NORTHPOINT COMMUNICATIONS GROUP INC, 10-Q, 2000-08-14

NORTHPOINT COMMUNICATIONS GROUP INC
10-Q, 2000-08-14
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE>

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended June 30, 2000

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

Commission file number: 000-29828

NORTHPOINT COMMUNICATIONS GROUP, INC.
(Exact name of Registrant as Specified in its Charter)

DELAWARE 52-2147716
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

303 Second Street, South Tower
San Francisco, California 94107
(Address of Principal Executive Offices)

Registrant's telephone number, including area code: (415) 403-4003

Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [_] No

The number of shares of Common Stock, par value $.001 per share, of NorthPoint
Communications Group, Inc. outstanding as of August 10, 2000 was 133,031,083.
<PAGE>

TABLE OF CONTENTS

<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements............................................................................ 3

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 11

Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................... 30

PART II. OTHER INFORMATION

Item 1. Legal Proceedings............................................................................................ 31

Item 2. Changes in Securities and Use of Proceeds.................................................................... 31

Item 3. Defaults Upon Senior Securities.............................................................................. 31

Item 4. Submission of Matters to a Vote of Security Holders.......................................................... 32

Item 5. Other Information............................................................................................ 32

Item 6. Exhibits and Reports on Form 8-K............................................................................. 33
</TABLE>

NorthPoint Communications Group, Inc. and Verizon Communications will file
a joint proxy statement/prospectus and other documents regarding the proposed
business combination transaction referenced in the following information with
the Securities and Exchange Commission. Investors and security holders are urged
to read the proxy statement/prospectus, when it becomes available, because it
will contain important information. A definitive joint proxy
statement/prospectus will be sent to stockholders of NorthPoint Communications
Group, Inc. seeking their approval of the proposed transaction. Investors and
security holders may obtain a free copy of the definitive joint proxy
statement/prospectus (when it is available) and other documents filed by
NorthPoint Communications Group, Inc. and Verizon Communications with the
Commission at the Commission's web site at www.sec.gov. The definitive joint
proxy statement/prospectus and these other documents may also be obtained for
free by NorthPoint stockholders by directing a request to: NorthPoint
Communications Group, Inc., 303 Second Street, South Tower, San Francisco, CA
94107, Attn: Investor Relations, (415) 403-4003, email:
[email protected].

2
<PAGE>

PART 1. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

NORTHPOINT COMMUNICATIONS GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except share and per share amounts)

<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
----------- ------------
2000 1999
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 91,679 $ 95,019
Short-term investments 125,383 115,034
Accounts receivable, net of an allowance of $1,434 and $834, respectively 27,492 10,558
Inventories 8,811 4,439
Prepaid expenses and other assets 34,035 19,555
--------- ---------

Total current assets 287,400 244,605
Property and equipment:
Networking equipment 229,202 117,625
Central office collocation space improvements 89,226 61,637
Computers and software 91,322 40,739
Leasehold improvements 21,281 14,176
Furniture, fixtures and office equipment 12,229 10,192
--------- ---------

Total property and equipment 443,260 244,369
Less accumulated depreciation and amortization (45,947) (17,245)
--------- ---------

Property and equipment, net 397,313 227,124
Long-term investments 49,400 6,740
Deposits 580 691
--------- ---------

Total assets $ 734,693 $ 479,160
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, including related party payables of $7,489 and $6,161, respectively $ 58,560 $ 56,004
Accrued expenses and other liabilities 53,221 26,023
Capital lease obligations, current portion, net of unamortized debt discount
of $265 and $265, respectively 2,033 1,027
--------- ---------

Total current liabilities 113,814 83,054
Capital lease obligations, long-term portion, net of unamortized debt discount
of $200 and $332, respectively 3,103 1,653
Deferred long-term credits 6,717 1,392
Notes payable 400,000 --
Term loan 85,000 85,000
--------- ---------

Total liabilities 608,634 171,099
--------- ---------

Commitments and contingencies (Note 3)
Stockholders' equity:
Common stock, $0.001 par value; 281,250,000 shares authorized at June 30, 2000 and December 31,
1999; 132,508,520 and 126,469,210 shares issued and outstanding at June 30, 2000 and December 31,
1999, respectively (the December 31, 1999 shares issued and outstanding includes 2,466,724 shares of
Class B common stock that converted into common stock in March 2000) 133 126
Warrants 2,619 8,701
Additional paid-in capital 539,308 525,294
Deferred stock compensation (9,968) (12,405)
Accumulated other comprehensive income (49) 330
Accumulated deficit (405,984) (213,985)
--------- ---------

Total stockholders' equity 126,059 308,061
--------- ---------

Total liabilities and stockholders' equity $ 734,693 $ 479,160
========= =========
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

3
<PAGE>

NORTHPOINT COMMUNICATIONS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in 000's, except share and per share amounts)

<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 24,403 $ 2,504 $ 44,374 $ 3,787

Operating expenses:
Network expenses 40,894 7,801 74,432 11,733
Selling, marketing, general and administrative
(excludes stock compensation expense of $1,252,
$1,215, $2,462 and $2,807, respectively) 62,301 23,910 110,473 38,240
Amortization of deferred stock compensation 1,252 1,215 2,462 2,807
Depreciation and amortization 17,959 2,813 28,702 4,200
------------ ----------- ------------ -----------

Total operating expenses 122,406 35,739 216,069 56,980
------------ ----------- ------------ -----------

Loss from operations (98,003) (33,235) (171,695) (53,193)

Interest income 4,810 3,026 9,848 3,264
Interest expense (16,602) (7,689) (27,612) (11,271)
Equity in net loss of affiliated companies (2,030) -- (2,030) --
Taxes (235) (4) (510) (54)
------------ ----------- ------------ -----------

Net loss $ (112,060) $ (37,902) $ (191,999) $ (61,254)
============ =========== ============ ===========

Net loss per common share - basic and diluted $ (0.85) $ (0.44) $ (1.47) $ (1.10)
============ =========== ============ ===========

Weighted average shares used in computing net loss per
common share - basic and diluted 132,098,858 86,113,944 130,554,664 55,680,075
============ =========== ============ ===========
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

4
<PAGE>

NORTHPOINT COMMUNICATIONS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's)

<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
June 30,
--------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (191,999) $ (61,254)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 28,702 4,200
Amortization of deferred stock compensation 2,462 2,806
Amortization of debt discount 133 4,347
Equity in net loss of affiliated companies 2,030 --
Changes in assets and liabilities:
Accounts receivable (16,934) (908)
Inventories (4,372) (616)
Prepaid expenses and other assets (14,480) (5,460)
Deposits 111 (114)
Accounts payable 2,556 (6,695)
Accrued expenses and other liabilities 27,198 11,680
Deferred charges 5,325 --
---------- ---------

Net cash used in operating activities (159,268) (52,014)

Cash flows from investing activities:
Purchase of short-term investments (10,728) (111,097)
Purchase of long-term investments (40,190) --
Purchase of property and equipment (195,888) (47,910)
---------- ---------

Net cash used by investing activities (246,806) (159,007)

Cash flows from financing activities:
Proceeds from issuance of common and preferred stock 3,413 482,478
Borrowings on line of credit -- 55,000
Payments on line of credit borrowings -- (50,725)
Proceeds from notes payable 400,000 5,600
Principal payments on capital lease obligations (679) (633)
---------- ---------

Net cash provided by financing activities 402,734 491,720
---------- ---------

Net increase (decrease) in cash and equivalents (3,340) 280,699
Cash and equivalents at beginning of period 95,019 10,956
---------- ---------

Cash and equivalents at end of period $ 91,679 $ 291,655
========== =========

Supplemental cash flow information and noncash activities:

Fixed assets obtained through capital leases $ 3,003 $ --
========== =========

Warrants issued for bridge loan, capital lease and with issuance of equity $ -- $ 4,530
========== =========

Conversion of convertible promissory note to Class B common stock $ -- $ 5,600
========== =========

Common stock issued for investment $ 4,500 $ --
========== =========

Income taxes paid $ 1 $ 7
========== =========

Interest paid $ 5,615 $ 5,795
========== =========
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

5
<PAGE>

NORTHPOINT COMMUNICATIONS GROUP, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Organization and Basis of Presentation

The Company

NorthPoint Communications, Inc. was formed in May 1997 to provide high
speed network and data transport services, allowing Internet Service Providers
(ISPs), broadband data service providers and long distance and local phone
companies (collectively, network service providers or NSPs) to meet the rapidly
increasing information needs of small and medium-sized businesses, people who
work in home offices and telecommuters.

Basis of Presentation

The consolidated financial statements include the accounts of NorthPoint
Communications Group, Inc. and its wholly-owned subsidiary NorthPoint
Communications, Inc., together with its wholly-owned subsidiary NorthPoint
Communications of Virginia, Inc. Effective March 22, 1999, NorthPoint
Communications, Inc. consummated a reorganization pursuant to which it became a
wholly-owned subsidiary of NorthPoint Communications Group, Inc., a newly
created holding company. The reorganization was effected by a merger of
NorthPoint Communications, Inc., with and into NorthPoint Merger Sub, Inc., a
wholly-owned subsidiary of NorthPoint Communications Group, Inc., with
NorthPoint Communications, Inc., as the surviving corporation of such merger. As
a result of the reorganization, the stockholders of NorthPoint Communications,
Inc. immediately before the reorganization became the only stockholders of
NorthPoint Communications Group, Inc. immediately after the reorganization. All
material intercompany accounts and transactions have been eliminated.

