
Date pursuant to the procedures described under
"The Exchange Offer--Withdrawals of Tenders."
Acceptance of Series A
Preferred and Delivery of
Series B Preferred.......... The Company will accept for exchange any and all
Series A Preferred that are properly tendered in
the Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date. The Series B
Preferred issued pursuant to the Exchange Offer
will be delivered promptly following the
Expiration Date. See "The Exchange Offer--Terms
of the Exchange Offer."
Certain Federal Income Tax
Considerations............. The exchange of the Series A Preferred for the
Series B Preferred pursuant to the Exchange Offer
should not constitute a taxable exchange to the
Holders thereof for U.S. Federal income tax
purposes. See "Certain Federal Income Tax
Considerations."
Effect on Holders of Series
A Preferred................. As a result of the making of this Exchange Offer,
the Company will have fulfilled certain of its
obligations under the Registration Rights
Agreement, and Existing Holders who do not tender
their Series A Preferred, except for limited
instances involving the Existing Holders that are
not eligible to participate in the Exchange
Offer, will not have any further registration
rights under the Registration Rights Agreement or
otherwise. See "The Exchange Offer--Purposes and
Effect of Exchange Offer." Such Existing Holders
will continue to hold the untendered Series A
Preferred and will be entitled to all the rights
and subject to all the limitations applicable
4
<PAGE>
thereto under the Certificate of Designation,
except to the extent such rights or limitations,
by their terms, terminate or cease to have
further effectiveness as a result of the Exchange
Offer. All untendered Series A Preferred will
continue to be subject to certain restrictions on
transfer. Accordingly, if any Series A Preferred
are tendered and accepted in the Exchange Offer,
the trading market for the untendered Series A
Preferred could be adversely affected. See "Risk
Factors--Consequences of Failure to Exchange."
Use of Proceeds............. There will be no proceeds to the Company from
exchange of Series A Preferred for Series B
Preferred pursuant to the Exchange Offer.
Exchange Agent.............. ChaseMellon Shareholder Services LLC.
5
<PAGE>
SUMMARY OF TERMS OF EXCHANGEABLE PREFERRED STOCK
AND EXCHANGE DEBENTURES
The rights, preferences and privileges of the Series B Preferred are the same
as the rights, preferences and privileges of the Series A Preferred (which they
replace) except that (i) the Series B Preferred have been registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof and (ii) the New Holders, except for limited instances involving the
Initial Purchasers and certain Existing Holders that are not eligible to
participate in the Exchange Offer, will not be entitled to further registration
rights under the Registration Rights Agreement, which rights will be satisfied
when the Exchange Offer is consummated, and will not be entitled to any
payments of Liquidated Damages (as defined) for failure to satisfy such rights.
From time to time in this Prospectus, the Series B Preferred and the Series A
Preferred are collectively referred to as the "Preferred Stock". See
"Description of Notes".
PREFERRED STOCK
Securities Offered.......... 150,000 shares of 13 1/2% Series B Senior
Redeemable Exchangeable Preferred Stock due 2010,
par value $1.00 per share, plus any additional
shares issued from time to time in lieu of cash
dividends.
Mandatory Redemption........ The Preferred Stock is subject to mandatory
redemption at their Liquidation Preference, plus
accumulated and unpaid dividends and Liquidated
Damages (as defined), if any, on June 1, 2010 out
of any funds legally available therefor.
Dividends................... Dividends on the Preferred Stock will accumulate
at a rate of 13 1/2% per annum of the Liquidation
Preference thereof and will be payable quarterly
in arrears on March 1, June 1, September 1 and
December 1 of each year (each a "Dividend Payment
Date") commencing September 1, 1998. Dividends
will be 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 Preferred Stock (including fractional
shares) having an aggregate Liquidation
Preference equal to the amount of such dividends.
Liquidation Preference...... $1,000 per share.
Ranking..................... The Preferred Stock will rank (i) senior to all
Junior Securities (as defined herein); (ii) on a
parity with any Parity Securities (as defined
herein); and (iii) junior to each class of Senior
Securities (as defined herein). In addition, the
Preferred Stock will rank junior in right of
payment to all indebtedness and other obligations
of the Company and its subsidiaries. As of March
31, 1998, the Preferred Shares would have been
junior in right of payment to approximately
$195.0 million of total indebtedness and other
obligations of the Company and its subsidiaries.
See "Description of Preferred Stock--Ranking."
Optional Redemption......... The Preferred Stock will be redeemable at the
option of the Company, in whole or in part, at
any time on or after June 1, 2003 at the
redemption prices set forth herein, plus
accumulated and unpaid dividends and Liquidated
Damages, if any, to the date of
6
<PAGE>
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 Preferred
Stock from the net proceeds of one or more Public
Equity Offerings or one or more sales of its
Common Stock (other than Disqualified Stock) to
one or more Strategic Investors. See "Description
of Preferred Shares--Redemption--Optional
Redemption."
Change of Control........... Following the occurrence of a Change of Control
(as defined below), the Company will be required
to make an offer to purchase all outstanding
shares of the Preferred Stock (a "Change of
Control Offer") at a purchase price equal to 101%
of Liquidated Preference thereof, plus
accumulated and unpaid dividends and Liquidated
Damages, if any, to the date of purchase;
provided, however, that no such Change of Control
Offer shall be required to be made on or prior to
the Existing Senior Notes Maturity Date (as
defined). If the Change of Control Offer would
not be permitted by reason of the foregoing
proviso, then, in lieu thereof, the holders of
two-thirds of the Preferred Stock will be
entitled to designate an Independent Financial
Advisor (as defined) to determine, within 20 days
of such designation, in the opinion of such firm,
the appropriate dividend rate that the Preferred
Stock should bear so that, after such reset, the
Preferred Stock would have a market value of 101%
of the Liquidation Preference. If, for any reason
and within 15 days of the designation of an
Independent Financial Advisor by the holders,
such Independent Financial Advisor is
unacceptable to the Company, the Company shall
designate a second Independent Financial Advisor
to determine, within 15 days of such designation,
in its opinion, such an appropriate reset
dividend rate for the Preferred Stock. In the
event that the two Independent Financial Advisors
cannot agree, within 25 days of the designation
of an Independent Financial Advisor by the
holders of two-thirds of the Preferred Stock, on
the appropriate reset dividend rate, the two
Independent Financial Advisors shall, within 10
days of such 25th day, designate a third
Independent Financial Advisor, which, within 15
days of designation, will determine, in its
opinion, such an appropriate reset rate which is
between the two rates selected by the first two
Independent Financial Advisors; provided,
however, that the reset rate shall in no event be
less than 13 1/2% per annum nor greater than 15
1/2% per annum. The reasonable fees and expenses,
including reasonable fees and expenses of legal
counsel, if any, and customary indemnification,
of each of the three above-referenced Independent
Financial Advisors shall be borne by the Company.
Upon the determination of the reset rate, the
Preferred Stock shall accumulate dividends at the
reset rate as of the date of occurrence of the
Change of Control. The Company may not have
available sufficient funds or the financial
resources necessary to satisfy its obligations to
repurchase the Preferred Stock and other
securities that may become repayable upon a
Change of Control. See "Risk Factors--Change of
Control" and "Description of Preferred Stock--
Change of Control."
7
<PAGE>
Certain Covenants........... The Certificate of Designation (as defined) will
contain certain covenants, including, among
others, covenants with respect to the following
matters: (i) limitation on indebtedness, (ii)
limitation on restricted payments, (iii)
limitation on dividends and other payment
restrictions affecting Restricted Subsidiaries
(as defined), (iv) consolidation, merger and sale
of assets, (v) limitation on transactions with
affiliates, and (vi) provision of financial
statements. These covenants are subject to
important exceptions and qualifications. See
"Description of Preferred Stock--Certain
Covenants."
Exchange.................... On any Dividend Payment Date, the Company may, at
its option, exchange, in whole but not in part,
all of the shares of the Preferred Stock then
outstanding for the Company's 13 1/2% Senior
Subordinated Debentures due 2010. See
"Description of Preferred Stock--Exchange."
EXCHANGE DEBENTURES
Securities Offered.......... 13 1/2% Debentures due 2010.
Maturity Date............... June 1, 2010
Interest.................... The Exchange Debentures will accrue interest at a
rate of 13 1/2% per annum payable semi-annually
in arrears on June 1, and December 1, commencing
the first such date after the issuance date of
the Exchange Debentures. 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.
Optional Redemption......... The Exchange Debentures will be redeemable at the
option of the Company, in whole or in part, at
any time on or after June 1, 2003, at the
redemption prices set forth herein, plus accrued
and unpaid interest and Liquidated Damages, if
any, 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
aggregate principal amount of Exchange Debentures
originally issued from the net proceeds of one or
more Public Equity Offerings or one or more sales
of its Common Stock (other than Disqualified
Stock) to one or more Strategic Investors. See
"Description of the Exchange Debentures--Optional
Redemption."
Change of Control........... Following the occurrence of a Change of Control
(as defined below), the Company will be required
to make an offer to purchase the Exchange
Debentures (a "Change of Control Offer") at a
purchase price equal to 101% of the aggregate of
the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any,
to the date of purchase; provided, however that
no such Change of Control Offer shall be required
to be made on or prior to the Existing Senior
Notes Maturity Date. If the Change of Control
Offer would not be permitted by reason of the
foregoing proviso, then, in lieu of any such
Change of Control Offer, holders of two-thirds of
the Exchange Debentures will be entitled to
designate an
8
<PAGE>
Independent Financial Advisor to determine,
within 20 days of such designation, in the
opinion of such firm, the appropriate interest
rate that the Exchange Debentures should bear so
that, after such reset, the Exchange Debentures
would have a market value of 101% of the
aggregate principal amount thereof. If, for any
reason and within 15 days of the designation of
an Independent Financial Advisor by the holder,
such Independent Financial Advisor is
unacceptable to the Company, the Company shall
designate a second Independent Financial Advisor
to determine, within 15 days of such designation,
in its opinion, such an appropriate reset
interest rate for the Exchange Debentures. In the
event that the two Independent Financial Advisors
cannot agree, within 25 days of the designation
of an Independent Financial Advisor by the
holders of two-thirds of the Exchange Debentures,
on the appropriate reset interest rate, the two
Independent Financial Advisors shall, within 10
days of such 25th day, designate a third
Independent Financial Advisor, which, within 15
days of designation, will determine, in its
opinion, such an appropriate reset rate which is
between the two rates selected by the first two
Independent Financial Advisors; provided,
however, that the reset rate shall in no event be
less than 13 1/2% per annum nor greater than 15
1/2% per annum. The reasonable fees and expenses,
including reasonable fees and expenses of legal
counsel, if any, and customary indemnification,
of each of the three above- referenced
Independent Financial Advisors shall be borne by
the Company. Upon the determination of the reset
rate, the Exchange Debentures shall accrue and
cumulate interest at the reset rate as of the
date of occurrence of the Change of Control. See
"Risk Factors--Change of Control" and
"Description of Exchange Debentures--Change of
Control."
Ranking..................... The Exchange Debentures will be general unsecured
obligations of the Company, subordinated in right
of payment to all existing and future Senior Debt
of the Company and to all indebtedness and other
liabilities and commitments of the Company's
subsidiaries. As of March 31, 1998, the Exchange
Debentures would have been subordinated in right
of payment to approximately $195.0 million of
Senior Debt of the Company. See "Description of
the Exchange Debentures--Ranking" and "--
Subordination."
Event of Default............ If the date of an Event of Default occurs on or
prior to the Existing Senior Notes Maturity Date,
the remedies of holders of the Exchange
Debentures will be limited as set forth in this
paragraph. Upon the acceleration of any
Designated Senior Debt by the holders thereof,
the interest rate payable with respect to the
Exchange Debentures will be increased by one-half
of one percent per annum for the 90-day period
following such Event of Default, which rate will
further increase by one-half of one-percent per
annum with respect to each subsequent 90-day
period during which such Event of Default is
continuing (or any other Event of Default is
occurring while such Event of Default is
continuing), up to a maximum aggregate increase
in interest rate of two percent (2%) per annum.
9
<PAGE>
Any interest rate increase effected pursuant to
the foregoing shall only be effective during such
time that an Event of Default is continuing and
prior to the Existing Senior Notes Maturity Date.
Subsequent to the Existing Senior Notes Maturity
Date, the Trustee and holders of the Exchange
Debentures will have customary remedies upon the
occurrence of an Event of Default. See
"Description of the Exchange Debentures--Events
of Default."
Certain Covenants........... The indenture under which the Exchange Debentures
will be issued (the "Indenture") will contain
certain covenants, including, among others,
covenants with respect to the following matters:
(i) limitation on indebtedness, (ii) limitation
on restricted payments, (iii) limitation on
transactions with affiliates, (iv) limitation on
liens, (v) limitation on sale of assets, (vi)
limitation on issuances of guarantees of
indebtedness, (vii) limitation on sale and
leaseback transactions, (viii) limitation on
Subsidiary capital stock, (ix) limitation on
dividends and other payment restrictions
affecting Subsidiaries, (x) limitations on
unrestricted Subsidiaries, (xi) provision of
financial statements, and (xii) limitation on
business. In addition, under certain
circumstances, the Company will be required to
offer to purchase Exchange Debentures (an "Excess
Proceeds Offer") at a price equal to 100% of the
principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, to the
date of purchase with the proceeds of certain
asset sales; provided, however that no such
Excess Proceeds Offer shall be required to be
made on or prior to the Existing Senior Notes
Maturity Date. See "Description of Exchange
Debentures--Offer to Purchase With Excess Asset
Sale Proceeds." These covenants are subject to
important exceptions and qualifications. See
"Description of the Exchange Debentures--Certain
Covenants."
Exchange Offer;
Registration Rights......... Pursuant to a registration rights agreement (the
"Registration Rights Agreement") between the
Company and the Initial Purchasers, the Company
has agreed to file a registration statement (the
"Exchange Offer Registration Statement") with
respect to an offer to exchange (the "Exchange
Offer") (i) the Series A Preferred Stock for the
Series B Preferred Stock offered hereby, with
terms substantially identical to those of the
Series A Preferred Stock or (ii) if the Preferred
Stock has been converted into Exchange
Debentures, the Exchange Debentures for a new
issue of debentures of the Company (the "New
Exchange Debentures") registered under the
Securities Act, with terms substantially
identical to those of the Exchange Debentures. If
(1) the Exchange Offer is not permitted by
applicable law or (2) any holder of Transfer
Restricted Securities (as defined) notifies the
Company that (A) it is prohibited by law or
Commission policy from participating in the
Exchange Offer, (B) it may not resell the New
Preferred Stock or New Exchange Debentures
acquired by it in the Exchange Offer to the
public without delivering a prospectus and the
prospectus contained in the Exchange Offer
Registration Statement is not appropriate or
available for such resales or (C) it is a broker-
dealer and holds New Preferred Stock
10
<PAGE>
or new Exchange Debentures acquired directly from
the Company or an affiliate of the Company, the
Company will be required to provide a shelf
registration statement (the "Shelf Registration
Statement") to cover resales of such Transfer
Restricted Securities by the holders thereof. If
the Company fails to satisfy these registration
obligations, it will be required to pay
liquidated damages ("Liquidated Damages") to the
affected holders of Preferred Stock or Exchange
Debentures under certain circumstances. See
"Description of the Exchange Debentures--
Registration Rights; Liquidated Damages."
11
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------- --------------------
PRO FORMA
YEAR ENDED
DECEMBER 31,
1993 1994 1995 1996 1997 1997(1)(2) 1997 1998(2)(3)
------- ------- -------- -------- -------- ------------ -------- ----------
STATEMENT OF OPERATIONS
DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 23 $ 442 $ 2,483 $ 15,648 $ 45,457 $ 55,411 $ 9,154 $ 16,484
Cost of revenue......... 130 2,891 16,168 47,945 61,439 70,635 15,744 17,724
Network equipment write-
off(4)................. -- -- -- 8,321 -- -- -- --
Development, marketing
and sales and general
and administrative
operating expenses..... 1,114 1,784 7,602 22,503 34,262 41,931 7,021 11,853
Amortization of goodwill
and other intangible
assets................. -- -- -- -- -- 3,239 -- 506
Write-off of in-process
technology............. -- -- -- -- -- -- -- 5,200
------- ------- -------- -------- -------- -------- -------- --------
Total costs and operat-
ing expenses........... 1,244 4,675 23,770 78,769 95,701 115,805 22,765 35,283
------- ------- -------- -------- -------- -------- -------- --------
Loss from operations.... (1,221) (4,233) (21,287) (63,121) (50,244) (60,394) (13,611) (18,799)
Other income, net....... -- -- -- -- 1,233 1,278 -- --
Net interest expense.... (24) (57) (721) (3,260) (6,571) (24,962) (1,070) (4,470)
------- ------- -------- -------- -------- -------- -------- --------
Loss before extraordi-
nary item.............. (1,245) (4,290) (22,008) (66,381) (55,582) (84,078) (14,681) (23,269)
Extraordinary gain on
early retirement of
debt................... -- -- -- -- -- -- -- 3,042
------- ------- -------- -------- -------- -------- -------- --------
Net loss................ $(1,245) $(4,290) $(22,008) $(66,381) $(55,582) $(84,078) $(14,681) $(20,227)
======= ======= ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Depreciation and amorti-
zation................. $ 46 $ 169 $ 2,196 $ 9,470 $ 19,230 $ 24,348 $ 3,840 $ 6,763
EBITDA(5)............... (1,175) (4,064) (19,091) (53,651) (31,014) (36,046) (9,771) (6,836)
Capital expendi-
tures(6)............... 817 718 17,176 39,093 22,798 25,938 8,930 2,847
Ratio of earnings to
fixed charges(7)....... N/A N/A N/A N/A N/A N/A N/A N/A
Deficiency of earnings
available to cover
fixed charges(2)(7).... $(1,245) $(4,290) $(22,008) $(66,381) $(55,582) $(84,078) $(14,681) $(23,269)
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------
AS
ACTUAL ADJUSTED(8)
-------- -----------
BALANCE SHEET DATA:
<S> <C> <C>
Cash and cash equivalents................................ $ 63,707 $207,957
Restricted cash(9)....................................... 53,273 53,273
Property and equipment, net.............................. 53,916 53,916
Total assets............................................. 202,870 347,120
Long term debt and capital lease obligations, net of cur-
rent portion............................................ 154,567 154,567
Senior redeemable exchangeable preferred stock........... -- 144,250
Total stockholders' equity............................... 12,146 12,146
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1997 1997 1997 1998(2)(3)
---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
QUARTERLY STATEMENT OF
OPERATIONS DATA:
Revenue................. $ 9,154 $ 10,814 $ 11,824 $ 13,665 $ 16,484
Cost of revenue......... 15,744 14,913 14,838 15,944 17,724
Development, marketing
and sales and general
and administrative op-
erating expenses....... 7,021 8,421 8,954 9,866 11,853
Amortization of goodwill
and other intangible
assets................. -- -- -- -- 506
Write-off of in-process
technology............. -- -- -- -- 5,200
-------- -------- -------- -------- --------
Total costs and operat-
ing expenses........... 22,765 23,334 23,792 25,810 35,283
-------- -------- -------- -------- --------
Loss from operations.... (13,611) (12,520) (11,968) (12,145) (18,799)
Other income (expense),
net.................... -- 1,395 (162) -- --
Net interest expense.... (1,070) (1,779) (2,088) (1,634) (4,470)
-------- -------- -------- -------- --------
Loss before extraordi-
nary item.............. (14,681) (12,904) (14,218) (13,779) (23,269)
Extraordinary gain on
early retirement of
debt................... -- -- -- -- 3,042
-------- -------- -------- -------- --------
Net loss................ $(14,681) $(12,904) $(14,218) $(13,779) $(20,227)
======== ======== ======== ======== ========
</TABLE>
- --------
(1) The pro forma statement of operations data gives effect to the InterNex
acquisition which occurred effective on February 5, 1998 as if it occurred
on January 1, 1997. In addition, the pro forma statement of operations data
includes pro forma adjustments reflecting the interest that would have been
incurred had the Company's 12 3/4% Senior Notes due 2007 (the "Existing
Senior Notes") been outstanding as of January 1, 1997. See Selected
Unaudited Pro Forma Condensed Combined Financial Information.
(2) Statement of operations data and deficiency of earnings to cover fixed
charges do not reflect the Offering. Preferred Stock dividends and
accretion on a pro forma basis, assuming the Offering occurred on January
1, 1997 would have been $21.8 million for the year ended December 31, 1997.
Assuming the Offering occurred on January 1, 1998, dividends and accretion
on a pro forma basis for the three months ended March 31, 1998 would have
been $5.2 million.
(3) Includes the results of InterNex's operations from February 5, 1998 (the
date of acquisition) through the end of the period. See Note 12 of Notes to
Financial Statements.
(4) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 of Notes to Financial Statements.
(5) EBITDA is loss from operations before interest, taxes, depreciation and
amortization and, for the three months ended March 31, 1998, also excludes
the write off of in-process technology. EBITDA is included herein because
management believes that certain investors find it to be a useful tool for
measuring a company's ability to service its debt; however, EBITDA does not
represent cash flow from operations, as defined by generally accepted
accounting principles, should not be considered as a substitute for net
loss as an indicator of the Company's operating performance or cash flow as
a measure of liquidity, and should be examined in conjunction with the
Financial Statements and Notes thereto of the Company included elsewhere in
this Prospectus.
(6) Capital expenditures includes assets acquired through capital lease
financing and other debt.
(7) For purposes of this computation, the ratio of earnings to fixed charges
has been calculated by dividing fixed charges into loss before income
taxes, fixed charges and extraordinary items. Fixed charges consist of
interest expense and a portion of lease rental charges considered to
represent interest cost.
(8) The as adjusted data gives effect to the Offering, after deduction of
estimated offering expenses and the estimated discount to the Initial
Purchasers. See "Use of Proceeds" and "Capitalization."
(9) Restricted cash of $53.3 million consists of funds held in escrow to pay
interest relating to the Company's Existing Senior Notes. See "Description
of Certain Indebtedness" and Note 4 of Notes to Financial Statements.
RECENT FINANCIAL RESULTS
The Company's revenue, net loss attributable to common stockholders and net
loss per share attributable to common stockholders for the three months ended
June 30, 1998 were $19.7 million, $21.5 million and $1.49, respectively, as
compared to revenue, net loss attributable to common stockholders and pro forma
net loss per share attributable to common stockholders for the three months
ended June 30, 1997 of $10.8 million, $12.9 million and $1.86, respectively.
For the six months ended June 30, 1998, the Company's revenue, net loss
attributable to common stockholders and net loss per share attributable to
common stockholders were $36.1 million, $41.7 million and $2.92, respectively,
as compared to revenue, net loss attributable to common stockholders and pro
forma net loss per share attributable to common stockholders of $20.0 million,
$27.6 million and $4.03 for the six months ended June 30, 1997, respectively.
The increase in revenue reflects growth in revenue from the Company's broadened
product offerings to its enterprise customers as well as continued growth in
revenue from internet access customers and revenue derived from acquisitions.
The net loss attributable to common stockholders and net loss per share
attributable to common stockholders numbers for the quarter ended June 30, 1998
and the six months ended June 30, 1998 include several charges related to
financings and acquisitions which occurred in the fourth quarter of 1997 and
first six months of 1998. For the quarter ended June 30, 1998, such charges
include a one-time charge of $1.3 million resulting from the acquisition of
Delta Internet Services, Inc., $1.3 million of dividends and accretion related
to the Series A Preferred, $5.0 million of interest expenses and amortization
of debt issuance costs and warrants related to the Senior Notes and
$0.8 million of amortization of goodwill and other intangibles related to the
Company's purchase of Internex Information Services, Inc. ("Internex") in
February 1998. For the six month period ended June 30, 1998, such charges
include the one-time charge of $1.3 million resulting from the acquisition of
Delta Internet Services, Inc., a one-time charge of $5.2 million resulting from
the acquisition of Internex, the $1.3 million of dividends and accretion
related to the Series A Preferred, $10.1 million of interest expense and
amortization of debt issuance costs and warrants related to the Senior Notes
and $1.3 million of amortization of goodwill and other intangible assets
relating to the acquisition of Internex.
For a discussion of certain factors that should be considered in connection
with a decision to exchange Series A Preferred for Series B Preferred, see
"Risk Factors."
13
<PAGE>
RISK FACTORS
An investment in the Securities offered hereby involves a high degree of
risk. Prospective investors should consider carefully the following risk
factors, in addition to the other information set forth in this Prospectus, in
connection with an investment in the Securities offered hereby. The Prospectus
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Those
statements appear in a number of places in this Prospectus and include
statements regarding the intent, belief or current expectations of the Company
or its directors or officers with respect to, among other things: (i) trends
affecting the Company's financial condition or results of operation; and (ii)
the Company's business and growth strategies. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual
results may differ materially from those projected, expressed or implied, in
the forward-looking statements as a result of various factors. The
accompanying information contained in this Prospectus, including without
limitation the information set forth under the headings "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," identifies important factors that could cause such
differences. Such forward-looking statements speak only as of the date of this
Prospectus, and the Company cautions potential investors not to place undue
reliance on such statements.
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE DEBT
The Company is and will continue to be highly leveraged, with significant
debt service requirements. At March 31, 1998 the Company's total debt was
$195.0 million and stockholders' equity was $12.1 million. The degree to which
the Company is leveraged has important consequences to the Company, including
the following: (i) the Company's ability to obtain additional financing in the
future, whether for working capital, capital expenditures, acquisitions or
other purposes, may be impaired; (ii) a substantial portion of the Company's
cash flow from operations is required to be dedicated to the payment of
interest on its debt, thereby reducing funds available to the Company for
other purposes; (iii) the Company's flexibility in planning for or reacting to
changes in market conditions may be limited; and (iv) the Company may be more
vulnerable in the event of a downturn in its business.
The ability of the Company to meet its debt service obligations will depend
on the future operating performance and financial results of the Company,
which will be subject in part to factors beyond the control of the Company.
Although the Company believes that its cash flow will be adequate to meet its
interest payments, there can be no assurance that the Company will continue to
generate sufficient cash flow in the future to meet its debt service
requirements including those with respect to the Existing Senior Notes. If the
Company is unable to generate cash flow in the future sufficient to cover its
fixed charges and is unable to borrow sufficient funds from other sources, it
may be required to refinance all or a portion of its existing debt or to sell
all or a portion of its assets. There can be no assurance that a refinancing
would be possible, nor can there be any assurance as to the timing of any
asset sales or the proceeds which the Company could realize therefrom. In
addition, the terms of certain of the Company's debt restrict its ability to
sell assets and the Company's use of the proceeds therefrom.
LIMITED OPERATING HISTORY; CONTINUING OPERATING LOSSES
The Company was incorporated in 1991, commenced network operations in 1994
and completed initial deployment of its current network architecture and use
of an advanced ATM backbone network in late 1996. Accordingly, the Company has
a limited operating history upon which an evaluation of the Company and its
prospects can be based. In addition, a majority of the Company's senior
management team have been working together at the Company for less than two
years. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in new and
rapidly evolving markets. To 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
14
<PAGE>
network services incorporating such technologies. There can be no assurance
that the Company will be successful in addressing such risks and the failure
to do so could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company has incurred net
losses and experienced negative cash flow from operations since inception and
expects to continue to operate at a net loss and experience negative cash flow
at least through 1998, although the Company's ability to achieve profitability
and positive cash flow from operations is dependent upon the Company's ability
to substantially grow its revenue base and achieve other operating
efficiencies. The Company experienced net losses of approximately $22.0
million, $66.4 million and $55.6 million for the years ended December 31,
1995, 1996 and 1997, respectively and $20.2 million for the three months ended
March 31, 1998. At March 31, 1998, the Company had an accumulated deficit of
approximately $169.8 million. There can be no assurance that the Company will
be able to achieve or sustain revenue growth, profitability or positive cash
flow on either a quarterly or an annual basis. At December 31, 1997, the
Company had approximately $60.0 million of gross deferred tax assets comprised
primarily of net operating loss carryforwards. The Company believes that,
based on a number of factors, the available objective evidence creates
sufficient uncertainty regarding the realizability of the deferred tax assets
such that a full valuation allowance has been recorded. These factors include
the Company's history of net losses since its inception and the fact that the
market in which the Company competes is intensely competitive and
characterized by rapidly changing technology. The Company believes that, based
on the current available evidence, it is more likely than not that the Company
will not generate taxable income through 1999, and possibly beyond, and
accordingly will not realize the Company's deferred tax assets through 1999
and possibly beyond. The Company will continue to assess the realizability of
the deferred tax assets based on actual and forecasted operating results. In
addition, the utilization of net operating losses may be subject to a
substantial annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses before
utilization. The Company's above estimates of the periods of time in which the
Company expects to continue to operate at a net loss, experience negative cash
flow and not generate taxable income are forward-looking statements that
involves risks and uncertainties, and actual results could vary materially as
a result of a number of factors, including those set forth above in this
paragraph. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 9 of Notes to Financial Statements.
RISKS RELATING TO PAYMENTS ON AND SUBORDINATION OF THE PREFERRED STOCK AND
EXCHANGE DEBENTURES
Restrictions on the Company's Ability to Accelerate Payment upon an Event of
Default Under the Exchange Debentures. If the date of an Event of Default
occurs on or prior to the Existing Senior Notes Maturity Date, the remedies of
holders of the Exchange Debentures will be limited as set forth in this
paragraph. Upon the acceleration of any Designated Senior Debt by the holders
thereof, the interest rate payable with respect to the Exchange Debentures
will be increased by one-half of one percent per annum for the 90-day period
following such Event of Default, which rate will further increase by one-half
of one percent per annum with respect to each subsequent 90-day period during
which such Event of Default is continuing (or any other Event of Default is
occurring while such initial Event of Default is occurring), up to a maximum
aggregate increase in interest rate of two percent (2%) per annum. Any
interest rate increase effected pursuant to the foregoing shall only be
effective during such time that an Event of Default is continuing and prior to
the Existing Senior Notes Maturity Date. In the Event that an Event of Default
occurs prior to the Existing Senior Notes Maturity Date and the holders of
Designated Senior Debt do not accelerate such Designated Senior Debt, no
remedy will exist for the Event of Default (unless such Event of Default
continues through the Existing Senior Note Maturity Date, in which case the
Trustee and the holders of the Exchange Debentures will have the remedies
described elsewhere herein and as otherwise provided in the Indenture
effective upon the Existing Senior Notes Maturity Date). After the Existing
Senior Notes Maturity Date, an Event of Default will entitle the holders of
the Exchange Debentures to accelerate the obligations owing under the Exchange
Debentures prior to its express maturity. See "Description of the Exchange
Debentures--Events of Default."
Restrictions on the Company's Ability to Pay Dividends on the Preferred
Stock. To date, the Company has not paid dividends on its shares of capital
stock. The ability of the Company to pay cash dividends is
15
<PAGE>
substantially restricted under various covenants and conditions contained in
the Existing Senior Notes Indenture (as defined). In addition to the
limitations imposed on the payment of dividends by the Existing Senior Notes
Indenture, under Delaware law the Company is permitted to pay dividends on its
capital stock, including the Preferred Stock, only out of its surplus, or in
the event that it has no surplus, out of its net profits for the year in which
a dividend is declared or for the immediately preceding fiscal year. Surplus
is defined as the excess of a company's total assets over the sum of its total
liabilities plus the par value of its outstanding capital stock. At March 31,
1998, the Company had surplus of $12.2 million. In order to pay dividends in
cash, the Company must have a surplus or net profits equal to the full amount
of the cash dividend at the time such dividend is declared. The Company cannot
predict what the value of its assets or the amount of its liabilities will be
in the future and, accordingly, there can be no assurance that the Company
will be able to pay cash dividends on the Preferred Stock.
Subordination of the Preferred Stock and Exchange Debentures. The Company's
obligations with respect to the Preferred Stock are subordinate and junior in
right of payment to all present and future indebtedness of the Company and its
subsidiaries, including the Existing Senior Notes and to all subsequent series
of preferred stock of the Company which by their terms rank senior to the
Preferred Stock. See "Description of Certain Indebtedness." In addition to the
substantial dividend and redemption restrictions set forth in the Existing
Senior Notes Indenture, no mandatory redemption payments may be made with
respect to the Preferred Stock on or prior to the Existing Senior Notes
Maturity Date. The Existing Senior Notes Indenture also contains certain
restrictions on the ability of the Company to pay cash dividends on the
Preferred Stock. As of March 31, 1998, the Preferred Stock would have been
junior in right of payment to $195.0 million of indebtedness and other
liabilities and commitments of the Company and its subsidiaries. In the event
of bankruptcy, liquidation or reorganization of the Company, the assets of the
Company will be available to pay obligations on the Preferred Stock only after
all Senior Securities (as defined) and all indebtedness of the Company has
been paid, and there may not be sufficient assets remaining to pay amounts due
on any or all of the Preferred Stock then outstanding. See "Description of
Preferred Stock--Ranking."
Similarly, the payment of principal, premium, if any, and interest on and
any other amounts owing in respect of, the Exchange Debentures, if issued,
will be subordinated to the prior payment in full of all existing and future
Senior Debt (as defined), including indebtedness represented by the Existing
Senior Notes, and will be effectively subordinated to all indebtedness and
other liabilities and commitments of the Company's subsidiaries. As of March
31, 1998, the Exchange Debentures would have been subordinated to $195.0
million of Senior Debt of the Company. The Existing Senior Notes Indenture and
the Indenture pursuant to which the Exchange Debentures would be issued permit
the incurrence by the Company and its subsidiaries of additional indebtedness,
all of which may constitute Senior Debt, under certain circumstances. In the
event of bankruptcy, liquidation or reorganization of the Company, the assets
of the Company will be available to pay obligations on the Exchange Debentures
only after all Senior Debt has been paid, and there may not be sufficient
assets remaining to pay amounts due on any or all of the Exchange Debentures
then outstanding. See "Description of Exchange Debentures--Ranking" and "--
Subordination."
Effect of Substantial Additional Indebtedness on the Company's Ability to
Make Payments on the Preferred Stock and the Exchange Debentures. The Existing
Senior Notes Indenture, the Certificate of Designation and the Indenture
limit, but do not prohibit, the incurrence of additional indebtedness during
the next few years. All additional indebtedness of the Company will rank
senior in right of payment to any payment obligations with respect to the
Preferred Stock and Exchange Debentures (to the extent that such additional
indebtedness represents Senior Debt). The debt service requirements of any
additional indebtedness would make it more difficult for the Company to pay
cash obligations with respect to the Preferred Stock and the Exchange
Debentures.
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have fluctuated in the past and may in the
future fluctuate significantly, depending upon a variety of factors, including
the timely deployment and expansion of the Concentric network
16
<PAGE>
and new network architectures, the incurrence of related capital costs, the
receipt of new value-added network services and consumer services
subscriptions and the introduction of new services by the Company and its
competitors. Additional factors that may contribute to variability of
operating results include: the pricing and mix of services offered by the
Company; customer retention rate; market acceptance of new and enhanced
versions of the Company's services; changes in pricing policies by the
Company's competitors; the Company's ability to obtain sufficient supplies of
sole- or limited-source components; user demand for network and Internet
access services; balancing of network usage over a 24-hour period; 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 securities would likely be materially and adversely affected.
CUSTOMER CONCENTRATION
The Company currently derives a substantial portion of its total revenue
from a single customer. For the years ended December 31, 1996 and 1997,
revenue from WebTV represented approximately 10.1% and 33.4%, respectively, of
the Company's revenue and approximately 32.7% and 30.8% of revenue for the
three months ended March 31, 1997 and 1998, respectively. The Company's
current agreement to provide services to WebTV is terminable at will after
October 1, 1999. While the Company expects revenue from WebTV to decrease as a
percentage of revenue in future periods, the Company believes that revenue
derived from a limited number of current and future customers may continue to
represent a significant portion of its revenue. As a result, the loss of one
or more of the Company's major customers could have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, there can be no assurance that revenue from customers that have
accounted for significant revenue in past periods, individually or as a group,
will continue, or if continued, will reach or exceed historical levels in any
future period. See Note 1 of Notes to Financial Statements.
MANAGEMENT OF POTENTIAL GROWTH AND EXPANSION
As of December 31, 1995, the Company had 96 employees and 47 independent
contractors, as of December 31, 1996, the Company had 246 employees and 46
independent contractors, and as of April 30, 1998, the Company had 402
employees and 56 independent contractors. The growth and expansion of the
Company's business and its service offerings have placed, and are expected to
continue to place, a significant strain on the Company's management,
operational and financial resources. The Company has recently expanded and
upgraded its network to use an ATM backbone. The Company plans to continue to
substantially expand its network in the future. There can be no assurance that
the Company will be able to add services at the rate or according to the
schedule presently planned by the Company. To manage its growth, the Company
must, among other things, (i) continue to implement and improve its
operational, financial and management information systems, including its
billing, accounts receivable and payable tracking, fixed assets and other
financial management systems; (ii) hire and train additional qualified
personnel; and (iii) continue to expand and upgrade its network
infrastructure. Demands on the Company's network infrastructure and technical
support resources have grown rapidly with the Company's expanding customer
base, and the Company may in the future experience difficulties meeting the
demand for its access services and technical support. There can be no
assurance that the Company's technical support or other resources will be
sufficient to facilitate the Company's growth. As the Company strives to
increase total network utilization and to optimize this utilization by
targeting both business and consumer users to balance the network's usage
throughout a 24-hour period, there will be additional demands on the Company's
customer support, sales and marketing resources. Any failure of the Company to
manage its growth effectively could have a material adverse effect on the
Company's business, financial condition and results of operations.
17
<PAGE>
RISKS ASSOCIATED WITH ACQUISITIONS
The Company completed the InterNex acquisition in February 1998 and may seek
to acquire additional assets or businesses complementary to its operations.
The InterNex acquisition has been and any subsequent acquisitions would be
accompanied by the risks commonly encountered in acquisitions of companies.
Such risks include, among other things, the difficulty of assimilating the
operations and personnel of InterNex or such other acquired companies, the
additional financial resources that may need to be applied to fund the
operations of InterNex or such other acquired companies, the potential
disruption of the Company's business, the inability of the Company's
management to maximize the financial and strategic position of the Company by
the incorporation of acquired technology or business such as the InterNex
network into the Company's service offerings, the difficulty of maintaining
uniform standards, controls, procedures and policies, the potential loss of
key employees of acquired companies, and the impairment of relationships with
employees and customers as a result of changes in management. No assurance can
be given that InterNex will be successfully integrated in the Company's
Operations. Likewise, no assurance can be given that any other acquisitions by
the Company will or will not occur, that if an acquisition does occur it will
not materially and adversely affect the Company or that any such acquisition
will be successful in enhancing the Company's business. If the Company
proceeds with additional significant acquisitions in which the consideration
consists of cash, a substantial portion of the 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 acquisition has been
accounted for using the purchase method of accounting. Because the
acquisitions of companies of the type that the Company is targeting, including
InterNex, typically involve the purchase of significant amounts of intangible
assets, acquisitions of such businesses also result in goodwill and possibly
significant amortization charges for acquired technology. For example, as a
result of the InterNex acquisition, the Company incurred charges relating to
in-process technology of $5.2 million for the three months ended March 31,
1998 and has recorded an aggregate of $12.5 million in goodwill and other
intangible assets, which will be amortized on a straight line basis over their
useful lives ranging from two to five years (see Note 12 of Notes to Financial
Statements). If the Company were to incur additional charges for acquired in-
process technology and amortization of goodwill with respect to future
acquisitions, the Company's business, operating results and financial
condition could be materially and adversely affected. See "Business--The
Concentric Network."
DEPENDENCE UPON NEW AND UNCERTAIN MARKETS
The markets for tailored, value-added network services for businesses and
consumers offered by the Company, including Internet access, are in the early
stages of development. Since these markets are relatively new and because
current and future competitors are likely to introduce competing services or
products, it is difficult to predict the rate at which the market will grow,
if at all, or whether new or increased competition will result in market
saturation. Certain critical issues concerning commercial use of tailored
value-added services and Internet services, including security, reliability,
ease and cost of access and quality of service, remain unresolved and may
impact the growth of such services. If the markets for the services offered by
the Company, including Internet access, fail to grow, grow more slowly than
anticipated, or become saturated with competitors, the Company's business,
financial condition and results of operations would be materially adversely
affected. See "--Competition," "--Dependence Upon New and Enhanced Services,"
and "--Risks of Technological Change and Evolving Industry Standards."
DEPENDENCE UPON NEW AND ENHANCED SERVICES
The Company has recently introduced new enterprise service offerings,
including the introduction of value-added, IP-based communication services to
enterprises and a new line of DSL services in limited areas. The failure of
these services to gain market acceptance in a timely manner or at all, or the
failure of the DSL service in particular, to achieve significant market
coverage could have a material adverse effect on the business, financial
condition and results of operations of the Company. Introduction by the
Company of new or enhanced services with reliability, quality or compatibility
problems could significantly delay or hinder market acceptance
18
<PAGE>
of such services, which could adversely affect the Company's ability to
attract new customers and subscribers. The Company's services may contain
undetected errors or defects when first introduced or as enhancements are
introduced. There can be no assurance that, despite testing by the Company or
its customers, errors will not be found in new services after commencement of
commercial deployment, resulting in additional development costs, loss of, or
delays in, market acceptance, diversion of technical and other resources from
the Company's other development efforts and the loss of credibility with the
Company's customers and subscribers. Any such event could have a material
adverse effect on the Company's business, financial condition and results of
operations. Additionally, if the Company is unable to achieve balanced network
utilization over a 24-hour period, the Concentric network could become
overburdened at certain periods during the day, which could adversely affect
the quality of service provided by the Company. Conversely, due to the high
fixed cost nature of Concentric's infrastructure, under-utilization of the
Concentric network during certain periods of the day could adversely affect
the Company's ability to provide cost-efficient services at other times. The
failure of the Company to achieve balanced network utilization, because of
either over- or under-utilization could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Services."
DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY
The Company relies on other companies to supply certain key components of
its network infrastructure, including telecommunications services and
networking equipment, which, in the quantities and quality demanded by the
Company, are available only from sole or limited sources. AT&T Corp. ("AT&T"),
WorldCom, Inc. ("WorldCom"), MCI Telecommunications, Inc. ("MCI"), which is
being acquired by WorldCom, and PacWest Telecomm, Inc. are the primary
providers to the Company of data communications facilities and capacity. AT&T
is currently the sole provider of the frame relay backbone of the Concentric
network, and MCI is currently the sole provider of the ATM backbone of the
Concentric network. The Company is also dependent upon local exchange carriers
("LECs") to provide telecommunications services to the Company and its
customers. The Company from time to time has experienced delays in receiving
telecommunications services, and there can be no assurance that the Company
will be able to obtain such services on the scale and within the time frames
required by the Company at an affordable cost, or at all. Any failure to
obtain such services on a timely basis at an affordable cost would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The routers, switches and modems the Company uses are supplied by Bay
Networks, Inc. through Racal. In addition, Racal acts as a systems integrator.
The servers primarily used in the Company's network infrastructure are
supplied solely by Sun Microsystems, Inc. The Company purchases these
components pursuant to purchase orders placed from time to time, does not
carry significant inventories of these components and has no guaranteed supply
arrangements for such components. The Company's suppliers also sell products
to the Company's competitors and may in the future themselves become
competitors of the Company. There can be no assurance that the Company's
suppliers will not enter into exclusive arrangements with the Company's
competitors or stop selling their products or components to the Company at
commercially reasonable prices or at all.
Expansion of network infrastructures by the Company and others is placing,
and will continue to place, a significant demand on the Company's suppliers,
some of which have limited resources and production capacity. In addition,
certain of the Company's suppliers, in turn, rely on sole or limited sources
of supply of components included in their products. Failure of the Company's
suppliers to adjust to meet such increasing demand may prevent them from
continuing to supply components and products in the quantities and quality and
at the times required by the Company, or at all. The Company's inability to
obtain sufficient quantities of sole- or limited-source components or to
develop alternative sources if required could result in delays and increased
costs in expanding, and overburdening of, the Company's network
infrastructure, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company also is dependent on its suppliers' ability to provide necessary
products and components that comply with various Internet and
telecommunications standards and that interoperate with products and
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components from other vendors. Any failure of the Company's sole- or limited-
source suppliers to provide products or components that comply with Internet
standards or that interoperate with other products or components used by the
Company in its network infrastructure could have a material adverse effect on
the Company's business, financial condition and results of operations.
Certain of the Company's suppliers, including the regional Bell operating
companies ("RBOCs") and other LECs, currently are subject to tariff controls
and other price constraints that in the future may be changed. In addition,
regulatory proposals are pending that may affect the prices charged by the
RBOCs and other LECs to the Company. Any such regulatory changes could result
in increased prices of products and services, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "--Dependence Upon New and Enhanced Services" and "--Risks of
Technological Change and Evolving Industry Standards."
DEPENDENCE UPON NETWORK INFRASTRUCTURE
The Company's success will depend upon the capacity, reliability and
security of its network infrastructure. The Company currently derives a
significant portion of its revenue from customer subscriptions. The Company
expects that a substantial portion of its future revenues will be derived from
the provision of tailored value-added network services to its customers. The
Company must continue to expand and adapt its network infrastructure as the
number of users and the amount of information they wish to transfer increase,
and as customer requirements change. The Company's current projections of
utilization of the Concentric network require rapid expansion of the capacity
of the network to avoid capacity constraints that would adversely affect the
performance of the system. The expansion and adaptation of the Company's
network infrastructure will require substantial financial, operational and
management resources. There can be no assurance that the Company will be able
to expand or adapt its network infrastructure to meet additional demand of its
customers' changing requirements on a timely basis, at a commercially
reasonable cost, or at all. In addition, if demand for usage of the Concentric
network were to increase faster than projected or were to exceed the Company's
current forecasts, the network could experience capacity constraints, which
would adversely affect the performance of the system. Any failure of the
Company to expand its network infrastructure on a timely basis or adapt it to
either changing customer requirements or evolving industry standards, or
capacity constraints experienced by the Concentric network for any reason,
could have a material adverse effect on the Company's business, financial
condition and results of operations. Currently, the Company has a transit
agreement with network MCI, Inc. to support the exchange of traffic between
the Concentric network and the Internet. With the acquisition of InterNex, the
Company is expanding its Internet connectivity to include not only private
transit with MCI, Sprint and UUNet, but also private peering with other
network providers as well as public peering with multiple smaller internet
service providers. The Company is still in the process of integrating the
InterNex network resources, including the Sprint and UUNet private transit and
public peering arrangements, and has yet to determine if it can successfully
execute its private/public Internet connection strategy. The failure of the
networks with which Concentric has public peering, private peering or private
transit, or the failure of any of the Company's data centers, or any other
link in the delivery chain, or the inability of the Company to successfully
integrate the InterNex network resources into the Company's existing
infrastructure, and resulting interruption in the Company's operations would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "--Risks Associated with Acquisition," "--Risks
Associated with Acquisitions," "--Risk of System Failure" and "Business--The
Concentric Network."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company currently anticipates that its available cash resources,
combined with the net proceeds from the issuance of the Preferred Stock and
financing available under a network equipment lease agreement (that currently
has no maximum borrowing limit) 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
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opportunities, including more rapid international expansion or acquisitions of
complementary businesses or technologies, or to develop new products or
otherwise respond to unanticipated competitive pressures. The Company may also
raise additional funds through public or private debt or equity financings if
such financings become available on favorable terms. If additional funds are
raised, there can be no assurance that additional financing will be available
on terms favorable to the Company, or at all. If adequate funds are not
available or are not available on acceptable terms, the Company may not be
able to take advantage of unanticipated opportunities, develop new products or
otherwise respond to unanticipated competitive pressures. Such inability could
have a material adverse effect on the Company's business, results of
operations and financial condition. The Company's forecast of the period of
time through which its financial resources will be adequate to support its
operations is a forward looking statement that involves risks and
uncertainties, and actual results could vary materially as a result of a
number of factors, including those set forth above in this paragraph. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
COMPETITION
The market for tailored value-added network services is extremely
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company believes
that its ability to compete successfully depends upon a number of factors,
including market presence; the capacity, reliability, low latency and security
of its network infrastructure; technical expertise and functionality,
performance and quality of services; customization; ease of access to and
navigation of the Internet; the pricing policies of its competitors and
suppliers; the variety of services; the timing of introductions of new
services by the Company and its competitors; customer support; the Company's
ability to support industry standards; and industry and general economic
trends.
The Company's current and prospective competitors generally may be divided
into the following five groups: (i) telecommunications companies, such as
AT&T, MCI, Sprint, Inc. ("Sprint"), WorldCom, the RBOCs and other LEC's and
various cable companies; (ii) online services providers, such as America
Online, Inc. ("America Online"), CompuServe Incorporated ("CompuServe"), the
Microsoft Network ("MSN") of Microsoft, and Prodigy Services Company
("Prodigy"); (iii) Internet service providers ("ISPs"), such as BBN
Corporation ("BBN"), a subsidiary of GTE, NETCOM On-Line Communications
Services, Inc. ("NETCOM"), a subsidiary of ICG Communications, Inc., PSINet,
Inc. ("PSI"), and other national and regional providers; (iv) nonprofit or
educational Internet connectivity providers; and (v) Web server farms such as
Internet Direct and Exodus. Many of these competitors have greater market
presence, engineering and marketing capabilities, and financial, technological
and personnel resources than those available to the Company. As a result, they
may be able to develop and expand their communications and network
infrastructures more quickly, adapt more swiftly to new or emerging
technologies and changes in customer requirements, take advantage of
acquisition and other opportunities more readily, and devote greater resources
to the marketing and sale of their products and services than can the Company.
In addition to the companies named above, various organizations have entered
into or are forming joint ventures or consortiums to provide services similar
to those of the Company.
The Company believes that new competitors, including large computer
hardware, software, media and other technology and telecommunications
companies, will enter the tailored value-added network services market,
resulting in even greater competition for the Company. Certain of such
telecommunications companies and online services providers are currently
offering or have announced plans to offer Internet or online services or to
expand their network services. Certain companies, including America Online,
BBN and PSI, have also obtained or expanded their Internet access products and
services as a result of acquisitions. Such acquisitions may permit the
Company's competitors to devote greater resources to the development and
marketing of new competitive products and services and the marketing of
existing competitive products and services. In addition, the ability of some
of the Company's competitors to bundle other services and products with
virtual private network services or Internet access services could place the
Company at a competitive disadvantage. Certain companies are also exploring
the possibility of providing or are currently providing high-speed data
services using alternative
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delivery methods such as over the cable television infrastructure, through
direct broadcast satellites and over wireless cable.
As a result of increased competition and vertical and horizontal integration
in the industry, the Company could encounter significant pricing pressure,
which in turn could result in significant reductions in the average selling
price of the Company's services. For example, certain of the Company's
competitors that are telecommunications companies may be able to provide
customers with reduced communications costs in connection with their Internet
access services or private network services, reducing the overall cost of
their solutions and significantly increasing price pressures on the Company.
There can be no assurance that the Company will be able to offset the effects
of any such price reductions with an increase in the number of its customers,
higher revenue from enhanced services, cost reductions or otherwise. In
addition, the Company believes that the Internet access and online services
businesses are likely to encounter consolidation in the near future, which
could result in increased price and other competition in these industries and,
potentially, the virtual private networks industry. Increased price or other
competition could result in erosion of the Company's market share and could
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that the Company will
have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully. See "--Management of
Potential Growth and Expansion" and "Business--Competition."
DEPENDENCE UPON THIRD-PARTY MARKETING, DISTRIBUTION AND ENGINEERING
RELATIONSHIPS
An important element of the Company's strategy is to develop relationships
with leading companies to enhance Concentric's engineering, marketing and
distribution efforts. The Company has OEM agreements with Netscape and
Microsoft pursuant to which the Company is entitled to distribute and modify
these companies' browsers. The customization of browsers by the Company is an
integral part of its current tailored VPN offerings. The Netscape agreement
expires in December 1998 and the Microsoft agreement expires in March 1999.
The Company has an agreement with Intuit for the development, operation and
maintenance of a VPN that is the integrated access, dial-up network and
infrastructure used by purchasers of Quicken, Turbo Tax and other Intuit
software products to access the Quicken Financial Network Website and upgrade
to full Internet access. The Intuit contract may be terminated at the election
of Intuit upon six months prior notice of an election to terminate. The
Company relies on these relationships for acquisition of consumer customers.
The termination of or failure to renew any of these agreements or the
inability of the Company to enter into similar relationships with others could
have a material adverse effect on the Company's business, financial condition
and results of operation. The Company has an outsourcing agreement with
Critical Technologies Incorporated ("CTI"), a subsidiary of Williams
Communications Group, Inc., that enables the Company to use CTI employees for
the operational support of the Concentric network. The Company's use of CTI
employees and CTI engineering expertise were integral to its development of
the Concentric network and continue to be integral to ongoing operation of the
Company's network operations center. Pursuant to the agreement with CTI, all
of the CTI employees currently working for Concentric will become employees of
Concentric at the termination of the agreement in December 2000. Termination
of any of these agreements or the failure of the Company to renew any of the
agreements upon termination on terms acceptable to the Company could result in
a material adverse affect on the Company's business, financial condition and
results of operations. See "Business--Key Business Alliances."
RISKS OF TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS
The markets for the Company's services are characterized by rapidly changing
technology, evolving industry standards, changes in customer needs, emerging
competition and frequent new product and service introductions. The Company's
future success will depend, in part, on its ability to effectively use leading
technologies; to continue to develop its technical expertise; to enhance its
current networking services; to develop new services that meet changing
customer needs; to advertise and market its services; and to influence and
respond to emerging industry standards and other technological changes in a
timely and cost-effective basis. There can be no assurance that the Company
will be successful in effectively using new technologies, developing new
services or enhancing its existing services on a timely basis, or that such
new technologies or enhancements
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will achieve market acceptance. The Company's pursuit of necessary
technological advances may require substantial time and expense, and there can
be no assurance that the Company will succeed in adapting its network service
business to alternate access devices and conduits. An integral part of the
Company's strategy is to design its network in order to meet the requirements
of emerging standards such as 56.6 Kbps modems and applications such as IP-
based interactive video and voice conferencing communications. Failure of the
Company, for technological or other reasons, to develop and introduce new or
enhanced services that are compatible with industry standards and that satisfy
customer requirements would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--The
Concentric Network."
The Company believes that its ability to compete successfully is also
dependent upon the continued compatibility and interoperability of its
services with products and architectures offered by various vendors. Although
the Company intends to support emerging standards in the market for Internet
access, there can be no assurance that industry standards will be established
or, if they become established, that the Company will be able to conform to
these new standards in a timely fashion and maintain a competitive position in
the market. Specifically, the Company's services rely on the continued
widespread commercial use of TCP/IP. Alternative open protocol and proprietary
protocol standards have been or are being developed. If any of these
alternative protocols become widely adopted, there may be a reduction in the
use of TCP/IP, which could render the Company's services obsolete and
unmarketable. Additionally, two of the leading modem manufacturers, Rockwell
and US Robotics, a subsidiary of 3Com Incorporated, have proposed different,
incompatible standards for 56.6 Kbps modems and cable modems. The Company
currently plans to accommodate both standards to the extent it can do so cost
effectively. The failure of the Company to anticipate the prevailing standard,
or the failure of a common standard to emerge could have a material adverse
effect on the Company's business and results of operations. In addition, there
can be no assurance that services or technologies developed by others will not
render the Company's services or technology uncompetitive or obsolete.
The Company faces the risk of fundamental changes in the way Internet access
is delivered. Currently, Internet services are accessed primarily by computers
connected by telephone lines. Recently, several companies announced the
development and planned sale of cable television modems, wireless modems and
satellite modems to provide access to the Internet. Cable television,
satellite and wireless modems have the ability to transmit data at
substantially faster speeds than the modems the Company and its subscribers
currently use. In addition, wireless modems have the potential to reduce the
cost of network services. As the Internet becomes accessible through these
cable television, wireless and satellite modems and by screen-based
telephones, television or other consumer electronic devices, or subscriber
requirements change the way Internet access is provided, the Company will have
to develop new technology or modify its existing technology to accommodate
these developments. The Company's pursuit of these technological advances may
require substantial time and expense, and there can be no assurance that the
Company will succeed in adapting its Internet access business to alternate
access devices and conduits.
RISK OF SYSTEM FAILURE
As the Company expands its network and usage grows, increased stress will be
placed upon network hardware and traffic management systems. While the
Company's network has been designed with redundant backbone circuits to allow
traffic re-routing, there can be no assurance that the Company will not
experience failures relating to individual network points of presence ("POPs")
or even catastrophic failure of the entire network. Moreover, the Company's
operations are dependent upon its ability to protect its network
infrastructure against damage from fire, earthquakes, floods, mudslides, power
loss, telecommunications failures and similar events. A significant portion of
the Company's computer equipment, including critical equipment dedicated to
its Internet access services, is located at its facilities in Bay City,
Michigan, and Cupertino, California. In addition, the Company's modems and
routers that serve large areas of the United States are located in such
cities. The Company's network operations center, which manages the entire
network, is in St. Louis, Missouri. Despite precautions taken by the Company,
the occurrence of a natural disaster or other unanticipated problems at the
Company's network operations center, at its hubs (sites at which the Company
has located routers, switches and other computer equipment that make up the
backbone of the Company's network infrastructure) or at a number
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of the Company's POPs has from time to time in the past caused, and in the
future could cause, interruptions in the services provided by the Company. In
addition, failure of the Company's telecommunications providers to provide the
data communications capacity in the time frame required by the Company as a
result of a natural disaster or operational disruption or for any other reason
could cause interruptions in the services provided by the Company. Any damage
or failure that causes interruptions in the Company's operations could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--The Concentric Network."
SYSTEM SECURITY RISKS
Despite the implementation of network security measures, the core of the
Company's network infrastructure is vulnerable to computer viruses, break-ins
and similar disruptive problems caused by its customers or Internet users.
Computer viruses, break-ins or other problems caused by third parties could
lead to interruptions, delays or cessation in service to the Company's
customers and subscribers. Furthermore, such inappropriate use of the network
by third parties could also potentially jeopardize the security of
confidential information stored in the computer systems of the Company and its
customers, which may result in liability to the Company and also may deter
potential subscribers. Although the Company intends to continue to implement
industry-standard security measures, such measures occasionally have been
circumvented in the past, and there can be no assurance that measures
implemented by the Company will not be circumvented in the future. The costs
and resources required to eliminate computer viruses and alleviate other
security problems may result in interruptions, delays or cessation of service
to the Company's customers that could have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Management of Potential Growth and Expansion," "--Dependence upon New and
Enhanced Services," "--Risks of Technological Change and Evolving Industry
Standards," "Use of Proceeds" and "Business--Services."
DEPENDENCE UPON KEY PERSONNEL; ABILITY TO HIRE ADDITIONAL QUALIFIED PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its executive management team, including Henry R. Nothhaft,
the Company's Chairman, President and Chief Executive Officer, and John K.
Peters, the Company's Executive Vice President and General Manager, Network
Services Division. The loss of the services of Messrs. Nothhaft or Peters
could have a material adverse effect on the Company. The Company does not have
employment agreements with any of its senior officers, including Messrs.
Nothhaft or Peters. Nor does the Company carry key man life insurance on the
life of any such persons. The Company's success will also depend upon the
continued service of the other members of its senior management team and
technical, marketing and sales personnel. The Company's employees may
voluntarily terminate their employment with the Company at any time, and
competition for qualified employees is intense. The Company's success also
depends upon its ability to attract and retain additional highly qualified
management, technical, sales and marketing and customer support personnel. The
process of locating such personnel with the combination of skills and
attributes required to carry out the Company's strategy is often lengthy. The
loss of the services of key personnel, or the inability to attract additional
qualified personnel, could have a material adverse effect upon the Company's
results of operations, development efforts and ability to complete the
expansion of its network infrastructure. Any such event could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "--Management of Potential Growth and Expansion" and
"Management."
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
A key component of the Company's strategy is its planned expansion into
international markets. In particular, the Company has entered into an
agreement with TMI, to establish an international network based on
Concentric's network technology and expertise and TMI's existing
telecommunications infrastructure to deliver a range of compatible network
services worldwide. If the companies are not able to successfully deploy
Concentric's technology over TMI's infrastructure, or if Concentric is
unsuccessful in transferring its knowledge to TMI employees, the Company's
international strategy may be delayed and the Company's business, results of
operation or financial condition could be materially adversely affected. To
date, the Company has only limited experience in working with TMI to develop
versions of its products and marketing and distributing its products
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internationally. Additionally, the Company entered into a roaming services
agreement in June 1997 with NTT PC. The roaming services agreement allows
Concentric customers to use the NTT PC network to access their internet
accounts in Japan and allows members of the NTT PC network to access their
internet accounts in the United States and Canada. Additionally, the Company
acquired Web hosting facilities in Stockholm, Sweden, Tokyo, Japan and Hong
Kong in February 1998. There can be no assurance that the Company will be able
to successfully market, sell and deliver its products in these markets. In
addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks inherent in doing business on
an international level, such as unexpected changes in regulatory requirements,
export restrictions, export controls relating to encryption technology,
tariffs and other trade barriers, difficulties in staffing and managing
foreign operations, longer payment cycles, problems in collecting accounts
receivable, political instability, fluctuations in currency exchange rates,
seasonal reductions in business activity during the summer months in Europe
and certain other parts of the world and potentially adverse tax consequences
that could adversely impact the success of the Company's international
operations. There can be no assurance that one or more of such factors will
not have a material adverse effect on the Company's future international
operations and, consequently, on the Company's business, financial condition
and results of operations.
GOVERNMENT REGULATION
The FCC currently does not regulate value-added network software or computer
equipment related services that transport data or voice messages over
telecommunication facilities. The Company provides value-added IP-based
network services, in part, through data transmissions over public telephone
lines. These transmissions are governed by regulatory policies establishing
charges and terms for wireline communications. Operators of these types of
value-added networks that provide access to regulated transmission facilities
only as part of a data services package currently are excluded from
regulations that applies to "telecommunications carrier" and as such the
Company is not currently subject to direct regulation by the FCC or any other
governmental agency, other than regulations applicable to businesses
generally. However, in the future the Company could become subject to
regulation by the FCC or another regulatory agency as a provider of basic
telecommunications services.
Currently, the FCC is reviewing its regulatory positions and could seek to
impose common carrier regulation on the network transport and communications
facilities aspects of an enhanced or information service package. Further, the
FCC could conclude that the Company's protocol conversions, computer
processing, and interaction with customer-supplied information are
insufficient to afford the Company the benefits of the enhanced or information
service classification, and thereby may seek to regulate some segments of the
Company's activities as basic telecommunications services. While state public
utility commissions generally have declined to regulate enhanced or
information services, some states have continued to regulate particular
aspects of enhanced services in limited circumstances, such as where they are
provided by LECs. Moreover, the public service commissions of certain states
continue to review potential regulation of such services. There can be no
assurance that regulatory authorities of states within which Concentric makes
its Internet access, Intranet and VPN services available will not seek to
regulate aspects of these activities as telecommunications services. Changes
in the regulatory environment relating to the Internet connectivity market,
including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood or scope of competition
from the RBOCs or other telecommunications companies, could affect the prices
at which the Company may sell its services. The Company cannot predict the
impact, if any, that future regulation or regulatory changes may have on its
business and there can be no assurance that such future regulation or
regulatory changes will not have a material adverse effect on the Company's
business, results of operations and financial condition.
DEPENDENCE ON TECHNOLOGY; PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
technology, although the Company believes that its success is more dependent
upon its technical expertise than its proprietary rights. The Company
principally relies upon a combination of copyright, trademark and trade secret
laws and contractual restrictions to protect its proprietary technology. It
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization or to develop similar
technology independently, and there can be no assurance that such measures
have been, or will be, adequate to protect the
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Company's proprietary technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or
superior to the Company's technology. The Company operates a material portion
of its business over the Internet, which is subject to a variety of risks.
Such risks include but are not limited to the substantial uncertainties that
exist regarding the system for assigning domain names and the status of
private rules for resolution of disputes regarding rights to domain names.
There can be no assurance that the Company will continue to be able to employ
its current domain names in the future or that the loss of rights to one or
more domain names will not have a material adverse effect on the Company's
business and results of operations.
Although the Company does not believe that it infringes the proprietary
rights of any third parties, there can be no assurance that third parties will
not assert such claims against the Company in the future or that such claims
will not be successful. The Company could incur substantial costs and
diversion of management resources with respect to the defense of any claims
relating to proprietary rights, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Furthermore, parties making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief that
could effectively block the Company's ability to license its products in the
United States or abroad. Such a judgment would have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the Company is obligated under certain agreements to indemnify the
other party in connection with infringement by the Company of the proprietary
rights of third parties. In the event the Company is required to indemnify
parties under these agreements, it could have a material adverse effect on the
business, financial condition and results of operations of the Company. In the
event a claim relating to proprietary technology or information is asserted
against the Company, the Company may seek licenses to such intellectual
property. There can be no assurance, however, that licenses could be obtained
on commercially reasonable terms, if at all, or that the terms of any offered
licenses would be acceptable to the Company. The failure to obtain the
necessary licenses or other rights could have a material adverse effect on the
Company's business, financial condition and results of operations.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK
The law relating to the liability of online service providers, private
network operators and Internet service providers for information carried on or
disseminated through the facilities of their networks is currently unsettled.
Several lawsuits seeking a judgment of such liability are pending. In one case
brought against an Internet service provider, Religious Technology Center v.
Netcom On-Line Communication Services, Inc., the United States District Court
for the Northern District of California ruled in a preliminary phase that
under certain circumstances Internet service providers could be held liable
for copyright infringement. The case has not reached final judgment. Such
claims have been asserted against the Company in the past, and there can be no
assurance that such claims will not be asserted in the future, or if asserted,
will not be successful. The Telecommunications Act of 1996 prohibits and
imposes criminal penalties and civil liability for using an interactive
computer service for transmitting certain types of information and content,
such as obscene communications. Numerous states have adopted or are currently
considering similar types of legislation. The imposition upon the Company,
Internet service providers or Web server hosts of potential liability for
materials carried on or disseminated through their systems could require the
Company to implement measures to reduce its exposure to such liability, which
may require the expenditure of substantial resources or the discontinuation of
certain product or service offerings. Further, the costs incurred in defending
against any such claims and potential adverse outcomes of such claims could
have a material adverse effect on the Company's financial condition and
results of operations. The Company believes that it is currently unsettled
whether the Telecommunications Act of 1996 prohibits and imposes liability for
any services provided by the Company should the content of information
transmitted be subject to the statute.
LEGAL PROCEEDINGS
In late April and early May, 1997, three putative securities class action
complaints were filed in the United States District Court, Central District by
certain stockholders of Diana, the parent corporation of Sattel, alleging
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securities fraud related to plaintiffs' purchase of shares of Diana Common
Stock in reliance upon allegedly misleading statements made by defendants,
Diana, Sattel and certain of their respective affiliates, officers and
directors. Concentric was named as a defendant in the complaint in connection
with certain statements made by Diana and officers of Diana related to
Concentric's purchase of network switching equipment from Diana's Sattel
subsidiary. The plaintiffs seek unspecified compensatory damages. A motion by
the Company to dismiss the complaint was denied, and the court has allowed the
action to proceed against the Company. A trial date has not yet been
determined.
While the ultimate outcome of such litigation is uncertain, the Company
believes it has meritorious defenses to the claims and intends to conduct a
vigorous defense. An unfavorable outcome in this matter could have a material
adverse effect on the Company's financial condition. In addition, even if the
ultimate outcome is resolved in favor of the Company, the defense of such
litigation could entail considerable cost and the diversion of efforts of
management, either of which could have a material adverse effect on the
Company's results of operations. See "Business--Legal Proceedings" and Note 11
of Notes to Financial Statements.
DISCRETIONARY AUTHORITY OVER USE OF NET PROCEEDS
As of the date of this Offering Memorandum, the Company has no specific
allocations for the net proceeds of this Offering. Consequently, management
will retain a significant amount of discretion over the application of the
Offering. Because of the number and variability of factors that determine the
Company's use of the net proceeds of the Offering, there can be no assurance
that such applications will not vary substantially from the Company's current
intentions. Pending such uses, the Company intends to invest the net proceeds
of the Offering in short-term U.S. investment grade and government securities.
See "Use of Proceeds."
ABSENCE OF PUBLIC MARKET FOR THE PREFERRED STOCK
The Preferred Stock has not been registered under the Securities Act or any
state securities laws, and, unless so registered, may not be offered or sold
except pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and any applicable state
securities laws. However, the Company is required to commence a registered
exchange offer for the Preferred Stock or register resales of the Preferred
Stock under the Act. See "Notice to Investors."
The Preferred Stock is a new security for which there is currently no
market. Although the Initial Purchasers have informed the Company that they
currently intend to make a market in the Preferred Stock, they are not
obligated to do so and any such market making may be discontinued at any time
without notice. Accordingly, there can be no assurance as to the development
or liquidity of any market for the Preferred Stock. The Preferred Stock is
expected to be eligible for trading in The Portal Market. The Company does not
intend to apply for listing of the Preferred Stock on any securities exchange
or for quotation through the Nasdaq National Market. If a market for the
Preferred Stock were to develop, the Preferred Stock could trade at prices
that may be higher or lower than its initial offering price depending upon
many factors, including prevailing interest rates, the Company's operating
results, and the market for similar securities. Historically, the market for
high-yield securities, such as the Preferred Stock, has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that, if a market for the Preferred
Stock were to develop, such market will not be subject to similar disruptions.
CONSEQUENCES OF FAILURE TO EXCHANGE
Any Series A Preferred tendered and exchanged in the Exchange Offer will
reduce the aggregate principal amount of Series A Preferred outstanding.
Following the consummation of the Exchange Offer, Existing Holders who did not
tender their Series A Preferred generally will not have any further
registration rights under the Registration Rights Agreement, and such Series A
Preferred will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Series A Preferred could be
adversely affected. The Series A Preferred are currently eligible for sale
pursuant to Rule 144A through The Portal Market. Because the Company
anticipates that most Existing Holders will elect to exchange such Series A
Preferred for Series B
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Preferred due to the absence of restrictions on the resale of Series B
Preferred (except for applicable restrictions on any New Holder who is an
affiliate of the Company or is a broker-dealer which acquired the Series A
Preferred directly from the Company) under the Securities Act, the Company
anticipates that the liquidity of the market for any Series A Preferred
remaining after the consummation of the Exchange Offer may be substantially
limited.
As a result of the making of this Exchange Offer, the Company will have
fulfilled certain of its obligations under the Registration Rights Agreement,
and Existing Holders who do not tender their Series A Preferred, except for
certain instances involving the Initial Purchasers or Existing Holders who are
not eligible to participate in the Exchange Offer, will not have any further
registration rights under the Registration Rights Agreement or otherwise or
rights to receive Liquidated Damages (as defined) for failure to register.
Accordingly, any Existing Holder that does not exchange that Holder's Series A
Preferred for Series B Preferred will continue to hold the untendered Series A
Preferred and will be entitled to all the rights and subject to all the
limitations applicable thereto under the Certificate of Designation, except to
the extent that such rights or limitations, by their terms, terminate or cease
to have further effectiveness as a result of the Exchange Offer.
The Series A Preferred that are not exchanged for Series B Preferred
pursuant to the Exchange Offer will remain restricted securities. Accordingly,
such Series A Preferred may be resold only (i) to the Company or any of its
subsidiaries, (ii) inside the United States to a QIB in a transaction
complying with Rule 144A, (iii) inside the United States to an institutional
"accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) an "Accredited Investor" that, prior to such transfer,
furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the
Trustee a signed letter containing certain representations and agreements
relating to the restrictions on transfer of the Securities (the form of which
letter can be obtained from such Trustee), (iv) outside the United States in
compliance with Rule 904 under the Securities Act, (v) pursuant to the
exemption from registration provided by Rule 144 under the Securities Act (if
available), or (vi) pursuant to an effective registration statement under the
Securities Act. Each Accredited Investor that is not a QIB and that is an
original purchaser of any of the Securities from the Initial Purchasers will
be required to sign a letter confirming that such person is an Accredited
Investor under the Securities Act and that such person acknowledges the
transfer restrictions summarized herein.
IMPACT OF THE YEAR 2000 ISSUE
Many installed computer systems and software products are coded to accept
only two digit entries in the date code field. Beginning in the year 2000,
these code fields will need to accept four digit entries to distinguish 21st
century dates from 20th century or earlier dates. As a result, in less than
two years, computer systems and/or software products used by many companies
may need to be upgraded to comply with such year 2000 requirements. The
Company is currently expending sufficient resources to review its products and
services, as well as its internal management information systems in order to
identify and modify those products, services and systems that are not year
2000 compliant. The Company expects such modifications will be made on a
timely basis and does not believe that the cost of such modifications will
have a material effect on the Company's operating results. There can be no
assurance, however, that the Company will be able to modify timely and
successfully such products, services and systems to comply with year 2000
requirements, which could have a material adverse effect on the Company's
operating results. Based on the Company's assessment to date, most newly
introduced products and services of the Company are year 2000 compliant,
however some of the Company's customers are running product versions that are
not year 2000 compliant. The Company has been encouraging such customers to
migrate to current product versions. In addition, the Company faces risks to
the extent that suppliers of products, services and systems purchased by the
Company and others with whom the Company transacts business on a worldwide
basis do not have business systems or products that comply with the year 2000
requirements. In the event any such third parties cannot timely provide the
Company with products, services or systems that meet the year 2000
requirements, the Company's operating results could be materially adversely
affected. Furthermore, there can be no assurance that these or other factors
relating to the year 2000 compliance issues, including litigation, will not
have a material adverse effect on the Company's business, operating results or
financial condition.
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USE OF PROCEEDS
SERIES A PREFERRED OFFERING
The net proceeds from the Offering, after deducting the Initial Purchasers'
discount and estimated offering expenses, was approximately $144.3 million.
The Company currently plans to use the net proceeds from the Offering to fund
operating losses and for working capital requirements or for other general
corporate purposes. Proceeds from the Offering also may be used to acquire
assets, technologies, or businesses complementary to the Company's value-added
enterprise network service strategy. Pending such uses, the proceeds will be
invested in short-term U.S. investment grade and government securities.
EXCHANGE OFFER
The Company will not receive any cash proceeds from the Exchange Offer. In
consideration for issuing the Series B Preferred in exchange for Series A
Preferred as described in this Prospectus, the Company will receive Series A
Preferred in like principal amount. The Series A Preferred surrendered in
exchange for the Series B Preferred will be retired and canceled.
