<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 000-22575
--------------------
CONCENTRIC NETWORK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 65-0257497
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1400 Parkmoor Avenue
San Jose, California 95126
(Address of principal executive offices, including zip code)
(408) 817-2800
(Registrant's telephone number, including area code)
--------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. Yes [X] No [_]
The number of issued and outstanding shares of the Registrant's Common Stock,
$0.001 par value, as of March 31, 2000, was 51,717,359.
================================================================================
<PAGE>
CONCENTRIC NETWORK CORPORATION
<TABLE>
<CAPTION>
<S>
PART I--FINANCIAL INFORMATION
Page
----
<C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at March 31, 2000 and December 31, 1999........................... 3
Condensed Consolidated Statements of Operations for the three month periods ended
March 31, 2000 and 1999................................................................................. 4
Condensed Consolidated Statements of Cash Flows for the three month periods ended
March 31, 2000 and 1999................................................................................. 5
Notes to Unaudited Condensed Consolidated Financial Statements.......................................... 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 8-25
PART II--OTHER INFORMATION
Item 1. Legal Proceedings....................................................................................... 26
Item 2. Changes in Securities and Use of Proceeds............................................................... 26
Item 3. Defaults Upon Senior Securities......................................................................... 26
Item 4. Submission of Matters to a Vote of Security Holders..................................................... 26
Item 5. Other Information....................................................................................... 26
Item 6. Exhibits and Reports on Form 8-K........................................................................ 26
Signatures.............................................................................................. 27
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
CONCENTRIC NETWORK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 103,008 $ 25,891
Short term investments............................................................... 58,566 80,095
Current portion of restricted cash................................................... 19,373 144,060
Accounts receivable, net............................................................. 34,458 29,114
Note receivable...................................................................... -- 16,000
Other current assets................................................................. 22,878 10,049
--------- ---------
Total current assets.............................................................. 238,283 305,209
Property and equipment, net.......................................................... 124,039 82,894
Goodwill and other intangible assets................................................. 303,244 70,627
Long term investments................................................................ 22,795 27,101
Other assets......................................................................... 11,000 11,963
--------- ---------
Total assets...................................................................... $ 699,361 $ 497,794
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................... $ 52,586 $ 35,750
Accrued compensation and other employee benefits..................................... 4,090 3,866
Other current liabilities............................................................ 22,320 5,655
Current portion of capital lease obligations......................................... 7,552 6,438
Deferred revenue..................................................................... 12,402 7,885
--------- ---------
Total current liabilities......................................................... 98,950 59,594
Capital lease obligations, net of current portion...................................... 13,626 6,774
Notes payable.......................................................................... 146,719 146,642
Other long term liabilities............................................................ 15,841 1,770
Commitments
Redeemable exchangeable preferred stock................................................ 185,873 179,521
Convertible redeemable preferred stock................................................. 42,992 41,339
Stockholders' equity:
Common stock......................................................................... 543,720 420,515
Accumulated deficit.................................................................. (348,317) (357,837)
Deferred compensation................................................................ (430) (524)
Cumulative translation adjustment.................................................... 387 --
--------- ---------
Total stockholders' equity............................................................. 195,360 62,154
--------- ---------
Total liabilities and stockholders' equity............................................. $ 699,361 $ 497,794
========= =========
</TABLE>
See accompanying notes.
3
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
Revenue................................................................................. $ 56,956 $ 30,066
Costs and expenses:
Cost of revenue....................................................................... 51,294 28,263
Development........................................................................... 3,449 2,645
Marketing and sales................................................................... 21,793 11,173
General and administrative............................................................ 7,170 3,321
Amortization of goodwill and other intangible assets.................................. 14,294 1,391
-------- --------
Total costs and expenses................................................................ 98,000 46,793
-------- --------
Loss from operations.................................................................... (41,044) (16,727)
Other income............................................................................ 61,772 17
Net interest expense.................................................................... (3,202) (3,237)
-------- --------
Net income (loss)....................................................................... 17,526 (19,947)
Preferred stock dividends and accretion................................................. (8,006) (5,553)
-------- --------
Net income (loss) attributable to common stockholders................................... $ 9,520 $(25,500)
======== ========
Net income (loss) per share:
Net income (loss)..................................................................... $ 0.35 $ (0.59)
Preferred stock dividends and accretion............................................... (0.16) (0.16)
-------- --------
Net income (loss) attributable to common stockholders................................. $ 0.19 $ (0.75)
Shares used in computing net income (loss) per share attributable to common ======== ========
stockholders............................................................................ 49,600 34,182
-------- --------
</TABLE>
See accompanying notes.
4
<PAGE>
CONCENTRIC NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
Operating Activities
Net income (loss)............................................................................................ $ 9,520 $(25,500)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation.............................................................................................. 12,542 6,266
Amortization of deferred interest, cost of revenue and marketing and sales related to issuance of
warrants.............................................................................................. 271 424
Amortization of goodwill and other intangible assets...................................................... 14,294 1,391
Amortization of financing costs........................................................................... 247 134
Amortization of other deferred assets..................................................................... 497 488
Amortization of deferred compensation..................................................................... 94 93
Preferred stock dividends and accretion................................................................... 8,006 5,553
Changes in current assets and liabilities:
Accounts receivable....................................................................................... (526) 1,345
Other current assets...................................................................................... 77 (335)
Prepaid expenses.......................................................................................... (502) (1,055)
Accounts payable.......................................................................................... (3,464) (2,392)
Accrued compensation and other employee benefits.......................................................... 224 184
Deferred revenue.......................................................................................... 160 337
Other current liabilities................................................................................. (3,678) 5,454
--------- --------
Net cash provided by (used in) operating activities.......................................................... 37,761 (7,613)
Investing Activities
Net change in restricted cash................................................................................ 124,967 --
Additions of property and equipment.......................................................................... (8,175) (10,832)
Net change in notes receivable............................................................................... 16,000 --
Net change in short term investments......................................................................... 21,529 3,954
Net change in long term investments.......................................................................... 4,306 (10,205)
Cash investment in Internet Technology Group, net of cash acquired........................................... (134,263) --
--------- --------
Net cash provided by (used in) investing activities.......................................................... 24,364 (17,083)
Financing Activities
Net change in restricted cash................................................................................ (280) (497)
Net change in notes payable.................................................................................. 2,978 --
Repayment of lease obligations............................................................................... (2,582) (1,550)
Proceeds from issuances of stock and warrants................................................................ 14,490 153,416
Foreign currency translation................................................................................. 386 --
--------- --------
Net cash provided by financing activities.................................................................... 14,992 151,369
--------- --------
Net change in cash and cash equivalents...................................................................... 77,117 126,673
Cash and cash equivalents at beginning of period............................................................. 25,891 98,988
--------- --------
Cash and cash equivalents at end of period................................................................... $103,008 $225,661
========= ========
Supplemental Disclosures of Noncash Investing and Financing Activities:
Capital lease obligations incurred........................................................................... $ -- $ 587
Supplemental Disclosures of Cash Flow Information
Interest paid................................................................................................ $ 1,252 $ 365
</TABLE>
5
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
These unaudited condensed consolidated financial statements and the related
footnote information have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the Company's
management, the accompanying unaudited interim condensed financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information for the periods presented.
The results for the interim period ended March 31, 2000 are not necessarily
indicative of results to be expected for the entire year ending December 31,
2000 or future operating periods.
All share and per share information presented herein, except as noted, and
in the Company's condensed consolidated financial statements has been
retroactively restated to reflect a two-for-one stock split of the Company's
common stock on May 21, 1999, paid in the form of a stock dividend, to holders
of record on April 30, 1999.
2. Cash, Cash Equivalents and Short Term Investments
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.
Investments with maturities between three and twelve months are considered to be
short term investments. Management determines the appropriate classification of
its investments in debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Company's debt securities have
been classified and accounted for as available-for-sale. These securities are
carried at fair value and unrealized gains and losses have not been material to
date. Realized gains and losses and declines in value judged to be other than
temporary on available-for-sale securities are included in interest income and
have not been material to date. Cash and cash equivalents are held primarily
with three financial institutions.
3. Net Loss Per Share
Basic and diluted net loss per share have been computed in accordance with
the Financial Accounting Standards Board issued Statement No. 128, "Earnings
Per Share". Net loss per share is computed using the weighted average number of
shares of common stock outstanding.