The accompanying financial data as of June 30, 2000 and for the three and
six months ended June 30, 2000 and June 30, 1999, have been prepared by the
Company, without audit, 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. The December 31, 1999 balance sheet was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles. However, the Company believes that the
disclosures are adequate to make the information presented not misleading. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.

In the opinion of management, the accompanying condensed consolidated
financial statements reflect all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair statement of the
Company's financial condition, the results of its operations and its cash flows
for the periods indicated. The results of operations for the three and six
months ended June 30, 2000 are not necessarily indicative of the operating
results for the full year.

2. Summary of Significant Accounting Policies

Business risks and credit concentrations

The Company's operations are subject to significant risks and uncertainties
including competitive, financial, developmental, operational, technological,
regulatory and other risks associated with an emerging business.

The Company sells its services on a wholesale basis to NSPs. For the three
months ended June 30, 2000 and March 31, 2000, two NSP customers accounted for
22% and 34% of revenue, respectively.

The Company is dependent upon a small number of major suppliers and service
providers.

Reclassifications

Certain prior year balances have been reclassified to conform with the
current year presentation.

6
<PAGE>

NORTHPOINT COMMUNICATIONS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)

Cash and cash equivalents

The Company considers all highly liquid monetary instruments with an
original maturity of three months or less at the date of purchase to be cash
equivalents.

A portion of the Company's cash deposits is restricted since it supports
letters of credit that the Company has provided to secure office space. The
balance of restricted cash at June 30, 2000 and December 31, 1999 was $4,060,400
and $4,365,400, respectively.

Short-term and long-term investments

Short-term and long-term investments are accounted for in accordance with
Statement of Financial Accounting Standards No. 115 Accounting for Certain
Investments in Debt and Equity Securities. This statement requires that
securities be classified as "held to maturity," "available-for-sale" or
"trading," and the securities in each classification be accounted for at either
amortized cost or fair market value, depending upon their classification. The
Company classifies its investments as held-to-maturity and available-for- sale.
Held-to-maturity securities are reported at amortized cost. Available-for- sale
securities are carried at fair value, with the unrealized gains and losses, net
of tax, reported as other comprehensive income, a separate component of
stockholders' equity. At the time of sale, any gains or losses will be
recognized as a component of operating results. The Company recorded other
comprehensive income of ($48,768) as of June 30, 2000 related to the net
unrealized losses of certain available-for-sale investments.

Inventories

Inventories consist of communications equipment that will be installed at
subscriber locations. Inventories are accounted for using the first-in first-out
method at the lower of cost or market.

Property and equipment

Property and equipment, including property and equipment under capital
leases, are recorded at cost and are depreciated using the straight-line method
over the shorter of their useful lives or, for leased assets, the remaining
lease term. The estimated useful life is three years for software, and five
years for all other property and equipment. Maintenance and repairs are charged
to expense as incurred, and improvements and betterments are capitalized. When
assets are retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in operations in the period in which they are realized.

7
<PAGE>

NORTHPOINT COMMUNICATIONS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)

Revenues

Revenues from transport services are recognized when the services are
provided. Payments received in advance of providing services are recorded as
deferred revenue until the period such services are provided. Revenues related
to installation services are recognized when the installation is completed.

Earnings (loss) per share

The Company computes net loss per share pursuant to Statement of Financial
Accounting Standards No. 128, Earnings Per Share. Basic net loss per share is
computed by dividing income or loss applicable to common stockholders by the
weighted average number of shares of the Company's common stock outstanding
during the period after having given consideration to shares subject to
repurchase. Diluted net loss per share is determined in the same manner as basic
net loss per share except that the number of shares is increased assuming
exercise of dilutive stock options and warrants using the treasury stock method
and conversion of the Company's convertible preferred stock.

See Condensed Consolidated Statements of Operations for computed amounts.

The dilutive effect of options and warrants has not been considered as their
effect would be antidilutive for all periods presented.

Recently issued accounting pronouncements

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. SAB 101 provides guidance for revenue recognition under certain
circumstances. Implementation of SAB 101 has been delayed by the Securities and
Exchange Commission until the fourth quarter of the fiscal year beginning after
December 15, 1999. The Securities and Exchange Commission is continuing to
evaluate the application of SAB 101. Accordingly, the Company will continue to
evaluate the impact of SAB 101 on its financial statements and related
disclosures.

In April 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25". This Interpretation
clarifies the application of Opinion 25 for certain stock compensation issues
including the definition of employee for purposes of applying Opinion 25, the
criteria for determining whether a plan qualifies as a noncompensatory plan, the
accounting consequence of various modifications to the terms of a previously
fixed stock option, and the accounting for an exchange of stock compensation
awards in a business combination. This Interpretation is effective July 1, 2000.
NorthPoint does not expect the adoption of FASB Interpretation No. 44 to have a
significant effect on the financial condition or results of operations.

3. Commitments and Contingencies

The Company is subject to state public utilities commission, Federal
Communications Commission and court decisions as they relate to the
interpretation and implementation of the Telecommunications Act, the
interpretation of CLEC interconnection agreements in general and the Company's
interconnection agreements in particular. In some cases the Company may be bound
by the results of ongoing proceedings of these bodies or the legal outcomes of
other contested interconnection agreements that are similar to the Company's
agreements. The Company cannot estimate the effect, if any, of these
proceedings.

The Company together with, in some instances, some of its directors and
officers, may from time to time be the subject of claims or named as a defendant
or co-defendant in various legal actions involving breach of contract and
various other claims incident to the conduct of its businesses. At this time,
management does not expect the Company to suffer any material liability by
reason of such actions, nor does it expect that such actions will have a
material effect on the Company's liquidity or operating results.

8
<PAGE>

NORTHPOINT COMMUNICATIONS GROUP, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4. Strategic Joint Ventures

During the quarter ended March 31, 2000, the Company formed two
international joint ventures. The first is a 50-50 joint venture with a
Canadian competitive service provider to deliver wholesale DSL-based broadband
services to businesses throughout Canada. The second is a 50-50 joint venture
with an alternative broadband local access network operator in the Benelux
region and the northwest Rhine region of Germany. This joint venture plans to
eventually deliver DSL services across Europe as those markets open. In April
2000, the Company contributed a total of $37,690,604 to the two joint ventures
to begin funding their operations. The Company has committed to contribute a
total of approximately $75,000,000 to these ventures by the end of the first
quarter of 2001.

5. Common Stock

From April 1, 2000 to June 30, 2000, the Company granted to employees
options to purchase an aggregate of 5,231,505 shares of common stock at an
exercise price of $10.00 to $17.9375 per share, some of which were below fair
market value. Under the provisions of APB No. 25, deferred compensation of
approximately $1,312,500 was recognized in connection with these grants and will
be amortized as deferred stock compensation expense over the vesting period of
the options.

On June 20, 2000, the Company issued an aggregate of 391,304 shares of
common stock in a private placement to a company in which it made a strategic
investment. The Company received a preferred equity interest in this company in
consideration of the Company's issuance of common shares and a cash investment
of $2.5 million that the Company made in such company.

6. Stock Warrants

Contingent Warrants

The Company has issued warrants to purchase up to 212,568 shares of its
common stock at a price of $1.5689 per share to one of its shareholders, which
are exercisable upon the achievement of certain milestones by the holder of the
warrants. The value of the warrants will be determined using a Black-Scholes
model and will be recorded once the milestones have been reached and the
warrants are no longer contingent.

7. Subsequent Events

Business Developments

On August 7, 2000, Bell Atlantic Corporation (d/b/a Verizon Communications)
("Verizon"), Verizon Ventures I Inc. ("Parent"), a wholly-owned subsidiary of
Verizon, Verizon Ventures II Inc. ("Merger Subsidiary"), a direct, wholly-owned
subsidiary of Parent, and NorthPoint Communications Group, Inc. ("NorthPoint")
entered into an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant
to the terms of the Merger Agreement, Verizon will contribute its DSL business
to Parent, consisting of the assets, equipment, installed lines, employees and
contracts, among other things, used in its digital subscriber line ("DSL")
business, and $800 million in cash in exchange for shares of Parent common
stock. Of the cash investment, $450 million will be used to fund Parent's
capital expenditures and operations and $350 million will be distributed to
NorthPoint stockholders. At the effective time of the Merger ("Effective Time"),
Merger Subsidiary will merge (the "Merger") with and into NorthPoint. Each share
of NorthPoint common stock issued and outstanding immediately prior to the
Effective Time will be cancelled and converted into one share of Parent common
stock and outstanding NorthPoint warrants and options will be converted into
warrants and options of Parent. In addition to the conversion of their shares of
NorthPoint common stock into Parent common stock, holders of issued and
outstanding NorthPoint common stock at the Effective Time will receive a total
of $350 million, payable to such stockholders on a pro rata basis, or
approximately $2.50 per share. As a result of these transactions, Verizon will
hold 55% of the common stock of Parent and the stockholders of issued and
outstanding NorthPoint common stock immediately prior to the Effective Time will
hold the remaining 45% of Parent common stock. The transactions contemplated by
the Merger Agreement are subject to the approval of the stockholders of
NorthPoint and other customary closing conditions, such as regulatory approvals.
Parent will use the "NorthPoint" name and brand and will be publicly traded on
Nasdaq.