DIVIDEND POLICY
The Company has not paid and does not anticipate paying any cash dividends
on the Common Stock in the foreseeable future. The Company intends to retain
its earnings, if any, for use in the Company's growth and ongoing operations.
In addition, the terms of the Certificate of Designation will restrict the
ability of the Company to pay dividends on the Common Stock. See "Description
of Preferred Stock--Certain Covenants; Restricted Payments."
Dividends on the Preferred Stock will accumulate at a rate of 13 1/2% per
annum of the Liquidation Preference thereof and will be payable quarterly in
arrears on March 1, June 1, September 1 and December 1 of each year (each a
"Dividend Payment Date") commencing September 1, 1998. Dividends will be
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 Preferred Stock (including fractional shares)
having an aggregate Liquidation Preference equal to the amount of such
dividends.
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THE EXCHANGE OFFER
The following discussion summarizes the material terms of the Exchange
Offer, including those set forth in the Letter of Transmittal distributed with
this Prospectus. This summary is qualified in its entirety by reference to the
full text of the documents underlying the Exchange Offer (including the
Registration Rights Agreement), which are exhibits to the Exchange Offer
Registration Statement.
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Series A Preferred were sold by the Company to the Initial Purchasers on
June 8, 1998, and were subsequently resold to qualified institutional buyers
pursuant to Rule 144A under the Securities Act. In connection with the Series
A Preferred Offering, the Company entered into the Registration Rights
Agreement, which requires, among other things, that within 30 days following
June 8, 1998 (the "Issue Date") (i.e. on or before July 8, 1998) the Company
(i) file with the Commission a registration statement under the Securities Act
with respect to an issue of Series B Preferred of the Company identical in all
material respects (other than transfer restrictions, registration rights and
the requirement, under certain circumstances, to pay Liquidated Damages) to
the Series A Preferred (which obligation has been satisfied by the filing of
the Exchange Offer Registration Statement), (ii) use their best efforts to
cause such registration statement to become effective under the Securities Act
by the date which is 120 days after the Issue Date (the "Target Effectiveness
Date") and (iii) to consummate the Exchange Offer within 30 days after the
Target Effectiveness Date, and offer to the Existing Holders the opportunity
to exchange their Series A Preferred for a like principal amount of Series B
Preferred, which would be issued without a restrictive legend and may
generally be reoffered and resold by the New Holder without restrictions or
limitations under the Securities Act, subject to the terms and conditions of
the Exxon Capital, Morgan Stanley and Shearman & Sterling No-Action Letters.
See Outside Front Cover, "Prospectus Summary--The Exchange Offer", and "--
Resale of Series B Preferred."
Any Series A Preferred tendered and exchanged in the Exchange Offer will
reduce the number of shares of Series A Preferred outstanding. Following the
consummation of the Exchange Offer, Existing Holders who did not tender their
Series A Preferred generally will not have any further registration rights
under the Registration Rights Agreement, and such Series A Preferred will
continue to be subject to certain restrictions on transfer. Accordingly, the
liquidity of the market for such Series A Preferred could be adversely
affected. The Series A Preferred are currently eligible for sale pursuant to
Rule 144A through The Portal Market. Because the Company anticipates that most
Existing Holders will elect to exchange such Series A Preferred for Series B
Preferred due to the absence of restrictions on the resale of Series B
Preferred under the Securities Act, the Company anticipates that the liquidity
of the market for any Series A Preferred remaining after the consummation of
the Exchange Offer may be substantially limited.
As a result of the making of this Exchange Offer, the Company will have
fulfilled certain of its obligations under the Registration Rights Agreement,
and Existing Holders who do not tender such Series A Preferred, except for
certain instances involving the Initial Purchasers or Existing Holders who are
not eligible to participate in the Exchange Offer, will not have any further
registration rights under the Registration Rights Agreement or otherwise or
rights to receive Liquidated Damages for failure to register. Accordingly, any
Existing Holder that does not exchange that Holder's Series A Preferred for
Series B Preferred will continue to hold the untendered Series A Preferred and
will be entitled to all the rights and subject to all the limitations
applicable thereto under the Certificate of Designation, except to the extent
that such rights or limitations, by their terms, terminate or cease to have
further effectiveness as a result of the Exchange Offer.
The Series A Preferred that are not exchanged for Series B Preferred
pursuant to the Exchange Offer will remain restricted securities. Accordingly,
such Series A Preferred may be resold only (i) to the Company or any of its
subsidiaries, (ii) inside the United States to a QIB in a transaction
complying with Rule 144A, (iii) inside the United States to an institutional
"accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) an "Accredited Investor" that, prior to such transfer,
furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the
Trustee a signed letter containing certain representations and agreements
relating to
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the restrictions on transfer of the Securities (the form of which letter can
be obtained from such Trustee), (iv) outside the United States in compliance
with Rule 904 under the Securities Act, (v) pursuant to the exemption from
registration provided by Rule 144 under the Securities Act (if available), or
(vi) pursuant to an effective registration statement under the Securities Act.
Each Accredited Investor that is not a QIB and that is an original purchaser
of any of the Securities from the Initial Purchasers will be required to sign
a letter confirming that such person is an Accredited Investor under the
Securities Act and that such person acknowledges the transfer restrictions
summarized herein.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all shares
of Series A Preferred validly tendered and not withdrawn prior to 5:00 p.m.,
New York City time on the Expiration Date. The Company will issue one share of
Series B Preferred in exchange for each share of issued and outstanding Series
A Preferred accepted in the Exchange Offer. Existing Holders may tender some
or all of their shares of Series A Preferred pursuant to the Exchange Offer.
The rights, preference and privileges of the Series B Preferred are the same
as the rights, preferences and privileges of the Series A Preferred except
that (i) the Series B Preferred have been registered under the Securities Act
and hence will not bear legends restricting the transfer thereof and (ii) New
Holders generally will not be entitled to certain rights under the
Registration Rights Agreement or Liquidated Damages, which rights generally
will terminate upon consummation of the Exchange Offer.
Existing Holders do not have any appraisal or dissenters' rights under the
Delaware General Corporation Law in connection with the Exchange Offer. The
Company intends to conduct the Exchange Offer in accordance with the
applicable requirements of the Exchange Act and the rules and regulations of
the Commission thereunder, including Rule 14e-1.
The Company shall be deemed to have accepted validly tendered Series A
Preferred when, as and if the Company has given oral or written notice thereof
to the Exchange Agent. The Exchange Agent will act as agent for the tendering
Existing Holders for the purpose of receiving the Series B Preferred from the
Company.
If any tendered Series A Preferred are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Series A Preferred will be
returned, without expense, to the tendering Existing Holder thereof as
promptly as practicable after the Expiration Date.
Existing Holders who tender Series A Preferred in the Exchange Offer will
not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of Series A Preferred pursuant to the Exchange Offer. The Company
will pay all charges and expenses, other than transfer taxes in certain
circumstances, in connection with the Exchange Offer. See "--Fees and
Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
September 9, 1998 unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
To extend the Exchange Offer, the Company will notify the Exchange Agent of
any extension by oral or written notice, followed by a public announcement
thereof no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date. In no event will the
Expiration Date be extended to a date more than 30 business days after
effectiveness of the Exchange Offer Registration Statement.
The Company reserves the right, in its reasonable judgment, (i) to delay
accepting any Series A Preferred, to extend the Exchange Offer or to terminate
the Exchange Offer if any of the conditions set forth below under
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"--Conditions" shall not have been satisfied, by giving oral or written notice
of such delay, extension or termination to the Exchange Agent or (ii) to amend
the terms of the Exchange Offer in any manner. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as
practicable by a public announcement thereof.
ACCUMULATED DIVIDENDS ON SERIES B PREFERRED
Each share of Series B Preferred will be entitled to dividends from the most
recent date to which dividends have been paid or duly provided for on the
Series A surrendered in exchange for such Series A Preferred or, if no such
dividends have been paid or duly provided for on such Series A Preferred, from
June 8, 1998. Holders of the Series A Preferred whose Series A Preferred are
accepted for exchange will not receive accumulated dividends on such Series A
Preferred for any period from and after the last Dividend Payment Date to
which dividends have been paid or duly provided for on such Series A Preferred
prior to the original issue date of the Series B Preferred or, if no such
dividends have been paid or duly provided for, will not receive any
accumulated dividends on such Series A Preferred, and will be deemed to have
waived the right to receive any dividends on such Series A Preferred which
have accumulated from and after such Dividend Payment Date or, if no such
dividends have been paid or duly provided for, from and after June 3, 1998.
Dividends on the Preferred Stock will be payable quarterly in arrears on March
1, June 1, September 1 and December 1 commencing on September 1, 1998.
PROCEDURES FOR TENDERING
Only Existing Holders may tender such Series A Preferred in the Exchange
Offer. To tender in the Exchange Offer, an Existing Holder must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the
signatures thereon guaranteed if required by the Letter of Transmittal, and
mail or otherwise deliver such Letter of Transmittal or such facsimile,
together with the Series A Preferred and any other required documents, to the
Exchange Agent so as to be received by the Exchange Agent at the address set
forth below prior to 5:00 p.m., New York City time, on the Expiration Date.
Delivery of the Series A Preferred may be made by book-entry transfer in
accordance with the procedures described below. Confirmation of such book-
entry transfer must be received by the Exchange Agent prior to the Expiration
Date.
By executing the Letter of Transmittal, each Existing Holder will make to
the Company the representation set forth below in the second paragraph under
the heading "--Resale of Series B Preferred."
The tender by an Existing Holder and the acceptance thereof by the Company
will constitute an agreement between such Existing Holder and the Company in
accordance with the terms and subject to the conditions set forth herein and
in the Letter of Transmittal.
THE METHOD OF DELIVERY OF SERIES A PREFERRED AND THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND
RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT
HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR SHARES SHOULD BE SENT TO THE
COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH
HOLDERS.
Any beneficial owner whose Series A Preferred are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact the registered Existing Holder promptly and
instruct such registered Existing Holder to tender on such beneficial owner's
behalf.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Series A Preferred tendered pursuant thereto (i) are signed
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by the registered Existing Holder, unless such Existing Holder has completed
the box entitled "Special Exchange Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal or (ii) are tendered for the
account of an Eligible Institution. In the event that signatures on a Letter
of Transmittal or a notice of withdrawal, as the case may be, are required to
be guaranteed, such guarantee must be by a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States, or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the registered
Existing Holder of any Series A Preferred listed therein, such Series A
Preferred must be endorsed or accompanied by a properly completed bond power,
signed by such registered Existing Holder as such registered Existing Holder's
name appears on such Series A Preferred, with the signature thereon guaranteed
by an Eligible Institution.
If the Letter of Transmittal or any Series A Preferred or stock powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by
the Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Series A Preferred and withdrawal of tendered
Series A Preferred will be determined by the Company in its sole discretion,
which determination will be final and binding. The Company reserves the
absolute right to reject any and all Series A Preferred not properly tendered
or any Series A Preferred the Company's acceptance of which would, in the
opinion of counsel for the Company, be unlawful. The Company also reserves the
right to waive any defects, irregularities or conditions of tender as to
particular Series A Preferred. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Series A Preferred
must be cured within such time as the Company shall determine. Although the
Company intends to notify Existing Holders of defects or irregularities with
respect to tenders of Series A Preferred, none of the Company, the Exchange
Agent or any other person shall incur any liability for failure to give such
notification. Tenders of Series A Preferred will not be deemed to have been
made until such defects or irregularities have been cured or waived. Any
Series A Preferred received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering Existing
Holders, unless otherwise provided in the Letter of Transmittal, as soon as
practicable following the Expiration Date.
TENDER OF SERIES A PREFERRED HELD THROUGH DTC
The Exchange Agent and DTC have confirmed that the Exchange Offer is
eligible for ATOP, the DTC Automated Tender Offer Program. Accordingly, DTC
participants may, in lieu of physically completing and signing the applicable
Letter of Transmittal and delivering it to the Exchange Agent, electronically
transmit their acceptance of the Exchange Offer by causing DTC to transfer
Series A Preferred to the Exchange Agent in accordance with DTC's ATOP
procedures for transfer. DTC will then send an Agent's Message to the Exchange
Agent.
The term "Agent's Message" means a message transmitted by DTC, received by
the Exchange Agent and forming part of the Book-Entry Confirmation, which
states that DTC has received an expressed acknowledgment from a participant in
DTC that it is tendering Series A Preferred which are the subject of such
Book-Entry Confirmation, that such participant has received and agrees to be
bound by the terms of the applicable Letter of Transmittal (or, in the case of
an Agent's Message relating to guaranteed delivery, that such participant has
received and agrees to be bound by the applicable Notice of Guaranteed
Delivery), and that the Company may enforce such agreement against such
participant.
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BOOK-ENTRY DELIVERY PROCEDURES
Within two business days after the date hereof, the Exchange Agent will
establish accounts with respect to the Series A Preferred at DTC (the "Book-
Entry Transfer Facility") for purposes of the Exchange Offer. Any financial
institution that is a participant in the Book-Entry Transfer Facility systems
may make book-entry delivery of the Series A Preferred by causing DTC to
transfer such Series A Preferred into the Exchange Agent's account at such
Book-Entry Transfer Facility in accordance with such Book-Entry Transfer
Facility's procedures for such transfer. Timely book-entry delivery of Series
A Preferred pursuant to the Exchange Offer, however, requires receipt by DTC
and the Exchange Agent of a Book-Entry Confirmation prior to the Expiration
Date. The Book-Entry Confirmation must include the participant number, the
CUSIP number for the Series A Preferred (20589R206), the CUSIP number for the
Series B Preferred (20989R305) and the number of shares of Preferred Stock
being exchanged in the Exchange Offer. Copies of the Book-Order Confirmation
must be delivered to DTC's Book-Entry Transfer Facility with an additional
copy sent by facsimile transmission to the Exchange Agent at (201) 296-4491,
Attention: Corey McQuillan. In addition, although delivery of Series A
Preferred may be effected through book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility, the Letter of Transmittal
(or a manually signed facsimile thereof), together with any required signature
guarantees and any other required documents, or an Agent's Message in
connection with a book-entry transfer, must, in any case, be delivered or
transmitted to and received by the Exchange Agent at its address set forth on
the back cover page of this Prospectus prior to the Expiration Date to receive
Series B Preferred for tendered Series A Preferred, or the guaranteed delivery
procedure described below must be complied with. Tender will not be deemed
made until such documents are received by the Exchange Agent. Delivery of
documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
GUARANTEED DELIVERY PROCEDURES
Existing Holders who wish to tender their Series A Preferred and (i) whose
Series A Preferred are not immediately available, (ii) who cannot deliver
their Series A Preferred, the Letter of Transmittal or any other required
documents to the Exchange Agent or (iii) who cannot complete the procedures
for book-entry transfer, prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Existing Holder, the certificate
number(s) of such Series A Preferred and the principal amount of Series A
Preferred tendered, stating that the tender is being made thereby and
guaranteeing that, within three New York Stock Exchange trading days after
the Expiration Date, the Letter of Transmittal (or facsimile thereof),
together with the certificate(s) representing the Series A Preferred (or a
confirmation of book-entry transfer of such Series A Preferred into the
Exchange Agent's account at DTC) and any other documents required by the
Letter of Transmittal, will be deposited by the Eligible Institution with
the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Series A Preferred in proper form for transfer (or a confirmation of book-
entry transfer of such Series A Preferred into the Exchange Agent's account
at DTC) and all other documents required by the Letter of Transmittal, are
received by the Exchange Agent within three New York Stock Exchange trading
days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Existing Holders who wish to tender their Series A Preferred according
to the guaranteed delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Series A Preferred may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
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To withdraw a tender of Series A Preferred in the Exchange Offer, a written
or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at the address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Series A Preferred to be
withdrawn (the "Depositor"), (ii) identify the Series A Preferred to be
withdrawn (including the certificate number(s) and principal amount of such
Series A Preferred, or, in the case of Series A Preferred transferred by book-
entry transfer, the name and number of the account at DTC to be credited),
(iii) be signed by the Existing Holder in the same manner as the original
signature on the Letter of Transmittal by which such Series A Preferred were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee register the transfer of
such Series A Preferred into the name of the person withdrawing the tender and
(iv) specify the name in which any such Series A Preferred are to be
registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time or receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Series A Preferred so withdrawn will be deemed not
to have been validly tendered for purposes of the Exchange Offer and no Series
B Preferred will be issued with respect thereto unless the Series A Preferred
so withdrawn are validly retendered. Any Series A Preferred which have been
tendered but which are not accepted for exchange will be returned to such
Existing Holder without cost to such Existing Holder as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Series A Preferred may be retendered by following one of
the procedures described above under "--Procedures for Tendering" at any time
prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange Series A Preferred for any Series B
Preferred, and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Series A Preferred, if:
(a) in the opinion of counsel to the Company, the Exchange Offer or any
part thereof contemplated herein violates any applicable law or
interpretation of the Staff;
(b) any action or proceeding shall have been instituted or threatened in
any court or by any governmental agency which might materially impair the
ability of the Company to proceed with the Exchange Offer or any material
adverse development shall have occurred in any existing action or
proceeding with respect to the Company;
(c) any governmental approval has not been obtained, which approval the
Company shall deem necessary for the consummation of the Exchange Offer as
contemplated hereby;
(d) any cessation of trading on the Nasdaq Stock Market or any exchange,
or any banking moratorium, shall have occurred, as a result of which the
Company is unable to proceed with the Exchange Offer; or
(e) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Exchange Offer
Registration Statement or proceedings shall have been initiated or, to the
knowledge of the Company, threatened for that purpose.
If the Company determines in its reasonable judgment that any of the
foregoing conditions are not satisfied, the Company may (i) refuse to accept
any Series A Preferred and return all tendered Series A Preferred to the
tendering Existing Holders, (ii) extend the Exchange Offer and retain all
Series A Preferred tendered prior to the expiration of the Exchange Offer,
subject, however, to the rights of Existing Holders to withdraw such Series A
Preferred (see "--Withdrawals of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Series A Preferred which have not been withdrawn.
EXCHANGE AGENT
ChaseMellon Shareholder Services, LLC will act as Exchange Agent for the
Exchange Offer with respect to the Series A Preferred.
35
<PAGE>
Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal for the Series A Preferred and
requests for copies of the Notice of Guaranteed Delivery should be directed to
the Exchange Agent, addressed as follows:
<TABLE>
<C> <S>
By Hand, Overnight Courier ChaseMellon Shareholder Services LLC
or Mail: 235 Montgomery Street, 23rd Floor
San Francisco, California 94104
Attention: William Dougherty
By Facsimile: (415) 398-7156
Confirm by Telephone: (415) 743-1434
</TABLE>
FEES AND EXPENSES
The expenses of soliciting Series A Preferred for exchange will be borne by
the Company. The principal solicitation is being made by mail by the Exchange
Agent. However, additional solicitation may be made by telephone, facsimile or
in person by officers and regular employees of the Company and its affiliates
and by persons so engaged by the Exchange Agent.
The Company will pay the Exchange Agent reasonable and customary fees for
its services and will reimburse it for its reasonable out-of-pocket expenses
in connection therewith and pay other registration expenses, including fees
and expenses of the Trustee (as defined), filing fees, blue sky fees and
printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Series A Preferred pursuant to the Exchange Offer. If, however,
certificates representing the Series B Preferred or the Series A Preferred for
principal amounts not tendered or accepted for exchange are to be delivered
to, or are to be issued in the name of, any person other than the registered
Holder of the Series A Preferred tendered, or if tendered Series A Preferred
are registered in the name of any person other than the person signing the
Letter of Transmittal, or if a transfer tax is imposed for any reason other
than the exchange of the Series A Preferred pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
Existing Holder or any other person) will be payable by the tendering Existing
Holder.
ACCOUNTING TREATMENT
The Series B Preferred will be recorded at the same carrying value as the
Series A Preferred. Accordingly, no gain or loss for accounting purposes will
be recognized in connection with the Exchange Offer. The expenses of the
Exchange Offer will be amortized over the term of the Series B Preferred.
RESALE OF SERIES B PREFERRED
The Company is making the Exchange Offer in reliance on the position of the
staff of the Staff of the Commission as set forth in the Staff's Exxon Capital
No-Action Letter, Morgan Stanley & Co. Incorporated No-Action Letter, Shearman
& Sterling No-Action Letter, and other interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letter addressing such matters and there can be no assurance that
the Staff would make a similar determination with respect to the Exchange
Offer as it has in such interpretive letters to third parties. Based on these
interpretations by the Staff, and subject to the two immediately following
sentences, the Company believes that Series B Preferred issued pursuant to
this Exchange Offer in exchange for Series A Preferred may be offered for
resale, resold and otherwise transferred by a such New Holder (other than a
New Holder who is a broker-dealer) without further compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that such Series B Preferred are acquired in the ordinary course of
such New Holder's business and that such New Holder is not participating, and
has no arrangement or understanding with any person to participate, in a
distribution (within the meaning of the Securities Act) of such Series B
Preferred. However, any Existing Holder who (i) is an "affiliate" of the
36
<PAGE>
Company (within the meaning of Rule 405 under the Securities Act), (ii) does
not acquire such Series B Preferred in the ordinary course of its business,
(iii) intends to participate in the Exchange Offer for the purpose of
distributing Series B Preferred, or (iv) is a broker-dealer who purchased such
Series A Preferred directly from the Company, (a) will not be able to rely on
the interpretations of the Staff set forth in the above-mentioned interpretive
letters, (b) will not be permitted or entitled to tender such Series A
Preferred in the Exchange Offer and (c) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or other transfer of such Series A Preferred unless such sale is made
pursuant to an exemption from such requirements. In addition, as described
below, if any broker-dealer holds Series A Preferred acquired for its own
account a Participating Broker-Dealer, then such Participating Broker-Dealer
may be deemed a statutory "underwriter" within the meaning of the Securities
Act and must deliver a prospectus meeting the requirements of the Securities
Act in connection with any resales of such Series B Preferred.
Each Existing Holder who wishes to exchange Series A Preferred for Series B
Preferred in the Exchange Offer will be required to represent that (i) it is
not an affiliate of the Company, (ii) any Series B Preferred to be received by
it are being acquired in the ordinary course of its business, and (iii) it has
no arrangement or understanding with any person to participate in a
distribution (within the meaning of the Securities Act) of such Series B
Preferred. Each broker-dealer that receives Series B Preferred for its own
account pursuant to the Exchange Offer must acknowledge that it acquired the
Series A Preferred for its own account as a result of market-making activities
or other trading activities (and not directly from the Company) and must agree
that it will deliver a prospectus meeting the requirements of the Securities
Act in connection with any resale of such Series B Preferred. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus,
such a Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. Based on the position
taken by the Staff in the interpretive letters referred to above, the Company
believes that Participating Broker-Dealers may fulfill their prospectus
delivery requirements with respect to the Series B Preferred received upon
exchange of such Series A Preferred with a prospectus meeting the requirements
of the Securities Act, which may be the prospectus prepared for an exchange
offer so long as it contains a description of the plan of distribution with
respect to the resale of such Series B Preferred. Accordingly, this
Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer during the period referred to below in
connection with resales of Series B Preferred received in exchange for Series
A Preferred where such Series A Preferred were acquired by such Participating
Broker-Dealer for its own account as a result of market-making or other
trading activities. Subject to certain provisions set forth in the
Registration Rights Agreement, the Company shall use its best efforts to keep
the Exchange Offer Registration Statement continuously effective, supplemented
and amended to the extent necessary to ensure that it is available for sales
of Series B Preferred by Participating Broker-Dealers, and to ensure that the
Exchange Offer Registration Statement conforms with the requirements of the
Act and the policies, rules and regulations of the Commission as announced
from time to time, for a period expiring approximately 180 days from the date
on which the Exchange Offer Registration Statement is declared effective. See
"Plan of Distribution." Any Participating Broker-Dealer who is an affiliate of
the Company may not rely on such interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. See "The Exchange Offer--Resales of
Series B Preferred."
In that regard, each Participating Broker-Dealer who surrenders Series A
Preferred pursuant to the Exchange Offer will be deemed to have agreed, by
execution of the Letter of Transmittal, that, upon receipt of notice from the
Company of the occurrence of any event or the discovery of any fact which
makes any statement contained or incorporated by reference in this Prospectus
untrue in any material respect or which causes this Prospectus to omit to
state a material fact necessary in order to make the statements contained or
incorporated by reference herein, in light of the circumstances under which
they were made, not misleading or of the occurrence of certain other events
specified in the Registration Rights Agreement, such Participating Broker-
Dealer will suspend the sale of Series B Preferred pursuant to this Prospectus
until the Company has amended or supplemented this Prospectus to correct such
misstatement or omission and has furnished copies of the amended or
supplemented
37
<PAGE>
Prospectus to such Participating Broker-Dealer or the Company has given notice
that the sale of the Series B Preferred may be resumed, as the case may be.
CONSEQUENCES OF FAILURE TO EXCHANGE
Any Series A Preferred tendered and exchanged in the Exchange Offer will
reduce the aggregate principal amount of Series A Preferred outstanding.
Following the consummation of the Exchange Offer, Existing Holders who did not
tender their Series A Preferred generally will not have any further
registration rights under the Registration Rights Agreement, and such Series A
Preferred will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Series A Preferred could be
adversely affected. The Series A Preferred are currently eligible for sale
pursuant to Rule 144A through The Portal Market. Because the Company
anticipates that most Existing Holders will elect to exchange such Series A
Preferred for Series B Preferred due to the absence of restrictions on the
resale of Series B Preferred (except for applicable restrictions on any New
Holder who is an affiliate of the Company or is a broker-dealer which acquired
the Series A Preferred directly from the Company) under the Securities Act,
the Company anticipates that the liquidity of the market for any Series A
Preferred remaining after the consummation of the Exchange Offer may be
substantially limited.
As a result of the making of this Exchange Offer, the Company will have
fulfilled certain of its obligations under the Registration Rights Agreement,
and Existing Holders who do not tender their Series A Preferred, except for
certain instances involving the Initial Purchasers or Existing Holders who are
not eligible to participate in the Exchange Offer, will not have any further
registration rights under the Registration Rights Agreement or otherwise or
rights to receive Liquidated Damages (as defined) for failure to register.
Accordingly, any Existing Holder that does not exchange that Holder's Series A
Preferred for Series B Preferred will continue to hold the untendered Series A
Preferred and will be entitled to all the rights and subject to all the
limitations applicable thereto under the Certificate of Designation, except to
the extent that such rights or limitations, by their terms, terminate or cease
to have further effectiveness as a result of the Exchange Offer.
The Series A Preferred that are not exchanged for Series B Preferred
pursuant to the Exchange Offer will remain restricted securities. Accordingly,
such Series A Preferred may be resold only (i) to the Company or any of its
subsidiaries, (ii) inside the United States to a QIB in a transaction
complying with Rule 144A, (iii) inside the United States to an institutional
"accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) an "Accredited Investor" that, prior to such transfer,
furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the
Trustee a signed letter containing certain representations and agreements
relating to the restrictions on transfer of the Securities (the form of which
letter can be obtained from such Trustee), (iv) outside the United States in
compliance with Rule 904 under the Securities Act, (v) pursuant to the
exemption from registration provided by Rule 144 under the Securities Act (if
available), or (vi) pursuant to an effective registration statement under the
Securities Act. Each Accredited Investor that is not a QIB and that is an
original purchaser of any of the Securities from the Initial Purchasers will
be required to sign a letter confirming that such person is an Accredited
Investor under the Securities Act and that such person acknowledges the
transfer restrictions summarized herein.
OTHER
Participation in the Exchange Offer is voluntary and Existing Holders should
carefully consider whether to accept. Existing Holders are urged to consult
their financial and tax advisors in making their own decision on what action
to take.
The Company may in the future seek to acquire untendered Series A Preferred
in open market or privately negotiated transactions, through subsequent
exchange offers or otherwise. The Company has no present plans to acquire any
Series A Preferred that are not tendered in the Exchange Offer or to file a
registration statement to permit resales of any untendered Series A Preferred.
38
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual cash and cash equivalents and
capitalization of the Company derived from its financial statements as of
March 31, 1998, and (ii) such amounts as adjusted to reflect the sale by the
Company of an aggregate of 150,000 shares of the Series A Preferred Stock
having net proceeds to the Company of $144.3 million after deducting the
estimated discount and offering expenses. The capitalization information set
forth in the table below is qualified by the more detailed Financial
Statements and Notes thereto included elsewhere in this Offering Memorandum
and should be read in conjunction with such Financial Statements and Notes.
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
AS
ACTUAL ADJUSTED
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents(1)......................... $ 63,707 $ 207,957
=========== ===========
Long-term debt:
Capital lease obligations, net of current por-
tion(2)........................................... $ 8,879 $ 8,879
12 3/4% Senior Notes due 2007(3)................... 145,688 145,688
----------- -----------
Total long-term debt, net of current portion..... 154,567 154,567
13 1/2% Senior Redeemable Exchangeable Preferred
Stock due 2010...................................... -- 144,250
Stockholders' equity:
Common Stock, $0.001 par value; 100,000,000 shares
authorized;
14,176,633 shares outstanding(4).................. 183,083 183,083
Accumulated deficit................................ (169,761) (169,761)
Deferred compensation.............................. (1,176) (1,176)
----------- -----------
Total stockholders' equity....................... 12,146 12,146
----------- -----------
Total capitalization............................. $ 166,713 $ 310,963
=========== ===========
</TABLE>
- --------
(1) Excludes restricted cash of $53.3 million held in an escrow account in
connection with the Company's Existing Senior Notes. See "Description of
Certain Indebtedness" and Note 4 of Notes to Financial Statements.
(2) See Note 3 of Notes to Financial Statements.
(3) Includes the unamortized discount of $4.3 million relating to the Warrants
which were issued in connection with the Existing Senior Notes. See Note 4
of Notes to Financial Statements.
(4) Excludes options and warrants to purchase approximately 5.1 million shares
of Common Stock of the Company outstanding at March 31, 1998.
39
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein. The statement of operations data for each of the
three years ended December 31, 1997 and balance sheet data as of December 31,
1996 and 1997 are derived from financial statements of the Company which have
been audited by Ernst & Young LLP, independent auditors, and are included
elsewhere herein. The statement of operations for the three month periods
ended March 31, 1997 and March 31, 1998 and balance sheet data as of March 31,
1998 are derived from unaudited financial statements included elsewhere
herein. The pro forma statement of operations data for the year ended December
31, 1997 has been derived from selected unaudited pro forma condensed combined
financial information which is included elsewhere in this Prospectus. The
unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and results of operations for these
periods. The operating results for the three months ended March 31, 1998 are
not necessarily indicative of the results to be expected for any future
period. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS
PRO FORMA ENDED
YEAR ENDED DECEMBER 31 YEAR ENDED MARCH 31,
---------------------------------------------- DECEMBER 31, --------------------
1993 1994 1995 1996 1997 1997(1)(2) 1997 1998(2)(3)
------- ------- -------- -------- -------- ------------ -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ 23 $ 442 $ 2,483 $ 15,648 $ 45,457 $ 55,411 $ 9,154 $ 16,484
Cost of revenue......... 130 2,891 16,168 47,945 61,439 70,635 15,744 17,724
Network equipment write-
off(4)................. -- -- -- 8,321 -- -- -- --
Development............. 349 534 837 2,449 4,850 5,665 1,025 1,507
Marketing and sales..... 131 639 3,899 16,609 24,622 28,613 4,936 8,494
General and
administrative......... 634 611 2,866 3,445 4,790 7,653 1,060 1,852
Amortization of goodwill
and other intangible
assets................. -- -- -- -- -- 3,239 -- 506
Write-off of in-process
technology............. -- -- -- -- -- -- -- 5,200
------- ------- -------- -------- -------- -------- -------- --------
Total costs and
operating expenses..... 1,244 4,675 23,770 78,769 95,701 115,805 22,765 35,283
------- ------- -------- -------- -------- -------- -------- --------
Loss from operations.... (1,221) (4,233) (21,287) (63,121) (50,244) (60,394) (13,611) (18,799)
Other income, net....... -- -- -- -- 1,233 1,278 -- --
Net interest expense.... (24) (57) (721) (3,260) (6,571) (24,962) (1,070) (4,470)
------- ------- -------- -------- -------- -------- -------- --------
Loss before
extraordinary item..... (1,245) (4,290) (22,008) (66,381) (55,582) (84,078) (14,681) (23,269)
Extraordinary gain on
early retirement of
debt................... -- -- -- -- -- -- -- 3,042
------- ------- -------- -------- -------- -------- -------- --------
Net loss................ $(1,245) $(4,290) $(22,008) $(66,381) $(55,582) $(84,078) $(14,681) $(20,227)
======= ======= ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Depreciation and
amortization........... $ 46 $ 169 $ 2,196 $ 9,470 $ 19,230 $ 24,348 $ 3,840 $ 6,763
EBITDA(5)............... (1,175) (4,064) (19,091) (53,651) (31,014) (36,046) (9,771) (6,836)
Capital
expenditures(6)........ 817 718 17,176 39,093 22,798 25,938 8,930 2,847
Ratio of earnings to
fixed charges(7)....... N/A N/A N/A N/A N/A N/A N/A N/A
Deficiency of earnings
available to cover
fixed charges(2)(7).... $(1,245) $(4,290) $(22,008) $(66,381) $(55,582) $(84,078) $(14,681) $(23,269)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------------------ MARCH 31,
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equiva-
lents.................... $ 55 $ 63 $19,054 $17,657 $119,959 $ 63,707
Restricted cash(8)........ -- -- -- -- 52,525 53,273
Property and equipment,
net...................... 675 1,303 16,289 47,927 53,710 53,916
Total assets.............. 783 1,798 37,235 70,722 244,489 202,870
Long-term debt and capital
lease obligations, net of
current portion.......... 1,251 1,648 11,047 30,551 179,172 154,567
Total stockholders' equity
(deficit)................ (1,172) (4,202) 9,763 2,925 31,918 12,146
</TABLE>
(Footnotes appear on the next page.)
40
<PAGE>
- --------
(1) The pro forma statement of operations data gives effect to the InterNex
acquisition which occurred effective on February 5, 1998 as if it occurred
on January 1, 1997. In addition, the pro forma statement of operations
data includes pro forma adjustments reflecting the interest that would
have been incurred had the Existing Senior Notes been outstanding as of
January 1, 1997. See Selected Unaudited Pro Forma Condensed Combined
Financial Information.
(2) Statement of operations data does not reflect the Offering. Preferred
Stock dividends and accretion on a pro forma basis, assuming the Offering
occurred on January 1, 1997, would have been $21.8 million for the year
ended December 31, 1997. Assuming the Offering occurred on January 1,
1998, dividends and accretion on a pro forma basis for the three months
ended March 31, 1998 would have been $5.2 million.
(3) Includes the results of InterNex's operations from February 5, 1998 (the
date of acquisition) through the end of the period. See Note 12 of Notes
to Financial Statements.
(4) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 of Notes to Financial Statements.
(5) EBITDA is loss from operations before interest, taxes, depreciation and
amortization and, for the three months ended March 31, 1998, also excludes
the write-off of in-process technology. EBITDA is included herein because
management believes that certain investors find it to be a useful tool for
measuring a company's ability to service its debt; however, EBITDA does
not represent cash flow from operations, as defined by generally accepted
accounting principles, should not be considered as a substitute for net
loss as an indicator of the Company's operating performance or cash flow
as a measure of liquidity, and should be examined in conjunction with the
Financial Statements and Notes thereto of the Company included elsewhere
in this Prospectus.
(6) Capital expenditures includes assets acquired through capital lease
financing and other debt.
(7) For purposes of this computation, the ratio of earnings to fixed charges
has been calculated by dividing fixed charges into loss before income
taxes, fixed charges and extraordinary items. Fixed charges consist of
interest expense and a portion of lease rental charges considered to
represent interest cost.
(8) Restricted cash of $53.3 million consists of funds held in escrow to pay
interest relating to the Company's Existing Senior Notes. See "Description
of Certain Indebtedness" and Note 4 of Notes to Financial Statements.
41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with financial
statements and related notes included elsewhere in this Prospectus. The
results shown herein are not necessarily indicative of the results to be
expected in any future periods. This discussion contains forward-looking
statements based on current expectations which involve risks and
uncertainties. Actual results and the timing of certain events may differ
significantly from those projected in such forward-looking statements due to a
number of factors, including those set forth in the section entitled "Risk
Factors" and elsewhere in this Prospectus.
OVERVIEW
The Company was founded in 1991. From 1991 to mid-1993, the Company
conducted development and network services planning activities and realized no
revenues. Initially, the Company was focused on providing consumers with
direct dial-up connectivity to bulletin board services. On-line gaming and
entertainment services for consumers were commenced in July 1993 through the
utilization of a third party network infrastructure. The Company commenced
operation of its own network in late 1994. In May 1995, new management led by
Henry R. Nothhaft redefined and broadened the Company's strategy to provide a
range of Internet and tailored, value-added Internet Protocol-based network
services to consumers and businesses.
The Company's revenue prior to 1996 has been primarily generated from
providing Internet access to consumers. The Company's current focus is on
developing and deploying 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 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, which will be amortized on a
straight-line basis over their useful lives ranging from two to five years.
See Note 12 of Notes to Financial Statements. If the Company were to incur
additional charges for acquired in-process technology and amortization of
goodwill 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 "Risk Factors--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 $20.2
million for the three months ended March 31, 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.
At December 31, 1997, the Company had approximately $60.0 million of gross
deferred tax assets comprised primarily of net operating loss carryforwards.
The Company believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability
of the deferred tax assets such that a full valuation allowance has been
recorded. These factors include the Company's history of net losses since its
inception and the fact that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology. The
42
<PAGE>
Company believes that, based on the current available evidence, it is more
likely than not that the Company will not generate taxable income through
1999, and possibly beyond, and accordingly will not realize the Company's
deferred tax assets through 1999, and possibly beyond. The Company will
continue to assess the realizability of the deferred tax assets based on
actual and forecasted operating results. In addition, the utilization of net
operating losses may be subject to a substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration
of net operating losses before utilization. See Note 9 of Notes to Financial
Statements.
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.
RECENT FINANCIAL RESULTS
The Company's revenue, net loss attributable to common stockholders and net
loss per share attributable to common stockholders for the three months ended
June 30, 1998 were $19.7 million, $21.5 million and $1.49, respectively, as
compared to revenue, net loss attributable to common stockholders and pro
forma net loss per share attributable to common stockholders for the three
months ended June 30, 1997 of $10.8 million, $12.9 million and $1.86,
respectively. For the six months ended June 30, 1998, the Company's revenue,
net loss attributable to common stockholders and net loss per share
attributable to common stockholders were $36.1 million, $41.7 million and
$2.92, respectively, as compared to revenue, net loss attributable to common
stockholders and pro forma net loss per share attributable to common
stockholders of $20.0 million, $27.6 million and $4.03 for the six months
ended June 30, 1997, respectively. The increase in revenue reflects growth in
revenue from the Company's broadened product offerings to its enterprise
customers as well as continued growth in revenue from internet access
customers and revenue derived from acquisitions. The net loss attributable to
common stockholders and net loss per share attributable to common stockholders
numbers for the quarter ended June 30, 1998 and the six months ended June 30,
1998 include several charges related to financings and acquisitions which
occurred in the fourth quarter of 1997 and first six months of 1998. For the
quarter ended June 30, 1998, such charges include a one-time charge of $1.3
million resulting from the acquisition of Delta Internet Services, Inc., $1.3
million of dividends and accretion related to the Series A Preferred, $5.0
million of interest expenses and amortization of debt issuance costs and
warrants related to the Senior Notes and $0.8 million of amortization of
goodwill and other intangibles related to the Company's purchase of Internex
in February 1998. For the six month period ended June 30, 1998, such charges
include the one-time charge of $1.3 million resulting from the acquisition of
Delta Internet Services, Inc., a one-time charge of $5.2 million resulting
from the acquisition of Internex, the $1.3 million of dividends and accretion
related to the Series A Preferred, $10.1 million of interest expense and
amortization of debt issuance costs and warrants related to the Senior Notes
and $1.3 million of amortization of goodwill and other intangible assets
relating to the acquisition of Internex.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997.
Revenue. Revenue totaled approximately $16.5 million for the three months
ended March 31, 1998, a $7.3 million increase over revenue of approximately
$9.2 million for the three months ended March 31, 1997. This increased revenue
reflects growth in revenue from the Company's broadened product offerings to
its enterprise customers and through the Company's leveraged marketing
arrangements with its strategic partners, continued growth in revenue derived
from Internet access customers and two months of revenue generated from
InterNex which was acquired in February 1998. For the three months ended March
31, 1998, revenue from WebTV Networks, Inc. ("WNI") declined to 30.8% of the
Company's net revenue from 32.7% for the three months ended March 31, 1997.
The Company expects revenue from WNI 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 below under the caption "Risk
Factors--Customer Concentration."
43
<PAGE>
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 March 31, 1998 was approximately $17.7 million, an increase
of $2.0 million from cost of revenue of $15.7 million in the first quarter of
1997. This increase is attributable to the overall growth in the size of the
network. As a percentage of revenue, such costs declined to 107.5% of revenue
in the three months ended March 31, 1998, down from 172.0% 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. 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 "Risk Factors--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 $1.5 million
and $1.0 million for the three months ended March 31, 1998 and 1997,
respectively. This higher level of development expense reflects an overall
increase in personnel to develop new product offerings and to manage the
overall growth in the network. Development expense as a percentage of revenue
declined to 9.1% for the three months ended March 31, 1998 from 11.2% in the
year earlier period as a result of the Company's increased revenue. The
Company expects its development spending to continue to increase in dollar
amount, but to decline as a percentage of revenue. The foregoing expectation
is a forward looking statement that involves risks and uncertainties and the
actual results could vary materially as a result of a number of factors,
including those set forth below under the caption "Risk Factors--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 $8.5
million and $4.9 million for the three months ended March 31, 1998 and 1997,
respectively. The $3.6 million increase in 1998 reflects a substantial
investment in the customer support, marketing and sales organizations
necessary to support the Company's expanded customer base. This increase also
reflects a growth in subscriber acquisition costs, related to both increased
direct marketing efforts as well as commissions paid to distribution partners.
Additionally, the increase reflects marketing efforts related to the
introduction and expansion of enterprise products and services. Marketing and
sales expense as a percentage of revenue declined to 51.5% for the three
months ended March 31, 1998 from 53.9% in the year earlier period as a result
of the Company's increased revenue. The Company expects marketing and sales
expenditures to continue to increase in dollar amount, but to decline as a
percentage of revenue. The foregoing expectation is a forward looking
statement that involves risks and uncertainties and the actual results could
vary materially as a result of a number of factors including those set forth
under "Risk Factors--Dependence on New and Uncertain Markets," "--Management
of Potential Growth and Expansion."
General and Administrative. General and administrative expense consists
primarily of personnel expense and professional fees. General and
administrative expense was approximately $1.9 million and $1.1 million for the
three months ended March 31, 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 declined to
11.2% for the three months ended March 31, 1998 from 11.6% in the year earlier
period as a result of the Company's increased revenue. The Company expects
general and administrative expense to increase in dollar amount, reflecting
its growth in operations and costs associated with being a publicly held
entity, but to decline as a percentage of revenue. The foregoing expectation
is a forward looking statement that involves risks and uncertainties and the
actual results could vary materially as a result of a number of factors
including those set forth under "Risk Factors--Dependence on New and Uncertain
Markets" and "--Management of Potential Growth and Expansion."
44
<PAGE>
Amortization of Goodwill and Other Intangible Assets. During the three
months ended March 31, 1998 the Company recorded amortization of goodwill and
other intangible assets of $506,000 resulting from the acquisition of InterNex
in February 1998 (see Note 12 of Notes to Financial Statements).
Write-off of In-Process Technology. In the quarter ended March 31, 1998 the
Company wrote-off $5.2 million in-process technology related to the InterNex
acquisition (see Note 12 of Notes to Financial Statements).
Net Interest Expense. Net interest expense was approximately $4.5 million
and $1.1 million for the quarters ending March 31, 1998 and 1997,
respectively. The increase is primarily due to interest related to $150.0
million principal amount of Existing Senior Notes.
Extraordinary Gain. During the three months ended March 31, 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 12 of Notes to
Financial Statements).
Net Loss. The Company's net loss increased to approximately $20.2 million
for the quarter ended March 31, 1998 as compared to approximately $14.7
million for the same quarter of 1997. The loss in 1998 included a one-time
charge for $5.2 million for the write-off of in process technology and an
extraordinary gain of $3.0 million for the early retirement of debt (see Note
12 of Notes to Financial Statements).
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
Revenue. Revenue for the year ended December 31, 1997 totaled approximately
$45.5 million, an increase of $29.9 million over revenue of $15.6 million for
the year ended December 31, 1996. This increased revenue reflects growth in
revenue from the Company's broadened product offerings to its enterprise
customers and through the Company's leveraged marketing arrangements with its
strategic partners, as well as continued growth in revenue derived from
Internet access customers. WebTV accounted for approximately 33.4% of total
revenue for the year ended December 31, 1997.
Cost of Revenue. Cost of revenue for the year ended December 31, 1997
totaled approximately $61.4 million compared with $47.9 million for the year
ended December 31, 1996. This increase is attributable to the overall growth
in the size of the network. As a percentage of revenue, costs declined to
135.2% of revenue in the year ended December 31, 1997 from 306.4% of revenue
in the year earlier period due to increased network utilization associated
with the Company's revenue growth and lower per port costs of the Company's
SuperPOP network architecture deployed in the second half of 1996.
Development. Development expense for the year ended December 31, 1997 and
1996 was approximately $4.9 million and $2.4 million, respectively. This
higher level of development expense reflects an overall increase in personnel
to develop new product offerings and to manage the overall growth in the
network. As a percent of revenue, development expense declined to 10.7% for
the year ended December 31, 1997 from 15.7% for the year ended December 31,
1996, as a result of the Company's increased revenue.
Marketing and Sales. For the year ended December 31, 1997 and 1996,
marketing and sales expense was approximately $24.6 million and $16.6 million,
respectively. The $8.0 million increase in 1997 reflects a substantial
investment in the customer support, marketing and sales organizations
necessary to support the Company's expanded customer base. This increase also
reflects a growth in subscriber acquisition costs, related to both increased
direct marketing efforts as well as commissions paid to distribution partners.
Additionally, the increase reflects the ramp-up of marketing efforts related
to the introduction of enterprise products and services. Marketing and sales
expense as a percentage of revenue declined to 54.2% for the year ended
December 31, 1997 from 106.1% in the year earlier period as a result of the
Company's increased revenue.
General and Administrative. For the year ended December 31, 1997 and 1996,
general and administrative expenses were approximately $4.8 million and $3.4
million, respectively. This higher level of expense reflects an increase in
personnel and professional fees necessary to manage the financial, legal and
administrative aspects of the business. For the year ended December 31, 1997,
general and administrative expense declined to 10.5% from 22.0% for the year
ended December 31, 1996 as a result of the Company's increased revenue.
Net Interest Expense. Net interest expense was approximately $6.6 million
and $3.3 million for the years ended December 31, 1997 and 1996, respectively.
The increase for the year ended December 31, 1997 was primarily due to a cost
of financing charge of $930,000 associated with the value of warrants issued
in connection
45
<PAGE>
with $5.0 million of bridge loans received in June 1997 and $744,000
associated with the issuance of the Existing Senior Notes. Additionally, the
principal amount of capitalized lease obligations increased $7.0 million from
December 31, 1996 to December 31, 1997. The year ended December 31, 1996
included approximately $330,000 associated with the value of warrants issued
in connection with bridge loan financing.
Other (Income) Expense. During the year ended December 31, 1997, upon
settlement of the Sattel litigation, the Company recorded $970,000 of other
income related to the reversal of previously established reserves.
Additionally, the Company recorded $425,000 of other income related to the re-
negotiation of a third party services agreement.
Net Loss. For the year ended December 31, 1997 the net loss totaled $55.6
million as compared to $66.4 million for the year ended December 31, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Revenue totaled approximately $15.6 million for the year ended
December 31, 1996, an increase of $13.1 million over 1995 revenue of
approximately $2.5 million. This increase reflects continued growth in revenue
derived from Internet access customers, as well as revenue from the Company's
broadened enterprise product offerings and through the Company's leveraged
marketing arrangements with its strategic partners. The average selling prices
of the Company's offerings for consumer Internet access services decreased by
approximately 33% beginning in April 1996 due to industry-wide adoption of
flat monthly rates for unlimited Internet access.
Cost of Revenue. Cost of revenue for the year ended December 31, 1996 was
approximately $47.9 million, an increase of $31.7 million from 1995 cost of
revenue of approximately $16.2 million. The largest component of this increase
was the cost of providing virtual local access ("VLA") service over 800
circuits. VLA service was an interim solution for providing nationwide
coverage, while the Company's SuperPOP network architecture was being
deployed. This deployment was substantially completed in December 1996. Costs
associated with VLA service are expected to be immaterial in amount in 1997.
The remainder of the increase in 1996 cost of revenue is primarily
attributable to the overall growth in the size of the network.
Network Equipment Write-off. In 1996, the Company took a charge of
approximately $8.3 million related to the cost of certain network equipment.
The Company decided not to deploy the equipment in the network because of
concerns that the equipment would not provide the functionality and
reliability required by the Company and concerns that the equipment provider
would be unable to provide timely maintenance and support. See Note 2 of Notes
to Financial Statements.
Development. Development expense for the year ended December 31, 1996 was
approximately $2.4 million, an increase of $1.6 million over 1995 expenditures
of approximately $837,000. This higher level of development expense in 1996
primarily reflects an overall increase in personnel to develop new product
offerings and to manage the overall growth in the network.
Marketing and Sales. Marketing and sales expense for 1996 was approximately
$16.6 million, an increase of $12.7 million over 1995 expenditures of
approximately $3.9 million. This increase in marketing and sales expense
reflects a substantial investment in the customer support, marketing and sales
organizations required to support the Company's expanded customer base. This
increase also reflects a growth in subscriber acquisition costs, related to
both increased direct marketing efforts as well as commissions paid to
distribution partners. Additionally, the increase reflects the ramp-up of
marketing efforts related to the introduction of enterprise products and
services.
General and Administrative. General and administrative expense for 1996 was
approximately $3.4 million, an increase of $500,000 over 1995 expenditures of
approximately $2.9 million. This increase reflects an increase in personnel
and professional fees necessary to manage the financial, legal and
administrative aspects of the business.
46
<PAGE>
Net Interest Expense. Net interest expense for 1996 was approximately $3.3
million as compared to approximately $721,000 for 1995. The increase of $2.6
million is primarily due to an increase of $27.6 million in principal amount
of the capitalized lease obligations from December 31, 1995 to December 31,
1996. This increase in interest expense was partially offset by greater
interest income from higher average cash balances resulting from equity
financings completed in late 1995 and in August 1996. See Notes 3 and 6 of
Notes to Financial Statements.
Net Loss. The Company's net loss increased to approximately $66.4 million in
1996 from approximately $22.0 million in 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenue. Revenue totaled approximately $2.5 million for 1995, an increase of
$2.1 million, over 1994 revenue of approximately $400,000. The Company's
revenue in 1995 reflects its first full year of providing network services.
The Company's revenue in both of these years was derived entirely from the
sale of Internet access services to consumers.
Cost of Revenue. Cost of revenue for 1995 was approximately $16.2 million,
an increase of $13.3 million over 1994 cost of revenue of approximately $2.9
million. The increase in cost of revenue from 1994 to 1995 reflected overall
higher costs associated with deploying and managing the Company's own network
infrastructure. Prior to late 1994, the Company had leased third party network
facilities and thus had not incurred significant network deployment and
maintenance expenses.
Development. Development expense for 1995 was approximately $837,000, an
increase of $303,000 over 1994 expenditures of approximately $534,000. This
higher level of development expense primarily reflected an overall increase in
personnel required to develop new products and support network growth.
Marketing and Sales. Marketing and sales expense for 1995 was approximately
$3.9 million, an increase of $3.3 million over 1994 expenditures of
approximately $639,000. This higher level of spending in 1995 reflected the
Company's new market focus on providing IP-based network services. In
connection with this new focus, the Company incurred increased expenses
related to direct subscriber acquisition, formation of a telesales group,
development of strategic relationships and marketing communications. With the
growth in subscribers, the Company added personnel to its customer support
organization.
General and Administrative. General and administrative expense for 1995 was
$2.9 million, an increase of $2.3 million over 1994 expenditures of
approximately $600,000. This increase generally reflects an increase in
personnel and professional fees necessary to manage the financial, legal and
administrative aspects of the business.
Net Interest Expense. Net interest expense for 1995 was approximately
$721,000 as compared with approximately $57,000 for 1994. This increase in net
interest expense resulted from the Company's deployment of network equipment
for its own network infrastructure beginning in late 1994 which equipment
purchases were primarily financed under capital leases. Capital lease
obligations at December 31, 1995 were $14.2 million, compared with no such
obligations at December 31, 1994.
Net Loss. The Company's net loss increased to approximately $22.0 million in
1995 from a net loss of $4.3 million in 1994.
QUARTERLY RESULTS OF OPERATIONS
The Company's quarterly operating results can fluctuate from period-to-
period depending upon factors such as the success of the Company's efforts to
expand its subscriber and third party partnership base, changes in, and the
timing of, expenses relating to development and sales and marketing and
changes in pricing policies by the Company or its competitors. Management
believes that period-to-period comparisons of its financial results should not
be relied upon as an indication of future performance. The Company may
experience significant period-to-period fluctuations in operating results.
47
<PAGE>
The following tables set forth the statement of operations data for each of
the five quarters through March 31, 1998, as well as the percentage of the
Company's revenue. This information has been derived from the Company's
unaudited financial statements. In the opinion of management, the unaudited
information set forth below has been prepared on the same basis as the audited
financial statements contained herein and includes all adjustments, consisting
only of normal recurring adjustments necessary to present fairly the
information set forth herein. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31, JUNE 30, SEP. 30, DEC. 31, MARCH 31,
1997 1997 1997 1997 1998
--------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue...................... $ 9,154 $ 10,814 $ 11,824 $ 13,665 $ 16,484
Costs and operating expenses:
Cost of revenue............. 15,744 14,913 14,838 15,944 17,724
Development................. 1,025 1,200 1,313 1,312 1,507
Marketing and sales......... 4,936 6,094 6,459 7,133 8,494
General and administrative.. 1,060 1,127 1,182 1,421 1,852
Amortization and goodwill
and other tangible assets.. -- -- -- -- 506
Write-off of in-process
technology................. -- -- -- -- 5,200
-------- -------- -------- -------- --------
Total costs and operating
expenses.................. 22,765 23,334 23,792 25,810 35,283
-------- -------- -------- -------- --------
Loss from operations......... (13,611) (12,520) (11,968) (12,145) (18,799)
Other income (expense), net.. -- 1,395 (162) -- --
Net interest expense......... (1,070) (1,779) (2,088) (1,634) (4,470)
-------- -------- -------- -------- --------
Loss before extraordinary
item........................ (14,681) (12,904) (14,218) (13,779) (23,269)
Extraordinary gain on early
retirement of debt.......... -- -- -- -- 3,042
-------- -------- -------- -------- --------
Net loss..................... $(14,681) $(12,904) $(14,218) $(13,779) $(20,227)
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31, JUNE 30, SEP. 30, DEC. 31, MARCH 31,
1997 1997 1997 1997 1998
--------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenue...................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and operating expenses:
Cost of revenue............. 172.0 137.9 125.5 116.7 107.5
Development................. 11.2 11.1 11.1 9.6 9.1
Marketing and sales......... 53.9 56.4 54.6 52.2 51.5
General and administrative.. 11.6 10.4 10.0 10.4 11.2
Amortization of goodwill and
other intangible assets.... -- -- -- -- 3.1
Write off of in-process
technology................. -- -- -- -- 31.6
------ ------ ------ ------ ------
Total operating costs and
expenses.................. 248.7 215.8 201.2 188.9 214.0
------ ------ ------ ------ ------
Loss from operations......... (148.7) (115.8) (101.2) (88.9) (114.0)
Other income (expense), net.. -- 12.9 (1.4) -- --
Net interest expense......... (11.7) (16.4) (17.7) (11.9) (27.1)
------ ------ ------ ------ ------
Loss before extraordinary
item........................ (160.4) (119.3) (120.3) (100.8) (141.1)
Extraordinary gain on early
retirement of debt.......... -- -- -- -- 18.4
------ ------ ------ ------ ------
Net loss..................... (160.4)% (119.3)% (120.3)% (100.8)% (122.7)%
====== ====== ====== ====== ======
</TABLE>
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
48
<PAGE>
and new network architectures, the incurrence of related capital costs, the
receipt of new value-added network services and consumer services
subscriptions and the introduction of new services by the Company and its
competitors. Additional factors that may contribute to variability of
operating results include: the pricing and mix of services offered by the
Company; customer retention rate; market acceptance of new and enhanced
versions of the Company's services; changes in pricing policies by the
Company's competitors; the Company's ability to obtain sufficient supplies of
sole- or limited-source components; user demand for network and Internet
access services; balancing of network usage over a 24-hour period; 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 securities would likely be materially and adversely affected.
In view of the significant growth of the Company's operations, the Company
believes that period-to-period comparisons of its financial results should not
be relied upon as an indication of future performance and that the Company may
experience in the future significant period-to-period fluctuations in
operating results. The Company expects to focus in the near term on building
and increasing its revenue base, which will require it to significantly
increase its expenses for personnel, marketing, network infrastructure and the
development of new services, and may adversely impact short term operating
results. As a result, there can be no assurance that the Company will be
profitable on a quarterly basis in the future and the Company believes that it
will incur losses in the near term.
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 financing obligations,
to finance and fund the InterNex acquisition and to provide for the early
retirement of debt. Net cash used in operating activities for the years ended
December 31, 1997 and 1996 was approximately $45.9 million and $42.1 million,
respectively. Included in the amount for the year ended December 31, 1997 is
$4.4 million of cash paid in settlement of a dispute with Sattel. Cash used in
operating activities in both periods was primarily affected by the net losses,
caused by increased costs relating to the expansion of the Company's network
and organizational infrastructure. Net cash used in operating activities for
the three months ended March 31, 1998 and 1997 was approximately $8.4 million
and $11.1 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 years ended December 31, 1997
and 1996 was approximately $6.5 million and $7.3 million, respectively.
Investing activities consisted primarily of purchases of capital equipment to
support the growing infrastructure. Net cash used in investing activities for
the three months ended March 31, 1998 and 1997 was approximately $17.7 million
and $2.5 million, respectively. Investing activities primarily consisted of a
cash payment of $15.5 million for the InterNex acquisition in the first
quarter of 1998 and purchases of capital equipment in both periods.
For the year ended December 31, 1997 net cash of approximately $154.7
million was generated from financing activities, of which $74.0 million, net
of issuance costs, was derived from the issuance of stocks and warrants and
$145.0 million, net of issuance costs, was derived from the issuances of the
Existing Senior Notes, net of $52.5 million investment in U.S. Government
treasury strips held as restricted cash in accordance with the terms of the
Existing Senior Notes. The Company also received $5.0 million in debt
financing in June 1997, of which $2.0 million was repaid and $3.0 million was
converted into Common Stock, respectively, upon closing
49
<PAGE>
of the Company's IPO. Concurrent with the closing of the IPO, the Company
repurchased $2.2 million of Common Stock from certain stockholders. The
remainder of financing activities for the year ended December 31, 1997 is
comprised of $11.6 million used for repayment of capital lease obligations.
For the year ended December 31, 1996, cash of approximately $48.1 million was
generated from financing activities, which reflects receipt of $48.5 million,
net of issuance costs, for Series D Convertible Preferred Stock. Also
reflected is a $5.0 million bridge loan which was later converted into Series
D Convertible Preferred Stock. Repayment of capital lease obligations for the
year ended December 31, 1996 was approximately $5.4 million. For the three
months ended March 31, 1998 net cash of approximately $30.1 million was used
in financing activities, of which $24.8 million was used for the early
retirement of capital lease obligations. For the three months ended March 31,
1997, net cash used in financing activities was $1.2 million relating to
principal payments on lease obligations.
The net cash increase for the year ended December 31, 1997 was $102.3
million as compared to a net cash decrease for the year ended December 31,
1996 of $1.4 million. At December 31, 1997, the Company had cash and cash
equivalents of approximately $120.0 million, restricted cash of $52.5 million
and working capital of $115.4 million. The net cash decrease for the three
month period ended March 31, 1998 was $56.3 million. This included a cash
payment of approximately $15.5 million associated with the acquisition of
InterNex and the related payment of $3.5 million for certain assumed
liabilities and $24.8 million used for the early retirement of debt. The net
cash decrease for the three months ended March 31, 1997 was $14.8 million. At
March 31, 1998 the Company had cash and cash equivalents of approximately
$63.7 million and working capital of $61.6 million.
On June 8, 1998, the Company issued 150,000 shares of Series A Preferred
(the "Offering") for total net proceeds of approximately $144.3 million.
Each share of Preferred Stock will have a liquidation preference of $1,000
per share. Dividends on the Preferred Stock will accrue at a rate of 13 1/2%
per annum of the liquidation preference thereof and will be payable quarterly
in arrears on March 1, June 1, September 1, and December 1 of each year (each
a "Dividend Payment Date"), commencing on September 1, 1998. Dividends will be
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 Preferred Stock (including fractional shares)
having an aggregate liquidation preference equal to the amount of such
dividends. The Preferred Stock will be redeemable at the option of the
Company, in whole or in part, at any time on or after June 1, 2003, at the
redemption prices set forth herein, plus accumulated and unpaid dividends and
Liquidated Damages, if any, 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 Preferred Stock from the net proceeds of one or more
Public Equity Offerings or one or more sales of its Common Stock other than
Disqualified Stock. The Preferred Stock is subject to mandatory redemption at
its liquidation preference, plus accumulated and unpaid dividends and
Liquidated Damages, if any, on June 1, 2010 out of any funds legally available
therefor. Upon a Change of Control, the Company will be required, subject to
certain conditions and after the Existing Senior Notes Maturity Date, to offer
to purchase all outstanding shares of the Preferred Stock at a price equal to
101% of the Liquidation Preference thereof plus accumulated and unpaid
dividends and Liquidated Damages, if any, to the date of purchase, or, if such
offer to purchase cannot be made, to reset the dividend rate on the Preferred
Stock so that, after such reset, the Preferred Stock would have a market value
of 101% of the Liquidation Preference thereof. See "Description of the
Preferred Stock."
The Preferred Stock will rank (i) senior to all Junior Securities; (ii) on a
parity with any Parity Securities; and (iii) junior to each class of Senior
Securities (as defined). In addition, the Preferred Stock will rank junior in
right of payment to all indebtedness and other obligations of the Company and
its subsidiaries. As of March 31, 1998, the Preferred Stock would have been
junior in right of payment to approximately $195.0 million of total
indebtedness and other obligations of the Company and its subsidiaries.
Following the Offering, the Company will have the ability to issue additional
shares of Preferred Stock in lieu of paying cash dividends through June 1,
2003. See "Description of Preferred Stock--Ranking."
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On any scheduled Dividend Payment Date, subject to certain conditions, the
Company may, at its option, exchange, in whole but not in part, all of the
shares of Preferred Stock then outstanding for the Company's 13 1/2% Senior
Subordinated Debentures due 2010 (the "Exchange Debentures"). See "Description
of Preferred Stock--Exchange."
Interest on the Exchange Debentures will accrue at a rate of 13 1/2% per
annum and will be payable semi-annually in arrears on June 1 and December 1 of
each year, commencing on the first such date after the issuance date of the
Exchange Debentures. Interest on the Exchange Debentures 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 Exchange Debentures will be
redeemable at the option of the Company, in whole or in part, at any time on
or after June 1, 2003 at the redemption prices set forth herein, plus accrued
and unpaid interest and Liquidated Damages, if any, 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 aggregate principal amount of Exchange Debentures
originally issued from the net proceeds of one or more underwritten public
offerings of its Common Stock or one or more sales of its Capital Stock (other
than Disqualified Stock) to one or more Strategic Investors. Upon a Change of
Control, the Company will be required, subject to certain conditions and after
the Existing Senior Notes Maturity Date, to offer to each holder of Exchange
Debentures to purchase all or any part of such holder's Exchange Debentures at
a price equal to 101% of the aggregate principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if any to the date of purchase,
or, if such offer to purchase cannot be made, to reset the interest rate on
the Exchange Debentures so that, after such reset, the Exchange Debentures
would have a market value of 101% of the aggregate principal amount thereof.
See "Description of the Exchange Debentures." The Preferred Stock and the
Exchange Debentures are sometimes referred to herein as the "Securities."
If the date of an Event of Default occurs on or prior to the Existing Senior
Notes Maturity Date, the remedies of holders of the Exchange Debentures will
be limited as set forth in this paragraph. Upon the acceleration of any
Designated Senior Debt by the holders thereof, the interest rate payable with
respect to the Exchange Debentures will be increased by one-half of one
percent per annum for the 90-day period following such Event of Default, which
rate will further increase by one-half of one percent per annum with respect
to each subsequent 90-day period during which such Event of Default is
continuing (or any other Event of Default is occurring while such initial
Event of Default is continuing), up to a maximum aggregate increase in
interest rate of two percent (2%) per annum. Any interest rate increase
effected pursuant to the foregoing shall only be effective during such time
that an Event of Default is continuing and prior to the Existing Senior Note
Maturity Date. Subsequent to the Existing Senior Notes Maturity Date, the
Trustee and holders of the Exchange Debentures will have customary remedies
upon the occurrence of an Event of Default. See "Description of the Exchange
Debentures--Events of Default."
The Company expects to incur additional operating losses and will rely
primarily on its available cash resources, the net proceeds from the issuance
of the Preferred Stock and financing available under a network equipment lease
agreement (that currently has no maximum borrowing limit) to meet its
anticipated cash needs for working capital and for the acquisition of capital
equipment through at least the end of 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 "Risk Factors--Future Capital Needs; Uncertainty of
Additional Financing." The Company may be required to raise additional funds
through public or private financing, strategic relationships or other
arrangements. There can be no assurance that such additional funding, if
needed, will be available on terms attractive to the Company, or at all.
IMPACT OF ADOPTION OF NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" (FAS 128). FAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted
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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 presented, and where appropriate, restated to conform to
the FAS 128 requirements and the SEC's SAB 98 related thereto.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" (FAS 130), and Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (FAS
131). The Company is required to adopt these Statements in fiscal 1998. FAS
130 establishes new standards for reporting and displaying comprehensive
income and its components. FAS 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. Adoption of these Statements is expected to
have no impact on the Company's financial position, results of operations or
cash flows.
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BUSINESS
Concentric provides tailored, value-added IP-based network services for
businesses and consumers. To provide these services, the Company utilizes its
low/fixed latency, high-throughput network, employing its advanced network
architecture and the Internet. Concentric's service offerings for enterprises
include VPNs, DAFs, remote access services and Web hosting services. These
services enable enterprises to take advantage of standard Internet tools such
as browsers and high-performance servers for customized data communications
within an enterprise and between an enterprise and its suppliers, partners and
customers. These services combine the cost advantages, nationwide access and
standard protocols of public networks with the customization, high
performance, reliability and security of private networks. Among the current
enterprise customers are Acer, Intuit, Netscape, Microsoft and WebTV.
Concentric's service offerings for consumers and small office/home office
customers include local Internet dial-up access and applications hosting
services.
INDUSTRY BACKGROUND
Development of Private Networks
Historically, the data communications services offered by public carriers
had limited security features, were expensive and did not adequately ensure
accurate and reliable transmission. As a result, many corporations established
and maintained their own private wide-area networks ("WANs") to provide
network-based services, such as transaction processing, to their customers and
to coordinate operations between employees, suppliers and business partners.
Such private WANs were frequently customized to specific applications,
business practices and user communities. As a result, these private WANs had
the capability of providing organizations and users with tailored performance
and features, security, reliability and private-label branding.
The demand for WANs has grown as a result of today's competitive business
environment. Factors stimulating the higher demand include the need to provide
broader and more responsive customer service, to operate faster and more
effectively between operating units, suppliers and other business partners,
and the need to take advantage of new business opportunities for network-based
offerings in a timely fashion. In addition, as businesses become more global
in nature, the ability to access business information across the enterprise
has become a competitive necessity.
Despite the attractive capabilities of private networks, limitations of many
private WANs have impeded or reduced the effectiveness of their use. These
networks, which traditionally have required the use of leased telephone lines
with bandwidth dedicated solely to this purpose and the purchase of vendor-
specific networking equipment, are inherently expensive to set up, operate and
maintain. Private WANs often require the development and maintenance of
proprietary software and lack cost-effective access. These aspects of
developing, deploying and maintaining such private WANs have conflicted with
the increased focus of many businesses on their core competencies, which has
prompted the outsourcing of many noncore functions. The Company believes that
many businesses have viewed as unacceptable the costs of maintaining a private
WAN infrastructure and the risks of investing in new technologies in the
absence of a single technological standard.
Emergence of the Internet
The emergence of the Internet and the widespread adoption of IP as a data
transmission standard in the 1990s, combined with deregulation of the
telecommunications industry and advances in telecommunications technology have
significantly increased the attractiveness of providing data communication
applications and services over public networks. At the same time, growth in
client/server computing, multimedia personal computers and online computing
services and the proliferation of networking technologies have resulted in a
large and growing group of people who are accustomed to using networked
computers for a variety of purposes, including e-mail, electronic file
transfers, online computing and electronic financial transactions. These
trends have led businesses increasingly to explore opportunities to provide
IP-based applications and services within their organization, and to customers
and business partners outside the enterprise.
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Need for IP-Based Private Networks
The ubiquitous nature and relatively low cost of the Internet have resulted
in its widespread usage for certain applications, most notably Web access and
e-mail. However, usage of the Internet for mission-critical business
applications has been impeded by the limited security and unreliable
performance inherent in the structure and management of the Internet.
Additionally, emerging applications such as IP-based voice and video
applications, multiplayer gaming and certain multimedia applications require a
network that has high performance characteristics, including low and/or fixed
latency (response time) and high throughput, as well as the ability to
customize features for specific user requirements. On the Internet, latency is
frequently relatively high and variable, making it suboptimal for these
emerging applications. Although private networks are capable of offering lower
and more stable latency levels, providers of these emerging applications also
desire a network that will offer their customers full access to the Internet.
As a result, these businesses and applications providers require a network
that combines the best features of the Internet, such as openness, ease of
access and low cost made possible by the IP standard, with the advantages of a
private network, such as high security, low/fixed latency and customized
features.
Industry analysts expect the market size for both value-added IP data
networking services and Internet access to grow rapidly as businesses and
consumers increase their use of the Internet, intranets and privately managed
IP networks. According to industry analyst Forrester Research, Inc., the total
market for these services is projected to grow from $6.2 billion in 1997 to
approximately $49.7 billion in the year 2002, with approximately $27.9 billion
in the enterprise market segment and $21.8 billion in the consumer market
segment.
THE CONCENTRIC SOLUTION
Concentric provides tailored, value-added IP-based network services for
businesses and consumers. To provide these services, the Company employs a
low/fixed latency, high-throughput network based on its advanced,
geographically dispersed ATM and frame relay backbone and the Internet.
Concentric allows enterprises to create virtual private networks providing
tailored network access, content and services to enterprise-defined end users
with higher reliability and more security than is available over the Internet.
Concentric's VPN solutions also provide the ease of access and flexibility of
public networks at a lower cost than private WANs without sacrificing
reliability or security.
The Concentric network employs an advanced, geographically dispersed ATM and
frame relay backbone, SuperPOPs in 16 major metropolitan areas and 138
secondary and tertiary POPs in other cities, allowing dial-up network access
in the U.S. and Canada. In addition, the Company can provide analog dial-up,
frame relay, fractional T-1, T-1 and DS3 access to the network. The Concentric
network is engineered and managed to provide superior quality of service,
balancing several key performance criteria. The Company provides guaranteed
levels of service for dedicated access facilities to enterprise customers, and
targets performance benchmarks for connection success rates, latency levels
and throughput for all of its service offerings.
In addition to strong network performance capabilities, the Company believes
that several factors distinguish its ability to provide value-added network
services. These factors include: (i) excellent service quality; (ii) rapid
development time and flexibility in meeting custom applications requirements;
(iii) responsive customer support and effective account management, available
24 hours per day, seven days per week through the Company's 170 customer
service personnel; and (iv) the Company's technical expertise in devising
cost-effective network solutions for customers.
BUSINESS STRATEGY
The Company's objective is to become the leading supplier of value-added,
IP-based network services worldwide. In order to achieve this goal, the
Company is implementing a business strategy focused on the following key
principles:
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Rapidly Provide Cost-Effective, Tailored Network Solutions. The Company
intends to capitalize on its expertise in developing tailored VPNs to
establish a leadership position in rapidly developing, deploying and
maintaining a range of value-added network services to meet the specific needs
of its customers. The Company utilizes a set of software and hardware
technology modules as "building blocks" to offer a variety of tailored network
services on an IP-based network architecture with minimal additional
investment in engineering and rapid time to market for businesses and
consumers. These building blocks include modules for client and system
software, dedicated and remote network connectivity, tracking and billing, Web
hosting, customer support and security.
Optimize Network Utilization. Given the fixed cost nature of Concentric's
network infrastructure, the Company strives to increase total network
utilization and to optimize this utilization by targeting both daytime
business and evening-intensive consumer users to balance the network's usage
throughout a 24-hour period. Accordingly, while the Company's current
strategic focus is on providing value-added IP-based communications services
to enterprises, the Company intends to continue partnering with multichannel
distributors to acquire and maintain a base of consumer subscribers who access
the Concentric network predominantly during non-business hours.
Acquire Complementary Assets or Businesses. The Company is actively seeking
to identify and acquire assets, technologies or businesses complementary to
the Company's value-added enterprise network service strategy. Such
acquisition efforts are targeted at businesses that offer the potential to
expand the Company's revenue base, increase the scalability of the Company's
network infrastructure and value-added service offerings, as well as optimize
the utilization of the Company's network. As part of this strategy, in
February 1998 the Company acquired InterNex, a provider of network services,
colocation services and Web-hosting facilities to enterprise customers.