4. Stockholders' Equity
In January 2000, Williams Communications Group, Inc. ("Williams"), a
stockholder of the Company, elected to receive payment for services and
equipment in the form of common stock as part of an agreement dated August 1997.
The Company issued 70,746 shares valued at $2.0 million to Williams.
5. Equity Investments
In February 2000 the Company sold its $10.0 million investment in Covad
Communications, Inc. ("Covad") for approximately $70.8 million, and recognized a
gain of approximately $60.8 million. In March 2000 the Company purchased
approximately $5.0 million of Series C Preferred Stock from Asia Online, Ltd.
("Asia Online").
6. Acquisitions
6
<PAGE>
In January 2000, the Company acquired Internet Technology Group, Plc
("ITG"). The transaction was accounted for using the purchase method of
accounting. The total purchase price of approximately $309.0 million consisted
of 4,835,773 shares of Concentric common stock valued at approximately $108.7
million, a $109.9 million cash payment upon closing and the assumption of
approximately $90.4 million of ITG's liabilities (including acquisition costs).
A summary of the purchase price allocation is as follows (in thousands):
<TABLE>
<S> <C>
Current and other assets..................................................... $ 18,922
Property, plant and equipment................................................ 45,512
Goodwill..................................................................... 212,027
Other intangible assets...................................................... 32,561
--------
Total purchase price allocation........................................... $309,022
========
</TABLE>
Goodwill is being amortized over five years. Other intangible assets
include tradenames, assembled workforce and customer lists and are being
amortized over two years.
7. Income Taxes
The Company accounts for income taxes using the liability method in
accordance with Financial Accounting Standards Board Statement No. 109,
''Accounting for Income Taxes'' (''FAS 109''). No provision for income taxes is
expected for 2000 as the Company expects to incur a net loss for the year and
does not meet the criteria for recognizing an income tax benefit under the
provisions of FAS 109.
8. Litigation
Concentric has been named as a defendant in a lawsuit file in New Jersey
state court on November 1, 1999. The complaint seeks statutory damages, treble
damages, and injunctive relief under the Telephone Consumer Protection Act of
1991 and alleges that, in or about March and June 1999, 9Net Avenue, Inc. ("9Net
Avenue") transmitted unsolicited facsmilies advertising its services. The suit
has been brought as a purported class action on behalf of all recipients of the
allegedly unsolicited faxes. Concentric purchased the assets of 9Net Avenue in
October 1999 and plantiff contends that Concentric has succeeded to any
liability 9Net Avenue incurred in connection with the alleged faxes. Concentric
intends to vigorously defend the claims against it; however, there can be no
guarantee that it will be successful or that this litigation will not have a
material adverse impact on its operations. In addition, Concentric has received
a subpoena from the New Jersey Attorney General seeking information concerning
the alleged transmission of unsolicited facsimile advertising by 9Net Avenue and
additional marketing materials distributed by 9Net Avenue.
9. Subsequent Event
In January 2000, Concentric agreed to be acquired by NEXTLINK. In this
transaction, both NEXTLINK and Concentric will merge into a newly-formed
company, to be renamed NEXTLINK Communications, Inc., which will assume all of
Concentric's and NEXTLINK's outstanding debt obligations. In the transaction,
each outstanding share of NEXTLINK's Class A common stock and Class B common
stock would be converted into one share of Class A common stock or Class B
common stock, as applicable, of the corporation surviving the merger, which
stock will be substantially identical to NEXTLINK's Class A and Class B common
stock. Each share of outstanding Concentric common stock will be converted into
$45.00 of surviving corporation Class A common stock, subject to a collar which
adjusts based upon the average NEXTLINK stock price for the 20 day trading
period ending on the third day prior to the closing of the merger. Pursuant to
the collar, between 0.650 (if the average NEXTLINK stock price prior to the
merger is $69.23 or less) and 0.495 (if the average NEXTLINK stock price prior
to the merger is $90.91 or greater) shares of surviving corporation Class A
common stock will be issued for each share of Concentric common stock converted
in the merger. The transaction is subject to approval of Concentric stockholders
and other customary closing conditions, and is expected to close in the second
quarter of 2000.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section and other parts of this Report contain forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the subsection entitled ''Risks Related to Concentric's
Business''. The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the Notes thereto included elsewhere in this Report.
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. Online 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.
In January 2000, Concentric agreed to be acquired by NEXTLINK. In this
transaction, both NEXTLINK and Concentric will merge into a newly-formed
company, to be renamed NEXTLINK Communications, Inc., which will assume all of
Concentric's and NEXTLINK's outstanding debt obligations. In the transaction,
each outstanding share of NEXTLINK's Class A common stock and Class B common
stock would be converted into one share of Class A common stock or Class B
common stock, as applicable, of the corporation surviving the merger, which
stock will be substantially identical to NEXTLINK's Class A and Class B common
stock. Each share of outstanding Concentric common stock will be converted into
$45.00 of surviving corporation Class A common stock, subject to a collar which
adjusts based upon the average NEXTLINK stock price for the 20 day trading
period ending on the third day prior to the closing of the merger. Pursuant to
the collar, between 0.650 (if the average NEXTLINK stock price prior to the
merger is $69.23 or less) and 0.495 (if the average NEXTLINK stock price prior
to the merger is $90.91 or greater) shares of surviving corporation Class A
common stock will be issued for each share of Concentric common stock converted
in the merger. The transaction is subject to approval of Concentric
stockholders and other customary closing conditions, and is expected to close in
the second quarter of 2000.
In connection with the anticipated merger, on March 24, 2000, Concentric and
NEXTLINK successfully completed a consent solicitation of holders of
Concentric's 12 3/4% Senior Notes due 2007 and 13 1/2% Series B Redeemable
Exchangeable Preferred Stock due 2010. In the consent solicitation, holders of
a majority of the outstanding principal amount of the notes and a majority of
the outstanding shares of the preferred stock consented to amend certain
covenants in the indenture governing the notes and the certificate of indenture
governing the notes and the certificate of designations governing the preferred
stock to conform to corresponding covenants in the indenture governing
NEXTLINK's 10 1/2% Senior Notes. The amendments will become effective upon
consummation of the merger.
The Company's revenue prior to 1996 was primarily generated from providing
Internet access to consumers. The Company provides complete Internet business
solutions for small- and medium-sized enterprises, including DSL access, Web
hosting, and e-commerce. The Company also offers data center services, virtual
private networks, dedicated access, and application infrastructure services for
delivering applications over the Internet or a virtual private network. The
Company focuses its sales and marketing effort under its own brand on the small-
to-medium enterprise market selling DSL and web-hosting as the lead-in products.
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.
8
<PAGE>
In October 1999, the Company acquired 9Net Avenue, a provider of domain
parking, Web hosting, e-commerce, dedicated hosting and co-location services.
This acquisition was accounted for using the purchase method of accounting. The
Company's historical financial statements do not include results of operations,
financial position or cash flows of 9Net Avenue prior to its acquisition in
October 1999. As a result of the acquisition, the Company has recorded an
aggregate of $58.0 million of goodwill and other intangible assets, which is
being amortized on a straight-line basis over their useful lives ranging from
three to five years.
In January 2000, the Company acquired Internet Technology Group, Plc, a
provider of Internet access and hosting services in the UK and Europe. 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 Internet Technology
Group prior to its acquisition in January 2000. In addition, as a result of the
acquisition, the Company recorded an aggregate of $244.6 million of goodwill and
other intangible assets, which is being amortized on a straight-line basis over
their estimated useful lives ranging from two to five years.
Additionally, in 1998 the Company acquired two other businesses, InterNex and
AnaServe, which were accounted for using the purchase method of accounting. As
a result, the Company has recorded an aggregate of $12.6 million and $12.0
million, respectively, of goodwill and other intangible assets, which is being
amortized on a straight-line basis over their useful lives ranging from one to
five years. The Company may acquire other complementary products, technology
and businesses. If the Company were to incur additional charges for acquired in-
process technology, amortization of goodwill and acquisition costs with respect
to any future acquisitions, the Company's business, operating results and
financial condition could be materially and adversely affected. See "Risks
Related to Concentric's Business--Concentric's Acquisition Strategy Poses
Several Risks" and "--Liquidity and Capital Resources."