Concurrently with entering into the Merger Agreement, Verizon issued to
NorthPoint a commitment letter pursuant to which Verizon is obligated to provide
to NorthPoint a $200 million senior secured debt facility on January 1, 2001 if
the transactions contemplated by the Merger Agreement have not been consummated
by that date. In addition, upon the fulfillment of certain conditions, Verizon
agreed to purchase $150 million of non-voting 9% Convertible Preferred Stock of
NorthPoint ("NorthPoint

9
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The Merger Agreement further provides that, following the closing of the
Merger, upon the exercise of any NorthPoint option or warrant that was
outstanding at the Effective Time (all of which will be converted into Parent
options and warrants), Parent will issue to Verizon such number of shares of
common stock as are necessary to allow Verizon to maintain its percentage
ownership as of the Effective Time.

The transactions contemplated by the Merger Agreement are subject to the
receipt of regulatory approvals, the satisfaction of all conditions set forth in
the Merger Agreement, including termination of the waiting period pursuant to
the Act, and compliance with other closing conditions customarily included in
similar merger transactions.

Common Stock

From July 1, 2000 to August 11, 2000, The Company granted to certain
employees options to purchase an aggregate of 355,900 shares of common stock at
an exercise price of $11.813 per share, which was at fair market value at the
time of grant.

10
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The following discussion and analysis of NorthPoint's financial condition
and results of operations should be read in conjunction with our financial
statements and related notes included elsewhere in this report. In the
discussion below, we refer to the period from inception (May 16, 1997) to
December 31, 1997 as "1997".

Certain statements set forth below constitute "forward-looking statements."
Such forward-looking statements involve certain risks and uncertainties
including, but not limited to, those discussed herein under "Risk Factors" that
may cause actual results to differ materially from those expressed or implied in
any forward-looking statement. Investors and prospective investors are
cautioned not to place undue reliance on such forward-looking statements. We
disclaim any obligation to update the forward-looking statements contained
herein to reflect future events or developments. See "Forward-Looking
Statements."

Overview

We are a national provider of high speed, local data network services. Our
networks use digital subscriber line, or DSL, technology to enable data
transport over telephone company copper lines at guaranteed speeds up to 25
times faster than common dial-up modems. We market our network and data
transport services to internet service providers, long-distance and local
telephone companies and data service providers, whom we call network service
providers. Our customers can use our fast, secure and reliable data networks to
provide continuously connected, economical Internet access and other data-
intensive applications to end users. These end users are typically small- and
medium-sized businesses with up to 500 employees, people who work in home
offices, and telecommuters. We offer, on a limited basis, network and data
transport services for residential end users as well.

We are currently providing services in 51 metropolitan areas, spanning 99
metropolitan statistical areas, in the United States and intend to offer service
in a total of over 60 metropolitan areas, spanning 110 metropolitan statistical
areas by the end of 2000. We have been and expect to be the first, or one of the
first, to offer DSL services in these markets. Our networks consist principally
of digital communications equipment that we own and install in telephone company
offices known as "central offices" and existing copper telephone lines that we
lease to connect our equipment with end users' premises. We will initially
install our equipment in the central offices with the highest density of small-
and medium-sized businesses in our targeted markets. As of June 30, 2000, we had
secured space in over 1,800 central offices and were providing services from
1,505 of those central offices. We intend to expand the coverage of our networks
in these markets over time by installing equipment in additional central
offices.

We are currently providing or have entered into agreements to provide our
services to more than 200 network service providers. As of June 30, 2000, we had
connected over 62,000 of their end users to our networks. Upon completion of our
planned expansion, our networks will be able to reach approximately 5.5 million
businesses and 45 million households, including more than 80% of the small- and
medium-sized businesses in our 60 markets.

Since inception on May 16, 1997, our principal activities have included:

. developing our business plans;

. procuring governmental authorizations and space in central offices;

. raising capital and hiring management and other key personnel;

. working on the design and development of our network architecture and
operations support systems;

. acquiring equipment and facilities;

. negotiating interconnection agreements; and

. selling and marketing our services to network service providers.

As a result of our development activities, we have experienced operating
losses. We expect to experience increasing operating losses as we expand our
operations.

We introduced our commercial services in March 1998 in the San Francisco
Bay Area. We subsequently launched service in 50 additional markets. We intend
to offer our services in 9 additional metropolitan areas by year-end 2000.
Deployment of our

11
<PAGE>

networks will require significant upfront capital expenditures. We were offering
service from 1,505 operational central offices at the end of the second quarter
of 2000 and plan to offer service from an additional 195 central offices by the
year end 2000 to allow us to achieve blanket coverage in our 51 markets as well
as 9 additional targeted markets. In addition, we deployed a fully redundant
point-to-point national ATM backbone connection between NorthPoint's local DSL
networks.

The principal capital expenditures we incur when we enter any market include:

. the establishment of a metropolitan node-a facility at which we aggregate
and disseminate data traffic in each metropolitan area-and the purchase and
installation of electronic switching equipment for that node;

. the procurement, design and construction of the collocation cage in each
central office;

. the purchase and installation of the network management and network test
equipment in those cages; and

. the capitalized cost of the installation of such equipment.

In addition, we will incur operations, sales and market development expenses
in order to enter a new market. Once we have deployed our network in a market,
the majority of our additional capital expenditures will be dependent upon
orders to connect new end users. These success-based capital expenditures
include DSL line cards, incremental digital subscriber line access multiplexer
and network test equipment, and line cards for our electronic switches in our
metropolitan node. In addition to the capital expenditures required to enter a
market, we will be required to fund each market's cash flow deficit as we build
our customer base.

Financial performance varies from market to market, and the time when we will
achieve positive EBITDA, if at all, will depend on factors such as:

. the size of the addressable market;

. the level of upfront sales and marketing expenses;

. the number and sequencing of central offices built out;

. the cost of the necessary infrastructure;

. the timing of market entry;

. the commercial acceptance of our services; and

. the rate at which we can provision lines.

EBITDA is a measure of financial performance commonly used in the
telecommunications industry. It is defined as earnings before net interest,
taxes, amortization of deferred stock compensation, depreciation and
amortization. Other companies' definition of EBITDA may differ from ours. You
should not construe it as an alternative to operating income as an indicator of
our operating performance or as an alternative to cash flows from operating
activities as a measure of liquidity.

Assuming the closing of the proposed Merger occurred on December 31, 2000,
the combined DSL operations of NorthPoint and Verizon are expected to include
the following:

. a broadband network, comprised of more than 3,000 unique operational
central offices, passing approximately 63 million homes and businesses
in 163 MSAs;

. more than 600,000 DSL lines;

. wholesale relationships with Verizon Online, AOL, UUNET and Genuity
and strategic marketing relationships with RadioShack, Microsoft,
Staples, Blockbuster and other industry leaders;

. approximately 3,000 employees; and

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. broadband ventures in Europe through VersaPoint and Canada through
NorthPoint Canada.

We expect to consummate the Merger by mid-2001.

Factors Affecting Future Operations

Revenues. We derive our revenues from monthly recurring and nonrecurring
charges to internet service providers, long-distance and local telephone
companies and data service providers, whom we call network service providers.
Monthly recurring revenues consist of end user line fees, based upon the number
of installed lines, for the network service providers' end users connected to
our networks and interconnection fees for each connection to our metropolitan
node in each market. Nonrecurring revenues include charges for the installation
and activation of new end users and in some cases, for end-user modems or other
electronic equipment. Prior to the quarter ended September 30, 1999, we had sold
only minimal amounts of end-user modems or other electronic equipment. Currently
we sell a significant amount of such equipment to support the needs of our
growing network service provider partner base.

We seek to price our services competitively in relation to those of the
traditional telephone companies and other competitive telecommunications
companies in each market. Current standard end user line prices that we charge
to our network service providers for our business class services generally range
from $75 per month for 144 kilobits per second service to $250 per month for 1.5
megabits per second service, before volume discounts. Pricing for residential
class service is approximately $40 per month. Although pricing will be an
important part of our strategy, we believe that customer relationships, customer
care and consistent quality will be the key to generating customer loyalty.
During the past several years, market prices for many telecommunications
services have been declining, which is a trend that we believe will likely
continue. As prices decline for any given speed of service, we expect that the
total number of end users and the proportion of our end users purchasing our
higher-speed, higher- priced services will increase. The cost to upgrade an end
user's speed is generally minimal.

We accelerated our deployment during the course of 1999 into additional
geographic markets, successfully enabling us to sign more network service
provider partners than previously planned. We plan to continue our strategy of
rapidly entering new markets to secure key channel partnerships and create
awareness of the NorthPoint brand. In addition, as described above, if the
proposed merger with Verizon's DSL business is approved and consummated, we
believe the proposed merger will allow us access to additional markets and
channel partnerships. We believe this strategy leaves us well-positioned to
capitalize on the demand for our products. In view of this rapid deployment, we
need to continue to enhance our abilities to develop the markets where we offer
service, including enhanced training of our employees as well as our existing
and new network service provider partners. Continuing future acceleration of
line installations is dependent upon our ability to upgrade our provisioning
processes and interfaces, the timing and effectiveness of which could affect
future quarterly results.