Employ Leveraged Marketing Through Strategic Partners. The Company actively
seeks to form alliances with certain software developers and
telecommunications service and equipment suppliers that have substantially
greater marketing, distribution and sales resources than does the Company and
that have a large installed customer base. These alliances facilitate the
cost-effective acquisition of consumer and business customers and increase
Concentric's network utilization. These marketing relationships are developed
and enhanced through the bundling of Concentric's IP-based network services
with the products and services offered by the strategic partners. These
relationships may involve customized browsers, registration services and
specialized pricing, commissions and billing programs. To date, Concentric has
established such strategic relationships with a number of companies, including
Acer, Bay Networks, Inc., Intuit, Microsoft, Netscape, PictureTel, Racal, TMI
and WebTV. See "Sales and Marketing."
Offer Next Generation Network Services. In addition to its core VPN service
offerings, the Company is continuing to expand the value-added network
services that it makes available to its customers. Towards this end, the
Company has recently introduced video conferencing and is in early stage
trials of IP-based telephony services that require the low/fixed latency
characteristics afforded by the Concentric network.
Deploy Network Services Internationally. The Company believes that its
enterprise customers increasingly will require their network solutions
providers to offer network services on a global basis. Pursuant to an
agreement with TMI, entered into in August 1996, the Company is working to
establish an international network based on Concentric's network technology
and expertise and TMIs existing telecommunications infrastructure to deliver a
range of compatible network services worldwide. TMI currently has a
telecommunications network deployed in over 40 countries worldwide. In April
1998, the Company and TMI launched Mondonet, the first international IP
network designed and built expressly to support VPN services with coverage in
more than 30 cities in 24 countries. Additionally, the Company entered into a
roaming services agreement in June 1997 with NTT PC, a leading provider of IP
services in Japan. The roaming services agreement allows Concentric customers
to use the NTT PC network to access their internet accounts in Japan and
allows members of the NTT PC network to access their internet accounts in the
United States and Canada. Additionally, the Company acquired Web- hosting
facilities in Stockholm, Sweden, Tokyo, Japan and Hong Kong in February 1998.
While
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the Company does not expect to generate significant revenue from deployment of
international network services until at least 1999, the Company believes that
the ability to deliver network solutions globally will be a key competitive
factor in its industry. The foregoing expectation is a forward-looking
statement that involves risks and uncertainties and the actual results could
vary materially as a result of a number of factors including those set forth
in "Risk Factors--Risks Associated with International Expansion."
SERVICES
Concentric provides tailored, value-added IP-based network services for
businesses and consumers. To provide these services, the Company employs a
low/fixed latency high-throughput network based on an advanced, geographically
dispersed ATM and frame relay backbone and the Internet.
Enterprise Solutions
For businesses, the Company has developed a set of enterprise services
including VPNs, dedicated access facilities ("DAF"), digital subscriber line
("DSL") services and Web hosting services.
Virtual Private Network Services. Concentric's custom VPN solutions enable
its customers to deploy tailored, IP-based mission-critical business
applications for internal enterprise, business-to-business and business-to-
customer data communications on the Concentric network while also affording
high-speed access to the Internet. Concentric offers its customers a secure
network on which to communicate and access information between an
organization's geographically dispersed locations; collaborate with external
groups or individuals, including customers, suppliers, and other business
partners and use the Web to access information on the Internet and communicate
with other Web users.
The Company's VPN solutions allow the enterprise customer to tailor the type
of access, services and information that various users of the VPN are afforded
according to the specific needs of the enterprise. Key benefits include rapid
implementation time, lower operating and maintenance costs, minimal capital
investment, higher quality of service overall and 24-hour network and customer
support. For example, starting in October 1995 the Company created and now
maintains the VPN used by Intuit customers using a customized version of the
Netscape Navigator browser bundled with Quicken for Windows, Quickbooks,
ProTax and TurboTax. The bundled software allows a Quicken customer to click
on an icon that launches Netscape, and takes the user directly to Quicken
Financial Network Website. On the Web page Quicken customers will find useful
financial advice, information from Intuit's bank and financial institution
partners, answers to commonly asked technical questions and tips on how to tap
the full potential of Intuit's financial products. See "--Key Customer
Applications."
In addition to the custom VPNs that Concentric has developed and delivered,
the following three distinct VPN products are now offered by the Company:
Concentric CustomLink. Concentric CustomLink provides a complete,
private-labeled dial-up VPN service for customers. In addition, CustomLink
permits the customer to segment its users, and apply various levels of
services, such as Web access, e-mail, and file transfer protocol ("FTP") to
each customer group. CustomLink includes dial-up network access, customized
and customer-branded client software, and private labeled help desk
services. The dial-up network access offerings include local access, toll-
free 800 number access, and a unique connection service, PremierConnect,
which provides important customers with connectivity to the VPN, even if
local access numbers are busy.
Enterprise VPN. The Company's Enterprise VPN service includes security
hardware and software, high speed network access, network connectivity,
customer premise routing equipment and customer support services. The
Enterprise VPN service is targeted at customers seeking to create a secure,
outsourced WAN for intranet and extranet applications. Installation support
for the customer premise located routing and security equipment is also
provided. Concentric can also optionally provide management services for
firewall and packet encryption equipment if desired by the customer.
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Concentric RemoteLink. The Company's remote access service, marketed as
Concentric RemoteLink, is targeted at businesses that have employees in
remote locations. RemoteLink offers customers the potential to
significantly reduce the high costs of telecommunications charges and user
support associated with building, deploying, and maintaining an internal
remote access infrastructure. RemoteLink enables an enterprise's
salespeople and other mobile employees, telecommuters and business partners
to dial into an enterprise's corporate network resources and use them as if
they were connected locally, thus increasing potential productivity and
allowing for information to be available on a real- time basis across the
enterprise. Concentric's RemoteLink is designed to be highly customizable
and provides the ability to interface with existing company network
infrastructure.
Concentric also performs around-the-clock monitoring of network performance
and enables its customers to monitor their network as well through the
Company's proprietary ConcentricView software. ConcentricView is a Web-based
network management tool which allows a customer to monitor usage on a call-by-
call basis and performance of that portion of the Concentric network bandwidth
supporting the customer's applications.
Dedicated Access Facilities. In January 1997, the Company began offering
DAFs as a stand-alone product targeted at businesses that desire single or
multipoint high-speed, dial-up and/or dedicated connections to distributed
locations such as regional offices, warehouses, manufacturing facilities
and/or to the Internet. DAF products are primarily targeted at providing
intranet connectivity amongst distributed enterprise locations with the
additional benefit of Internet access if desired by the customer. The Company
provides a full range of connectivity options, allowing the customer to order
the appropriate amount of bandwidth to meet its networking requirements. In
addition, Concentric offers its DAF customers a guarantee on the quality of
service and performance of these facilities. Furthermore, Concentric believes
it is the only network service provider to bill customers based on average
usage levels rather than peak usage levels.
Concentric has six offerings in its dedicated access product line:
FullChannel T-1, FullChannel T-1 Protected, FlexChannel and LECFrame Relay, as
well as FullChannel and FlexChannel offerings at DS3 (T-3) bandwidth options
which support up to 45 Mbps.
FullChannel T-1 and DS3 (T-3) pricing is based on a one time set-up fee and
average utilization pricing. The customer's usage is measured at five-minute
intervals throughout the month, and the average of all of those measurements
is used to determine the customer's bill at the end of the month. The one time
set-up fee for FullChannel T-1 service is $3,000 and the monthly fee ranges
from $1,095 to $2,695 depending on usage. The one time set-up fee for
FullChannel T-3 service is $5,000 and the monthly fee ranges from $6,000 to
$40,500 depending on usage. FullChannel T-1 and T-3 pricing is the appropriate
choice for those customers who have fluctuating and/or uncertain bandwidth
consumption patterns.
FullChannel T-1 Protected gives a customer a fixed price for a full 1.5
megabits of bandwidth. The one time set-up fee is $3,000 and the and the
monthly fee is set at $2,095. This is an economical choice for those customers
who recognize in advance that their bandwidth throughput requirements will
equal T-1 levels.
FlexChannel gives a customer the opportunity to purchase a fractional
portion of a T-1 or T-3 for a fixed monthly fee. The set up fee is the same as
for FullChannel pricing but the monthly fee ranges from $895 to $1,895 for
FlexChannel T-1 service and from $6,000 to 25,500 for FlexChannel T-3 pricing.
FlexChannel T-1 and T-3 pricing is the appropriate choice for the customers
who know that their bandwidth requirements are going to be consistently less
than a full T-1 or T-3.
LECFrame Relay is based on various LECs' Frame Relay facilities. Although
Concentric does not offer service level guarantees over LECFrame Relay,
Concentric does guarantee the committed information rate. This offering gives
a lower cost, lower performance network service for those customers for whom
performance is less imperative. Concentric charges a one time set-up fee of
$2,000 LECFrame Relay services and monthly fees ranging from $395 to $1,095
depending on usage.
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Digital Subscriber Lines. In December 1997, Concentric began offering
Internet and intranet connectivity using DSL technology. DSL and its variants
are a new dedicated access technology being deployed by telephone companies
that allows high speed digital service over regular telephone lines. The
Company has formed relationships with a number of Competitive Local Exchange
Carriers ("CLECs"), including Covad Communications Company and Northpoint
Communications, to expand its DSL service area. Concentric's DSL service
offerings are currently available in Northern California through such CLEC
relationships. The Company's DSL service offerings include a wide range of
dedicated access speeds, from 144Kbps to 1.1Mbps symmetric DSL, as well as
1.5Mbps/38Kbps asymmetric DSL.
Concentric DSL services are targeted at the consumer, telecommuter, and
small-to-medium sized business markets. The "dedicated access feature" of DSL
services combined with its high speed and low flat rate pricing are designed
to appeal to the large installed base of ISDN users. Pricing for the service
is low relative to traditional dedicated access services, making it attractive
to medium sized businesses, while at the same time broadening the market to
reach small businesses who previously could not justify the expense of
dedicated Internet service.
Pricing is based on the bandwidth of the DSL circuit, and is a flat rate
monthly fee ranging from $149 to $399 depending on the service speed.
Concentric provides complete installation services including all the customer
premise equipment necessary to provide the DSL service at fees ranging from
$325 to $725.
Web Hosting Services. The Company's Web hosting services were introduced in
March 1997, and are targeted at businesses that are implementing high-
performance intranet, streaming video, Web, e-mail, gaming, chat or other
types of services. Concentric offers a wide range of hosting solutions
structured to meet the needs of small businesses to very large enterprises.
The Company's high-end hosting capabilities were enhanced by the acquisition
of five domestic data centers and three international hosting facilities. By
outsourcing its Web hosting requirements to Concentric, an enterprise can
reduce costs while increasing reliability and performance of its servers.
Web hosting consists of providing and/or managing the necessary equipment to
allow companies to operate Web sites. The components of Web hosting are the
server; a workstation or PC that runs the Website; the facility to host the
server; high speed Internet access for hosted servers; server and power backup
to ensure 24 hour functionality; and maintenance to ensure ongoing operation
of the server. Concentric also bundles Web hosting software and network
services to provide businesses with complete Internet presence solutions.
In February 1998 Concentric announced the availability of ConcentricHost
Server Solutions, a line of Web hosting services designed for companies who
require outsourced maintenance, management, bandwidth and housing for their
internet or extranet Web servers. Unlike colocation services that simply
supply rack space and bandwidth, ConcentricHost Server Solutions provide high-
performance Internet access from state-of-the-art data centers, skilled
technicians and maintenance programs that monitor servers 24 hours a day,
seven days a week, and scalability to address the growing networking needs of
businesses of all sizes.
For reliable, high-performance flow of traffic between customer's Web
servers and worldwide networks, Concentric has combined public peering and
private peering arrangements to provide improved performance to users.
Concentric Network currently operates data centers in Santa Clara, Cupertino,
San Francisco and Los Angeles, California, Chicago, Illinois and Washington,
D.C., along with hosting facilities in Stockholm, Hong Kong and Tokyo. Each
Concentric Network data center is connected via multiple DS3 (45Mbps) or OC3
(155Mbps) high-speed links to geographically dispersed points in its private
ATM backbone. This network architecture provides diversity and redundancy to
user's network systems while minimizing user cost. See""--The Concentric
Network."
In addition to state-of-the-art hosting facilities, Concentric provides
industry-leading server management tools. ConcentricHost Server Solutions
offer a suite of advanced server support and management services, called
Remote Hands, to monitor performance of user's business-critical applications.
Remote Hands features include: power cycling equipment; running diagnostic
equipment; providing diagnostic displays; upgrading equipment; file system
back-up; and upgrading drive capacity.
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ConcentricHost Server Solutions range in price from $550 to $4,400 a month,
depending on required bandwidth and rack space. Remote Hands options range in
price from basic services included at no cost with colocation service to more
advanced services ranging in price from $195 to $250 an hour. A range of
Remote Hands fixed-fee service packages, based on specific customer needs, are
also available with pricing options starting at $1,250 a month.
In February 1998, Concentric announced an extension of its ConcentricHost
line of hosting products, adding four new service packages that offer small
and mid-sized businesses flexible, tailored solutions to meet their Web
hosting needs. ConcentricHost Internet Suite(TM) is a complete, easy-to-use
service designed to cost effectively provide for all of the Internet needs of
a business in one account. Packages range from $59.95 to $199.95 a month
depending on the range of e-mail accounts, disk space and bandwidth provided
to the customer. These packages also offer the user shared security and full
domain names and are managed from a user-friendly Web interface. Other
features include 24 hours a day, seven days a week customer support and built-
in self-administration tools that allow the user to change options and analyze
activity on-line in near real time. For instance, users can increase bandwidth
allotments, create and delete e-mail accounts, and add Web space on-line. The
administration system also notifies users via e-mail of potential resource
consumption problems, such as being low on disk space or near the monthly
allocation of Internet bandwidth, allowing modifications to be made on-demand.
ConcentricHost at Netscape. Effective April 1998, the Company modified its
strategic relationship with Netscape to market the ConcentricHost shared
server product within the Small Business Source area of Netscape's Website.
Through this relationship, Netscape exclusively markets ConcentricHost as the
preferred Small Business Source hosting service on the Netscape site. The
Netscape Small Business Source is an online service launched in April 1998
that brings a wide variety of small business products, services and
information into one location on the Internet, the Netscape site. The current
agreement between Netscape and Concentric supersedes the June 1997 agreements
which were entered into to market an online virtual office product. The new
agreement is intended to leverage Concentric's focus on public and private web
hosting services through its ConcentricHost line of hosting products.
ConcentricHost at Netscape is a co-branded suite of Internet services which
combines Internet access, multiple e-mail accounts and public/private web
hosting. ConcentricHost at Netscape broadens the distribution opportunity for
Concentric's web hosting services and provides flexible and scalable Internet
services for the small business market segment.
Concentric IP Video Services. Concentric offers enterprise-quality IP-based
video-conferencing services. Created in partnership with PictureTel,
Concentric Video IP services offer high quality video transport and value-
added services along with the flexibility and cost-effectiveness expected of
IP networks. Concentric's network offers the performance and security required
to run H.323-native desktop and room system video-conferencing over a WAN.
Concentric IP Voice Services. Concentric offers IP-based international long-
distance telephone services to businesses and consumers through the Interline
consortium. The Interline consortium is creating a global network of service
providers who will offer international long-distance phone services over IP-
based private networks and the Internet using regular telephones.
Consumer Services
Concentric provides its individual and small office/home office ("SOHO")
customers with a broad range of Internet access options and Web hosting e-
mail, chat, File Transfer Protocol ("FTP"), Gopher and online shareware
services. Users can choose from local and long distance direct dial 800-number
and telnet services. Concentric offers the Microsoft Internet Explorer or
browser to its users when they sign up for dial-up or 800-number service.
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INTERNET ACCESS PRICING
<TABLE>
<CAPTION>
PLAN MONTHLY FEE ADDITIONAL TIME
---- ----------- ---------------
<S> <C> <C>
Starter Plan............ $ 7.95 $1.95/hour after 5 hours
Standard Plan........... $19.95 No charges for additional time. Unlimited
active access for one monthly fee.
800-number Plan......... $10.00 $5/hour after 2 hours
Inbound Internet Plan... $10.00 No charges for additional time. Unlimited
active access for one monthly fee.
</TABLE>
The Company also offers consumers value-added services, including a
collection of premium products targeted to vertical segments such as the
family and SOHO market. This includes the upselling of discounted products and
services in such areas as retail products, software, hardware, telephony
services with such partners as Amazon.com, Inc., QuadraCom, LLC, TuneUp.com,
Connected OnLine Backup and Classifieds 2000. Such arrangements not only
provide an additional monthly revenue stream but also increase customer
satisfaction and retention. Additional value-added products and services being
reviewed by the Company for potential introduction include premium service,
customer support, education research, virus protection, and faxing services.
CUSTOMERS
The following is a representative list of the Company's customers during the
last 12 months.
Acer America Corporation Netscape Communications Corporation
Ameritech Services, Inc. Network Associates, Inc.
AT&T Corporation NTT PC Communications, Inc.
Bascom Global Internet OnCommand Corporation
Services, Inc. Oracle Corporation
Bay Networks, Inc. OzeMail Interline Pty, Ltd.
Bloomberg, L.P. Peapod L.P.
Connected Corporation Philips Mobile Computing
Corel Corporation PictureTel Corporation
Electronic Data Systems PointCast, Inc.
Corporation Rosemount Inc.
Excite, Inc. SCP Communications
Fiberlane Communications, SMC Communications LLC
Inc. Scopus Technology, Inc.
First Data Corporation Sega of America, Incorporated
Fishking Processors, Inc. Tachyon Technology Corporation
Graybar Electric Company, 3Com, Inc.
Inc. Toshiba America Information Systems
Hewlett-Packard Company USWeb Corporation
Imagesoft Technologies, Inc. WebTV Networks, Inc.
Infogear Technology WorldCom, Inc.
Corporation You Bet! On-Line Entertainment
Intuit, Inc. Ziff-Davis Publishing Co.
Investools, Inc.
Iomega Corporation
Kleiner, Perkins Caufield, &
Byers
Lycos, Inc.
McAfee Associates Inc.
Microsoft Corporation
During the year ended December 31, 1996 and 1997, revenue from WebTV
accounted for 10.1% and 33.4%, respectively, of the Company's revenue and
approximately 32.7% and 30.8% of revenue for the three months ended March 31,
1997 and 1998, respectively. See "Risk Factors--Customer Concentration."
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The Company aggressively pursues business alliances with a variety of
companies. Through these partners, the Company seeks to expand its enterprise
and consumer customer base and increase the 24 hour utilization of the
Concentric network. The following is a summary of selected strategic
relationships:
Intuit. Intuit, a financial software and Web-based services company, is a
market leader in personal and small business financial software. Intuit views
its Websites as a key channel for communicating with its customers, and as a
vehicle to provide personal finance, investment and tax related financial
information. Concentric and Intuit partnered in October 1995 to launch
integrated Internet access to the Quicken Financial Network and the Internet.
The Internet access capability included both a virtual private network service
designed to provide Intuit customers subsidized access to select Intuit Web
sites and the ability to upgrade to full access to the Internet. Intuit has
bundled tailored versions of the Netscape Navigator browser in its fiscal year
1996 and 1997 releases and the Microsoft Explorer browser in its 1998 releases
of Quicken, TurboTax, ProTax and Quickbooks. Concentric designed and
implemented tailored registration and network access software to provide
Intuit customers with seamless, subsidized access to select Intuit Web sites.
Concentric provides an easy, Web- based upgrade process for customers desiring
full Internet access and e-mail services. Customers are billed for network
time through Concentric's billing systems. In addition, Concentric provides
private-labeled customer service to Intuit customers with full network access
on a twenty-four hour a day, seven day a week basis. Most recently, Intuit
provided subsidized full access Internet accounts in the 1998 releases of
Quicken, Quickbooks, TurboTax and ProTax, along with the option for customers
to upgrade to other full Internet access plans. Intuit uses Concentric's high
performance network to enable customers to send electronic tax filings and
software product registration.
WebTV Networks Inc. WebTV provides the world's first high-quality Internet
solution for television. In the fall of 1996, WebTV's licensees, Sony
Electronics, Inc. and Philips Electronics introduced a plug-and-play set-top
box that enables Internet browsing from a television. As part of the WebTV
service, Concentric and WebTV jointly designed and implemented a national
virtual private dial-up network solution to connect WebTV Network(TM) users to
the Internet, utilizing Concentric's network. The WebTV Internet terminal,
combined with the virtual private network, allows anyone to browse the
Internet from the comfort of their living room.
PictureTel Corporation. PictureTel, a leading provider of video conferencing
products, and Concentric have signed a joint development agreement which
specifies both parties' intent to jointly develop products and services to
enable PictureTel desktop and room video conferencing systems to communicate
over the Concentric network. Both Concentric and PictureTel currently have
trial systems installed and operating over the Concentric network. Preliminary
results demonstrate that the low/fixed latency and high throughput of the
Concentric network deliver superior quality for both desktop and room video
conferencing over IP-routed networks.
OnCommand Corp. OnCommand provides in-room TV services to guests at hotels
worldwide. OnCommand replaced its low-speed private-line network with a
Concentric Enterprise Virtual Private Network ("EVPN") that links its 12
regional offices with the San Jose, California headquarters. The EVPN allows
OnCommand to provide faster service to hotels, enabling agents to have instant
access to technical data, database information, contracts and customer
inquiries.
THE CONCENTRIC NETWORK
The Concentric network employs an advanced, geographically dispersed ATM and
frame relay backbone, 16 SuperPOPs in many major metropolitan areas plus a
total of 138 secondary and tertiary POPs in other cities, allowing local dial-
up access to the network to users in the U.S. and Canada. In addition, the
Company can provide analog dial-up, frame relay, fractional T-1, T-1 and DS3
access to the network. The Concentric network supports 28.8 Kbps (V.34) modems
and Concentric currently plans to complete development of 56.6 Kbps modem
access in 1998. This planned deployment is a forward looking statement and is
subject to a number of risks and uncertainties and the actual results could
differ materially as a result of a number of factors including those set forth
under the caption "Factors Affecting Operating Results--Dependence on New an
Enhanced Services" and "--Dependence on Network Infrastructure."
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The Concentric network is managed via a centralized network control center
in St. Louis, Missouri. Two data centers (located in Bay City, Michigan and
Cupertino, California) house the servers that support log on/authentication,
billing, e-mail, Internet access, Web services and other network services. In
February 1998, the Company acquired InterNex, a provider of network services,
colocation services and Web-hosting facilities to enterprise customers. With
the acquisition of InterNex, the Company has expanded its Internet
connectivity strategy to include not only private transit with MCI, Sprint and
UUNet, but also private peering with other network providers as well as public
peering with multiple smaller internet service providers. The Company's new
hybrid private/public Internet connectivity strategy is designed to allow
Concentric to offer superior Internet connectivity performance by avoiding
congestion (packet loss) when connecting to certain network providers at many
public peering points. In connection with the InterNex transaction, the
Company acquired new data centers in Santa Clara, California, San Francisco,
California, Los Angeles, California, Chicago, Illinois and Washington, D.C.,
and new hosting facilities in Stockholm, Sweden, Tokyo, Japan and Hong Kong.
See "Factors Affecting Operating Results--Risks Associated With Acquisitions"
and "--Dependence on Network Infrastructure."
The Concentric SuperPOPs are designed to support both dial-up and dedicated
access services within a broad geographic region. Typically, a SuperPOP will
utilize one or more CLECs and LECs to aggregate dial traffic within a 50-200
mile radius of the SuperPOP and terminate it at the SuperPOP. This strategy
allows Concentric to offer users local call coverage within the SuperPOP
region without having to deploy individual POPs in each local calling area.
All the calls are terminated at the modem equipment at the regional SuperPOP.
This results in broader call coverage, lower costs due to the typically lower
rates from CLECs and economies of scale from larger modem installations, lower
maintenance costs, and easier capacity upgrades since equipment is located in
a single location within a region.
DAFs and DSLs from customer locations in a region are terminated in the
SuperPOP as well. Typically, Fractional T-1, T-1, and T-3 circuits are
terminated directly into SuperPOP router equipment (via CSU/DSUs) or via a
channelized DS3 connected to a competitive access provider. Frame access is
terminated via aggregated LEC Frame Access circuit(s). DSL is terminated via a
multiplexed DS-3 connection to a LEC/CLEC metropolitan area DSL network. Both
dial-up and dedicated traffic is then aggregated by the routers/switches in
the SuperPOP and directed to the Concentric ATM backbone via one or more T-3
ATM links.
Some applications, such as Web browsing and file transfer require high
throughput, but can tolerate moderate and variable latency, while others, such
as mission-critical business applications and voice and video conferencing,
require low/fixed latency. Still others, such as transaction processing may
require high levels of security and are indifferent to latency levels.
Traditional static network access technologies and backbone architectures
cannot cost-effectively manage these varied requirements in a single network.
The Concentric network has been designed to solve this problem by
incorporating software intelligence in both its access and backbone
technologies to adapt the network's connection setup, security and data
transfer properties to the nature of the user's application requirements on a
call-by-call or service-by-service basis.
The Concentric network also offers its customers the security, reliability
and management features that companies require in their own private networks.
Varying layers of security and encryption are supported and tailored to
specific customer requirements. The network design includes a standard
security layer and is compatible with most types of custom security
applications. Further, security is provided at both the edge of the network
and internally based on embedded firewall and encryption techniques. The
Concentric network features colocation of network access and switching
equipment in "hardened" facilities, direct connections to carrier facilities,
a resilient ATM/frame relay backbone, dual data processing centers, and
redundancy within data centers to substantially enhance its uptime
performance.
Network managers, customer service, and technical support staff require near
real-time access to information about the performance and quality of their
networks. In traditional private networks, this information is provided by
network management, trouble reporting/tracking, and management information
systems. Customers usually sacrifice a great deal of control and have access
to less information when using a public network instead of a private network.
It has been difficult for public network providers to provide their major
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customers with information regarding network performance that relates to that
customer's usage without either compromising other customers' proprietary
information or compromising the integrity of the network itself. Concentric
has developed a set of non-intrusive software tools and reporting mechanisms,
distributed to enterprise customers to allow a customer's network manager to
monitor network performance and quality and to adequately support inquiries
for help from their users. Web browsers and file transfer tools are used to
provide access to much of this information. In some cases, custom integration
of Concentric's network management and trouble tracking/reporting systems will
be provided to customers.
RELATIONSHIP WITH WILLIAMS COMMUNICATIONS, INC.
Concurrent with the closing of the Company's initial public offering of
common stock in August 1997 (the "IPO"), the Company entered into a strategic
relationship with Williams Communications Group, Inc., a subsidiary of the
Williams Companies, Inc. (together, "Williams"). Williams provides a full
range of enterprise network solutions, communications services and advanced
applications to businesses, including equipment and services for data, voice
and video; international satellite and fiber-optic transmission services;
telemarketing services; and, multipoint video- and audio-conferencing. The
relationship with Williams includes an equity investment in the Company by
Williams of approximately $15.0 million which closed in August 1997, and the
execution of a number of strategic business agreements. In exchange for the
approximately $15.0 million investment by Williams, the Company issued and
sold 1,249,236 shares of common stock to Williams at the initial per share
price of $12.00 in the Company's IPO.
As part of the strategic business relationship, Williams has made available,
and the Company has agreed to purchase from Williams, a total of $21.2 million
in telecommunications equipment and services through the five year period
ending in 2002. At the election of Williams, $2.0 million of the minimum
purchase commitment may be paid by the issuance of Common Stock by the Company
at the then-current fair market value. Additionally, Williams and the Company
have entered into a reseller agreement and an agency agreement through which
Williams is able to sell the Company's products and services for an initial
term of two years. The agreements with Williams provide that, in the event of
a change of control of the Company, Williams will have a right to purchase a
nonexclusive, perpetual license to use, distribute and modify all of the
intellectual property of the Company, including any copyright, patent,
license, trademark or trade secret which the Company has or obtains the right
to transfer. Finally, the parties also agreed to amend and restate the
Employee Services and Staffing Agreement between the Company and CTI, a
wholly-owned subsidiary of Williams, and to amend the Co-location Services
Agreement between the Company and CTI, to among other things, extend the terms
of such agreements to December 31, 2000 and to forego a $1.1 million
acquisition fee to be paid by CTI to the Company as a result of the
acquisition of CTI by Williams in 1996. In exchange for the waiver of the
acquisition fee, Williams agreed to issue $1.1 million in telecommunications
services credits to the Company.
SALES AND MARKETING
The Company focuses on marketing its services to two distinct market
segments: enterprise and consumer. By attracting enterprise customers who use
the network primarily during the daytime, and consumer customers who use the
network primarily at night, the Company is able to more fully utilize its
network infrastructure by having some customers online during the day and the
others, using the same modem pools, online during the night. The Company has
developed a multi-tiered sales strategy consisting of leveraged third party
distribution channels, inbound and outbound telesales, value-added resellers
and direct sales. As of April 30, 1998, the Company employed 106 persons in
sales and marketing.
Leveraged Third Party Distribution. The Company has positioned itself as a
key network services provider for companies that bundle network access in
their products or services. For example, the Company's network service is
bundled with Intuit's Quicken, TurboTax and Quickbooks products, Microsoft
Office 97 and with WebTV and Sega Saturn Internet access devices.
Additionally, the Company is one of the Internet services providers listed on
the Netscape Navigator and Microsoft Internet Explorer browser registration
servers.
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Telesales. The Company uses an inbound telesales group to answer calls from
potential consumers/ subscribers and to sign up customers. Inbound telesales
representatives also proactively upsell premium products and services. The
Company also uses an outbound telesales group to sell DAFs and high-end
hosting products to small and medium-sized businesses. Both the inbound and
outbound telesales groups forward leads to the direct sales force when
appropriate.
Value-Added Resellers. The Company has also begun to establish sales
channels through value-added resellers. These resellers are companies that
sell equipment or other components for full-service network solutions to
medium and large businesses. Value-added resellers such as Racal, which
employs more than 500 direct sales, sales-support and network services people,
are compensated for selling Concentric's enterprise service offerings in
conjunction with their other products. These relationships enable the VARs to
provide more comprehensive solutions to their customers while affording the
Company the benefit of the VAR's large sales force without incurring the costs
of maintaining a large sales force of its own.
Direct Sales Force. For large and complex enterprise solutions and to
acquire, support and retain distribution channel partners, the Company employs
20 direct sales people located in Cupertino and Orange County, California,
Dallas, Texas, Washington, D.C., the New York metropolitan area, Atlanta,
Georgia, Chicago, Illinois and Boston, Massachusetts to provide national
direct sales coverage. The Company's direct sales force is supported by inside
sales/account managers and systems engineers.
Concentric markets its enterprise services to information service ("IS")
professionals. In addition, the Company uses print advertising in targeted
industry publications to build awareness and acquire leads for its VARs and
its direct sales team.
In the consumer market, the Company focuses on direct mail to targeted
audiences; establishment of customer referral programs; and co-marketing such
as packaging literature with MasterCard mailers and Intuit software. In
addition, the Company has implemented on-line programs, such as a Website
"home" where they can learn how to use the service, how to use the Internet,
and how to find information quickly, designed to increase customer retention.
The Company is also implementing programs to sell additional products and
services to its consumer customers. Additionally, the Company is generating
advertising revenue on its growing Website traffic in direct ad banner
placements as well as in shared revenue relationships with content partners
such as Excite, Inc., Lycos, Inc., and Classifieds 2000, Inc.
The Company employs public relations personnel in-house and works with an
outside public relations agency to provide broad coverage in network computer
and vertical industry publications. The Company participates in industry trade
shows based on the size and vertical makeup of the trade show audience. Shows
attended in 1997 include E3 and NetWorld + InterOp. The Company also
participates in trade shows with its strategic marketing partners to promote
the sale of Concentric products and services.
CUSTOMER SUPPORT
Concentric believes that a high level of customer support is critical to
attracting and retaining its enterprise and consumer customers. The Company
maintains a customer support call center at its Saginaw, Michigan facility.
Concentric offers several levels of customer support all of which are
available 24 hours per day, seven days per week. The basic level of customer
support includes support for customers on installing and using their software,
customer communications and customer training. Premier level service programs
guarantee an exceptional performance standard, offer supplemental support
training, and provide monthly reports on operations. Private label support
gives businesses a premier level of support provided by their own customer
service team who answer calls with that customer's company name. Customer
support is provided by e-mail, telephone, Website and online chat. As of April
30, 1998, the Company employed 170 persons in customer support.
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COMPETITION
The market for tailored value-added network services is extremely
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company believes
that its ability to compete successfully depends upon a number of factors,
including market presence; the capacity, reliability, low latency and security
of network infrastructure; technical expertise and functionality, performance
and quality of services; customization; ease of access to and navigation of
the Internet; the pricing policies of its competitors; the variety of
services; the timing of introductions of new services by the Company and its
competitors; customer support; the Company's ability to support industry
standards; and industry and general economic trends.
The Company's current and prospective competitors generally may be divided
into the following five groups: (i) telecommunications companies, such as
AT&T, Sprint, WorldCom, MCI, RBOCs and various cable companies; (ii) online
services providers, such as America Online, CompuServe, Microsoft's MSN, and
Prodigy; (iii) ISPs, such as BBN, which has been acquired by GTE, NETCOM, PSI
Net, and other national and regional providers; (iv) nonprofit or education
Internet connectivity providers; and (v) Web server farms such as Internet
Direct and Exodus. Many of these competitors have greater market presence,
engineering and marketing capabilities, and financial, technological and
personnel resources than those available to the Company. As a result, they may
be able to develop and expand their communications and network infrastructures
more quickly, adapt more swiftly to new or emerging technologies and changes
in customer requirements, take advantage of acquisition and other
opportunities more readily, and devote greater resources to the marketing and
sale of their products than can the Company. In addition, various
organizations, including certain of those identified above, have entered into
or are forming joint ventures or consortiums to provide services similar to
those of the Company.
The Company believes that new competitors, including large computer
hardware, software, media and other technology and telecommunications
companies will enter the value added network services markets, resulting in
even greater competition for the Company. Certain of such telecommunications
companies and online services providers are currently offering or have
announced plans to offer Internet or online services or to expand their
Internet access services. Certain companies, including America Online, BBN and
PSI, have also obtained or expanded their Internet access products and
services as a result of acquisitions. Such acquisitions may permit the
Company's competitors to devote greater resources to the development and
marketing of new competitive products and services and the marketing of
existing competitive products and services. In addition, the ability of some
of the Company's competitors to bundle other services and products with VPN
and consumer network services could place the Company at a competitive
disadvantage. Certain companies are also exploring the possibility of
providing high-speed data services using alternative delivery methods such as
over the cable television infrastructure, through direct broadcast satellite
technology and by wireless cable.
As a result of increased competition in the industry and vertical and
horizontal integration in the industry, the Company could encounter
significant pricing pressure, which in turn could result in significant
reductions in the average selling price of the Company's services. For
example, certain of the Company's competitors that are telecommunications
companies may be able to provide customers with reduced communications costs
in connection with their Internet access services or private network services,
reducing the overall cost of their solutions and significantly increasing
price pressures on the Company. There can be no assurance that the Company
will be able to offset the effects of any such price reductions with an
increase in the number of its customers, higher revenue from enhanced
services, cost reductions or otherwise. In addition, the Company believes that
the Internet access and online services businesses are likely to encounter
consolidation in the near future, which could result in increased price and
other competition in these industries and, potentially, the virtual private
networks industry. Increased price or other competition could result in
erosion of the Company's market share and could have a material adverse effect
on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will have the financial resources,
technical expertise or marketing and support capabilities to continue to
compete successfully. See "Risk Factors--Competition,"
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"--Risks of Growth and Expansion," "--Future Capital Needs; Uncertainty of
Additional Financing" and""--Competition."
GOVERNMENT REGULATION
The Federal Communications Commission ("FCC") currently does not regulate
value-added network software or computer equipment related services that
transport data or voice messages over telecommunication facilities. The
Company provides value-added IP-based network services, in part, through data
transmissions over public telephone lines. These transmissions are governed by
regulatory policies establishing charges and terms for wireline
communications. Operators of these types of value-added networks that provide
access to regulated transmission facilities only as part of a data services
package are currently excluded from regulations that apply to
"telecommunications carrier" and as such the Company is not currently subject
to direct regulation by the FCC or any other governmental agency, other than
regulations applicable to businesses generally. However, in the future the
Company could become subject to regulation by the FCC or another regulatory
agency as a provider of basic telecommunications services.
Currently, the FCC is reviewing its regulatory positions and could seek to
impose common carrier regulation on the network transport and communications
facilities aspects of an enhanced or information service package. Further, the
FCC could conclude that the Company's protocol conversions, computer
processing, and interaction with customer-supplied information are
insufficient to afford the Company the benefits of the enhanced or information
service classification, and thereby may seek to regulate some segments of the
Company's activities as basic telecommunications services. While state public
utility commissions generally have declined to regulate enhanced or
information services, some states have continued to regulate particular
aspects of enhanced services in limited circumstances, such as where they are
provided by LECs. Moreover, the public service commissions of certain states
continue to review potential regulation of such services. There can be no
assurance that regulatory authorities of states within which Concentric makes
its Internet access, Intranet and VPN services available will not seek to
regulate aspects of these activities as telecommunications services. Changes
in the regulatory environment relating to the Internet connectivity market,
including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood or scope of competition
from the RBOCs or other telecommunications companies, could affect the prices
at which the Company may sell its services. The Company cannot predict the
impact, if any, that future regulation or regulatory changes may have on its
business and there can be no assurance that such future regulation or
regulatory changes will not have a material adverse effect on the Company's
business, results of operations and financial condition.
PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
technology, although the Company believes that its success is more dependent
upon its technical expertise than its proprietary rights. The Company
principally relies upon a combination of copyright, trademark and trade secret
laws and contractual restrictions to protect its proprietary technology. It
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization or to develop similar
technology independently, and there can be no assurance that such measures
have been, or will be, adequate to protect the Company's proprietary
technology or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. The Company operates a material portion of its business over the
Internet, which is subject to a variety of risks. Such risks include but are
not limited to the substantial uncertainties that exist regarding the system
for assigning domain names and the status of private rules for resolution of
disputes regarding rights to domain names. There can be no assurance that the
Company will continue to be able to employ its current domain names in the
future or that the loss of rights to one or more domain names will not have a
material adverse effect on the Company's business and results of operations.
Although the Company does not believe that it infringes the proprietary
rights of any third parties, there can be no assurance that third parties will
not assert such claims against the Company in the future or that such claims
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will not be successful. In addition, participants in the Company's industry
also rely upon trade secret law. The Company could incur substantial costs and
diversion of management resources with respect to the defense of any claims
relating to proprietary rights which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Furthermore, parties making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief which
could effectively block the Company's ability to license its products in the
United States or abroad. Such a judgment would have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the Company is obligated under certain agreements to indemnify the
other party in connection with infringement by the Company of the proprietary
rights of third parties. In the event a claim relating to proprietary
technology or information is asserted against the Company, the Company may
seek licenses to such intellectual property. There can be no assurance,
however, that licenses could be obtained on commercially reasonable terms, if
at all, or that the terms of any offered licenses will be acceptable to the
Company. The failure to obtain the necessary licenses or other rights could
have a material adverse effect on the Company's business, financial condition
and results of operations.
EMPLOYEES
As of April 30, 1998, Concentric had 402 employees and 56 independent
contractors, including 106 persons in sales and marketing, 142 persons in
network operations and development, 170 in customer support and 40 in finance
and administrative functions. The Company believes that its future success
will depend in part on its continued ability to attract, hire and retain
qualified personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be able to identify, attract, and retain
such personnel in the future. None of the Company's employees is represented
by a labor union, and management believes its employee relations are good.
LEGAL PROCEEDINGS
In late April and early May, 1997, three putative securities class action
complaints were filed in the United States District Court, Central District by
certain stockholders of Diana, the parent corporation of Sattel, alleging
securities fraud related to plaintiffs' purchase of shares of Diana Common
Stock in reliance upon allegedly misleading statements made by defendants,
Diana, Sattel and certain of their respective affiliates, officers and
directors. Concentric was named as a defendant in the complaint in connection
with certain statements made by Diana and officers of Diana related to
Concentric's purchase of network switching equipment from Diana's Sattel
subsidiary. The plaintiffs seek unspecified compensatory damages. A motion by
the Company to dismiss the complaint was denied, and the court has allowed the
action to proceed against the Company. A trial date has not yet been
determined.
While the ultimate outcome of such litigation is uncertain, the Company
believes it has meritorious defenses to the claims and intends to conduct a
vigorous defense. An unfavorable outcome in this matter could have a material
adverse effect on the Company's financial condition. In addition, even if the
ultimate outcome is resolved in favor of the Company, the defense of such
litigation could entail considerable cost and the diversion of efforts of
management, either of which could have a material adverse effect on the
Company's results of operations. See "Risk Factors--Legal Proceedings" and
Note 11 of Notes to Financial Statements.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth certain information as of June 30, 1998, with
respect to the executive officers and directors of the Company, as well as
certain members of its senior management.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Henry R. Nothhaft..... 54 Chairman, President, Chief Executive Officer and
Director
John K. Peters........ 50 Executive Vice President and General Manager,
Network Services Division
Michael F. Anthofer... 46 Senior Vice President and Chief Financial Officer
Mark W. Fisher........ 38 Vice President of Corporate Marketing
William C. Etheredge.. 51 Senior Vice President of Sales
Eileen A. Curtis...... 49 Vice President of Customer Relations
George D. Carr........ 53 Vice President of Field Sales
James L. Isaacs....... 38 Vice President of Business Development
Warren A. Smith....... 48 Vice President of Software Engineering
Scott G. Eagle........ 39 Vice President of Consumer Marketing
Donald C. Schutt...... 53 Vice President of International Services
Vinod Khosla(2)....... 43 Director
Gordon Martin(1)...... 38 Director
Franco Regis(1)....... 42 Director
Gary E. Rieschel(2)... 42 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Henry R. Nothhaft joined the Company as President and Chief Executive
Officer in May 1995 and was appointed a Director of the Company in August 1995
and Chairman of the Board in January 1998. From 1989 to August 1994, Mr.
Nothhaft was President, Chief Executive Officer and a Director of David
Systems, Inc. ("David Systems"), a networking company. From 1983 to 1989, Mr.
Nothhaft held various positions with DSC Communications Corporation ("DSC"),
including President of the Business Network Systems Group, President of the
Digital Switch Corporation subsidiary, Senior Vice President of Marketing and
a Corporate Director of DSC. From 1979 to 1983, Mr. Nothhaft was Vice
President of Domestic Marketing and Vice President of Sales for GTE Telenet
Communications Corporation (now Sprint). Mr. Nothhaft has an M.B.A. in
Information Systems Technology from George Washington University and a B.S.
from the U.S. Naval Academy, and is a former officer in the U.S. Marine Corps.
John K. Peters was named Executive Vice President and General Manager,
Network Services Division in June 1995. From 1993 to August 1995, Mr. Peters
served as President of Venture Development Consulting, a consulting firm
specializing in new communications and information services. From 1988 to
1993, Mr. Peters was Vice President and Chief Operating Officer of Pacific
Bell Information Services, Inc. Prior to that, Mr. Peters spent three years as
Vice President of Application Services for Telestream Corporation. In 1981,
Mr. Peters co-founded Integrated Office Systems, Inc., a communications and
information systems company. From 1976 to 1980, Mr. Peters was Vice President
of Advanced Network Services for GTE Telenet Communications
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Corporation. Mr. Peters has an M.B.A. from Stanford Graduate School of
Business and a B.S. in Statistics from Stanford University.
Michael F. Anthofer joined the Company in January 1996 as Vice President and
Chief Financial Officer and became a Senior Vice President in November 1996.
From January 1991 to December 1995, Mr. Anthofer served as an Executive Vice
President and Chief Financial Officer, as well as a member of the Board of
Directors, of Shared Resource Exchange, Inc., a privately held digital
switching platform and PBX supplier. Prior to 1991, Mr. Anthofer held various
executive positions at DSC including Vice President, Corporate Business
Planning, Vice President, Business Network Group and Vice President, Network
Products Group. Mr. Anthofer has an M.B.A. and a B.S. from the University of
California, Berkeley.
Mark W. Fisher joined the Company in June 1997 as Vice President of
Corporate Marketing. From July 1996 to June 1997, Mr. Fisher was General
Manager and Vice President, Marketing of Pacific Bell Internet Services, a
wholly owned subsidiary of Pacific Bell. From June 1995 to August 1996, Mr.
Fisher was Vice President, Marketing of Pacific Bell Internet Services. From
1989 to May 1995, Mr. Fisher held various data product marketing and data
center operations positions at Pacific Bell. Mr. Fisher has an M.B.A. from the
University of California, Berkeley and a B.S. in mechanical engineering from
the U.S. Naval Academy.
William C. Etheredge joined the Company in March 1997 as the Senior Vice
President of Sales. From May 1991 to March 1997, Mr. Etheredge served first as
Vice President of Sales and Marketing and then as Vice President of Sales for
Meridian Data, Inc., a provider of networked CD-ROM database creation and
retrieval software and network servers. From July 1990 to May 1991, he served
as Vice President of Strategic Accounts for Maxtor Corporation. From June 1985
to June 1990, he served first as Vice President US Sales and Marketing and
then Vice President Western Region for Memorex-Telex Corporation. Mr.
Etheredge has an M.B.A. from Bowling Green University and a B.A. from
Westminster College.
Eileen A. Curtis became Customer Relations Manager in January 1995, Director
of Customer Relations in September 1995 and Vice President, Customer Relations
in November 1996. From August 1987 to July 1993, Ms. Curtis was employed by
Cox Communications Saginaw, Inc. and served in various positions including
Marketing and Public Relations Manager, Administrative Manager and Customer
Service Manager. Ms. Curtis has an MBA and a B.S. from Central Michigan
University.
George D. Carr became Vice President of Sales in September 1995. From June
1993 to June 1995, Mr. Carr was Vice President of Sales and Marketing of David
Systems/ChipCom. From June 1989 to June 1993, Mr. Carr was VP of Operations
and International Sales of David Systems. From December 1983 to June 1989,
Mr. Carr was VP of Operations and Service of David Systems. Mr. Carr has a
B.A. from Loyola Marymount.
James L. Isaacs joined the Company in October 1995 as the Director of
Product Management. In March 1997, he became Vice President of Product
Management and in November 1997 he was appointed Vice President of Business
Development. From July 1988 to October 1995, Mr. Isaacs held various positions
at Apple Computer, including Group Manager Product Marketing, Apple On Line
Services Division and Business Development Manager of Apple On Line Services
Division. Mr. Isaacs has an M.B.A. from the University of California, Berkeley
and an A.B. from Stanford University.
Warren A. Smith joined the Company in April 1996 as Vice President, Software
Engineering. From October 1992 to April 1996, Mr. Smith was the Director of
Engineering at NetManage, Inc., a software company. From July 1987 to July
1992, Mr. Smith was the Director of Distributed Computing Technology for Sun
Microsystems, Inc. From March 1983 to July 1987, Mr. Smith was the Western
Regional Manager of SEI Information Technology an engineering consulting firm.
Mr. Smith has a B.S. from California State University, Sacramento.
Scott G. Eagle joined the Company in March 1996 as Vice President of
Consumer Marketing. From November 1993 to February 1996, Mr. Eagle was the
Vice President, Strategic Marketing Development for MFS
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Intelenet, Inc., a start-up division of MFS Communications Company, Inc. From
February 1989 to November 1993, Mr. Eagle was the Vice President of Marketing
for the Woodbridge Group, a marketer of consumer package goods. Prior to
February 1989, Mr. Eagle served in various marketing management positions with
The Procter & Gamble Company. Mr. Eagle has a B.S. from the University of
Pennsylvania, Wharton School of Business.
Donald C. Schutt joined the Company in February 1994 as Vice President of
Sales and Marketing and was appointed Chief Operations Officer later that
year. Mr. Schutt was named Vice President and General Manager, Bay City
Operations in August 1995. His title was changed to Vice President of Michigan
Operations in March 1996 and to Vice President of International Services in
November 1997. From 1964 to 1985, Mr. Schutt held various management positions
with General Motors, after which Mr. Schutt served until 1989 as Vice
President for Sales and Marketing for Gentex Corporation. From 1989 to 1993,
Mr. Schutt was President and Chief Executive Officer of AMPM, Inc., a full-
service advertising agency, and retains a 54 percent interest in such entity.
Mr. Schutt has a B.S. in Marketing from Ferris University.
Vinod Khosla has been a Director of the Company since April 1995. Mr. Khosla
has been a General Partner with the venture capital firm of Kleiner Perkins
Caufield & Byers from February 1986 to the present. Mr. Khosla was a co-
founder of Daisy Systems and the founding Chief Executive Officer of Sun
Microsystems, Inc. Mr. Khosla also serves on the boards of Excite, Inc.,
PictureTel, The 3DO Company, and Spectrum Holobyte. He has a B.S.E. from the
Indian Institute of Technology in New Delhi, an M.S.E. from Carnegie Mellon
University, and an M.B.A. from the Stanford Graduate School of Business.
Gordon Martin has been a director of the Company since October 1997. Mr.
Martin is vice president of strategic marketing for Williams Communications
Group, Inc. Williams, a subsidiary of the Williams Companies, Inc. Mr. Martin
joined Williams Communications Group, Inc. in October 1987 as manager of
interexchange carrier sales for the network division. He was promoted to
director of product marketing in January 1993. From February 1995 to May 1995,
he served as General Manager of Digital Frontiers LLC, a division of Williams.
In June 1995, he returned to Williams as Vice President, Marketing until he
was promoted to his current position in January 1997. Mr. Martin has a
bachelor's degree in accounting and an M.B.A. from Oral Roberts University.
Franco Regis has been a Director of the Company since October 1996. Since
1994, Mr. Regis has been a Director of Business Development and Strategic
Planning at Telecom Italia, SpA, the telephone operating company of Italy.
From 1992 to 1994, Mr. Regis was a Director of Budget and Control for the
business division of Telecom Italia. Mr. Regis has an engineering degree from
the Rome State University.
Gary E. Rieschel has been a Director of the Company since October 1996. Mr.
Rieschel is a Senior Vice President at SOFTBANK Holdings, having joined that
company in January 1996. Mr. Rieschel was Vice President for N-Cube
Corporation from August 1994 through December 1995. He was Sales Director at
Cisco Systems, Inc. from July 1993 through October 1994. Prior to this, Mr.
Rieschel was a General Manager and Sales Director at Sequent Computer for over
nine years. Mr. Rieschel has an M.B.A. from Harvard Graduate School of
Business and a B.A. in biology from Reed College.
Classified Board of Directors
The Company's Certificate of Incorporation provides that, so long as the
Board of Directors consists of more than two directors, the Board of Directors
will be divided into three classes of directors serving staggered three-year
terms. As a result, one-third of the Company's Board of Directors will be
elected each year.
Director Compensation
Directors are reimbursed for certain reasonable expenses incurred in
attending Board or committee meetings. Officers of the Company are elected
annually by the Board of Directors and serve at its discretion.
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The Company has entered into indemnification agreements with each member of
the Board of Directors and certain of its officers providing for the
indemnification of such person to the fullest extent authorized, permitted or
allowed by law.
Compensation Committee
The Company's Board of Directors currently has a Compensation Committee that
reviews and approves the compensation and benefits to be provided to the
officers, directors, employees, and consultants of the Company, administers
the Company's 1993 Incentive Stock Option Plan, 1995 Stock Incentive Plan for
Employees and Consultants, and Amended and Restated 1996 Stock Plan, and will
administer the 1997 Stock Plan and 1997 Employee Stock Purchase Plan. The
Compensation Committee currently consists of Messrs. Khosla and Rieschel.
Audit Committee
The Company's Board of Directors currently has an Audit Committee that
monitors the corporate financial reporting and the external audits of the
Company, reviews and approves material accounting policy changes, monitors
internal accounting controls, recommends engagement of independent auditors,
reviews related-party transactions and performs other duties as prescribed by
the Board of Directors. The Audit Committee currently consists of Messrs.
Martin and Regis.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of June 30, 1998, by: (i) each
person who is known by the Company to own beneficially more than 5% of the
Common Stock; (ii) each director of the Company, the Chief Executive Officer
and the four most highly compensated officers in 1997; and (iii) all directors
and executive officers of the Company as a group. Except as otherwise noted,
the persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable.
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY BENEFICIALLY
NAMES AND ADDRESSES OWNED OWNED(1)
- ------------------- ------------ ------------
<S> <C> <C>
Williams Communications, Inc.(2).................... 1,604,254 11.0%
One Williams Center
Tulsa, OK 74172
TMI Telemedia International, Ltd.(3)................ 1,580,966 10.9
Viale del Campo, Boario, 56D
00153 Rome, Italy
SOFTBANK Ventures, Inc. ............................ 1,026,179 7.2
c/o SOFTBANK Holdings Inc.
10 Langley Road, Suite 403
Newton Center, MA 02159
Kleiner Perkins Caufield & Byers Entities(4)........ 1,006,873 7.0
2750 Sand Hill Road
Menlo Park, CA 94025
Denver Investment Advisors LLC...................... 909,500 6.4
1225 17th Street, 26th Floor
Denver, CO 80202
Henry R. Nothhaft(5)................................ 168,658 1.1
John K. Peters(6)................................... 140,342 *
Michael F. Anthofer(7).............................. 45,314 *
Warren A. Smith(8).................................. 30,607 *
George D. Carr(9)................................... 17,847 *
Vinod Khosla(10).................................... 1,006,873 7.0
Gordon Martin(11)................................... -- --
Franco Regis(12).................................... 1,580,966 10.9
Gary E. Rieschel(13)................................ -- --
All current executive officers and directors as a
group (16 persons)(14)............................. 3,091,321 20.4
</TABLE>
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- --------
*Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, based on factors including voting and
investment power with respect to shares, subject to the applicable
community property laws. Shares of Common Stock subject to options or
warrants currently exercisable, or exercisable by October 31, 1997, are
deemed outstanding for the purpose of computing the percentage ownership
of the person holding such options or warrants, but are not deemed
outstanding for computing the percentage ownership of any other person.
(2) Includes warrants to purchase 355,018 shares of Common Stock.
(3) Includes warrants to purchase 341,001 shares of Common Stock.
(4) Includes shares held by Kleiner Perkins Caufield & Byers VII and KPCB
Information Sciences Zaibatsu Fund II (collectively, the "KPCB
Entities"). Also includes warrants to purchase 141,854 shares of Common
Stock held by the KPCB Entities.
(5) Includes 141,992 shares of Common Stock issuable upon exercise of
outstanding stock options and warrants.
(6) Includes 139,167 shares of Common Stock issuable upon exercise of
outstanding stock options and warrants.
(7) Includes 44,652 shares of Common Stock issuable upon exercise of
outstanding stock options.
(8) Includes 29,722 shares of Common Stock issuable upon exercise of
outstanding stock options.
(9) Includes 17,847 shares of Common Stock issuable upon exercise of
outstanding stock options.
(10) Represents shares beneficially owned by the KPCB Entities. Mr. Khosla is
an affiliate of such entities. See note (5). Mr. Khosla disclaims
beneficial ownership of such shares, except to the extent of his
pecuniary interest therein.
(11) Excludes 1,604,254 shares held by Williams Communications, Inc. Mr.
Martin, a Director of the Company, is a vice president of Williams
Communications Group, Inc., an affiliate of Williams Communications, Inc.
Mr. Martin disclaims beneficial ownership of such shares.
(12) Includes 1,580,966 shares and exercisable warrants held by TMI Telemedia
International, Ltd. Mr. Regis is the Director of Business Development and
Strategic Planning of Telecom Italia, S.p.A., the parent of TMI Telemedia
International, Ltd. See note (3). Mr. Regis disclaims beneficial
ownership of such shares.
(13) Excludes 1,026,179 shares held by SOFTBANK Ventures Inc. Mr. Rieschel, a
director of the Company, is a Senior Vice President at SOFTBANK Holdings
Inc., an affiliate of SOFTBANK Ventures Inc. Mr. Rieschel disclaims
beneficial ownership of such shares.
(14) Includes shares of Common Stock issuable upon exercise of outstanding
options and warrants, and shares beneficially owned by entities
associated with Messrs. Regis and Khosla, as to which they disclaim
beneficial ownership. See Notes (5)-(13).
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<PAGE>
DESCRIPTION OF THE PREFERRED STOCK
GENERAL
The following is a summary of certain terms of the Series B Preferred
offered hereby. The Series B Preferred, like the Series A Preferred, will be
issued pursuant to the Certificate of Designation of Voting Power, Designation
Preferences and Relative, Participating, Optional or Other Special Rights and
Qualifications, Limitations and Restrictions (the "Certificate of
Designation"). The terms of the Series B Preferred are substantially identical
in all material respects to those of the Series A Preferred except that the
Series B Preferred (i) will have been registered under the Securities Act, and
therefore will not be subject to certain restrictions on transfer applicable
to the Series A Preferred and (ii) will not be entitled to registration or
other rights under the Registration Rights Agreement including the provision
in the Registration Rights Agreement for payment of Liquidated Damages upon
failure by the Company to consummate the Exchange Offer or the occurrence of
certain other events. The following summary of the Preferred Stock, the
Certificate of Designation and the Registration Rights Agreement is not
intended to be complete and is subject to, and qualified in its entirety by
reference to, the Company's Certificate of Incorporation, the Certificate of
Designation and the Registration Rights Agreement, including the definitions
therein of certain terms used below. Copies of the proposed form of
Certificate of Designation and Registration Rights Agreement are available as
set forth under "Description of Exchange Debentures--Additional Information."
The definitions of certain terms used in the following summary are set forth
below under "--Certain Definitions." As used in this Description of Preferred
Stock, the term "Company" refers to Concentric Network Corporation, excluding
its Subsidiaries and references to the Preferred Stock shall be deemed to
include the Series B Preferred.
Pursuant to the Certificate of Designation, 295,000 shares of Series B
Preferred with a liquidation preference of $1,000 per share (the "Liquidation
Preference") will be authorized for issuance in the Exchange Offer. The Series
B Preferred will, when issued and paid for in accordance with the terms of the
Exchange Offer, be fully paid and nonassessable, and holders thereof will have
no preemptive rights in connection therewith.
The transfer agent for the Preferred Stock is ChaseMellon Shareholder
Services LLC unless and until a successor is selected by the Company (the
"Transfer Agent").
RANKING
The Preferred Stock, with respect to dividend distributions and
distributions upon the liquidation, winding-up and dissolution of the Company,
ranks (i) senior to all classes of common stock of the Company and to each
other class of capital stock or series of preferred stock established after
the date of this Prospectus by the Board of Directors, the terms of which do
not expressly provide that it ranks senior to or on a parity with the
Preferred Stock as to dividend distributions and distributions upon the
liquidation, winding-up and dissolution of the Company (collectively referred
to with the common stock of the Company as "Junior Securities"); (ii) on a
parity with any additional Preferred Stock issued by the Company in the future
and any other class of capital stock or series of preferred stock issued by
the Company in the future and any other class of capital stock or series of
preferred stock issued by the Company established after the date of this
Prospectus by the Board of Directors, the terms of which expressly provide
that such class or series will rank on a parity with the Preferred Stock as to
dividend distributions and distributions upon the liquidation, winding-up and
dissolution of the Company (collectively referred to as "Parity Securities");
and (iii) junior to each class of capital stock or series of preferred stock
issued by the Company established after the date of this Prospectus by the
Board of Directors, the terms of which expressly provide that such class or
series will rank senior to the Preferred Stock as to dividend distributions
and distributions upon liquidation, winding-up and dissolution of the Company
(collectively referred to as "Senior Securities").
All claims of the holders of the Preferred Stock, including without
limitation, claims with respect to dividend payments, redemption payments,
mandatory repurchase payments or rights upon liquidation, winding-up or
dissolution, shall rank junior to the claims of the holders of any debt of the
Company and all other creditors of the Company. As of March 31, 1998, the
Preferred Stock would have been junior in right of payment to
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approximately $195.0 million of total indebtedness of the Company. In
addition, following the Offering, the Company will have the ability to issue
additional shares of Preferred Stock to the holders of Preferred Stock in lieu
of paying dividends. The Certificate of Designation provides that the Company
may not, without the consent of the holders of at least a majority of the then
outstanding shares of Preferred Stock, authorize, create (by way of
reclassification or otherwise) or issue any Senior Securities (as defined) or
any Obligation or security convertible or exchangeable into or evidencing a
right to purchase, shares of any class or series of Senior Securities. See "--
Voting Rights."
In addition, certain of the Company's operations are conducted through its
Subsidiaries and, therefore, the Company may be dependent upon the cash flow
of its Subsidiaries to meet its obligations, including its obligations under
the Preferred Stock. Any right of the Company to receive assets of any of its
Subsidiaries will be effectively subordinated to all indebtedness and other
liabilities and commitments (including trade payables and lease obligations)
of the Company's Subsidiaries. As of March 31, 1998, the aggregate amount of
Indebtedness and other obligations of the Company and its Subsidiaries that
would effectively rank senior in right of payment to the obligations of the
Company under the Preferred Stock would have been approximately $195.0
million. See "Risk Factors--Substantial Indebtedness; Ability to Service
Debt."
DIVIDENDS
The holders of the Preferred Stock are entitled to receive, when, as and if
dividends are declared by the Board of Directors out of funds of the Company
legally available therefor, cumulative preferential dividends from the Issue
Date accumulating at the rate per share of 13 1/2% of the Liquidation
Preference per share per annum, payable quarterly in arrears on each March 1,
June 1, September 1, and December 1 of each year or, if any such date is not a
business day, on the next succeeding business day (each, a "Dividend Payment
Date"), to the holders of record as of the next preceding February 15, May 15,
August 15 and November 15 (each, a "Record Date"). Dividends may be paid, at
the Company's option, by the issuance of additional shares of Preferred Stock
(including fractional shares provided, that the Company may, at its option,
pay cash in lieu of issuing fractional shares) having an aggregate Liquidation
Preference equal to the amount of such dividends; provided that after June 1,
2003, to the extent and so long as the Company is not precluded from paying
dividends on the Preferred Stock by the terms of any agreement or instruments
governing and of its then outstanding, the Company shall pay dividends in
cash. The issuance of such additional shares of Preferred Stock constitutes
"payment" of the related dividend for all purposes of the Certificate of
Designation. The first dividend payment on the Preferred Stock will be payable
on September 1, 1998. Dividends payable on the Preferred Stock will be
computed on the basis of a 360-day year consisting of twelve 30-day months and
are deemed to accumulate on a daily basis on the Liquidation Preference of the
Preferred Stock. For a discussion of certain federal income tax considerations
relevant to the payment of dividends on the Preferred Stock, see "Certain
Federal Income Tax Considerations--Preferred Stock Distributions on the
Preferred Stock."
Dividends on the Preferred Stock will accrue whether or not the Company has
earnings or profits, whether or not there are funds legally available for the
payment of such dividends and whether or not dividends are declared. Dividends
accumulate to the extent they are not paid on the Dividend Payment Date for
the period to which they relate. The Certificate of Designation provides that
the Company will take all actions required or permitted under the Delaware
General Corporation Law (the "DGCL") to permit the payment of dividends on the
Preferred Stock, including, without limitation, through the revaluation of its
assets in accordance with the DGCL, to make or keep funds legally available
for the payment of dividends.
No dividend whatsoever shall be declared or paid upon, or any sum set apart
for the payment of dividends upon, any outstanding share of the Preferred
Stock with respect to any dividend period unless all dividends for all
preceding dividend periods have been declared and paid, or declared and a
sufficient sum set apart for the payment of such dividend, upon all
outstanding shares of Preferred Stock. Unless full cumulative dividends on all
outstanding shares of Preferred Stock for all past dividend periods shall have
been declared and paid, or declared and a sufficient sum for the payment
thereof set apart, then: (i) no dividend (other than a dividend payable solely
in shares of any Junior Securities) shall be declared or paid upon, or any sum
set apart for the
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payment of dividends upon, any shares of Junior Securities; (ii) no other
distribution shall be declared or made upon, or any sum set apart for the
payment of any distribution upon, any shares of Junior Securities, other than
a distribution consisting solely of Junior Securities; (iii) no shares of
Junior Securities shall be purchased, redeemed or otherwise acquired or
retired for value (excluding an exchange for shares of other Junior
Securities) by the Company or any of its Subsidiaries; and (iv) no monies
shall be paid into or set apart or made available for a sinking or other like
fund for the purchase, redemption or other acquisition or retirement for value
of any shares of Junior Securities by the Company or any of its Subsidiaries.
Holders of the Preferred Stock are not entitled to any dividends, whether
payable in cash, property or stock, in excess of the full cumulative dividends
as herein described.
The Existing Senior Notes Indenture contains, any future credit agreements
or other agreements relating to Indebtedness to which the Company becomes a
party may contain, restrictions on the ability of the Company to pay dividends
on the Preferred Stock.
VOTING RIGHTS
Holders of record of the Preferred Stock will have no voting rights, except
as required by law and as provided in the Certificate of Designation. The
Certificate of Designation will provide that upon (a) the accumulation of
dividends remaining unpaid either in cash or by the issuance of additional
shares of Preferred Stock on the outstanding Preferred Stock in an amount
equal to six quarterly dividends (whether or not consecutive); (b) the failure
of the Company to satisfy any mandatory redemption or repurchase obligation
(including, without limitation, pursuant to any required Change of Control
Offer) with respect to the Preferred Stock; (c) the Company fails to comply
with the Change of Control covenant contained in the Certificate of
Designation; (d) the failure of the Company to comply with any of the other
covenants or agreements set forth in the Certificate of Designation and the
continuance of such failure for 60 consecutive days or more after notice from
the holders of at least 25% of the Preferred Stock; or (e) any (i) default by
the Company or any Subsidiary in the payment of the principal, premium, if
any, or interest has occurred with respect to amounts in excess of $5.0
million under any agreement, indenture or instrument evidencing Indebtedness
when the same shall become due and payable in full and such default shall have
continued after any applicable grace period and shall not have been cured or
waived and, if not already matured at its final maturity in accordance with
its terms, the holder of such Indebtedness shall have the right to accelerate
such Indebtedness or (ii) event of default as defined in any agreement,
indenture or instrument of the Company evidencing Indebtedness in excess of
$5.0 million shall have occurred and the Indebtedness thereunder, if not
already matured at its final maturity in accordance with its terms, shall have
been accelerated (each of the events described in clauses (a), (b), (c), (d)
and (e) being referred to herein as a "Voting Rights Triggering Event"), then
the holders of a majority of the outstanding Preferred Stock, voting as a
separate single class, are entitled to elect two members to the Board of
Directors of the Company and the number of members of the Company's Board of
Directors will be immediately and automatically increased by two. Voting
rights arising as a result of a Voting Rights Triggering Event will continue
until such time as all dividends in arrears on the Preferred Stock are paid in
full and all other Voting Rights Triggering Events have been cured or waived,
at which time the term of office of any such members of the Board of Directors
so elected shall terminate and such directors shall be deemed to have
resigned. The voting rights provided for in the Certificate of Designation
will be the holder's exclusive remedy at law or in equity.
In addition, the Certificate of Designation provides that the Company will
not authorize any class of Senior Securities or any Obligation or security
convertible or exchangeable into or evidencing a right to purchase shares of
any class or series of Senior Securities, without the approval of holders of
at least a majority of the shares of the Preferred Stock then outstanding,
voting or consenting, as the case may be, as one class. The Certificate of
Designation also provides that the Company may not amend the Certificate of
Designation so as to affect adversely the specified rights, preferences,
privileges or voting rights of holders of shares of Preferred Stock without
the approval of the holders of at least a majority of the then outstanding
shares of Preferred Stock, voting or consenting, as the case may be, as one
class; provided, however, that the Company may not amend the Change of Control
provisions of the Certificate of Designation (including the related
definitions) without the approval of
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all of the holders of the then outstanding shares of Preferred Stock, voting
or consenting, as the case may be, as one class. The Certificate of
Designation also provides that, except as set forth above, the creation,
authorization or issuance of, or the increase or decrease in the authorized
amount of, capital stock of any class, including any preferred stock, shall
not require the consent of the holders of Preferred Stock and shall not be
deemed to affect adversely the rights, preferences, privileges, special rights
or voting rights of holders of Preferred Stock.
AMENDMENT
The Certificate of Designation shall not be amended, either directly or
indirectly, or through merger or consolidation with another entity, in any
manner that would alter or change the powers, preferences or special rights of
the Preferred Stock so as to affect them adversely without the affirmative
vote of the holders of a majority or more of the outstanding Preferred Stock,
voting separately as a class.
EXCHANGE
The Company may, at its option, on any Dividend Payment Date, exchange, in
whole, but not in part, the then outstanding shares of Preferred Stock for
Exchange Debentures with a principal amount equal to the aggregate Liquidation
Preference of the Preferred Stock; provided that on the date of such exchange
(i) there are no accumulated and unpaid dividends and Liquidated Damages (as
defined), if any, on the Preferred Stock (including the dividends payable on
such date) or any contractual impediments to such exchange; (ii) there shall
be legally available funds sufficient therefor; (iii) immediately after giving
effect to such exchange, no Default or Event of Default (each as defined in
the Indenture) would exist under the Indenture or would be caused thereby;
(iv) the Indenture has been qualified under the Trust Indenture Act if such
qualification is required at the time of exchange; and (v) the Company shall
have delivered a written opinion to the Trustee (as defined herein) to the
effect that all conditions to be satisfied prior to such exchange have been
satisfied.
Upon any exchange pursuant to the preceding paragraph, holders of
outstanding Preferred Stock will be entitled to receive, subject to the second
succeeding sentence of this paragraph, $1.00 principal amount of Exchange
Debentures for each $1.00 of the aggregate Liquidation Preference of Preferred
Stock held by them. The Exchange Debentures will be issued in registered form,
without coupons. The Exchange Debentures will be issued in principal amounts
of $1,000 and integral multiples thereof to the extent possible, and will also
be issuable in principal amounts less than $1,000 so that each holder of
Preferred Stock will receive certificates representing the entire amount of
Exchange Debentures to which such holder's shares of Preferred Stock entitle
such holder. Notice of the intention to exchange will be sent by or on behalf
of the Company not more than 60 days nor less than 30 days prior to the date
of exchange ("Exchange Date"), by first class mail, postage prepaid, to each
holder of record of Preferred Stock at its registered address. In addition to
any information required by law or by the applicable rules of any exchange
upon which Preferred Stock may be listed or admitted to trading, such notice
will state: (i) the Exchange Date; (ii) the place or places where certificates
for such shares are to be surrendered for exchange, including any procedures
applicable to exchanges to be accomplished through book-entry transfers; and
(iii) that dividends on the shares of Preferred Stock to be exchanged will
cease to accumulate on the Exchange Date. If notice of any exchange has been
properly given, and if on or before the Exchange Date the Exchange Debentures
have been duly executed and authenticated and deposited with the Transfer
Agent, then on and after the close of business on the Exchange Date, the
shares of Preferred Stock to be exchanged will no longer be deemed to be
outstanding and may thereafter be issued in the same manner as the other
authorized but unissued preferred stock, but not as Preferred Stock, and all
rights of the holders thereof as stockholders of the Company will cease,
except the right of the holders to receive upon surrender of their
certificates the Exchange Debentures and all accrued interest, if any,
thereon.
REDEMPTION
Mandatory Redemption
On June 1, 2010 (the "Mandatory Redemption Date"), the Company will be
required to redeem (subject to the legal availability of funds therefor) all
outstanding shares of Preferred Stock at a price in cash equal to the
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Liquidation Preference thereof, plus accumulated and unpaid dividends
(including an amount in cash equal to a prorated dividend for any partial
dividend period) and Liquidated Damages, if any, to the date of redemption.
The Company will not be required to make sinking fund payments with respect to
the Preferred Stock. The Certificate of Designation will provide that the
Company will take all actions required or permitted under Delaware law to
permit such redemption.
Optional Redemption
Except as set forth below, the Preferred Stock may not be redeemed at the
option of the Company prior to June 1, 2003. The Preferred Stock will be
subject to redemption at any time on or after June 1, 2003, at the option of
the Company, in whole or in part, on not less than 30 nor more than 60 days'
prior notice in amounts of $1,000 or an integral multiple thereof at the
following redemption prices (expressed as percentages of the Liquidation
Preference thereof), if redeemed during the 12-month period beginning June 1
of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003........................................................... 106.75%
2004........................................................... 105.40%
2005........................................................... 104.05%
2006........................................................... 102.70%
2007........................................................... 101.35%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accumulated and unpaid dividends (including an amount in cash equal to a
prorated dividend for any partial dividend) and Liquidated Damages, if any, to
the date of redemption.
In addition, at any time prior to June 1, 2001, the Company may, at its
option, use the net proceeds of one or more Public Equity Offerings or the
sale of Common Stock (other than Disqualified Stock) of the Company to a
Strategic Investor in a single transaction or a series of related
transactions, to redeem up to an aggregate of 35% of the shares of Preferred
Stock then outstanding (whether initially issued or issued in lieu of cash
dividends) at a redemption price equal to 113 1/2% of the Liquidation
Preference per share, plus accumulated and unpaid dividends thereon and
Liquidated Damages, if any, to the redemption date; provided that at least 65%
of the shares of Preferred Stock initially issued remains outstanding
immediately after the occurrence of such redemption. In order to effect the
foregoing redemption, the Company must mail a notice of redemption no later
than 45 days after the related Public Equity Offering and must consummate such
redemption within 60 days of the closing of the Public Equity Offering.
LIQUIDATION RIGHTS
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company or reduction or decrease in its capital stock resulting in a
distribution of assets to the holders of any class or series of the Company's
capital stock, each holder of shares of the Preferred Stock will be entitled
to payment out of the assets of the Company available for distribution of an
amount equal to the Liquidation Preference per share of Preferred Stock held
by such holder, plus accumulated and unpaid dividends and Liquidated Damages,
if any, to the date fixed for liquidation, dissolution, winding-up or
reduction or decrease in capital stock, before any distribution is made on any
Junior Securities, including, without limitation, common stock of the Company.