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 2000. 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 attributable to common stockholders of approximately $55.6 million,
$94.1 million and $111.8 million for the years ended December 31, 1997, 1998,
and 1999, respectively. The Company realized a net profit of $9.5 million for
the three months ended March 31, 2000, attributable solely to gains on the sale
of investments. We cannot assure you 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, 1999, the Company had
approximately $125.0 million of net deferred tax assets comprised primarily of
net operating loss carry-forwards. 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 2000, and possibly beyond, and accordingly will not realize the
Company's deferred tax assets through 2000, 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 "Risks Related to Concentric's
Business--Concentric Has Incurred Net Losses and Experienced Negative Cash Flow
From Operations Since Inception and Expects to Have Continuing Operating
Losses."
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 we cannot
assure you that the Company will be profitable in the future.
The Company's operating results have fluctuated in the past and may in the
future fluctuate significantly, depending upon a variety of factors, including
the timely deployment and expansion of the Concentric network and new network
architectures, the incurrence of related capital costs, variability and length
of the sales cycle associated with the Company's product and service offerings,
the receipt of new value-added network services and consumer services
subscriptions and the introduction of new services by the Company and its
competitors. Additional factors that may contribute to variability of
9
<PAGE>
operating results include: the pricing and mix of services offered by the
Company; customer retention rate; market acceptance of new and enhanced versions
of the Company's services; changes in pricing policies by the Company's
competitors; the Company's ability to obtain sufficient supplies of sole- or
limited-source components; user demand for network and Internet access services;
balancing of network usage over a 24-hour period; the ability to manage
potential growth and expansion; 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 affect on the
Company's business. As a result, variations in the timing and amounts of
revenues could have a material adverse affect on the Company's quarterly
operating results. Due to the foregoing factors, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and that such comparisons cannot be relied upon as indicators of
future performance. In the event that the Company's operating results in any
future period fall below the expectations of securities analysts and investors,
the trading price of the Company's common stock would likely decline.
Results of Operations
Revenue. Revenue totaled approximately $57.0 million for the three month
period ended March 31, 2000, a $26.9 million increase over revenue of
approximately $30.1 million for the three month period ended March 31, 1999.
This increase reflects growth in revenue from:
. the Company's broadened product offerings to its enterprise customers;
. the Company's marketing arrangements with its strategic partners; and
. revenues from acquired operations.
The Company expects revenue growth from Internet access customers to decline
over time as it de-emphasizes this sector of the business. Revenue from WebTV
decreased to 17.7% of the Company's net revenue for the three month period ended
March 31, 2000 compared to 30.1% for the three month period ended March 31,
1999. The Company expects revenue from WebTV to decrease as a percentage of
revenue. The foregoing expectation is a forward looking statement that involves
risks and uncertainties and the actual results could vary materially as a result
of a number of factors including those set forth under the caption ''Risks
Related to Concentric's Business--The Loss of Any of Concentric's Major
Customers Could Severely Impact Its Business.''
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, 2000 was approximately $51.3 million, an increase of $23.0
million from cost of revenue of $28.3 million for the three month period ended
March 31, 1999. This increase is attributable to the overall growth in the size
of the network and costs associated with acquired operations. As a percentage of
revenue, such costs declined to 90.1% of revenue in the three month period ended
March 31, 2000, down from 94.0% 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 under the captions ''Risks Related to Concentric's
Business--Concentric Has Incurred Net Losses and Experienced Negative Cash Flow
From Operations Since Inception and Expects to Have Continuing Operating Losses,
- --Concentric's Growth and Expansion May Strain Its Resources and --Concentric
Depends Upon New and Uncertain Markets."
Development Expense. 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 $3.4 million and
$2.6 million for the three month periods ended March 31, 2000 and 1999,
respectively. This higher level of development expense reflects an overall
increase in personnel to develop new product offerings, to manage the overall
growth in the network and from acquired operations. Development expense as a
percentage of revenue declined to 6.1% for the three month period ended March
31, 2000 from 8.8% for the three month period ended March 31, 1999 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
10
<PAGE>
uncertainties and the actual results could vary materially as a result of a
number of factors, including those set forth below under the captions "Risks
Related to Concentric's Business--Concentric Has Incurred Net Losses and
Experienced Negative Cash Flow From Operations Since Inception and Expects to
Have Continuing Operating Losses--Concentric's Growth and Expansion May Strain
Its Resources and--Concentric Depends Upon Its Introduction of New and Enhanced
Services."
Marketing and Sales Expense. 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 $21.8
million for the three month period ended March 31, 2000 and $11.2 million for
the three month period ended March 31, 1999. The $10.6 million increase in 2000
reflects an expansion of 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.
Marketing and sales expense as a percentage of revenue increased to 38.3% for
the three month period ended March 31, 2000 from 37.2% in the year earlier
period. 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 the captions ''Risks Related
to Concentric's Business--Concentric's Growth and Expansion May Strain Its
Resources and --Concentric Depends Upon New and Uncertain Markets."
General and Administrative Expense. General and administrative expense
consists primarily of personnel expense and professional fees. General and
administrative expense was approximately $7.2 million for the three month period
ended March 31, 2000 and $3.3 million for the three month period ended March 31,
1999. 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, including acquired operations. General and
administrative expense as a percentage of revenue increased to 12.6% for the
three month period ended March 31, 2000 from 11.0% in the year earlier period.
The Company expects general and administrative expense to increase in dollar
amount, reflecting its growth in operations, but to decline as a percentage of
revenue. The foregoing expectation is a forward looking statement that involves
risks and uncertainties and the actual results could vary materially as a result
of a number of factors including those set forth under the captions ''Risks
Related to Concentric's Business-- Concentric's Growth and Expansion May Strain
Its Resources and --Concentric Depends Upon New and Uncertain Markets."
Amortization of Goodwill and Other Intangible Assets. For the three month
periods ended March 31, 2000 and March 31, 1999, respectively, the Company
recorded amortization of goodwill and other intangible assets of $14.3 million
and $1.4 million. The increase is primarily the result of the acquisitions of
ITG in January 2000 and 9 Net Avenue in October 1999.
Other Income. Other income for the three month period ended March 31, 2000 was
$61.8 million. This is primarily the result of the gain on the sale of an
investment in Covad.
Net Interest Expense. Net interest expense was approximately $3.2 million for
each of the respective three month periods ended March 31, 2000 and 1999.
Preferred Stock Dividends and Accretions. For the three month periods ended
March 31, 2000 and 1999, the Company recorded dividend and stock accretion of
$8.0 million and $5.6 million, respectively, related to the Series B 13 1/2%
Redeemable Exchangeable Preferred Stock due 2010 ("Series B Preferred") and the
Series C 7% Convertible Redeemable Preferred Stock due 2010 ("Series C
Preferred").
Net Income (Loss) Attributable to Common Stockholders. The Company's net
income attributable to common stockholders was approximately $9.5 million for
the three month period ended March 31, 2000 as compared to approximately $25.5
million net loss for the three month period ended March 31, 1999. For
comparative purposes, the net income attributable to common stockholders for the
three month period ended March 31, 2000 included a gain on the sale of
investments of $62.4 million.
Liquidity and Capital Resources
11
<PAGE>
To date, the Company has satisfied its cash requirements primarily through the
sale of capital stock, debt financings and capitalized lease financings. The
Company's principal uses of cash are to fund working capital requirements and
capital expenditures, to service its capital lease and debt financing
obligations, to finance and fund acquisitions, to provide for the early
retirement of debt and to finance equity investments in strategic partners. Net
cash provided by operating activities for the three month period ended March 31,
2000 was approximately $37.8 million which included gains on the sale of
investments of $62.4 million, which offset cash used in all other operating
activities of $24.4 million. Net cash used in operating activities for the
three month period ended March 31, 1999 was approximately $7.6 million, which
was primarily affected by the net loss, caused by increased costs related to the
expansion of the Company's network and organizational infrastructure.
Net cash provided by investing activities for the three month period ended
March 31, 2000 was primarily the result of the release of restricted funds of
$125.0 million and repayment of $16.0 million of notes receivable related to the
ITG acquisition which were then offset by the cash investment in ITG of $134.3
million. Long term investments changed by the sale of an equity investment in
Covad of $10.0 million and the purchase of an equity investment in Asia Online
of $5.0 million. Net cash used in investing activities for the three month
period ended March 31, 1999 was $17.1 million and consisted primarily of an
equity investment of $10.0 million in Covad and $10.8 million used for purchases
of capital equipment.