Network Expenses. Our network expenses consist of nonrecurring and monthly
recurring charges for the commodity transport elements we choose to lease rather
than own. Nonrecurring network expenses include transport and loop installation
fees. We expect these costs will be largely related to the activation of new
central offices and new end users. Monthly recurring network expenses include
loop fees, rent, power and other fees charged by traditional telephone
companies, competitive telecommunications companies and other providers. As our
customer and end user base grows, we expect the largest element of network
expenses to be traditional telephone company charges for leased copper lines,
which have historically been $3 to $40 per line per month, depending on the
identity of the traditional telephone company and the location of the lines.

Selling, Marketing, General and Administrative Expenses. Our selling,
marketing, general and administrative expenses primarily consist of costs
related to selling, marketing, customer care, provisioning, billing, regulatory,
corporate administration, network engineering and maintenance. On occasion, we
will participate in various sales promotions with our customers by advancing
market development funds to assist in their marketing efforts, particularly for
new markets. These costs are deferred and amortized over the estimated duration
of the promotion's effect in those markets. Additionally, we incur other costs
associated with administrative overhead, office leases and bad debt. In general,
we reserve for bad debt expense based upon our experience and estimates of
collectability. Because our history is limited it is possible that, on occasion,
we may have to increase our bad debt reserves in excess of our past experience.
The timing of these increases if any, could affect future quarterly results. We
expect that our selling, marketing, general and administrative costs will grow
significantly as we expand our operations and that administrative overhead will
be a large portion of these expenses during the start-up phase of our business.
However, we expect these expenses to decline as a percentage of our revenues as
we build our customer base and the number of end users connected to our networks
increases.

We plan to employ a regional sales team in each market we enter. To attract
and retain a highly qualified sales force, we plan to offer our sales and
customer care personnel a compensation package consisting of commissions and
stock options. We expect to incur significant selling and marketing costs as we
continue to expand our operations. In addition, we plan to offer sales
promotions,

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especially in the first few years as we establish our market presence.

Amortization of Deferred Stock Compensation. Stock compensation arises as
a result of the granting of stock options to employees with exercise prices
below the fair values at the date of grant. The deferred compensation is being
amortized over the vesting period of the associated options.

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Depreciation and Amortization. We expect depreciation and
amortization expense to increase significantly as more of our network becomes
operational and as we increase capital expenditures to expand our network.
Depreciation and amortization expense includes:

. depreciation of network infrastructure equipment;

. depreciation of information systems, furniture and fixtures;

. amortization of improvements to central offices, network control
center facilities and corporate facilities;

. amortization of central office collocation space improvements; and

. amortization of software.

Taxation. We have not generated any taxable income to date and
therefore have not paid any federal income taxes since inception. State taxes
were limited to nominal amounts. Use of our net operating loss carryforwards,
which begin to expire in 2003, may be subject to limitations under Section 382
of the Internal Revenue Code of 1986, as amended. We have recorded a full
valuation allowance on the deferred tax asset, consisting primarily of net
operating loss carryforwards, because of uncertainty regarding its
recoverability.

Results of Operations

As a result of the development and rapid growth of the Company's
business during the periods presented, the period-to-period comparisons of the
Company's results of operations are not necessarily meaningful and should not be
relied upon as an indication of future performance.

Revenues. Revenues for the quarter ended June 30, 2000 were
approximately $24,403,000, 60% of which consisted of recurring revenues. For the
six months ended June 30, 2000 and June 30, 1999, revenues were $44,374,000 and
$3,787,000, respectively, of which 55% consisted of recurring revenues for the
six months ended June 30, 2000 and 71% consisted of recurring revenues for the
six months ended June 30, 2000. We recognized $2,504,000 in revenues for the
quarter ended June 30, 1999, 67% of which consisted of recurring revenues and
did not include sales of end user modems or other electronic equipment. The
increase in revenues is due to the expansion of our installed end user base that
has occurred over the past year. We expect that non-recurring revenues as a
percentage of total revenues will decrease over time as we add end users to our
networks.

Network Expenses. Network expenses were approximately $40,894,000 for
the quarter ended June 30, 2000 and $7,801,000 for the quarter ended June 30,
1999. For the six months ended June 30, 2000 and June 30, 1999, network expenses
were $74,432,000 and $11,733,000, respectively. These costs consisted primarily
of monthly rental costs for lines between end users and central offices, between
central offices and our metropolitan nodes, between our metropolitan nodes and
our network service providers, end user line installation costs, costs of end
user modems, and costs charged to us by the traditional telephone companies. The
increase in network expenses reflects the growth in our network as we expand
into new markets, connect new end users and interconnect existing partners to
our network.

Selling, Marketing, General and Administrative Expenses. Selling,
marketing, general and administrative expenses were approximately $62,301,000
for the quarter ended June 30, 2000 and $23,910,000 for the quarter ended June
30, 2000. For the six months ended June 30, 2000 and June 30, 1999, selling,
marketing, general and administrative expenses were $110,473,000 and
$38,240,000, respectively. These expenses consisted primarily of salaries and
related expenses for the development of our business, network architecture and
software, the establishment of our management team and the development of
corporate identification, promotional and advertising materials. As the staffing
levels and operations of the Company have expanded over the past year, so have
these operating expenses to support such growth.

Amortization of Deferred Stock Compensation. Amortization of deferred
stock compensation was $1,252,000 for the quarter ended June 30, 2000 and
$1,215,000 for the quarter ended June 30, 2000. For the six months ended June
30, 2000 and June 30, 1999, amortization of deferred stock compensation was
$2,462,000 and $2,807,000, respectively. This reduction in deferred stock
compensation expense is due to the attrition of those employees to whom such
options were granted. The unamortized balance of $9,968,000 at June 30, 2000
will be amortized over the remaining vesting period of each grant.

Depreciation and Amortization. Depreciation and amortization expenses
were approximately $17,959,000 for the quarter ended June 30, 2000 and
$2,813,000 for the quarter ended June 30, 1999. For the six months ended June
30, 2000 and June 30, 1999,

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depreciation and amortization was $28,702,000 and $4,200,000, respectively. Such
expenses consisted primarily of depreciation of network equipment, information
systems, office equipment, furniture and fixtures and amortization of leasehold
improvements. The increase in depreciation and amortization is primarily due to
the additional property and equipment that has been acquired and placed into
service as we continue to build out our networks.

Interest Income and Expense. The interest income for the quarter ended
June 30, 2000 was $4,810,000 and was earned primarily from the proceeds raised
in the sale of our senior notes in February 2000. Interest income for the
quarter ended June 30, 1999 was $3,026,000. This interest income was earned
primarily from the proceeds raised in the initial public offering in May 1999.
Interest income was $9,848,000 for the six months ended June 30, 2000 and
$3,264,000 for the six months ended June 30, 1999.

Interest expense for the quarter ended June 30, 2000 was $16,602,000
and primarily represents the interest associated with our senior notes sold in
February 2000 and also our senior credit facilities, which we closed in December
1999. Interest expense for the quarter ended June 30, 1999 was approximately
$7,689,000. Interest expense for the quarter ended June 30, 1999 includes
amortization of $2,862,000 related to debt discount recorded in conjunction with
the issuance of bridge loan warrants and equipment lease warrants. The remainder
of the interest expense primarily represents the interest associated with our
senior credit facility and bridge loan. Interest expense was $27,612,000 for the
six months ended June 30, 2000 and $11,271,000 for the six months ended June 30,
1999.

Equity in Net Loss of Affiliated Companies. There was no equity in
net loss of affiliates during 1999. For the quarter ended June 30, 2000, equity
in net loss of affiliates was $2,030,000. For the six months ended June 30,
2000, equity in net loss of affiliates was $2,030,000. This net loss primarily
represents our shares of the net losses of the European and Canadian joint
ventures that were formed during the first quarter of 2000.

Taxes. Taxes were approximately $235,000 for the quarter ended June
30, 2000 and $4,000 for the quarter ended June 30, 1999. For the six months
ended June 30, 2000 and June 30, 1999, taxes were $510,000 and $54,000,
respectively. These taxes primarily represent state corporation, business and
jurisdictional taxes that have been paid.

Liquidity and Capital Resources

Our operations have required substantial capital investment for the
procurement, design and construction of our central office colocation space
improvements and cages, the purchase of telecommunications equipment and the
design and development of our networks. Capital expenditures were approximately
$47,910,000 for the six months ended June 30, 1999 and $195,888,000 for the six
months ended June 30, 2000.

Although we have no material commitments for capital expenditures
during 2000, we plan to make total capital expenditures in 2000 estimated at
approximately $325,000,000 to develop our networks. In each market, we will
initially target the central offices with the highest density of small-and
medium-sized businesses. We will expand into other central offices when we
obtain adequate demand or volume commitments from our customers. We will also
incur capital expenditures for building a metropolitan node in each market and
for expanding our network control center in the San Francisco Bay Area.

As of June 30, 2000, we had an accumulated operating deficit of
$405,984,000 and cash, cash equivalents and short-term investments of
$217,062,000.