After payment in full of the Liquidation Preference and all accrued dividends
and Liquidated Damages, if any, to which holders of Preferred Stock are
entitled, such holders will not be entitled to any further participation in
any distribution of assets of the Company. If, upon any voluntary or
involuntary liquidation, dissolution or winding-up of the Company, the amounts
payable with respect to the Preferred Stock and all other Parity Securities
are not paid in full, the holders of the Preferred Stock and the Parity
Securities will share equally and ratably in any distribution of assets of the
Company in proportion to the full liquidation preference and accumulated and
unpaid
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dividends and Liquidated Damages to which each is entitled. However, neither
the voluntary sale, conveyance, exchange or transfer (for cash, shares of
stock, securities or other consideration) of all or substantially all of the
property or assets of the Company nor the consolidation or merger of the
Company with or into one or more corporations will be deemed to be a voluntary
or involuntary liquidation, dissolution or winding-up of the Company or
reduction or decrease in capital stock, unless such sale, conveyance, exchange
or transfer shall be in connection with a liquidation, dissolution or winding-
up of the business of the Company or reduction or decrease in capital stock.
The Certificate of Designation will not contain any provision requiring
funds to be set aside to protect the Liquidation Preference of the Preferred
Stock, although such Liquidation Preference will be substantially in excess of
the par value of the shares of the Preferred Stock, and there can be no
assurance that, upon any such voluntary or involuntary liquidation,
dissolution or winding-up of the Company that there will be funds available in
amount sufficient to pay such Liquidation Preference in full, in part or at
all.
CHANGE OF CONTROL
If a Change of Control shall occur at any time, then each holder of
Preferred Stock shall have the right to require that the Company purchase such
holder's Preferred Stock in whole or in part in integral multiples of $1,000,
at a purchase price (the "Change of Control Purchase Price") in cash, in an
amount equal to 101% of the principal amount of such Preferred Stock or
portion thereof, plus accumulated and unpaid dividends and Liquidated Damages,
if any, to the date of purchase (the "Change of Control Purchase Date"),
pursuant to the offer described below (the "Change of Control Offer").
Within 30 days of any Change of Control, the Company shall give written
notice of such Change of Control to each holder of Preferred Stock, by first-
class mail, postage prepaid, at his address appearing in the security
register, stating: that a Change of Control has occurred and the date of such
event, the circumstances and relevant facts regarding such Change of Control;
that the purchase price and the purchase date which shall be fixed by the
Company on a business day no earlier than 30 days nor later than 60 days from
the date such notice is mailed, or such later date as is necessary to comply
with requirements under the Exchange Act; that any Preferred Stock not
tendered will continue to accrue dividends; that, unless the Company defaults
in the payment of the Change of Control Purchase Price, any Preferred Stock
accepted for payment pursuant to the Change of Control Offer shall cease to
accrue dividends after the Change of Control Purchase Date; and that certain
other procedures that a holder of Preferred Stock must follow to accept a
Change of Control Offer or to withdraw such acceptance.
The Company will not be required to make a Change of Control Offer to the
holders of Preferred Stock upon a Change of Control if either (a) a third
party makes the Change of Control Offer described above in the manner, at the
times and otherwise in compliance with the requirements set forth in the
Certificate of Designation, and purchases all shares of Preferred Stock
validly tendered and not withdrawn under such Change of Control Offer or (b)
the date on which such Change of Control Offer would otherwise be required to
be made is on or prior to the Existing Senior Notes Maturity Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Preferred Stock that might be delivered by
holders of the Preferred Stock seeking to accept the Change of Control Offer.
See "Risk Factors--Change of Control." The failure of the Company to make or
consummate the Change of Control Offer or pay the Change of Control Purchase
Price when due will give the holders of the Preferred Stock the rights
described under "--Voting Rights; Amendment."
If the date on which a Change of Control Offer otherwise would be required
to be made is on or prior to the Existing Senior Notes Maturity Date, then, in
lieu of any such Change of Control Offer, holders of two-thirds of the
Preferred Stock will be entitled to designate an Independent Financial Advisor
(as defined below) to determine, within 20 days of such designation, in the
opinion of such firm, the appropriate dividend rate that the Preferred Stock
should bear so that, after such reset, the Preferred Stock would have a market
value of 101% of
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the Liquidation Preference. If, for any reason and within 15 days of the
designation of an Independent Financial Advisor by the holders, such
Independent Financial Advisor is unacceptable to the Company, the Company may
designate a second Independent Financial Advisor to determine, within 15 days
of such designation, in its opinion, such an appropriate reset dividend rate
for the Preferred Stock. In the event that the two Independent Financial
Advisors cannot agree, within 25 days of the designation of an Independent
Financial Advisor by the holders of two-thirds of the Preferred Stock, on the
appropriate reset dividend rate, the two Independent Financial Advisors shall,
within 10 days of such 25th day, designate a third Independent Financial
Advisor, which, within 15 days of designation, will determine, in its opinion,
such an appropriate reset rate which is between the two rates selected by the
first two Independent Financial Advisors; provided, however, that the reset
rate shall in no event be less than 13 1/2% per annum nor greater than 15 1/2%
per annum. The reasonable fees and expenses, including reasonable fees and
expenses of legal counsel, if any, and customary indemnification, of each of
the three above-referenced Independent Financial Advisors shall be borne by
the Company. Upon the determination of the reset rate, the Preferred Stock
shall accrue and cumulate dividends at the reset rate as of the date of
occurrence of the Change of Control. "Independent Financial Advisor" means a
United States investment banking firm of national standing in the United
States which does not, and whose directors, officers and employees or
affiliates do not, have a direct or indirect financial interest in the
Company.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Certificate of Designation are applicable.
Except as described above with respect to a Change of Control, the Certificate
of Designation does not contain provisions that permit the holders of the
Preferred Stock to require that the Company repurchase or redeem the Preferred
Stock in the event of a takeover, recapitalization or similar transaction.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of Preferred Stock to require the Company to repurchase such Preferred
Stock as a result of a sale, lease, transfer, conveyance or other disposition
of less than all of the assets of the Company to another Person may be
uncertain.
The existence of a holder's right to require the Company to repurchase such
holder's Preferred Stock upon a Change of Control may deter a third party from
acquiring the Company in a transaction which constitutes a Change of Control.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with a Change of Control Offer.
CERTAIN COVENANTS
The sole remedy to holders of Preferred Stock in the event of a breach of
any of the covenants described below and the continuation of such failure for
60 days following receipt of written notice thereof from the holders of 25% of
the Preferred Stock outstanding will be the voting rights arising from a
Voting Rights Triggering Event, and such breach by the Company will not cause
any action taken by the Company to be invalid or unauthorized under its
charter documents. The Certificate of Designation will contain, among others,
the following covenants:
Limitation on Indebtedness.
(a) The Company shall not, and shall not cause or permit any Restricted
Subsidiary to, directly or indirectly, Incur any Indebtedness (other than the
Preferred Stock); provided, however, that the Company may Incur Indebtedness,
and the Company or any Restricted Subsidiary may Incur Acquired Indebtedness,
if, at the time of such Incurrence, the Debt to Annualized Operating Cash Flow
Ratio would be less than or equal to 5.5 to 1.0 prior to December 15, 2000, or
less than or equal to 5.0 to 1.0 after December 15, 2000.
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(b) The foregoing limitations of paragraph (a) of this covenant will not
apply to Incurrence of Indebtedness permitted under any of the following
("Permitted Indebtedness"), each of which shall be given independent effect:
(i) the Incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness (other than Acquired Indebtedness) consisting of Capital
Lease Obligations, Purchase Money Obligations, mortgage financings or other
obligations incurred for the purpose of financing all or any part of the
purchase price, cost of construction or improvement of property, plant or
equipment used in connection with the Telecommunications Business or a
credit facility or a master lease arrangement entered into for the purpose
of providing such financing, provided that such Indebtedness does not
exceed the lesser of the Fair Market Value (determined at the time of the
consummation of the purchase, construction or improvement of such property,
plant or equipment), or the purchase price of such property, plant or
equipment;
(ii) Indebtedness of the Company or any of its Restricted Subsidiaries,
and any renewals, extensions, substitutions, refinancings or replacements
of such Indebtedness, so long as the aggregate principal amount of such
Indebtedness shall not exceed $50.0 million outstanding at any one time in
the aggregate;
(iii) the Incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness (other than secured Acquired Indebtedness) in an aggregate
principal amount not to exceed, at any one time outstanding, 2.0 times the
Net Cash Proceeds received by the Company from the issuance and sale of any
class or series of its Capital Stock (other than Disqualified Stock) on and
after the Issue Date plus the Fair Market Value of any of its Capital Stock
(other than Disqualified Stock) issued on and after the Issue Date in
connection with the acquisition of an equity interest in a
Telecommunications Business or assets used in a Telecommunications
Business; provided that such Indebtedness does not mature prior to the
Mandatory Redemption Date or have an Average Life to Stated Maturity that
is shorter than the period then remaining prior to the Mandatory Redemption
Date;
(iv) Indebtedness of the Company or any Restricted Subsidiary entered
into in the ordinary course of business (a) pursuant to Interest Rate
Agreements designed to protect the Company or any Restricted Subsidiary
against fluctuations in interest rates in respect of Indebtedness of the
Company or any Restricted Subsidiary as long as the notional principal
amount of such Interest Rate Agreements do not exceed the aggregate
principal amount of such Indebtedness then outstanding, (b) under any
Currency Hedging Arrangements designed to protect the Company or any
Restricted Subsidiary against fluctuations in the value of any currency or
(c) under any Commodity Price Protection Agreements designed to protect the
Company or any Restricted Subsidiary against fluctuations in the price of
any commodity;
(v) the Incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness in respect of bid, performance or advance payment bonds and
appeal or surety bonds;
(vi) Indebtedness existing on the Issue Date;
(vii) the Incurrence of (a) Indebtedness of any Restricted Subsidiary
owed to and held by the Company or another Restricted Subsidiary and (b)
Indebtedness of the Company owed to and held by any Restricted Subsidiary;
and
(viii) any renewals, extensions, substitutions, refundings, refinancings
or replacements (collectively, a "refinancing") of any Indebtedness
described in clauses (i), (ii), (iii), (vi) and (vii) of this paragraph (b)
of this covenant including any successive refinancings so long as the
borrower under such refinancing is the Company or, if not the Company, the
same as the borrower of the Indebtedness being refinanced and the aggregate
principal amount of Indebtedness represented thereby is not increased by
such refinancing plus the lesser of (I) the stated amount of any premium or
other payment required to be paid in connection with such a refinancing
pursuant to the terms of the Indebtedness being refinanced or (II) the
amount of premium or other payment actually paid at such time to refinance
the Indebtedness, plus, in either case, the amount of expenses of the
Company incurred in connection with such refinancing.
(c) For purposes of determining any particular amount of Indebtedness under
this covenant, guarantees, Liens or obligations with respect to letters of
credit supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included.
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(d) For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness may be Incurred through the first paragraph of
this covenant or by meeting the criteria of one or more of the types of
Indebtedness described in the second paragraph of this covenant (or the
definitions of the terms used therein), the Company, in its sole discretion,
(i) may classify such item of Indebtedness under and comply with either of
such paragraphs (or any of such definitions), as applicable, (ii) may classify
and divide such item of Indebtedness into more than one of such paragraphs (or
definitions), as applicable, and (iii) may elect to comply with such
paragraphs (or definitions), as applicable, in any order.
Limitation on Restricted Payments.
(a) The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly:
(i) declare or pay any dividend on, or make any distribution on any
shares of the Company's Capital Stock that are Junior Securities (other
than dividends or distributions payable solely in shares of its Qualified
Capital Stock that are Junior Securities or in options, warrants or other
rights to acquire shares of such Qualified Capital Stock that are Junior
Securities);
(ii) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, the Company's Capital Stock or any Capital Stock of any
Affiliate of the Company (other than Capital Stock of any Wholly Owned
Subsidiary of the Company) or options, warrants or other rights to acquire
such Capital Stock that are Junior Securities;
(iii) declare or pay any dividend or distribution on any Capital Stock of
any Restricted Subsidiary to any Person (other than (a) to the Company or
any of its Wholly Owned Subsidiaries or (b) to all holders of Capital Stock
of such Restricted Subsidiary on a pro rata basis); or
(iv) make any Investment in any Person (other than any Permitted
Investments)
(any of the foregoing actions described in clauses (i) through (v), other than
any such action that is a Permitted Payment (as defined below), collectively,
"Restricted Payments") (the amount of any such Restricted Payment, if other
than cash, as determined by the board of directors of the Company, whose
determination shall be conclusive and evidenced by a board resolution), unless
(1) immediately before and immediately after giving effect to such proposed
Restricted Payment on a pro forma basis, no Voting Rights Triggering Event
shall have occurred and be continuing; (2) immediately before and immediately
after giving effect to such Restricted Payment on a pro forma basis, the
Company could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the provisions described under "--Limitation on
Indebtedness;" and (3) after giving effect to the proposed Restricted Payment,
the aggregate amount of all such Restricted Payments declared or made after
the Issue Date, does not exceed the sum of the following (the "Basket"):
(A) (i) the Cumulative Operating Cash Flow determined at the time of such
Restricted Payment less (ii) 150% of cumulative Consolidated Interest
Expense determined for the period (treated as one accounting period)
commencing on the Issue Date and ending on the last day of the most recent
fiscal quarter immediately preceding the date of such Restricted Payment
for which consolidated financial information of the Company is required to
be available;
(B) the sum of (i) (x) capital contributions to the Company after the
Issue Date or (y) the aggregate Net Cash Proceeds received after the Issue
Date by the Company from the issuance or sale (other than to any of its
Restricted Subsidiaries) of Qualified Capital Stock of the Company or any
options, warrants or rights to purchase such Qualified Capital Stock of the
Company (except, in each case, to the extent such proceeds are used to
purchase, redeem or otherwise retire Capital Stock or Subordinated
Indebtedness as set forth below in clause (ii) or (iii) of paragraph (b)
below);
(C) the aggregate Net Cash Proceeds received after the Issue Date by the
Company (other than from any of its Restricted Subsidiaries) upon the
exercise of any options, warrants or rights to purchase Qualified Capital
Stock of the Company;
(D) the aggregate Net Cash Proceeds received after the Issue Date by the
Company from the conversion or exchange, if any, of debt securities or
Disqualified Stock of the Company or its Restricted
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Subsidiaries into or for Qualified Capital Stock of the Company plus, to
the extent such debt securities or Disqualified Stock were issued after the
Issue Date, the aggregate of Net Cash Proceeds from their original
issuance; and
(E) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment, an amount equal to the return of capital
with respect to such Investment and the initial amount of such Investment.
(b) Notwithstanding the foregoing, and in the case of clauses (ii) and (iii)
below, so long as there is no Voting Rights Triggering Event continuing, the
foregoing provisions shall not prohibit the following actions (each of clauses
(i) through (iii) being referred to as a "Permitted Payment"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment was
permitted by the provisions of paragraph (a) of this Section and such
payment shall have been deemed to have been paid on such date of
declaration and shall not have been deemed a Permitted Payment for purposes
of the calculation required by paragraph (a) of this Section;
(ii) the repurchase, redemption, or other acquisition or retirement for
value of any shares of any class of Capital Stock of the Company that are
Junior Securities in exchange for (including any such exchange pursuant to
the exercise of a conversion right or privilege in connection with which
cash is paid in lieu of the issuance of fractional shares or scrip), or out
of the Net Cash Proceeds of a substantially concurrent issuance and sale
for cash (other than to a Restricted Subsidiary) of, other shares of
Qualified Capital Stock of the Company that are Junior Securities; provided
that the Net Cash Proceeds from the issuance of such shares of Qualified
Capital Stock are excluded from clause (3)(B) of paragraph (a) of this
Section;
(iii) the repurchase of shares of, or options to purchase shares of,
common stock of the Company or any of its Restricted Subsidiaries from
employees, former employees, directors or former directors of the Company
or any of its Restricted Subsidiaries (or permitted transferees of such
employees, former employees, directors or former directors), pursuant to
the terms of the agreements (including employment agreements) or plans (or
amendments thereto) approved by the Board of Directors under which such
individuals purchase or sell or are granted the option to purchase or sell,
shares of such common stock; provided, however, that the aggregate amount
of such repurchases in any calendar year shall not exceed $1.0 million and
$5.0 million in the aggregate.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries.
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create any consensual encumbrance or restriction
on the ability of any Restricted Subsidiary to (i) pay dividends or make any
other distribution on its Capital Stock, (ii) pay any Indebtedness owed to the
Company or any other Restricted Subsidiary, (iii) make any Investment in the
Company or any other Restricted Subsidiary or (iv) transfer any of its
properties or assets to the Company or any other Restricted Subsidiary, except
for: (a) any encumbrance or restriction, with respect to a Restricted
Subsidiary that is not a Restricted Subsidiary of the Company on the Issue
Date, in existence at the time such Person becomes a Restricted Subsidiary of
the Company and not incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary; (b) encumbrances or restrictions (I)
by reason of applicable law, or (II) under the Certificate of Designation; (c)
customary non-assignment provisions of any contract or lease of any Restricted
Subsidiary entered into in the ordinary course of business; (d) encumbrances
or restrictions imposed pursuant to contracts entered into in connection with
Permitted Liens; (e) any encumbrance or restriction imposed pursuant to
contracts for the sale of assets with respect to the assets to be sold
pursuant to such contract; and (f) any encumbrance or restriction existing
under any agreement that extends, renews, refinances or replaces the
agreements containing the encumbrances or restrictions in the foregoing
clauses (a) through (e), or in this clause (f), provided that the terms and
conditions of any such encumbrances or restrictions are no more restrictive in
any material respect than those under or pursuant to the agreement evidencing
the Indebtedness so extended, renewed, refinanced or replaced.
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Consolidation, Merger, Sale of Assets.
The Company will not, in a single transaction or through a series of related
transactions, consolidate with or merge with or into any other Person or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially
all of its properties and assets to any Person or group of affiliated Persons,
or permit any of its Restricted Subsidiaries to enter into any such
transaction or series of related transactions if such transaction or series of
related transactions, in the aggregate, would result in a sale, assignment,
conveyance, transfer, lease or disposition of all or substantially all of the
properties and assets of the Company and its Restricted Subsidiaries on a
Consolidated basis to any other Person or group of affiliated Persons, unless
at the time and after giving effect thereto (i) either (a) the Company will be
the continuing corporation in the case of a consolidation or merger involving
the Company or (b) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by sale, assignment, conveyance, transfer, lease or disposition all or
substantially all of the properties and assets of the Company and its
Restricted Subsidiaries on a Consolidated basis (the "Surviving Entity") will
be a corporation duly organized and validly existing under the laws of the
United States of America, any state thereof or the District of Columbia and
such Person expressly assumes all the obligations of the Company under the
Preferred Stock and New Preferred Stock; (ii) immediately before and
immediately after giving effect to such transaction on a pro forma basis (and
treating any Indebtedness not previously an obligation of the Company or any
of its Restricted Subsidiaries which becomes the obligation of the Company or
any of its Restricted Subsidiaries as a result of such transaction as having
been incurred at the time of such transaction), no Voting Rights Triggering
Event will have occurred and be continuing; and (iii) immediately before and
immediately after giving effect to such transaction on a pro forma basis, the
Company could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the provisions of "--Certain Covenants--Limitation on
Indebtedness." Notwithstanding the foregoing, the Company (i) may merge or
consolidate with any of its Restricted Subsidiaries, and (ii) the Company may
merge or consolidate into any Person in a transaction designed solely for the
purpose of effecting a change in the jurisdiction of incorporation of the
Company within the United States of America.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraph in
which the Company is not the Surviving Entity, such Surviving Entity shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company, and the Company shall be discharged from all obligations and
covenants under the Preferred Stock and New Preferred Stock.
Limitation on Transactions with Affiliates.
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into any transaction or series of related
transactions (including, without limitation, the sale, purchase, exchange or
lease of assets, property or services) with or for the benefit of any
Affiliate of the Company (other than the Company or a Wholly Owned Subsidiary)
unless such transaction or series of related transactions is entered into in
good faith and in writing and (a) such transaction or series of related
transactions is on terms that are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than those that would be reasonably
expected to be available in a comparable transaction in arm's-length dealings
with an unrelated third party, (b) with respect to any transaction or series
of related transactions involving aggregate value in excess of $5.0 million,
the Company delivers an officers' certificate to the Transfer Agent certifying
that such transaction or series of related transactions complies with clause
(a) above, and (c) with respect to any transaction or series of related
transactions involving aggregate value in excess of $10.0 million, either (A)
such transaction or series of related transactions has been approved by a
majority of the Disinterested Directors of the Company, or in the event there
is only one Disinterested Director, by such Disinterested Director, or (B) the
Company delivers to the Transfer Agent a written opinion of an investment
banking firm of national standing or other recognized independent expert with
experience appraising the terms and conditions of the type of transaction or
series of related transactions for which an opinion is required stating that
the transactions or series of related transactions is fair to the Company or
such Restricted Subsidiary from a financial point of view; provided, however,
that this provision shall not apply to: (a) compensation and employee benefit
arrangements with any officer, director or
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employee of the Company, including under any stock option or stock incentive
plans, in the ordinary course of business; (b) any transaction solely between
or among the Company and/or any Restricted Subsidiaries, if such transaction
is otherwise in compliance with the Certificate of Designation and is on fair
and reasonable terms; (c) any transaction otherwise permitted by the terms of
the section of the Certificate of Designation described under "Certain
Covenants--Limitations on Restricted Payments;" (d) the execution and delivery
of or payments made under any tax sharing agreement between or among any of
the Company and any Restricted Subsidiary; (e) licensing or sublicensing of
use of any intellectual property by the Company or any Restricted Subsidiary
to any Restricted Subsidiary of the Company; provided that the licensor shall
continue to have access to such intellectual property to the extent necessary
for the conduct of its respective business; (f) arrangements between the
Company and any Restricted Subsidiary of the Company for the purpose of
providing services or employees to such Restricted Subsidiary; (g) any
transaction entered into for the purpose of granting or altering registration
rights with respect to the Capital Stock of the Company; and (h) any
transaction or series of related transactions entered into prior to the Issue
Date.
Provision of Financial Statements.
Whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, the Company will, to the extent permitted under the Exchange
Act, file with the Commission the annual reports, quarterly reports and other
documents which the Company would have been required to file with the
Commission pursuant to Section 13(a) or 15(d) if the Company were so subject,
such documents to be filed with the Commission on or prior to the date (the
"Required Filing Date") by which the Company would have been required so to
file such documents if the Company were so subject. The Company will also in
any event (x) within 15 days of each Required Filing Date transmit by mail to
all holders, as their names and addresses appear in the security register,
without cost to such holders copies of the annual reports, quarterly reports
and other documents which the Company would have been required to file with
the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act if the
Company were subject to either of such Sections and (y) if filing such
documents by the Company with the Commission is not permitted under the
Exchange Act, promptly upon written request and payment of the reasonable cost
of duplication and delivery, supply copies of such documents to any
prospective holder at the Company's cost. The Certificate of Designation also
provides that, so long as any of the Preferred Stock remain outstanding, the
Company will make available to any prospective purchaser of Preferred Stock or
beneficial owner of Preferred Stock in connection with any sale thereof the
information required by Rule 144A(d)(4) under the Securities Act, until such
time as the Company has either exchanged the Preferred Stock for securities
identical in all material respects which have been registered under the
Securities Act or until such time as the holders thereof have disposed of such
Preferred Stock pursuant to an effective registration statement under the
Securities Act.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Certificate of
Designation. Reference is made to the Certificate of Designation for a full
disclosure of all such terms, as well as any other capitalized terms used
herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Restricted Subsidiary or (ii) assumed in connection
with the acquisition of assets from such Person, in each case, other than
Indebtedness incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or such acquisition, as the case may be,
provided that Indebtedness of such Person which is redeemed, defeased, retired
or otherwise repaid at the time of or immediately upon consummation of the
transactions by which such Person becomes a Restricted Subsidiary or such
asset acquisition shall not constitute Acquired Indebtedness.
"Acquired Person" means, with respect to any specified Person, any other
Person which merges with or into or becomes a Subsidiary of such specified
Person.
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"Acquisition" means (i) any capital contribution (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise) by the Company or any Restricted
Subsidiary to any other Person, or any acquisition or purchase of Capital
Stock of any other Person by the Company or any Restricted Subsidiary, in
either case pursuant to which such Person shall become a Subsidiary or shall
be consolidated, merged with or into the Company or any Restricted Subsidiary
or (ii) any acquisition by the Company or any Restricted Subsidiary of the
assets of any Person which constitute substantially all of an operating unit
or line of business of such Person or which is otherwise outside of the
ordinary course of business of the Company or such Restricted Subsidiary.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of: (i) any Capital
Stock of any Restricted Subsidiary; (ii) all or substantially all of the
properties and assets of any division or line of business of the Company or
its Restricted Subsidiaries; or (iii) any other properties or assets of the
Company or any Restricted Subsidiary other than in the ordinary course of
business.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the
sum of the products of (a) the number of years from the date of determination
to the date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment; by
(ii) the sum of all such principal payments.
"Capital Lease Obligation" of any Person means any obligation of such Person
and its subsidiaries on a Consolidated basis under any capital lease of real
or personal property which, in accordance with GAAP, has been recorded as a
capital lease obligation.
"Capital Stock" means (i) with respect to any Person that is a corporation,
and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of common stock and preferred stock of such Person and (ii) with respect to
any Person that is not a corporation, any and all partnership, membership or
other equity interests of such Person.
"Cash Equivalents" means (i) any evidence of Indebtedness, maturing not more
than one year after the date of acquisition, issued by the United States of
America, or an instrumentality or agency thereof, and guaranteed fully as to
principal, premium, if any, and interest by the United States of America, (ii)
any certificate of deposit, maturing not more than one year after the date of
acquisition, issued by, or time deposit of, a commercial banking institution
that is a member of the Federal Reserve System and that has combined capital
and surplus and undivided profits of not less than $500 million, whose short
term debt has a rating, at the time as of which any investment therein is
made, of "P-1" (or higher) according to Moody's Investors Service, Inc.
("Moody's") or any successor rating agency or "A-1" (or higher) according to
Standard & Poor's Corporation ("S&P") or any successor rating agency, (iii)
commercial paper, maturing not more than 270 days after the date of
acquisition, issued by a corporation (other than an Affiliate or Restricted
Subsidiary of the Company) organized and existing under the laws of the United
States of America with a rating, at the time as of which any investment
therein is made, of "P-1" (or higher) according to Moody's or "A-1" (or
higher) according to S&P and (iv) any money market deposit accounts issued or
offered by a domestic commercial bank having capital and surplus in excess of
$500 million; provided that the short term debt of such commercial bank has a
rating, at the time of Investment, of "P-1" (or higher) according to Moody's
or "A-1" (or higher) according to S&P.
"Change of Control" means the occurrence of any of the following events: (i)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act) is or becomes the "beneficial owner"
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(as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a
Person shall be deemed to have beneficial ownership of all shares that such
Person has the right to acquire, whether such right is exercisable immediately
or only after the passage of time), directly or indirectly, of more than 50%
of the total outstanding Voting Stock of the Company; (ii) during any period
of two consecutive years, individuals who at the beginning of such period
constituted the board of directors of the Company (together with any new
directors whose election to such board or whose nomination for election by the
stockholders of the Company was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved), cease for any reason to constitute a majority of such board of
directors then in office; (iii) the Company consolidates with or merges with
or into any Person or conveys, transfers or leases all or substantially all of
its assets to any Person, or any corporation consolidates with or merges into
or with the Company, in any such event pursuant to a transaction in which the
outstanding Voting Stock of the Company is changed into or exchanged for cash,
securities or other property, other than any such transaction where the
outstanding Voting Stock of the Company is not changed or exchanged at all
(except to the extent necessary to reflect a change in the jurisdiction of
incorporation of the Company or where no "person" or "group" owns, immediately
after such transaction, directly or indirectly, more than 50% of the total
outstanding Voting Stock of the surviving corporation); or (iv) the Company is
liquidated or dissolved or adopts a plan of liquidation or dissolution other
than in a transaction which complies with the provisions described under "--
Consolidation, Merger, Sale of Assets."
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
Issue Date such Commission is not existing and performing the duties now
assigned to it under the Trust Indenture Act then the body performing such
duties at such time.
"Commodity Price Protection Agreement" means any forward contract, commodity
swap, commodity option or other similar financial agreement or arrangement
relating to, or the value which is dependent upon, fluctuations in commodity
prices.
"Consolidated" means, consolidated in accordance with GAAP.
"Consolidated Income Tax Expense" of any Person means, for any period, the
provision for federal, state, local and foreign income taxes of such Person
and its Consolidated subsidiaries for such period as determined in accordance
with GAAP.
"Consolidated Interest Expense" of any Person means, without duplication,
for any period, the sum of (a) the interest expense of such Person and its
subsidiaries for such period, on a Consolidated basis, including, without
limitation, (i) amortization of debt discount, (ii) the net costs associated
with Interest Rate Agreements, Currency Hedging Agreements and Commodity Price
Protection Agreements (including amortization of discounts), (iii) the
interest portion of any deferred payment obligation and (iv) accrued interest,
plus (b) (i) the interest component of the Capital Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by such Person and its
subsidiaries during such period and (ii) all capitalized interest of such
Person and its subsidiaries plus (c) the interest expense actually paid by
such Person under any Guaranteed Debt of such Person and any Subsidiary to the
extent not included under clause (a)(iv) above, plus (d) the aggregate amount
for such period of cash or non-cash dividends on any Disqualified Stock or
preferred stock of the Company and its Restricted Subsidiaries, in each case
as determined on a Consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any period, the net income
of the Company and any Restricted Subsidiary for such period determined on a
consolidated basis in accordance with GAAP, adjusted, to the extent included
in calculating such net income, by excluding, without duplication: (a) other
than for purposes of calculating the Basket, all extraordinary gains or losses
for such period; (b) other than for purposes of calculating the Basket, all
gains or losses from the sales or other dispositions of assets out of the
ordinary course of business (net of taxes, fees and expenses relating to the
transaction giving rise thereto) for such period; (c) that portion of such net
income derived from or in respect of investments in Persons other than
Restricted Subsidiaries, except to the extent actually received in cash by the
Company or any Restricted Subsidiary (subject,
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in the case of any Restricted Subsidiary, to the provisions of clause (f) of
this definition); (d) the portion of such net income (or loss) allocable to
minority interests in any Person (other than a Restricted Subsidiary) for such
period, except to the extent the Company's allocation portion of such Person's
net income for such period is actually received in cash by the Company or any
Restricted Subsidiary (subject, in the case of any Restricted Subsidiary, to
the provisions of clause (f) of this definition); (e) the net income (or loss)
or any other Person combined with the Company or any Restricted Subsidiary on
a "pooling of interests" basis attributable to any period prior to the date of
combination; and (f) the net income of any Restricted Subsidiary to the extent
that the declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time (regardless of any waiver)
permitted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to that Restricted Subsidiary or its
Capital Stock holders.
"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period increased (without duplication), to
the extent deducted in calculating such Consolidated Net Income, by (a)
Consolidated Income Tax Expense for such period; (b) Consolidated Interest
Expense for such period; and (c) depreciation, amortization and any other non-
cash items for such period (other than any non-cash item which requires the
accrual of, or a reserve for, cash charges for any future period) of the
Company and any Restricted Subsidiary, including, without limitation,
amortization of capitalized debt issuance costs for such period, all of the
foregoing determined on a consolidated basis in accordance with GAAP minus
non-cash items to the extent they increase Consolidated Net Income (including
the partial or entire reversal of reserves taken in prior periods) for such
period.
"Cumulative Operating Cash Flow" means, as at any date of determination, the
positive cumulative Consolidated Operating Cash Flow realized during the
period commencing on Issue Date and ending on the last day of the most recent
fiscal quarter immediately preceding the date of determination for which
consolidated financial information of the Company is available or, if such
cumulative Consolidated Operating Cash Flow for such period is negative, the
negative amount by which cumulative Consolidated Operating Cash Flow is less
than zero.
"Currency Hedging Arrangements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
foreign exchange contracts, currency swap agreements or other similar
agreements or arrangements designed to protect against the fluctuations in
currency values.
"Debt to Annualized Operating Cash Flow Ratio" means the ratio of (a) the
Total Consolidated Indebtedness as of the date of calculation (the
"Determination Date") to (b) two times the Consolidated Operating Cash Flow
for the latest two fiscal quarters for which financial information is
available immediately preceding such Determination Date (the "Measurement
Period"). For purposes of calculating Consolidated Operating Cash Flow for the
Measurement Period immediately prior to the relevant Determination Date, (i)
any Person that is a Restricted Subsidiary on the Determination Date (or would
become a Restricted Subsidiary on such Determination Date in connection with
the transaction that requires the determination of such Consolidated Operating
Cash Flow) will be deemed to have been a Restricted Subsidiary at all times
during such Measurement Period, (ii) any Person that is not a Restricted
Subsidiary on such Determination Date (or would cease to be a Restricted
Subsidiary on such Determination Date in connection with the transaction that
requires the determination of such Consolidated Operating Cash Flow) will be
deemed not to have been a Restricted Subsidiary at any time during such
Measurement Period, and (iii) if the Company or any Restricted Subsidiary
shall have in any manner (x) acquired (through an Acquisition or the
commencement of activities constituting such operating business) or (y)
disposed of (by of an Asset Sale or the termination or discontinuance of
activities constituting such operating business) any operating business during
such Measurement Period or after the end of such period and on or prior to
such Determination Date, such calculation will be made on a pro forma basis in
accordance with GAAP as if, in the case of an Acquisition or the commencement
of activities constituting such operating business, all such transactions had
been consummated prior to the first day of such Measurement Period (it being
understood that in calculating Consolidated Operating Cash Flow the exclusions
set forth in clauses
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(a) through (f) of the definition of Consolidated Net Income shall apply to an
Acquired Person as if it were a Restricted Subsidiary).
"Disinterested Director" means, with respect to any transaction or series of
related transactions, a member of the board of directors of the Company who
does not have any material direct or indirect financial interest in or with
respect to such transaction or series of related transactions.
"Disqualified Stock" means, with respect to any person, any Capital Stock
(excluding the Preferred Stock) which, by its terms (or by the terms of any
security into which it is convertible at the option of the holder thereof or
for which it is exchangeable at the option of the holder thereof), or upon the
happening of any event, matures or becomes mandatorily redeemable, pursuant to
a sinking fund obligation or otherwise, or becomes exchangeable for
Indebtedness at the option of the holder thereof, or becomes redeemable at the
option of the holder thereof, in whole or in part, on or prior to the earlier
of the Mandatory Redemption Date or the date the Preferred Stock is no longer
outstanding; provided such Capital Stock shall only constitute Disqualified
Stock to the extent it so matures or becomes so redeemable or exchangeable on
or prior to the earlier of the Mandatory Redemption Date or the date the
Preferred Stock is no longer outstanding; provided, further, that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such person to repurchase or
redeem such Capital Stock upon the occurrence of an "asset sale" or "change of
control" occurring prior to the earlier of the Mandatory Redemption Date or
the date the Preferred Stock is no longer outstanding shall not constitute
Disqualified Stock so long as, in the case of any "change of control"
provisions applicable to such Capital Stock, such provisions are no more
favorable to the holders of such Capital Stock than the provisions contained
in "Change of Control" described above and such Capital Stock specifically
provides that such person will not repurchase or redeem any such stock
pursuant to such provision prior to the Issuer's repurchase of such shares of
Preferred Stock as is required to be repurchased pursuant to the "Change of
Control" provision described above.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute.
"Existing Senior Notes" means the Company's 12 3/4% Senior Notes due 2007.
"Existing Senior Notes Indenture" means the Indenture governing the
Company's 12 3/4% Senior Notes due 2007, as may be amended from time to time.
"Existing Senior Notes Maturity Date" means the earlier of: (i) the "Stated
Maturity" of the principal of the Existing Senior Notes as such term is used
for the purpose of determining whether "Capital Stock" constitutes
"Indebtedness" (as such terms are defined in the Existing Senior Notes
Indenture) under the Existing Senior Notes Indenture or (ii) December 15,
2007.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be reasonably expected to be obtained in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy. Fair Market
Value shall be determined by the board of directors of the Company acting in
good faith and shall be evidenced by a resolution of the board of directors.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied,
which are in effect on the Issue Date.
"Guaranteed Debt" of any Person means, without duplication, all Indebtedness
of any other Person guaranteed directly or indirectly in any manner by such
Person, or in effect guaranteed directly or indirectly by such Person through
an agreement (i) to pay or purchase such Indebtedness or to advance or supply
funds for the payment or purchase of such Indebtedness, (ii) to purchase, sell
or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling the debtor to make payment of such
Indebtedness or to assure the holder of such Indebtedness against loss, (iii)
to supply funds to, or in any other manner invest
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in, the debtor (including any agreement to pay for property or services
without requiring that such property be received or such services be
rendered), (iv) to maintain working capital or equity capital of the debtor,
or otherwise to maintain the net worth, solvency or other financial condition
of the debtor or (v) otherwise to assure a creditor against loss; provided
that the term "guarantee" shall not include endorsements for collection or
deposit, in either case in the ordinary course of business.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to
GAAP or otherwise, of any such Indebtedness or other obligation on the balance
sheet of such Person (and "Incurrence," "Incurred" and "Incurring" shall have
meanings correlative to the foregoing). Indebtedness of a Person existing at
the time such Person becomes a Restricted Subsidiary or is merged or
consolidated with or into the Company or any Restricted Subsidiary shall be
deemed to be Incurred at such time.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables and other
accrued current liabilities arising in the ordinary course of business, (ii)
all obligations of such Person evidenced by bonds, notes, debentures or other
similar instruments, (iii) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (unless the rights and remedies of the seller or
lender under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade payables arising
in the ordinary course of business, (iv) all obligations under Interest Rate
Agreements, Currency Hedging Agreements or Commodity Price Protection
Agreements of such Person, (v) all Capital Lease Obligations of such Person,
(vi) all Indebtedness referred to in clauses (i) through (v) above of other
Persons and all dividends of other Persons, the payment of which is secured by
(or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien, upon or with respect to
property (including, without limitation, accounts and contract rights) owned
by such Person, even though such Person has not assumed or become liable for
the payment of such Indebtedness, (vii) all Disqualified Stock issued by such
Person valued at the greater of its voluntary or involuntary maximum fixed
repurchase price plus accumulated and unpaid dividends, and (viii) any
amendment, supplement, modification, deferral, renewal, extension, refunding
or refinancing of any liability of the types referred to in clauses (i)
through (vii) above. For purposes hereof, the "maximum fixed repurchase price"
of any Disqualified Stock which does not have a fixed repurchase price shall
be calculated in accordance with the terms of such Disqualified Stock as if
such Disqualified Stock were purchased on any date on which Indebtedness shall
be required to be determined pursuant to the Certificate of Designation, and
if such price is based upon, or measured by, the Fair Market Value of such
Disqualified Stock, such Fair Market Value to be determined in good faith by
the board of directors of the issuer of such Disqualified Stock. In no event
shall "Indebtedness" include any trade payable or other current liabilities
arising in the ordinary course of business. The amount of any item of
Indebtedness shall be the amount of such Indebtedness properly classified as a
liability on a balance sheet prepared in accordance with GAAP.
"Interest Rate Agreements" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest
rate protection agreements (including, without limitation, interest rate
swaps, caps, floors, collars and similar agreements) and/or other types of
interest rate hedging agreements from time to time.
"Investment" means, with respect to any Person, directly or indirectly, any
advance, loan (including guarantees), or other extension of credit or capital
contribution to (by means of any transfer of cash or other property to others
or any payment for property or services for the account or use of others), or
any purchase, acquisition or ownership by such Person of any Capital Stock,
bonds, notes, debentures or other securities issued or owned by any other
Person and all other items that would be classified as investments on a
balance sheet prepared in accordance with GAAP.
"Issue Date" means the date on which shares of Preferred Stock are first
issued.
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"Lien" means any mortgage or deed of trust, pledge, lien (statutory or
otherwise), security interest, easement, hypothecation, or other encumbrance
upon or with respect to any property of any kind, real or personal, movable or
immovable, now owned or hereafter acquired. A Person shall be deemed to own
subject to a Lien any property which such Person has acquired or holds subject
to the interest of a vendor or lessor under any conditional sale agreement,
capital lease or other title retention agreement, other than any lease
properly classified as an operating lease under GAAP and intellectual property
licensing arrangements.
"Net Cash Proceeds" means with respect to any issuance or sale of Capital
Stock or options, warrants or rights to purchase Capital Stock, or debt
securities or Capital Stock that have been converted into or exchanged for
Capital Stock as referred to under "--Certain Covenants--Limitation on
Restricted Payments," the proceeds of such issuance or sale in the form of
cash or Cash Equivalents including payments in respect of deferred payment
obligations when received in the form of, or stock or other assets when
disposed of for, cash or Cash Equivalents (except to the extent that such
obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary), net of attorney's fees, accountant's fees and
brokerage, consultation, underwriting and other fees and expenses actually
incurred in connection with such issuance or sale (or conversion in the case
of debt securities or Capital Stock that have been converted) and net of taxes
paid or payable as a result thereof.
"New Preferred Stock" means the Preferred Stock authorized by the
Certificate of Designation that may be issued in exchange for Preferred Stock
pursuant to the Exchange Offer pursuant to the Registration Rights Agreement.
"Obligation" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Investment" means: (i) Investments in any Wholly Owned Subsidiary
or any Person which, as a result of such Investment, (a) becomes a Wholly
Owned Subsidiary or (b) is merged or consolidated with or into, or transfers
or conveys all or substantially all of its assets to, or is liquidated into,
the Company or any Wholly Owned Subsidiary; (ii) Indebtedness of the Company
or a Restricted Subsidiary described under clauses (iv) and (vii) of paragraph
(b) under "--Certain Covenants--Limitation on Indebtedness"; (iii) Investments
in any of the Preferred Stock; (iv) Investments in Cash Equivalents; (v)
Investments acquired by the Company or any Restricted Subsidiary in connection
with an Asset Sale to the extent such Investments are non-cash proceeds; (vi)
Investments in existence on the Issue Date; (vii) guarantees of Indebtedness
of a Wholly Owned Subsidiary given by the Company or another Wholly Owned
Subsidiary and guarantees of Indebtedness of the Company given by any
Restricted Subsidiary, in each case, in accordance with the terms of the
Certificate of Designation; (viii) advances to employees or officers of the
Company in the ordinary course of business so long as the aggregate amount of
such advances shall not exceed $1 million outstanding at any one time; (ix)
any Investment in the Company by any Restricted Subsidiary of the Company; (x)
accounts receivable created or acquired in the ordinary course of business of
the Company or any Restricted Subsidiary and Investments arising from
transactions by the Company or any Restricted Subsidiary with trade creditors
or customers in the ordinary course of business (including any such Investment
received pursuant to any plan of reorganization or similar arrangement
pursuant to the bankruptcy or insolvency of such trade creditors or customers
or otherwise in settlement of a claim); (xi) loans in the ordinary course of
business to employees of the Company or a Restricted Subsidiary to purchase
Capital Stock of the Company pursuant to the terms of employee stock benefit
plans; (xii) Investments the consideration of which is Capital Stock of the
Company; (xiii) stock obligations or securities received in satisfaction of
judgments; (xiv) Investments in prepaid expenses, negotiable instruments held
for collection, and lease, utility and workers' compensation, performance and
other similar deposits; and (xv) any other Investments in an aggregate amount
not to exceed $20 million at any one time outstanding. In connection with any
assets or property contributed or transferred to any Person as an Investment,
such property and assets shall be equal to the Fair Market Value (as
determined by the Company's Board of Directors) at the time of such
Investment.
"Permitted Lien" means:
(a) any Lien existing as of the Issue Date;
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(b) any Lien arising by reason of (1) any judgment, decree or order of
any court, so long as such Lien is adequately bonded and any appropriate
legal proceedings which may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have
expired; (2) taxes not yet delinquent or which are being contested in good
faith; (3) security for payment of workers' compensation or other insurance
or arising under worker's compensation laws or similar legislation; (4)
good faith deposits in connection with bids, tenders, leases, contracts
(other than contracts evidencing Indebtedness); (5) zoning restrictions,
easements, licenses, reservations, title defects, rights of others for
rights of way, utilities, sewers, electric lines, telephone or telegraph
lines, and other similar purposes, provisions, covenants, conditions,
waivers, restrictions on the use of property or minor irregularities of
title (and with respect to leasehold interests, mortgages, obligations,
liens and other encumbrances incurred, created, assumed or permitted to
exist and arising by, through or under a landlord or owner of the leased
property, with or without consent of the lessee), none of which materially
impairs the use of any parcel of property material to the operation of the
business of the Company or any Restricted Subsidiary or the value of such
property for the purpose of such business; (6) deposits to secure public or
statutory obligations, or in lieu of surety or appeal bonds; or
(7) operation of law in favor of landlords, carriers, warehousemen,
bankers, mechanics, materialmen, laborers, employees or suppliers, incurred
in the ordinary course of business for sums which are not yet delinquent or
are being contested in good faith by negotiations or by appropriate
proceedings which suspend the collection thereof;
(c) any Lien to secure the performance bids, trade contracts, leases
(including, without limitation, statutory and common law landlord's liens),
statutory obligations, surety and appeal bonds, letters of credit and other
obligations of a like nature and incurred in the ordinary course of
business of the Company or any Restricted Subsidiary;
(d) any Lien securing Indebtedness permitted under that section of the
Certificate of Designation described in clause (i) of paragraph (b) of "--
Limitation of Indebtedness" on the cash proceeds of such Indebtedness or on
the property, plant or equipment that is purchased, constructed or improved
with the direct or indirect proceeds of such Indebtedness (including any
attachments, accessions, additions to, or replacements or proceeds of such
property, plant or equipment); provided that the aggregate principal amount
of such Indebtedness does not exceed the sum of (i) the cost of purchasing,
constructing or improving such property, plant or equipment and (ii) the
remaining proceeds of such Indebtedness;
(e) any Lien arising from judgments, decrees or attachments in
circumstances not constituting a Voting Rights Triggering Event;
(f) any Lien securing obligations in connection with Indebtedness
permitted under that section of the Certificate of Designation described in
clause (ii) or (iii) of paragraph (b) of "--Limitation on Indebtedness;"
(g) any Lien in favor of the Company or any Restricted Subsidiary;
(h) any Lien securing obligations in connection with Acquired
Indebtedness; provided that any such Lien does not extend to or cover any
property or assets of the Company or any of its Restricted Subsidiaries
other than the property or assets of the Acquired Person covered thereby or
the property assets so acquired;
(i) any Lien encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of the Company
or any Restricted Subsidiary if and to the extent arising in the ordinary
course of business, including rights of offset and set-off;
(j) any Lien in favor of customs or revenue authorities to secure payment
of customs duties in connection with the importation of goods in the
ordinary course of business;
(k) leases or subleases granted to third Persons not interfering with the
ordinary course of business of the Company or its Restricted Subsidiaries;
and
(l) any Lien securing any extension, renewal, refinancing or replacement,
in whole or in part, of any obligation or Indebtedness described in the
foregoing clauses (a) through (d) and (f) through (h) so long as no
additional collateral is granted as security thereby.
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"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"preferred stock" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over the
Capital Stock of any other class in such Person.
"Public Equity Offering" means an underwritten offering of common stock of
the Company with gross proceeds to the Company of at least $25 million
pursuant to a registration statement that has been declared effective by the
Commission pursuant to the Securities Act (other than a registration statement
on Form S-8 or otherwise relating to equity securities issuable under any
employee benefit plan of the Company).
"Purchase Money Obligation" means any Indebtedness secured by a Lien on
assets related to the business of the Company and any additions and accessions
thereto, which are purchased at any time after the Issue Date; provided that
(i) the security agreement or conditional sales or other title retention
contract pursuant to which the Lien on such assets is created (collectively, a
"Purchase Money Security Agreement") shall be entered into within 180 days
after the purchase or substantial completion of the construction of such
assets and shall at all times be confined solely to the assets so purchased or
acquired, any additions and accessions thereto and any proceeds therefrom,
(ii) at no time shall the aggregate principal amount of the outstanding
Indebtedness secured thereby be increased, except in connection with the
purchase of additions and accessions thereto and except in respect of fees and
other obligations in respect of such Indebtedness and (iii) (A) the aggregate
outstanding principal amount of Indebtedness secured thereby (determined on a
per asset basis in the case of any additions and accessions) shall not at the
time such Purchase Money Security Agreement is entered into exceed 100% of the
purchase price to the Company of the assets subject thereto or (B) the
Indebtedness secured thereby shall be with recourse solely to the assets so
purchased or acquired, any additions and accessions thereto and any proceeds
therefrom.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Disqualified Stock.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute.
"Stated Maturity" means, when used with respect to any Indebtedness or any
installment of interest thereon, the dates specified in such Indebtedness as
the fixed date on which the principal of such Indebtedness or such installment
of interest, as the case may be, is due and payable.
"Strategic Investor" means any Person which is (or a controlled Affiliate of
any Person which is or a controlled Affiliate of which is) engaged principally
in the Telecommunications Business and which has a Total Market Capitalization
of at least $1.0 billion.
"Subsidiary" means, with respect to any Person, an corporation, association
or other business entity (i) of which outstanding Capital Stock having at
least the majority of the votes entitled to be cast in the election of
directors is owned, directly or indirectly, by such Person and/or any one or
more subsidiaries of such Person, or (ii) of which at least a majority of
voting interest is owned, directly or indirectly, by such Person and/or one or
more subsidiaries of such Person.
"Telecommunications Business" means, when used in reference to any Person,
that such Person is engaged primarily in (i) the business of transmitting, or
providing services relating to the transmission of, voice, video or data
through owned or leased transmission facilities, (ii) the business of
creating, developing or marketing
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communications related network equipment, software and other devices for use
in a Telecommunications Business or (iii) businesses reasonably related or
incidental thereto.
"Total Consolidated Indebtedness" means, as at any date of determination, an
amount equal to the aggregate amount of all Indebtedness of the Company and
any Restricted Subsidiary, on a Consolidated basis, outstanding as of such
date of determination, after giving effect to any Incurrence of Indebtedness
and the application of the proceeds therefrom giving rise to such
determination.
"Total Market Capitalization" of any Person means, as of any day of
determination, the sum of (a) the consolidated Indebtedness of such Person and
any Subsidiaries on such day, plus (b) the product of (i) the aggregate number
of outstanding shares of common stock of such Person on such day (which shall
not include any options or warrants on, or securities convertible or
exchangeable into, shares of Common Stock of such Person) and (ii) the average
closing price of such common stock over the 10 consecutive Trading Days ending
not earlier than 10 Trading Days immediately prior to such date of
determination, plus (c) the liquidation value of any outstanding shares of
preferred stock of such Person on such day. If no such closing price exists
with respect to shares of any such class, the value of such shares for
purposes of clause (b) of the preceding sentence shall be determined by the
Board in good faith and evidenced by a resolution of the Board to be made
available to the holders of Preferred Stock through the Transfer Agent.
Notwithstanding the foregoing, unless the Person's Common Stock is listed on
any national securities exchange or on the Nasdaq National Market, the "Total
Market Capitalization" of the Person shall mean, as of any day of
determination, the enterprise value (without duplication) of the Person and
any subsidiaries (including the fair market value of their debt and equity),
as determined by an independent banking firm of national standing with
experience in such valuations and evidenced by a written opinion in customary
form to be made available to the holders of Preferred Stock through the
Transfer Agent; provided that for purposes of any such determination, the
enterprise value of the Person shall be calculated as if the Person were a
publicly held corporation without a controlling stockholder. For purposes of
any such determination, such banking firm's written opinion may state that
such fair market value is no less than a specified amount and such opinion may
be as of a date no earlier than 90 days prior to the date of such
determination.
"Trading Day" with respect to a securities exchange or automated quotation
system means a day on which such exchange or system is open for a full day of
trading.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended, or
any successor statute.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be an Unrestricted Subsidiary (as designated
by the Board of Directors of the Company, as provided below) and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the
Company may designate any Subsidiary of the Company (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary if all
of the following conditions apply: (a) neither the Company nor any of its
Restricted Subsidiaries provides credit support for Indebtedness of such
Subsidiary (including any undertaking, agreement or instrument evidencing such
Indebtedness), (b) such Subsidiary is not liable, directly or indirectly, with
respect to any Indebtedness other than Unrestricted Subsidiary Indebtedness,
(c) such Unrestricted Subsidiary is not party to any agreement, contract,
arrangement or understanding at such time with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; and (v) such Unrestricted
Subsidiary does not own any Capital Stock in any Restricted Subsidiary of the
Company which is not simultaneously being designated an Unrestricted
Subsidiary. Any such designation by the Board of Directors of the Company
shall be made available to the holders of Preferred Stock through the Transfer
Agent a board resolution giving effect to such designation and an officers'
certificate certifying that such designation complies with the foregoing
conditions and shall be deemed a Restricted Payment on the date of designation
in an amount equal to the greater of (1) the net book value of such Investment
or (2) the fair market value of such Investment as determined in good faith by
the Company's Board of Directors. The Board of Directors of the Company may
designate any Unrestricted
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Subsidiary as a Restricted Subsidiary; provided that (i) immediately after
giving effect to such designation, the Company could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the restrictions
under "--Certain Covenants--Limitation on Indebtedness" and (ii) all
Indebtedness of such Subsidiary shall be deemed to be incurred on the date
such Subsidiary becomes a Restricted Subsidiary.
"Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary means
Indebtedness of such Unrestricted Subsidiary (i) as to which neither the
Company nor any Restricted Subsidiary is directly or indirectly liable (by
virtue of the Company or any such Restricted Subsidiary being the primary
obligor on, guarantor of, or otherwise liable in any respect to, such
Indebtedness), except Guaranteed Debt of the Company or any Restricted
Subsidiary to any Affiliate, in which case (unless the incurrence of such
Guaranteed Debt resulted in a Restricted Payment at the time of incurrence)
the Company shall be deemed to have made a Restricted Payment equal to the
principal amount of any such Indebtedness to the extent guaranteed at the time
such Affiliate is designated an Unrestricted Subsidiary and (ii) which, upon
the occurrence of a default with respect thereto, does not result in, or
permit any holder of any Indebtedness of the Company or any Restricted
Subsidiary to declare, a default on such Indebtedness of the Company or any
Restricted Subsidiary or cause the payment thereof to be accelerated or
payable prior to its Stated Maturity.
"Voting Stock" means Capital Stock of the class or classes pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees
of a corporation (irrespective of whether or not at the time Capital Stock of
any other class or classes shall have or might have voting power by reason of
the happening of any contingency).
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which is owned by the Company or another Wholly Owned Subsidiary. For
the purposes of this definition, any director qualifying shares or investments
by foreign nationals mandated by applicable law shall be disregarded in
determining the ownership of a Restricted Subsidiary.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Preferred Stock to be resold
as set forth herein will initially be issued in the form of one Global
Security (the "Global Security"). The Global Security will be deposited on the
date of the closing of the sale of the Preferred Stock offered hereby (the
"Closing Date") with or on behalf of The Depositary Trust Company (the
"Depositary") and registered in the name of Cede & Co., as nominee of the
Depositary (such nominee being referred to herein as the "Global Security
Holder").
Shares of Preferred Stock that are issued as described below under "--
Certificated Securities" will be issued in the form of registered definitive
certificates (the "Certificated Securities"). Upon the transfer of
Certificated Securities, such Certificated Securities may, unless the Global
Security has previously been exchanged for Certificated Securities, be
exchanged for an interest in the Global Security representing the shares of
Preferred Stock being transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depositary's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect
Participants" or the "Depositary's Indirect Participants") that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Security, the Depositary will credit
the accounts of Participants designated by the Initial Purchasers with
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the appropriate number of shares of the Global Security and (ii) ownership of
the Preferred Stock evidenced by the Global Security will be shown on, and the
transfer of ownership thereof will be effected only through, records
maintained by the Depositary (with respect to the interests of the
Depositary's Participants), the Depositary's Participants and the Depositary's
Indirect Participants. Prospective purchasers are advised that the laws of
some states require that certain persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to transfer
Preferred Stock evidenced by the Global Security will be limited to such
extent. For certain other restrictions on the transferability of the Preferred
Stock see "Notice to Investors."
So long as the Global Security holder is the registered owner of any
Preferred Stock the Global Security Holder will be considered the sole holder
under the Certificate of Designation of any Preferred Stock evidenced by the
Global Security. Beneficial owners of Preferred Stock evidenced by the Global
Security will not be considered the owners or holders thereof under the
Certificate of Designation for any purpose. Neither the Company nor the
Transfer Agent will have any responsibility or liability for any aspect of the
records of the Depositary or for maintaining, supervising or reviewing any
records of the Depositary relating to the Preferred Stock.
Payments in respect of dividends and redemption payments and Liquidated
Damages, if any, on any Preferred Stock registered in the name of the Global
Security holder on the applicable record date will be payable by the Company
to or at the direction of the Global Security holder in its capacity as the
registered holder under the Certificate of Designation. Under the terms of the
Certificate of Designation, the Company and the Transfer Agent may treat the
persons in whose names Preferred Stock, including the Global Security, are
registered as the owners thereof for the purpose of receiving such payments.
Consequently, neither the Company nor the Transfer Agent has or will have any
responsibility or liability for the payment of such amounts to beneficial
owners of Preferred Stock. The Company believes, however, that it is currently
the policy of the Depositary to immediately credit the accounts of the
relevant Participants with such payments, in amounts proportionate to their
respective holdings of beneficial interests in the relevant security as shown
on the records of the Depositary. Payments by the Depositary's Participants
and the Depositary's Indirect Participants to the beneficial owners of
Preferred Stock will be governed by standing instructions and customary
practice and will be the responsibility of the Depositary's Participants or
the Depositary's Indirect Participants.
CERTIFICATED SECURITIES
Subject to certain conditions, any person having a beneficial interest in
the Global Security may, upon request to the Transfer Agent, exchange such
beneficial interest for Preferred Stock in the form of Certificated
Securities. Upon any such issuance, the Transfer Agent is required to register
such Certificated Securities in the name of, and cause the same to be
delivered to, such person or persons (or the nominee of any thereof). All such
certificated Preferred Stock would be subject to the legend requirements
described herein under "Notice to Investors." In addition, if (i) the Company
notifies the Transfer Agent in writing that the Depositary is no longer
willing or able to act as a depositary and the Company is unable to locate a
qualified successor within 90 days or (ii) the Company, at its option,
notifies the Transfer Agent in writing that it elects to cause the issuance of
Preferred Stock in the form of Certificated Securities under the Certificate
of Designation, then, upon surrender by the Global Security Holder of its
Global Security, Preferred Stock in such form will be issued to each person
that the Global Security Holder and the Depositary identify as being the
beneficial owner of the related Preferred Stock.
Neither the Company nor the Transfer Agent will be liable for any delay by
the Global Security Holder or the Depositary in identifying the beneficial
owners of Preferred Stock and the Company and the Transfer Agent may
conclusively rely on, and will be protected in relying on, instructions from
the Global Security Holder or the Depositary for all purposes.
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DESCRIPTION OF THE EXCHANGE DEBENTURES
GENERAL
The 13 1/2% Subordinated Debentures due 2010 (the "Exchange Debentures")
will be issued pursuant to an Indenture (the "Indenture") between the Company
and a trustee to be selected by the Company (the "Trustee"). The terms of the
Exchange Debentures include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act. The Exchange
Debentures are subject to all such terms, and holders of Exchange Debentures
are referred to the Indenture and the Trust Indenture Act for a statement
thereof. The following summary of certain provisions of the Indenture does not
purport to be complete and is qualified in its entirety by reference to the
Indenture, including the definitions therein of certain terms used below. The
definitions of certain terms used in the following summary are set forth below
under "--Certain Definitions." However, under certain circumstances, the
Company will be able to designate current or future Subsidiaries as
Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to
many of the restrictive covenants set forth in the Indenture. As used in this
Description of the Exchange Debentures, the term "Company" refers to
Concentric Network Corporation, excluding its Subsidiaries.
RANKING
The Exchange Debentures will be general unsecured obligations of the Company
and will be subordinated in right of payment to all current and future Senior
Debt. As of March 31, 1998, on a pro forma basis giving effect to issuance of
the Series A Preferred, the Company would have had Senior Debt of
approximately $195.0 million. The Indenture will permit the incurrence of
additional Senior Debt in the future.
Certain of the Company's operations are conducted through its Subsidiaries
and, therefore, the Company is dependent upon the cash flow of its
Subsidiaries to meet its obligations, including its obligations under the
Exchange Debentures. The Exchange Debentures will be effectively subordinated
to all indebtedness and other liabilities and commitments (including trade
payables and lease obligations) of the Company's Subsidiaries. Any right of
the Company to receive assets of any of its Subsidiaries upon the latter's
liquidation or reorganization (and the consequent right of the holders of the
Exchange Debentures to participate in those assets) will be effectively
subordinated to the claims of that Subsidiary's creditors, except to the
extent that the Company is itself recognized as a creditor of such Subsidiary,
in which case the claims of the Company would still be subordinate to any
security in the assets of such Subsidiary and any indebtedness of such
Subsidiary senior to that held by the Company.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Exchange
Debentures will be subordinated in right of payment, as set forth in the
Indenture, to the prior payment in full of all Senior Debt, whether
outstanding on the date of the Indenture or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full of all Obligations due in respect of such Senior Debt
(including interest after the commencement of any such proceeding at the rate
specified in the applicable Senior Debt) before the holders of Exchange
Debentures will be entitled to receive any payment with respect to the
Exchange Debentures and until all Obligations with respect to Senior Debt are
paid in full, any distribution to which the holders of Exchange Debentures
would be entitled shall be made to the holders of Senior Debt.
The Company also may not make any payment upon or in respect of the Exchange
Debentures if (i) a default in the payment of the principal of, premium, if
any, or interest on Designated Senior Debt occurs and is continuing beyond any
applicable period of grace or (ii) any other default occurs and is continuing
with respect
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to Designated Senior Debt that permits holders of the Designated Senior Debt
as to which such default relates to accelerate its maturity and the Trustee
receives a notice of such default (a "Payment Blockage Notice") from the
Company or the holders of any Designated Senior Debt. Payments on the Exchange
Debentures may and shall be resumed (a) in the case of a payment default, upon
the date on which such default is cured or waived and (b) in case of a
nonpayment default, the earlier of the date on which such nonpayment default
is cured or waived or 179 days after the date on which the applicable Payment
Blockage Notice is received, unless the maturity of any Designated Senior Debt
has been accelerated. No new period of payment blockage may be commenced
unless and until (i) 360 days have elapsed since the effectiveness of the
immediately prior Payment Blockage Notice and (ii) all scheduled payments of
principal, premium, if any, and interest on the Exchange Debentures that have
come due have been paid in full in cash. No more than one Payment Blockage
Notice to the Trustee may be given in any 360 day period. No nonpayment
default with respect to Designated Senior Debt that existed or was continuing
on the date of the commencement of any period of any payment blockage with
respect to the Designated Senior Debt initiating such period of payment
blockage will be, or can be, made the basis of the commencement of a second
period of payment blockage, unless such default has been cured for a period of
not less than 30 consecutive days.
The Indenture will further require that the Company promptly notify holders
of Designated Senior Debt if payment of the Exchange Debentures is accelerated
because of an Event of Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, holders of Exchange Debentures may recover less
ratably than creditors of the Company who are holders of Senior Debt. On a pro
forma basis, after giving effect to the Offering and the application of the
proceeds therefrom, the principal amount of Senior Debt outstanding at March
31, 1998, would have been approximately $195.0 million. The Indenture will
limit, subject to certain financial tests, the amount of additional
Indebtedness, including Senior Debt, that the Company and its Restricted
Subsidiaries can incur. See "--Certain Covenants--Limitation on Indebtedness."
PRINCIPAL, MATURITY AND INTEREST
The Exchange Debentures will be issued with an aggregate principal amount
limited to the aggregate liquidation preference of the Series A Preferred or
Series B Preferred, as the case may be, plus accumulated and unpaid dividends
on the date of exchange of the Series A Preferred Stock or Series B Preferred,
as the case may be, into Exchange Debentures (plus any additional Exchange
Debentures issued in lieu of cash interest as described herein) and will
mature on June 1, 2010. Interest will accrue at a rate of 13 1/2% per annum
and will be payable semi-annually on June 1 and December 1 of each year,
commencing on the first such date after the issuance date of the Exchange
Debentures, to holders of record on the immediately preceding May 15 and
November 15. 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.
Interest on the Exchange Debentures will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date
of issuance of the Exchange Debentures. Interest will be computed on the basis
of a 360-day year comprised of twelve 30-day months. The Exchange Debentures
will be payable both as to principal, premium, if any, interest and Liquidated
Damages (as defined), if any, at the office or agency of the Company
maintained for such purpose within the City and State of New York or, at the
option of the Company, payment of interest and Liquidated Damages may be made
by check mailed to the holders of the Exchange Debentures at their respective
addresses set forth in the register of holders of the Exchange Debentures.
Until otherwise designated by the Company, the Company's office or agency in
New York will be the office of the Trustee maintained for such purpose. The
Exchange Debentures will be issued in registered form, without coupons, and in
denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
Except as set forth below, the Exchange Debentures may not be redeemed at
the option of the Company prior to June 1, 2003. The Exchange Debentures will
be subject to redemption at any time on or after June 1, 2003, at the option
of the Company, in whole or in part, on not less than 30 nor more than 60
days' prior notice
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in amounts of $1,000 or an integral multiple thereof at the following
redemption prices (expressed as percentages of the principal amount), if
redeemed during the 12-month period beginning of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003........................................................... 106.75%
2004........................................................... 105.40%
2005........................................................... 104.05%
2006........................................................... 102.70%
2007........................................................... 101.35%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the redemption date (subject to the
rights of holders of record on relevant record dates to receive interest due
on an interest payment date).
In addition, at any time prior to June 1, 2001, the Company may, at its
option, use the net proceeds of one or more Public Equity Offerings or the
sale of Common Stock (other than Disqualified Stock) of the Company to a
Strategic Investor in a single transaction or a series of related
transactions, to redeem up to an aggregate of 35% of the aggregate principal
amount of Exchange Debentures originally issued under the Indenture at a
redemption price equal to 113 1/2% of the aggregate principal amount thereof,
plus accrued and unpaid interest thereon, if any, to the redemption date;
provided that at least 65% of the initial aggregate principal amount of
Exchange Debentures remains outstanding immediately after the occurrence of
such redemption. In order to effect the foregoing redemption, the Company must
mail a notice of redemption no later than 45 days after the related Public
Equity Offering and must consummate such redemption within 60 days of the
closing of the Public Equity Offering.
MANDATORY REDEMPTION
The Company will not be required to make mandatory redemption or sinking
fund payments with respect to the Exchange Debentures.
CHANGE OF CONTROL
If a Change of Control shall occur at any time, then each holder of Exchange
Debentures shall have the right to require that the Company purchase such
holder's Exchange Debentures in whole or in part in integral multiples of
$1,000, at a purchase price (the "Change of Control Purchase Price") in cash,
in an amount equal to 101% of the principal amount of such Exchange Debentures
or portion thereof, plus accrued and unpaid interest and Liquidated Damages,
if any, to the date of purchase (the "Change of Control Purchase Date"),
pursuant to the offer described below (the "Change of Control Offer") and in
accordance with the other procedures set forth in the Indenture.
Within 30 days of any Change of Control, the Company shall give written
notice of such Change of Control to each holder of Exchange Debentures, by
first-class mail, postage prepaid, at his address appearing in the security
register, stating that a Change of Control has occurred and the date of such
event, the circumstances and relevant facts regarding such Change of Control;
the purchase price and the purchase date which shall be fixed by the Company
on a business day no earlier than 30 days nor later than 60 days from the date
such notice is mailed, or such later date as is necessary to comply with
requirements under the Exchange Act; that any Exchange Debentures not tendered
will continue to accrue interest; that, unless the Company defaults in the
payment of the Change of Control Purchase Price, any Exchange Debentures
accepted for payment pursuant to the Change of Control Offer shall cease to
accrue interest after the Change of Control Purchase Date; and certain other
procedures that a holder of Exchange Debentures must follow to accept a Change
of Control Offer or to withdraw such acceptance.
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The Company will not be required to make a Change of Control Offer to the
holders of Exchange Debentures upon a Change of Control if either (a) a third
party makes the Change of Control Offer described above in the manner, at the
times and otherwise in compliance with the requirements set forth in the
Indenture, and purchases all Exchange Debentures validly tendered and not
withdrawn under such Change of Control Offer or (b) the date on which such
Change of Control Offer would otherwise be required to be made is on or prior
to the Existing Senior Notes Maturity Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Exchange Debentures that might be delivered by
holders of the Exchange Debentures seeking to accept the Change of Control
Offer. See "Risk Factors--Change of Control." The failure of the Company to
make or consummate the Change of Control Offer or pay the Change of Control
Purchase Price when due will give the Trustee and the holders of the Exchange
Debentures the rights described under "Events of Default."
If the date on which a Change of Control Offer otherwise would be required
to be made is on or prior to the Existing Senior Notes Maturity Date, then, in
lieu of any such Change of Control Offer, holders of two-thirds of the
Exchange Debentures will be entitled to designate an Independent Financial
Advisor (as defined below) to determine, within 20 days of such designation,
in the opinion of such firm, the appropriate interest rate that the Exchange
Debentures should bear so that, after such reset, the Exchange Debentures
would have a market value of 101% of the aggregate principal amount thereof.
If, for any reason and within 15 days of the designation of an Independent
Financial Advisor by the holder, such Independent Financial Advisor is
unacceptable to the Company, the Company shall designate a second Independent
Financial Advisor to determine, within 15 days of such designation, in its
opinion, such an appropriate reset interest rate for the Exchange Debentures.
In the event that the two Independent Financial Advisors cannot agree, within
25 days of the designation of an Independent Financial Advisor by the holders
of two-thirds of the Exchange Debentures, on the appropriate reset interest
rate, the two Independent Financial Advisors shall, within 10 days of such
25th day, designate a third Independent Financial Advisor, which, within 15
days of designation, will determine, in its opinion, such an appropriate reset
rate which is between the two rates selected by the first two Independent
Financial Advisors; provided, however, that the reset rate shall in no event
be less than 13 1/2% per annum nor greater than 15 1/2% per annum. The
reasonable fees and expenses, including reasonable fees and expenses of legal
counsel, if any, and customary indemnification, of each of the three above-
referenced Independent Financial Advisors shall be borne by the Company. Upon
the determination of the reset rate, the Exchange Debentures shall accrue and
cumulate interest at the reset rate as of the date of occurrence of the Change
of Control. "Independent Financial Advisor" means a United States investment
banking firm of national standing in the United States which does not, and
whose directors, officers and employees or affiliates do not, have a direct or
indirect financial interest in the Company.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the holders of the Exchange Debentures
to require that the Company repurchase or redeem the Exchange Debentures in
the event of a takeover, recapitalization or similar transaction.
The term "all or substantially all" as used in the definition of "Change of
Control" has not been interpreted under New York law (which is the governing
law of the Indenture) to represent a specific quantitative test. As a
consequence, in the event the holders of the Exchange Debentures elected to
exercise their rights under the Indenture and the Company elected to contest
such election, there could be no assurance as to how a court interpreting New
York law would interpret the phrase.
The existence of a holder's right to require the Company to repurchase such
holder's Exchange Debentures upon a Change of Control may deter a third party
from acquiring the Company in a transaction which constitutes a Change of
Control.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with a Change of Control Offer.
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SELECTION OF EXCHANGE DEBENTURES FOR REDEMPTION OR OFFERS TO PURCHASE
If less than all of the Exchange Debentures are to be redeemed or to be
purchased pursuant to any purchase offer required under the Indenture at any
time, selection of Exchange Debentures for redemption or purchase will be made
by the Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the Exchange Debentures are listed, or,
if the Exchange Debentures are not so listed, on a pro rata basis, by lot or
by such method as the Trustee shall deem fair and appropriate, provided that
no Exchange Debentures with a principal amount of $1,000 or less shall be
redeemed or purchased in part. A new Exchange Debenture in principal amount
equal to the unredeemed or unpurchased portion will be issued in the name of
the holder thereof upon cancellation of the original Exchange Debenture. On
and after the redemption or purchase date, interest will cease to accrue on
the Exchange Debentures or portions of them called for redemption or purchase.
NOTICE OF REDEMPTION
Notice of redemption shall be mailed by first class mail at least 30 but not
more than 60 days before the redemption date to each holder of Exchange
Debentures to be redeemed at its registered address. If any Exchange Debenture
is to be redeemed in part only, the notice of redemption that relates to such
Exchange Debenture shall state the portion of the principal amount to be
redeemed.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness.
(a) The Company shall not, and shall not cause or permit any Restricted
Subsidiary to, directly or indirectly, Incur any Indebtedness (other than the
Exchange Debentures); provided, however, that the Company may Incur
Indebtedness, and the Company or any Restricted Subsidiary may Incur Acquired
Indebtedness, if, at the time of such Incurrence, the Debt to Annualized
Operating Cash Flow Ratio would be less than or equal to 5.5 to 1.0 prior to
December 15, 2000, or less than or equal to 5.0 to 1.0 after December 15,
2000.