For the three month periods ended March 31, 2000 and 1999, net cash of
approximately $15.0 million and $151.4 million, respectively, was provided from
financing activities, primarily the proceeds from the sale of stock to
stockholders exercising options and warrants.
For the three month periods ended March 31, 2000 and 1999, net cash increased
$77.1 million and $126.7 million, respectively.
At March 31, 2000, the Company had cash and cash equivalents of approximately
$103.0 million, short term investments of $58.6 million, restricted cash of
$19.4 million and working capital of $139.3 million. The Company expects to
incur additional operating losses and will rely primarily on its available cash
resources and the net proceeds from the sale of certain equity investments to
meet its anticipated cash needs for working capital and for the acquisition of
capital equipment through at least the end of 2000. However, the Company may
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 under the caption ''Risks Related to
Concentric's Business--Concentric May Need Additional Capital in the Future and
Such Additional Financing May Not Be Available.'' The Company may be required to
raise additional funds through public or private financing, strategic
relationships or other arrangements. We cannot assure you that such additional
funding, if needed, will be available on terms attractive to the Company, or at
all.
Equity Price Risk
Concentric owns 277,840 shares of Class B Common Stock of NorthPoint purchased
in April 1999 at $18.00 per share, 1,370,834 shares of Series A Convertible
Preferred Stock of Register.com purchased in July 1999 at the split-adjusted
price of $3.43 per share, 629,660 shares of Series B Preferred Stock of Asia
Online purchased in August 1999 at $3.176 per share, 769,231 shares of Series C
Preferred Stock of Corio purchased in October 1999 at $6.50 per share and
570,082 shares of Series C Preferred Stock of Asia Online purchased in March
2000 at $8.77 per share. Concentric values these investments using the lower of
cost or market method, and thus continues to value them at their respective
costs of $5.0 million, $4.7 million, $2.0 million, $5.0 million and $5.0
million, respectively. If the price per share of these stocks were to decline
below the cost per share and such decline was considered to be other than
temporary, Concentric would be required to write-down the value of these
investments. Concentric is generally restricted from selling these shares for at
least one year from the date of purchase. Concentric has not hedged against
equity price changes.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 provides guidance on the recognition, presentation and disclosure
of revenue in financial statements of all public registrants. The Company has
determined that the implementation
12
<PAGE>
of SAB 101 has no material impact on its existing revenue recognition policies
or its previously reported results of operations.
Risks Related to Concentric's Business
As described by the following factors, the past financial performance of
Concentric should not be considered a reliable indicator of the future
performance of Concentric and investors should not use historical trends to
anticipate results or trends in future periods.
The Proposed Merger Involves Risks and Uncertainties and May Not Be Completed
Concentric has recently entered into an agreement with NEXTLINK under which
both NEXTLINK and Concentric will merge into a newly-formed company, to be
renamed NEXTLINK Communications, Inc. Details of the merger and the related
risks and uncertainties will be described in a proxy statement which will be
mailed in the future to all Concentric stockholders. The merger is subject to a
number of conditions which must be satisfied or waived before the merger can
take place, including approval by NEXTLINK and Concentric stockholders.
Concentric cannot assure you that the merger will occur or that the performance
of the combined company will be favorable to Concentric stockholders, and that
the pendency of the merger will not have an adverse effect on Concentric in the
interim. The factors which could affect the success of the combined companies
include, but are not limited to, the combined company's ability to successfully
market its products and services to current and new customers in a competitive
marketplace, to design and construct fiber optic networks, install cable
facilities, including switching electronics and to develop, install and
provision wireless equipment to customers and on satisfactory terms and
conditions. Additional factors which could adversely impact the success of the
combined operations include the companies' ability to successfully integrate
their operations, products and services, and to timely obtain the regulatory and
stockholder approvals that are conditions to closing the proposed transaction.
Concentric Has Incurred Net Losses and Experienced Negative Cash Flow From
Operations Since Inception and Expects to Have Continuing Operating Losses
Concentric expects to continue to operate at a net loss and experience
negative cash flow at least through 2000. Its ability to achieve profitability
and positive cash flow from operations is dependent upon its ability to
substantially grow its revenue base and achieve other operating efficiencies.
Concentric experienced net losses attributable to common stockholders of
approximately $55.6 million, $94.1 million and $111.8 million for the years
ended December 31, 1997, 1998, and 1999, respectively. The Company realized a
net profit of $9.5 million for the three months ended March 31, 2000,
attributable solely to gains on the sale of investments. On March 31, 2000,
Concentric had an accumulated deficit of approximately $348.3 million.
Concentric cannot assure you that it will be able to achieve or sustain revenue
growth, profitability or positive cash flow on either a quarterly or an annual
basis. Concentric's estimates of the periods of time in which it expects to
continue to operate at a net loss, experience negative cash flow and not
generate taxable income are forward-looking statements that involve risks and
uncertainties. Actual results could vary materially as a result of a number of
factors, including those set forth in this section.
Concentric's Operating Results Fluctuate and Could Decline
Concentric's operating results have fluctuated in the past and may fluctuate
significantly in the future. Concentric's operating results fluctuate due to a
variety of factors, including the following:
. timely deployment and expansion of its network and new network
architectures;
. the incurrence of capital costs related to network expansion;
. variability and length of the sales cycle associated with its product and
service offerings;
. the introduction of new services by Concentric and its competitors;
. the pricing and mix of services offered by Concentric;
. Concentric's customer retention rate;
. market acceptance of new and enhanced versions of Concentric's services;
. changes in pricing policies by Concentric's competitors;
. Concentric's ability to obtain sufficient supplies of sole- or limited-
source equipment and services;
. user demand for network and Internet access services;
13
<PAGE>
. balancing of network usage over a 24-hour period;
. the ability to manage potential growth and expansion;
. the ability to identify, acquire and successfully integrate suitable
acquisition candidates; and
. charges related to acquisitions.
Due to the foregoing factors, Concentric believes that period-to-period
comparisons of its operating results are not necessarily meaningful. Such
comparisons cannot be relied upon as indicators of future performance. If
Concentric's operating results in any future period fall below the expectations
of securities analysts and investors, the market price of its securities would
likely decline.
The Loss of Any of Concentric's Major Customers Could Severely Impact Its
Business
Concentric currently derives a substantial portion of its total revenue from
WebTV. Revenue from WebTV accounted for approximately 33.4% of its revenue for
the year ended December 31, 1997, 26.8% of its revenue for the year ended
December 31, 1998, 25.2% of its revenue for the year ended December 31, 1999 and
17.7% of its revenue for the three month period ended March 31, 2000. WebTV may
terminate its current agreement at will after December 31, 2002. While
Concentric expects revenue from WebTV to decrease as a percentage of revenue in
future periods, Concentric believes that revenue derived from a limited number
of customers may continue to represent a significant portion of its revenue. As
a result, the loss of one or more of Concentric's major customers could have a
material adverse effect on its business, financial condition and results of
operations. In addition, Concentric cannot assure you that revenue from
customers that have accounted for significant revenue in past periods,
individually or as a group, will continue, or will reach or exceed historical
levels in any future period.
Concentric's Growth and Expansion May Strain Its Resources
Concentric's business and service offerings have grown rapidly since its
inception. The growth and expansion of Concentric's business and Concentric's
service offerings have placed, and are expected to continue to place, a
significant strain on Concentric's management, operational and financial
resources. Concentric plans to continue to substantially expand its network in
2000 and future periods. To manage its growth, Concentric must, among other
things:
. continue to implement and improve its operational, financial and management
information systems, including its billing, order management, provisioning,
fixed assets and other financial management systems;
. hire, train and retain qualified personnel in a competitive labor market;
and
. continue to expand and upgrade its network infrastructure.
Concentric is currently in the process of replacing or updating its
operational, financial and management information systems. The systems being
replaced or updated include its billing, provisioning, order management and
other financial management systems. Concentric began to replace its information
systems in the fourth quarter of 1998 and these efforts continued throughout
1999 and will continue throughout 2000. Concentric consolidated two facilities
in Southern California into one in 1999. Management of the transition of its
information systems and of the personnel and operational equipment necessary to
manage the new facility has placed additional strain on its resources.