Net cash used in operating activities was $52,014,000 for the six
months ended June 30, 1999 and $159,268,000 for the six months ended June 30,
2000. The net cash used in operations for the six months ended June 30, 1999 was
primarily due to net losses, offset in part by increases in accrued expenses and
accounts payable. The net cash used in operations for the six months ended June
30, 2000 was primarily due to net losses. The net cash used in investing
activities was $159,007,000 for the six months ended June 30, 1999 and
$246,806,000 for the six months ended June 30, 2000. Investing activities were
principally acquisitions of property and equipment in both years. Net cash
provided by financing activities was approximately $491,720,000 for the six
months ended June 30, 1999, of which $482,478,000 related to the issuance of
common and preferred stock, $55,000,000 related to borrowings, and $5,600,000
related to proceeds from a convertible promissory note, offset primarily by the
repayment of a $50,000,000 bridge loan. Net cash provided by financing
activities was approximately $402,734,000 for the six months ended June 30, 2000
and relates to the proceeds from the sale of our senior notes, offset by the
principal payments on our capital lease obligations totaling approximately
$679,000.

Concurrently with entering into the Merger Agreement, Verizon issued
to NorthPoint a commitment letter pursuant to which Verizon is obligated to
provide to NorthPoint a $200 million senior secured debt facility on January 1,
2001 if the transactions contemplated by the Merger Agreement have not been
consummated by that date. In addition, upon the fulfillment of certain
conditions, Verizon agreed to purchase $150 million of non-voting 9% Convertible
Preferred Stock of NorthPoint ("NorthPoint

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<PAGE>

Preferred Stock"). The sale of the preferred stock to Verizon is expected to
occur immediately upon receipt by NorthPoint of necessary approvals under its
senior credit facility. Upon termination of the waiting period pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "Act"), the NorthPoint
Preferred Stock will obtain voting rights. The NorthPoint Preferred Stock will
automatically convert to NorthPoint common stock at the time of the closing of
the Merger and is convertible into NorthPoint common stock at any time following
the termination of the waiting period pursuant to the Act at Verizon's option.
Pursuant to the Merger Agreement, at the time of closing of the Merger, Verizon
will invest $450 million in NorthPoint. Any amounts previously funded by Verizon
pursuant to the commitment letter or the purchase of preferred stock will be
offset against the $450 million payable at closing.

On February 3, 2000, we issued senior notes in the aggregate principal
amount of $400.0 million. These notes bear interest at a fixed annual rate of 12
7/8% to be paid in cash every six months and mature on February 15, 2010. Net
proceeds from these notes were approximately $387.5 million.

On December 9, 1999 we entered into a secured credit facility with a
syndicate of lenders. The secured credit facility consists of the following:

. Revolving credit facility in an amount up to $55,000,000.
The revolving credit facility is used for general corporate
purposes. As of the date of this report, we have not
borrowed any amount under the revolving credit facility.

. Delayed draw term loan facility in the amount of
$110,000,000. As of the date of this report, we have not
borrowed any amount of the delayed draw term loan facility
but we are required to borrow the entire facility on or
before December 9, 2000.

. Term loan facility in the amount of $85,000,000. We borrowed
the entire term loan facility amount on December 9, 1999.

The secured credit facility also provides for the issuance of letters
of credit on our behalf by the lenders.

Borrowings under the secured credit facility are collateralized by a
first priority lien against substantially all of our assets. Our obligations
under the secured credit facility are guaranteed by all of our subsidiaries and
collateralized by a first priority lien on the assets of those subsidiaries. We
further pledged to the lenders under the secured credit facility all of the
capital stock of NorthPoint Communications, Inc. held by us. The lenders under
the secured credit facility have agreed that the liens collateralizing the
secured credit facility may also collateralize an additional $50,000,000 of
additional borrowings in the event the secured credit facility is extended, but
the lenders have no obligation to provide such additional financing.

Loans under the facilities bear interest at floating rates based on
the prime rate or the London Offered Interbank Rate (LIBOR) plus, in each case,
an additional interest rate margin.

In March and April 1999, we issued and sold an aggregate of 3,968,174
shares of Series D-1 preferred stock with total proceeds of approximately
$38,800,000. Purchasers of our Series D-1 preferred stock included ICG Services,
Inc. (an affiliate of ICG Communications, Inc.), Excite@Home, Verio Inc., Cable
& Wireless USA, Inc., Concentric Network Corporation, ALC Communications
Corporation (an affiliate of Global Crossing Holdings Limited), Network Plus
Corporation and Netopia, Inc.

In May 1999, we sold 17,250,000 shares of our common stock at $24 per
share in our initial public offering. Net of underwriting discounts and
commissions, the proceeds to us were $388,500,000. Microsoft Corporation and
Tandy Corporation purchased $30,000,000 and $20,000,000, respectively, of our
stock in this offering.

We believe that our current capital resources and lines of credit will
be sufficient for the funding and working capital requirements needed for the
deployment of our networks in our 60 targeted markets and to support operating
needs over at least the next 12 months. However, we may decide to seek
additional capital depending upon the demand for our services and regulatory,
technological and competitive developments, including additional financial
market developments and new opportunities, in our industry. We may also need
additional financing if:

. we alter the schedule, targets or scope of our network rollout plan;

. our plans or projections change or prove to be inaccurate; or

. we acquire other companies or businesses.

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We may obtain additional financing through commercial bank borrowings,
equipment financing or the private or public sale of equity or debt securities.

We may be unsuccessful in raising sufficient additional capital. In
particular, we may be unable to raise additional capital on terms that we
consider acceptable, that are within the limitations contained in our financing
agreements and that will not impair our ability to develop our business. If we
fail to raise sufficient funds, we may need to modify, delay or abandon some of
our planned future expansion or expenditures, which could have a material
adverse effect on our business, prospects, financial condition and results of
operations.

Year 2000 Compliance

We believe that our computer systems and software are year 2000
compliant. We have inventoried and tested our enterprise application systems,
including internally-developed and vendor-developed applications and off-the-
shelf software and hardware relating to our internal information systems, and
believe that such systems are year 2000 compliant. We requested assurances
regarding year 2000 compliance from our equipment and software vendors and the
traditional telephone companies. We have also learned that the traditional
telephone companies have informed the Federal Communications Commission that
they are year 2000 compliant. We requested that they provide assurances of their
year 2000 compliance directly to us. Furthermore, we have not experienced any
year 2000 problems and we have not been informed of any material year 2000
problems by our customers and vendors. Our aggregate historical costs for year
2000 analysis, planning and remediation have not been material to date and,
based on the tests we have performed on our computer systems and software and
assurances received from our vendors and the traditional telephone companies, we
do not expect to incur material costs to resolve year 2000 issues in the future.

Recently Issued Accounting Pronouncements

Forward Looking Statements

The statements contained in this report which are not historical facts
may be deemed to contain forward-looking statements, including but not limited
to deployment of the company's network in new and existing regions and the
timing and breadth of coverage in each region. Actual results may differ
materially from those anticipated in any forward-looking statements as a result
of certain risks and uncertainties. Some of these risks and uncertainties
include, without limitation: NorthPoint's dependence on strategic third parties
to market and resell its services, intense competition for NorthPoint's service
offerings, dependence on growth in demand for DSL-based services, ability to
raise additional capital, the inability to obtain, or meet conditions imposed
for, governmental approvals for the proposed merger with Verizon Communications'
DSL business, the failure of NorthPoint's stockholders to approve the merger,
costs related to the merger, the risk that NorthPoint's and Verizon's DSL
businesses will not be integrated successfully, the failure of NorthPoint to
realize anticipated benefits of the merger and other economic, business,
competitive and/or regulatory risks and uncertainties detailed herein and in the
company's Securities and Exchange Commission filings. All written and oral
forward-looking statements made in connection with this report on Form 10-Q
which are attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the "Risk Factors" and other cautionary
statements set forth herein and included in our Securities and Exchange
Commission filings. Prospective investors are cautioned not to place undue
reliance on such forward-looking statements. We disclaim any obligation to
update information contained in any forward-looking statement.

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Risk Factors

In addition to the other information contained herein, you should
carefully consider the following risk factors in evaluating our company.

Because We Have a Limited Operating History, It Is Difficult to Evaluate Our
Business

We were formed in May 1997 and began offering commercial services in
the San Francisco Bay Area in March 1998. Because of our limited operating
history, you have limited operating and financial data about our company upon
which to base an evaluation of our performance and an investment in our company.

You should consider the risks, expenses and difficulties we may
encounter, including those frequently encountered by early stage companies in
new and rapidly evolving industries. As a result, we may be unable to:

. develop our operational support systems and other information
technology systems;

. obtain central office space and suitable copper wire loops;

. expand our customer base;

. raise additional capital;

. maintain adequate control of our expenses;

. attract and retain qualified personnel;

. enter into and implement interconnection agreements with
traditional telephone companies, some of which are our
competitors or potential competitors;

. expand the geographic coverage of our network;

. obtain governmental authorizations to operate as a competitive
telecommunications company in new markets;

. continue to upgrade our technologies and enhance our product
features; and

. respond to technological changes and competitive industry
conditions.