(b) The foregoing limitations of paragraph (a) of this covenant will not
apply to Incurrence of Indebtedness permitted under any of the following
("Permitted Indebtedness"), each of which shall be given independent effect:
(i) the Incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness (other than Acquired Indebtedness) consisting of Capital
Lease Obligations, Purchase Money Obligations, mortgage financings or other
obligations incurred for the purpose of financing all or any part of the
purchase price, cost of construction or improvement of property, plant or
equipment used in connection with the Telecommunications Business or a
credit facility or a master lease arrangement entered into for the purpose
of providing such financing, provided that such Indebtedness does not
exceed the lesser of the Fair Market Value (determined at the time of the
consummation of the purchase, construction or improvement of such property,
plant or equipment) or the purchase price of such property, plant or
equipment;
(ii) Indebtedness of the Company or any of its Restricted Subsidiaries,
and any renewals, extensions, substitutions, refinancings or replacements
of such Indebtedness, so long as the aggregate principal amount of such
Indebtedness shall not exceed $50.0 million outstanding at any one time in
the aggregate;
(iii) the Incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness (other than secured Acquired Indebtedness) in an aggregate
principal amount not to exceed, at any one time outstanding, 2.0 times the
Net Cash Proceeds received by the Company from the issuance and sale of any
class or series of its Capital Stock (other than Disqualified Stock) on and
after the Exchange Preferred Stock Issue Date plus the Fair Market Value of
any of its Capital Stock (other than Disqualified Stock) issued on and
after the Exchange Preferred Stock Issue Date in connection with the
acquisition of an equity interest
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in a Telecommunications Business or assets used in a Telecommunications
Business; provided that such Indebtedness does not mature prior to the
Stated Maturity of the Exchange Debentures or have an Average Life to
Stated Maturity that is shorter than the period then remaining prior to the
Stated Maturity of the Exchange Debentures;
(iv) Indebtedness of the Company or any Restricted Subsidiary entered
into in the ordinary course of business (a) pursuant to Interest Rate
Agreements designed to protect the Company or any Restricted Subsidiary
against fluctuations in interest rates in respect of Indebtedness of the
Company or any Restricted Subsidiary as long as the notional principal
amount of such Interest Rate Agreements do not exceed the aggregate
principal amount of such Indebtedness then outstanding, (b) under any
Currency Hedging Arrangements designed to protect the Company or any
Restricted Subsidiary against fluctuations in the value of any currency or
(c) under any Commodity Price Protection Agreements designed to protect the
Company or any Restricted Subsidiary against fluctuations in the price of
any commodity;
(v) the Incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness in respect of bid, performance or advance payment bonds and
appeal or surety bonds;
(vi) Indebtedness existing on the Exchange Preferred Stock Issue Date;
(vii) the Incurrence of (a) Indebtedness of any Restricted Subsidiary
owed to and held by the Company or another Restricted Subsidiary and (b)
Indebtedness of the Company owed to and held by any Restricted Subsidiary;
and
(viii) any renewals, extensions, substitutions, refundings, refinancings
or replacements (collectively, a "refinancing") of any Indebtedness
described in clauses (i), (ii), (iii), (vi) and (vii) of this paragraph (b)
of this covenant including any successive refinancings so long as the
borrower under such refinancing is the Company or, if not the Company, the
same as the borrower of the Indebtedness being refinanced and the aggregate
principal amount of Indebtedness represented thereby is not increased by
such refinancing plus the lesser of (I) the stated amount of any premium or
other payment required to be paid in connection with such a refinancing
pursuant to the terms of the Indebtedness being refinanced or (II) the
amount of premium or other payment actually paid at such time to refinance
the Indebtedness, plus, in either case, the amount of expenses of the
Company incurred in connection with such refinancing and, in the case of
any refinancing of Indebtedness that is Subordinated Indebtedness, such new
Indebtedness is made subordinated to the Exchange Debentures at least to
the same extent as the Indebtedness being refinanced and such refinancing
does not reduce the Average Life to Stated Maturity or the Stated Maturity
of such Subordinated Indebtedness.
(c) For purposes of determining any particular amount of Indebtedness under
this covenant, guarantees, Liens or obligations with respect to letters of
credit supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included; provided, however, that the foregoing
shall not in any way be deemed to limit the provisions of "--Limitations on
Issuances of Guarantees of Indebtedness."
(d) For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness may be Incurred through the first paragraph of
this covenant or by meeting the criteria of one or more of the types of
Indebtedness described in the second paragraph of this covenant (or the
definitions of the terms used therein), the Company, in its sole discretion,
(i) may classify such item of Indebtedness under and comply with either of
such paragraphs (or any of such definitions), as applicable, (ii) may classify
and divide such item of Indebtedness into more than one of such paragraphs (or
definitions), as applicable, and (iii) may elect to comply with such
paragraphs (or definitions), as applicable, in any order. (Section 1008)
Limitation on Restricted Payments.
(a) The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly:
(i) declare or pay any dividend on, or make any distribution on any
shares of the Company's Capital Stock (other than dividends or
distributions payable solely in shares of its Qualified Capital Stock or in
options, warrants or other rights to acquire shares of such Qualified
Capital Stock);
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(ii) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, the Company's Capital Stock or any Capital Stock of any
Affiliate of the Company (other than Capital Stock of any Wholly Owned
Subsidiary of the Company) or options, warrants or other rights to acquire
such Capital Stock;
(iii) make any principal payment on, or repurchase, redeem, defease,
retire or otherwise acquire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Subordinated Indebtedness;
(iv) declare or pay any dividend or distribution on any Capital Stock of
any Restricted Subsidiary to any Person (other than (a) to the Company or
any of its Wholly Owned Subsidiaries or (b) to all holders of Capital Stock
of such Restricted Subsidiary on a pro rata basis); or
(v) make any Investment in any Person (other than any Permitted
Investments)
(any of the foregoing actions described in clauses (i) through (v), other than
any such action that is a Permitted Payment (as defined below), collectively,
"Restricted Payments") (the amount of any such Restricted Payment, if other
than cash, as determined by the board of directors of the Company, whose
determination shall be conclusive and evidenced by a board resolution), unless
(1) immediately before and immediately after giving effect to such proposed
Restricted Payment on a pro forma basis, no Default or Event of Default shall
have occurred and be continuing; (2) immediately before and immediately after
giving effect to such Restricted Payment on a pro forma basis, the Company
could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the provisions described under "--Limitation on
Indebtedness"; and (3) after giving effect to the proposed Restricted Payment,
the aggregate amount of all such Restricted Payments declared or made after
the date of the Indenture, does not exceed the sum of the following (the
"Basket"):
(A) (i) the Cumulative Operating Cash Flow determined at the time of such
Restricted Payment less (ii) 150% of cumulative Consolidated Interest
Expense determined for the period (treated as one accounting period)
commencing on the date of the original issue of the Exchange Debentures and
ending on the last day of the most recent fiscal quarter immediately
preceding the date of such Restricted Payment for which consolidated
financial information of the Company is required to be available;
(B) the sum of (i)(x) capital contributions to the Company after the date
of the Indenture or (y) the aggregate Net Cash Proceeds received after the
date of the Indenture by the Company from the issuance or sale (other than
to any of its Restricted Subsidiaries) of Qualified Capital Stock of the
Company or any options, warrants or rights to purchase such Qualified
Capital Stock of the Company (except, in each case, to the extent such
proceeds are used to purchase, redeem or otherwise retire Capital Stock or
Subordinated Indebtedness as set forth below in clause (ii) or (iii) of
paragraph (b) below);
(C) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company (other than from any of its Restricted
Subsidiaries) upon the exercise of any options, warrants or rights to
purchase Qualified Capital Stock of the Company;
(D) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the conversion or exchange, if any, of debt
securities or Disqualified Stock of the Company or its Restricted
Subsidiaries into or for Qualified Capital Stock of the Company plus, to
the extent such debt securities or Disqualified Stock were issued after the
date of the Indenture, the aggregate of Net Cash Proceeds from their
original issuance; and
(E) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment, an amount equal to the return of capital
with respect to such Investment and the initial amount of such Investment.
(b) Notwithstanding the foregoing, and in the case of clauses (ii) through
(vi) below, so long as there is no Default or Event of Default continuing, the
foregoing provisions shall not prohibit the following actions (each of clauses
(i) through (vi) being referred to as a "Permitted Payment"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment was
permitted by the provisions of paragraph (a) of this Section and such
payment
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shall have been deemed to have been paid on such date of declaration and
shall not have been deemed a Permitted Payment for purposes of the
calculation required by paragraph (a) of this Section;
(ii) the repurchase, redemption, or other acquisition or retirement for
value of any shares of any class of Capital Stock of the Company in
exchange for (including any such exchange pursuant to the exercise of a
conversion right or privilege in connection with which cash is paid in lieu
of the issuance of fractional shares or scrip), or out of the Net Cash
Proceeds of a substantially concurrent issuance and sale for cash (other
than to a Restricted Subsidiary) of, other shares of Qualified Capital
Stock of the Company; provided that the Net Cash Proceeds from the issuance
of such shares of Qualified Capital Stock are excluded from clause (3)(B)
of paragraph (a) of this Section;
(iii) the repurchase, redemption, defeasance, retirement or acquisition
for value or payment of principal of any Subordinated Indebtedness or
Disqualified Stock in exchange for, or in an amount not in excess of the
Net Cash Proceeds of, a substantially concurrent issuance and sale for cash
(other than to any Restricted Subsidiary of the Company) of any Qualified
Capital Stock of the Company, provided that the Net Cash Proceeds from the
issuance of such shares of Qualified Capital Stock are excluded from clause
(3)(B) of paragraph (a) of this Section;
(iv) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any Subordinated
Indebtedness (other than Disqualified Stock) (a "refinancing") through the
substantially concurrent issuance of new Subordinated Indebtedness of the
Company, provided that any such new Subordinated Indebtedness (1) shall be
in a principal amount that does not exceed the principal amount so
refinanced (or, if such Subordinated Indebtedness provides for an amount
less than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, then such lesser amount as of the date
of determination), plus the lesser of (I) the stated amount of any premium
or other payment required to be paid in connection with such a refinancing
pursuant to the terms of the Indebtedness being refinanced or (II) the
amount of premium or other payment actually paid at such time to refinance
the Indebtedness, plus, in either case, the amount of expenses of the
Company incurred in connection with such refinancing; (2) has an Average
Life to Stated Maturity greater than the remaining Average Life to Stated
Maturity of the Exchange Debentures; (3) has a Stated Maturity later than
the Stated Maturity of the Exchange Debentures; and (4) is expressly
subordinated in right of payment to the Exchange Debentures at least to the
same extent as the Subordinated Indebtedness to be refinanced;
(v) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of any Disqualified Stock through the
substantially concurrent issuance of new Disqualified Stock of the Company,
provided that any such new Disqualified Stock (1) shall have an aggregate
liquidation preference that does not exceed the aggregate liquidation
preference of the amount so refinanced; (2) has an Average Life to Stated
Maturity greater than the remaining Average Life to Stated Maturity of the
Exchange Debentures; and (3) has a Stated Maturity later than the Stated
Maturity of the Exchange Debentures; and
(vi) the repurchase of shares of, or options to purchase shares of,
common stock of the Company or any of its Restricted Subsidiaries from
employees, former employees, directors or former directors of the Company
or any of its Restricted Subsidiaries (or permitted transferees of such
employees, former employees, directors or former directors), pursuant to
the terms of the agreements (including employment agreements) or plans (or
amendments thereto) approved by the Board of Directors under which such
individuals purchase or sell or are granted the option to purchase or sell,
shares of such common stock; provided, however, that the aggregate amount
of such repurchases in any calendar year shall not exceed $1.0 million and
$5.0 million in the aggregate. (Section 1009)
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into any transaction or series of related transactions (including,
without limitation, the sale, purchase, exchange or lease of assets, property
or services) with or for the benefit of any Affiliate of the Company (other
than the Company or a Wholly Owned Subsidiary) unless such transaction or
series of related transactions is entered into in good faith and in writing
and (a) such transaction or series of related transactions is on terms that
are no less favorable to the Company or such Restricted Subsidiary, as the
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case may be, than those that would be reasonably expected to be available in a
comparable transaction in arm's-length dealings with an unrelated third party,
(b) with respect to any transaction or series of related transactions
involving aggregate value in excess of $3.0 million, the Company delivers an
officers' certificate to the Trustee certifying that such transaction or
series of related transactions complies with clause (a) above, and (c) with
respect to any transaction or series of related transactions involving
aggregate value in excess of $7.0 million, either (A) such transaction or
series of related transactions has been approved by a majority of the
Disinterested Directors of the Company, or in the event there is only one
Disinterested Director, by such Disinterested Director, or (B) the Company
delivers to the Trustee a written opinion of an investment banking firm of
national standing or other recognized independent expert with experience
appraising the terms and conditions of the type of transaction or series of
related transactions for which an opinion is required stating that the
transactions or series of related transactions is fair to the Company or such
Restricted Subsidiary from a financial point of view; provided, however, that
this provision shall not apply to: (a) compensation and employee benefit
arrangements with any officer, director or employee of the Company, including
under any stock option or stock incentive plans, in the ordinary course of
business; (b) any transaction solely between or among the Company and/or any
Restricted Subsidiaries, if such transaction is otherwise in compliance with
the Indenture and is on fair and reasonable terms; (c) any transaction
otherwise permitted by the terms of the section of the Indenture described
under "Certain Covenants--Limitations on Restricted Payments;" (d) the
execution and delivery of or payments made under any tax sharing agreement
between or among any of the Company and any Restricted Subsidiary; (e)
licensing or sublicensing of use of any intellectual property by the Company
or any Restricted Subsidiary to any Restricted Subsidiary of the Company;
provided that the licensor shall continue to have access to such intellectual
property to the extent necessary for the conduct of its respective business;
(f) arrangements between the Company and any Restricted Subsidiary of the
Company for the purpose of providing services or employees to such Restricted
Subsidiary; (g) any transaction entered into for the purpose of granting or
altering registration rights with respect to the Capital Stock of the Company;
and (h) any transaction or series of related transactions entered into prior
to the date of the Indenture. (Section 1010)
Limitation on Liens.
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create, incur or affirm any Lien of any kind upon any
property or assets (including any intercompany notes) of the Company or any
Restricted Subsidiary owned on the date of the Indenture or acquired after the
date of the Indenture, or any income or profits therefrom, unless the Exchange
Debentures are directly secured equally and ratably with (or, in the case of
Subordinated Indebtedness, prior or senior thereto, with the same relative
priority as the Exchange Debentures shall have with respect to such
Subordinated Indebtedness) the obligation or liability secured by such Lien
except for any Permitted Liens. (Section 1011)
Limitation on Sale of Assets.
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, consummate an Asset Sale unless (i)
at least 75% of the consideration from such Asset Sale is received in cash or
other comparable consideration (as described below), and (ii) the Company or
such Restricted Subsidiary receives consideration at the time of such Asset
Sale at least equal to the Fair Market Value of the shares or assets subject
to such Asset Sale (as determined by the board of directors of the Company and
evidenced in a board resolution). The following types of consideration shall
be deemed "comparable consideration" for the purposes of this covenant: (A)
Cash Equivalents, (B) liabilities (contingent or otherwise) of the Company or
a Restricted Subsidiary assumed by the transferee (or its designee) such that
the Company or such Restricted Subsidiary has no further liability therefor,
and (C) any securities, notes or other obligations received by the Company or
any such Restricted Subsidiary from such transferee that are immediately
converted by the Company or such Restricted Subsidiary into cash.
(b) The Company or a Restricted Subsidiary may, within 365 days of the Asset
Sale invest the Net Cash Proceeds in properties and other assets that will be
used in Telecommunications Businesses or to repay any Senior Indebtedness of
the Company or any Restricted Subsidiary (including the repurchase of the
Exchange
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Debentures). The amount of such Net Cash Proceeds not used or invested within
365 days of the Asset Sale as set forth in this paragraph constitutes "Excess
Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million,
the Company will be required to make an Excess Proceeds Offer in accordance
with the terms set forth under "Offer to Purchase with Excess Asset Sale
Proceeds." Notwithstanding the foregoing, the Company shall have no obligation
to make an Excess Proceeds Offer until after the Existing Senior Notes
Maturity Date.
(c) When the aggregate amount of Excess Proceeds exceeds $10.0 million or
more, the Company will apply the Excess Proceeds to the repayment of the
Exchange Debentures and any other Pari Passu Indebtedness outstanding with
similar provisions requiring the Company to make an offer to purchase such
Indebtedness with the proceeds from any Asset Sale as follows: (A) the Company
will make an offer to purchase (an "Offer") from all holders of the Exchange
Debentures in accordance with the procedures set forth in the Indenture in the
maximum principal amount (expressed as a multiple of $1,000) of Exchange
Debentures that may be purchased out of an amount (the "Debenture Amount")
equal to the product of such Excess Proceeds multiplied by a fraction, the
numerator of which is the outstanding principal amount of the Exchange
Debentures, and the denominator of which is the sum of the outstanding
principal amount of the Exchange Debentures and such Pari Passu Indebtedness
(subject to proration in the event such amount is less than the aggregate
Offered Price (as defined herein) of all Exchange Debentures tendered) and (B)
to the extent required by such Pari Passu Indebtedness to permanently reduce
the principal amount of such Pari Passu Indebtedness, the Company will make an
offer to purchase or otherwise repurchase or redeem Pari Passu Indebtedness (a
"Pari Passu Offer") in an amount (the "Pari Passu Debt Amount") equal to the
excess of the Excess Proceeds over the Debenture Amount; provided that in no
event will the Company be required to make a Pari Passu Offer in a Pari Passu
Debt Amount exceeding the principal amount of such Pari Passu Indebtedness.
The offer price for the Exchange Debentures will be payable in cash in an
amount equal to 100% of the principal amount of the Exchange Debentures plus
accrued and unpaid interest, if any, to the date (the "Offer Date") such Offer
is consummated (the "Offered Price"), in accordance with the procedures set
forth in the Indenture. To the extent that the aggregate Offered Price of the
Exchange Debentures tendered pursuant to the Offer is less than the Debenture
Amount relating thereto or the aggregate amount of Pari Passu Indebtedness
that is purchased in a Pari Passu Offer is less than the Pari Passu Debt
Amount, the Company will use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of Exchange Debentures
and Pari Passu Indebtedness surrendered by holders thereof exceeds the amount
of Excess Proceeds, the Trustee shall select the Exchange Debentures to be
purchased on a pro rata basis. Upon the completion of the purchase of all the
Exchange Debentures tendered pursuant to an Offer and the completion of a Pari
Passu Offer, the amount of Excess Proceeds, if any, shall be reset at zero.
Notwithstanding the foregoing, if the date on which any Offer otherwise would
be required to be made is on or prior to the Existing Senior Notes Maturity
Date, the Company shall not be required to make an Offer until the first date
after the Existing Senior Notes Maturity Date.
(d) The Indenture will provide that, if the Company becomes obligated to
make an Offer pursuant to clause (c) above, the Exchange Debentures and the
Pari Passu Indebtedness shall be purchased by the Company, at the option of
the holders thereof, in whole or in part, in integral multiples of $1,000, on
a date that is not earlier than 30 days and not later than 60 days from the
date the notice of the Offer is given to holders, or such later date as may be
necessary for the Company to comply with the requirements under the Exchange
Act.
(e) The Indenture will provide that the Company will comply with the
applicable tender offer rules, including Rule 14e-1 under the Exchange Act,
and any other applicable securities laws or regulations in connection with an
Offer. (Section 1012)
Limitation on Issuances of Guarantees of Indebtedness
(a) The Company will not permit any Restricted Subsidiary, directly or
indirectly, to guarantee, assume or in any other manner become liable with
respect to any Pari Passu Indebtedness or Subordinated Indebtedness of
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the Company unless such Restricted Subsidiary simultaneously executes and
delivers a supplemental indenture to the Indenture providing for a Guarantee
of the Exchange Debentures on the same terms as the guarantee of such
Indebtedness; provided, however, that (A) such guarantee need not be secured
unless required pursuant to "--Limitation on Liens" and (B) if such
Indebtedness is by its terms expressly subordinated to the Exchange
Debentures, any such assumption, guarantee or other liability of such
Restricted Subsidiary with respect to such Indebtedness shall be subordinated
to such Restricted Subsidiary's Guarantee of the Exchange Debentures at least
to the same extent as such Indebtedness is subordinated to the Exchange
Debentures; provided that this paragraph shall not apply to any guarantee or
assumption of liability of Indebtedness permitted under Indenture described in
clauses (i), (ii), (iv), (v), (vii) and (viii) of paragraph (b) of "Certain
Covenants--Limitation on Indebtedness."
(b) Notwithstanding the foregoing, any Guarantee by a Restricted Subsidiary
of the Exchange Debentures shall provide by its terms that it (and all Liens
securing the same) shall be automatically and unconditionally released and
discharged upon any sale, exchange or transfer, to any Person not an Affiliate
of the Company, of all of the Company's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary, which transaction
is in compliance with the terms of the Indenture and such Restricted
Subsidiary is released from its guarantees of other Indebtedness of the
Company or any Restricted Subsidiaries. (Section 1013)
Limitation on Sale and Leaseback Transactions.
The Company will not, and will not permit any Restricted Subsidiary of the
Company to, directly or indirectly, enter into any sale and leaseback
transaction with respect to any property or assets (whether now owned or
hereafter acquired) unless (i) the sale or transfer of such property or assets
to be leased is treated as an Asset Sale and complies with the "--Limitation
on Sale of Assets" covenant and (ii) the Company or such Restricted Subsidiary
would be entitled under the "Limitation on Indebtedness" covenant to incur any
Indebtedness (with the lease obligations being treated as Indebtedness for
purposes of ascertaining compliance with this covenant unless such lease is
properly classified as an operating lease under GAAP) in respect of such sale
and leaseback transaction. (Section 1015)
The foregoing restriction does not apply to any sale-leaseback transaction
if: (i) the lease is for a period, including renewal rights, not in excess of
three years; (ii) the transaction is solely between the Company and any Wholly
Owned Subsidiary or any Wholly Owned Subsidiary and any other Wholly Owned
Subsidiary; or (iii) the transaction is consummated within 180 days of the
acquisition by the Company or its Restricted Subsidiary of the property or
assets subject to such sale-leaseback or entered into within 180 days after
the purchase or substantial completion of the construction of such property or
assets.
Limitation on Restricted Subsidiary Capital Stock.
The Company will not permit (a) any Restricted Subsidiary of the Company to
issue any Capital Stock, except for (i) Capital Stock issued or sold to, held
by or transferred to the Company or a Wholly Owned Subsidiary, and (ii)
Capital Stock issued by a Person prior to the time (A) such Person becomes a
Restricted Subsidiary, (B) such Person merges with or into a Restricted
Subsidiary or (C) a Restricted Subsidiary merges with or into such Person;
provided that such Capital Stock was not issued or incurred by such Person in
anticipation of the type of transaction contemplated by subclause (A), (B) or
(C) or (b) any Person (other than the Company or a Wholly Owned Subsidiary) to
acquire Capital Stock of any Restricted Subsidiary from the Company or any
Restricted Subsidiary, except, in the case of clause (a) or (b), (1) upon the
acquisition of all the outstanding Capital Stock of such Restricted Subsidiary
in accordance with the terms of the Indenture, (2) if, immediately after
giving effect to such issuance or sale, such Restricted Subsidiary would no
longer constitute a Restricted Subsidiary, and any Investment in such Person
remaining after giving effect to such issuance or sale would have been
permitted to be made under the provisions of the Indenture described in
"Certain Covenants--Limitations on Restricted Payments" if made on the date of
such issuance or sale, (3) issuances of director's qualifying shares, or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law, (4) issuances or sales
of common stock of a Restricted Subsidiary,
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provided that the Company or such Restricted Subsidiary applies the Net Cash
Proceeds, if any, in accordance with the provisions of the Indenture to the
extent applicable, (5) issuances after which the Company maintains its direct
or indirect percentage of beneficial and economic ownership of such Restricted
Subsidiary, or (6) issuances in connection with Acquisitions for the primary
purpose of minimizing tax liability to the Company, any of its Restricted
Subsidiaries, the Acquired Person or any shareholders of the Acquired Person.
(Section 1016)
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries.
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create any consensual encumbrance or restriction
on the ability of any Restricted Subsidiary to (i) pay dividends or make any
other distribution on its Capital Stock, (ii) pay any Indebtedness owed to the
Company or any other Restricted Subsidiary, (iii) make any Investment in the
Company or any other Restricted Subsidiary or (iv) transfer any of its
properties or assets to the Company or any other Restricted Subsidiary, except
for: (a) any encumbrance or restriction, with respect to a Restricted
Subsidiary that is not a Restricted Subsidiary of the Company on the date of
the Indenture, in existence at the time such Person becomes a Restricted
Subsidiary of the Company and not incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary; (b)
encumbrances or restrictions (I) by reason of applicable law, or (II) under
the Indenture; (c) customary non-assignment provisions of any contract or
lease of any Restricted Subsidiary entered into in the ordinary course of
business; (d) encumbrances or restrictions imposed pursuant to contracts
entered into in connection with Permitted Liens, but solely to the extent such
encumbrances or restrictions affect property or assets subject to such
Permitted Lien; (e) any encumbrance or restriction imposed pursuant to
contracts for the sale of assets with respect to the assets to be sold
pursuant to such contract; and (f) any encumbrance or restriction existing
under any agreement that extends, renews, refinances or replaces the
agreements containing the encumbrances or restrictions in the foregoing
clauses (a) through (e), or in this clause (f), provided that the terms and
conditions of any such encumbrances or restrictions are no more restrictive in
any material respect than those under or pursuant to the agreement evidencing
the Indebtedness so extended, renewed, refinanced or replaced. (Section 1017)
Limitations on Unrestricted Subsidiaries.
The Company will not make, and will not permit its Restricted Subsidiaries
to make, any Investment in Unrestricted Subsidiaries if, at the time thereof,
the aggregate amount of such Investments would exceed the amount of Restricted
Payments then permitted to be made pursuant to the "--Limitation on Restricted
Payments" covenant. Any Investments in Unrestricted Subsidiaries permitted to
be made pursuant to this covenant will be treated as a Restricted Payment in
calculating the amount of Restricted Payments made by the Company. (Section
1018)
Provision of Financial Statements.
Whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, the Company will, to the extent permitted under the Exchange
Act, file with the Commission the annual reports, quarterly reports and other
documents which the Company would have been required to file with the
Commission pursuant to Sections 13(a) or 15(d) if the Company were so subject,
such documents to be filed with the Commission on or prior to the date (the
"Required Filing Date") by which the Company would have been required so to
file such documents if the Company were so subject. The Company will also in
any event (x) within 15 days of each Required Filing Date (i) transmit by mail
to all holders, as their names and addresses appear in the security register,
without cost to such holders and (ii) file with the Trustee copies of the
annual reports, quarterly reports and other documents which the Company would
have been required to file with the Commission pursuant to Sections 13(a) or
15(d) of the Exchange Act if the Company were subject to either of such
Sections and (y) if filing such documents by the Company with the Commission
is not permitted under the Exchange Act, promptly upon written request and
payment of the reasonable cost of duplication and delivery, supply copies of
such documents to any prospective holder at the Company's cost. If any
Guarantor's financial statements would be
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required to be included in the financial statements filed or delivered
pursuant to the Indenture if the Company were subject to Section 13(a) or
15(d) of the Exchange Act, the Company shall include such Guarantor's
financial statements in any filing or delivery pursuant to the Indenture. The
Indenture also provides that, so long as any of the Exchange Debentures remain
outstanding, the Company will make available to any prospective purchaser of
Exchange Debentures or beneficial owner of Exchange Debentures in connection
with any sale thereof the information required by Rule 144A(d)(4) under the
Securities Act, until such time as the Company has either exchanged the
Exchange Debentures for securities identical in all material respects which
have been registered under the Securities Act or until such time as the
holders thereof have disposed of such Exchange Debentures pursuant to an
effective registration statement under the Securities Act. (Section 1019)
Limitation on Business.
The Company will not, and will not permit any of the Restricted Subsidiaries
to, engage in a business which is not substantially a Telecommunications
Business. (Section 1022)
Additional Covenants.
The Indenture also contains covenants with respect to the following matters:
(i) payment of principal, premium and interest; (ii) maintenance of an office
or agency in The City of New York; (iii) arrangements regarding the handling
of money held in trust; (iv) maintenance of corporate existence; (v) payment
of taxes and other claims; (vi) maintenance of properties; and (vii)
maintenance of insurance.
CONSOLIDATION, MERGER, SALE OF ASSETS
The Company will not, in a single transaction or through a series of related
transactions, consolidate with or merge with or into any other Person or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially
all of its properties and assets to any Person or group of affiliated Persons,
or permit any of its Restricted Subsidiaries to enter into any such
transaction or series of related transactions if such transaction or series of
related transactions, in the aggregate, would result in a sale, assignment,
conveyance, transfer, lease or disposition of all or substantially all of the
properties and assets of the Company and its Restricted Subsidiaries on a
Consolidated basis to any other Person or group of affiliated Persons, unless
at the time and after giving effect thereto (i) either (a) the Company will be
the continuing corporation in the case of a consolidation or merger involving
the Company or (b) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by sale, assignment, conveyance, transfer, lease or disposition all or
substantially all of the properties and assets of the Company and its
Restricted Subsidiaries on a Consolidated basis (the "Surviving Entity") will
be a corporation duly organized and validly existing under the laws of the
United States of America, any state thereof or the District of Columbia and
such Person expressly assumes, by a supplemental indenture, in a form
reasonably satisfactory to the Trustee, all the obligations of the Company
under the Exchange Debentures, the Indenture and the Registration Rights
Agreement, as the case may be, and the Exchange Debentures, the Indenture and
the Registration Rights Agreement will remain in full force and effect as so
supplemented; (ii) immediately before and immediately after giving effect to
such transaction on a pro forma basis (and treating any Indebtedness not
previously an obligation of the Company or any of its Restricted Subsidiaries
which becomes the obligation of the Company or any of its Restricted
Subsidiaries as a result of such transaction as having been incurred at the
time of such transaction), no Default or Event of Default will have occurred
and be continuing; (iii) immediately after giving effect to such transaction
on a pro forma basis, the Company (or the Surviving Entity if the Company is
not the continuing obligor under the Indenture) could incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) under the
provisions of "--Certain Covenants--Limitation on Indebtedness;" (iv) at the
time of the transaction, each Guarantor, if any, unless it is the other party
to the transactions described above, will have by supplemental indenture
confirmed that its Guarantee shall apply to such Person's obligations under
the Indenture and the Exchange Debentures; (v) at the time of the transaction
if any of the property or assets of the Company or any of its Restricted
Subsidiaries would thereupon become subject to any Lien, the provisions of "--
Certain Covenants--Limitation on Liens" are complied with; and (vi) at the
time of the transaction the Company or the Surviving Entity will have
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delivered, or caused to be delivered, to the Trustee, in form and substance
reasonably satisfactory to the Trustee, an officers' certificate and an
opinion of counsel, each to the effect that such consolidation, merger,
transfer, sale, assignment, conveyance, transfer, lease or other transaction
and the supplemental indenture in respect thereof comply with the Indenture.
Notwithstanding the foregoing, the Company (i) may merge or consolidate with
any of its Restricted Subsidiaries, and (ii) the Company may merge or
consolidate into any Person in a transaction designed solely for the purpose
of effecting a change in the jurisdiction of incorporation of the Company
within the United States of America. (Section 801)
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraph in
which the Company is not the Surviving Entity, such Surviving Entity shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company, and the Company shall be discharged from all obligations and
covenants under the Indenture, the Exchange Debentures and the Registration
Rights Agreement. (Section 802)
EVENTS OF DEFAULT
An Event of Default will occur under the Indenture if:
(i) there shall be a default in the payment of any interest on any
Exchange Debenture when it becomes due and payable, and such default shall
continue for a period of 60 days;
(ii) there shall be a default in the payment of the principal of (or
premium, if any, on) any Exchange Debenture at its Maturity (upon
acceleration, optional or mandatory redemption, required repurchase or
otherwise);
(iii) (a) there shall be a default in the performance, or breach, of any
covenant or agreement of the Company or any Guarantor under the Indenture,
the Registration Rights Agreement or any Guarantee (other than a default in
the performance, or breach, of a covenant or agreement which is
specifically dealt with in clause (i), (ii) or in clause (b), (c) or (d) of
this clause (iii)) and such default or breach shall continue for a period
of 30 days after written notice has been given, by certified mail, (x) to
the Company by the Trustee or (y) to the Company and the Trustee by the
holders of at least 25% in aggregate principal amount of the outstanding
Exchange Debentures; (b) there shall be a default in the performance or
breach of the provisions described in "--Consolidation, Merger, Sale of
Assets;" (c) the Company shall have failed to make or consummate an Offer
in accordance with the provision described in "--Certain Covenants--
Limitation on Sale of Assets;" or (d) the Company shall have failed to make
or consummate a Change of Control Offer in accordance with the provisions
of "--Change of Control;"
(iv) (a) any default by the Company or any Restricted Subsidiary in the
payment of the principal, premium, if any, or interest has occurred with
respect to amounts in excess of $5.0 million under any agreement, indenture
or instrument evidencing Indebtedness when the same shall become due and
payable in full and such default shall have continued after any applicable
grace period and shall not have been cured or waived and, if not already
matured at its final maturity in accordance with its terms, the holder of
such Indebtedness shall have the right to accelerate such Indebtedness or
(b) any event of default as defined in any agreement, indenture or
instrument of the Company evidencing Indebtedness in excess of $5.0 million
shall have occurred and the Indebtedness thereunder, if not already matured
at its final maturity in accordance with its terms, shall have been
accelerated;
(v) any Guarantee shall for any reason cease to be, or shall for any
reason be asserted in writing by any Guarantor or the Company not to be, in
full force and effect and enforceable in accordance with its terms, except
to the extent contemplated by the Indenture and any such Guarantee;
(vi) one or more judgments or orders for the payment of money in excess
of $5.0 million, either individually or in the aggregate, shall be rendered
against the Company not paid or covered by financially sound third-party
insurers, or any Restricted Subsidiary or any of their respective
properties and there shall not be discharged and there shall have been a
period of 60 consecutive days during which a stay of enforcement of such
judgment or order, by reason of an appeal or otherwise, shall not be in
effect;
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(vii) any holder or holders of at least $5.0 million in aggregate
principal amount of Indebtedness of the Company or any Restricted
Subsidiary after a default under such Indebtedness shall notify the Trustee
of its commencement of proceedings to foreclose on any assets of the
Company or any Restricted Subsidiary that have been pledged to or for the
benefit of such holder or holders to secure such Indebtedness or shall
commence proceedings, or take any action (including by way of set-off), to
retain in satisfaction of such Indebtedness or to collect on, seize,
dispose of or apply in satisfaction of Indebtedness, assets of the Company
or any Restricted Subsidiary (including funds on deposit or held pursuant
to lock-box and other similar arrangements);
(viii) there shall have been the entry by a court of competent
jurisdiction of (a) a decree or order for relief in respect of the Company
or any Restricted Subsidiary in an involuntary case or proceeding under any
applicable Bankruptcy Law or (b) a decree or order adjudging the Company or
any Restricted Subsidiary bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company or
any Restricted Subsidiary under any applicable federal or state law, or
appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Company or any Restricted
Subsidiary or of any substantial part of their respective properties, or
ordering the winding up or liquidation of their respective affairs, and any
such decree or order for relief shall continue to be in effect, or any such
other decree or order shall be unstayed and in effect, for a period of 60
consecutive days; or
(ix) (a) the Company or any Restricted Subsidiary commences a voluntary
case or proceeding under any applicable Bankruptcy Law or any other case or
proceeding to be adjudicated bankrupt or insolvent, (b) the Company or any
Restricted Subsidiary consents to the entry of a decree or order for relief
in respect of the Company or such Restricted Subsidiary in an involuntary
case or proceeding under any applicable Bankruptcy Law or to the
commencement of any bankruptcy or insolvency case or proceeding against it,
(c) the Company or any Restricted Subsidiary files a petition or answer or
consent seeking reorganization or relief under any applicable federal or
state law, (d) the Company or any Restricted Subsidiary (I) consents to the
filing of such petition or the appointment of, or taking possession by, a
custodian, receiver, liquidator, assignee, trustee, sequestrator or similar
official of the Company or such Restricted Subsidiary or of any substantial
part of the Company's Consolidated properties, (II) makes an assignment for
the benefit of creditors or (III) admits in writing its inability to pay
its debts generally as they become due or (e) the Company or any Restricted
Subsidiary takes any corporate action in furtherance of any such actions in
this paragraph (ix). (Section 501)
If an Event of Default (other than as specified in clauses (viii) and (ix)
of the prior paragraph) shall occur and be continuing with respect to the
Indenture, the Trustee or the holders of not less than 25% in aggregate
principal amount of the Exchange Debentures then outstanding may, and the
Trustee at the request of such holders shall, declare all unpaid principal of,
premium, if any, and accrued interest on all Exchange Debentures to be due and
payable, by a notice in writing to the Company (and to the Trustee if given by
the holders of the Exchange Debentures) and upon any such declaration, such
principal, premium, if any, and interest shall become due and payable
immediately. If an Event of Default specified in clause (viii) or (ix) of the
prior paragraph occurs with respect to the Company and is continuing, then all
the Exchange Debentures shall ipso facto become and be due and payable
immediately in an amount equal to the principal amount of the Exchange
Debentures, together with accrued and unpaid interest, if any, to the date the
Exchange Debentures become due and payable, without any declaration or other
act on the part of the Trustee or any holder. Thereupon, the Trustee may, at
its discretion, proceed to protect and enforce the rights of the holders of
Exchange Debentures by appropriate judicial proceedings. Notwithstanding the
foregoing provisions of this paragraph, the obligations under Exchange
Debentures shall not be accelerated or otherwise become due and payable under
this paragraph prior to the Existing Senior Notes Maturity Date.
If the date on which an Event of Default occurs is on or prior to the
Existing Senior Notes Maturity Date, then the remedy for such Event of Default
will be limited as set forth in this paragraph. Upon the acceleration of any
Designated Senior Debt by the holders thereof while any such Event of Default
is continuing, the interest rate payable with respect to the Exchange
Debentures will be increased by one-half of one percent per annum
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for the 90-day period following such Event of Default, which rate will further
increase by one-half of one percent per annum with respect to each subsequent
90-day period during which an Event of Default is continuing, up to a maximum
aggregate increase in interest rate of two percent (2%) per annum. Any
interest rate increase effected pursuant to the foregoing shall only be
effective during such time that such Event of Default is continuing (or any
other Event of Default is occurring while such initial Event of Default is
continuing) and prior to the Existing Senior Note Maturity Date. If an Event
of Default occurs prior to the Existing Senior Note Maturity Date but is
continuing past such date, then, upon the Existing Senior Note Maturity Date,
the interest rate will return to the stated rate and the Trustee and holders
of the Exchange Debentures will have the remedies described in the preceding
paragraph and as otherwise provided in the Indenture. In the event that an
Event of Default occurs prior to the Existing Senior Note Maturity Date and
the holders of Designated Senior Debt do not accelerate such Designated Senior
Debt, no remedy will exist for the Event of Default (unless such Event of
Default continues through the Existing Senior Note Maturity Date, in which
case the Trustee and holders of the Exchange Debentures will have the remedies
described in the preceding paragraph and as otherwise provided in the
Indenture effective upon the Existing Senior Note Maturity Date).
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of Exchange Debentures outstanding by
written notice to the Company and the Trustee, may rescind and annul such
declaration and its consequences if (a) the Company has paid or deposited with
the Trustee a sum sufficient to pay (i) all sums paid or advanced by the
Trustee under the Indenture and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, (ii) all
overdue interest on all Exchange Debentures then outstanding, (iii) the
principal of and premium, if any, on any Exchange Debentures then outstanding
which have become due otherwise than by such declaration of acceleration and
interest thereon at the rate borne by the Exchange Debentures and (iv) to the
extent that payment of such interest is lawful, interest upon overdue interest
at the rate borne by the Exchange Debentures; and (b) all Events of Default,
other than the non-payment of principal of the Exchange Debentures which have
become due solely by such declaration of acceleration, have been cured or
waived as provided in the Indenture. No such rescission shall affect any
subsequent default or impair any right consequent thereon. (Section 502)
The holders of not less than a majority in aggregate principal amount of the
Exchange Debentures outstanding may on behalf of the holders of all
outstanding Exchange Debentures waive any past default under the Indenture and
its consequences, except a default in the payment of the principal of,
premium, if any, or interest on any Exchange Debenture or in respect of a
covenant or provision which under the Indenture cannot be modified or amended
without the consent of the holder of each Exchange Debenture affected by such
modification or amendment. (Section 513)
The Company is also required to notify the Trustee within thirty business
days of the occurrence of any Default unless such Default shall have been
cured. (Section 602) The Company is required to deliver to the Trustee, on or
before a date not more than 60 days after the end of each fiscal quarter and
not more than 120 days after the end of each fiscal year, a written statement
as to compliance with the Indenture, including whether or not any Default has
occurred that is not cured. (Section 1020)
The Trust Indenture Act contains limitations on the rights of the Trustee,
should it become a creditor of the Company or any Guarantor, if any, to obtain
payment of claims in certain cases or to realize on certain property received
by it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions, provided that if it acquires any
conflicting interest it must eliminate such conflict upon the occurrence of an
Event of Default or else resign.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company, any Guarantor and any other obligor upon the
Exchange Debentures discharged with respect to the outstanding Exchange
Debentures ("defeasance"). Such defeasance means that the Company, any such
Guarantor and any
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other obligor under the Indenture shall be deemed to have paid and discharged
the entire Indebtedness represented by the outstanding Exchange Debentures,
except for (i) the rights of holders of such outstanding Exchange Debentures
to receive payments in respect of the principal of, premium, if any, and
interest on such Exchange Debentures when such payments are due, (ii) the
Company's obligations with respect to the Exchange Debentures concerning
issuing temporary Exchange Debentures, registration of Exchange Debentures,
mutilated, destroyed, lost or stolen Exchange Debentures, and the maintenance
of an office or agency for payment and money for security payments held in
trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee
and (iv) the defeasance provisions of the Indenture. In addition, the Company
may, at its option and at any time, elect to have the obligations of the
Company and any Guarantor released with respect to certain covenants that are
described in the Indenture ("covenant defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or an Event of
Default with respect to the Exchange Debentures. In the event covenant
defeasance occurs, certain events (not including non-payment, bankruptcy and
insolvency events) described under "Events of Default" will no longer
constitute an Event of Default with respect to the Exchange Debentures.
(Sections 401, 402 and 403)
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Exchange Debentures cash in United States dollars, U.S.
Government Obligations (as defined in the Indenture), or a combination
thereof, in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants or a nationally recognized
investment banking firm, to pay and discharge the principal of, premium, if
any, and interest on the outstanding Exchange Debentures on the Stated
Maturity thereof (or on any date after June 1, 2003 (such date being referred
to as the "Defeasance Redemption Date"), if at or prior to electing either
defeasance or covenant defeasance, the Company has delivered to the Trustee an
irrevocable notice to redeem all of the outstanding Exchange Debentures on the
Defeasance Redemption Date); (ii) in the case of defeasance, the Company shall
have delivered to the Trustee an opinion of independent counsel in the United
States stating that (A) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the date of
the Indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion of
independent counsel in the United States shall confirm that, the holders of
the outstanding Exchange Debentures will not recognize income, gain or loss
for federal income tax purposes as a result of such defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such defeasance had not
occurred; (iii) in the case of covenant defeasance, the Company shall have
delivered to the Trustee an opinion of independent counsel in the United
States to the effect that the holders of the outstanding Exchange Debentures
will not recognize income, gain or loss for federal income tax purposes as a
result of such covenant defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have
been the case if such covenant defeasance had not occurred; (iv) no Default or
Event of Default shall have occurred and be continuing on the date of such
deposit or insofar as clauses (viii) or (ix) under the first paragraph under--
"Events of Default" are concerned, at any time during the period ending on the
91st day after the date of deposit; (v) such defeasance or covenant defeasance
shall not cause the Trustee for the Exchange Debentures to have a conflicting
interest for purposes of the Trust Indenture Act with respect to any
securities of the Company or any Guarantor; (vi) such defeasance or covenant
defeasance shall not result in a breach or violation of, or constitute a
Default under, the Indenture or any other material agreement or instrument to
which the Company, any Guarantor or any Restricted Subsidiary is a party or by
which it is bound; (vii) such defeasance or covenant defeasance shall not
result in the trust arising from such deposit constituting an investment
company within the meaning of the Investment Company Act of 1940, as amended,
unless such trust shall be registered under such Act or exempt from
registration thereunder; (viii) the Company will have delivered to the Trustee
an opinion of independent counsel in the United States to the effect that
after the 91st day following the deposit, the trust funds will not be subject
to the effect of any applicable bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally; (ix) the Company shall
have delivered to the Trustee an officers' certificate stating that the
deposit was not made by the Company with the intent of preferring the holders
of the Exchange Debentures or any Guarantee over the other creditors of the
Company or any Guarantor with the intent of defeating, hindering, delaying or
defrauding creditors of the Company, any Guarantor or others; (x) no event or
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condition shall exist that would prevent the Company from making payments of
the principal of, premium, if any, and interest on the Exchange Debentures on
the date of such deposit or at any time ending on the 91st day after the date
of such deposit; and (xi) the Company will have delivered to the Trustee an
officers' certificate and an opinion of independent counsel, each stating that
all conditions precedent provided for relating to either the defeasance or the
covenant defeasance, as the case may be, have been complied with. (Section
404)
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Exchange Debentures as expressly provided for in the Indenture) as to all
outstanding Exchange Debentures under the Indenture when (a) either (i) all
such Exchange Debentures theretofore authenticated and delivered (except lost,
stolen or destroyed Exchange Debentures which have been replaced or paid or
Exchange Debentures whose payment has been deposited in trust or segregated
and held in trust by the Company and thereafter repaid to the Company or
discharged from such trust as provided for in the Indenture) have been
delivered to the Trustee for cancellation or (ii) all Exchange Debentures not
theretofore delivered to the Trustee for cancellation (x) have become due and
payable, (y) will become due and payable at their Stated Maturity within one
year, or (z) are to be called for redemption within one year under
arrangements reasonably satisfactory to the Trustee for the giving of notice
of redemption by the Trustee in the name, and at the expense, of the Company;
and the Company or any Guarantor has irrevocably deposited or caused to be
deposited with the Trustee as trust funds in trust an amount in United States
dollars sufficient to pay and discharge the entire indebtedness on the
Exchange Debentures not theretofore delivered to the Trustee for cancellation,
including principal of, premium, if any, and accrued interest at such
Maturity, Stated Maturity or redemption date; (b) the Company or any Guarantor
has paid or caused to be paid all other sums payable under the Indenture by
the Company and any Guarantor; and (c) the Company has delivered to the
Trustee an officers' certificate and an opinion of independent counsel each
stating that (i) all conditions precedent under the Indenture relating to the
satisfaction and discharge of such Indenture have been complied with and (ii)
such satisfaction and discharge will not result in a breach or violation of,
or constitute a default under, the Indenture or any other material agreement
or instrument to which the Company, any Guarantor or any Restricted Subsidiary
is a party or by which the Company, any Guarantor or any Restricted Subsidiary
is bound. (Section 1301)
MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the Indenture may be made by the Company,
each Guarantor, if any, and the Trustee with the consent of the holders of at
least a majority in aggregate principal amount of the Exchange Debentures then
outstanding; provided, however, that no such modification or amendment may,
without the consent of the holder of each outstanding Exchange Debenture
affected thereby: (i) change the Stated Maturity of the principal of, or any
installment of interest on, or change to an earlier date any redemption date
of, or waive a default in the payment of the principal or interest on, any
such Exchange Debenture or reduce the principal amount thereof or the rate of
interest thereon or any premium payable upon the redemption thereof, or change
the coin or currency in which the principal of any such Exchange Debenture or
any premium or the interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment after the Stated
Maturity thereof (or, in the case of redemption, on or after the redemption
date); (ii) amend, change or modify the obligation of the Company to make and
consummate an Offer with respect to any Asset Sale or Asset Sales in
accordance with "Certain Covenants--Limitation on Sale of Assets" or the
obligation of the Company to make and consummate a Change of Control Offer in
the event of a Change of Control in accordance with "--Change of Control,"
including, in each case, amending, changing or modifying any definitions
relating thereto; (iii) reduce the percentage in principal amount of such
outstanding Exchange Debentures, the consent of whose holders is required for
any such supplemental indenture, or the consent of whose holders is required
for any waiver or compliance with certain provisions of the Indenture; (iv)
modify any of the provisions relating to supplemental indentures requiring the
consent of holders or relating to the waiver of past defaults or relating to
the waiver of certain covenants, except to increase the percentage of such
outstanding Exchange Debentures required for such actions or to provide that
certain other provisions of the Indenture cannot be modified or waived without
the consent of the holder of each such Exchange Debenture affected thereby;
(v) except as otherwise
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permitted under "Consolidation, Merger, Sale of Assets," consent to the
assignment or transfer by the Company or any Guarantor of any of its rights
and obligations under the Indenture; or (vi) amend or modify any of the
provisions of the Indenture in any manner which subordinates the Exchange
Debentures issued thereunder in right of payment to any other Indebtedness of
the Company or which subordinates any Guarantee in right of payment to any
other Indebtedness of the Guarantor issuing any such Guarantee. (Section 902)
Notwithstanding the foregoing, without the consent of any holders of the
Exchange Debentures, the Company, any Guarantor and the Trustee may modify or
amend the Indenture: (a) to evidence the succession of another Person to the
Company or a Guarantor, and the assumption by any such successor of the
covenants of the Company or such Guarantor in the Indenture, the Exchange
Debentures, the Registration Rights Agreement and in any Guarantee in
accordance with "--Consolidation, Merger, Sale of Assets"; (b) to add to the
covenants of the Company, any Guarantor or any other obligor upon the Exchange
Debentures for the benefit of the holders of the Exchange Debentures or to
surrender any right or power conferred upon the Company or any Guarantor or
any other obligor upon the Exchange Debentures, as applicable, in the
Indenture, in the Exchange Debentures or in any Guarantee; (c) to cure any
ambiguity, or to correct or supplement any provision in the Indenture, the
Exchange Debentures or any Guarantee which may be defective or inconsistent
with any other provision in the Indenture, the Exchange Debentures or any
Guarantee or make any other provisions with respect to matters or questions
arising under the Indenture, the Exchange Debentures or any Guarantee;
provided that, in each case, such provisions shall not adversely affect the
interest of the holders of the Exchange Debentures; (d) to comply with the
requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act; (e) to add a
Guarantor under the Indenture; (f) to evidence and provide the acceptance of
the appointment of a successor Trustee under the Indenture; or (g) to
mortgage, pledge, hypothecate or grant a security interest in favor of the
Trustee for the benefit of the holders of the Exchange Debentures as
additional security for the payment and performance of the Company's and any
Guarantor's obligations under the Indenture, in any property, or assets,
including any of which are required to be mortgaged, pledged or hypothecated,
or in which a security interest is required to be granted to the Trustee
pursuant to the Indenture or otherwise. (Section 901)
The holders of a majority in aggregate principal amount of the Exchange
Debentures outstanding may waive compliance with certain restrictive covenants
and provisions of the Indenture. (Section 1021)
GOVERNING LAW
The Indenture, the Exchange Debentures and any Guarantee will be governed
by, and construed in accordance with, the laws of the State of New York,
without giving effect to the conflicts of law principles thereof.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue as Trustee with such conflict or resign as Trustee.
(Sections 608 and 610)
The holders of a majority in principal amount of the then outstanding
Exchange Debentures will have the right to direct the time, method and place
of conducting any proceeding for exercising any remedy available to the
Trustee, subject to certain exceptions. The Indenture provides that in case an
Event of Default occurs (which has not been cured), the Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
at the request of any holder of Exchange Debentures unless such holder shall
have offered to the Trustee security and indemnity satisfactory to it against
any loss, liability or expense. (Sections 601 and 603)
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ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Certificate of
Designation, the Indenture or the Registration Rights Agreement without charge
by writing to Concentric Network Corporation, 10590 N. Tantau Road, Cupertino,
California 95014, Attention: Peter Bergeron, Secretary.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Exchange Debentures to be
resold as set forth herein will initially be issued in the form of one Global
Security (the "Global Security"). The Global Security and the Global Warrant
Certificate are sometimes each referred to herein as a "Global Security." Each
Global Security will be deposited on the date of the closing of the sale of
the Exchange Debentures offered hereby (the "Closing Date") with, or on behalf
of, The Depositary Trust Company ( the "Depositary") and registered in the
name of Cede & Co., as nominee of the Depositary (such nominee being referred
to herein as the "Global Security Holder").
Exchange Debentures that were (i) transferred to institutional "accredited
investors" who are not "qualified institutional buyers" (as such terms are
defined under "Notice to Investors" elsewhere herein (the "Non-Global
Purchasers")) or (ii) issued as described below under "Certificated
Securities" will be issued in registered, definitive, certificated form (the
"Certificated Securities"). Upon the transfer to a qualified institutional
buyer of any Certificated Security initially issued to a Non-Global Purchaser,
such Certificated Security may, unless a Global Security has previously been
exchanged for Certificated Securities, be exchanged for an interest in a
Global Security representing the principal amount of the Securities being
transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depositary's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect
Participants" or the "Depositary's Indirect Participants") that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of any Global Security, the Depositary will credit
the accounts of Participants designated by the Initial Purchasers with
portions of the principal amount of any Global Security and (ii) ownership of
the Exchange Debentures evidenced by each Global Security will be shown on,
and the transfer of ownership thereof will be effected only through, records
maintained by the Depositary (with respect to the interests of the
Depositary's Participants), the Depositary's Participants and the Depositary's
Indirect Participants. Prospective purchasers are advised that the laws of
some states require that certain persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to own, transfer
or pledge Exchange Debentures evidenced by any Global Security will be limited
to such extent. For certain other restrictions on the transferability of the
Exchange Debentures, see "Notice to Investors."
So long as the Global Security Holder is the registered owner of any
Exchange Debentures, the Global Security Holder will be considered the sole
holder under the Indenture of any Exchange Debentures evidenced by any Global
Security. Beneficial owners of Exchange Debentures evidenced by any Global
Security will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any
aspect of the records of the Depositary or for maintaining, supervising or
reviewing any records of the Depositary relating to the Exchange Debentures.
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Payments in respect of the principal of, premium, if any, interest and
Additional Interest, if any, on any Exchange Debentures registered in the name
of the Global Security Holder on the applicable record date will be payable by
the Trustee to or at the direction of the Global Security Holder in its
capacity as the registered holder under the Indenture. Under the terms of the
Indenture, the Company and the Trustee may treat the person in whose names
Exchange Debentures, including any Global Security, are registered as the
owners thereof for the purpose of receiving such payments. Consequently,
neither the Company nor the Trustee has or will have any responsibility or
liability for the payment of such amounts to beneficial owners of Exchange
Debentures. The Company believes, however, that it is currently the policy of
the Depositary to immediately credit the accounts of the relevant Participants
with such payments, in amounts proportionate to their respective holdings of
beneficial interests in the relevant security as shown on the records of the
Depositary. Payments by the Depositary's Participants and the Depositary's
Indirect Participants to the beneficial owners of Exchange Debentures will be
governed by standing instructions and customary practice and will be the
responsibility of the Depositary's Participants or the Depositary's Indirect
Participants.
CERTIFICATED SECURITIES
Transferees of Exchange Debentures who are not "qualified institutional
buyers" as defined in Rule 144A under the Securities Act may hold Exchange
Debentures only in the form of Certificated Securities. All such Certificated
Securities would be subject to the legend requirements described herein under
"Notice to Investors." In addition, if (i) the Company notifies the Trustee in
writing that the Depositary is no longer willing or able to act as a
depositary and the Company is unable to locate a qualified successor within 90
days or (ii) the Company, at its option, notifies the Trustee in writing that
it elects to change the issuance of Exchange Debentures in the form of
Certificated Securities under the Indenture then, upon surrender by the Global
Security Holder of any Global Security, Certificated Securities will be issued
to each person that the Global Security Holder and the Depositary identify as
being the beneficial owner of the related Exchange Debentures.
Neither the Company nor the Trustee will be liable for any delay by the
Global Security Holder or the Depositary in identifying the beneficial owners
of Exchange Debentures and the Company and the Trustee may conclusively rely
on, and will be protected in relying on, instructions from the Global Security
Holder or the Depositary for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Exchange
Debentures represented by the Global Security (including principal, premium,
if any, interest and Additional Interest, if any) be made by wire transfer of
immediately available funds to the accounts specified by the Global Security
Holder. With respect to Certificated Securities, the Company will make all
payments of principal, premium, if any, interest and Additional Interest, if
any, by wire transfer of immediately available funds to the accounts specified
by the holders thereof or, if no such account is specified, by mailing a check
to each such holder's registered address. Secondary trading in long-term notes
and debentures of corporate issuers is generally settled in clearing-house or
next-day funds. In contrast, the Exchange Debentures represented by the Global
Security have been approved for trading in The Portal Market and to trade in
the Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such Exchange Debentures will, therefore, be
required by the Depositary to be settled in immediately available funds. The
Company expects that secondary trading in the Certificated Securities will
also be settled in immediately available funds.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Restricted Subsidiary or (ii) assumed in connection
with the acquisition of assets from such Person, in each case, other than
Indebtedness incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or such acquisition, as the case may be,
provided that Indebtedness of such Person which is redeemed, defeased, retired
or otherwise repaid at the time of or immediately upon consummation of the
transactions by
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which such Person becomes a Restricted Subsidiary or such asset acquisition
shall not constitute Acquired Indebtedness.
"Acquired Person" means, with respect to any specified Person, any other
Person which merges with or into or becomes a Subsidiary of such specified
Person.
"Acquisition" means (i) any capital contribution (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise) by the Company or any Restricted
Subsidiary to any other Person, or any acquisition or purchase of Capital
Stock of any other Person by the Company or any Restricted Subsidiary, in
either case pursuant to which such Person shall become a Subsidiary or shall
be consolidated, merged with or into the Company or any Restricted Subsidiary
or (ii) any acquisition by the Company or any Restricted Subsidiary of the
assets of any Person which constitute substantially all of an operating unit
or line of business of such Person or which is otherwise outside of the
ordinary course of business of the Company or such Restricted Subsidiary.
"Additional Interest" has the meaning provided in Section 5 of the
Registration Rights Agreement.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of: (i) any Capital
Stock of any Restricted Subsidiary; (ii) all or substantially all of the
properties and assets of any division or line of business of the Company or
its Restricted Subsidiaries; or (iii) any other properties or assets of the
Company or any Restricted Subsidiary other than in the ordinary course of
business. For the purposes of this definition, the term "Asset Sale" shall not
include any transfer of properties and assets (A) that is governed by the
provisions described under "Consolidation, Merger, Sale of Assets," (B) that
is by the Company to any Restricted Subsidiary or by any Restricted Subsidiary
to the Company or any other Restricted Subsidiary in accordance with the terms
of the Indenture, (C) that is of obsolete equipment in the ordinary course of
business, (D) the Fair Market Value of which in the aggregate does not exceed
$200,000 in any transaction or series of related transactions, (E) that is
made in accordance with the provisions described under "Certain Covenants--
Limitations on Restricted Payments," (F) which constitutes the granting of any
Permitted Lien and (G) any transfer of assets that are transferred in exchange
for one or more like-kind assets; provided that if the Fair Market Value of
the assets to be transferred by the Company or such Restricted Subsidiary
under this clause G, plus the Fair Market Value of any other consideration
paid or credited by the Company or such Restricted Subsidiary exceeds $1
million, such transaction shall require approval of the Board of Directors of
the Company.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the
sum of the products of (a) the number of years from the date of determination
to the date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment; by
(ii) the sum of all such principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding up, liquidation, reorganization
or relief of debtors or any amendment to, succession to or change in any such
law.
"Capital Lease Obligation" of any Person means any obligation of such Person
and its subsidiaries on a Consolidated basis under any capital lease of real
or personal property which, in accordance with GAAP, has been recorded as a
capital lease obligation.
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"Capital Stock" means (i) with respect to any Person that is a corporation,
and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of common stock and preferred stock of such Person and (ii) with respect to
any Person that is not a corporation, any and all partnership, membership or
other equity interests of such Person.
"Cash Equivalents" means (i) any evidence of Indebtedness, maturing not more
than one year after the date of acquisition, issued by the United States of
America, or an instrumentality or agency thereof, and guaranteed fully as to
principal, premium, if any, and interest by the United States of America, (ii)
any certificate of deposit, maturing not more than one year after the date of
acquisition, issued by, or time deposit of, a commercial banking institution
that is a member of the Federal Reserve System and that has combined capital
and surplus and undivided profits of not less than $500 million, whose short
term debt has a rating, at the time as of which any investment therein is
made, of "P-1" (or higher) according to Moody's Investors Service, Inc.
("Moody's") or any successor rating agency or "A-1" (or higher) according to
Standard & Poor's Corporation ("S&P") or any successor rating agency, (iii)
commercial paper, maturing not more than 270 days after the date of
acquisition, issued by a corporation (other than an Affiliate or Restricted
Subsidiary of the Company) organized and existing under the laws of the United
States of America with a rating, at the time as of which any investment
therein is made, of "P-1" (or higher) according to Moody's or "A-1" (or
higher) according to S&P and (iv) any money market deposit accounts issued or
offered by a domestic commercial bank having capital and surplus in excess of
$500 million; provided that the short term debt of such commercial bank has a
rating, at the time of Investment, of "P-1" (or higher) according to Moody's
or "A-1" (or higher) according to S&P.
"Change of Control" means the occurrence of any of the following events: (i)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act) is or becomes the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed
to have beneficial ownership of all shares that such Person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 50% of the total
outstanding Voting Stock of the Company; (ii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the board of directors of the Company (together with any new directors whose
election to such board or whose nomination for election by the stockholders of
the Company was approved by a vote of a majority of the directors then still
in office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved), cease for any
reason to constitute a majority of such board of directors then in office;
(iii) the Company consolidates with or merges with or into any Person or
conveys, transfers or leases all or substantially all of its assets to any
Person, or any corporation consolidates with or merges into or with the
Company in any such event pursuant to a transaction in which the outstanding
Voting Stock of the Company is changed into or exchanged for cash, securities
or other property, other than any such transaction where the outstanding
Voting Stock of the Company is not changed or exchanged at all (except to the
extent necessary to reflect a change in the jurisdiction of incorporation of
the Company or where no "person" or "group" owns, immediately after such
transaction, directly or indirectly, more than 50% of the total outstanding
Voting Stock of the surviving corporation); or (iv) the Company is liquidated
or dissolved or adopts a plan of liquidation or dissolution other than in a
transaction which complies with the provisions described under "--
Consolidation, Merger, Sale of Assets."
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
date of the Indenture such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act then the body
performing such duties at such time.
"Commodity Price Protection Agreement" means any forward contract, commodity
swap, commodity option or other similar financial agreement or arrangement
relating to, or the value which is dependent upon, fluctuations in commodity
prices.
"Company" means Concentric Network Corporation, a corporation incorporated
under the laws of Delaware, until a successor Person shall have become such
pursuant to the applicable provisions of the Indenture, and thereafter
"Company" shall mean such successor Person.
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"Consolidated" means, consolidated in accordance with GAAP.
"Consolidated Income Tax Expense" of any Person means, for any period, the
provision for federal, state, local and foreign income taxes of such Person
and its Consolidated subsidiaries for such period as determined in accordance
with GAAP.
"Consolidated Interest Expense" of any Person means, without duplication,
for any period, the sum of (a) the interest expense of such Person and its
subsidiaries for such period, on a Consolidated basis, including, without
limitation, (i) amortization of debt discount, (ii) the net costs associated
with Interest Rate Agreements, Currency Hedging Agreements and Commodity Price
Protection Agreements (including amortization of discounts), (iii) the
interest portion of any deferred payment obligation and (iv) accrued interest,
plus (b) (i) the interest component of the Capital Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by such Person and its
subsidiaries during such period and (ii) all capitalized interest of such
Person and its subsidiaries plus (c) the interest expense actually paid by
such Person under any Guaranteed Debt of such Person and any Subsidiary to the
extent not included under clause (a)(iv) above, plus (d) the aggregate amount
for such period of cash or non-cash dividends on any Disqualified Stock or
preferred stock of the Company and its Restricted Subsidiaries, in each case
as determined on a Consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any period, the net income
of the Company and any Restricted Subsidiary for such period determined on a
consolidated basis in accordance with GAAP, adjusted, to the extent included
in calculating such net income, by excluding, without duplication, (a) other
than for purposes of calculating the Basket, all extraordinary gains or losses
for such period, (b) other than for purposes of calculating the Basket, all
gains or losses from the sales or other dispositions of assets out of the
ordinary course of business (net of taxes, fees and expenses relating to the
transaction giving rise thereto) for such period: (c) that portion of such net
income derived from or in respect of investments in Persons other than
Restricted Subsidiaries, except to the extent actually received in cash by the
Company or any Restricted Subsidiary (subject, in the case of any Restricted
Subsidiary, to the provisions of clause (f) of this definition); (d) the
portion of such net income (or loss) allocable to minority interests in any
Person (other than a Restricted Subsidiary) for such period, except to the
extent the Company's allocation portion of such Person's net income for such
period is actually received in cash by the Company or any Restricted
Subsidiary (subject, in the case of any Restricted Subsidiary, to the
provisions of clause (f) of this definition); (e) the net income (or loss) or
any other Person combined with the Company or any Restricted Subsidiary on a
"pooling of interests" basis attributable to any period prior to the date of
combination; and (f) the net income of any Restricted Subsidiary to the extent
that the declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time (regardless of any waiver)
permitted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to that Restricted Subsidiary or its
Capital Stock holders.
"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period increased (without duplication), to
the extent deducted in calculating such Consolidated Net Income, by (a)
Consolidated Income Tax Expense for such period; (b) Consolidated Interest
Expense for such period; and (c) depreciation, amortization and any other non-
cash items for such period (other than any non-cash item which requires the
accrual of, or a reserve for, cash charges for any future period) of the
Company and any Restricted Subsidiary, including, without limitation,
amortization of capitalized debt issuance costs for such period, all of the
foregoing determined on a consolidated basis in accordance with GAAP minus
non-cash items to the extent they increase Consolidated Net Income (including
the partial or entire reversal of reserves taken in prior periods) for such
period.
"Credit Agreement" means, with respect to any Person, any agreement entered
into by and among such Person and one or more commercial banks or financial
institutions, providing for senior term or revolving credit borrowings of a
type similar to credit agreements typically entered into by commercial banks
and financial institutions, including and related notes, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, as such credit agreement and related agreements may be amended,
extended, refinanced, renewed, restated, replaced or refunded from time to
time.
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"Cumulative Operating Cash Flow" means, as at any date of determination, the
positive cumulative Consolidated Operating Cash Flow realized during the
period commencing on the original issue date of the Exchange Debentures and
ending on the last day of the most recent fiscal quarter immediately preceding
the date of determination for which consolidated financial information of the
Company is available or, if such cumulative Consolidated Operating Cash Flow
for such period is negative, the negative amount by which cumulative
Consolidated Operating Cash Flow is less than zero.
"Currency Hedging Arrangements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
foreign exchange contracts, currency swap agreements or other similar
agreements or arrangements designed to protect against the fluctuations in
currency values.
"Debt to Annualized Operating Cash Flow Ratio" means the ratio of (a) the
Total Consolidated Indebtedness as of the date of calculation (the
"Determination Date") to (b) two times the Consolidated Operating Cash Flow
for the latest two fiscal quarters for which financial information is
available immediately preceding such Determination Date (the "Measurement
Period"). For purposes of calculating Consolidated Operating Cash Flow for the
Measurement Period immediately prior to the relevant Determination Date, (i)
any Person that is a Restricted Subsidiary on the Determination Date (or would
become a Restricted Subsidiary on such Determination Date in connection with
the transaction that requires the determination of such Consolidated Operating
Cash Flow) will be deemed to have been a Restricted Subsidiary at all times
during such Measurement Period, (ii) any Person that is not a Restricted
Subsidiary on such Determination Date (or would cease to be a Restricted
Subsidiary on such Determination Date in connection with the transaction that
requires the determination of such Consolidated Operating Cash Flow) will be
deemed not to have been a Restricted Subsidiary at any time during such
Measurement Period, and (iii) if the Company or any Restricted Subsidiary
shall have in any manner (x) acquired (through an Acquisition or the
commencement of activities constituting such operating business) or (y)
disposed of (by of an Asset Sale or the termination or discontinuance of
activities constituting such operating business) any operating business during
such Measurement Period or after the end of such period and on or prior to
such Determination Date, such calculation will be made on a pro forma basis in
accordance with GAAP as if, in the case of an Acquisition or the commencement
of activities constituting such operating business, all such transactions had
been consummated prior to the first day of such Measurement Period (it being
understood that in calculating Consolidated Operating Cash Flow the exclusions
set forth in clauses (a) through (f) of the definition of Consolidated Net
Income shall apply to an Acquired Person as if it were a Restricted
Subsidiary).
"Default" means any event which is, or after notice or passage of any time
or both would be, an Event of Default.
"Designated Senior Debt" means (i) a Credit Agreement, (ii) the Existing
Senior Notes and (iii) any other Senior Debt permitted under the Indenture the
principal amount of which is $20 million or more (when aggregated with all
other Debt incurred with the same issuance or transaction) and that has been
designated by the Company as "Designated Senior Debt."
"Disinterested Director" means, with respect to any transaction or series of
related transactions, a member of the board of directors of the Company who
does not have any material direct or indirect financial interest in or with
respect to such transaction or series of related transactions.
"Disqualified Stock" means, with respect to any person, any Capital Stock
(excluding the Exchange Preferred Stock) which, by its terms (or by the terms
of any security into which it is convertible at the option of the holder
thereof or for which it is exchangeable at the option of the holder thereof),
or upon the happening of any event, matures or becomes mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or becomes exchangeable
for Indebtedness at the option of the holder thereof, or becomes redeemable at
the option of the holder thereof, in whole or in part, on or prior to the
earlier of the Stated Maturity of the Exchange Debentures or the date the
Indenture is discharged pursuant to the terms of the Indenture; provided such
Capital Stock shall only constitute Disqualified Stock to the extent it so
matures or becomes so redeemable or
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exchangeable on or prior to the earlier of the Stated Maturity of the Exchange
Debentures or the date the Indenture is discharged pursuant to the terms of
the Indenture; provided, further, that any Capital Stock that would not
constitute Disqualified Stock but for provisions thereof giving holders
thereof the right to require such person to repurchase or redeem such Capital
Stock upon the occurrence of an "asset sale" or "change of control" occurring
prior to the earlier of the Stated Maturity of the Exchange Debentures or the
date the Indenture is discharged pursuant to the terms of the Indenture shall
not constitute Disqualified Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are no more favorable to the
holders of such Capital Stock than the provisions contained in "Limitation on
Sale of Assets" and "Change of Control" described above and such Capital Stock
specifically provides that such person will not repurchase or redeem any such
stock pursuant to such provision prior to the Issuer's repurchase of such
Exchange Debentures as are required to be repurchased pursuant to the
"Limitation on Sale of Assets" and "Change of Control" provisions described
above.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute.
"Exchange Debentures" means the Initial Exchange Debentures and the New
Exchange Debentures issued from time to time under the Indenture.
"Exchange Preferred Stock" means the Company's 13 1/2% Senior Redeemable
Exchangeable Preferred Stock due 2010.
"Exchange Preferred Stock Issue Date" means the date on which shares of the
Exchange Preferred Stock are first issued.
"Existing Senior Notes" means the Company's 12 3/4% Senior Notes due 2007.
"Existing Senior Notes Indenture" means the Indenture governing the
Company's 12 3/4% Senior Notes due 2007, as may be amended from time to time.
"Existing Senior Notes Maturity Date" means the earlier of (i) the "Stated
Maturity" of the principal of the Existing Senior Notes as such term is used
for the purpose of determining whether "Capital Stock" constitutes
"Indebtedness" (as such terms are defined in the Existing Senior Notes
Indenture) under the Existing Senior Notes Indenture or (ii) December 15,
2007.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be reasonably expected to be obtained in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy. Fair Market
Value shall be determined by the board of directors of the Company acting in
good faith and shall be evidenced by a resolution of the board of directors.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied,
which are in effect on the date of the Indenture.
"Guarantee" means the guarantee by any Guarantor of the Company's Indenture
Obligations.
"Guaranteed Debt" of any Person means, without duplication, all Indebtedness
of any other Person guaranteed directly or indirectly in any manner by such
Person, or in effect guaranteed directly or indirectly by such Person through
an agreement (i) to pay or purchase such Indebtedness or to advance or supply
funds for the payment or purchase of such Indebtedness, (ii) to purchase, sell
or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling the debtor to make payment of such
Indebtedness or to assure the holder of such Indebtedness against loss, (iii)
to supply funds to, or in any other manner invest in, the debtor (including
any agreement to pay for property or services without requiring that such
property be received or such services be rendered), (iv) to maintain working
capital or equity capital of the debtor, or otherwise to maintain the net
worth, solvency or other financial condition of the debtor or (v) otherwise to
assure
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a creditor against loss; provided that the term "guarantee" shall not include
endorsements for collection or deposit, in either case in the ordinary course
of business.
"Guarantor" means any Restricted Subsidiary which is a guarantor of the
Exchange Debentures, including any Person that is required after the date of
the Indenture to execute a guarantee of the Exchange Debentures pursuant to
the "Limitation on Issuance of Guarantees of Indebtedness" covenant until a
successor replaces such party pursuant to the applicable provisions of the
Indenture and, thereafter, shall mean such successor.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to
GAAP or otherwise, of any such Indebtedness or other obligation on the balance
sheet of such Person (and "Incurrence," "Incurred" and "Incurring" shall have
meanings correlative to the foregoing). Indebtedness of a Person existing at
the time such Person becomes a Restricted Subsidiary or is merged or
consolidated with or into the Company or any Restricted Subsidiary shall be
deemed to be Incurred at such time.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables and other
accrued current liabilities arising in the ordinary course of business, (ii)
all obligations of such Person evidenced by bonds, notes, debentures or other
similar instruments, (iii) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (unless the rights and remedies of the seller or
lender under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade payables arising
in the ordinary course of business, (iv) all obligations under Interest Rate
Agreements, Currency Hedging Agreements or Commodity Price Protection
Agreements of such Person, (v) all Capital Lease Obligations of such Person,
(vi) all Indebtedness referred to in clauses (i) through (v) above of other
Persons and all dividends of other Persons, the payment of which is secured by
(or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien, upon or with respect to
property (including, without limitation, accounts and contract rights) owned
by such Person, even though such Person has not assumed or become liable for
the payment of such Indebtedness, (vii) all Disqualified Stock issued by such
Person valued at the greater of its voluntary or involuntary maximum fixed
repurchase price plus accumulated and unpaid dividends, and (viii) any
amendment, supplement, modification, deferral, renewal, extension, refunding
or refinancing of any liability of the types referred to in clauses (i)
through (vii) above. For purposes hereof, the "maximum fixed repurchase price"
of any Disqualified Stock which does not have a fixed repurchase price shall
be calculated in accordance with the terms of such Disqualified Stock as if
such Disqualified Stock were purchased on any date on which Indebtedness shall
be required to be determined pursuant to the Indenture, and if such price is
based upon, or measured by, the Fair Market Value of such Disqualified Stock,
such Fair Market Value to be determined in good faith by the board of
directors of the issuer of such Disqualified Stock. In no event shall
"Indebtedness" include any trade payable or other current liabilities arising
in the ordinary course of business. The amount of any item of Indebtedness
shall be the amount of such Indebtedness properly classified as a liability on
a balance sheet prepared in accordance with GAAP.