Concentric cannot assure you that these transitions will be completed
successfully or on a timely basis. Concentric cannot assure you that it will be
able to expand its network or add services at the rate or according to the
schedule presently planned by it. Additionally, Concentric has recently
acquired 9 Net Avenue in October 1999 and Internet Technology Group, Plc, in
January 2000. The consolidation and integration of acquisitions will place
additional strain on the resources, information systems and management of
Concentric. Concentric cannot assure you that it will be able to effectively
manage its growth in operations and personnel. Additionally, Concentric cannot
assure you that it will be able to hire, train and retain sufficient numbers of
qualified personnel to meet its requirements.
Concentric's Expanding Customer Base Demands the Rapid Growth of its Network
Infrastructure and Technical Support Resources.
Concentric may in the future experience difficulties meeting the demand for
its access services and technical support. Concentric cannot assure you that
its technical support or other resources will be sufficient to facilitate its
growth. Concentric is striving 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 its
14
<PAGE>
customer support and sales and marketing resources as Concentric pursues this
utilization strategy. If Concentric fails to manage its growth effectively, its
business, financial condition and results of operations could be materially
adversely affected.
Concentric's Acquisition Strategy Poses Several Risks
Concentric has completed a number of acquisitions to date, and may seek to
acquire additional assets, technologies and businesses complementary to its
operations. The completed acquisitions are and any subsequent acquisitions
would be accompanied by the risks commonly encountered in such transactions.
Such risks include, among other things:
. difficulties integrating the operations and personnel of acquired companies;
. the additional financial resources that may be needed to fund the operations
of acquired companies;
. the potential disruption of business;
. management's ability to maximize its financial and strategic position by the
incorporation of acquired technology or businesses into its service
offerings;
. the difficulty of maintaining uniform standards, controls, procedures and
policies;
. the potential loss of key employees of acquired companies;
. the impairment of relationships with employees and customers as a result of
changes in management; and
. the incurrence of significant expenses in consummating acquisitions.
Any of the above risks could prevent Concentric from realizing significant
benefits from its acquisitions. In addition, the issuance of its common stock
in acquisitions will dilute its stockholder interests in its company, while the
use of cash will deplete its cash reserves. Finally, if Concentric is unable to
account for its acquisitions under the "pooling of interests" method of
accounting, Concentric may incur significant, one-time write-offs and
amortization charges. These write-offs and charges could decrease its future
earnings or increase its future losses.
Concentric's Future Success Depends Upon Third-Party Distribution and
Engineering Relationships
An important element of Concentric's strategy is to develop relationships with
leading companies to enhance its distribution and engineering efforts.
Concentric has a number of agreements, among which includes an agreement with
Microsoft pursuant to which Concentric distributes and modifies its browsers.
Concentric is one of the Internet Service Providers which Microsoft features on
its Internet Referral Server program and through which Concentric obtains
primarily consumer subscribers. Concentric also has technology supply
arrangements in place for key components of its web hosting and e-commerce
platform including those with Netopia and Intershop. If any of Concentric's key
technology suppliers were to experience difficulties or shifts within their
business or decided to take different strategic directions than what the current
course of their business is, then Concentric may be adversely impacted.
Concentric has also entered into a strategic agreement with SBC for the
delivery of private-labeled services to its customers. Concentric relies on
this relationship for the acquisition of small-and-medium sized business
enterprise customers. Its inability to capitalize on this agreement, the
termination of or failure to renew any of these agreements or its inability to
enter into similar relationships with others could have a material adverse
effect on its business, financial condition and results of operations.
Termination of any of these agreements or Concentric's failure to renew any of
the agreements on terms acceptable to Concentric could have a material adverse
effect on Concentric's business, financial condition and results of operations.
For example, Concentric currently is in the process of winding down its
relationship with Teligent to deliver private-label services to Teligent's
customers. Concentric expects the relationship to be terminated in 2000. If
Concentric does not successfully replace the Teligent relationship, then
Concentric may have difficulty attracting new small-and-medium sized enterprise
customers which would have a material adverse impact on its results of
operations.
Concentric has an outsourcing agreement with Williams Technology Solutions, a
subsidiary of Williams Communications Group, Inc., that enables Concentric to
use Williams employees for the operational support of its network. Concentric's
use of Williams employees and Williams engineering expertise was integral to the
development of Concentric's network and continues to be integral to the ongoing
operation of Concentric's network operations center. Pursuant to the agreement
with Williams, all of the Williams employees currently working for Concentric
will become Concentric
15
<PAGE>
employees when the agreement terminates in December 2000. Concentric cannot
assure you that it will be able to hire all of the Williams employees required
to grow and manage the network.
Concentric Depends Upon New and Uncertain Markets
Concentric offers tailored, value-added network services for enterprises and
consumers, including Internet access. These markets are in the early stages of
development. It is difficult to predict the rate at which these the markets
will grow, if at all, because these markets are relatively new and current and
future competitors are likely to introduce competing services or products. New
or increased competition may result in market saturation. Certain critical
issues concerning commercial use of tailored, value-added services and Internet
services, remain unresolved and may impact the growth of such services. These
issues include, among others, security, reliability, ease and cost of access,
and quality of service. Concentric's business, financial condition and results
of operations would be materially adversely affected if the markets for its
services, including Internet access:
. fail to grow;
. grow more slowly than anticipated; or
. become saturated with competitors.
Concentric Depends Upon Its Introduction and Acceptance of New and Enhanced
Services
Concentric has recently introduced new enterprise service offerings, including
the introduction of value-added, IP-based communication services to enterprises,
expanded hosting and co-location services and DSL services in limited areas.
Concentric's failure to introduce new enterprise service offerings or the
failure of these services to gain market acceptance in a timely manner or at
all, or the failure to achieve significant market coverage could have a material
adverse effect on its business, financial condition and results of operations.
If Concentric introduces new or enhanced services with reliability, quality or
compatibility problems, then market acceptance of such services could be
significantly delayed or hindered. Such problems or delays could adversely
affect Concentric's ability to attract new customers and subscribers.
Concentric's New or Enhanced Services May Have Errors or Defects
Concentric's services may contain undetected errors or defects when new
services or enhancements are first introduced. Concentric cannot assure you
that, despite testing by Concentric or its customers, errors will not be found
in new services or enhancements after commencement of commercial deployment.
Such errors could result in:
. additional development costs;
. loss of, or delays in, market acceptance;
. diversion of technical and other resources from its other development
efforts;
. the loss of customers and subscribers; and
. damage to its reputation in the marketplace.
Any of these consequences could have a material adverse effect on Concentric's
business, financial condition and results of operations.
Concentric Needs to Balance Network Use to Provide Quality Service
If Concentric does not achieve balanced network utilization over a 24-hour
period, its network could become overburdened at certain periods during the day,
which could adversely affect Concentric's quality of service. Conversely, due
to the high fixed cost nature of its infrastructure, under-utilization of its
network during certain periods of the day could adversely affect Concentric's
ability to provide cost-efficient services at other times. The failure to
achieve balanced network utilization could have a material adverse effect on
Concentric's business, financial condition and results of operations.
Concentric Depends Upon Its Suppliers and Has Sole- and Limited-Sources of
Supply for Certain Products and Services
Concentric relies on other companies to supply certain key components of its
network infrastructure. These components include critical telecommunications
services and networking equipment, which, in the quantities and quality demanded
by
16
<PAGE>
Concentric, are available only from sole- or limited-sources. AT&T Corp.,
MCI WorldCom, Inc., PacWest Telecomm, Inc., Covad and Williams are Concentric's
primary providers of data communications facilities and capacity. AT&T is
currently the sole provider of the frame relay backbone of Concentric's network.
MCI WorldCom and Williams are currently the providers of the ATM backbone of its
network.
Concentric is also dependent upon LECs to provide telecommunications services
to it and its customers. Concentric experiences delays from time to time in
receiving telecommunications services from these suppliers. Concentric cannot
assure you that it will be able to obtain such services on the scale and within
the time frames required by us at an affordable cost, or at all. Any failure to
obtain such services on a sufficient scale, on a timely basis or at an
affordable cost would have a material adverse effect on Concentric's business,
financial condition and results of operations.