We Expect Our Losses and Negative Cash Flow to Continue

To date, we have incurred substantial operating losses, net losses and
negative cash flow on both an annual and quarterly basis. For the year ended
December 31, 1999, we had operating losses of approximately $168,426,000, net
losses of $183,698,000, and negative cash flow from operating and investing
activities of $439,571,000. For the six months ended June 30, 2000, we had
operating losses of approximately $98,003,000, net losses of $112,060,000, and
negative cash flow from operating and investing activities of $406,074,000. We
cannot assure our investors that we will ever achieve profitability or generate
positive cash flow.

We expect our operating expenses will increase, especially in the
areas of operations, sales and marketing, as we develop and expand our business
and, as a result, we will need to increase our revenue to become profitable. If
our revenue does not grow as expected or increases in our expenses are not in
line with our plans, there could be a material adverse effect on our business,
prospects, financial condition and results of operations.

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We Cannot Predict Whether We Will be Successful Because Our Business Model Is
Unproven and Our Industry Is Developing

Our business strategy is unproven. To be successful, we must, among
other things, develop and market data networks and services that are widely
accepted by our customers and their end users at prices that will yield a
profit. Because our business and the overall demand for high speed data
communications services are in the early stages of development, we are unsure
whether or when our DSL services will achieve commercial acceptance.

Our Failure to Achieve or Sustain Market Acceptance at Desired Pricing Levels
Could Impair Our Ability to Achieve Profitability or Positive Cash Flow

Prices for digital communication services have fallen historically, a
trend we expect will continue. Accordingly, we cannot predict to what extent we
may need to reduce our prices to remain competitive or whether we will be able
to sustain future pricing levels as our competitors introduce competing services
or similar services at lower prices. Our failure to achieve or sustain
acceptance at desired pricing levels could impair our ability to achieve
profitability or positive cash flow, which would have a material adverse effect
on our business, prospects, financial condition and results of operations.

Our Quarterly Operating Results Are Likely to Fluctuate Significantly, Causing
Our Stock Price to be Volatile or to Decline

We cannot accurately forecast our revenue because of our limited
operating history and the emerging nature of the data communications industry in
our markets. Our revenue could fall short of our expectations if we experience
delays or cancellations by even a small number of our customers. A number of
factors are likely to cause fluctuations in our operating results, including:

. the rate at which we are able to attract and retain customers, and
whether larger customers fulfill their volume commitments to us;

. the ability of our customers to generate significant end user demand;

. the timing and willingness of traditional telephone companies to
provide and construct the required central office facilities;

. the timing and willingness of traditional telephone companies to
provide suitable copper wire loops at favorable prices;

. the prices our customers and, in turn, their end users pay for our
services;

. availability of financing to continue to fund our expansion;

. our ability to deploy our services on a timely basis to satisfy end
user demand;

. the mix of line orders between lower priced and higher priced lines;

. the amount and timing of capital expenditures and operating costs as
we expand our network;

. the announcement or introduction of new or enhanced services by our
competitors; and

. technical difficulties or network downtime.

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<PAGE>

As a result, it is likely that in some future quarters our operating
results will be below the expectations of securities analysts and investors. If
this happens, the trading price of our common stock would likely be materially
adversely affected.

We May Be Unable to Meet Conditions to the Closing of the Proposed Merger of Our
Business with the DSL Business of Verizon Communications

Our proposed merger with Verizon's DSL business has been approved by
the boards of directors of both Northpoint and Verizon. However, the merger
agreement is subject to numerous conditions, including approval by the
stockholders of Northpoint, expiration or termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and FCC and
state regulatory approvals. There can be no assurance that Northpoint will be
able to obtain, or to meet conditions imposed for, these governmental approvals
or that Northpoint's stockholders will approve the merger and that the merger
will be consummated.

Our Merger with the DSL Business of Verizon Communications May Result in
Unanticipated Costs and We May Face Difficulties in Successfully Integrating the
Business and Realizing Anticipated Benefits of the Merger

Our merger with the DSL business of Verizon Communications will result
in substantial integration costs, including costs that we do not currently
anticipate or are unable accurately to estimate. Furthermore, the realization of
anticipated benefits from the merger is uncertain and we could face substantial
difficulties in integrating our business with Verizon's DSL business.
Accordingly, there can be no assurance that we will be able to successfully
integrate our businesses or realize the anticipated benefits of the merger.

A Limited Number of Customers Account for a High Percentage of Our Revenues and
the Loss of a Significant Customer Could Harm Our Business

We currently provide or have agreements to provide data transport
solutions to more than 200 network service providers. For the year ended
December 31, 1999, our two largest customers accounted for 32% of our revenues.
For the three months ended June 30, 2000, our two largest customers accounted
for 22% of our revenues. We anticipate that, as we expand our business, we will
continue to rely upon a limited number of customers for a high percentage of our
revenue and end-user lines. As a result of this concentration of our customer
base, a loss of or decrease in business from one or more of our customers could
have a material adverse effect on our business, prospects, financial condition
and results of operations.

Similarly, if our customers are unsuccessful in competing for end
users in their own intensely competitive markets or experience other financial
or operating difficulties, our business, prospects, financial condition and
results of operations would be materially adversely affected.

Many of our agreements with our customers are non-exclusive, and many
of our customers are also customers of, or have invested in, our competitors. To
the extent our significant customers strengthen their commercial relationships
with our competitors, our business would be materially adversely affected.

We May Not Be Able to Continue to Grow Our Business If We Do Not Obtain
Significant Additional Funds

We believe our current capital resources will be sufficient for the
funding and working capital requirements needed for the deployment of our
networks in our 60 targeted markets. If we decide to accelerate the timing of
the buildout of our networks or target additional markets, we may need
significant additional funds. We expect that the actual amount and timing of our
future capital requirements, if any, will depend upon the demand for our
services and regulatory, technological and competitive developments, including
additional developments and new opportunities in our industry. These future
capital requirements may be substantial. In addition, we may seek additional
financing if:

. our plans or projections change or prove to be inaccurate;

. we acquire other companies or businesses; or

. financial market conditions allow us to raise public or
privately financed capital on attractive terms.

We may be unsuccessful in raising sufficient additional capital at all
or on terms that we consider acceptable. If we are unable to obtain adequate
funds on acceptable terms, our ability to deploy and operate our networks, fund
our expansion or respond to competitive pressures could be significantly
impaired. Such limitation could have a material adverse effect on our business,
prospects, financial condition or results of operations.

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Our Business Activities and Our Ability to Raise Additional Funds Are Limited by
Covenants Contained in Our Financing Agreements and the Indenture

Our debt agreements, including our secured credit facility, the
indenture governing our senior notes and other financing agreements contain and
will contain restrictions on our activities and financial covenants with which
we will be required to comply. If we fail to comply with these requirements, we
would be in default and our debt could be declared immediately due and payable.
We may be unable to make such required payments, or to raise sufficient funds
from other sources.

In addition, the terms of proposed new indebtedness or other funding
may not be permitted by the terms of our current financing agreements, including
our secured credit facility and the indenture. This may impair our ability to
develop our business. If we fail to raise sufficient funds, we may be required
to modify, delay or abandon some of our expansion plans, which could have a
material adverse effect on our business, prospects, financial condition and
results of operations.

We Need to Make Significant Capital Expenditures, and the Amounts, Timing and
Returns are Uncertain

In 2000, we will have to make significant capital expenditures,
estimated at approximately $325,000,000, to develop our business and deploy our
services and systems. We may also need to make additional capital expenditures
in connection with the acquisition of other companies. In addition, the amount
and timing of these expenditures are uncertain and will depend upon our ability
to execute our plans in a timely and cost-effective manner. We will need to
increase our revenue in order to earn a return from our capital expenditures. If
our revenue does not grow as expected, or capital expenditures exceed our
estimates, there could be a material adverse effect on our business, prospects,
financial condition and results of operations.

Our Failure to Manage Our Growth Effectively Could Impair Our Business

If we are successful in implementing our business plan, our operations
will expand rapidly. This rapid expansion could place a significant strain on
our management, financial and other resources. Our ability to manage future
growth, if it occurs, will depend upon our ability to:

. control costs;

. maintain regulatory compliance;

. implement and significantly expand our financial and operating
systems;

. maintain our operations support systems; and

. expand, train and manage our employee base.

We may be unable to do these things successfully. In addition, we may
not successfully obtain, integrate and use our employees and management,
operating and financial resources. Our business, prospects, financial condition
and results of operations will be materially adversely affected if we are unable
to manage our growth effectively.

The Data Communications Industry Is Undergoing Rapid Technological Changes and
New Technologies May Be Superior to the Technology We Use

The data communications industry is subject to rapid and significant
technological change, including continuing developments in DSL technology, which
does not presently have widely accepted standards, and alternative technologies
for providing high speed data communications such as cable modem technology. As
a consequence:

. we will rely on third parties, including some of our
competitors and potential competitors, to develop and provide
us with access to communications and networking technology;

. our success will depend on our ability to anticipate or adapt
to new technology on a timely basis; and

. we expect that new products and technologies will emerge that
may be superior to, or may not be compatible with, our
products and technologies.

If we fail to adapt successfully to technological changes or
obsolescence or fail to obtain access to important technologies,

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our business, prospects, financial condition and results of operations could be
materially adversely affected.