"Indenture Obligations" means the obligations of the Company and any other
obligor under the Indenture or under the Exchange Debentures including any
Guarantor, to pay principal of, premium, if any, and interest when due and
payable, and all other amounts due or to become due under or in connection
with the Indenture, the Exchange Debentures and the performance of all other
obligations to the Trustee and the holders under the Indenture and the
Exchange Debentures, according to the respective terms thereof.
"Interest Rate Agreements" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest
rate protection agreements (including, without limitation, interest rate
swaps, caps, floors, collars and similar agreements) and/or other types of
interest rate hedging agreements from time to time.
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"Initial Exchange Debentures" means Exchange Debentures issued in this
Offering.
"Investment" means, with respect to any Person, directly or indirectly, any
advance, loan (including guarantees), or other extension of credit or capital
contribution to (by means of any transfer of cash or other property to others
or any payment for property or services for the account or use of others), or
any purchase, acquisition or ownership by such Person of any Capital Stock,
bonds, notes, debentures or other securities issued or owned by any other
Person and all other items that would be classified as investments on a
balance sheet prepared in accordance with GAAP.
"Lien" means any mortgage or deed of trust, pledge, lien (statutory or
otherwise), security interest, easement, hypothecation, or other encumbrance
upon or with respect to any property of any kind, real or personal, movable or
immovable, now owned or hereafter acquired. A Person shall be deemed to own
subject to a Lien any property which such Person has acquired or holds subject
to the interest of a vendor or lessor under any conditional sale agreement,
capital lease or other title retention agreement, other than any lease
properly classified as an operating lease under GAAP and intellectual property
licensing arrangements.
"Issue Date" means the date on which shares of Preferred Stock are first
issued.
"Maturity" means, when used with respect to the Exchange Debentures, the
date on which the principal of the Exchange Debentures becomes due and payable
as therein provided or as provided in the Indenture, whether at Stated
Maturity, the Offer Date or the redemption date and whether by declaration of
acceleration, Offer in respect of Excess Proceeds, Change of Control Offer in
respect of a Change of Control, call for redemption or otherwise.
"Net Cash Proceeds" means (a) with respect to any Asset Sale by any Person,
the proceeds thereof (without duplication in respect of all Asset Sales) in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of, or stock or other assets
when disposed of for, cash or Cash Equivalents (except to the extent that such
obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary) net of (i) brokerage commissions and other reasonable
fees and expenses (including fees and expenses of counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes payable as
a result of such Asset Sale, (iii) payments made to retire Indebtedness where
payment of such Indebtedness is secured by the assets or properties the
subject of such Asset Sale, (iv) amounts required to be paid to any Person
(other than the Company or any Restricted Subsidiary) owning a beneficial
interest in the assets subject to the Asset Sale and (v) appropriate amounts
to be provided by the Company or any Restricted Subsidiary, as the case may
be, as a reserve, in accordance with GAAP, against any liabilities associated
with such Asset Sale and retained by the Company or any Restricted Subsidiary,
as the case may be, after such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale, all as reflected in an officers' certificate
delivered to the Trustee and (b) with respect to any issuance or sale of
Capital Stock or options, warrants or rights to purchase Capital Stock, or
debt securities or Capital Stock that have been converted into or exchanged
for Capital Stock as referred to under "--Certain Covenants--Limitation on
Restricted Payments," the proceeds of such issuance or sale in the form of
cash or Cash Equivalents including payments in respect of deferred payment
obligations when received in the form of, or stock or other assets when
disposed of for, cash or Cash Equivalents (except to the extent that such
obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary), net of attorney's fees, accountant's fees and
brokerage, consultation, underwriting and other fees and expenses actually
incurred in connection with such issuance or sale (or conversion in the case
of debt securities or Capital Stock that have been converted) and net of taxes
paid or payable as a result thereof.
"New Exchange Debentures" means New Exchange Debentures issued in exchange
for Initial Exchange Debentures pursuant to Registration Rights Agreement.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
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"Pari Passu Indebtedness" means (a) any Indebtedness of the Company that is
pari passu in right of payment to the Exchange Debentures and (b) with respect
to any Guarantee, Indebtedness which ranks pari passu in right of payment to
such Guarantee.
"Permitted Investment" means (i) Investments in any Wholly Owned Subsidiary
or any Person which, as a result of such Investment, (a) becomes a Wholly
Owned Subsidiary or (b) is merged or consolidated with or into, or transfers
or conveys all or substantially all of its assets to, or is liquidated into,
the Company or any Wholly Owned Subsidiary; (ii) Indebtedness of the Company
or a Restricted Subsidiary described under clauses (iv) and (vii) of paragraph
(b) under "--Certain Covenants--Limitation on Indebtedness;" (iii) Investments
in any of the Exchange Debentures; (iv) Investments in Cash Equivalents; (v)
Investments acquired by the Company or any Restricted Subsidiary in connection
with an Asset Sale permitted under "--Certain Covenants--Limitation on Sale of
Assets" to the extent such Investments are non-cash proceeds as permitted
under such covenant; (vi) Investments in existence on the date of the
Indenture; (vii) guarantees of Indebtedness of a Wholly Owned Subsidiary given
by the Company or another Wholly Owned Subsidiary and guarantees of
Indebtedness of the Company given by any Restricted Subsidiary, in each case,
in accordance with the terms of the Indenture; (viii) advances to employees or
officers of the Company in the ordinary course of business so long as the
aggregate amount of such advances shall not exceed $1 million outstanding at
any one time; (ix) any Investment in the Company by any Restricted Subsidiary
of the Company; provided, that any such Investment in the form of Indebtedness
shall be Subordinated Indebtedness; (x) accounts receivable created or
acquired in the ordinary course of business of the Company or any Restricted
Subsidiary and Investments arising from transactions by the Company or any
Restricted Subsidiary with trade creditors or customers in the ordinary course
of business (including any such Investment received pursuant to any plan of
reorganization or similar arrangement pursuant to the bankruptcy or insolvency
of such trade creditors or customers or otherwise in settlement of a claim);
(xi) loans in the ordinary course of business to employees of the Company or a
Restricted Subsidiary to purchase Capital Stock of the Company pursuant to the
terms of employee stock benefit plans; (xii) Investments the consideration of
which is Capital Stock of the Company; (xiii) stock obligations or securities
received in satisfaction of judgments; (xiv) Investments in prepaid expenses,
negotiable instruments held for collection, and lease, utility and workers'
compensation, performance and other similar deposits; and (xv) any other
Investments in an aggregate amount not to exceed $20 million at any one time
outstanding. In connection with any assets or property contributed or
transferred to any Person as an Investment, such property and assets shall be
equal to the Fair Market Value (as determined by the Company's Board of
Directors) at the time of such Investment.
"Permitted Lien" means:
(a) any Lien existing as of the date of the Indenture;
(b) any Lien arising by reason of (1) any judgment, decree or order of
any court, so long as such Lien is adequately bonded and any appropriate
legal proceedings which may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have
expired; (2) taxes not yet delinquent or which are being contested in good
faith; (3) security for payment of workers' compensation or other insurance
or arising under worker's compensation laws or similar legislation; (4)
good faith deposits in connection with bids, tenders, leases, contracts
(other than contracts evidencing Indebtedness); (5) zoning restrictions,
easements, licenses, reservations, title defects, rights of others for
rights of way, utilities, sewers, electric lines, telephone or telegraph
lines, and other similar purposes, provisions, covenants, conditions,
waivers, restrictions on the use of property or minor irregularities of
title (and with respect to leasehold interests, mortgages, obligations,
liens and other encumbrances incurred, created, assumed or permitted to
exist and arising by, through or under a landlord or owner of the leased
property, with or without consent of the lessee), none of which materially
impairs the use of any parcel of property material to the operation of the
business of the Company or any Restricted Subsidiary or the value of such
property for the purpose of such business; (6) deposits to secure public or
statutory obligations, or in lieu of surety or appeal bonds; or (7)
operation of law in favor of landlords, carriers, warehousemen, bankers,
mechanics, materialmen, laborers, employees or suppliers, incurred in the
ordinary course of business for sums which are not yet delinquent
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or are being contested in good faith by negotiations or by appropriate
proceedings which suspend the collection thereof;
(c) any Lien to secure the performance bids, trade contracts, leases
(including, without limitation, statutory and common law landlord's liens),
statutory obligations, surety and appeal bonds, letters of credit and other
obligations of a like nature and incurred in the ordinary course of
business of the Company or any Restricted Subsidiary;
(d) any Lien securing Indebtedness permitted under that section of the
Indenture described in clause (i) of paragraph (b) of "--Limitation on
Indebtedness" on the cash proceeds of such Indebtedness or on the property,
plant or equipment that is purchased, constructed or improved with the
direct or indirect proceeds of such Indebtedness (including any
attachments, accessions, additions to, or replacements or proceeds of such
property, plant or equipment); provided that the aggregate principal amount
of such Indebtedness does not exceed the sum of (i) the cost of purchasing,
constructing or improving such property, plant or equipment and (ii) the
remaining proceeds of such Indebtedness;
(e) any Lien arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default;
(f) any Lien securing obligations in connection with Indebtedness
permitted under that section of the Indenture described in clauses (ii) or
(iii) of paragraph (b) of "--Limitation on Indebtedness;"
(g) any Lien in favor of the Company or any Restricted Subsidiary;
(h) any Lien securing obligations in connection with Acquired
Indebtedness; provided that any such Lien does not extend to or cover any
property or assets of the Company or any of its Restricted Subsidiaries
other than the property or assets of the Acquired Person covered thereby or
the property assets so acquired;
(i) any Lien in favor of the Trustee for the benefit of the Holders or
the Trustee arising under the provisions in the Indenture;
(j) any Lien encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of the Company
or any Restricted Subsidiary if and to the extent arising in the ordinary
course of business, including rights of offset and set-off;
(k) any Lien in favor of customs or revenue authorities to secure payment
of customs duties in connection with the importation of goods in the
ordinary course of business;
(l) leases or subleases granted to third Persons not interfering with the
ordinary course of business of the Company or its Restricted Subsidiaries;
and
(m) any Lien securing any extension, renewal, refinancing or replacement,
in whole or in part, of any obligation or Indebtedness described in the
foregoing clauses (a) through (d) and (f) through (h) so long as no
additional collateral is granted as security thereby.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"preferred stock" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over the
Capital Stock of any other class in such Person.
"Public Equity Offering" means an underwritten offering of common stock of
the Company with gross proceeds to the Company of at least $25 million
pursuant to a registration statement that has been declared effective by the
Commission pursuant to the Securities Act (other than a registration statement
on Form S-8 or otherwise relating to equity securities issuable under any
employee benefit plan of the Company).
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"Purchase Money Obligation" means any Indebtedness secured by a Lien on
assets related to the business of the Company and any additions and accessions
thereto, which are purchased at any time after the Issue Date; provided that
(i) the security agreement or conditional sales or other title retention
contract pursuant to which the Lien on such assets is created (collectively, a
"Purchase Money Security Agreement") shall be entered into within 180 days
after the purchase or substantial completion of the construction of such
assets and shall at all times be confined solely to the assets so purchased or
acquired, any additions and accessions thereto and any proceeds therefrom,
(ii) at no time shall the aggregate principal amount of the outstanding
Indebtedness secured thereby be increased, except in connection with the
purchase of additions and accessions thereto and except in respect of fees and
other obligations in respect of such Indebtedness and (iii) (A) the aggregate
outstanding principal amount of Indebtedness secured thereby (determined on a
per asset basis in the case of any additions and accessions) shall not at the
time such Purchase Money Security Agreement is entered into exceed 100% of the
purchase price to the Company of the assets subject thereto or (B) the
Indebtedness secured thereby shall be with recourse solely to the assets so
purchased or acquired, any additions and accessions thereto and any proceeds
therefrom.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Disqualified Stock.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute.
"Senior Debt" means any Indebtedness permitted to be incurred by the Company
under the terms of the Indenture, unless the instrument under which such
Indebtedness is incurred expressly provides that it is subordinated in right
of payment to the Exchange Debentures. Notwithstanding anything to the
contrary in the foregoing, Senior Debt will not include (i) any liability for
federal, state, local or other taxes owed or owing by the Company, (ii) any
Indebtedness of the company to any of its Restricted Subsidiaries or other
Affiliates, (iii) any trade payables or (iv) any Indebtedness that is incurred
in violation of the Indenture.
"Stated Maturity" means, when used with respect to any Indebtedness or any
installment of interest thereon, the dates specified in such Indebtedness as
the fixed date on which the principal of such Indebtedness or such installment
of interest, as the case may be, is due and payable.
"Strategic Investor" means any Person which is (or a controlled Affiliate of
any Person which is or a controlled Affiliate of which is) engaged principally
in the Telecommunications Business and which has a Total Market Capitalization
of at least $1.0 billion.
"Subordinated Indebtedness" means Indebtedness of the Company or a Guarantor
subordinated in right of payment to the Exchange Debentures or the Guarantee
of such Guarantor, as the case may be.
"Subsidiary" means, with respect to any Person, an corporation, association
or other business entity (i) of which outstanding Capital Stock having at
least the majority of the votes entitled to be cast in the election of
directors is owned, directly or indirectly, by such Person and/or any one or
more subsidiaries of such Person, or (ii) of which at least a majority of
voting interest is owned, directly or indirectly, by such Person and/or one or
more subsidiaries of such Person.
"Telecommunications Business" means, when used in reference to any Person,
that such Person is engaged primarily in (i) the business of transmitting, or
providing services relating to the transmission of, voice, video or data
through owned or leased transmission facilities, (ii) the business of
creating, developing or marketing communications related network equipment,
software and other devices for use in a Telecommunications Business or (iii)
businesses reasonably related or incidental thereto.
"Total Consolidated Indebtedness" means, as at any date of determination, an
amount equal to the aggregate amount of all Indebtedness of the Company and
any Restricted Subsidiary, on a Consolidated basis,
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outstanding as of such date of determination, after giving effect to any
Incurrence of Indebtedness and the application of the proceeds therefrom
giving rise to such determination.
"Total Market Capitalization" of any Person means, as of any day of
determination, the sum of (a) the consolidated Indebtedness of such Person and
any Subsidiaries on such day, plus (b) the product of (i) the aggregate number
of outstanding shares of common stock of such Person on such day (which shall
not include any options or warrants on, or securities convertible or
exchangeable into, shares of Common Stock of such Person) and (ii) the average
closing price of such common stock over the 10 consecutive Trading Days ending
not earlier than 10 Trading Days immediately prior to such date of
determination, plus (c) the liquidation value of any outstanding shares of
preferred stock of such Person on such day. If no such closing price exists
with respect to shares of any such class, the value of such shares for
purposes of clause (b) of the preceding sentence shall be determined by the
Board in good faith and evidenced by a resolution of the Board filed with the
Trustee. Notwithstanding the foregoing, unless the Person's Common Stock is
listed on any national securities exchange or on the Nasdaq National Market,
the "Total Market Capitalization" of the Person shall mean, as of any day of
determination, the enterprise value (without duplication) of the Person and
any subsidiaries (including the fair market value of their debt and equity),
as determined by an independent banking firm of national standing with
experience in such valuations and evidenced by a written opinion in customary
form filed with the Trustee; provided that for purposes of any such
determination, the enterprise value of the Person shall be calculated as if
the Person were a publicly held corporation without a controlling stockholder.
For purposes of any such determination, such banking firm's written opinion
may state that such fair market value is no less than a specified amount and
such opinion may be as of a date no earlier than 90 days prior to the date of
such determination.
"Trading Day" with respect to a securities exchange or automated quotation
system means a day on which such exchange or system is open for a full day of
trading.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended, or
any successor statute.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be an Unrestricted Subsidiary (as designated
by the Board of Directors of the Company, as provided below) and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the
Company may designate any Subsidiary of the Company (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary if all
of the following conditions apply: (a) neither the Company nor any of its
Restricted Subsidiaries provides credit support for Indebtedness of such
Subsidiary (including any undertaking, agreement or instrument evidencing such
Indebtedness), (b) such Subsidiary is not liable, directly or indirectly, with
respect to any Indebtedness other than Unrestricted Subsidiary Indebtedness,
(c) any Investment in such Subsidiary made as a result of designating such
Subsidiary an Unrestricted Subsidiary shall not violate the provisions of the
"--Certain Covenants--Limitation on Unrestricted Subsidiaries" covenant and
such Unrestricted Subsidiary is not party to any agreement, contract,
arrangement or understanding at such time with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; and (v) such Unrestricted
Subsidiary does not own any Capital Stock in any Restricted Subsidiary of the
Company which is not simultaneously being designated an Unrestricted
Subsidiary. Any such designation by the Board of Directors of the Company
shall be evidenced to the Trustee by filing with the Trustee a board
resolution giving effect to such designation and an officers' certificate
certifying that such designation complies with the foregoing conditions and
shall be deemed a Restricted Payment on the date of designation in an amount
equal to the greater of (1) the net book value of such Investment or (2) the
fair market value of such Investment as determined in good faith by the
Company's Board of Directors. The Board of Directors of the Company may
designate any Unrestricted Subsidiary as a Restricted Subsidiary; provided
that (i) immediately after giving effect to such designation, the Company
could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to the restrictions under "--Certain Covenants--
Limitation on Indebtedness" and (ii) all Indebtedness of such Subsidiary shall
be deemed to be incurred on the date such Subsidiary becomes a Restricted
Subsidiary.
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"Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary means
Indebtedness of such Unrestricted Subsidiary (i) as to which neither the
Company nor any Restricted Subsidiary is directly or indirectly liable (by
virtue of the Company or any such Restricted Subsidiary being the primary
obligor on, guarantor of, or otherwise liable in any respect to, such
Indebtedness), except Guaranteed Debt of the Company or any Restricted
Subsidiary to any Affiliate, in which case (unless the incurrence of such
Guaranteed Debt resulted in a Restricted Payment at the time of incurrence)
the Company shall be deemed to have made a Restricted Payment equal to the
principal amount of any such Indebtedness to the extent guaranteed at the time
such Affiliate is designated an Unrestricted Subsidiary and (ii) which, upon
the occurrence of a default with respect thereto, does not result in, or
permit any holder of any Indebtedness of the Company or any Restricted
Subsidiary to declare, a default on such Indebtedness of the Company or any
Restricted Subsidiary or cause the payment thereof to be accelerated or
payable prior to its Stated Maturity.
"U.S. Government Securities" means securities that are direct obligations of
the United States of America, the payment of which its full faith and credit
is pledged.
"Voting Stock" means Capital Stock of the class or classes pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees
of a corporation (irrespective of whether or not at the time Capital Stock of
any other class or classes shall have or might have voting power by reason of
the happening of any contingency).
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which is owned by the Company or another Wholly Owned Subsidiary. For
the purposes of this definition, any director qualifying shares or investments
by foreign nationals mandated by applicable law shall be disregarded in
determining the ownership of a Restricted Subsidiary.
REGISTRATION RIGHTS
The Company and the Initial Purchasers entered into the Registration Rights
Agreement on the Closing Date. Pursuant to the Registration Rights Agreement,
the Company agreed to file with the Commission the Exchange Offer Registration
Statement on the appropriate form under the Securities Act with respect to the
Series B Preferred, or if the Series A Preferred had been exchanged for
Exchange Debentures, the New Exchange Debentures. Upon the effectiveness of
the Exchange Offer Registration Statement, the Company will offer to the
holders of Transfer Restricted Securities (as defined) pursuant to the
Exchange Offer who are able to make certain representations the opportunity to
exchange their Transfer Restricted Securities for Series B Preferred Stock or
New Exchange Debentures, as the case may be. If (i) the Company is not
required to file the Exchange Offer Registration Statement or permitted to
consummate the Exchange Offer because the Exchange Offer is not permitted by
applicable law or Commission policy or (ii) any holder of Transfer Restricted
Securities notifies the Company prior to the 20th day following consummation
of the Exchange Offer that (A) it is prohibited by law or Commission policy
from participating in the Exchange Offer or (B) that it may not resell the New
Preferred Stock or New Exchange Debentures acquired by it in the Exchange
Offer to the public without delivering a prospectus and the prospectus
contained in the Exchange Offer Registration Statement is not appropriate or
available for such resales or (C) that it is a broker-dealer and owns
Preferred Stock or Exchange Debentures acquired directly from the Company or
an affiliate of the Company, the Company will file with the Commission a shelf
registration statement (the "Shelf Registration Statement") to cover resales
of the Preferred Stock or Exchange Debentures by the holders thereof who
satisfy certain conditions relating to the provision of information in
connection with the Shelf Registration Statement. The Company will use its
best efforts to cause the applicable registration statement to be declared
effective as promptly as possible by the Commission. For purposes of the
foregoing, "Transfer Restricted Securities" means each share of Series A
Preferred or Exchange Debenture until (i) the date on which such Series A
Preferred or Exchange Debenture has been exchanged by a person other than a
broker-dealer for Series B Preferred or Exchange Debentures in the Exchange
Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of
Series A Preferred or Exchange Debentures for Series B Preferred or New
Exchange Debentures, the date on which such Series B Preferred or New Exchange
Debentures are sold to a purchaser who receives from such broker-dealer on or
prior to the date of
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such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement, (iii) the date on which such Series A Preferred or
Exchange Debenture has been effectively registered under the Securities Act
and disposed of in accordance with the Shelf Registration Statement or (iv)
the date on which Series A Preferred or Exchange Debenture is distributed to
the public pursuant to Rule 144 under the Securities Act.
The Registration Rights Agreement provides that (i) the Company will file an
Exchange Offer Registration Statement with the Commission on or prior to 30
days after the Closing Date, (ii) the Company will use its best efforts to
have the Exchange Offer Registration Statement declared effective by the
Commission on or prior to 120 days after the Closing Date, (iii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will commence the Exchange Offer and use its best efforts to issue
on or prior to 30 days after the date on which the Exchange Offer Registration
Statement was declared effective by the Commission, shares of Series B
Preferred or New Exchange Debentures, as the case may be, in exchange for all
Series A Preferred or Exchange Debentures tendered prior thereto in the
Exchange Offer and (iv) if obligated to file the Shelf Registration Statement,
the Company will use its best efforts to file the Shelf Registration Statement
with the Commission on or prior to 30 days after such filing obligation arises
(and in any event within 150 days after the Closing Date) and to cause the
Shelf Registration Statement to be declared effective by the Commission on or
prior to 90 days after such obligation arises (and in any event within 240
days after the Closing Date). If (a) the Company fails to file any of the
Registration Statements required by the Registration Rights Agreement on or
before the date specified for such filing, (b) any of such Registration
Statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness (the "Target Effectiveness Date"), or (c) the
Company fails to consummate the Exchange Offer within 30 days of the Target
Effectiveness Date with respect to the Exchange Offer Registration Statement,
or (d) the Shelf Registration Statement or the Exchange Offer Registration
Statement is declared effective but thereafter ceases to be effective or
usable in connection with resales of Transfer Restricted Securities during the
periods specified in the Registration Rights Agreement (each such event
referred to in clauses (a) through (d) above a "Registration Default"), the
dividend rate of the Preferred Stock or the interest rate borne by the
Exchange Debentures, as the case may be, shall be increased by one-half of one
percent per annum for the 90-day period following such Registration Default,
which rate will further increase by one-half of one percent per annum with
respect to each subsequent 90-day period up to a maximum aggregate increase in
rate of one and one-half percent (1.50%) per annum until cured ("Liquidated
Damages"). Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease and the dividend rate or the interest rate, as
the case may be, will revert to the original rate.
Holders of Series A Preferred or Exchange Debentures will be required to
make certain representations to the Company (as described in the Registration
Rights Agreement) in order to participate in the Exchange Offer and will be
required to deliver information to be used in connection with the Shelf
Registration Statement and to provide comments on the Shelf Registration
Statement within the time periods set forth in the Registration Rights
Agreement in order to have their Series A Preferred or Exchange Debentures
included in the Shelf Registration Statement and benefit from the provisions
regarding Liquidated Damages set forth above.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR NOTES
As of March 31, 1998, the Company had outstanding an aggregate principal
amount of $150,000,000 of 12 3/4% Senior Notes due 2007 (the "Existing Senior
Notes"). The Existing Senior Notes mature on December 15, 2007 and interest on
the Existing Senior Notes is payable semi-annually in arrears on June 15 and
December 15 of each year. The Existing Senior Notes may be redeemed at the
Company's option at any time after December 15, 2000 upon payment of the
redemption price plus accrued and unpaid interest, if any, to the date of
redemption. The Existing Senior Notes are secured, in an amount sufficient to
provide payment in full of the scheduled interest payments on such notes
through December 15, 2001, by a pledge of United States government securities.
In the event of a change of control of the Company, holders of the Existing
Senior Notes have the right to require the Company to purchase their Existing
Senior Notes, in whole or in part, at a price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, to the
date of purchase.
The covenants set forth in the Existing Senior Notes Indenture are similar,
but more restrictive in some instances, to those in the Indenture, including
with respect to the covenant described below under the caption "Description of
the Exchange Debentures--Certain Covenants--Limitations on Indebtedness." The
Existing Senior Notes Indenture contains certain covenants, that, among other
things, limit the ability of the Company and its subsidiaries to make certain
restricted payments, incur additional indebtedness and issue preferred stock,
pay dividends or make other distributions, repurchase equity interest or
subordinated indebtedness, engage in sale and leaseback transactions, create
certain liens, enter into certain transactions with affiliates, sell assets of
the Company or its subsidiaries, conduct certain lines of business, issue or
sell equity interests of the Company's subsidiaries or enter into certain
mergers and consolidations. In addition, under certain circumstances, the
Company is required to offer to purchase Existing Senior Notes at a price
equal to 100% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of purchase, with the proceeds of certain asset
sales.
CAPITAL LEASE OBLIGATIONS
As of March 31, 1998, the Company had outstanding approximately $15.8
million aggregate principal amount of capital lease obligations arising
primarily from five master lease agreements for leases of network equipment
used in the Company's data centers. The effective interest rates under these
agreements range from 7.0% to 15.4% and expire from December 1998 to March
2003.
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DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not purport to
be complete and is subject to and qualified in its entirety by the Company's
Amended and Restated Certificate of Incorporation and Bylaws and by the
provisions of applicable Delaware law. At March 31, 1998, there were
14,176,633 shares of Common Stock.
The Amended and Restated Certificate of Incorporation and Bylaws contain
certain provisions that are intended to enhance the likelihood of continuity
and stability in the composition of the Board of Directors and which may have
the effect of delaying, deferring, or preventing a future takeover or change
in control of the Company unless such takeover or change in control is
approved by the Board of Directors.
COMMON STOCK
The Company has authorized a total of 100,000,000 shares of Common Stock.
Holders of Common Stock do not have cumulative voting rights, and, therefore,
holders of a majority of the shares voting for the election of directors can
elect all of the directors. In such event, the holders of the remaining shares
will not be able to elect any directors.
Holders of the Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any existing or future agreements
between the Company and its debtholders. See "Dividend Policy." The Company
has never declared or paid cash dividends on its capital stock, expects to
retain future earnings, if any, for use in the operation and expansion of its
business, and does not anticipate paying any cash dividends in the foreseeable
future. In the event of the liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets legally available for distribution after payment of all debts and other
liabilities and subject to the prior rights of any holders of Preferred Stock
then outstanding. The Common Stock has no preemptive, redemption or
subscription rights.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of such series, without any
further vote or action by the Stockholders. The issuance of preferred stock
could adversely affect the voting power of holders of Common Stock and the
likelihood that such holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no present plan to issue any
shares of preferred stock other than the Preferred Stock. See "Description of
the Preferred Stock."
WARRANTS
As of March 31, 1998, the following warrants were outstanding:
(i) Warrants to purchase 44,935 shares of Common Stock at an exercise
price of $15.00 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on September 1, 1998.
(ii) Warrants to purchase 5,000 shares of Common Stock exercisable
through February 15, 2000, at a nominal exercise price.
(iii) Warrants to purchase 25,536 shares of Common Stock at an exercise
price of $7.40 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on July 20, 1998.
(iv) Warrants to purchase 117,046 shares of Common Stock at an exercise
price of $10.82 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on December 11, 1998.
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(v) Warrants to purchase 130,273 shares of Common Stock at an exercise
price of $26.87 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on December 31, 2000.
(vi) Warrants to purchase 38,482 shares of Common Stock at an exercise
price of $19.49 per share (subject to adjustment for stock splits, stock
dividends and the like), which expires on June 6, 1999. Warrants to
purchase 35,915 shares of Common Stock at an exercise price of $19.49 per
share (subject to adjustment for stock splits, stock dividends and the
like), which expire on July 31, 1999. Warrant to purchase 156,072 shares of
Common Stock at an exercise price of $19.49 per share (subject to
adjustment for stock splits, stock dividends and the like), which expires
on August 21, 1999. Warrants to purchase 462,324 shares of Common Stock at
an exercise price of $19.49 per share (subject to adjustment for stock
splits, stock dividends and the like), which expire on October 31, 1999.
Warrant to purchase 184,930 shares of Common Stock at an exercise price of
$19.49 per share (subject to adjustment for stock splits, stock dividends
and the like), which expires on March 5, 2000.
(vii) Warrants to purchase 63,351 shares of Common Stock at an exercise
price per share equal to $6.00, which expire on June 19, 2002.
(viii) Warrants to purchase 83,333 shares of Common Stock at an exercise
price per share equal to $6.00, which expire on June 27, 2002.
(ix) Warrants to purchase 291,667 shares of Common Stock at an exercise
price per share equal to $6.00, which expire on August 6, 2002.
(x) Warrants to purchase 951,108 shares of Common Stock at an exercise
price per share equal to $10.8625, which expire on December 15, 2007.
REGISTRATION RIGHTS
Common Stockholders. Pursuant to the agreement between the Company and
holders of approximately 7,296,253 shares of Common Stock (the "Holders"), the
Holders are entitled to certain rights with respect to the registration of
such shares under the Securities Act. If the Company proposes to register any
of its securities under the Securities Act, either for its own account or for
the account of other security Holders exercising registration rights
(including any Resale Registrations (as defined) filed on behalf of the
holders of the Warrants), such Holders are entitled to notice of such
registration and are entitled to include shares of such Common Stock therein.
Additionally, Holders of the Registrable Securities are also entitled to
certain demand registration rights pursuant to which they may require the
Company to file a registration statement under the Securities Act at the
Company's expense with respect to their shares of Common Stock, and the
Company is required to use its best efforts to effect such registration. All
of these registration rights are subject to certain conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in such registration. Additionally, a majority
of the Holders have agreed not to request registration of their registrable
securities until the expiration of certain lock-up restrictions on the Holders
in August 1998. Additionally, pursuant to an agreement with CTI, certain
employees of CTI who have been granted options to purchase an aggregate of up
to 60,000 shares of the Company's Common Stock are entitled to certain
piggyback registration rights with respect to such shares. Such rights are
subject to the right of the underwriters of an offering to limit the number of
shares included in such registration.
Warrant Holders. The holders of the Warrants and the shares of Common Stock
underlying the Warrants (the "Warrant Shares") may require the Company, after
the first anniversary of the date of issuance of the Warrants, on three
occasions, to prepare and file a registration statement under the Securities
Act that provides for the public resale by the holders of Warrants and/or
Warrant Shares of all or any portion of their Warrant Shares in an
underwritten public offering or otherwise (a "Resale Registration"). All
shares of Common Stock included in such Resale Registration shall, under
certain circumstances, be subject to pro rata cut-back provisions.
Additionally, if, after the first anniversary of the date of issuance of the
Warrants, the Company proposes to register any of its Common Stock under the
Securities Act for its own account, the holders of the Warrants and the
Warrant Shares will be entitled to notice of the registration and will be
entitled to include all
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or any portion of their Warrant Shares therein, subject to pro rata cut-back
provisions. The Company is entitled to delay the filing of a shelf
registration statement under certain circumstances for up to 90 days.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Limitation of Director and Officer Liability
The Company's Certificate of Incorporation and Bylaws contain certain
provisions relating to the limitation of liability and indemnification of
directors and officers. The Company's Certificate of Incorporation provides
that directors of the Company may not be held personally liable to the Company
or its stockholders for monetary damages for a breach of fiduciary duty,
except for liability (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of the law,
(iii) under Section 174 of the Delaware General Corporation Law, relating to
prohibited dividends, distributions and repurchases or redemptions of stock,
or (iv) for any transaction from which the director derives an improper
personal benefit. However, such limitation does not limit the availability of
non-monetary relief in any action or proceeding against a director. In
addition, the Company's Certificate of Incorporation and Bylaws provide that
the Company shall indemnify its directors and officers to the fullest extent
authorized by Delaware law.
Classified Board of Directors
The Company's Certificate of Incorporation provides that, so long as the
Board of Directors consists of more than two directors, the Board of Directors
will be divided into three classes of directors serving staggered three-year
terms. As a result, one-third of the Company's Board of Directors will be
elected each year.
No Stockholder Action by Written Consent
The Company's Certificate of Incorporation provides that the stockholders
can take action only at a duly called annual or special meeting of
Stockholders. Stockholders of the Company are not able to take action by
written consent in lieu of a meeting. These provisions may have the effect of
deterring hostile takeovers or delaying changes in control or management of
the Company.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services LLC has been appointed as the transfer
agent and registrar for the Company's Common Stock. Its telephone number for
such purposes is (800) 851-9677.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the material U.S. Federal income
tax considerations applicable to initial holders of the Preferred Stock. This
summary is based upon current provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), regulations of the Treasury Department,
administrative rulings and pronouncements of the Internal Revenue Service (the
"IRS") and judicial decisions currently in effect, all of which are subject to
change or differing interpretations, possibly with retroactive effect. The
discussion does not address all aspects of U.S. Federal income taxation that
may be relevant to particular investors in light of their personal
circumstances (for example, persons subject to the alternative minimum tax),
nor does it address U.S. Federal income tax considerations applicable to
certain types of investors subject to special treatment under the U.S. Federal
income tax laws (for example, insurance companies, tax-exempt organizations,
financial institutions or broker-dealers and persons holding Preferred Stock
or Exchange Debentures as part of a hedge, conversion, straddle, constructive
sale or other risk reduction transaction). The tax consequences of acquiring,
holding and disposing of the Preferred Stock is uncertain. The IRS is not
precluded from successfully adopting a position different from that described
herein. In addition, the discussion does not consider the effect of any
foreign, state, local, gift, estate (except with respect to non-U.S. Holders)
or other tax laws that may be applicable to a particular investor. Except as
provided below under "Non-U.S. Holders," the discussion assumes that investors
are U.S. Holders (as defined below) that will hold the Preferred Stock or
Exchange Debentures as capital assets within the meaning of Section 1221 of
the Code. The discussion also assumes the Preferred Stock constitutes "equity"
for U.S. Federal income tax purposes and the Exchange Debentures constitute
"indebtedness" for U.S. Federal income tax purposes. EACH POTENTIAL INVESTOR
SHOULD CONSULT ITS TAX ADVISOR REGARDING THE PARTICULAR TAX CONSEQUENCES OF
PURCHASING, HOLDING AND DISPOSING OF PREFERRED STOCK AND EXCHANGE DEBENTURES,
INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
EXCHANGE OFFER
The exchange of Series A Preferred for Series B Preferred pursuant to the
Exchange Offer should not constitute a taxable exchange for U.S. Federal
income tax purposes. If the Company pays Liquidated Damages such amounts would
likely be treated in the same manner as distributions described below under
"Distributions with Respect to Preferred Stock in General." Nevertheless, the
IRS may assert, among other things, that such payments are not eligible for
the dividends-received deduction.
U.S. HOLDERS
The following discussion is limited to the U.S. Federal income tax
consequences relevant to a holder of Preferred Stock or Exchange Debentures
that is (i) a citizen or resident (as defined in Section 7701(b)(1) of the
Code) of the United States, (ii) a corporation or other entity taxable as a
corporation created or organized under the laws of the United States or any
State thereof (including the District of Columbia), (iii) an estate or trust
described in Section 7701(a)(30) of the Code, or (iv) a person whose worldwide
income or gain is otherwise subject to U.S. Federal income taxation on a net
income basis (a "U.S. Holder").
Distributions With Respect to Preferred Stock In General
Distributions with respect to the Preferred Stock will be treated as
dividends (taxable as ordinary income) to the extent of the current and
accumulated earnings and profits of the Company. To the extent that the amount
of a distribution with respect to the Preferred Stock exceeds the current and
accumulated earnings and profits of the Company, it will be treated first as a
tax-free return of capital to the extent of the U.S. Holder's basis in the
Preferred Stock, and thereafter as capital gain from the sale or exchange of
the Preferred Stock. The Company does not currently have any current or
accumulated earnings and profits.
A U.S. Holder that is a corporation otherwise entitled to the dividends-
received deduction as provided in Section 243 of the Code will be entitled to
that deduction (generally at a 70% rate) with respect to amounts treated as
dividends on the Preferred Stock, but will not be entitled to that deduction
with respect to amounts treated as a return of capital or capital gain. In
addition, the benefit of a dividends-received deduction may be reduced by the
corporate alternative minimum tax.
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In determining entitlement to the dividends-received deduction, corporate
U.S. Holders should also consider the provisions of Sections 246(c), 246A and
1059 of the Code. Section 246(c) of the Code disallows the dividends-received
deduction in its entirety if (i) the U.S. Holder does not hold the share of
stock for a 46-day minimum holding period during the 90-day period beginning
on the date which is 45 days before the date on which such share becomes ex-
dividend with respect to such dividend, or, in certain circumstances, for a
91-day minimum holding period during the 180-day period beginning on the date
which is 90 days before the date on which such shares become ex-dividend with
respect to such dividend or (ii) the U.S. Holder is under an obligation to
make related payments with respect to positions in substantially similar or
related property. Code Section 246(c)(4) provides that a U.S. Holder may not
count toward the minimum holding period any period in which the U.S. Holder
(i) has, among other things, an option to sell, (ii) is under a contractual
obligation to sell, or (iii) has made (and not closed) a short sale of
substantially identical stock or securities. Section 246A of the Code contains
the "debt-financed portfolio stock" rules, under which the dividends-received
deduction could be reduced to the extent that a U.S. Holder incurs
indebtedness directly attributable to its investment in the Preferred Stock.
Under certain circumstances, where a corporate holder has not held Preferred
Stock for more than two years, Section 1059 of the Code (i) reduces the tax
basis of stock by a portion of any "extraordinary dividends" that are eligible
for the dividends-received deduction and (ii), to the extent that the basis
reduction would otherwise reduce the tax basis of the stock below zero,
requires immediate recognition of gain, which is treated as gain from the sale
or exchange of the stock. In the case of the Preferred Stock, an
"extraordinary dividend" is a dividend that (i) equals or exceeds five percent
of the U.S. Holder's adjusted tax basis in the stock (taking into account any
prior reduction in basis under Section 1059 as a result of any prior
dividend), treating all dividends having ex-dividend dates within an 85-day
period as one dividend or (ii) exceeds 20 percent of the U.S. Holder's
adjusted tax basis in the stock, treating all dividends having ex-dividend
dates within a 365-day period as one dividend. An extraordinary dividend would
also include any amount treated as a dividend with respect to a redemption
that is not pro rata to all stockholders (or meets certain other
requirements), without regard to either the relative amount of the dividend or
the U.S. Holder's holding period for the Preferred Stock. CORPORATE PREFERRED
STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE
POSSIBLE APPLICATION OF SECTION 1059 TO THEIR OWNERSHIP AND DISPOSITION OF THE
PREFERRED STOCK.
Preferred Stock Distributions on the Preferred Stock
If the Company pays a distribution on the Preferred Stock in the form of
additional shares of Preferred Stock, such distribution will be taxable for
U.S. Federal income tax purposes in the same manner as distributions described
above under "Distributions With Respect to Preferred Stock in General." The
amount of such distribution should equal the fair market value on the
distribution date of the additional shares distributed to a U.S. Holder on
that date. A U.S. Holder's tax basis in an additional share of Preferred Stock
should equal the fair market value of such share on the distribution date, and
such U.S. Holder's holding period for such share will begin on the day
following the distribution date. It is possible, however, that the IRS will
argue that the amount of the distribution (and thus the holder's basis in the
additional shares) will equal the liquidation preference of the additional
shares distributed.
Redemption Premium
Under Section 305 of the Code and the Treasury Regulations promulgated
thereunder, if the redemption price of Preferred Stock exceeds its issue price
(i.e., the amount paid by the original purchaser) by more than a de minimis
amount, then under certain circumstances, such excess may be treated as a
constructive distribution taxable in the same manner as distributions
described above under "Distributions With Respect to Preferred Stock in
General." A holder of such Preferred Stock is required to treat such excess as
a constructive distribution received by the holder over the life of the
Preferred Stock under a constant interest (economic yield) method that takes
into account the compounding of yield.
It is anticipated that the mandatory redemption price of the Preferred Stock
(other than additional shares of Preferred Stock paid as distributions or
Preferred Stock) will not exceed such stock's issue price by more than a de
minimis amount.
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The issue price of an additional share of Preferred Stock will be the amount
treated as a dividend and this will likely be the fair market value of such
share on the date of distribution. If the liquidation preference of an
additional share of Preferred Stock exceeds the issue price of such share by
more than a de minimis amount, then a U.S. Holder thereof would be required to
treat such excess as a constructive distribution over the term of the
additional share (as described above), which distribution would be treated in
the same manner as distributions described above under "Distributions With
Respect to Preferred Stock In General." Because additional shares of Preferred
Stock may be issued at different times prior to June 1, 2003 (and possibly
thereafter), it is possible that a U.S. Holder would own additional shares of
Preferred Stock with different issue prices. In such event, if the Company had
current or accumulated earnings and profits, a U.S. Holder would be treated as
having received constructive dividends on its additional shares in differing
amounts depending on the issue price of each additional share, and those
shares would not be fungible with each other or with Preferred Stock purchased
pursuant to the Offering due to their differing U.S. Federal income tax
characteristics. As a result, the Company might not be able to determine the
proper amount of income to be accrued for any particular share of Preferred
Stock. Moreover, purchasers of Preferred Stock in the secondary market might
not be able to determine the proper amount of income to accrue with respect to
their Preferred Stock.
Accrued Dividends on the Preferred Stock
Any unpaid dividends on the Preferred Stock will accrue and will be payable
upon the optional or mandatory redemption of the Preferred Stock. The tax
treatment of such accruing dividends ("Accrued Dividends") is not free from
doubt. Under current law, it appears likely that Accrued Dividends would not
be treated as having been received by U.S. Holders of the Preferred Stock
until such Accrued Dividends were actually paid in cash or additional
preferred shares (and, would then be taxable for U.S. Federal income tax
purposes in the same manner as distributions described above under
"Distributions With Respect to Preferred Stock in General"). The legislative
history to the 1990 amendments to Section 305(c) of the Code, however, grants
the IRS authority to issue regulations (possibly with retroactive effect) that
would treat such Accrued Dividends as part of the redemption price of the
stock. If Accrued Dividends were included in the redemption price of the
Preferred Stock, a U.S. Holder would be required to take such Accrued
Dividends into account in determining the amount that constitutes an excessive
redemption price for purposes of Section 305(c) of the Code, as described
above under "Redemption Premium." The effect of such treatment would be to
treat such U.S. Holder as having received such Accrued Dividends as
constructive distributions at the time they accrue, rather than at the time
they are paid in cash. Until regulations requiring such treatment with respect
to Accrued Dividends are issued, however, the Company intends to take the
position that Accrued Dividends on Preferred Stock need not be treated as
received by a U.S. Holder until such time as such Accrued Dividends are
actually paid to such holder in cash or additional shares of Preferred Stock
and intends to report to the IRS on that basis.
PURCHASERS OF PREFERRED STOCK ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS
TO THE TAX TREATMENT OF DIVIDENDS ON THE PREFERRED STOCK.
Sale, Redemption or other Taxable Disposition
Upon a sale or other taxable disposition of Preferred Stock (including
certain redemptions as described below), a U.S. Holder generally will
recognize capital gain or loss for U.S. Federal income tax purposes (except to
the extent of cash payments received on the disposition that are attributable
to declared dividends, which will be treated in the same manner as
distributions described above under "Distributions With Respect to Preferred
Stock in General") in an amount equal to the difference between (i) the sum of
the amount of cash and the fair market value of any property received upon
such sale, redemption or other taxable disposition and (ii) the U.S. Holder's
adjusted tax basis in the stock being disposed of. Such gain or loss will be
long term capital gain or loss if the holding period of the Preferred Stock
exceeds one year, and with respect to individual U.S. Holders, will be subject
to a maximum tax rate of 20% if the holding period exceeds 18 months.
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A U.S. Holder's initial tax basis in the Preferred Stock (other than
additional shares of Preferred Stock distributed on the Preferred Stock) will
equal the purchase price of such stock. A U.S. Holder's initial tax basis in
an additional share of Preferred Stock distributed on the Preferred Stock will
equal the fair market value of such share on the distribution date.
Thereafter, the initial tax basis of the Preferred Stock will be (i) increased
by the amount (if any) of any constructive distributions the U.S. Holder is
treated as having received pursuant to the rules described above under
"Redemption Premium," and (ii) decreased by the portion of any distribution
(actual or constructive) that is treated as a tax-free recovery of basis as
described above under "Distributions With Respect to Preferred Stock In
General."
Under Section 302 of the Code, gain or loss recognized by a U.S. Holder on a
redemption of the Preferred Stock (including, as discussed below, a redemption
in which the U.S. Holder receives Exchange Debentures) would qualify for the
treatment described above, if, taking into account stock that is actually or
constructively owned under the constructive ownership rules of Code Section
318 by such U.S. Holder, either (i) the U.S. Holder's interest in the stock of
the Company is completely terminated as a result of the redemption; (ii) such
U.S. Holder's percentage ownership of the voting stock of the Company
immediately after the redemption is less than 80% of such U.S. Holder's
percentage ownership immediately before the redemption; or (iii) the
redemption is "not essentially equivalent to a dividend" (the "Section 302
Tests"). Under Section 318 of the Code, a person generally will be treated as
the owner of stock of the Company owned by certain related parties or certain
entities in which the person owns an interest and stock that a U.S. Holder
could acquire through exercise of an option. Whether a redemption is not
essentially equivalent to a dividend depends on each U.S. Holder's facts and
circumstances, but in any event, requires a "meaningful reduction" in such
U.S. Holder's interest in the Company. A U.S. Holder of the Preferred Stock
who sells some or all of the stock of the Company owned by it may be able to
take such sales into account, if necessary, to satisfy one of the foregoing
conditions, but such a U.S. Holder should consult its own tax advisor in this
regard.
If none of the above conditions is satisfied, the entire amount of the cash
or the fair market value of the Exchange Debentures received on a redemption
will be treated as a distribution (without offset by the U.S. Holder's tax
basis in the redeemed shares), which will be treated in the same manner as
distributions described above under "Distributions With Respect to Preferred
Stock in General." Although not free from doubt, in such case, the U.S.
Holder's basis in the redeemed Preferred Stock would be transferred to the
U.S. Holder's remaining shares of the Company stock (if any) or, if the U.S.
Holder does not retain any shares of the Company stock, such basis may be
entirely lost. In addition, to the extent that any such distribution
constitutes a dividend, it may constitute an extraordinary dividend to which
the rules described above under "--Distributions With Respect to Preferred
Stock in General" would apply.
The tax consequences of a redemption, particularly an exchange of Preferred
Stock for an Exchange Debenture, are uncertain. PROSPECTIVE PURCHASERS ARE
STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX TREATMENT OF A
REDEMPTION.
Change of Control--Preferred Stock
The Company intends to take the position that the Change of Control
provisions on the Preferred Stock will have no effect prior to their becoming
operative. In addition, the Company intends to take the position that upon any
such change (including if the dividend rate on the Preferred Stock is reset
following a Change of Control), a U.S. Holder of the Preferred Stock would not
have a taxable exchange for U.S. Federal income tax purposes.
Exchange of Preferred Stock for Exchange Debentures
An exchange of Preferred Stock for an Exchange Debenture will also be
subject to the rules of Section 302 of the Code described above. If none of
the Section 302 Tests are met, the fair market value of the Exchange
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Debentures received upon the exchange will be treated in the same manner as
distributions described above under "Distributions With Respect to Preferred
Stock in General." In such event, the basis of the Exchange Debentures will be
equal to their fair market value as of the date of the exchange. If the holder
retains any Preferred Stock in the Company, the tax basis in the exchanged
Preferred Stock should be transferred to such retained stock. If the holder
retains no stock in the Company, it is unclear whether the tax basis in the
exchanged Preferred Stock would be transferred to the Exchange Debentures or
would be lost. For purposes of determining the recognition of gain under the
extraordinary dividend basis reduction rules described above, only the basis
of the shares of Preferred Stock exchanged for Exchange Debentures may be
taken into account.
In the event at least one of the Section 302 Tests is satisfied, a U.S.
Holder will recognize gain or loss equal to the fair market value of Exchange
Debentures received (except to the extent the Debentures are considered
attributable to accrued dividends not previously included in income) less the
U.S. Holder's tax basis in the Preferred Stock exchange therefor. Such gain or
loss would be long-term capital gain or loss if the holding period exceeds one
year, and will be taxable at a maximum rate of 20% if the holding period
exceeds 18 months. It is possible that the IRS may contend that the holding
period of Preferred Stock does not begin so long as the Company's redemption
right is outstanding. The installment method will not be available for
reporting such gain in the event that the Preferred Stock or the Debentures
are traded or readily tradable on an established securities market.
Original Issue Discount and Premium on Debentures
The Exchange Debentures will be issued with original issue discount, and
each U.S. Holder will be required to include in its gross income original
issue discount as described below. The amount of original issue discount on an
Exchange Debenture will equal the excess of the stated redemption price at
maturity of such Exchange Debenture over the issue price. The stated
redemption price at maturity of an Exchange Debenture will equal the total of
all payments required to be made thereon, including payments of stated
interest.
Determination of the issue price of an Exchange Debenture depends upon
whether the Preferred Stock or Exchange Debenture exchanged therefor is or
will be traded on an established securities market, for purposes of the
Treasury Regulations under Section 1273 of the Code, at any time during the
60-day period ending 30 days after the date of the exchange ("Traded").
If the exchange of Preferred Stock for an Exchange Debenture satisfies at
least one of the Section 302 Tests, (i) in the event the Exchange Debenture is
Traded, the issue price of the Exchange Debenture will be its fair market
value as determined as of the date of the exchange, (ii) in the event the
Exchange Debenture is not Traded, but the Preferred Stock is so Traded, the
issue price of the Exchange Debenture will be the fair market value of the
Preferred Stock exchanged therefor as of the date of the exchange, and (iii)
in the event that neither the Preferred Stock nor the Exchange Debentures are
Traded, the issue price of the Exchange Debenture will be its initial stated
principal amount, assuming that the Exchange Debenture bears "adequate stated
interest" within the meaning of Section 1274 of the Code, and if the Exchange
Debenture does not bear adequate stated interest, the issue price will be
equal to its "imputed principal amount" as determined under Section 1274 of
the Code.
If the exchange of Preferred Stock for an Exchange Debenture does not
satisfy the Section 302 Tests, (i) in the event the Exchange Debenture is
Traded, the issue price of the Exchange Debenture will be its fair market
value as determined as of the date of the exchange, and (ii) in the event the
Exchange Debenture is not so Traded, the issue price will be its stated
principal amount.
Additional Exchange Debentures distributed to holders of Exchange Debentures
should be aggregated with the Exchange Debentures, and should not be
considered to be a payment on the Exchange Debentures. Such additional
Exchange Debentures should be considered to be fungible with the Exchange
Debentures, and thus, among other things, should have the same issue price,
stated redemption price at maturity and yield to maturity as the Expense
Debentures.
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For U.S. federal income tax purposes, a U.S. Holder of an Exchange Debenture
will generally be required to include in gross income (irrespective of the
holder's method of accounting) a portion of the original issue discount as it
accrues, even though the cash to which such income is attributable would not
be received until maturity or redemption of the Exchange Debenture. The amount
of any original issue discount included in income for each year will be
calculated under a constant yield to maturity formula that will result in the
allocation of less original issue discount to the early years of the term of
the Exchange Debenture and more original issue discount to later years.
Original issue discount required to be included in income with respect to an
Exchange Debenture may be reduced or eliminated to the extent the holder has
amortizable bond premium or acquisition premium on such Exchange Debenture, as
discussed below.
If Preferred Stock is exchanged for an Exchange Debenture whose basis
exceeds the amount payable at maturity (or earlier call date, if appropriate),
such excess will be allowed as an offset or deduction (as described below) to
the holder, as amortizable bond premium over the term of the Exchange
Debenture (taking into account earlier call dates, as appropriate), under a
yield to maturity formula, if an election by the taxpayer under Section 171 of
the Code is in effect or is made. An election under Section 171 will apply to
all obligations owned or subsequently acquired by the taxpayer during or after
the taxable year in which the election is made. Amortizable bond premium will
be treated as an offset to stated interest on an Exchange Debenture to the
extent thereof and any excess will be allowable as a deduction subject to the
following limitation. The amount of any amortized bond premium deduction will
be limited to the excess of the holder's interest income inclusions on the
Exchange Debenture in prior accrual periods over bond premium deductions
allowed the holder in such prior periods, and any amount in excess of such
limitation will be carried forward as additional bond premium in the next
accrual period.
If Preferred Stock is exchanged for an Exchange Debenture, the basis of
which exceeds the issue price of the Exchange Debenture but not the stated
redemption price at maturity of such Exchange Debenture, the U.S. Holder of
such Exchange Debenture will be considered to have "acquisition premium" with
respect to the Exchange Debenture, which may reduce the amount of original
issue discount, if any, that the U.S. Holder is required to include in income.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
TREATMENT OF DISTRIBUTIONS, AND THE ACCRUAL OF ORIGINAL ISSUE DISCOUNT, ON
EXCHANGE DEBENTURES.
There are several circumstances under which the Company could make a payment
on an Exchange Debenture, which would affect the yield to maturity of an
Exchange Debenture, including (as described in "Description of the Exchange
Debentures") the payment of Liquidated Damages. According to Treasury
Regulations, the possibility of a change in the yield will not be treated as
affecting the amount of original issue discount required to be realized by a
holder, or the timing of such recognition, if the likelihood of the change, as
of the date the debt obligations are issued, is remote. The Company will
likely report on the basis that the likelihood of any change in the yield on
the Exchange Debentures is remote.
Redemption or Sale of Exchange Debentures
Generally, a redemption or sale of an Exchange Debenture will result in
taxable gain or loss equal to the difference between the amount of cash and
fair market value of other property received and the holder's tax basis in the
Exchange Debenture. To the extent that the amount received is attributable to
accrued interest, however, that amount will be taxed as ordinary income. The
tax basis of an Exchange Debenture will generally be equal to its basis at the
time of the Exchange plus any original issue discount included in the holder's
income less any payments on the Exchange Debenture and any premium previously
allowed as an offset to interest income on the Exchange Debenture. Gain or
loss on the sale of redemption of an Exchange Debenture will be capital gain
or loss and will be long-term gain or loss if the holding period exceeds one
year.
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If the Exchange Debentures are issued with original issue discount and the
Company were found to have had an intention at the time the Exchange
Debentures were issued to call them before maturity, any gain realized on a
sale, exchange or redemption of Exchange Debentures prior to maturity would be
considered ordinary income to the extent of any unamortized original issue
discount for the period remaining to the stated maturity of the Exchange
Debentures. The Company cannot predict whether it would have an intention,
when and if the Exchange Debentures are issued, to call the Exchange
Debentures before their maturity.
Change of Control--Exchange Debentures
The Company intends to take the position that the Change of Control
provisions on the Preferred Stock will have no effect prior to their becoming
operative. In the event of a Change of Control and a reset of the interest
rate on the Exchange Debentures, then solely for purposes of the accrual of
original issue discount, the yield and maturity of the Exchange Debentures
will be redetermined by treating the Exchange Debentures as retired and
reissued for an amount equal to its adjusted issue price.
Deemed Exchange Upon a Defeasance
In the event of a defeasance of the Exchange Debentures by the Company, for
U.S. Federal income tax purposes, the Exchange Debentures may be deemed to be
exchanged for new debentures. Assuming such deemed exchange constitutes a
recapitalization, (i) a U.S. Holder of an Exchange Debenture will recognize
gain but not loss on the deemed exchange, (ii) a U.S. Holder will receive a
tax basis in the new debenture equal to the U.S. Holder's adjusted tax basis
in the Exchange Debenture deemed exchanged therefor, plus any gain recognized
by the U.S. Holder in the exchange, and (iii) the U.S. Holder's holding period
for the new debenture will include the period in which the U.S. Holder held
the Exchange Debenture. The deemed exchange will not constitute a
recapitalization if the Exchange Debenture does not constitute a "security"
within the meaning of the provisions of the Code governing reorganizations. If
the deemed exchange does not constitute a recapitalization, a U.S. Holder
generally will recognize gain or loss on the exchange equal to the difference
between the fair market value of the Exchange Debenture at the time of the
exchange, and the U.S. Holder's adjusted tax basis in the Exchange Debenture.
In addition, in the event of a deemed exchange, the Company will redetermine
the amount of original issue discount accruing on the debentures. PROSPECTIVE
PURCHASERS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX
TREATMENT TO THEM OF A DEFEASANCE.
NON-U.S. HOLDERS
For purposes of this discussion, a "Non-U.S. Holder" is any holder of
Preferred Stock that is not a U.S. Holder.
Dividends
Dividends paid in either cash or additional shares of Preferred Stock to a
Non-U.S. Holder of Preferred Stock generally will be subject to withholding of
U.S. Federal income tax at a 30% rate (or such lower rate as may be specified
by an applicable income tax treaty) unless the dividend (i) is effectively
connected with the conduct of a trade or business of the Non-U.S. Holder
within the United States or (ii) if a tax treaty applies, is attributable to a
United States permanent establishment of the Non-U.S. Holder, in which case
the dividend will be taxed at ordinary U.S. Federal income tax rates. If the
Non-U.S. Holder is a corporation, such effectively connected income may also
be subject to an additional "branch profits tax." Although under current law a
Non-U.S. Holder receiving dividends at an address in a foreign country is
presumed to be a resident of that country, under the Final Regulations
(defined below) this presumption is eliminated. Thus, for dividends paid after
December 31, 1999, a Non-U.S. Holder will be required to satisfy certain
certification requirements in order to claim treaty benefits or otherwise
claim a reduction of, or exemption from, the withholding obligation pursuant
to the above described rules. See "--Backup Withholding and Information
Reporting Requirements."
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For purposes of the foregoing discussion, dividends will also include
amounts received on the redemption of Preferred Stock (including an exchange
of Preferred Stock for Exchange Debentures) that are characterized as
distributions under the rules described above. See "--U.S. Holders--Sale,
Redemption or other Taxable Disposition," and "--U.S. Holders--Exchange of
Preferred Stock for Debentures." Thus any amounts so characterized would be
subject to withholding tax under the rules described above.
Interest and Original Issue Discount
Payments of interest and original issue discount on an Exchange Debenture
received by a Non-U.S. Holder will not be subject to United States federal
withholding tax, under the "portfolio interest exemption," provided that (a)
the Non-U.S. Holder does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the Company entitled to
vote, (b) the holder is not a controlled foreign corporation that is related
to the Company through stock ownership, and (c) for payments on or prior to
December 31, 1999, either (1) the beneficial owner of the Debenture, under
penalties of perjury, provides the Company or its agent with its name and
address and certifies that it is not a United States person or (2) a
securities clearing organization, bank or other financial institution that
holds customer's securities in the ordinary course of its trade or business (a
"Financial Institution") certifies to the Company or its agent, under
penalties of perjury, that such a statement has been received from the
beneficial owner by it or another financial institution and furnishes to the
Company or its agent a copy thereof. For payments made after December 31,
1999, different certification rules will apply. See "--Backup Withholding and
Information Reporting Requirements."
Sale or Other Disposition of Preferred Stock or Exchange Debentures
A Non-U.S. Holder generally will not be subject to U.S. Federal income or
withholding tax in respect of any gain recognized on the sale or other taxable
disposition of a share of Preferred Stock (including upon the exchange of
Preferred Stock for an Exchange Debenture, but only if such exchange satisfies
one of the Section 302 tests described above) or an Exchange Debenture unless
(a) the gain is effectively connected with a trade or business of the Non-U.S.
Holder in the United States; (b) in the case of a Non-U.S. Holder who is an
individual and holds the Preferred Stock or Exchange Debenture as a capital
asset, the holder is present in the United States for 183 or more days in the
taxable year of the disposition and either (i) the individual has a "tax home"
for U.S. Federal income tax purposes in the United States or (ii) the gain is
attributable to an office or other fixed place of business maintained by the
individual in the United States; (c) the Non-U.S. Holder is subject to tax
pursuant to the provisions of U.S. Federal income tax law applicable to
certain United States expatriates; or (d) with respect to the sale or
disposition of Preferred Stock the Company is or has been during certain
periods preceding the disposition a "U.S. real property holding corporation"
for U.S. Federal income tax purposes (which the Company does not believe it is
or is likely to become).
Federal Estate Taxes
Preferred Stock owned or treated as owned by an individual who is not a
citizen or resident (as specially defined for U.S. Federal estate tax
purposes) of the United States at the time of death will be included in such
individual's gross estate for U.S. Federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise. An Exchange Debenture will
not be included in an individual's gross estate provided the portfolio
interest exemption applies with respect to interest on such Exchange
Debenture.
BACKUP WITHHOLDING AND INFORMATION REPORTING REQUIREMENTS
On October 6, 1997, the IRS issued final regulations relating to
withholding, information reporting and backup withholding that unify current
certification procedures and forms and clarify reliance standards (the "Final
Regulations"). The Final Regulations generally will be effective with respect
to payments made after December 31, 1999. Except as provided below, this
section describes rules applicable to payments made on or before December 31,
1999.
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Information reporting and backup withholding may apply to certain
noncorporate U.S. Holders with respect to payments of dividends on the
Preferred Stock and interest including original issue discount on Exchange
Debentures by the Company. Such payments will be subject to backup withholding
at a rate of 31% unless the beneficial owner of the Preferred Stock or
Exchange Debentures supplies the payor or its agent with a taxpayer
identification number, certified under penalties of perjury, and certain other
information, or otherwise establishes, in the manner prescribed by law, an
exemption from backup withholding. Backup withholding generally will not apply
to dividends paid on the Preferred Stock to a Non-U.S. Holder at an address
outside the United States. The Company will be required to report annually to
the IRS and to each Non-U.S. Holder the amount of dividends paid to and the
amount of original issue discount accruing to, and the tax withheld with
respect to, such holder, regardless of whether any tax was actually withheld.
This information may also be made available to the tax authorities in the Non-
U.S. Holder's country of residence.
In addition, if a U.S. Holder sells Preferred Stock or Exchange Debentures
to (or through) a "broker," the broker may be required to withhold 31% of the
entire sales price, unless either (i) the broker determines that the seller is
a corporation or other exempt recipient or (ii) the seller provides, in the
required manner, certain identifying information. Such a sale must also be
reported by the broker to the IRS, unless the broker determines that the
seller is an exempt recipient. The term "broker" includes all persons who, in
the ordinary course of their business, stand ready to effect sales made by
others.
In the case of a Non-U.S. Holder that sells Preferred Stock to or through a
United States office of a broker, the broker must withhold at a rate of 31%
and report the sale to the IRS, unless the holder certifies its Non-U.S.
status under penalties of perjury or otherwise establishes an exemption. In
the case of a Non-U.S. Holder that sells Preferred Stock or an Exchange
Debenture to or through the foreign office of a United States broker, or a
foreign broker with certain types of relationships to the United States, the
broker must report the sale to the IRS (but not withhold) unless the broker
has documentary evidence in its files that the seller is a Non-U.S. Holder
and/or certain other conditions are met, or the holder otherwise establishes
an exemption.
Any amount withheld under the backup withholding rules from a payment to a
holder is allowable as a credit against the holder's U.S. Federal income tax,
which may entitle the holder to a refund, provided that the holder furnishes
the required information to the IRS. In addition, certain penalties may be
imposed by the IRS on a holder who is required to supply information but does
not do so in the proper manner.
Prospective purchasers of the Preferred Stock are urged to consult their own
tax advisors as to the effect, if any, of the Final Regulations on their
purchase, ownership and disposition of the Preferred Stock and Exchange
Debentures.
THE FOREGOING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH PURCHASER OF THE PREFERRED STOCK SHOULD CONSULT WITH ITS OWN
TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH PURCHASER OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED STOCK AND EXCHANGE
DEBENTURES, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN
INCOME AND EXCHANGE DEBENTURES OTHER TAX LAWS.
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PLAN OF DISTRIBUTION
This Prospectus, as it may be amended or supplemented from time to time, may
be used by Participating Broker-Dealers in connection with resales of Series B
Preferred received in exchange for Series A Preferred where such Series A
Preferred were acquired as a result of market-making activities or other
trading activities. Each Participating Broker-Dealer that receives Series B
Preferred for its own account pursuant to the Exchange offer must acknowledge
that it will deliver a prospectus in connection with any resale of such Series
B Preferred. The Company has agreed that under certain circumstances, the
Company shall use its best efforts to keep the Exchange Offer Registration
Statement continuously effective supplemented and amended to the extent
necessary to ensure that it is available for sales of Series B Preferred by
Participating Broker-Dealers, and to ensure that the Exchange Offer
Registration Statement conforms with the requirements of the Act and the
policies, rules and regulations of the Commission as announced from time to
time, for a period expiring approximately 180 days from the date on which the
Exchange Offer Registration Statement is declared effective.
The Company will not receive any proceeds from any sale of Series B
Preferred by broker-dealers. Series B Preferred received by broker-dealers for
their own account pursuant to the Exchange offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Series B Preferred or a
combination of such methods or resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such Series B
Preferred. Any Participating Broker-dealer that acquired Existing notes as a
result of market making activities or other trading activities and who resells
Series B Preferred that were received by it pursuant to the Exchange Offer and
any broker or dealer that participates in a distribution of such Series B
Preferred may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of Series B Preferred and any
commission or concession received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Series B Preferred
will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1996
and 1997 and for each of the three years in the period ended December 31,
1997, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of InterNex Information Services, Inc. as of June
30, 1997 and for the year then ended, included in this Prospectus and
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, dated
January 26, 1998, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing.
144
<PAGE>
GLOSSARY OF TERMS
56 Kbps...................... Equivalent to a single high-speed telephone
service line; capable of transmitting one voice
call or 56 Kbps of data. Currently in
widespread use by medium and large businesses
primarily for entry level high-speed data and
very low-speed video applications.
ATM.......................... Asynchronous Transfer Mode. A low latency,
fixed delay information transfer standard for
routing traffic. The ATM format can be used by
many different information systems, including
LANs, to deliver traffic at varying rates,
permitting a mix of data, voice and video.
Backbone..................... A centralized high-speed network that
interconnects smaller, independent networks.
Bandwidth.................... The number of bits of information that can move
through a communications medium in given amount
of time; the capacity of a telecommunications
circuit/network to carry voice, data and video
information. Typically measured in Kbps and
Mbps. Bandwidth from public networks is
typically available to business and residential
end-users in increments from 56 Kbps to T-3.
CIR.......................... Committed Information Rate. The rate, usually
expressed as a particular quantitative amount
of Kbps of Mbps of bandwidth, at which data is
guaranteed to be transmitted through a
dedicated lease line network connection.
E-mail....................... An application that allows a user to send or
receive text messages to or from any other user
with an Internet address, commonly termed an E-
mail address.
Firewall..................... A system placed between networks that filters
data passing through it and removes
unauthorized traffic, thereby enhancing the
security of the network.
Frame relay.................. A variable delay information transfer standard
for relaying traffic. Frame relay can be an
economical means to backhaul traffic to an ATM
network.
FTP.......................... File Transfer Protocol. A protocol that allows
file transfer between a host and a remote
computer.
Internet..................... A global collection of interconnected computer
networks which use TCP/IP, a common
communications protocol.
ISDN......................... Integrated Services Digital Network. An
information transfer standard for transmitting
digital voice and data over telephone lines at
speeds up to 128 Kbps.
Kbps......................... Kilobits per second. A transmission rate. One
kilobit equals 1,024 bits of information.
G-1
<PAGE>
LAN.......................... Local Area Network. A data communications
network designed to interconnect personal
computers, workstations, minicomputers, file
servers and other communications and computing
devices within a localized environment.
Latency...................... The time that elapses between the moment when a
command is sent to the time that a response is
received. On a network, latency is due to
delays in routers or switches, congestion
delays on a crowded backbone, and the time
required for electrons to travel a great
distance between nodes on a network.
Leased line.................. Telecommunications line dedicated to a
particular customer along a predetermined
route.
LEC.......................... Local Exchange Carrier. A telecommunications
company that provides telecommunications
services in a geographic area in which calls
generally are transmitted without toll charges.
Mbps......................... Megabits per second.
Modem........................ A device for transmitting digital information
over an analog telephone line.
NAP.......................... Network Access Point. A location at which ISPs
exchange each other's traffic.
Online services.............. Commercial information services that offer a
computer user access to a specified slate of
information, entertainment and communications
menus on what appears to be a single system.
Peering...................... The commercial practice under which nationwide
ISPs exchange each other's traffic without the
payment of settlement charges.
POPs......................... Points-of-presence. Geographic areas within
which the Company provides local access. For
purposes of this Memorandum, POPs include both
physical points of presence as well as VLA.
Router....................... A system placed between networks that relays
data to those networks based upon a destination
address contained in the data packets being
routed.
Server....................... Software that allows a computer to offer a
service to another computer. Other computers
contact the server program by means of matching
client software. In addition, such term means
the computer on which server software runs.
SuperPOP..................... A SuperPOP is a Concentric POP that is directly
connected to the Concentric ATM backbone.
SuperPOPs typically support dial access from
the region surrounding the SuperPOP (typically
within 200 miles of the SuperPOP) using the
services of a CLEC. SuperPOPs also support
dedicated access connections to customer
locations using Local Exchange Carrier and/or
Competitive Access Provider facilities to
connect the customer to the Concentric
SuperPOP.
G-2
<PAGE>
TCP/IP....................... Transmission Control Protocol/Internet
Protocol. A suite of network protocols that
allow computers with different architectures
and operating system software to communicate
with other computers on the Internet.
T-1.......................... A data communications circuit capable of
transmitting data at 1.5 Mbps.
T-3 or DS3................... A data communications circuit capable of
transmitting data at 45 Mbps.
UNIX......................... A computer operating system frequently found on
workstations and PCs and noted for its
portability and communications functionality.
VLA.......................... Virtual local access call numbers which allow a
subscriber in a location outside the calling
area of a physical POP to place a local call to
a phone number without incurring long distance
or message unit charges.
VPN.......................... Virtual Private Network. A network capable of
providing the tailored services of a private
network (i.e., low latency, high throughput,
security and customization) while maintaining
the benefits of a public network (i.e.,
ubiquity and economies of scale).
World Wide Web or Web........ A system that supports easy access to documents
that have been linked across the Internet. The
documents contain links to each other, hence
the term "Web." Users do not have to know the
locations of particular documents and work
through a user friendly interface.
Webserver.................... A server connected to the Internet from which
Internet users can obtain information.
G-3
<PAGE>
CONCENTRIC NETWORK CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Concentric Network Corporation:
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Common Stock Subject to Rescission and
Stockholders' Equity (Deficit).......................................... F-5
Consolidated Statements of Cash Flows.................................... F-7
Notes to Consolidated Financial Statements............................... F-9
InterNex Information Services, Inc.:
Report of Arthur Andersen LLP, Independent Public Accountants............ F-25
Balance Sheets........................................................... F-26
Statements of Operations................................................. F-27
Statements of Shareholder's Equity....................................... F-28
Statements of Cash Flows................................................. F-29
Notes to Financial Statements............................................ F-30
Selected Unaudited Pro Forma Condensed Combined Financial Information:
Introduction............................................................. F-35
Statement of Operations.................................................. F-36
Notes to Selected Unaudited Pro Forma Condensed Combined Financial
Information............................................................. F-37
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors Concentric Network Corporation.