Concentric purchases its Nortel/Bay Networks, Cisco Systems, Netopia, Lucent
Technologies, Sun Microsystems, Cisco and other vendor equipment either directly
from the manufacturer or via systems integrators including Milgo Solutions, Inc.
and Williams. Some of these vendors are sole-source suppliers. Concentric
purchases these components pursuant to purchase orders placed from time to time
with its suppliers. Concentric does not carry significant inventories of these
components and has no guaranteed supply arrangements for such components.
Concentric's suppliers also sell products to Concentric's competitors and may in
the future themselves become Concentric's competitors. Concentric cannot assure
you that its suppliers will not enter into exclusive arrangements with its
competitors or stop selling their products or components to Concentric at
commercially reasonable prices, or at all.
The Expansion of Concentric's Network Infrastructure Is Placing, and Will
Continue to Place, a Significant Demand on Concentric's Suppliers.
Some of Concentric's suppliers have limited resources and production capacity.
In addition, some of Concentric's suppliers rely on sole-or limited-sources of
supply for components included in their products. Failure of Concentric's
suppliers to meet increasing demand may prevent them from continuing to supply
components and products in the quantities and quality and at the times required
by Concentric, or at all. Concentric'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, Concentric's network infrastructure. Any such delay,
increased costs or overburdening would have a material adverse effect on
Concentric's business, financial condition and results of operations.
Concentric also depends on its suppliers' ability to provide necessary
products and components that comply with various Internet and telecommunications
standards. These products and components must also inter-operate with products
and components from other vendors. Any failure of Concentric's suppliers to
provide products or components that comply with Internet standards or that
inter-operate with other products or components used by Concentric in its
network infrastructure could have a material adverse effect on Concentric's
business, financial condition and results of operations.
Some of Concentric's suppliers, including the 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
what the RBOCs and other LECs charge Concentric. Any such regulatory changes
could result in increased prices of products and services, which could have a
material adverse effect on Concentric's business, financial condition and
results of operations. Concentric's operations and revenue in the UK and the
Netherlands are dependent on the payment of interconnect fees from the regulated
telephone companies such as British Telecom in the UK. The interconnect fees
are based on the number of minutes of connect time that are generated by the
consumer dial up business in both of those countries. The amount and terms of
these fees is regulated by Oftel. There is no guarantee that the amount, terms
or conditions of these payments to Concentric will not be changed in the future
and any such change may have an adverse impact on Concentric's business.
Concentric Depends Upon Its Network Infrastructure
Concentric's success depends upon the capacity, reliability and security of
its network infrastructure. Concentric currently derives a significant portion
of its revenue from customer subscriptions. Concentric expects that a
substantial portion of its future revenue will be derived from the provision of
tailored, value-added network services to its enterprise customers. Concentric
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.
17
<PAGE>
Concentric currently projects its network utilization will require rapid
expansion of the network capacity to avoid capacity constraints that would
adversely affect system performance. The expansion and adaptation of
Concentric's network infrastructure will require substantial financial,
operational and management resources in 2000 and future periods. Concentric
cannot assure you that it will be able to expand or adapt its network
infrastructure to meet additional demand or its customers' changing requirements
on a timely basis, at a commercially reasonable cost, or at all. In addition,
if demand for network usage were to increase faster than projected or were to
exceed Concentric's current forecasts, the network could experience capacity
constraints, which would adversely affect the performance of the system.
Concentric's business, financial condition and results of operations could be
materially adversely affected if, for any reason, it failed to:
. expand its network infrastructure on a timely basis;
. adapt its network infrastructure to changing customer requirements or
evolving industry trends; or
. alleviate capacity constraints experienced by its network infrastructure.
Currently, Concentric has transit or peering agreements with MCI WorldCom,
Sprint, UUNet, America Online, PSINet and other network providers to support the
exchange of traffic between Concentric's network and the Internet. Concentric
also has public peering arrangements with multiple smaller Internet service
providers. These public peering arrangements also support the exchange of
traffic between Concentric's network and the Internet. The failure of the
networks with which Concentric has public peering, private peering or private
transit, or the failure of any of its data centers, or any other link in the
delivery chain, or any inability to successfully integrate new network resources
into its existing infrastructure, and resulting interruption of its operations
would have a material adverse effect on Concentric's business, financial
condition and results of operations.
Concentric's Market Is Extremely Competitive
Concentric's market for tailored value-added network services is extremely
competitive. There are no substantial barriers to entry in this market, and
Concentric expects that competition will intensify in the future. Concentric
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 us and its competitors;
. customer support;
. the ability to support industry standards; and
. industry and general economic trends.
Concentric's competitors generally may be divided into four groups:
. telecommunications companies,
. online service providers,
. Internet service providers and
. Web hosting providers.
Many of Concentric's competitors have greater market presence, engineering and
marketing capabilities, and financial, technological and personnel resources
than those available to Concentric. 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 Concentric.
18
<PAGE>
In addition to the competitors discussed above, various organizations have
entered into or are forming joint ventures or consortiums to provide services
similar to those of Concentric. Concentric believes that new competitors will
enter the value-added network services market. Such new competitors could
include large computer hardware, software, media and other technology and
telecommunications companies. Certain 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, PSINet and Verio, have also
obtained or expanded their Internet access products and services as a result of
acquisitions. Such acquisitions may permit Concentric'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 Concentric's competitors to bundle other
services and products with virtual private network services or Internet access
services could place Concentric at a competitive disadvantage. Certain
companies are also exploring the possibility of providing or are currently
providing high-speed data services using alternative delivery methods such as
over the cable television infrastructure, through direct broadcast satellites
and over wireless cable.
As a result of increased competition and vertical and horizontal integration
in the industry, Concentric could encounter significant pricing pressure. This
pricing pressure could result in significant reductions in the average selling
price of its services. For example, telecommunications companies that compete
with Concentric 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 Concentric. Concentric cannot assure you that it
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, Concentric believes that the Internet access and online services
businesses are likely to continue to encounter consolidation in the future.
Consolidation 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 Concentric's market share
and could have a material adverse effect on Concentric's business, financial
condition and results of operations. Concentric cannot assure you that it will
have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully.
Concentric Must Keep Up With Rapid Technological Change and Evolving Industry
Standards
The markets for Concentric's services are characterized by rapidly changing
technology, evolving industry standards, changes in customer needs, emerging
competition and frequent new product and service introductions. Concentric's
future success will depend, in part, on its ability to:
. effectively use leading technologies;
. continue to develop its technical expertise;
. enhance its current networking services;
. develop new services that meet changing customer needs;
. advertise and market its services; and
. influence and respond to emerging industry standards and other
technological changes.
All this must be accomplished in a timely and cost-effective manner.
Concentric cannot assure you that it will be successful in effectively using new
technologies, developing new services or enhancing its existing services on a
timely basis.
Concentric cannot assure you that such new technologies or enhancements will
achieve market acceptance. Concentric's pursuit of necessary technological
advances may require substantial time and expense. Concentric cannot assure you
that it will succeed in adapting its network service business to alternate
access devices and conduits as they emerge.
Concentric 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 Concentric
intends to support emerging standards in the market for Internet access,
Concentric cannot assure you that industry standards will be established. If
industry standards are established, Concentric cannot assure you that it will be
able to conform to these new standards in a timely fashion and maintain a
competitive position in the market. Specifically, Concentric's services rely on
19
<PAGE>
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 Concentric's services obsolete and
unmarketable.
In addition, Concentric cannot assure you that services or technologies
developed by others will not render its services or technology uncompetitive or
obsolete. An integral part of Concentric's strategy is to design its network to
meet the requirements of emerging standards such as DSL (Digital Subscriber
Line). If Concentric fails, for technological or other reasons, to develop and
introduce succesive enhancements to DSL technology or other enhanced services
that are compatible with industry standards and that satisfy customer
requirements, then its business, financial condition and results of operations
would be materially adversely affected.
Concentric Faces the Risk of Fundamental Changes in the Way Internet Access is
Delivered
Internet services are currently accessed primarily by computers connected by
telephone lines. Several companies have announced the development and planned
sale of cable television modems, wireless modems and satellite modems to provide
Internet access. Cable television, satellite and wireless modems can transmit
data at substantially faster speeds than the modems Concentric 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, televisions or other consumer electronic devices, or subscriber
requirements change the way Internet access is provided, Concentric will have to
develop new technology or modify its existing technology to accommodate new
developments such as:
. Internet access through cable television, satellite and wireless modems;
. Internet access through screen-based telephones, televisions or other
consumer electronic devices;
. or subscriber requirements that change the way Internet access is provided.