Our Success in Attracting and Retaining Customers Significantly Depends on Our
Ability to Obtain Central Office Space from Traditional Telephone Companies

We believe the growth and success of our business will depend upon
securing physical central office space for our equipment in the central offices
of traditional telephone companies in our target markets. We have experienced
initial rejections of our applications to obtain space in some central offices.
We believe we will continue to receive rejections of requested physical central
office space as we expand our existing and planned networks. Although to date a
majority of our applications to obtain physical central office space that were
initially rejected have subsequently been accepted, we cannot assure you that we
will be successful in reversing the pending rejections or any other rejected
applications for space in desired central offices. Nor can we predict the extent
of these rejections or their impact on our ability to provide service in our
target markets. The rejection of our applications for central office space has
in the past and could in the future result in delays and increased costs as we
expand our services in our target markets. This may materially adversely affect
our business, prospects, financial condition and results of operations.

As we grow, we may be unable to secure central office space on a
timely basis or at all. In some cases, although physical central office space is
available, traditional telephone companies have claimed that they must refurbish
space to make it suitable for our equipment--for example, by adding separate
entrances, removing asbestos or obsolete machinery, or increasing power supply
and air conditioning--which in some cases has made the cost to obtain that
physical central office space prohibitively expensive. We expect physical
central office space to become increasingly scarce due to increasing demand from
a growing number of competitive telecommunications companies.

Even when space is available, we may face delays ranging from four
months to more than a year after we place an order before space for our
equipment is made available. If our applications for physical central office
space are rejected, or the costs or delays associated with obtaining central
office space become too expensive, our expansion plans could be adversely
affected, which could have a material adverse effect on our business, prospects,
financial condition and results of operations.

Broad service availability is also important to our customers and
potential customers that want to provide Internet access or other data services
on a national or regional basis. Our inability to obtain physical central office
space in a timely manner could have a material adverse effect on our ability to
attract and retain customers.

Any disputes with traditional telephone companies over the types of
equipment we seek to install in the central office space could also delay our
installation and even impair our ability to provide service in the manner we
deem appropriate. These delays or refusals could have a material adverse effect
on our business, prospects, financial condition and results of operations.

Our Success Depends on Interconnection Agreements With Traditional Telephone
Companies in Each of Our Markets

The success of our strategy depends on our ability to enter into and
renew interconnection agreements with traditional telephone companies in each of
our target markets on a timely basis. Delays in obtaining additional
interconnection agreements would postpone our entry into a market, which could
have a material adverse effect on our business, prospects, financial condition
and results of operations.

Interconnection agreements have limited terms of two to three years
and we cannot assure you that existing or new agreements will be extended or
negotiated on terms favorable to us. Interconnection agreements are also subject
to state commission, FCC and judicial oversight. These government bodies may
modify the terms or prices of our interconnection agreements in ways that
adversely affect our business, prospects, financial condition and results of
operations.

Our Business Could Suffer if High Quality Copper Lines Are Not Available or Cost
Us More Than We Expect

We significantly depend on the quality of the copper lines and the
traditional telephone companies' maintenance of such lines. We cannot assure you
that we will be able to obtain the copper lines and the services we require from
the traditional telephone companies at quality levels, prices, terms and
conditions satisfactory to us. Our failure to do so would have a material
adverse effect on our business, prospects, financial condition and results of
operations.

Under federal law, traditional telephone companies have an obligation
to negotiate with us in good faith to enter into interconnection agreements,
including agreements on the price at which we can obtain suitable lines from
these telephone companies. If no agreement can be reached, either side may
petition the applicable state commission to arbitrate remaining disagreements.
These arbitration proceedings can last up to nine months. Moreover, the state
commission must approve any interconnection agreement resulting from negotiation
or arbitration, and any party may appeal an adverse decision by the state
commission to federal district

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court. The potential cost in resources and delay from this process could harm
our ability to compete in certain markets, and there is no guarantee that a
state commission would resolve disputes, including pricing disputes, regarding
our access to suitable lines in our favor. Moreover, the FCC rules governing
pricing standards for access to the networks of the traditional telephone
companies are currently being challenged in federal court. If the courts
overturn the FCC's pricing rules, the FCC may adopt a new pricing methodology
that would require us to pay a higher price to traditional telephone companies
for access to suitable lines. This could have a detrimental effect on our
business.

We have not yet established a history of ordering and obtaining the
provisioning and repair of very large volumes of lines from any traditional
telephone company. We also depend on cooperation from traditional telephone
companies for repair of transmission facilities. The traditional telephone
companies in turn rely significantly on unionized labor. Labor-related issues
and actions on the part of the traditional telephone companies have in the past,
and may in the future, adversely affect traditional telephone companies'
provision of services and network components that we order.

Our dependence on the traditional telephone companies has caused and could
continue to cause us to encounter delays in establishing our networks,
provisioning lines and upgrading our services. These delays could adversely
affect our relationships with our customers, harm our reputation or otherwise
have a material adverse effect on our business, prospects, financial condition
and results of operations.

We Depend on Market Acceptance for DSL-Based Services

The demand for small- and medium-sized business, telecommuter and
residential Internet access is in the early stages of development. Because we
offer services to a new and evolving market and because current and future
competitors are likely to introduce competing services, it is difficult for us
to predict the rate at which the demand for our services will grow. Various
providers of high-speed digital communications services are testing products
from various suppliers for various applications, and it is unclear if DSL will
offer the same or more attractive price-performance characteristics. If the
demand for our services fail to develop, grow more slowly than anticipated or
become saturated with competitors, our business, prospects, financial condition
and results of operations could be materially adversely affected.

We Depend on Our Billing, Customer Service and Information Support Systems,
Which Need Further Development

Sophisticated information and processing systems are vital to our growth
and ability to monitor costs, bill customers, process customer orders and
achieve operating efficiencies. Our plans for the development and implementation
of our operations support systems rely, for the most part, on acquiring products
and services offered by third-party vendors and integrating those products and
services in-house to produce efficient operational solutions. However, we may
not successfully identify all of our information and processing needs or
implement these systems on a timely basis or at all, and these systems may not
perform as expected. If our plans for the development and implementation of our
operations support systems do not proceed as expected, or if these systems, once
implemented, fail to perform as expected, our business prospects, financial
condition and results of operations could be materially adversely affected.

In addition, our right to use these systems is dependent upon license
agreements with third-party vendors. Some of those agreements may be cancelable
by the vendor and the cancellation or nonrenewal of these agreements may have a
material adverse effect on our business, prospects, financial condition and
results of operations.

Similar issues are applicable to the operations support systems and other
systems of our customers, and to the interface between our systems and those of
our customers. Therefore, failures at our customers could also have a material
adverse effect on our business, prospects, financial condition and results of
operations.

We May Be Unable to Expand Our Network Services Effectively and Provide High
Performance to a Substantial Number of End Users

Due to the limited deployment of our services, the ability of our DSL
network to connect and manage a substantial number of end users at high
transmission speeds is still unknown. While peak digital data transmission
speeds across our DSL network to and from the central office and the end user
can exceed 1.5 megabits per second, the actual data transmission speeds over our
network could be significantly slower due to:

. the type of DSL technology deployed;

. the distance an end user is located from a central office;

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. the configuration of the telecommunications line being used;

. the gauge of the copper lines; and

. the presence and severity of interfering transmissions on nearby
lines.

For example, we are not certain whether we can successfully deploy higher
DSL speeds through digital loop carrier systems which, because they connect
copper lines to a fiber link, currently limit DSL service to a maximum speed of
144 kilobits per second.

Because we rely on traditional telephone companies to overcome technical
limitations associated with loop carrier systems, we cannot assure you that we
will be able to successfully deploy high speed DSL service to all areas in which
we provide service. As a result, our network may not be able to achieve and
maintain the highest possible digital transmission speed. Our failure to achieve
or maintain high speed digital transmissions would have a material adverse
effect on our business, prospects, financial condition and results of
operations.

Our Success Depends on Our Retention of Executive Officers and Other Key
Personnel and Our Ability to Hire Additional Key Personnel

We are managed by a small number of executive officers. Competition for
qualified executives in the data communications services industry is intense,
and there are a limited number of persons with comparable experience. We depend
upon our executive officers because we believe there are few managerial
personnel with qualifications to swiftly implement a business plan integrating
DSL technology with the existing telephone infrastructure. Any of our executive
officers may terminate his or her employment with us at any time. We do not have
"key person" life insurance policies on any of our executive officers. The loss
of these key individuals could have a material adverse effect on our business,
prospects, financial condition and results of operations.

We believe that our success will depend in large part on our ability to
retain and attract qualified technical, marketing, managerial and other
personnel. Additionally, we believe an effective sales force is critical to our
success. The industry in which we compete is characterized by a high level of
employee mobility and aggressive recruiting of skilled personnel. We may be
unable to hire or retain necessary personnel in the future. Our inability to
attract and retain key personnel would have a material adverse effect on our
business, prospects, financial condition and results of operations.