We have audited the accompanying balance sheets of Concentric Network
Corporation as of December 31, 1996 and 1997, and the related statements of
operations, common stock subject to rescission and stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Concentric Network
Corporation at December 31, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Jose, California
January 27, 1998, except for Note
12 as to which the date is March
31, 1998
F-2
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------- -----------
1996 1997 1998
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 17,657 $ 119,959 $ 63,707
Current portion of restricted cash........... -- 19,125 19,125
Accounts receivable, net of allowances of $56
in 1996, $80 in 1997 and $369 at March 31,
1998 (unaudited)............................ 1,849 4,549 6,542
Goodwill and other intangible assets......... -- -- 3,240
Prepaid expenses and other current assets.... 1,722 5,139 5,185
-------- --------- ---------
Total current assets........................ 21,228 148,772 97,799
Property and equipment:
Computer and telecommunications equipment.... 55,091 71,942 75,451
Software..................................... 583 1,519 2,120
Furniture and fixtures and leasehold
improvements................................ 2,130 2,984 4,257
-------- --------- ---------
57,804 76,445 81,828
Accumulated depreciation and amortization.... 9,877 22,735 27,912
-------- --------- ---------
47,927 53,710 53,916
Restricted cash, net of current portion....... -- 33,400 34,148
Goodwill and other intangible assets, net of
current portion.............................. -- -- 8,796
Other assets.................................. 1,567 8,607 8,211
-------- --------- ---------
Total assets.............................. $ 70,722 $ 244,489 $ 202,870
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 16,723 $ 10,144 $ 16,141
Accrued compensation and other employee
benefits.................................... 714 1,577 1,219
Other current liabilities.................... 2,163 4,917 9,916
Current portion of capital lease obligations,
including $10,180 in 1996, $13,600 in 1997
and $4,696 at March 31, 1998 (unaudited) to
a related party............................. 11,258 15,326 6,911
Deferred revenue............................. 1,238 1,435 1,970
-------- --------- ---------
Total current liabilities................... 32,096 33,399 36,157
Capital lease obligations, including $29,167
in 1996 and $32,373 in 1997 and $7,299 at
March 31, 1998 (unaudited) to a related
party, net of
current portion.............................. 30,551 33,595 8,879
Notes payable................................. -- 145,577 145,688
Commitments and contingencies
Class A common stock subject to rescission,
$0.001 par value:
Issued and outstanding shares--455 in 1996
and none in 1997............................ 5,150 -- --
Stockholders' equity:
Preferred stock, $0.001 par value; issuable
in series:
Authorized shares--7,333 in 1996 and 10,000
in 1997
Issued and outstanding shares--4,901 in 1996
and none in 1997........................... 95,215 -- --
Common stock, $0.001 par value; issuable in
classes:
Authorized shares--13,343 in 1996 and
100,000 in 1997
Issued and outstanding shares--1,393 in
1996, 14,139 in 1997 and 14,177 at March
31, 1998 (unaudited)....................... 1,850 182,721 183,083
Accumulated deficit........................... (93,952) (149,534) (169,761)
Deferred compensation......................... (188) (1,269) (1,176)
-------- --------- ---------
Total stockholders' equity.................. 2,925 31,918 12,146
-------- --------- ---------
Total liabilities and stockholders'
equity................................... $ 70,722 $ 244,489 $ 202,870
======== ========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue................... $ 2,483 $ 15,648 $ 45,457 $ 9,154 $ 16,484
Costs and expenses:
Cost of revenue......... 16,168 47,945 61,439 15,744 17,724
Network equipment write-
off.................... -- 8,321 -- -- --
Development............. 837 2,449 4,850 1,025 1,507
Marketing and sales,
including $920, $2,448
and $2,600 to a related
party for the years
ended December 31,
1995, 1996 and 1997,
respectively........... 3,899 16,609 24,622 4,936 8,494
General and
administrative......... 2,866 3,445 4,790 1,060 1,852
Amortization of goodwill
and other intangible
assets................. -- -- -- -- 506
Write-off of in-process
technology............. -- -- -- -- 5,200
-------- -------- -------- --------- ---------
Total costs and
expenses............. 23,770 78,769 95,701 22,765 35,283
-------- -------- -------- --------- ---------
Loss from operations...... (21,287) (63,121) (50,244) (13,611) (18,799)
Other income.............. -- -- 1,233 -- --
Interest income........... 137 614 1,217 128 2,023
Interest expense,
including $797, $3,065
and $6,197 to related
parties for the years
ended December 31, 1995,
1996 and 1997,
respectively............. (858) (3,874) (7,788) (1,198) (6,493)
-------- -------- -------- --------- ---------
Loss before extraordinary
item..................... (22,008) (66,381) (55,582) (14,681) (23,269)
Extraordinary gain on
early retirement of
debt..................... -- -- -- -- 3,042
-------- -------- -------- --------- ---------
Net loss.................. $(22,008) $(66,381) $(55,582) $ (14,681) $ (20,227)
======== ======== ======== ========= =========
Loss per share (historical
1998 and 1995, pro-forma
1997 and 1996)
Loss before
extraordinary item..... $ (16.53) $ (13.46) $ (5.63) $ (2.17) $ (1.64)
Extraordinary gain...... -- -- -- -- 0.21
-------- -------- -------- --------- ---------
Net loss................ $ (16.53) $ (13.46) $ (5.63) $ (2.17) $ (1.43)
======== ======== ======== ========= =========
Shares used in computing
net loss per share
(historical 1998 and
1995, pro-forma 1997 and
1996).................... 1,331 4,937 9,872 6,767 14,157
======== ======== ======== ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION AND
STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK STOCKHOLDERS' EQUITY (DEFICIT)
SUBJECT TO ------------------------------------------ TOTAL
RESCISSION PREFERRED STOCK COMMON STOCK ACCUMU- DEFERRED STOCKHOLDERS'
------------- ---------------- --------------- LATED COMPEN- EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT SATION (DEFICIT)
------ ------ ------- -------- ------ -------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... 248 $2,812 -- $ -- 1,317 $ 1,361 $ (5,563) $ -- $ (4,202)
Issuance of Series A
preferred stock and
common stock (net of
issuance costs)....... -- -- 906 10,147 62 117 -- -- 10,264
Issuance of Series C
preferred stock (net
of issuance costs).... -- -- 805 20,691 -- -- -- -- 20,691
Conversion of note to
Series B preferred
stock................. -- -- 367 4,035 -- -- -- -- 4,035
Warrants issued to
purchase Series B
preferred stock....... -- -- -- 822 -- -- -- -- 822
Issuance of Class A
common stock.......... 23 690 -- -- -- 1 -- -- 1
Issuance of Class A
common stock for
services.............. -- -- -- -- 2 19 -- -- 19
Conversion of officer's
note payable for Class
B common stock........ -- -- -- -- 7 80 -- -- 80
Warrants issued to
purchase Class A
common stock.......... -- -- -- -- -- 61 -- -- 61
Conversion of
debentures to Class A
common stock.......... 174 1,578 -- -- -- -- -- -- --
Net loss............... -- -- -- -- -- -- (22,008) -- (22,008)
--- ------ ------ -------- ----- -------- --------- ------- --------
Balance at December 31,
1995................... 445 5,080 2,078 35,695 1,388 1,639 (27,571) -- 9,763
Issuance of Class A
common stock.......... -- -- -- -- -- 1 -- -- 1
Conversion of
debentures to Class A
common stock.......... 10 70 -- -- -- -- -- -- --
Exercise of options.... -- -- -- -- 5 22 -- -- 22
Conversion of note to
Series C preferred
stock (net of issuance
costs)................ -- -- 123 2,960 -- -- -- -- 2,960
Issuance of Series D
preferred stock (net
of issuance costs).... -- -- 2,451 48,533 -- -- -- -- 48,533
Conversion of note to
Series D preferred
stock................. -- -- 249 5,072 -- -- -- -- 5,072
Warrants issued to
purchase Series D
preferred stock....... -- -- -- 2,955 -- -- -- -- 2,955
Deferred compensation
resulting from grant
of options............ -- -- -- -- -- 188 -- (188) --
Net loss............... -- -- -- -- -- -- (66,381) -- (66,381)
--- ------ ------ -------- ----- -------- --------- ------- --------
Balance at December 31,
1996................... 455 $5,150 4,901 $95,215 1,393 $ 1,850 $ (93,952) $ (188) $ 2,925
</TABLE>
See accompanying notes.
F-5
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION AND
STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK STOCKHOLDERS' EQUITY (DEFICIT)
SUBJECT TO ---------------------------------------------
RESCISSION PREFERRED STOCK COMMON STOCK ACCUMU- DEFERRED
-------------- ---------------- ---------------- LATED COMPEN-
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT SATION
------ ------- ------ -------- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Class A common stock
for services ..................... -- $ -- -- $ -- 5 $ 17 $ -- $ --
Conversion of Class B common to
Series A preferred stock ......... -- -- 7 -- (7) -- -- --
Conversion of Series A, B, C and D
preferred to Class A common
stock............................. -- -- (5,693) (99,604) 5,693 99,604 -- --
Shares issued upon the initial
public offering (net of issuance
costs) ........................... -- -- -- -- 4,945 52,757 -- --
Shares issued in a private
placement......................... -- -- -- -- 1,246 14,950 -- --
Conversion of note to Class A
common stock ..................... -- -- -- -- 253 3,041 -- --
Repurchase of Class A common stock
in connection with the initial
public offering .................. -- -- -- -- (185) (2,217) -- --
Shares issued subject to dilution
ratios............................ -- -- 484 -- -- -- -- --
Exercise of options to purchase
stock ............................ -- -- -- -- 65 243 -- --
Exercise of warrants to purchase
stock ............................ -- -- 301 3,281 309 1,201 -- --
Warrants issued to purchase stock . -- -- -- 1,108 -- 5,370 -- --
Deferred compensation resulting
from grant of options ............ -- -- -- -- -- 1,303 -- (1,303)
Amortization of deferred
compensation ..................... -- -- -- -- -- -- -- 222
Expiration of statutes of
limitations on common stock
subject to rescission............. (422) (4,602) -- -- 422 4,602 -- --
Repurchase of shares for
cancellation in connection with
Recission Offer................... (33) (548) -- -- -- -- -- --
Net loss .......................... -- -- -- -- -- -- (55,582) --
---- ------- ------ -------- ------ -------- --------- -------
Balance at December 31, 1997 ....... -- -- -- -- 14,139 182,721 (149,534) (1,269)
Amortization of deferred
compensation (unaudited).......... -- -- -- -- -- -- -- 93
Common stock issued under stock
purchase plan (unaudited)......... -- -- -- -- 33 337 -- --
Exercise of options to purchase
common stock (unaudited).......... -- -- -- -- 5 25 -- --
Net loss (unaudited)............... -- -- -- -- -- -- (20,227) --
---- ------- ------ -------- ------ -------- --------- -------
Balance at March 31, 1998
(unaudited)........................ -- $ -- -- $ -- 14,177 $183,083 $(169,761) $(1,176)
==== ======= ====== ======== ====== ======== ========= =======
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Issuance of Class A common stock
for services ..................... $ 17
Conversion of Class B common to
Series A preferred stock ......... --
Conversion of Series A, B, C and D
preferred to Class A common
stock............................. --
Shares issued upon the initial
public offering (net of issuance
costs) ........................... 52,757
Shares issued in a private
placement......................... 14,950
Conversion of note to Class A
common stock ..................... 3,041
Repurchase of Class A common stock
in connection with the initial
public offering .................. (2,217)
Shares issued subject to dilution
ratios............................ --
Exercise of options to purchase
stock ............................ 243
Exercise of warrants to purchase
stock ............................ 4,482
Warrants issued to purchase stock . 6,478
Deferred compensation resulting
from grant of options ............ --
Amortization of deferred
compensation ..................... 222
Expiration of statutes of
limitations on common stock
subject to rescission............. 4,602
Repurchase of shares for
cancellation in connection with
Recission Offer................... --
Net loss .......................... (55,582)
-------------
Balance at December 31, 1997 ....... 31,918
Amortization of deferred
compensation (unaudited).......... 93
Common stock issued under stock
purchase plan (unaudited)......... 337
Exercise of options to purchase
common stock (unaudited).......... 25
Net loss (unaudited)............... (20,227)
-------------
Balance at March 31, 1998
(unaudited)........................ $ 12,146
=============
</TABLE>
See accompanying notes.
F-6
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................. $(22,008) $(66,381) $(55,582) $ (14,681) $ (20,227)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........... 2,196 7,528 16,852 3,629 5,282
Amortization of deferred
interest, cost of
revenue and marketing
and sales related to
issuance of warrants... -- 1,942 1,720 193 304
Amortization of goodwill
and other intangible
assets................. -- -- -- -- 506
Amortization of deferred
interest related to
Senior Notes........... -- -- -- -- 127
Amortization of other
deferred assets........ -- -- -- -- 451
Amortization of deferred
compensation and
other.................. -- -- 658 18 93
Gain on retirement of
debt................... -- -- -- -- (3,042)
Write-off of in-process
technology............. -- -- -- -- 5,200
Loss on disposal of
equipment.............. 29 -- 162 -- --
Network equipment write-
off.................... -- 8,321 -- -- --
Compensation related to
stock and option
grants................. 883 -- -- -- --
Changes in current
assets and liabilities:
Prepaid expenses and
other current assets.. (818) (57) (3,581) 49 (97)
Accounts receivable.... (14) (1,734) (2,700) (474) (475)
Accounts payable....... 3,051 5,129 (7,287) 624 93
Accrued compensation
and other employee
benefits.............. 173 484 863 (143) (559)
Deferred revenue....... 141 1,097 197 (57) (66)
Other current
liabilities........... 539 1,546 2,795 (282) 3,995
-------- -------- -------- --------- ---------
Net cash used in operating
activities............... (15,828) (42,125) (45,903) (11,124) (8,415)
INVESTING ACTIVITIES
Additions of property and
equipment................ (1,427) (6,889) (6,130) (2,495) (1,543)
Increase in refundable
deposits................. -- (442) -- -- --
Decrease (increase) in
note receivable.......... 255 -- (370) -- --
Increase in restricted
cash..................... -- -- -- -- (748)
Acquisition of Internex
Information Services,
Inc., net of cash
acquired................. -- -- -- -- (15,452)
-------- -------- -------- --------- ---------
Net cash used in investing
activities............... (1,172) (7,331) (6,500) (2,495) (17,743)
FINANCING ACTIVITIES
Proceeds from notes
payable.................. 7,000 6,300 155,000 -- --
Increase in restricted
cash..................... -- -- (52,525) -- --
Repayment of lease
obligations to a related
party.................... (1,609) (4,561) (10,039) (1,972) (3,079)
Repayment of lease
obligations to a related
party--early retirement
of debt.................. -- -- -- -- (24,750)
Repayment of lease
obligations.............. -- (886) (1,517) (344) (504)
Repayment of notes
payable.................. (218) (1,300) (2,000) -- (1,960)
Repurchase of common
stock.................... -- -- (2,765) -- --
Deferred financing costs.. -- -- (5,006) -- (163)
Proceeds from issuances of
stock and warrants....... 30,818 48,506 73,557 1,119 362
-------- -------- -------- --------- ---------
Net cash provided by (used
in) financing
activities............... 35,991 48,059 154,705 (1,197) (30,094)
-------- -------- -------- --------- ---------
Increase (decrease) in
cash and cash
equivalents.............. 18,991 (1,397) 102,302 (14,816) (56,252)
Cash and cash equivalents
at beginning of period... 63 19,054 17,657 17,657 119,959
-------- -------- -------- --------- ---------
Cash and cash equivalents
at end of period......... $ 19,054 $ 17,657 $119,959 $ 2,841 $ 63,707
======== ======== ======== ========= =========
</TABLE>
See accompanying notes.
F-7
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------- -------------
1995 1996 1997 1997 1998
-------- -------- -------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Stock exchanged for notes payable,
including accrued interest.......... $ 4,115 $ 8,082 $ 3,041 $ -- $ --
Capital lease obligations incurred
with a related party................ 14,578 30,945 16,668 6,435 1,285
Capital lease obligations incurred... 1,207 2,136 -- -- 19
Reduction of accounts payable through
capital lease obligations incurred.. -- -- 2,000 1,726 --
Convertible debentures exchanged for
stock............................... 1,578 70 -- -- --
Issuance of warrants................. 883 2,955 5,370 -- --
Purchase of property and equipment
through accounts payable............ -- 6,344 -- -- --
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid........................ $ 850 $ 2,807 $ 5,728 $1,156 $1,397
</TABLE>
See accompanying notes.
F-8
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Concentric Network Corporation (the Company or Concentric) was incorporated
in the state of Florida in 1991 and reincorporated into Delaware in 1997.
Concentric provides tailored, value-added Internet Protocol (IP) based network
services for businesses and consumers. To provide these services, the Company
utilizes its low/fixed latency, high-throughput network, employing its
advanced network architecture and the Internet. Concentric's service offerings
for enterprises include virtual private networks (VPNs), dedicated access
facilities (DAFs), remote access services and Web hosting services. These
services enable enterprises to take advantage of standard Internet tools such
as browsers and high-performance servers for customized data communications
within an enterprise and between an enterprise and its suppliers, partners and
customers. These services combine the cost advantages, nationwide access and
standard protocols of public networks with the customization, high
performance, reliability and security of private networks.
Interim Results
The accompanying balance sheet as of March 31, 1998 and the statements of
operations and cash flows for the three months ended March 31, 1997 and 1998
and the statement of common stock subject to rescission and stockholders'
equity (deficit) for the three months ended March 31, 1998 are unaudited. In
the opinion of management, the statements have been prepared on the same basis
as the audited financial statements and include all adjustments, consisting of
normal recurring adjustments, necessary for the fair statement of interim
periods. The data disclosed in these notes to the financial statements for
these periods is also unaudited.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity (at date of purchase) of three months or less to be the equivalent of
cash for the purpose of balance sheet and statement of cash flows
presentation. Cash and cash equivalents consist primarily of money market
funds and United States Government Obligations which are carried at cost which
approximates market value. Cash and cash equivalents are held primarily with
two banks.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
related assets as follows: computer and telecommunications equipment: three to
five years; purchased software: three to five years; furniture and fixtures:
eight to ten years; and leasehold improvements: the shorter of the remaining
term of the related leases or the estimated economic useful lives of the
improvements. Equipment under capital leases is amortized over the shorter of
the expected useful life or the related lease term (see Note 3).
Revenue and Customer Receivables
Revenue is recognized over the period in which services are provided,
generally monthly. Payments received in advance of services being provided are
included in deferred revenues. Substantially all end-user subscribers pay for
services with major credit cards for which the Company receives daily
remittances from the credit card carriers.
Commissions and other obligations to strategic partners through marketing
and distribution arrangements are expensed as incurred, at the time the
associated revenue is recognized.
F-9
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
Concentration of Credit Risk
The Company typically offers its enterprise customers credit terms. The
Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have
historically been insignificant.
Advertising Costs
The Company expenses the costs of advertising as incurred except for direct-
response advertising costs meeting certain specific criteria. To date, no
direct-response advertising costs have been capitalized.
Income Taxes
The Company accounts for income taxes using the liability method in
accordance with Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes" (FAS 109).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Basic and Diluted Net Loss Per Share (Historical)
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" (FAS 128). FAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
restated to conform to the FAS 128 requirements.
Except as noted below, net loss per share is computed using the weighted
average number of shares of common stock outstanding excluding common stock
subject to rescission. Common stock equivalent shares from convertible
preferred stock and from stock options and warrants are not included as the
effect is antidilutive. Pursuant to the Securities and Exchange Commission
Staff Accounting Bulletin No. 98 (SAB No. 98) which was issued in February
1998, common and common equivalent shares issued by the Company for nominal
consideration during any of the periods for which a statement of operations
was presented in the Company's initial public offering registration statement
have been included in the calculation of basic and diluted net loss per share
for all such periods in a manner similar to a stock split. The net loss per
share calculations have been restated for all periods presented in accordance
with SAB No. 98 which replaced SAB No. 83. The following table shows basic net
loss per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
------------------------
1995 1996 1997
------- ------- ------
<S> <C> <C> <C>
Basic Net Loss Per Share......................... $(16.53) $(47.72) $(8.34)
======= ======= ======
Shares Used in Computing Basic Net Loss Per
Share........................................... 1,331 1,391 6,665
======= ======= ======
</TABLE>
F-10
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
Pro Forma Net Loss Per Share
Pro forma net loss per share has been computed as described above and also
gives effect, even if antidilutive, to common equivalent shares from
convertible preferred shares that were automatically converted to common
shares upon the closing of the Company's initial public offering (using the
as-if-converted method).
Stock-Based Compensation
The Company accounts for employee stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB Opinion No. 25), and has adopted the "disclosure only"
alternative described in Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123).
Long-Lived Assets
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," effective January 1, 1996. The Company continually reviews
long-lived assets to assess recoverability based upon undiscounted cash flow
analysis. Impairments, if any, are recognized in operating results in the
period in which a permanent diminution in value is determined (see Note 2).
Customer Concentrations
The Company currently derives a substantial portion of its total revenue
from a single customer. For the years ended December 31, 1996 and 1997 and for
the three months ended March 31, 1997 and 1998, revenue from WebTV Networks,
Inc. represented approximately 10.1% and 33.4% and 32.7% and 30.8%,
respectively, of the Company's total revenue.
Effect of New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" (FAS 130), and Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (FAS
131). The Company is required to adopt these Statements in fiscal 1998. FAS
130 establishes new standards for reporting and displaying comprehensive
income and its components. FAS 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. Adoption of these Statements is expected to
have no material impact on the Company's financial position, results of
operations or cash flows.
2. NETWORK EQUIPMENT WRITE-OFF
In December 1996, the Company wrote off approximately $8,321,000
representing the net book value and future commitments for certain network
equipment purchased from Sattel Communications LLC (Sattel), a stockholder of
the Company. The Company decided not to deploy the equipment in the network
because of concerns that the equipment would not provide the functionality and
reliability required by the Company and concerns that the equipment provider
would be unable to provide timely maintenance and support. Included in
accounts payable in the accompanying balance sheet at December 31, 1996 and
1997 was $7,517,000 and $0, respectively, related to this equipment (see Note
11).
F-11
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. COMMITMENTS
Operating Leases
The Company has an agreement with a related party through which such related
party makes available the premises at which the Company's POP sites throughout
the United States are located. POP sites are locations where certain
telecommunications switching and related equipment are installed. This
agreement expires in December 2000, and the amount of the payments is based,
among other things, on the number of POP sites maintained by the Company,
subject to certain minimums. Expenses of approximately $1,155,000, $1,622,000
and $1,326,000 were incurred during the years ended December 31, 1995, 1996
and 1997, respectively, for these facilities. Additionally, the Company has
agreements with three telecommunications companies to locate POP sites and
certain of such equipment at their facilities. The expiration dates associated
with these agreements range from December 1998 to January 2000.
The Company leases its facilities and certain office equipment under non-
cancelable operating leases which expires at various dates through December
2001. Total rent expense for all operating leases was approximately
$1,291,000, $2,060,000 and $2,418,000 for the years ended December 31, 1995,
1996 and 1997, respectively.
Future minimum lease commitments for all noncancelable operating leases at
December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998.................................................................. $1,710
1999.................................................................. 829
2000.................................................................. 226
2001.................................................................. 216
------
Total................................................................. $2,981
======
</TABLE>
Capital Leases
In August 1994, the Company entered into a master lease agreement under
which a related party began installing networking equipment at the Company's
POP sites and data center. This agreement became effective upon installation
and acceptance by the Company on March 31, 1995. The lease provides for
monthly payments for terms of 48 or 60 months, depending upon the type of
equipment. The Company has continued to install equipment under the terms of
this agreement, resulting in a monthly payment of approximately $896,000 and
$1,443,000 at December 31, 1996 and 1997, respectively.
In September 1995, the Company entered into a master lease agreement with a
third party for an equipment lease line against which the Company has leased
approximately $3,342,000 as of December 31, 1997. The term of the lease is 36
months and provides for monthly payments of approximately $114,000 as of
December 31, 1997. The Company has granted to the third party a security
interest in all equipment leased under this agreement.
Assets capitalized under capital leases totaled approximately $48,856,000,
and $61,927,000 at December 31, 1996 and 1997, respectively, and are included
in computer and telecommunications equipment. Accumulated amortization for
assets capitalized under capital leases totaled approximately $8,306,000 and
$18,542,000 at December 31, 1996 and 1997, respectively. Amortization of
leased assets is included in depreciation and
F-12
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
amortization expense. Future minimum lease payments under capital lease
obligations at December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................ $20,516
1999................................................................ 16,077
2000................................................................ 12,498
2001................................................................ 8,444
Thereafter.......................................................... 1,586
-------
Total minimum lease payments........................................ 59,121
Less amount representing interest................................... 10,200
-------
Present value of net minimum lease payments......................... 48,921
Less current portion of capital leases.............................. 15,326
-------
Long-term portion of capital leases................................. $33,595
=======
</TABLE>
Other
The Company has a noncancelable service agreement with AT&T for the
utilization of its frame relay telecommunications network. The agreement
provides for minimum payments to AT&T of approximately $300,000 per month over
its three-year term, expiring in June 1999.
The Company has a noncancelable service agreement with MCI for the
utilization of its ATM telecommunications network. The agreement provides for
minimum payments to MCI of approximately $1,200,000 per year over its term,
expiring three years after the end of an initial ramp up period but no later
than June 2000. The Company also has a noncancelable telecommunications
service agreement with MCI for other services, including dedicated access and
800 service, that provides for minimum payments of approximately $8,500,000
over the term of the agreement, expiring in June 1998. The Company had
incurred expenses of approximately $3,700,000 and $8,100,000 for the years
ended December 31, 1996 and 1997, respectively, related to these other
services.
In November 1995, the Company entered into a two-year service agreement
under which a third party provided substantially all of the network analysis
and deployment and maintenance of POP sites. In 1997, the third party was
purchased by Williams Communication, Group Inc. (Williams), a stockholder of
the Company and whom also has a seat on the Board of Directors of the Company,
and the agreement was extended to December 31, 2000. The Company will
reimburse the related party for its employee compensation and direct costs for
services provided. At the end of the agreement, Williams is obligated to
transfer to the Company those personnel, resources, and facilities used to
support the Company's network analysis, POP site deployment, and maintenance.
Additionally, as part of the agreement, the Company granted 60,000 options for
its common stock to employees of Williams at an exercise price of $3.75. At
December 31, 1997, all of these options were vested.
In August 1997, the Company entered into a five-year service and equipment
agreement under which Williams, a related party, will provide
telecommunication services and equipment. The agreement provides for minimum
payments as follows: $1.2 million in 1998, $2.5 million in 1999, $7.0 million
in 2000, $6.5 million in 2001 and $4.0 million in 2002. At the election of the
third party, $2.0 million of the minimum payments may be paid by the issuance
of common stock of the Company at the then-current fair market value.
F-13
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. CONVERTIBLE DEBENTURES AND NOTES PAYABLE
Bridge Loans
At December 31, 1995, convertible debentures in the amount of $70,000,
representing 9,802 shares of common stock, were outstanding. The conversion of
these debentures into shares of common stock subject to rescission was
completed in March 1996.
In 1995, the Company issued convertible notes totaling $7,000,000 to
shareholders of which $4,000,000, plus accrued interest, was converted into
Series B convertible preferred stock in December 1995. The remaining
$3,000,000 outstanding at December 31, 1995 was converted into Series C
convertible preferred stock in February 1996.
In June 1997, the Company borrowed $3 million from a related party in the
form of a 10% convertible secured promissory note (the Secured Note). The
Secured Note automatically converted into 253,403 shares of common stock upon
the closing of the Public Offering at a per share conversion price equal to
the Public Offering price of $12.00. In connection with the Secured Note, the
Company issued a warrant to purchase 63,351 shares of common stock at an
exercise price of $6.00 per share (see Note 7).
In June 1997, the Company borrowed $2 million from a stockholder in the form
of a 10% unsecured promissory note (the Unsecured Note). The Unsecured Note
was repaid in August 1997. In connection with the Unsecured Note, the Company
issued a warrant to purchase 83,333 shares of common stock at an exercise
price of $6.00 per share (see Note 7).
Senior Notes
In December 1997, the Company issued 150,000 units (collectively, the
Units), each consisting of $1,000 principal amount of 12 3/4% Senior Notes
(the Senior Notes) due 2007 and one warrant (a Warrant), each Warrant
entitling the holder thereof to purchase 6.34 shares of common stock at $10.86
per share and such Warrants expire on December 15, 2007 (see Note 7) for
aggregate cash proceeds of $150.0 million. Approximately $52.5 million of the
cash proceeds was placed in a escrow account to fund the first six interest
payments in accordance with the Senior Note agreement.
The Warrants resulted in the right of the holders to purchase 951,108 shares
of the Company's common stock. The Company deemed the fair value of the
warrants, using the Black-Scholes method to be approximately $4,440,000 which
was recorded as a discount on the Senior Notes. The discount is being
amortized as interest expense over the term of the Senior Notes. Amortization
expense was nominal for the year ended December 31, 1997.
The Senior Notes will be redeemable at the option of the Company, in whole
or in part, at any time on or after December 15, 2002, at the redemption
prices set forth within the Senior Note agreement, plus accrued interest to
the date of redemption. In addition, on or prior to December 15, 2000, the
Company may redeem up to 35% of the original aggregate principal amount of
Senior Notes at a redemption price of 112.75% of the principal amount,
together with accrued and unpaid interest to the date of redemption with the
net cash proceeds of one or more public equity offerings or the sale of common
stock to a strategic investor, provided that at least 65% of the original
aggregate principal amount of the Senior Notes remain outstanding.
In connection with the issuance of Senior Notes, the Company incurred
approximately $5,000,000 of debt issuance costs which are classified as other
assets. These costs are being amortized as interest expense over the term of
the Senior Notes. Amortization expense was nominal for the year ended
December 31, 1997.
F-14
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. COMMON STOCK SUBJECT TO RESCISSION
In August 1993, the Company commenced sales of convertible debentures and
certain additional shares of its common stock. Through March 31, 1995, sales
of convertible debentures aggregated $4,260,000, and issuance of common stock
aggregated $890,000. The sale of common stock and sale of and/or conversion of
debentures into common stock was not made pursuant to a registration statement
filed under the Securities Act of 1933 (the Act) or any filings pursuant to
the laws of any of the states in which such sales occurred (State Blue Sky
Laws). Although at the time the Company believed the sale and conversion, if
applicable, of these securities was exempt from the provisions of the Act and
applicable State Blue Sky Laws, it appears that the appropriate exemptions may
not have been available. As a result, on September 30, 1997, the Company made
rescission offers (the "Rescission Offer") to certain purchasers of these
securities who are entitled to a return of the consideration paid for their
stock or debentures. As such, these shares have been classified as common
stock subject to rescission in the accompanying financial statements.
Additionally, options issued pursuant to the Company's 1995 Stock Incentive
Plan to Employees and Consultants and non-plan options were issued in various
states for which the Company may not have had an available exemption under
state laws. Such options are potentially subject to rescission and the Company
has included them in the Rescission Offer. As of December 31, 1997, statutes
of limitations under federal and state securities laws applicable to the
shares which may have been issued without securities laws exemptions have
lapsed and the Rescission Offer had expired. Pursuant to the Rescission Offer,
the Company offered to rescind the issuance of shares and options as to which
the applicable statute of limitations had not run. There can be no assurances
that the Company will not otherwise be subject to additional liabilities with
respect to such issuances. The Company repurchased 32,423 shares of Common
Stock subject to the Rescission Offer for $548,000 and paid related interest
charges of $125,000. Based upon the above, the Company has reclassified the
remaining rescission liability and shares into stockholders' equity.
6. STOCKHOLDERS' EQUITY
On August 5, 1996, the Company amended its Articles of Incorporation to
increase the number of authorized shares of Class A common stock and preferred
stock to 13,333,333 and 7,333,333, respectively. Of the 7,333,333 authorized
shares of preferred stock, 1,000,000, 866,667, 933,333, and 4,533,333 are
designated as Series A, B, C, and D, respectively.
Initial Public Offering and Direct Placements
Effective July 30, 1997, the Company reincorporated under the laws of the
state of Delaware, at which time a one for 15 reverse stock split took effect.
In addition, the Company authorized 100,000,000 shares of its common stock.
Upon closing of the initial public offering (the Public Offering), all
outstanding shares of Series A, B, C, and D convertible preferred stock and
Class B common stock were converted into common stock. All share and per share
data in these financial statements have been retroactively restated to reflect
the reverse stock split.
On August 1, 1997, the Company effected its Public Offering of common stock.
The offering consisted of 4,300,000 shares of common stock issued to the
public at $12.00 per share. Concurrent with the closing of the Public
Offering, certain strategic investors, including Williams, purchased directly
from the Company 1,499,236 shares of common stock having an aggregate purchase
price of approximately $18 million (including the cancellation of
approximately $3 million in indebtedness). Such shares are unregistered shares
and were purchased at the Public Offering price of $12.00 per share.
In connection with the direct purchase, the Company issued warrants to one
of the strategic investors to purchase 291,667 shares of the Company's common
stock at $6.00 per share (see Note 7). In September, the
F-15
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
underwriters exercised an option to purchase an additional 645,000 shares of
common stock at the Public Offering price of $12.00 per share to cover over-
allotments in connection with the Public Offering.
Preferred Stock
Preferred stock at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
SHARES
ISSUED AND PAR LIQUIDATION
AUTHORIZED OUTSTANDING VALUE AMOUNT PREFERENCE
---------- ----------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Series A convertible.... 1,000,000 906,454 $0.001 $10,146,987 $10,000,000
Series B convertible.... 866,667 366,946 $0.001 4,857,130 4,035,130
Series C convertible.... 933,333 928,243 $0.001 23,651,008 20,690,804
Series D convertible.... 4,533,333 2,699,588 $0.001 56,559,871 55,071,586
--------- ----------- -----------
4,901,231 $95,214,996 $89,797,520
========= =========== ===========
</TABLE>
In connection with the Public Offering, all shares of Series A, B, C and D
preferred stock were converted into common stock of the Company.
Common Stock
Common stock at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
SHARES ISSUED PAR
AUTHORIZED AND OUTSTANDING VALUE AMOUNT
---------- --------------- ------ ----------
<S> <C> <C> <C> <C>
Class A......................... 13,333,333 1,385,790 $0.001 $1,769,819
Class B......................... 10,024 7,117 $0.001 80,065
---------- --------- ----------
13,343,357 1,392,907 $1,849,884
========== ========= ==========
</TABLE>
In connection with the Public Offering, all shares of Class A and Class B
common stock were converted into common stock of the Company.
Stock Option Plans
1995 Stock Incentive Plan for Employees and Consultants. The Company's 1995
Stock Incentive Plan for Employees and Consultants (the 1995 Plan) provides
for the granting to employees of incentive stock options and for the granting
to employees and consultants of nonstatutory stock options, stock appreciation
rights (SARs) and restricted stock awards (RSAs). No SARs or RSAs have been
granted under the 1995 Plan. The 1995 Plan was approved by the Board of
Directors in September 1995 and Stockholders in September 1995, and an
amendment decreasing the number of shares thereunder from 840,000 to 762,600
was approved by the Board of Directors in February 1996. Incentive stock
options granted under the 1995 Plan must generally be exercised within three
months of the end of an optionee's status as an employee or consultant of the
Company, or within 12 months after such optionee's termination by death or
disability, but in no event later than the expiration of the option's term,
which may not exceed ten years. The exercise price of all options granted
under the 1995 Plan must be at least equal to the fair market value of the
common stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any option must
equal at least 110% of the fair market value on
F-16
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
the grant date and the term of the option must not exceed five years. The term
of all other options granted under the 1995 Plan may not exceed 10 years. The
1995 Plan was terminated effective October 4, 1996, and no further grants are
being made thereunder. A total of 762,600 shares of common stock are reserved
for issuance pursuant to the 1995 Plan. As of December 31, 1997, options to
purchase 332,130 shares of common stock at a weighted exercise price of $3.75
per share were outstanding under the 1995 plan.
Amended and Restated 1996 Stock Plan. The Company's Amended and Restated
1996 Stock Plan (the Restated 1996 Plan) provides for the granting to
employees of incentive stock options and for the granting to employees,
directors and consultants of nonstatutory stock options and stock purchase
rights (Rights). The 1996 Plan was initially approved by the Board of
Directors effective as of December 1996. It was amended and restated in May
1997 and approved by the Stockholders at the 1997 annual meeting. Unless
terminated sooner, the Restated 1996 Plan will terminate automatically in
December 2006. The form of option agreement currently in use provides that
options generally must be exercised within 90 days of the end of optionee's
status as an employee, director or consultant of the Company. Under the
Restated 1996 Plan, options must be exercised within twelve months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option's term. In the case of Rights, the Restricted Stock
Purchase Agreement issued in connection with the Right shall grant the Company
a repurchase option exercisable upon the voluntary or involuntary termination
of the purchaser's service with the Company. The purchase price for shares
repurchased pursuant to the Restricted Stock Purchase Agreement shall be the
original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to the Company. The repurchase option shall
generally lapse at a rate of 20% per year over five years. Generally, options
vest 25% after one year and 1/36 per month thereafter. The exercise price of
all incentive stock options granted under the Restated 1996 Plan must be at
least equal to the fair market value of the common stock on the date of grant.
The exercise price of nonstatutory stock options and Rights must at least be
equal to 85% of the fair market value of the common stock on the date of
grant. With respect to any participant who owns stock possessing more than 10%
of the voting power of all classes of the Company's outstanding capital stock,
the exercise price of any incentive or nonstatutory stock option granted must
equal at least 110% of the fair market value on the grant date. The term of an
incentive stock option granted to such a 10% stockholder must not exceed five
years. The term of other options granted under the Restated 1996 Plan may not
exceed ten years. A total of 1,100,000 shares of common stock are currently
reserved for issuance pursuant to the Restated 1996 Plan. As of December 31,
1997, options to purchase 914,283 shares of common stock at a weighted average
exercise price of $6.40 per share were outstanding, and 185,717 shares of
common stock remained available for future grant under the Restated 1996 Stock
Plan.
The Restated 1996 Plan provides that in the event of a merger of the Company
with or into another corporation, a sale of substantially all of the Company's
assets or a like transaction involving the Company, each option shall be
assumed or an equivalent option substituted by the successor corporation. If
the outstanding options are not assumed or substituted as described in the
preceding sentence, the Restated 1996 Plan provides the optionee or Right
holder to have the right to exercise the option or Right as to all of the
optioned stock, including shares as to which it would not otherwise be
exercisable.
1997 Stock Plan. The Company's 1997 Stock Plan (the 1997 Plan) provides for
the granting to employees of incentive stock options and for the granting to
employees, directors and consultants of nonstatutory stock options and stock
purchase rights (Rights). The 1997 Plan was approved by the Board of Directors
on June 6, 1997 and by the stockholders on June 30, 1997. Unless terminated
sooner, the 1997 Plan will terminate automatically in 2007. Options granted
under the 1997 Plan must generally be exercised within three months of the end
of optionee's status as an employee, director or consultant of the Company, or
within twelve months
F-17
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
after such optionee's termination by death or disability, but in no event
later than the expiration of the option's term. The exercise price of all
incentive stock options granted under the 1997 Plan must be at least equal to
the fair market value of the common stock on the date of grant. The exercise
price of nonstatutory stock options and Rights granted under the 1997 Plan is
determined by the 1997 Plan's Compensation Committee, but with respect to
nonstatutory stock options intended to qualify as "performance-based
compensation," the exercise price must at least be equal to the fair market
value of the common stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of the Company's outstanding capital stock, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market
value on the grant date and the term of such incentive stock option must not
exceed five years. The term of other incentive stock options granted under the
1997 Plan may not exceed ten years. A total of 1,500,000 shares of common
stock are currently reserved for issuance pursuant to the 1997 Plan. As of
December 31, 1997, options to purchase 511,271 shares of common stock at a
weighted average exercise price of $11.25 per share were outstanding, and
988,729 shares of common stock remained available for future grants under the
1997 plan.
The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets
or a like transaction involving the Company, each option shall be assumed or
an equivalent option substituted by the successor corporation. If the
outstanding options are not assumed or substituted as described in the
preceding sentence, the 1997 Plan provides for the optionee or Right holder to
have the right to exercise the option or Right as to all of the optioned
stock, including shares as to which it would not otherwise be exercisable.
1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock
Purchase Plan (the 1997 Purchase Plan) was approved by the Board of Directors
on June 6, 1997 and by the stockholders on June 30, 1997. A total of 500,000
shares of common stock has been reserved for issuance under the 1997 Purchase
Plan. The 1997 Purchase Plan, which is intended to qualify under Section 423
of the Internal Revenue Code, consists of 24-month offering periods beginning
on the first trading day on or after February 15 and August 15 of each year,
except for the first such offering period, which commenced on August 4, 1997
and ends on February 13, 1998. Each offering period contains four six-month
purchase periods. Employees are eligible to participate if they are
customarily employed by the Company or any designated subsidiary for at least
20 hours per week and more than five months in any calendar year. The 1997
Purchase Plan permits eligible employees to purchase common stock through
payroll deductions of up to 10% of an employee's compensation (excluding
overtime, shift premium, and other bonuses and incentive compensation), up to
a maximum of $25,000 for all offering periods ending within the same calendar
year. No employee may purchase more than 25,000 shares in any purchase period.
The price of stock purchased under the 1997 Purchase Plan is 85% of the lower
of the fair market value of the common stock at the beginning of the offering
period or at the end of the current purchase period. Employees may end their
participation at any time during an offering period, and they will be paid
their payroll deductions to date. Participation ends automatically upon
termination of employment with the Company.
The 1997 Purchase Plan provides that, in the event of a merger of the
Company with or into another corporation or a sale of substantially all of the
Company's assets, each outstanding option shall be assumed or an equivalent
option shall be substituted for it, or the Board of Directors or its committee
shall shorten the purchase and offering periods then in progress (so that
employees' rights to purchase stock under the Plan are exercised prior to the
merger or sale of assets). The 1997 Purchase Plan will terminate in 2007.
In April 1995, an additional 53,333 options to purchase common stock for
$30.00 per share were issued to two of the Company's executives in connection
with their employment by the Company. These options were fully vested upon
issuance and are exercisable over five years.
F-18
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
In October 1995 and August 1996, the exercise price of options to purchase
182,375 shares and 46,673 shares of common stock, respectively, were repriced
to $3.75 per share, the then fair value of the common stock, as determined by
the Company's Board of Directors.
The Company issued options to purchase 179,300 shares of common stock in
December 1996, 40,267 shares of common stock in January 1997, 216,733 shares
of common stock in June 1997, and repriced 181,473 options in July 1997. The
Company recorded deferred compensation, for financial reporting purposes, of
approximately $188,000 in 1996 and $1,303,000 for the year ended December 31,
1997, with respect to such option grants to reflect the difference between the
exercise price and the deemed fair value for financial reporting purposes of
these shares. Amortization of this deferred compensation was $0 in 1996 and
$222,000 in the year ended December 31, 1997. The amortization of this
deferred compensation will continue over the four year vesting period of the
associated stock options.
The following table summarizes stock option activity under all of the Plans:
<TABLE>
<CAPTION>
NUMBER PRICE
OF SHARES PER SHARE
--------- --------------
<S> <C> <C>
Balance at December 31, 1994.......................... 352,456 $3.75--$33.00
Granted.............................................. 642,075 $3.75--$33.00
Exercised............................................ (133) $9.00
Canceled............................................. (187,315) $11.25--$12.45
---------
Balance at December 31, 1995.......................... 807,083 $3.75--$33.00
Granted.............................................. 421,620 $3.75
Exercised............................................ (4,483) $3.75--$ 9.00
Canceled............................................. (95,218) $3.75--$30.00
---------
Balance at December 31, 1996.......................... 1,129,002 $3.75--$33.00
Granted.............................................. 1,472,338 $3.75--$11.25
Exercised............................................ (64,544) $3.75
Canceled............................................. (244,630) $3.75--$11.25
---------
Balance at December 31, 1997.......................... 2,292,166 $3.75--$30.00
Granted (unaudited).................................. 294,267 $9.88--$13.00
Exercised (unaudited)................................ (5,969) $3.75--$ 6.00
Canceled (unaudited)................................. (44,459) $3.75--$13.00
---------
Balance at March 31, 1998 (unaudited)................. 2,536,005 $3.75--$30.00
=========
</TABLE>
At December 31, 1997, vested options totaled 710,495.
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
WEIGHTED AVERAGE NUMBER
NUMBER REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE AND VESTED EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$3.75................... 1,029,579 8.20 $ 3.75 612,161 $ 3.75
$6.00................... 394,638 9.04 $ 6.00 43,336 $ 6.00
$8.85--$9.30............ 301,780 9.46 $ 9.11 -- --
$11.25.................. 511,171 9.83 $11.25 -- --
$12.45--$30.00.......... 54,998 6.80 $12.98 54,998 $12.98
--------- -------
Total................... 2,292,166 710,495
========= =======
</TABLE>
F-19
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
Stock-Based Compensation
Pro forma information regarding results of operations and loss per share is
required by FAS 123 for awards granted after December 31, 1994 as if the
Company had accounted for its stock-based awards to employees under a
valuation method permitted by FAS 123. The value of the Company's stock-based
awards to employees in 1995 and 1996 was estimated using the minimum value
method. Options granted after the Public Offering have been valued using the
Black-Scholes option pricing model. Among other things, the Black-Scholes
model considers the expected volatility of the Company's stock price,
determined in accordance with FAS 123, in arriving at an option valuation. The
minimum value method does not consider stock price volatility. Further,
certain other assumptions necessary to apply the Black-Scholes model may
differ significantly from assumptions used in calculating the value of options
granted in 1995 and 1996 under the minimum value method.
The fair value of the Company's stock-based awards to employees was
estimated assuming no expected dividends and the following weighted average
assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Expected volatility........................................ N/A N/A .250
Expected life of options in years.......................... 4.4 4.0 3.3
Risk-free interest rate.................................... 6.2% 6.3% 6.0%
Expected dividend yield.................................... 0.00% 0.00% 0.00%
</TABLE>
The weighted average minimum value of stock options granted during 1997 was
$1.87. For pro forma purposes, the estimated minimum value of the Company's
stock-based awards to employees is amortized over the options' vesting period.
The results of applying FAS 123 to the Company's option grants in 1995, 1996
and 1997 was not material to the results of operations or loss per share for
those years reported in the accompanying statements of operations. Because FAS
123 is applicable only to awards granted subsequent to December 31, 1994, its
pro forma effect will not be fully reflected until approximately 1998.
7. WARRANTS TO PURCHASE COMMON STOCK
In connection with the Company's Public Offering, all of the outstanding
warrants to purchase preferred stock were converted to warrants to purchase
common stock. The following warrants to purchase shares of the Company's
common stock were outstanding at December 31, 1997 and March 31, 1998:
<TABLE>
<CAPTION>
WARRANTS OUTSTANDING
----------------------------------
NUMBER WEIGHTED AVERAGE YEAR
EXERCISE PRICES OF SHARES EXERCISE PRICE EXPIRES
--------------- --------- ---------------- -------
<S> <C> <C> <C>
$ 7.40-$15.00............................. 187,517 $11.36 1998
$19.49.................................... 692,793 $19.49 1999
$ 3.75-$26.87............................. 320,203 $22.25 2000
$ 6.00.................................... 438,351 $ 6.00 2002
$10.86.................................... 951,108 $10.86 2007
---------
2,589,972
=========
</TABLE>
The above warrants were issued at various times during the three year period
ended December 31, 1997 in connection with a service agreement, a capital
lease agreement, and several debt and equity financings. The Company has
deemed the fair market value of such warrants, using the Black-Scholes method,
to be $822,000, $61,000, $5,700,000 and $2,623,000, respectively. The Company
is amortizing the value of the warrants over the term of the related
agreements which range from one to ten years. Amortization expense for the
years ended
F-20
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
December 31, 1995, 1996 and 1997 was $0, $1,942,000 and $1,720,000,
respectively. The Company has reserved the amount of shares necessary to meet
the exercise of these warrants.
8. EMPLOYEE BENEFIT PLANS
Retirement Savings Plan
The Company maintains a contributory 401(k) plan that covers substantially
all employees. The Company contributes $0.30 for every $1.00 contributed by
the participant up to a maximum of 1.5% of the participants' compensation. The
Company contributed $6,000, $45,000 and $158,000 to the plan during the years
ended December 31, 1995, 1996 and 1997, respectively.
9. INCOME TAXES
As of December 31, 1997, the Company had federal and state net operating
loss carryforwards of approximately $141,000,000 and $109,000,000,
respectively. The net operating loss carryforwards will expire at various
dates beginning in the years 2003 through 2012, if not utilized.
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes of December 31, 1996 and 1997 are as
follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $ 32,000,000 $ 55,000,000
Write-off of network equipment 5,000,000 4,000,000
Other, net..................................... 1,000,000 1,000,000
------------ ------------
Total deferred tax assets........................ 38,000,000 60,000,000
------------ ------------
Deferred tax liabilities:
Other, net 1,000,000 2,000,000
------------ ------------
Net deferred tax assets.......................... 37,000,000 58,000,000
Valuation allowance.............................. (37,000,000) (58,000,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
The Company believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability
of the deferred tax assets such that a full valuation allowance has been
recorded. These factors include the Company's history of net losses since
inception and the fact that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology. The
Company believes that, based on the currently available evidence, it is more
likely than not that the Company will not generate taxable income through
1999, and possibly beyond, and accordingly will not realize the Company's
deferred tax assets through 1999 and possibly beyond. The Company will
continue to assess the realizability of the deferred tax assets based on
actual and forecasted operating results. In addition, the utilization of net
operating losses may be subject to a substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration
of net operating losses before utilization.
The net valuation allowance increased by approximately $28,000,000 in 1996
and $21,000,000 in 1997.
F-21
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
10. RELATED PARTY TRANSACTIONS--OTHER
An officer of the Company is a majority shareholder of a vendor of the
Company. The Company incurred marketing fees to the vendor totaling $920,000,
$2,448,000 and $2,600,000 in the years ended December 31, 1995, 1996, and
1997, respectively.
11. CONTINGENCIES
In late April and early May, 1997, three putative securities class action
complaints were filed in the United States District Court, Central District by
certain stockholders of Diana Corporation (Diana), the parent corporation of
Sattel Communications LLC (Sattel), alleging securities fraud related to
plaintiffs' purchase of shares of Diana Common Stock in reliance upon
allegedly misleading statements made by defendants, Diana, Sattel and certain
of their respective affiliates, officers and directors. The Company was named
as a defendant in the complaint in connection with certain statements made by
Diana and officers of Diana related to the Company's purchase of network
switching equipment from Diana's Sattel subsidiary. The plaintiffs seek
unspecified compensatory damages. A trial date has not yet been determined.
While the ultimate outcome of such litigation is uncertain, the Company
believes it has meritorious defenses to the claims and intends to conduct a
vigorous defense. An unfavorable outcome in this matters could have a material
adverse effect on the Company's financial condition. In addition, even if the
ultimate outcomes is resolved in favor of the Company, the defense of such
litigation could entail considerable cost and the diversion of efforts of
management, either or which could have a material adverse effect on the
Company's results of operations.
Sattel Settlement
On April 22, 1997, a complaint was filed in the Los Angeles County,
California Superior Court against the Company and other unnamed defendants by
Sattel Communications LLC (Sattel). Sattel's complaint alleged that the
Company was in breach of an agreement to pay for up to $4.3 million of DSS
Switches from Sattel for use in the Company's network and also sought
unspecified consequential and punitive damages. On July 11, 1997, the Company
settled the complaint with Sattel in the amount of $4.4 million. The Company
also purchased 32,986 shares of the Company's common stock held by Sattel on
the day after the closing of the offering at the Public Offering price. In
August, 1997 the Company made cash payments to Sattel totaling approximately
$4.8 million, to satisfy its obligations pursuant to the settlement agreement
and the repurchase of common stock. Upon the settlement of the Sattel
complaint, the Company recorded $970,000 of other income related to the
reversal of previously established reserves.
F-22
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
12. SUBSEQUENT EVENTS
Acquisition
On February 5, 1998, the Company acquired all of the outstanding stock of
InterNex Information Services, Inc. (InterNex). The transaction was accounted
for using the purchase method of accounting. The total purchase price of
approximately $23.9 million consisted of a $15.5 million cash payment upon
closing and the assumption of approximately $8.4 million of InterNex's
liabilities (including acquisition costs).
A summary of the purchase price allocation is as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Current and other assets............................................ $ 1,348
Computer and telecommunications equipment........................... 4,784
Goodwill............................................................ 9,496
Other intangible assets............................................. 3,080
Write-off of in process technology.................................. 5,200
-------
Total purchase price allocation.................................... $23,908
=======
</TABLE>
The purchase price allocation has been recorded on a tentative basis, and
any adjustments to the purchase price allocation will be made within one year
of the purchase in accordance with generally accepted accounting principles.
Goodwill arising from the acquisition will be amortized on a straight-line
basis over 5 years. Other intangible assets include developed technology,
assembled workforce and customer lists and are being amortized over their
useful lives ranging from two to four years.
The following unaudited pro forma information represents the combined
results of operations as if the acquisition of InterNex had occurred as of the
beginning of the periods presented and does not purport to be indicative of
what would have occurred had the acquisitions been made as of that date or the
results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
(IN THOUSANDS,
EXCEPT PER
SHARE AMOUNTS)
--------------
<S> <C>
Pro forma net revenues..................................... $ 55,411
Pro forma net loss......................................... $(84,078)
Pro forma net loss per share............................... $ (8.52)
</TABLE>
The pro forma results include the historical operations of the Company and
the historical operations of the acquired business adjusted to reflect certain
pro forma adjustments, including the amortization of intangible assets,
totaling $3.2 million. In addition, the pro forma results reflect the interest
expense that would have been incurred had the Senior Notes been offered on
January 1, 1997. Finally, interest expense and related charges of bridge
financings have been excluded since such bridge financings would not have
occurred if the Senior Notes been offered on January 1, 1997. The pro forma
results do not include the write-off of purchased research and development of
$5.2 million since it is considered a non-recurring adjustment.
Early Retirement of Debt
On March 31, 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 and has a remaining liability of $1.5 million
F-23
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
for related sales taxes which is classified as accounts payable. The Company
recognized an extraordinary gain of $3.0 million in connection with this
transaction.
Operating Lease
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.
13. SUBSEQUENT EVENT (UNAUDITED)
Acquisition
On May 29, 1998, the Company acquired Delta Internet Services, Inc.
("Delta") in a transaction that was accounted for as a pooling of interests.
The Company issued approximately 226,449 shares of its common stock to Delta
shareholders in exchange for all outstanding Delta shares. In addition, the
Company assumed all outstanding Delta stock options and warrants to purchase
approximately 98,713 shares of the Company's stock. The results of operations
of Delta have not been material in relation to those of the Company, and thus
the consolidated results of operations and financial position of the Company
for previously reported periods, have not been restated.
Preferred Stock
In June 1998, the Company issued 150,000 shares of Series A Preferred Stock
(the "Shares"), each Share consisting of $1,000 principal amount of 13 1/2%
Senior Redeemable Exchangeable Preferred Stock due 2010 for aggregate cash
proceeds of $150.0 million.
The Shares will be redeemable at the option of the Company, in whole or in
part, at any time on or after June 1, 2003, at the redemption prices set forth
within the Share agreement, plus accrued dividends to the date of redemption.
In addition, on or prior to June 1, 2001, the Company may redeem up to 35% of
the original Shares at a redemption price of 113.25% of the principal amount,
together with accrued and unpaid dividends to the date of redemption with the
net cash proceeds of one or more public equity offerings or the sale of common
stock to a strategic investor.
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To InterNex Information Services, Inc.:
We have audited the accompanying balance sheet of InterNex Information
Services, Inc. (a California corporation and a wholly owned subsidiary of
InterNex Communications, Inc.) as of June 30, 1997 and the related statements
of operations, shareholder's equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of InterNex Information
Services, Inc. as of June 30, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company had an accumulated deficit of approximately
$11.2 million and negative working capital of approximately $2.7 million. In
addition, for the year ended June 30, 1997, the Company had a negative cash
flow from operations and incurred a significant net operating loss.
Management's current projections indicate that the cash flow from operations
will be insufficient to enable the Company to continue to meet its obligations
and fund operating expenses during fiscal 1998. These conditions, among
others, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Arthur Andersen LLP
San Jose, California
January 26, 1998
F-25
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNT)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1997
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash................................................... $ 68 $ 11
Accounts receivable, net of allowance for doubtful
accounts of $339 and $207, respectively............... 1,002 1,403
Inventories............................................ 162 40
Other current assets................................... 113 124
-------- -------
Total current assets.................................. 1,345 1,578
-------- -------
Property And Equipment:
Network and computer equipment......................... 6,310 6,618
Furniture and office equipment......................... 557 565
Leasehold improvements................................. 773 992
-------- -------
7,640 8,175
Less--Accumulated depreciation and amortization........ (1,872) (2,877)
-------- -------
Property and equipment, net............................. 5,768 5,298
-------- -------
Other Assets........................................ 145 144
-------- -------
$ 7,258 $ 7,020
======== =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current portion of capital lease obligations........... $ 523 $ 523
Notes payable to bank.................................. -- 1,228
Accounts payable....................................... 2,373 2,285
Accrued compensation and other employee benefits....... 165 216
Other current liabilities.............................. 994 1,052
-------- -------
Total current liabilities............................. 4,055 5,304
-------- -------
Capital lease obligations, net of current portion....... 1,115 852
-------- -------
Redeemable Convertible Preferred Stock.................. -- --
-------- -------
Commitments (Note 5)
Shareholder's Equity:
Preferred stock, no par value
Authorized--2,000,000 shares at June 30, 1997
Outstanding--None outstanding......................... -- --
Common stock, no par value
Authorized--30,000,000 shares
Issued and outstanding--7,000,000 at June 30, 1997.... 13,239 15,141
Accumulated deficit.................................... (11,151) (14,277)
-------- -------
Total shareholder's equity............................ 2,088 864
-------- -------
$ 7,258 $ 7,020
======== =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-26
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
YEAR ENDED ENDED DECEMBER 31,
JUNE 30, -------------------
1997 1996 1997
---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Service revenue............................... $ 8,486 $ 3,801 $4,823
Equipment revenue............................. 1,696 1,397 147
------- -------- ---------
Total revenues.............................. 10,182 5,198 4,970
------- -------- ---------
Operating Costs And Expenses:
Data communications and operations............ 7,563 3,024 4,304
Equipment cost................................ 1,415 1,170 108
Sales and marketing........................... 3,687 1,503 1,807
General and administrative.................... 2,730 1,175 1,308
Research and development...................... 569 258 504
------- -------- ---------
Total operating expenses.................... 15,964 7,130 8,031
------- -------- ---------
Loss from operations............................ (5,782) (1,932) (3,061)
Other income (expense):
Interest expense.............................. (84) (39) (110)
Other income, net............................. -- -- 45
------- -------- ---------
(84) (39) (65)
------- -------- ---------
Net loss........................................ $(5,866) $ (1,971) $ (3,126)
======= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------- ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT DEFICIT EQUITY
------ ------- ----------- -------------
<S> <C> <C> <C> <C>
Balance At June 30, 1996.............. 4,048 $ 6,609 $ (5,285) $ 1,324
Contributed capital received from
Internex Communications, Inc....... -- 6,330 -- 6,330
Conversion of redeemable convertible
preferred stock into common stock.. 2,952 300 -- 300
Net loss............................ -- -- (5,866) (5,866)
----- ------- -------- -------
Balance At June 30, 1997.............. 7,000 13,239 (11,151) 2,088
Contributed capital received from
Internex Communications, Inc.
(unaudited)........................ -- 1,902 -- 1,902
Net loss (unaudited)................ -- -- (3,126) (3,126)
----- ------- -------- -------
Balance At December 31, 1997
(unaudited).......................... 7,000 $15,141 $(14,277) $ 864
===== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
YEAR ENDED ENDED DECEMBER 31,
JUNE 30, --------------------
1997 1996 1997
---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................... $(5,866) $ (1,971) $ (3,126)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............. 1,380 506 1,005
Provision for doubtful accounts........... 563 140 --
Changes in operating assets and
liabilities:
Accounts receivable..................... (30) 304 (401)
Inventories............................. (29) (6) 122
Other assets............................ (190) (317) (10)
Accounts payable........................ 769 (217) (88)
Other current liabilities............... 385 414 109
------- --------- ---------
Net cash used in operating activities......... (3,018) (1,147) (2,389)
------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........... (3,140) (2,819) (535)
------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from Internex Communications,
Inc.......................................... 6,330 3,947 1,902
Proceeds from bank line of credit............. -- -- 1,228
Principal payments on capital lease
obligations.................................. (268) (28) (263)
------- --------- ---------
Net cash provided by financing activities..... 6,062 3,919 2,867
------- --------- ---------
Net decrease in cash.......................... (96) (47) (57)
Cash, beginning of period..................... 164 164 68
------- --------- ---------
Cash, end of period........................... $ 68 $ 117 $ 11
======= ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Equipment acquired under capital leases....... $ 1,316 $ -- $ --
======= ========= =========
Conversion of preferred stock into common
stock........................................ $ 300 $ -- $ --
======= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest expense................ $ 84 $ 39 $ 110
======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. NATURE OF OPERATIONS, ORGANIZATION AND LIQUIDITY:
InterNex Information Services, Inc. ("InterNex" or the "Company"), a
California corporation, is a wholly owned subsidiary of InterNex
Communications, Inc., a California corporation ("Communications Inc." or the
"Parent Company"). The Company provides Internet access services and products
to both organizations and individuals throughout the United States. The
Company offers a broad spectrum of internet access services ranging from dial-
up services to continuous access services using dedicated high speed telephone
circuits. In addition, the Company offers Web hosting services, training and
consulting services.
The Company was incorporated in August 1993, and commenced commercial
operations in May 1995. On March 17, 1995, the shareholders of InterNex
entered into an organization and financing agreement with Communications Inc.,
a California corporation formed for the purpose of acquiring InterNex, whereby
the shareholders of Internex converted 4,048,000 shares of common stock,
2,024,000 shares of Series A preferred stock and an $83,000 debenture into
4,275,720 shares of Communications Inc. common stock (see Note 6).
The Company is subject to certain risks and uncertainties including, among
others, the need for additional financing, dependence on key personnel, actual
and prospective competition by entities with greater financial and other
resources, risks associated with the development of the Internet market, risks
associated with consolidation in the industry, acquisitions and international
expansion, limited experience in the market for individual customers and the
software industry, technology and regulatory risks and dependence upon sole
and limited suppliers.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As of June 30, 1997, the Company had
an accumulated deficit of approximately $11.2 million and negative working
capital of approximately $2.7 million. In addition, for the year ended June
30, 1997, the Company had a negative cash flow from operations and incurred a
significant net operating loss. Management's current projections indicate that
the cash flow from operations will be insufficient to enable the Company to
continue to meet its obligations and fund operating expenses during fiscal
1998. The Company has been engaged in several efforts to raise the necessary
working capital through an equity offering to enable the Company to continue
to meet its debt obligations and monthly operating expense requirements,
however, there can be no assurances that the efforts to raise the necessary
working capital will be successful. These conditions, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates in Preparation of Financial Statements
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reporting amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues from services consist primarily of fixed monthly service fees and
hourly amounts based on usage and are recognized as the service is provided.
Payments received in advance of providing services are deferred until the
period such services are provided. Deferred revenue, which was approximately
$354,000 at June 30, 1997, is included in other current liabilities in the
accompanying balance sheet. Revenues from the sale of
F-30
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
equipment, which is provided by third-party equipment manufacturers, is
recognized at the time the installation of the equipment is complete.
Significant Customer
No single customer accounted for more than 10% of the Company's total
revenues during the year ended June 30, 1997.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends related
to past losses and other information. As of June 30, 1997, approximately 47%
of accounts receivable were concentrated with fifteen customers.
Inventories
Inventory consists of equipment purchased from third-party equipment
manufacturers and is stated at the lower of cost or market, using the first-
in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation, including
depreciation of assets acquired under capital leases, is provided using the
straight-line method over the estimated useful lives of the assets (or over
the lease term, if shorter, for capital leases and leasehold improvements),
which range from three to five years.
The Company leases certain network and computer equipment under non-
cancelable capital leasing arrangements. Total cost of equipment capitalized
under capital leases as of June 30, 1997 was approximately $1.9 million and
related accumulated depreciation was approximately $325,000.
3. RELATED PARTY TRANSACTIONS:
The Company shares its corporate facilities with Internex Communications
Inc., and Tiara Computer Systems, Inc., ("Tiara") a non-operating wholly owned
subsidiary of Internex Communications Inc. that filed Chapter 7 liquidation
bankruptcy in 1996. Reimbursement of general operating expenses from Internex
Communications Inc. and Tiara was not significant during fiscal 1997. As of
June 30, 1997, amounts due to or from either Communications Inc., or Tiara
were not significant, and the total payments received from Tiara during 1997
were not significant.
4. BANK DEBT:
On July 21, 1997, the Company entered into a $200,000 promissory note
payable agreement with a bank which bears interest at the prime rate plus 1.5%
(10% as of January 26, 1998). Principal borrowings and accrued interest under
the promissory note are due by January 31, 1998. As of January 26, 1998,
$200,000 was outstanding under the promissory note.
F-31
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On July 26, 1997 the Company entered into a line of credit agreement (the
"Agreement") with a bank which allows for borrowings of up to $3 million.
Advances under the Agreement will be limited to 80% of eligible accounts
receivable and bears interest at the prime rate plus 2.25% (10.5% as of July
26, 1997). Borrowings outstanding under the Agreement will be secured by
substantially all of the assets of the Company. The Agreement, which expires
on July 26, 1999, requires that the Company maintain a minimum tangible net
worth, including any subordinated debt, of $1.5 million at all times. As of
January 26, 1998, approximately $1.0 million was outstanding under the
Agreement.
5. COMMITMENTS, CONTINGENCIES AND CAPITAL LEASES:
The Company leases its facilities and certain office equipment under non-
cancelable operating leases which expire at various dates through 2005. Total
rental expense for all operating leases was approximately $311,000 for the
year ended June 30, 1997. The Company also leases certain equipment under non-
cancelable capital leasing arrangements with a leasing company. The
obligations under the capital leasing arrangements are at fixed annual
interest rates at approximately 7% and 15% and are collateralized by the
related equipment.
The Company also has certain non-cancelable operating lease agreements with
several telephone companies (the "Connectivity Agreements"). Under the
Connectivity Agreements, the Company leases access to various high-speed
telephone lines and other telecommunication-related services. Total rental
expense for all Connectivity Agreements was approximately $710,000 for the
year ended June 30, 1997.
As of June 30, 1997, future minimum lease payments under all non-cancelable
operating leases, capital leases and Connectivity Agreements were as follows
(in thousands):
<TABLE>
<CAPTION>
CONNECTIVITY OPERATING CAPITAL
YEAR ENDING JUNE 30, TOTAL AGREEMENTS LEASES LEASES
-------------------- ------ ------------ --------- -------
<S> <C> <C> <C> <C>
1998................................. $1,969 $ 899 $ 360 $ 711
1999................................. 2,078 1,030 362 685
2000................................. 1,732 902 343 486
2001................................. 537 381 35 122
2002................................. 136 105 31 --
Thereafter........................... 101 -- 101 --
------ ------ ------ ------
Total minimum lease payments......... $6,553 $3,317 $1,232 2,004
====== ====== ======
Less: Amounts representing interest
on capital leases................... (366)
------
Present value of net minimum capital
lease payments...................... 1,638
Less: Current portion................ (523)
------
Long-term portion.................... $1,115
======
</TABLE>
From time to time, the Company is involved in various disputes which arise
in the ordinary course of business. Management believes that the ultimate
resolution of these disputes will not have a material adverse impact on the
Company's financial position or results of operation.
6. CONVERTIBLE PREFERRED STOCK:
As of June 30, 1996, the Company has authorized the issuance of up to
3,000,000 shares of redeemable convertible preferred stock, of which it has
designated 2,024,000 shares as Series A preferred stock, which were held by
the Parent Company. On May 12, 1997, the Parent Company converted the
outstanding 2,024,000 shares
F-32
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of redeemable convertible Series A preferred stock it held in the Company into
2,952,000 shares of Internex common stock.
As of June 30, 1997, there were no shares of preferred stock outstanding. In
August 1997, the Company increased the number of authorized preferred shares
to 5,000,000 and designated 2,000,000 shares as Series A preferred stock.
7. COMMON STOCK:
The Company has authorized the issuance of up to 30,000,000 shares of common
stock, of which 7,000,000 are issued and held by the Parent Company as of June
30, 1997.
Stock Plans
In April 1997, the Company adopted the 1997 Stock Option Plan (the "1997
Plan"), whereby 1,500,000 shares of common stock have been reserved for future
issuance to employees, consultants and directors of the Company. As of January
26, 1998, no options have been issued under the 1997 Plan.
Effective March 17, 1995, the Parent Company adopted the 1995 Stock Option
Plan (the "1995 Plan"). Under the 1995 Plan, the Board of Directors of the
Parent Company may grant incentive and nonqualified stock options to
employees, consultants and directors of the Company to purchase common stock
of the Parent Company. The exercise price per share for an incentive stock
option cannot be less than the fair market value of a share of common stock,
as determined by the Board of Directors, on the date of grant. The exercise
price per share for nonqualified stock options cannot be less than 85% of the
fair market value, as determined by the Board of Directors of the Parent
Company, on the date of grant. Options generally expire ten years after the
date of grant and generally vest over a four-year period, not to exceed five
years.
In addition, effective March 17, 1995, the Parent Company adopted the 1995
Stock Purchase Plan (the "Purchase Plan"). Under the Purchase Plan, the Board
of Directors of the Parent Company may grant stock purchase rights to
employees and consultants of the Company to purchase common stock of the
Parent Company. The sale price per share for a stock purchase right cannot be
less than the fair market value of a share of common stock, as determined by
the Board of Directors of the Parent Company, on the date of grant. Stock
purchase rights are subject to repurchase as determined by the Board of
Directors of Communications Inc. As of June 30, 1997, rights to purchase
93,000 shares of common stock of the Parent Company have been granted to
consultants of the Company. The Company has recognized compensation expense of
approximately $25,000 related to these stock purchase rights for the years
ended June 30, 1997.
The following table summarizes option activity under the Option Plans:
<TABLE>
<CAPTION>
OPTIONS EXERCISE
OUTSTANDING PRICE
----------- ---------
<S> <C> <C>
Outstanding at June 30, 1996......................... 3,223,500 $0.08-.60
Granted............................................ 1,547,500 0.50
Exercised.......................................... (157,708) 0.08-.60
Cancelled.......................................... (2,121,042) 0.08-.60
---------- ---------
Outstanding at June 30, 1997......................... 2,492,250 0.08-.60
Exercisable at June 30, 1996......................... 528,000 0.08-.60
========== =========
Exercisable at June 30, 1997......................... 1,046,000 $ .08-.60
========== =========
</TABLE>
F-33
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company accounts for the Option Plan and Purchase Plan (the "Plans")
under APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, compensation expense is generally not recognized. Had
Compensation expense for the Plans been determined consistent with Statement
of Financial Accounting standards (SFAS) No. 123, "Accounting for Stock Based
Compensation," the Company's net loss would not had been materially different.
The weighted average fair values of options granted during fiscal 1997 was
$0.11 per share. The fair value of each stock option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in fiscal 1997: risk-free
interest rates of 6.2%; expected dividend yield of zero percent; expected life
of 4 years; expected volatility of zero percent.
8. INCOME TAXES:
The Parent Company accounts for income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes". This statement requires recognition of deferred
tax liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Payables
and deferrals of income taxes are allocated to Internex through intercompany
accounts from the Parent Company, as the Parent Company reports income taxes
on a consolidated basis. As of June 30, 1997, the portion of the consolidated
deferred tax asset allocated to Internex was approximately $3.5 million and
consisted of net operating loss carryforwards and cumulative book to tax
temporary differences. The Company believes sufficient uncertainty exists
regarding the realizability of these items, and accordingly, a valuation
allowance for the entire amount has been established.
As of June 30, 1997, the portion of the consolidated net operating loss
carryforwards for Federal and state purposes allocated to Internex was
approximately $10.1 million and $5.5 million, respectively. The net operating
loss carryforwards expire at various dates through 2012. Under current tax
law, utilization of the net operating loss in any given year will be limited
upon the occurrence of certain events, including significant changes in
ownership interests.
9. SUBSEQUENT EVENT (UNAUDITED):
On February 5, 1998, Concentric Network Corporation ("Concentric"), a
Delaware corporation, acquired all of the outstanding capital stock of the
Company from Communications Inc., pursuant to a Share Acquisition Agreement,
dated February 1, 1998, by and among Concentric, the Company and
Communications Inc. Concentric paid approximately $15.5 million in cash to
Communications Inc. as consideration for all of the issued and outstanding
shares of capital stock of the Company. The amount of consideration for the
transaction was determined by arms-length negotiations between the parties.
F-34
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
The selected unaudited pro forma condensed combined financial information
for the Company set forth below gives effect to the acquisition of InterNex
Information Services, Inc. ("InterNex"). The Unaudited Pro Forma Condensed
Combined Statement of Operations for the fiscal year ended December 31, 1997,
gives effect to the acquisition of InterNex as if such acquisition had been
consummated as of the beginning of the period presented. The Company's fiscal
year ends on December 31 and Internex's fiscal year ends on June 30. The
Unaudited Pro Forma Condensed Combined Statement of Operations for the year
ended December 31, 1997 combines the results of the Company for such year with
the results of InterNex for the calendar year ended December 31, 1997. The
historical financial information set forth below has been derived from, and is
qualified by reference to, the financial statements of the Company and
InterNex and should be read in conjunction with those financial statements and
the notes thereto included elsewhere herein. The selected unaudited pro forma
condensed combined financial information set forth below reflects certain
adjustments, including, among others, adjustments to reflect the amortization
of the excess purchase price in connection with the acquisition of InterNex
and the interest expense which would have been incurred had the 12 3/4% Senior
Notes offering ("Offering") occurred on January 1, 1997.
The pro forma data is based on the historical combined statements of the
Company and Internex giving effect to the InterNex acquisition under the
purchase method of accounting, and to the assumptions and adjustments (which
the Company believes to be reasonable) described in the accompanying Notes to
Unaudited Pro Forma Condensed Combined Financial Information. Under the
purchase method of accounting, assets acquired and liabilities assumed will be
recorded at their estimated fair value at the date of acquisition. The pro
forma adjustments set forth in the following unaudited pro forma combined
financial information are estimated and may differ from the actual adjustments
when they become known; however, no material differences are anticipated by
the Company.
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Financial Statements--the Company and InterNex Information
Services, Inc." The selected unaudited pro forma condensed combined financial
information set forth below does not purport to represent what the combined
results of operations of the Company would actually have been if the InterNex
acquisition and Offering had in fact occurred on such dates or to project the
future combined results of operations of the Company.
F-35
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
INTERNEX FOR PRO FORMA
COMPANY FOR THE YEAR PRO FORMA COMBINED FOR
THE YEAR ENDED ENDED BUSINESS PRO FORMA THE YEAR ENDED
DECEMBER 31, DECEMBER 31, COMBINATION DEBT OFFERING DECEMBER 31,
1997 1997 COMBINED ADJUSTMENTS ADJUSTMENTS 1997
-------------- ------------ -------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 45,457 $ 9,954 $ 55,411 $ -- $ -- $ 55,411
Cost and expenses:
Cost of revenue........ 61,439 9,196 70,635 -- -- 70,635
Development............ 4,850 815 5,665 -- -- 5,665
Marketing and sales.... 24,622 3,991 28,613 -- -- 28,613
General and
administrative........ 4,790 2,863 7,653 -- -- 7,653
Amortization of
goodwill and other
intangible assets..... -- -- -- 3,239(1) -- 3,239
-------- ------- -------- ------- -------- --------
Total cost and
expenses.............. 95,701 16,865 112,566 3,239 -- 115,805
-------- ------- -------- ------- -------- --------
Loss from operations.... (50,244) (6,911) (57,155) (3,239) -- (60,394)
Other income............ 1,233 45 1,278 -- -- 1,278
Interest income......... 1,217 -- 1,217 -- -- 1,217
Interest expense........ (7,788) (155) (7,943) -- (18,236)(2) (26,179)
-------- ------- -------- ------- -------- --------
Net Loss................ $(55,582) $(7,021) $(62,603) $(3,239) $(18,236) $(84,078)
======== ======= ======== ======= ======== ========
Pro forma net loss per
share(3)............... $ (8.52)
========
Shares used in computing
pro forma loss per
share.................. 9,872
========
</TABLE>
See accompanying notes.