Concentric's pursuit of these technological advances may require substantial
time and expense. Concentric cannot assure you that it will succeed in adapting
its Internet access business to alternate access devices and conduits.
Concentric's Network System Could Fail
Network expansion and growth in usage will place increased stress upon
Concentric's network hardware and traffic management systems. Concentric's
network has been designed with redundant backbone circuits to allow traffic re-
routing. Concentric cannot assure you, however, that it will not experience
failures relating to individual network POPs or even catastrophic failure of the
entire network.
Moreover, Concentric's operations are dependent upon its ability to protect
its network infrastructure against damage from power loss, telecommunications
failures and similar events. A significant portion of its computer equipment,
including critical equipment dedicated to its Internet access services, is
located at Concentric's facilities in Chicago, Illinois, Secaucus, New Jersey,
London, England, San Jose and Irvine, California. In addition, its modems and
routers that serve large areas of the United States are located in these cities.
Concentric's network operations center, which manages its entire network, is in
St. Louis, Missouri. Despite its precautions, a natural disaster, such as an
earthquake, or other unanticipated problem at the network operations center, at
one of its hubs (sites at which Concentric has located routers, switches and
other computer equipment that make up the backbone of its network
infrastructure) or at a number of its POPs has from time to time in the past
caused, and in the future could cause, interruptions in its services.
In addition, Concentric's services could be interrupted if its
telecommunications providers fail to provide the data communications capacity in
the time frame required by Concentric as a result of a natural disaster or for
some other reason. Any damage or failure that causes interruptions in its
operations could have a material adverse effect on Concentric's business,
financial condition and results of operations.
Concentric's System May Experience Security Breaches Despite the Implementation
of Network Security Measures; the core of Concentric's Network Infrastructure
is Vulnerable to Computer Viruses, Break-ins and Similar Disruptive Problems
Caused by its Customers or Internet Users
20
<PAGE>
Computer viruses, break-ins or other problems caused by third parties could
lead to interruptions, delays or cessation in service to Concentric's customers
and subscribers. Furthermore, inappropriate use of the network by third parties
could also potentially jeopardize the security of confidential information
stored in Concentric's computer systems and its customer's computer systems.
Concentric may face liability and may lose potential subscribers as a result.
Although Concentric intends to continue to implement industry-standard security
measures, such measures occasionally have been circumvented in the past.
Concentric cannot assure you that its security enclosures 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 its customers that could have a
material adverse effect on its business, financial condition and results of
operations.
Concentric Has Incurred Substantial Indebtedness and May Not Be Able to
Service Its Debt
Concentric is and will continue to have a significant amount of outstanding
indebtedness. Concentric has significant debt service requirements as a result
of this indebtedness. At March 31, 2000, its total debt (including current
portion) was $275.1 million, and stockholders' equity was $195.4 million.
Interest on such indebtedness totaled approximately $5.9 million in the three
months ended March 31, 2000. Concentric also issued 150,000 shares of preferred
stock in June 1998 with dividends which accrue at the rate of 13 1/2% per year
and 50,000 shares of preferred stock in June 1999 with dividends which accrue at
the rate of 7% per year. On March 31, 2000, cumulative dividends and accretion
on the preferred stock totaled approximately $46.7 million. Dividends and
accretion will total approximately $33.4 million in 2000 and are expected to
grow in each successive year. To date, Concentric has paid such dividends in
shares of preferred stock, rather than in cash. Concentric must also redeem
both issuances of the preferred stock in 2010. As a result of these and other
features, the preferred stock is substantially equivalent to debt.
Concentric's debt, including the preferred stock, has important consequences
for its company and its stockholders, including the following:
. its ability to obtain additional financing in the future, whether for
working capital, capital expenditures, acquisitions or other purposes, may
be impaired;
. a substantial portion of its cash flow from operations is dedicated to the
payment of interest on its debt, which reduces the funds available to us
for other purposes;
. its flexibility in planning for or reacting to changes in market conditions
may be limited; and
. Concentric may be more vulnerable in the event of a downturn in its
business.
Concentric's ability to meet its debt service and preferred stock dividend
obligations will depend on its future operating performance and financial
results. This ability will be subject in part to factors beyond its control.
Although Concentric believes that its cash flow will be adequate to meet its
interest and dividend payments, Concentric cannot assure you that it will
continue to generate sufficient cash flow in the future to meet its debt service
and preferred stock requirements. If Concentric 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, then Concentric may be required to:
. refinance all or a portion of its existing debt;
. or sell all or a portion of its assets.
Concentric cannot assure you that a refinancing would be possible. Concentric
cannot assure you that any asset sales would be timely or that the proceeds
which Concentric could realize from such asset sales would be sufficient to meet
its debt service requirements. In addition, the terms of its debt and preferred
stock restrict its ability to sell its assets and its use of the proceeds from
any such asset sale.
Concentric May Need Additional Capital in the Future and Such Additional
Financing May Not Be Available
Concentric currently anticipates that its available cash resources will be
sufficient to meet its anticipated working capital and capital expenditure
requirements through December 2000. However, Concentric cannot assure you that
such resources will be sufficient for anticipated or unanticipated working
capital and capital expenditure requirements. Concentric may need to raise
additional funds through public or private debt or equity financing in order to:
21
<PAGE>
. take advantage of unanticipated opportunities, including more rapid
international expansion or acquisitions of complementary businesses or
technologies;
. develop new products or services; or
. respond to unanticipated competitive pressures.
Concentric may also raise additional funds through public or private debt or
equity financings if such financings become available on favorable terms.
Concentric cannot assure you that any additional financing it may need will be
available on terms favorable to Concentric, or at all. If adequate funds are
not available or are not available on acceptable terms, Concentric may not be
able to take advantage of unanticipated opportunities, develop new products or
services or otherwise respond to unanticipated competitive pressures. In such
case, its business, results of operations and financial condition could be
materially adversely affected. Concentric'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.
Concentric Faces Risks Associated with International Expansion
A key component of Concentric's strategy is to expand into international
markets. The following risks are inherent in doing business on an international
level:
. 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 its international operations.
Concentric cannot assure you that one or more of such factors will not have a
material adverse effect on its future international operations and,
consequently, on its business, financial condition and results of operations.
Concentric's experience in developing versions of its products and marketing
and distributing its products internationally is limited and its primary efforts
in this area are through its recently completed acquisition of Internet
Technology Group, Plc, an Internet network service provider in the UK and the
Netherlands. Concentric's international strategy has not developed as rapidly as
anticipated and may be further delayed if:
. Concentric cannot successfully develop satisfactory relationships with
other partners;
. Concentric cannot successfully deploy its technology over its partners'
infrastructure;
. Concentric cannot transfer its knowledge to its partners' employees; or
. Concentric's partners do not devote sufficient management, technological or
marketing resources to this project.
Concentric's business, results of operation or financial condition could be
materially adversely affected if delays in its international strategy continue
or worsen. Concentric has entered into roaming agreements with third parties to
allow its customers to access their Internet accounts from Japan and certain
other foreign countries. Concentric cannot assure you that it will be able to
successfully market, sell and deliver its products in international markets.
Concentric Could Face Government Regulation
The Federal Communications Commission ("FCC") currently does not regulate
value-added network software or computer equipment related services that
transport data or IP-based voice messages over telecommunication facilities as
telecommunications services. Concentric provides value-added IP-based network
services, in part, through data transmissions over public telephone lines.
Operators of these types of value-added networks that provide access to
regulated
22
<PAGE>
transmission facilities only as part of a data services package are classified
for regulatory purposes as providers of "information services" and are currently
excluded from regulations that apply to "telecommunications carriers." As such,
Concentric is not currently subject to direct regulation by the FCC or any other
governmental agency, other than regulations applicable to businesses generally.
However, future changes in law or regulation could result in some aspects of
its current operations becoming subject to one or more forms of
telecommunication regulation by the FCC or other regulatory agencies. The FCC
currently is reviewing its regulatory positions on data transmissions over
telecommunications networks and could seek to impose some form of
telecommunications carrier regulation on the network transport and
telecommunications functions of an enhanced or information services package.
Further, the FCC could conclude that its protocol conversions, computer
processing and interaction with customer-supplied information are insufficient
to afford Concentric with the benefits of the enhanced or information service
regulatory classification. If the FCC reaches such conclusions, it may seek to
regulate some segments of its activities as telecommunications services.
One significant example of the type of regulation some incumbent LECs would
like to have the FCC impose on IP-based services is typified by a recent
Petition for Expedited Declaratory Ruling filed by US West seeking an FCC ruling
that IP-based Telephony services provided over interchange carrier networks not
be considered information services, but telecommunications services subject to
incumbent LEC-imposed interstate access charges. While the FCC has not taken
action to date on the US West Petition, its filing indicates that there are
telecommunications carriers anxious to reclassify exempt information services to
be regulated telecommunications services.
State public utility commissions generally have declined to regulate enhanced
or information services. Some states, however, have continued to regulate
particular aspects of enhanced services in limited circumstances, such as where
they are provided by incumbent LECs that operate telecommunications networks.
Moreover, the public service commissions of some states continue to review
potential regulation of such services. Concentric cannot assure you that
regulatory authorities of states where Concentric provides Internet access,
intranet and VPN services will not seek to regulate aspects of these activities
as telecommunications services. The prices at which Concentric may sell its
services could be affected by regulatory changes:
. in the Internet connectivity market;
. that indirectly or directly affect telecommunications costs; or
. that increase the likelihood or scope of competition from the RBOCs.
Concentric cannot predict the impact, if any, that future regulation or
regulatory changes may have on its business, and Concentric cannot assure you
that future regulation or regulatory changes will not have a material adverse
effect on its business, results of operations or financial condition.
Concentric Depends On Its Proprietary Technology and Technological Expertise
Concentric's success and ability to compete is dependent in part upon its
technology. In this regard, Concentric believes its success is more dependent
upon its technical expertise than its proprietary rights. Concentric 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 Concentric's products or
technology without authorization or to develop similar technology independently.
Concentric cannot assure you that such measures have been, or will be, adequate
to protect its proprietary technology. Concentric's competitors may also
independently develop technologies that are substantially equivalent or superior
to Concentric's technology.
Concentric operates a material portion of its business over the Internet. The
Internet 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. Concentric cannot assure you that it
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 its business and results of operations.
Third Parties May Claim Concentric Infringed Their Proprietary Rights
23
<PAGE>
Although Concentric does not believe it infringes on the proprietary rights of
any third parties, Concentric cannot assure you that third parties will not
assert such claims against Concentric in the future or that such claims will not
be successful. Concentric could incur substantial costs and diversion of
management resources to defend any claims relating to proprietary rights, which
could have a material adverse effect on its 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 Concentric's ability to license its products
in the United States or abroad. Such a judgment would have a material adverse
effect on Concentric's business, financial condition and results of operations.
In addition, Concentric is obligated under certain agreements to indemnify the
other party for claims that Concentric infringes on the proprietary rights of
third parties. If Concentric is required to indemnify parties under these
agreements, its business, financial condition and results of operations could be
materially adversely affected. If someone asserts a claim relating to
proprietary technology or information against Concentric, Concentric may seek
licenses to such intellectual property. Concentric cannot assure you, however,
that it could obtain licenses on commercially reasonable terms, if at all. The
failure to obtain the necessary licenses or other rights could have a material
adverse effect on Concentric's business, financial condition and results of
operations.
Concentric Could Face Liability for Information Disseminated Through Its
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 continuing to evolve
and remains unsettled. In the past, at least one court has ruled that Internet
service providers could be found liable for copyright infringement as a result
of information disseminated through their networks. Such claims have been
asserted against Concentric in the past and Concentric cannot assure you that
similar claims will not be asserted in the future.
Federal laws have been enacted, however, which, under certain circumstances,
provide Internet service providers with immunity from liability for information
that is disseminated through their networks when they are acting as mere
conduits of information. A Federal Court of Appeals has recently held that the
Telecommunications Act of 1996 creates immunity from liability on the part of
Internet service providers for libel claims arising out of information
disseminated over their services by third party content providers. In addition,
the Digital Millennium Copyright Act, which was enacted in 1998, creates a safe-
harbor from copyright infringement liability for Internet service providers that
meet certain requirements. These requirements include certain technical
measures and registering with the Copyright Office the identity of the
provider's Designated Infringement Agent who is to receive notice of any claims
of copyright infringement. Concentric cannot assure you, however, that the
Digital Millennium Copyright Act or any other legislation will protect it from
copyright infringement liability.
The Child Online Protection Act of 1998 prohibits and imposes criminal
penalties and civil liability on anyone engaged in the business of selling or
transferring, by means of the World Wide Web, material that is harmful to minors
without restricting access to such material by persons under seventeen years of
age. Numerous states have adopted or are currently considering similar types of
legislation. The imposition upon Concentric, Internet service providers or Web
server hosts of potential liability for such materials carried on or
disseminated through Concentric's systems could require Concentric to implement
measures to reduce its exposure to such liability. Such measures may require
the expenditure of substantial resources or the discontinuation of certain
product or service offerings. Further, the costs of defending against any such
claims and potential adverse outcomes of such claims could have a material
adverse effect on Concentric's business, financial condition and results of
operations. The Child Online Protection Act of 1998 has been challenged by
civil rights organizations in part on the grounds that it violates the First
Amendment. The United States Supreme Court held a similar statute
unconstitutional in 1997. On February 1, 1999 a United States District Court
preliminarily enjoined enforcement of the law pending final resolution of the
case.
Concentric's Stock Price Has Been and May Continue to Be Volatile
The trading price of Concentric's common stock has been and is likely to be
highly volatile. Concentric's stock price could be subject to wide fluctuations
in response to a variety of factors, including the following:
. actual or anticipated variations in quarterly operating results;
. announcements of technological innovations;
. new products or services offered by Concentric or its competitors;
24
<PAGE>
. changes in financial estimates by securities analysts;
. conditions or trends in the network services market;
. its announcement of significant acquisitions, strategic partnerships, joint
ventures or capital commitments;
. additions or departures of key personnel;
. sales of common stock; and
. other events or factors that may be beyond its control.
In addition, the stock markets in general, and the Nasdaq National Market and
the trading activity of network services and technology companies in particular,
have experienced extreme price and volume fluctuations recently. These
fluctuations often have been unrelated or disproportionate to the operating
performance of these companies. The trading prices of many technology
companies' stocks are at or near historical highs and these trading prices and
multiples are substantially above historical levels. These trading prices and
multiples may not be sustained. These broad market and industry factors may
materially adversely affect the market price of its common stock, regardless of
its actual operating performance. In the past, following periods of volatility
in the market price of a company's securities, securities class action
litigation often has been instituted against that company. Litigation like
this, if instituted, could result in substantial costs and a diversion of
management's attention and resources.
25
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27.1 Financial data schedule
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated January 9, 2000 to
report under Item 5 the Agreement and Plan of Merger and Share Exchange
Agreement under which each share of Concentric stock shall be exchanged for a
fractional share of common stock of NEXTLINK Communications, Inc.
The Company filed a Current Report on Form 8-K dated February 14, 2000 to
report under Item 2 the acquisition of all of the outstanding capital stock of
Internet Technology Group for approximately $115.4 million in cash and 4,728,130
shares of Concentric common stock.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2000
CONCENTRIC NETWORK CORPORATION
By: /s/ Henry R. Nothhaft
---------------------------
Henry R. Nothhaft,
President, Chief Executive
Officer and Director
By: /s/ Michael F. Anthofer
-------------------------------
Michael F. Anthofer,
Senior Vice President and
Chief Financial Officer
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 122381
<SECURITIES> 58566
<RECEIVABLES> 36432
<ALLOWANCES> 1974
<INVENTORY> 0
<CURRENT-ASSETS> 238283
<PP&E> 213458
<DEPRECIATION> 89419
<TOTAL-ASSETS> 699361
<CURRENT-LIABILITIES> 98950
<BONDS> 0
228865
0
<COMMON> 543720
<OTHER-SE> (348317)
<TOTAL-LIABILITY-AND-EQUITY> 699361
<SALES> 56956
<TOTAL-REVENUES> 56956
<CGS> 51294
<TOTAL-COSTS> 98000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3202
<INCOME-PRETAX> 9520
<INCOME-TAX> 0
<INCOME-CONTINUING> 9520
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9520
<EPS-BASIC> .19
<EPS-DILUTED> .19
</TABLE>