F-36
<PAGE>
NOTES TO THE SELECTED UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
Pro forma business and Offering adjustments for the statement of operations
for the year ended December 31, 1997 are as follows:
(1) Reflects the amortization of the cost over the fair value of net
assets acquired for the InterNex acquisition as follows:
<TABLE>
<CAPTION>
COST OVER
THE FAIR VALUE
OF NET AMORTIZATION
ASSETS ACQUIRED PERIOD
--------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Goodwill........................................ 9,496 5 yrs
Other intangible assets ........................ 3,080 2 to 4 yrs
</TABLE>
The pro forma results do not include the write-off of purchased research and
development of $5.2 million since it is considered a non-recurring adjustment.
See Note 12 of Notes to Financial Statements.
(2) Reflects the interest expense that would have been incurred had the
Offering occurred on January 1, 1997.
(3) Pro forma net loss per share is computed using the weighted average
number of shares of common stock outstanding plus common equivalent shares
from convertible preferred stock, that was converted upon the Company's
proposed initial public offering (using the if-converted method), have been
included whether dilutive or anti-dilutive pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 98. Such pro forma net
loss per share reflects the impact of the adjustments above.
F-37
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THE
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY EXCHANGE OF SERIES A PREFERRED FOR SERIES
B PREFERRED MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICA-
TION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 14
Use of Proceeds.......................................................... 29
Dividend Policy.......................................................... 29
The Exchange Offer....................................................... 30
Capitalization........................................................... 39
Selected Historical Consolidated Financial Data.......................... 40
Management's Discussion and Analysis of Condition and Results of
Operations.............................................................. 42
Business................................................................. 53
Management............................................................... 68
Principal Stockholders................................................... 72
Description of the Preferred Stock....................................... 74
Description of the Exchange Debentures................................... 97
Description of Certain Indebtedness...................................... 131
Description of Capital Stock............................................. 132
Certain U.S. Federal Income Tax Considerations........................... 135
Plan of Distribution..................................................... 144
Legal Matters............................................................ 144
Experts.................................................................. 144
Glossary of Terms........................................................ G-1
Index to Financial Statements............................................ F-1
</TABLE>
================================================================================
================================================================================
$150,000,000
[CONCENTRIC LOGO]
EXCHANGE OFFER
WITH RESPECT TO
13 1/2% SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK DUE 2010
----------------
PROSPECTUS
AUGUST 11, 1998
----------------
EXCHANGE AGENT:
CHASEMELLON SHAREHOLDER SERVICES LLC
235 Montgomery Street, 23rd Floor
San Francisco, CA 94104
Attention: William Dougherty
Tel: (415) 743-1434; Fax: (415) 398-7156
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In May 1997, the Registrant entered into indemnification agreements with its
directors and officers providing for limitations on a director's and officer's
liability for judgments, settlements, penalties, fines and expenses of defense
(including attorneys' fees, bonds and costs of investigation) arising out of
or in any way related to acts or omissions as a director or an officer, or in
any other capacity in which services are rendered to the Registrant. The
Registrant believes its indemnification agreements will assist it in
attracting and retaining qualified individuals to serve as directors and
officers. The agreements provide that a director or officer is not entitled to
indemnification under such agreements (i) if the director or officer is not
relieved of liability under applicable law, (ii) for violations of certain
securities laws, or (iii) for certain claims initiated by the officer or
director. Due to the lack of applicable case law, it is not clear whether
indemnification is available in case of a breach of securities laws of the
U.S.
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Second Amended and Restated Certificate of Incorporation includes
a provision that eliminates the personal liability of its directors for
monetary damages for breach or alleged breach of their duty of care. In
addition, as permitted by Section 145 of the Delaware General Corporation Law
the Bylaws, as amended, of the Registrant provide that: the Registrant is
required to indemnify its directors and officers and persons serving in such
capacities in other business enterprises (including, for example, subsidiaries
of the Registrant) at the Registrant's request, to the fullest extent
permitted by Delaware law, including in those circumstances in which
indemnification would otherwise be discretionary; (ii) the Registrant may, in
its discretion, indemnify employees and agents in those circumstances where
indemnification is not required by law; (iii) the Registrant is required to
advance expenses, as incurred, to its directors and officers in connection
with defending a proceeding (except that it is not required to advance
expenses to a person against whom the Registrant brings a claim for breach of
the duty of loyalty, failure to act in good faith, intentional misconduct,
knowing violation of law or deriving an improper personal benefit); (iv) the
rights conferred in the Bylaws, as amended, are not exclusive, and the
Registrant is authorized to enter into indemnification agreements with its
directors, officers and employees; and (v) the Registrant may not
retroactively amend the Bylaw provisions in a way that is adverse to such
directors, officers and employees.
The Registrant's policy is to enter into indemnification agreements with
each of its directors and officers that provide the maximum indemnity allowed
to directors and officers by Section 145 of the Delaware General Corporation
Law and the Bylaws, as amended, as well as certain additional procedural
protections.
The indemnification provisions in the Bylaws, as amended, and the agreements
entered into between the Registrant and its directors and officers may be
sufficiently broad to permit indemnification of the Registrant's directors and
officers for liabilities arising under the Securities Act.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
3.2* Form of Amended and Restated Certificate of Incorporation of Registrant.
3.4* Amended and Restated Bylaws of Registrant.
4.1## Certificate of Designation of Voting Power, Designation Preferences and
Relative, Participating, Optional and Other Special Rights and
Qualifications, Limitations and Restrictions of 13 1/2% Series A and
Series B Senior Redeemable Exchangeable Preferred Stock, due 2010 of the
Registrant.
4.2## Form of Series A Preferred Stock Certificate.
4.3 Form of Series B Preferred Stock Certificate.
5.1## Opinion of Wilson Sonsini Goodrich& Rosati, Professional Corporation.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
10.1* Amended and Restated Registration Rights Agreement, as amended and
restated as of August 21, 1996, by and among the Registrant, GS
Capital Partners, L.P., Kleiner Perkins Caufield & Byers VII,
Comdisco, Inc., Intuit, Inc., certain listed holders of Series C
Convertible Preferred Stock, certain listed holders of Common Stock,
certain listed holders of Series D Convertible Preferred Stock, and
Racal-Datacom, Inc.
10.2* Preferred Stock and Warrant Purchase Agreement, dated as of April 20,
1995, by and among the Registrant, GS Capital Partners, L.P., and
Kleiner Perkins Caufield & Byers VII and KPCB Information Sciences
Zaibatsu Fund 11, as amended.
10.3* Form of Director and Officer Indemnification Agreement.
10.4* 1995 Stock Incentive Plan for Employees and Consultants, as amended
February 21, 1996.
10.5* Amended and Restated 1996 Stock Plan.
10.6* 1997 Stock Plan.
10.7* 1997 Employee Stock Purchase Plan.
10.8* Termination of Services and Indemnification Agreement, dated as of
February 15, 1996, by and between the Registrant and Marc Collins-
Rector and Chad Shackley.
10.9* Agreement, dated as of February 15, 1996, by and between the
Registrant and Randy Maslow.
10.10* Governance Agreement, dated May 15, 1997, by and among the Registrant,
Marc Collins--Rector, Chad Shackley, GS Capital Partners, L.P.,
Kleiner Perkins Caufield & Byers VII, KPCB VII Founders Fund, KPCB
Information Sciences Zaibatsu Fund II, and Intuit, Inc.
10.11+* Amended and Restated Employee Services and Staffing Agreement, dated
June 19, 1997, between the Registrant and Critical Technologies, Inc.,
as amended on September 30, 1996, and October 23, 1996, including
Colocation Services Agreement, dated as of November 1, 1994, between
the Registrant and Critical Technologies, Inc. and amendments thereto.
10.12+* Internet-Sign Up Wizard Referral and Microsoft Internet Explorer
License and Distribution Agreement, dated March 28, 1997, between the
Registrant and Microsoft Corporation.
10.13+* OEM License Agreement dated July 27, 1995, between the Registrant and
Netscape Communications Corporation, as amended by First Amendment,
dated January 2, 1996, Second Amendment, effective January 2, 1996,
and Third Amendment, dated May 21, 1996.
10.14+* "Dial up Client" Agreement, dated August 21, 1995, between the
Registrant and Netscape Communications Corporation.
10.15+* "Internet Account Server" Participation Agreement, dated as of January
14, 1997, between the Registrant and Netscape Communications
Corporation.
10.16+* Special Customer Arrangement, dated May 17, 1996, between MCI
Telecommunications Corporation and Sattel Communications LLC, as
amended by First Amendment, dated July 2, 1996; assigned to Registrant
by Assignment and Novation Agreement #2, dated as of August 7, 1996.
10.17+* Master Agreement for MCI Enhanced Services, effective November 1,
1996, between the Registrant and MCI Telecommunications Corporation.
10.18+* Amended and Restated Employee Services and Staffing Agreement.
10.19+* Amendment No. 3 to Internet Access Services Agreement, dated August
23, 1996, between the Registrant and Intuit Inc.
10.20+* Contract for Services, dated June 17, 1996, by and between the
Registrant and MFS Telephone, Inc.
10.21+* AT&T Contract Tariff Order, dated June 17, 1996, and Addendum of even
date therewith.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
10.22+* Master Lease Agreement Number CON01C Between Concentric Research
Corporation and Racal-Datacom, Inc. ("Racal"), dated August 4, 1994,
as Supplemented by Letter Agreement, dated March 30, 1995, Between the
Corporation and Racal.
10.23+* Lease Agreement Number CON04C between Concentric Network Corporation
and Racal-Datacom, Inc., dated June 26, 1996.
10.24+* Master On-site Maintenance Plan Agreement Number CON02C Between
Concentric Research Corporation and Racal-Datacom, Inc., dated August
24, 1994.
10.25* Lease Agreement, dated November 1, 1996, effective March 11, 1996, by
and between the Registrant and Saginaw Video Associates, d.b.a.
Saginaw Conference Center.
10.26* Amended and Restated Lease Agreement, dated as of October 7, 1996,
between the Registrant and Larry Shackley.
10.27* (Master) Lease, dated January 26, 1988, between Tandem Computers
Incorporated and Spicker- French #130, Limited Partnership, as amended
by Lease Amendment No.1, effective February 5, 1990, and Extension
Agreement, dated March 23, 1993.
10.28* Sublease, dated June 22, 1995, between the Registrant and Tandem
Computers Incorporated.
10.29* Sublease, dated April 25, 1995, between Tandem Computers Incorporated
and Passage Systems, Inc.
10.30* Assignment Agreement, dated December 6, 1996, by and between the
Registrant and Passage Systems, Inc.
10.31+* Internet Access Service Agreement, dated December 11, 1995, effective
as of August 1, 1995, between the Registrant and Intuit, Inc., as
amended.
10.32+* Virtual Private Network Services, dated August 16, 1996, between the
Registrant and WebTV Networks, Inc.
10.33+* Support Services Agreement, dated March 31, 1997, by and between the
Registrant and MCI Telecommunications Corporation.
10.34* Note and Warrant Purchase Agreement, dated June 19, 1997, by and
between the Registrant and Williams Communications Group, Inc. ("WCG")
10.35* Service Credits Letter Agreement, dated June 19, 1997, by and between
the Registrant and WCG.
10.36* $1,100,000 Obligation Letter Agreement, dated June 19, 1997, between
the Registrant and WCG.
10.37* Agency Agreement and Distribution Agreement, dated June 19, 1997,
between the Registrant and WCG.
10.38+* Co-Marketing Service Agreement, dated June 23, 1997 between the
Registrant and Netscape Communications, Inc. ("Netscape")
10.39+* Trademark License Agreement, dated June 23, 1997, between the
Registrant and Netscape.
10.40+* Software License Order Form, dated June 23, 1997, between the
Registrant and Netscape.
10.41* Note and Warrant Purchase Agreement, dated June 23, 1997, between the
Registrant, Kleiner Perkins, Caufield& Byers VII and KPCB Information
Science Zaibatsu Fund VII.
10.42** Amendment to Virtual Private Network Services Agreement between the
Registrant and WebTV Networks, Inc., dated November 1, 1997.
10.43# Registration Rights Agreement, dated as of December 18, 1997 between
the Registrant and UBS Securities LLC, Bear Stearns& Co., Inc., and
Wheat First Securities, Inc. (the "Initial Purchasers")
10.44# Purchase Agreement, dated as of December 15, 1997 between the
Registrant and the Initial Purchasers.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
10.45# Warrant Agreement, dated as of December 18, 1997, between the Regis-
trant and Chase Manhattan Bank and Trust Company, National Associa-
tion, as warrant agent.
10.46# Warrant Registration Rights Agreement, dated as of December 18, 1997,
between the Registrant and the Initial Purchasers.
10.47# Escrow Agreement, dated December 18, 1997, between the Registrant and
Chase Manhattan Bank and Trust Company, National Association.
10.48++ Standard Industrial Lease, dated as of February 17, 1995, by and be-
tween Tiara Computer Systems, Inc. and Internex Information Services,
Inc.
10.49++ Standard Industrial Lease, dated as of July 25, 1996, by and between
San Tomas Investors II and Internex Information Service, Inc.
10.50# Form of Indenture, dated as of December 18, 1997 among the Registrant
and Chase Manhattan Bank and Trust Company, National Association, as
trustee.
10.51# Form of $150,000,000 12 3/4% Senior Note due 2007.
10.52# Form of $150,000,000 new 12 3/4% Senior Notes due 2007.
10.53# Form of Warrant to purchase Common Stock.
10.54## Purchase Agreement, dated as of June 3, 1998, by and among the
Registrant and the Initial Purchasers.
10.55## Registration Rights Agreement, dated as of June 8, 1998, by and among
the Registrant and the Initial Purchasers.
10.56## Form of Indenture for Exchange Debentures.
11.1++ Statement re computation of earnings per share.
12.1## Statement of computation of ratio of earnings to fixed charges.
21.1++ List of Subsidiaries.
23.1## Consent of Wilson Sonsini Goodrich& Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of Ernst & Young, LLP, Independent Auditors.
23.3 Consent of Arthur Andersen LLP, Independent Public Accountants
24.1## Power of Attorney (see page II-6).
27.1++ Financial Data Schedule.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
</TABLE>
- --------
* Incorporated by reference from Registrant's Registration Statement on Form
S-1 (File No. 333-27241), as amended, declared effective by the Securities
and Exchange Commission ("SEC") on July 31, 1997.
** Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997, filed with the SEC on November
14, 1997.
+ Certain information in this exhibit was omitted and filed separately with
the Securities and Exchange Commission pursuant to a confidential treatment
request.
# Incorporated by reference from Registrant's Registration Statement on Form
S-4 (File No. 333-45055), as amended, declared effective by the SEC on
March 24, 1998.
++ Incorporated by reference from Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
## Previously filed.
(b) Financial Statement Schedules
None.
II-4
<PAGE>
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes as follows:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(2) That every prospectus (i)that is filed pursuant to paragraph (1)
immediately preceding, or (ii)that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona filed offering thereof.
(b) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of
this Form, within one business day of receipt of such request, and to
send the incorporated documents by first call mail or other equally
prompt means. This includes information contained in documents filed
subsequent o the effective date of the registration statement through the
date of responding to the request.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT OF REGISTRATION STATEMENT ON FORM S-
4 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE CITY OF CUPERTINO, STATE OF CALIFORNIA, ON THE 11TH DAY OF AUGUST, 1998.
Concentric Network Corporation
By: /s/ Henry R. Nothhaft
---------------------------------
HENRY R. NOTHHAFT, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW ON AUGUST 11, 1998,
BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Henry R. Nothhaft President and Chief August 11, 1998
- ------------------------------------- Executive Officer
HENRY R. NOTHHAFT (Principal Executive
Officer), Director
/s/ Michael F. Anthofer Chief Financial August 11, 1998
- ------------------------------------- Officer (Principal
MICHAEL F. ANTHOFER Financial and
Accounting Officer)
* Director August 11, 1998
- -------------------------------------
VINOD KHOSLA
Director
- -------------------------------------
FRANCO REGIS
* Director August 11, 1998
- -------------------------------------
GARY E. RIESCHEL
* Director August 11, 1998
- -------------------------------------
GORDON C. MARTIN
/s/ Henry R. Nothhaft
- -------------------------------------
*HENRY R. NOTHHAFT
ATTORNEY-IN-FACT
</TABLE>
II-6
[CAPTION]
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.2* Form of Amended and Restated Certificate of Incorporation of
Registrant.
3.4* Amended and Restated Bylaws of Registrant.
4.1## Certificate of Designation of Voting Power, Designation Preferences
and Relative, Participating, Optional and Other Special Rights and
Qualifications, Limitations and Restrictions of 13 1/2% Series A and
Series B Senior Redeemable Exchangeable Preferred Stock, due 2010 of
the Registrant.
4.2## Form of Series A Preferred Stock Certificate.
4.3 Form of Series B Preferred Stock Certificate.
5.1## Opinion of Wilson Sonsini Goodrich& Rosati, Professional Corporation.
10.1* Amended and Restated Registration Rights Agreement, as amended and
restated as of August 21, 1996, by and among the Registrant, GS
Capital Partners, L.P., Kleiner Perkins Caufield & Byers VII,
Comdisco, Inc., Intuit, Inc., certain listed holders of Series C
Convertible Preferred Stock, certain listed holders of Common Stock,
certain listed holders of Series D Convertible Preferred Stock, and
Racal-Datacom, Inc.
10.2* Preferred Stock and Warrant Purchase Agreement, dated as of April 20,
1995, by and among the Registrant, GS Capital Partners, L.P., and
Kleiner Perkins Caufield & Byers VII and KPCB Information Sciences
Zaibatsu Fund 11, as amended.
10.3* Form of Director and Officer Indemnification Agreement.
10.4* 1995 Stock Incentive Plan for Employees and Consultants, as amended
February 21, 1996.
10.5* Amended and Restated 1996 Stock Plan.
10.6* 1997 Stock Plan.
10.7* 1997 Employee Stock Purchase Plan.
10.8* Termination of Services and Indemnification Agreement, dated as of
February 15, 1996, by and between the Registrant and Marc Collins-
Rector and Chad Shackley.
10.9* Agreement, dated as of February 15, 1996, by and between the
Registrant and Randy Maslow.
10.10* Governance Agreement, dated May 15, 1997, by and among the Registrant,
Marc Collins--Rector, Chad Shackley, GS Capital Partners, L.P.,
Kleiner Perkins Caufield & Byers VII, KPCB VII Founders Fund, KPCB
Information Sciences Zaibatsu Fund II, and Intuit, Inc.
10.11+* Amended and Restated Employee Services and Staffing Agreement, dated
June 19, 1997, between the Registrant and Critical Technologies, Inc.,
as amended on September 30, 1996, and October 23, 1996, including
Colocation Services Agreement, dated as of November 1, 1994, between
the Registrant and Critical Technologies, Inc. and amendments thereto.
10.12+* Internet-Sign Up Wizard Referral and Microsoft Internet Explorer
License and Distribution Agreement, dated March 28, 1997, between the
Registrant and Microsoft Corporation.
10.13+* OEM License Agreement dated July 27, 1995, between the Registrant and
Netscape Communications Corporation, as amended by First Amendment,
dated January 2, 1996, Second Amendment, effective January 2, 1996,
and Third Amendment, dated May 21, 1996.
10.14+* "Dial up Client" Agreement, dated August 21, 1995, between the
Registrant and Netscape Communications Corporation.
10.15+* "Internet Account Server" Participation Agreement, dated as of January
14, 1997, between the Registrant and Netscape Communications
Corporation.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.16+* Special Customer Arrangement, dated May 17, 1996, between MCI
Telecommunications Corporation and Sattel Communications LLC, as
amended by First Amendment, dated July 2, 1996; assigned to Registrant
by Assignment and Novation Agreement #2, dated as of August 7, 1996.
10.17+* Master Agreement for MCI Enhanced Services, effective November 1,
1996, between the Registrant and MCI Telecommunications Corporation.
10.18+* Amended and Restated Employee Services and Staffing Agreement.
10.19+* Amendment No. 3 to Internet Access Services Agreement, dated August
23, 1996, between the Registrant and Intuit Inc.
10.20+* Contract for Services, dated June 17, 1996, by and between the
Registrant and MFS Telephone, Inc.
10.21+* AT&T Contract Tariff Order, dated June 17, 1996, and Addendum of even
date therewith.
10.22+* Master Lease Agreement Number CON01C Between Concentric Research
Corporation and Racal-Datacom, Inc. ("Racal"), dated August 4, 1994,
as Supplemented by Letter Agreement, dated March 30, 1995, Between the
Corporation and Racal.
10.23+* Lease Agreement Number CON04C between Concentric Network Corporation
and Racal-Datacom, Inc., dated June 26, 1996.
10.24+* Master On-site Maintenance Plan Agreement Number CON02C Between
Concentric Research Corporation and Racal-Datacom, Inc., dated August
24, 1994.
10.25* Lease Agreement, dated November 1, 1996, effective March 11, 1996, by
and between the Registrant and Saginaw Video Associates, d.b.a.
Saginaw Conference Center.
10.26* Amended and Restated Lease Agreement, dated as of October 7, 1996,
between the Registrant and Larry Shackley.
10.27* (Master) Lease, dated January 26, 1988, between Tandem Computers
Incorporated and Spicker- French #130, Limited Partnership, as amended
by Lease Amendment No.1, effective February 5, 1990, and Extension
Agreement, dated March 23, 1993.
10.28* Sublease, dated June 22, 1995, between the Registrant and Tandem
Computers Incorporated.
10.29* Sublease, dated April 25, 1995, between Tandem Computers Incorporated
and Passage Systems, Inc.
10.30* Assignment Agreement, dated December 6, 1996, by and between the
Registrant and Passage Systems, Inc.
10.31+* Internet Access Service Agreement, dated December 11, 1995, effective
as of August 1, 1995, between the Registrant and Intuit, Inc., as
amended.
10.32+* Virtual Private Network Services, dated August 16, 1996, between the
Registrant and WebTV Networks, Inc.
10.33+* Support Services Agreement, dated March 31, 1997, by and between the
Registrant and MCI Telecommunications Corporation.
10.34* Note and Warrant Purchase Agreement, dated June 19, 1997, by and
between the Registrant and Williams Communications Group, Inc. ("WCG")
10.35* Service Credits Letter Agreement, dated June 19, 1997, by and between
the Registrant and WCG.
10.36* $1,100,000 Obligation Letter Agreement, dated June 19, 1997, between
the Registrant and WCG.
10.37* Agency Agreement and Distribution Agreement, dated June 19, 1997,
between the Registrant and WCG.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.38+* Co-Marketing Service Agreement, dated June 23, 1997 between the
Registrant and Netscape Communications, Inc. ("Netscape")
10.39+* Trademark License Agreement, dated June 23, 1997, between the
Registrant and Netscape.
10.40+* Software License Order Form, dated June 23, 1997, between the
Registrant and Netscape.
10.41* Note and Warrant Purchase Agreement, dated June 23, 1997, between the
Registrant, Kleiner Perkins, Caufield& Byers VII and KPCB Information
Science Zaibatsu Fund VII.
10.42** Amendment to Virtual Private Network Services Agreement between the
Registrant and WebTV Networks, Inc., dated November 1, 1997.
10.43# Registration Rights Agreement, dated as of December 18, 1997 between
the Registrant and UBS Securities LLC, Bear Stearns& Co., Inc., and
Wheat First Securities, Inc. (the "Initial Purchasers")
10.44# Purchase Agreement, dated as of December 15, 1997 between the
Registrant and the Initial Purchasers.
10.45# Warrant Agreement, dated as of December 18, 1997, between the Regis-
trant and Chase Manhattan Bank and Trust Company, National Associa-
tion, as warrant agent.
10.46# Warrant Registration Rights Agreement, dated as of December 18, 1997,
between the Registrant and the Initial Purchasers.
10.47# Escrow Agreement, dated December 18, 1997, between the Registrant and
Chase Manhattan Bank and Trust Company, National Association.
10.48++ Standard Industrial Lease, dated as of February 17, 1995, by and be-
tween Tiara Computer Systems, Inc. and Internex Information Services,
Inc.
10.49++ Standard Industrial Lease, dated as of July 25, 1996, by and between
San Tomas Investors II and Internex Information Service, Inc.
10.50# Form of Indenture, dated as of December 18, 1997 among the Registrant
and Chase Manhattan Bank and Trust Company, National Association, as
trustee.
10.51# Form of $150,000,000 12 3/4% Senior Note due 2007.
10.52# Form of $150,000,000 new 12 3/4% Senior Notes due 2007.
10.53# Form of Warrant to purchase Common Stock.
10.54## Purchase Agreement, dated as of June 3, 1998, by and among the
Registrant and the Initial Purchasers.
10.55## Registration Rights Agreement, dated as of June 8, 1998, by and among
the Registrant and the Initial Purchasers.
10.56## Form of Indenture for Exchange Debentures.
11.1++ Statement re computation of earnings per share.
12.1 Statement of computation of ratio of earnings to fixed charges.
21.1++ List of Subsidiaries.
23.1## Consent of Wilson Sonsini Goodrich& Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of Ernst & Young, LLP, Independent Auditors.
23.3 Consent of Arthur Andersen LLP, Independent Public Accountants
24.1## Power of Attorney (see page II-6).
27.1++ Financial Data Schedule.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
</TABLE>
- --------
* Incorporated by reference from Registrant's Registration Statement on Form
S-1 (File No. 333-27241), as amended, declared effective by the Securities
and Exchange Commission ("SEC") on July 31, 1997.
** Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997, filed with the SEC on November
14, 1997.
+ Certain information in this exhibit was omitted and filed separately with
the Securities and Exchange Commission pursuant to a confidential treatment
request.
# Incorporated by reference from Registrant's Registration Statement on Form
S-4 (File No. 333-45055), as amended, declared effective by the SEC on
March 24, 1998.
++ Incorporated by reference from Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
## Previously filed.
<PAGE>
EXHIBIT 4.3
INCORPORATED UNDER THE LAWS OF THE STATE OF
DELAWARE
SEE RESTRICTIONS ON REVERSE SIDE
B-1 **150,000**
CUSIP 20589R 30 5
13 1/2% SERIES B SENIOR REDEEMABLE EXCHANGEABLE
PREFERRED STOCK DUE 2010
CONCENTRIC NETWORK CORPORATION
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PREFERRED STOCK
$1.00 PAR VALUE PER SHARE OF CONCENTRIC NETWORK CORPORATION
This is to Certify that ** CEDE & CO. ** is the owner of **ONE HUNDRED
FIFTY THOUSAND** shares of fully paid and non-assessable 13 1/2% SERIES B SENIOR
REDEEMABLE EXCHANGEABLE PREFERRED STOCK DUE 2010 of CONCENTRIC NETWORK
CORPORATION transferable only on the books of the Corporation by the holder
hereof in person or by the duly authorized Attorney upon surrender of this
certificate properly endorsed. Witness, the seal of the Corporation and the
signatures of its duly authorized officers.
Dated: August 11, 1998
/s/ PETER J. BERGERON /s/ HENRY R. NOTHHAFT
- ----------------------------- ----------------------------
Peter J. Bergeron, Secretary Henry R. Nothhaft, President
<PAGE>
FOR VALUE RECEIVED I DO HEREBY SELL, ASSIGN, AND TRANSFER UNTO ________________
______________________________ SHARES REPRESENTED BY THE WITHIN CERTIFICATE AND
DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT ___________________________, AS
ATTORNEY TO TRANSFER THE SAID SHARES ON THE SHARE REGISTER OF THE WITHIN NAMED
CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED ____________________, 199____ ______________________________________
(Shareholder)
____________________________________ ______________________________________
(Witness) (Shareholder)
NOTICE: THE SIGNATURE ON THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR A SECURITY IN
DEFINITIVE FORM, THIS SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE
DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO
THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY
SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR
DEPOSITARY. THE DEPOSITARY TRUST COMPANY SHALL ACT AS THE DEPOSITARY UNTIL A
SUCCESSOR SHALL BE APPOINTED Y THE COMPANY AND THE TRANSFER AGENT. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY, A NEW YORK CORPORATION ("DTC"),TO ISSUER OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN
THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER
ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER,
PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
<PAGE>
EXHIBIT 12.1
EXHIBIT 12.1--STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------
PROFORMA THREE MONTHS
YEAR ENDED DECEMBER 31, YEAR ENDED ENDED MARCH 31,
---------------------------------------------- DECEMBER 31, ------------------
1993 1994 1995 1996 1997 1997(1) 1997 1998(1)
------- ------- -------- -------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net loss before
extraordinary item..... $(1,245) $(4,290) $(22,008) $(66,381) $(55,582) $(84,078) $(14,681) $(23,269)
Interest expense........ 24 76 858 3,874 7,788 26,179 1,199 6,493
Interest portion of
rental expense......... -- 23 110 176 135 150 34 38
------- ------- -------- -------- -------- -------- -------- --------
Earnings................ $(1,221) $(4,191) $(21,040) $(62,331) $(47,659) $(57,749) $(13,448) $(16,738)
======= ======= ======== ======== ======== ======== ======== ========
Interest expense........ $ 24 $ 76 $ 858 $ 3,874 $ 7,788 $ 26,179 $ 1,199 $ 6,493
Interest portion of
rental charges......... -- 23 110 176 135 150 34 38
------- ------- -------- -------- -------- -------- -------- --------
Fixed charges........... $ 24 $ 99 $ 968 $ 4,050 $ 7,923 $ 26,329 $ 1,233 $ 6,531
======= ======= ======== ======== ======== ======== ======== ========
Ratio of earnings to
fixed charges.......... -- -- -- -- -- -- -- --
======= ======= ======== ======== ======== ======== ======== ========
Deficiency of earnings
to cover fixed
charges................ $(1,245) $(4,290) $(22,008) $(66,381) $(55,582) $(84,078) $(14,681) $(23,269)
======= ======= ======== ======== ======== ======== ======== ========
</TABLE>
- --------
(1) The deficiency of earnings to cover fixed charges does not reflect
preferred stock dividends and accretion relating to the issuance of
150,000 shares of Series A Preferred Stock which was issued in June 1998
(the "Offering"). Preferred stock dividends and accretion on a pro forma
basis, assuming the Offering occurred on January 1, 1997 would have been
$21.8 million for the year ended December 31, 1997. Assuming the Offering
occurred on January 1, 1998 dividends and accretion on a pro forma basis
for the three months ended March 31, 1998 would have been $5.2 million.
See Note 13 of Notes to Financial Statements.
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the caption "Experts" and
"Selected Historical Consolidated Financial Data" and to the use of our report
dated January 27, 1998, except for Note 12 as to which the date is March 31,
1998, in the Registration Statement (Form S-4) and the related Prospectus of
Concentric Network Corporation for the registration of $150 million of 13 1/2%
Series B Senior Redeemable Exchangeable Preferred Stock due 2010.
/s/ Ernst & Young LLP
San Jose, California
August 7, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated January 26, 1998 on the financial statements of Internex
Information Services, Inc. for the year ended June 30, 1997 included in this
Form S-4. It should be noted that we have not audited any financial statements
of Internex Information Services, Inc. for any period subsequent to June 30,
1997 or performed any audit procedures subsequent to the date of our report.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
August 7, 1998
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
CONCENTRIC NETWORK CORPORATION
OFFER TO EXCHANGE ITS
NEW 13 1/2% SERIES B SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK DUE 2010
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
13 1/2% SERIES A SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK DUE 2010
PURSUANT TO THE PROSPECTUS
DATED AUGUST 11, 1998
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME ON SEPTEMBER 9, 1998 (UNLESS EXTENDED BY CONCENTRIC NETWORK
CORPORATION IN ITS SOLE DISCRETION) (SUCH TIME AND SUCH DATE, AND AS SUCH
TIME AND DATE MAY BE EXTENDED, THE "EXPIRATION DATE").
If you desire to accept the Exchange Offer (as defined below), this Letter
of Transmittal should be completed, signed, and submitted to:
CHASEMELLON SHAREHOLDER SERVICES, LLC
Exchange Agent
BY MAIL, OVERNIGHT DELIVERY OR HAND:
ChaseMellon Shareholder Services, LLC
235 Montgomery Street, 23rd Floor
San Francisco, CA 94104
Attention: William Dougherty
(Concentric Network Corporation)
FACSIMILE TRANSMISSIONS:
(415) 398-7156
TO CONFIRM BY TELEPHONE OR FOR INFORMATION:
(415) 743-1434
ORIGINALS OF ALL DOCUMENTS SENT BY FACSIMILE SHOULD BE SENT PROMPTLY BY
HAND, OVERNIGHT COURIER OR REGISTERED OR CERTIFIED MAIL.
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A NUMBER
OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus (as defined below).
1
<PAGE>
This Letter of Transmittal is to be completed by holders of Series A
Preferred (as defined below) either if Series A Preferred are to be forwarded
herewith or if tenders of Series A Preferred are to be made by book-entry
transfer to an account maintained by ChaseMellon Shareholder Services, LLC
(the "Exchange Agent") at The Depository Trust Company ("DTC") pursuant to the
procedures set forth in "The Exchange Offer-Procedures for Tendering" in the
Prospectus.
Holders of Series A Preferred whose certificates (the "Certificates") for
such Series A Preferred are not immediately available or who cannot deliver
their Certificates and all other required documents to the Exchange Agent on
or prior to the Expiration Date (as defined in the Prospectus) or who cannot
complete the procedures for book-entry transfer on a timely basis, must tender
their Series A Preferred according to the guaranteed delivery procedures set
forth in "The Exchange Offer-Procedures for Tendering" in the Prospectus. See
Instruction 1 hereto. DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE
DELIVERY TO THE EXCHANGE AGENT.
2
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to Concentric Network Corporation, a Delaware
corporation (the "Company"), the aggregate principal amount of the Company's
13 1/2% Series A Preferred Senior Redeemable Exchangeable Preferred Stock due
2010 (the "Series A Preferred") described in Box 1 below, in exchange for a
like aggregate principal amount of the Company's new 13 1/2% Series B Senior
Redeemable Exchangeable Preferred Stock due 2010 (the "Series B Preferred")
which have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), upon the terms and subject to the conditions set forth in
the Prospectus dated August 11, 1998 (as the same may be amended or
supplemented from time to time, the "Prospectus"), receipt of which is
acknowledged, and in this Letter of Transmittal (which, together with the
Prospectus, constitutes the "Exchange Offer").
Subject to, and effective upon, the acceptance for exchange of all or any
portion of the Series A Preferred tendered herewith in accordance with the
terms and conditions of the Exchange Offer (including, if the Exchange Offer
is extended or amended, the terms and conditions of any such extension or
amendment), the undersigned hereby sells, assigns and transfers to or upon the
order of the Company all right, title and interest in and to such Series A
Preferred as are being tendered herewith. The undersigned hereby irrevocably
constitutes and appoints ChaseMellon Shareholder Services, LLC as the Exchange
Agent (the "Exchange Agent") as its agent and attorney-in-fact (with full
knowledge that the Exchange Agent is also acting as agent of the Company in
connection with the Exchange Offer) with respect to the tendered Series A
Preferred, with full power of substitution (such power of attorney being
deemed to be an irrevocable power coupled with an interest), subject only to
the right of withdrawal described in the Prospectus, to (i) deliver
Certificates for Series A Preferred to the Company together with all
accompanying evidences of transfer and authenticity to, or upon the order of,
the Company, upon receipt by the Exchange Agent, as the undersigned's agent,
of the Series A Preferred to be issued in exchange for such Series A Preferred
(ii) present Certificates for such Series A Preferred for transfer, and to
transfer the Series A Preferred on the books of the Company, and (iii) receive
for the account of the Company all benefits and otherwise exercise all rights
of beneficial ownership of such Series A Preferred, all in accordance with the
terms and conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS FULL
POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE SERIES
A PREFERRED TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR EXCHANGE,
THE COMPANY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE
AND CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES, AND THAT THE
SERIES A PREFERRED TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE CLAIMS OR
PROXIES. THE UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY
ADDITIONAL DOCUMENTS DEEMED BY THE COMPANY OR THE EXCHANGE AGENT TO BE
NECESSARY OR DESIRABLE TO COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF
THE SERIES A PREFERRED TENDERED HEREBY, AND THE UNDERSIGNED WILL COMPLY WITH
ITS OBLIGATIONS UNDER THE REGISTRATION RIGHTS AGREEMENT. THE UNDERSIGNED HAS
READ AND AGREES TO ALL OF THE TERMS OF THE EXCHANGE OFFER.
The name(s) and address(es) of the registered holder(s) of the Series A
Preferred tendered hereby should be printed in Box 1 below, if they are not
already set forth below, as they appear on the Certificates representing such
Series A Preferred. The Certificate number(s) and the Series A Preferred that
the undersigned wishes to tender should be indicated in the appropriate box
below.
If any tendered Series A Preferred are not exchanged pursuant to the
Exchange Offer for any reason, or if Certificates are submitted for more
Series A Preferred than are tendered or accepted for exchange, Certificates
for such nonexchanged or nontendered Series A Preferred will be returned (or,
in the case of Series A Preferred tendered by book-entry transfer, such Series
A Preferred will be credited to an account maintained at DTC), without expense
to the tendering holder, promptly following the expiration or termination of
the Exchange Offer.
3
<PAGE>
The undersigned understands that tenders of Series A Preferred pursuant to
any one of the procedures described in "The Exchange Offer-Procedures for
Tendering Series A Preferred" in the Prospectus and in the instructions hereto
will, upon the Company's acceptance for exchange of such tendered Series A
Preferred, constitute a binding agreement between the undersigned and the
Company upon the terms and subject to the conditions of the Exchange Offer.
The undersigned recognizes that, under certain circumstances set forth in the
Prospectus, the Company may not be required to accept for exchange any of the
Series A Preferred tendered hereby.
Unless otherwise indicated herein in the box entitled "Special Exchange
Instructions" below (Box 7), the undersigned hereby directs that the Series B
Preferred be issued in the name(s) of the undersigned or, in the case of a
book-entry transfer of Series A Preferred, that such Series B Preferred be
credited to the account indicated below maintained at DTC. If applicable,
substitute Certificates representing Series B Preferred not exchanged or not
accepted for exchange will be issued to the undersigned or, in the case of a
book-entry transfer of Series A Preferred, will be credited to the account
indicated below maintained at DTC. Similarly, unless otherwise indicated under
"Special Delivery Instructions" (Box 8), please deliver Series B Preferred to
the undersigned at the address shown below the undersigned's signature.
BY TENDERING SERIES A PREFERRED AND EXECUTING THIS LETTER OF TRANSMITTAL,
THE UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT (i) THE UNDERSIGNED IS NOT
AN "AFFILIATE" OF THE COMPANY, (ii) ANY SERIES B PREFERRED TO BE RECEIVED BY
THE UNDERSIGNED ARE BEING ACQUIRED IN THE ORDINARY COURSE OF ITS BUSINESS,
(iii) THE UNDERSIGNED HAS NO ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO
PARTICIPATE IN A DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF
SERIES B PREFERRED TO BE RECEIVED IN THE EXCHANGE OFFER, AND (iv) IF THE
UNDERSIGNED IS NOT A BROKER-DEALER, THE UNDERSIGNED IS NOT ENGAGED IN, AND
DOES NOT INTEND TO ENGAGE IN, A DISTRIBUTION (WITHIN THE MEANING OF THE
SECURITIES ACT) OF SUCH SERIES B PREFERRED. BY TENDERING SERIES A PREFERRED
PURSUANT TO THE EXCHANGE OFFER AND EXECUTING THIS LETTER OF TRANSMITTAL, A
HOLDER OF SERIES A PREFERRED WHICH IS A BROKER-DEALER REPRESENTS AND AGREES,
CONSISTENT WITH CERTAIN INTERPRETIVE LETTERS ISSUED BY THE STAFF OF THE
DIVISION OF CORPORATION FINANCE OF THE SECURITIES AND EXCHANGE COMMISSION TO
THIRD PARTIES, THAT SUCH SERIES A PREFERRED WERE ACQUIRED BY SUCH BROKER-
DEALER FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER
TRADING ACTIVITIES (SUCH A BROKER-DEALER WHICH IS TENDERING SERIES A PREFERRED
IS HEREIN REFERRED TO AS A "PARTICIPATING BROKER-DEALER") AND IT WILL DELIVER
THE PROSPECTUS (AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME) MEETING THE
REQUIREMENTS OF THE SECURITIES ACT IN CONNECTION WITH ANY RESALE OF SERIES B
PREFERRED (PROVIDED THAT, BY SO ACKNOWLEDGING AND BY DELIVERING A PROSPECTUS,
SUCH PARTICIPATING BROKER-DEALER WILL NOT BE DEEMED TO ADMIT THAT IT IS AN
"UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT).
THE COMPANY HAS AGREED THAT, SUBJECT TO THE PROVISIONS OF THE REGISTRATION
RIGHTS AGREEMENT, THE PROSPECTUS, AS IT MAY BE AMENDED OR SUPPLEMENTED FROM
TIME TO TIME, MAY BE USED BY A PARTICIPATING BROKER-DEALER IN CONNECTION WITH
RESALES OF SERIES B PREFERRED RECEIVED IN EXCHANGE FOR SERIES A PREFERRED,
WHERE SUCH SERIES A PREFERRED WERE ACQUIRED BY SUCH PARTICIPATING BROKER-
DEALER FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER
TRADING ACTIVITIES, FOR A PERIOD ENDING 180 DAYS AFTER THE EXPIRATION DATE OR,
IF EARLIER, WHEN ALL SERIES B PREFERRED HAVE BEEN DISPOSED OF BY SUCH
PARTICIPATING BROKER-DEALER. IN THAT REGARD, EACH PARTICIPATING BROKER-DEALER,
BY TENDERING SUCH SERIES A PREFERRED AND EXECUTING THIS LETTER OF TRANSMITTAL,
AGREES THAT, UPON RECEIPT OF NOTICE FROM THE COMPANY OF THE OCCURRENCE OF ANY
EVENT OR THE DISCOVERY OF ANY FACT WHICH MAKES ANY STATEMENT CONTAINED OR
INCORPORATED
4
<PAGE>
BY REFERENCE IN THE PROSPECTUS UNTRUE IN ANY MATERIAL RESPECT OR WHICH CAUSES
THE PROSPECTUS TO OMIT TO STATE A MATERIAL FACT NECESSARY IN ORDER TO MAKE THE
STATEMENTS CONTAINED THEREIN, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY
WERE MADE, NOT MISLEADING OR OF THE OCCURRENCE OF CERTAIN OTHER EVENTS
SPECIFIED IN THE REGISTRATION RIGHTS AGREEMENT, SUCH PARTICIPATING BROKER-
DEALER WILL SUSPEND THE SALE OF SERIES B PREFERRED PURSUANT TO THE PROSPECTUS
UNTIL THE COMPANY HAS AMENDED OR SUPPLEMENTED THE PROSPECTUS TO CORRECT SUCH
MISSTATEMENT OR OMISSION AND HAS FURNISHED COPIES OF THE AMENDED OR
SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING BROKER-DEALER OR THE COMPANY HAS
GIVEN NOTICE THAT THE SALE OF THE SERIES B PREFERRED MAY BE RESUMED, AS THE
CASE MAY BE.
Each share of Series B Preferred will be entitled to dividends from the most
recent date to which dividends have been paid or duly provided for on the
Series A surrendered in exchange for such Series A Preferred or, if no such
dividends have been paid or duly provided for on such Series A Preferred, from
June 8, 1998. Holders of the Series A Preferred whose Series A Preferred are
accepted for exchange will not receive accumulated dividends on such Series A
Preferred for any period from and after the last Dividend Payment Date to
which dividends have been paid or duly provided for on such Series A Preferred
prior to the original issue date of the Series B Preferred or, if no such
dividends have been paid or duly provided for, will not receive any
accumulated dividends on such Series A Preferred, and will be deemed to have
waived the right to receive any dividends on such Series A Preferred which
have accumulated from and after such Dividend Payment Date or, if no such
dividends have been paid or duly provided for, from and after June 3, 1998.
Dividends on the Preferred Stock will be payable quarterly in arrears on March
1, June 1, September 1 and December 1 commencing on September 1, 1998.
All authority herein conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned. Except
pursuant to the withdrawal rights set forth in the Prospectus, this tender is
irrevocable.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING
THE BOXES BELOW AND FOLLOW THE INSTRUCTIONS BEGINNING ON PAGE 11 HEREOF.
5
<PAGE>
ALL TENDERING HOLDERS COMPLETE THIS BOX 1:
BOX 1
- --------------------------------------------------------------------------------
DESCRIPTION OF SERIES A PREFERRED TENDERED
(ATTACH ADDITIONAL SIGNED PAGES, IF NECESSARY)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IF BLANK,
PLEASE PRINT
NAME(S) AND
ADDRESS(ES) OF
REGISTERED
HOLDER(S),
EXACTLY AS
NAME(S)
APPEAR(S) ON CERTIFICATE NUMBER OF SHARES
SERIES A NUMBER(S) OF NUMBER OF SHARES OF SERIES A
PREFERRED SERIES A OF SERIES A PREFERRED
CERTIFICATE(S): PREFERRED* PREFERRED TENDERED
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
TOTAL TOTAL AMOUNT
AMOUNT $ TENDERED $
- --------------------------------------------------------------------------------
</TABLE>
* Need not be completed by book-entry holders.
** All Series A Preferred held shall be deemed tendered unless a lesser
number is specified this column. See Instruction 4.
BOX 2
- --------------------------------------------------------------------------------
BOOK-ENTRY TRANSFER
(SEE INSTRUCTION 1 BELOW)
- --------------------------------------------------------------------------------
[_] CHECK HERE IF TENDERED SERIES A PREFERRED ARE BEING DELIVERED BY BOOK-
ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH
DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution ________________________________________________
DTC Account Number ___________________________________________________________
Transaction Code Number ______________________________________________________
6
<PAGE>
BOX 3
NOTICE OF GUARANTEED DELIVERY
(SEE INSTRUCTION 1 BELOW)
- --------------------------------------------------------------------------------
[_] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY
IF TENDERED SERIES A PREFERRED ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name of Registered Holders(s) ________________________________________________
Window Ticket Number (if any) ________________________________________________
Date of Execution of Notice of Guaranteed Delivery ___________________________
Name of Institution which Guaranteed Delivery ________________________________
If Guaranteed Delivery is to be made By Book-Entry Transfer: _________________
Name of Tendering Institution ________________________________________________
DTC Account Number ___________________________________________________________
Transaction Code Number ______________________________________________________
BOX 4
RETURN OF NON-EXCHANGED SERIES A PREFERRED TENDERED BY BOOK-ENTRY TRANSFER
(SEE INSTRUCTIONS 4 AND 6 BELOW)
- --------------------------------------------------------------------------------
[_] CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED SERIES A
PREFERRED ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET FORTH
ABOVE.
BOX 5
PARTICIPATING BROKER-DEALER
- --------------------------------------------------------------------------------
[_] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE SERIES A PREFERRED
FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING
ACTIVITIES (A "PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE TEN
ADDITIONAL COPIES OF THE PROSPECTUS AND TEN COPIES OF ANY AMENDMENTS OR
SUPPLEMENTS THERETO.
Name: ________________________________________________________________________
Address: _____________________________________________________________________
7
<PAGE>
BOX 6
TENDERING HOLDER SIGNATURE
- --------------------------------------------------------------------------------
Holder(s) Sign Here __________________________________________________________
(SEE INSTRUCTIONS 2, 5 AND 6 BELOW)
(PLEASE COMPLETE SUBSTITUTE FORM W-9 IN BOX 9 BELOW)
(NOTE: SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 2)
Must be signed by registered holder(s) exactly as name(s) appear(s) on
Certificate(s) for the Series A Preferred hereby tendered or on a security
position listing, or by a person(s) authorized to become the registered
holder(s) by endorsements and documents transmitted herewith (including such
opinions of counsel, certifications and other information as may be required
by the Company or the Trustee for the Series A Preferred to comply with the
restrictions on transfer applicable to the Series A Preferred). If signature
is by an attorney-in-fact, executor, administrator, trustee, guardian,
officer of a corporation or another acting in a fiduciary capacity or
representative capacity, please set forth the signer's full title. See
Instruction 5 below.
______________________________
(Signature(s) of Holder(s))
Date ________________ , 1998
Name(s) ______________________________________________________________________
(Please Print)
Address ______________________________________________________________________
(Include Zip Code)
Area Code and Telephone Number _______________________________________________
(Tax Identification or Social Security Number(s)) ____________________________
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 1, 2 AND 5 BELOW)
______________________________
Authorized Signature
Name _________________________________________________________________________
(Please Print)
Date _________________, 1998
Capacity or Title ____________________________________________________________
Name of Firm _________________________________________________________________
Address ______________________________________________________________________
(Include Zip Code)
Area Code and Telephone Number _______________________________________________
8
<PAGE>
BOX 7 BOX 8
SPECIAL EXCHANGE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6 (SEE INSTRUCTIONS 1, 5 AND 6
BELOW) BELOW)
To be completed ONLY if the Se- To be completed ONLY if Series B
ries B Preferred are to be issued Preferred are to be sent to some-
in the name of someone other than one other than the registered
the registered holder of the Se- holder of the Series A Preferred
ries A Preferred whose name(s) whose name(s) appear(s) above, or
appear(s) above. to such registered holder(s) at
an address other than that shown
above.
Issue Series B Preferred to:
Name _____________________________ Mail Series B Preferred to:
(Please Print) Name______________________________
Address __________________________ (Please Print)
__________________________________ Address __________________________
(Include Zip Code) __________________________________
__________________________________ (Include Zip Code)
(Tax Identification or Social __________________________________
Security Number) (Tax Identification or Social
Security Number)
9
<PAGE>
BOX 9
SUBSTITUTE FORM W-9
TO BE COMPLETED BY ALL TENDERING SECURITYHOLDERS
(SEE INSTRUCTION 9 BELOW)
SIGN THIS SUBSTITUTE FORM W-9 IN ADDITION TO THE SIGNATURE(S) REQUIRED IN BOX
6
PAYER'S NAME: CHASEMELLON SHAREHOLDERS SERVICES, LLC
- --------------------------------------------------------------------------------
PART I--Please provide your TIN:
SUBSTITUTE TIN (either your social
security number or employer ----------------------
FORM W-9 identification number) in
the box to the right and
certify by signing and
dating below.
--------------------------------------------------------
DEPARTMENT OF PART II--Awaiting TIN [_]
THE TREASURY SIGN THIS FORM AND THE CERTIFICATION OF AWAITING
INTERNAL TAXPAYER IDENTIFICATION NUMBER BELOW.
REVENUE --------------------------------------------------------
SERVICE PART III--EXEMPT [_]
See enclosed Guidelines for additional information
and SIGN THIS FORM.
--------------------------------------------------------
Certification--Under penalties of
perjury, I certify that:
PAYER'S REQUEST (1) The number shown on this form is my correct
FOR TAXPAYER taxpayer identification number (or I am waiting
IDENTIFICATION for a number to be issued to me); and
NUMBER (TIN) (2) I am not subject to backup withholding because
AND CERTIFICATION (i) I am exempt from backup withholding, or (ii) I
have not been notified by the Internal Revenue
Service (IRS) that I am subject to backup
withholding as a result of a failure to report all
interest or dividends, or (iii) the IRS has notified
me that I am no longer subject to backup
withholding.
(3) Any other information provided on this form is
true and correct.
-------------------------------------------------------
Certification Instructions--You must cross out item
(iii) in Part (2) above if you have been notified by
the IRS that you are subject to backup withholding
because of underreporting interest or dividends on
your tax return and you are no longer subject to
backup withholding.
Signature: _______________________ Date: __________
- --------------------------------------------------------------------------------
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE
IF YOU CHECKED THE BOX IN PART 2 OF THE SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(2) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number by the
time of payment, 31% of all payments made to me on account of the Exchange
Notes shall be retained until I provide a taxpayer identification number to
the Exchange Agent and that, if I do not provide my taxpayer identification
number within 60 days, such retained amounts shall be remitted to the
Internal Revenue Service as backup withholding and 31% of all reportable
payments made to me thereafter will be withheld and remitted to the Internal
Revenue Service until I provide a taxpayer identification number.
Signature: ___________________________________________________________________
Date: ________________________________________________________________________
- --------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU. PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
FOR ADDITIONAL INFORMATION.
10
<PAGE>
INSTRUCTIONS TO LETTER OF TRANSMITTAL
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
GENERAL
Please do not send Certificates for Series A Preferred directly to the
Company. Your Series A Preferred Certificates, together with your signed and
completed Letter of Transmittal and any required supporting documents should
be mailed in the enclosed addressed envelope, or otherwise delivered, to the
Exchange Agent, at either of the addresses indicated on the first page hereof.
THE METHOD OF DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, OR OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES
This Letter of Transmittal is to be completed if either (a) Certificates are
to be forwarded herewith or (b) tenders are to be made pursuant to the
procedures for tender by book-entry transfer set forth in "The Exchange
Offer--Procedures for Tendering Series A Preferred" in the Prospectus.
Certificates, or timely confirmation of a book-entry transfer of such Series A
Preferred into the Exchange Agent's account at DTC, as well as this Letter of
Transmittal (or facsimile thereof), properly completed and duly executed, with
any required signature guarantees, and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent at its address
set forth herein on or prior to 5:00 p.m., New York City time, on the
Expiration Date. Existing Holders may tender some or all of their shares of
Series A Preferred pursuant to the Exchange Offer.
Holders who wish to tender their Series A Preferred and (i) whose Series A
Preferred are not immediately available or (ii) who cannot deliver their
Series A Preferred, this Letter of Transmittal and all other required
documents to the Exchange Agent on or prior to the Expiration Date or (iii)
who cannot complete the procedures for delivery by book-entry transfer on a
timely basis, may tender their Series A Preferred by properly completing and
duly executing a Notice of Guaranteed Delivery pursuant to the guaranteed
delivery procedures set forth in "The Exchange Offer--Procedures for Tendering
Series A Preferred" in the Prospectus and by completing Box 3 hereof. Pursuant
to such procedures: (i) such tender must be made by or through an Eligible
Institution (as defined below); (ii) a properly completed and duly executed
Notice of Guaranteed Delivery, substantially in the form made available by the
Company, must be received by the Exchange Agent on or prior to the Expiration
Date; and (iii) the Certificates (or a book-entry confirmation (as defined in
the Prospectus)) representing all tendered Series A Preferred, in proper form
for transfer, together with a Letter of Transmittal (or facsimile thereof),
properly completed and duly executed, with any required signature guarantees
and any other documents required by this Letter of Transmittal, must be
received by the Exchange Agent within three New York Stock Exchange trading
days after the date of execution of such Notice of Guaranteed Delivery, all as
provided in "The Exchange Offer--Procedures for Tendering Series A Preferred"
in the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted by
facsimile or mail to the Exchange Agent, and must include a guarantee by an
Eligible Institution in the form set forth in such Notice. For Series A
Preferred to be properly tendered pursuant to the guaranteed delivery
procedure, the Exchange Agent must receive a Notice of Guaranteed Delivery on
or prior to the Expiration Date. As used herein, "Eligible Institution" means
a firm or other entity identified in Rule 17Ad-15 under the Exchange Act as
"an eligible guarantor institution," including (as such terms are defined
therein) (i) a bank; (ii) a broker, dealer, municipal securities broker or
dealer or government securities broker or dealer; (iii) a credit union; (iv) a
national securities exchange, registered securities association or clearing
agency; or (v) a savings association, that is a participant in the Securities
Transfer Agents Medallion Program, the New York Stock Exchange Medallion
Signature Program or the Stock Exchanges Medallion Program.
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<PAGE>
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance
of such tender.
2. GUARANTEE OF SIGNATURES
No signature guarantee on this Letter of Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered holder (which
term, for purposes of this document, shall include any participant in DTC
whose name appears on a security position listing as the owner of the
Series A Preferred) of Series A Preferred tendered herewith, unless such
holder(s) has completed either the box entitled "Special Exchange
Instructions" (Box 7) or the box entitled "Special Delivery Instructions"
(Box 8) above, or
(ii) such Series A Preferred are tendered for the account of a firm that
is an Eligible Institution.
In all other cases, an Eligible Institution must guarantee the signature(s)
on this Letter of Transmittal (Box 6). See Instruction 5.
3. INADEQUATE SPACE
If the space provided in the box captioned "Description of Series A
Preferred" is inadequate, the Certificate number(s) and/or the principal
amount of Series A Preferred and any other required information should be
listed on a separate signed schedule which should be attached to this Letter
of Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS
Tenders of all Series A Preferred will be accepted. If less than all the
Series A Preferred evidenced by any Certificate submitted are to be tendered,
fill in the amount of Series A Preferred which are to be tendered in Box 1
under the column "Amount of Series A Preferred Tendered". In such case, new
Certificate(s) for the remainder of the Series A Preferred that were evidenced
by your Existing Certificate(s) will only be sent to the holder of the Series
A Preferred, promptly after the Expiration Date. All Series A Preferred
represented by Certificates delivered to the Exchange Agent will be deemed to
have been tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Series A Preferred may be
withdrawn at any time prior to 5;00 pm., New York City time, to the Expiration
Date. In order for a withdrawal to be effective on or prior to that time, a
written, telegraphic, telex or facsimile transmission of such notice of
withdrawal must be timely received by the Exchange Agent at its address set
forth above or in the Prospectus on or prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Series A Preferred to be withdrawn (the "Depositor"), (ii) identify the
Series A Preferred to be withdrawn (including the certificate number(s) and
principal amount of such Series A Preferred, or, in the case of Series A
Preferred transferred by book-entry transfer, the name and number of the
account at DTC to be credited), (iii) be signed by the Existing Holder in the
same manner as the original signature on the Letter of Transmittal by which
such Series A Preferred were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee register the transfer of such Series A Preferred into the name of the
person withdrawing the tender and (iv) specify the name in which any such
Series A Preferred are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time or receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Series A
Preferred so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no Series B Preferred will be issued with
respect thereto unless the Series A Preferred so withdrawn are validly
retendered. Any Series A Preferred which have been tendered but which are not
accepted for exchange will be returned to such Existing Holder without cost to
such Existing Holder as soon as practicable after withdrawal, rejection of
tender or termination of the Exchange Offer. Properly withdrawn Series A
Preferred may be retendered by following one of the procedures described above
under "--Procedures for Tendering" at any time prior to the Expiration Date.
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<PAGE>
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all
parties. Neither the Company, any affiliates or assigns of the Company, the
Exchange Agent nor any other person shall be under any duty to give any
notification of any irregularities in any notice of withdrawal or incur any
liability for failure to give such notification. Any Series A Preferred which
have been tendered but which are withdrawn will be returned to the holder
thereof without cost to such holder promptly after withdrawal.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS
If this Letter of Transmittal is signed by the registered holder(s) of the
Existing Notes tendered hereby, the signature(s) must correspond exactly with
the name(s) as written on the face of the Certificate(s) without alteration,
enlargement or any change whatsoever.
If any of the Series A Preferred tendered hereby are owned of record by two
or more joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Series A Preferred are registered in different name(s) on
several Certificates, it will be necessary to complete, sign and submit as
many separate Letters of Transmittal (or facsimiles thereof) as there are
different registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing and, unless waived by the
Company, must submit proper evidence satisfactory to the Company, in its sole
discretion, of such persons' authority to so act.
When this Letter of Transmittal is signed by the registered owner(s) of the
Series A Preferred listed and transmitted hereby, no endorsement(s) of
Certificate(s) or separate bond power(s) are required unless Series B
Preferred are to be issued in the name of a person other than the registered
holder(s). However, if Series B Preferred are to be issued in the name of a
person other than the registered holder(s), signature(s) on such
Certificate(s) or bond power(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered owner(s) of the Series A Preferred listed, the certificates must be
endorsed or accompanied by appropriate bond powers, signed exactly as the name
or names of the registered owner(s) appear(s) on the Certificates, and also
must be accompanied by such opinions of counsel, certifications and other
information as the Company or the Trustee for the Series A Preferred may
require in accordance with the restrictions on transfer applicable to the
Series A Preferred. Signatures on such Certificates or bond powers must be
guaranteed by an Eligible Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS
If Series B Preferred are to be issued in the name of a person other than
the signer of this Letter of Transmittal, or if Series B Preferred are to be
sent to someone other than the signer of this Letter of Transmittal or to an
address other than that shown above, the appropriate boxes on this Letter of
Transmittal should be completed (Box 7 and 8). Certificates for Series A
Preferred not exchanged will be returned by mail or, if tendered by book-entry
transfer, by crediting the account indicated above maintained at DTC. See
Instruction 4.
7. DETERMINATION OF VALIDITY
The Company will determine, in its sole discretion, all questions as to the
form of documents, validity, eligibility (including time of receipt) and
acceptance for exchange of any tender of Series A Preferred, which
determination shall be final and binding on all parties. The Company reserves
the absolute right to reject any and all tenders determined by it not to be in
proper form or the acceptance of which, or exchange for, may, in the view of
counsel to the Company, be unlawful. The Company also reserves the absolute
right, subject to
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<PAGE>
applicable law, to waive any of the conditions of the Series B Preferred set
forth in the Prospectus under "The Exchange Offer-Certain Conditions to the
Exchange Offer" or any conditions or irregularity in any tender of Series A
Preferred of any particular holder whether or not similar conditions or
irregularities are waived in the case of other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including this Letter of Transmittal and the instructions hereto) will
be final and binding. No tender of Series A Preferred will be deemed to have
been validly made until all irregularities with respect to such tender have
been cured or waived. Neither the Company, any affiliates or assigns of the
Company, the Exchange Agent, nor any other person shall be under any duty to
give notification of any irregularities in tenders or incur any liability for
failure to give such notification.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES
Questions and requests for assistance may be directed to the Exchange Agent
at its address and telephone number set forth on the front of this Letter of
Transmittal. Additional copies of the Prospectus, the Notice of Guaranteed
Delivery and the Letter of Transmittal may be obtained from the Exchange
Agent.
9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9
For U.S. Federal income tax purposes, holders are required, unless an
exemption applies, to provide the Exchange Agent with such holder's correct
taxpayer identification number ("TIN") on Substitute Form W-9 of this Letter
of Transmittal (Box 9) and certify, under penalties of perjury, that such
number is correct and he or she is not subject to backup withholding. If the
Exchange Agent is not provided with the correct TIN, the Internal Revenue
Service (the "IRS") may subject the holder or other payee to a $50 penalty. In
addition, payments to such holders or other payees with respect to Series A
Preferred exchanged pursuant to the Exchange Offer, or with respect to Series
B Preferred following the Exchange Offer, may be subject to 31% backup
withholding.
The box in Part 2 of the Substitute Form W-9 (Box 9) may be checked if the
tendering holder has not been issued a TIN and has applied for a TIN or
intends to apply for a TIN in the near future. If the box in Part 2 is
checked, the holder or other payee must also complete the Certificate of
Awaiting Taxpayer Identification Number below Substitute Form W-9 in order to
avoid backup withholding. Notwithstanding that the box in Part 2 is checked
and the Certificate of Awaiting Taxpayer Identification Number is completed,
the Exchange Agent will withhold 31% of all payments made prior to the time a
properly certified TIN is provided to the Exchange Agent.
The holder is required to give the Exchange Agent the TIN (i.e., social
security number or employer identification number) of the registered owner of
the Series A Preferred or of the last transferee appearing on the transfers
attached to, or endorsed on, the Series A Preferred. If the Series A Preferred
are registered in more than one name or are not in the name of the actual
owner, consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
number to report.
Certain holders (including, among others, corporations, financial
institutions and certain foreign persons) may not be subject to these backup
withholding and reporting requirements. Such holders should nevertheless
complete the attached Substitute Form W-9 below and check the box in Part 3 of
Box 9 for "exempt", to avoid possible erroneous backup withholding. A foreign
person may qualify as an exempt recipient by submitting a properly completed
IRS Form W-8, signed under penalties of perjury, attesting to that holder's
exempt status. Please consult the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for additional guidance
on which holders are exempt from backup withholding.
Backup withholding is not an additional U.S. Federal income tax. Rather, the
U.S. Federal income tax liability of a person subject to backup withholding
will be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
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<PAGE>
10. LOST, DESTROYED OR STOLEN CERTIFICATES
If any Certificate(s) representing Series A Preferred have been lost,
destroyed or stolen, the holder should promptly notify the Exchange Agent. The
holder will then be instructed as to the steps that must be taken in order to
replace the Certificate(s). This Letter of Transmittal and related documents
cannot be processed until the procedures for replacing lost, destroyed or
stolen Certificate(s) have been followed.
11. SECURITY TRANSFER TAXES
Holders who tender their Series A Preferred for exchange will not be
obligated to pay any transfer taxes in connection therewith. If, however,
Series B Preferred are to be delivered to, or are to be issued in the name of,
any person other than the registered holder of the Series A Preferred
tendered, or if a transfer tax is imposed for any reason other than the
exchange of Series A Preferred in connection with the Exchange Offer, then the
amount of any such transfer tax (whether imposed on the registered holder or
any other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER
REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE
EXPIRATION DATE.
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<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
A. TIN--The Taxpayer Identification Number for most individuals is their
social security number. Refer to the following chart to determine the
appropriate number:
<TABLE>
<CAPTION>
- ------------------------------------------------- ---------------------------------------------------
GIVE THE GIVE THE EMPLOYER
SOCIAL SECURITY IDENTIFICATION
FOR THIS TYPE OF ACCOUNT: NUMBER OF-- FOR THIS TYPE OF ACCOUNT: NUMBER OF--
- ------------------------------------------------- ---------------------------------------------------
<S> <C> <C> <C>
1. individual The individual 6. Sole proprietorship The owner(3)
2. Two or more individuals The actual owner 7. A valid trust, estate Legal entity(4)
(joint account) of the account or pension trust
or, if combined 8. Corporate The corporation
funds, the first 9. Association, club, The organization
individual on religious, charitable,
the account(1) educational or other
3. Custodian account of a The minor(2) tax-exempt
minor (Uniform Gift to organization
Minors Act) 10. Partnership The partnership
4. a The usual revocable The grantor- 11. A broker or registered The broker or
savings trust (grantor trustee(1) nominee nominee
is also trustee) 12. Account with the The public
b So-called trust account The actual Department of entity
that is not a legal or owner(1) Agriculture
valid trust under State
law
5. Sole proprietorship The owner(3)
- ------------------------------------------------- ---------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's name and social security
number.
(3) Show the individual's name. You may also enter your business name or
"doing business as" name. You may use either your Social Security number
or your employer identification number.
(4) List first and circle the name of the legal trust, estate, or pension
trust.
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
B. EXEMPT PAYEES--The following lists exempt payees. If you are exempt, you
must nonetheless complete the form and provide your TIN in order to establish
that you are exempt. Check the box in Part 3 of the form, sign and date the
form.
For this purpose, Exempt Payees include: (1) A corporation; (2) An
organization exempt from tax under section 501(a), or an individual retirement
plan (IRA) or a custodial account under section 403(b)(7); (3) The United
States or any of its agencies or instrumentalities; (4) A state, the District
of Columbia, a possession of the United States, or any of their political
subdivisions or instrumentalities; (5) A foreign government or any of its
political subdivisions, agencies or instrumentalities; (6) An international
organization or any of its agencies or instrumentalities; (7) A foreign
central bank of issue; (8) A dealer in securities or commodities required to
register in the U.S. or a possession of the U.S.; (9) A real estate investment
trust; (10) An entity or person registered at all times during the tax year
under the Investment Company Act of 1940; (11) A common trust fund operated by
a bank under section 584(a); (12) A financial institution.
C. OBTAINING A NUMBER
If you do not have a taxpayer identification number or you do not know your
number, obtain Form SS-5, application for a Social Security Number, or Form
SS-4, Application for Employer Identification Number, at the local office of
the Social Security Administration or the Internal Revenue Service and apply
for a number.
D. PRIVACY ACT NOTICE
Section 6109 requires most recipients of dividend, interest or other
payments to give taxpayer identification numbers to payers who must report the
payments to the IRS. The IRS uses the numbers for identification purposes.
Payers must be
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<PAGE>
given the numbers whether or not payees are required to file tax returns.
Payers must generally withhold 31% of taxable interest, dividend, and certain
other payments to a payee who does not furnish a taxpayer identification
number. Certain penalties may also apply.
E. PENALTIES
(1) Penalty for Failure to Furnish Taxpayer Identification Number. If you
fail to furnish your taxpayer identification number to a payer, you are
subject to a penalty of $50 for each such failure unless your failure is due
to reasonable cause and not to willful neglect.
(2) Failure to Report Certain Dividend and Interest Payments. If you fail to
include any portion of an includible payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being due
to negligence and will be subject to a penalty of 5% on any portion of an
under-payment attributable to that failure unless there is clear and
convincing evidence to the contrary.
(3) Civil Penalty for False Information with Respect to Withholding. If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) Criminal Penalty for Falsifying Information. Falsifying certifications
or affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL
REVENUE SERVICE.
17
<PAGE>
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
13 1/2% SERIES A SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK DUE 2010
OF
CONCENTRIC NETWORK CORPORATION
THIS NOTICE OF GUARANTEED DELIVERY, OR ONE SUBSTANTIALLY EQUIVALENT TO THIS
FORM, MUST BE USED TO ACCEPT THE EXCHANGE OFFER (AS DEFINED BELOW) IF (I)
CERTIFICATES FOR THE COMPANY'S (AS DEFINED BELOW) 13 1/2% SERIES A SENIOR
REDEEMABLE EXCHANGEABLE PREFERRED STOCK DUE 2010 (SERIES A PREFERRED) ARE NOT
IMMEDIATELY AVAILABLE, (II) SERIES A PREFERRED, THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS CANNOT BE DELIVERED TO CHASEMELLON SHAREHOLDER
SERVICES, LLC (THE "EXCHANGE AGENT") ON OR PRIOR TO THE EXPIRATION DATE (AS
DEFINED IN THE PROSPECTUS REFERRED TO BELOW) OR (III) THE PROCEDURES FOR
DELIVERY BY BOOK-ENTRY TRANSFER CANNOT BE COMPLETED ON A TIMELY BASIS. THIS
NOTICE OF GUARANTEED DELIVERY MAY BE DELIVERED BY HAND, OVERNIGHT COURIER OR
MAIL, OR TRANSMITTED BY FACSIMILE TRANSMISSION, TO THE EXCHANGE AGENT. SEE
"THE EXCHANGE OFFER PROCEDURES FOR TENDERING" IN THE PROSPECTUS.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
CHASEMELLON SHAREHOLDER SERVICES, LLC
BY MAIL, OVERNIGHT DELIVERY OR HAND:
CHASEMELLON SHAREHOLDER SERVICES, LLC
235 MONTGOMERY STREET, 23RD FLOOR
SAN FRANCISCO, CA 94104
ATTENTION: WILLIAM DOUGHERTY
(CONCENTRIC NETWORK CORPORATION)
FACSIMILE TRANSMISSIONS:
(415) 398-7156
TO CONFIRM BY TELEPHONE OR FOR INFORMATION:
(415) 743-1434
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA
FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
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<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to Concentric Network Corporation, a Delaware
corporation (the "Company"), upon the terms and subject to the conditions set
forth in the Prospectus dated August 11, 1998 (as the same may be amended or
supplemented from time to time, the "Prospectus") and the related Letter of
Transmittal (which together constitute the "Exchange Offer"), receipt of which
is hereby acknowledged, the aggregate principal amount of Series A Preferred
set forth below pursuant to the guaranteed delivery procedures set forth in
the Prospectus under the caption "The Exchange Offer-Procedures for Tendering
Series A Preferred."
DESCRIPTION OF SERIES A PREFERRED TENDERED
Name(s), Address(es) and Area Code(s) and Telephone
Number(s) of Registered Holder(s): Certificate Number(s) (if available):
Aggregate Principal Amount Tendered: $
Signature(s):
If Series A Preferred will be tendered by book-entry transfer, please provide
the following information:
Name of Tendering Institution:
DTC Account Number:
Date:
Transaction Code Number:
THE GUARANTEE BELOW MUST BE COMPLETED
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, as an "eligible guarantor
institution," including (as such terms are defined therein) (i)a bank; (ii)a
broker, dealer, municipal securities broker or dealer or government securities
broker or dealer; (iii)a credit union; (iv)a national securities exchange,
registered securities association or clearing agency; or (v)a savings
association, that is a participant in the Securities Transfer Agents Medallion
Program, the New York Stock Exchange Medallion Signature Program or the Stock
Exchanges Medallion Program (each of the foregoing being referred to as an
"Eligible Institution"), hereby guarantees to deliver to the Exchange Agent,
at its address set forth above, either the Series A Preferred tendered hereby
in proper form for transfer, or confirmation of the book-entry transfer of
such Series A Preferred to the Exchange Agent's account at The Depository
Trust Company ("DTC"), pursuant to the procedures for book-entry transfer set
forth in the Prospectus, in either case together with one or more properly
completed and duly executed Letter(s) of Transmittal (or facsimile thereof)
and any other required documents within three New York Stock Exchange trading
days after the date of execution of this Notice of Guaranteed Delivery.
2
<PAGE>
The undersigned acknowledges that it must deliver the Letter(s) of
Transmittal and the Series A Preferred tendered hereby to the Exchange Agent
within the time period set forth above and that failure to do so could result
in a financial loss to the undersigned.
Name of Firm: Authorized Signature:
Address: Name (Please Print):
Capacity or Title:
Area Code and Telephone Number: Date:
NOTE: DO NOT SEND SERIES A PREFERRED WITH THIS NOTICE OF GUARANTEED
DELIVERY. ACTUAL SURRENDER OF SERIES A PREFERRED MUST BE MADE PURSUANT TO, AND
BE ACCOMPANIED BY, A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF
TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS.
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
the Prospectus, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any exchange of Series A
Preferred for Series B Preferred made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to its date. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the securities to which it relates. This Prospectus does
not constitute an offer to sell or the solicitation of an offer to buy such
securities in any circumstances in which such offer or solicitation is
unlawful.
----------------
3