The Industry in Which We Operate is Highly Competitive, and We May Not Be Able
to Compete Effectively, Especially Against Established Competitors With
Significantly Greater Financial Resources

We face competition from many competitors with significantly greater
financial resources, well-established brand names and larger customer bases. We
also expect competition to intensify in the future. We expect significant
competition from traditional and new telephone and telecommunications companies,
including national long distance carriers, cable modem service providers,
Internet service providers, on-line service providers, and wireless and
satellite data service providers.

Other Competitive Telecommunications Companies, Some With Greater Financial
Resources, Compete in the Same Areas for the Same Customers. Other competitive
telecommunications companies have entered and may continue to enter the industry
and offer high speed data services using a business strategy similar to ours.
Some competitors, including those focusing on data transport such as Rhythms
NetConnections Inc., HarvardNet Inc., @Link Networks L.L.C., New Edge Networks,
Covad Communications Group, Inc., BlueStar Communications, JATO, Telocity, Vitts
Network, DSL.net and Network Access Solutions Corporation, have begun to offer
DSL-based access services, and others are likely to do so in the future.
Finally, traditional voice-based telephone companies such as BTI Telecom,
Hyperion, MCG, McLeod Communications, Allegiance and Network Plus, are starting
to offer high speed data services. Certain of our customers have made
investments in our competitors, which may enhance their relationships with these
competitors at our expense. The Telecommunications Act of 1996 specifically
grants any competitive local exchange carrier, or competitive telecommunications
company, the right to negotiate interconnection agreements with traditional
telephone companies, or incumbent local exchange carriers. The
Telecommunications Act also allows competitive telecommunications companies to
enter into interconnection agreements which are identical in all respects to
ours. In addition, some competitive telecommunications companies have extensive
fiber networks in many metropolitan areas primarily providing high speed digital
and voice circuits to large corporations, and have interconnection agreements
with traditional telephone companies pursuant to which they have acquired space
in traditional telephone companies' central offices in many of our markets. As a
result, our customers may contract with other competitive telecommunications
companies, which may decrease our customers' demand for our services.

Traditional Telephone Companies With Greater Resources Than Ours May
Directly Compete in Our Service Areas. The

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<PAGE>

traditional telephone companies have an established brand name and reputation
for high quality in their service areas, possess significant capital to deploy
DSL equipment rapidly, have their own copper lines and can bundle digital data
services with their existing analog voice services to achieve economies of scale
in serving customers. In addition, most traditional telephone companies have
established or are establishing their own Internet service provider businesses,
and all of the largest traditional telephone companies that are present in our
target markets are conducting market trials of or have commenced offering DSL-
based access services. For example, Verizon Communications, BellSouth,
Cincinnati Bell, Pacific Bell and Southwestern Bell are offering commercial
services in some territories in which we offer services, U S WEST is offering
commercial DSL services and Ameritech has announced commercial DSL services in
some areas of Michigan and Illinois. We recognize that the traditional telephone
companies have the potential to quickly deploy DSL services and are in a
position to offer service from central offices where we may be unable to secure
space in traditional telephone companies' central offices. In addition, the FCC
is considering establishing requirements for separate subsidiaries through which
the traditional telephone companies could provide DSL service on a largely
deregulated basis. As a result, we expect traditional telephone companies to be
strong competitors in each of our target markets.

National Long Distance Carriers May Begin to Compete for Our Small- and
Medium-Sized Business Customers. Many of the leading traditional national long
distance carriers, including MCI WorldCom, Inc., AT&T Corp. and Sprint
Corporation, are expanding their capabilities to support high speed, end-to-end
data networking services. They also have interconnection agreements with many of
the traditional telephone companies and a number of spaces in traditional
telephone companies' central offices from which they could begin to offer
competitive DSL services. The newer national long distance carriers, such as
Level 3 Communications, Inc., The Williams Companies, Inc. and Qwest
Communications International, Inc. are building and managing high speed fiber-
based national data networks and partnering with Internet service providers to
offer services directly to the public. These companies could modify their
current business focus to include small- and medium-sized business customers
using DSL or other technologies in combination with their current fiber
networks. Sprint has already launched services in Las Vegas and Charlotte.

Cable Modem Service Providers May Offer High Speed Internet Access at More
Competitive Rates Than Ours, Forcing Us to Lower Our Prices. Cable modem service
providers, such as At Home Corporation and Road Runner, Inc. (with their cable
partners), are deploying high speed internet access services over hybrid fiber
coaxial cable networks. Where deployed, these networks provide similar and in
some cases higher speed Internet access than we provide. They also offer these
services at lower price points than our services. Actual or prospective cable
modem service provider competition may have a significant negative effect on our
ability to secure customers and may create downward pressure on the prices we
can charge for our services.

Internet Service Providers, Our Targeted Customers, May Begin to Provide
DSL Services Directly. Internet service providers, such as Verio Inc., Genuity,
UUNET (a subsidiary of MCI WorldCom, Inc.), Sprint, Concentric Network
Corporation, MindSpring Enterprises, Inc. and PSINet, Inc., provide Internet
access to residential and business customers, generally using the existing
telephone system. Some regional Internet service providers, such as HarvardNet
Inc., BlueStar Communications, New Edge Networks, @Link Networks L.L.C.,
InterAccess Co., Vitts Networks Inc. and Prism Solutions, Inc., have begun
offering DSL-based services. Internet service providers could become competing
high speed data service providers if they attain certification as competitive
telecommunications companies in the states in which they planned to operate.

On-line Service Providers, Our Targeted Customers, May Begin to Provide DSL
Services Directly. On-line service providers, such as America Online, Inc.,
Compuserve (a subsidiary of America Online), Microsoft Network, Prodigy, Inc.,
and WebTV Networks, Inc. (a subsidiary of Microsoft), provide, over the Internet
and on proprietary on-line services, content and applications ranging from news
and sports to consumer video conferencing. These services are designed for broad
consumer access over telecommunications-based transmission media, which enable
digital services to be provided to the significant number of consumers who have
personal computers with modems. In addition, on-line service providers provide
Internet connectivity, ease-of-use and consistency of environment. Many of these
on-line service providers have developed their own access networks for modem
connections. AOL has announced that it will purchase DSL services from Verizon
Communications and SBC Communications. If these on-line service providers were
to extend their owned access networks to DSL, they would be our competitors.

Wireless and Satellite Data Service Providers May Begin to Offer Wireless
and Satellite-Based Internet Connectivity, Also Competing Against Us. Wireless
and satellite data service providers are developing wireless and satellite-based
Internet connectivity. We may face competition from terrestrial wireless
services, including multi-channel multipoint distribution systems, local
multipoint distribution systems, wireless communication service and point-to-
point microwave systems. The FCC recently adopted new rules to permit multi-
channel multipoint distribution system licensees to use their systems to offer
two-way services, including high speed data, rather than solely to provide one-
way video services. The FCC also has auctioned local multipoint distribution
system licenses in all markets for wireless systems, which can be used for high
speed data services. In addition, companies such as Teligent, Inc., Advanced
Radio Telecom Corp., NEXTLINK and WinStar Communications, Inc. hold point-to-
point and/or point-to-multipoint microwave licenses to provide fixed wireless
services such as voice, data and video conferencing.

We also may face competition from satellite-based systems. Motorola
Satellite Systems, Inc., Hughes Communications, Inc.

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(a subsidiary of General Motors Corporation), Teledesic LLC and others have
filed applications with the FCC for global satellite networks which can be used
to provide broadband voice and data services.

In January 1997, the FCC allocated 300 MHz of spectrum in the 5 GHz band
for unlicensed devices to provide short-range, high speed wireless digital
communications. These frequencies must be shared with incumbent users without
causing interference. Although the allocation is designed to facilitate the
creation of new wireless local area networks, it is too early to predict what
kind of equipment might ultimately be manufactured and for what purposes it
might be used.

The telecommunications industry is subject to rapid and significant changes
in technology, and we cannot predict the effect of technological changes on our
business, such as continuing developments in DSL technology and alternative
technologies for providing high speed data communications. These technological
developments in the telecommunications industry could have a material adverse
effect on our competitive position and therefore on our business, prospects,
financial condition and results of operations.

Industry Consolidation Could Make Competing More Difficult

Consolidation of companies offering high speed local data transport is
occurring through acquisitions, joint ventures and licensing arrangements
involving our competitors and our customers' competitors. As a company with
limited operating history, we cannot assure that we will be able to compete
successfully in an increasingly consolidated industry. Any heightened
competitive pressures that we may face may have a material adverse effect on our
business, prospects, financial condition and results of operations.
Additionally, because we rely on our customers' marketing channels to provide
our services to business and residential end users, if our customers are
adversely affected by consolidation and integration in the market, our business,
prospects, financial condition and results of operations could be materially
adversely affected.

Our Services Are Subject to Uncertain Government Regulation, and Changes in
Current or Future Laws or Regulations Could Restrict the Way We Operate Our
Business

We are subject to federal, state and local regulation of our
telecommunications business. With the passage of the Telecommunications Act in
1996, Congress sought to foster competition in the telecommunications industry
and to promote the deployment of advanced telecommunications technology.
Implementation of the Telecommunications Act is the subject of ongoing
administrative proceedings at the federal and state levels, litigation in
federal and state courts, and legislation in federal and state legislatures. We
cannot predict the outcome of the various proceedings, litigation and
legislation or whether or to what extent these proceedings, litigation and
legislation may adversely affect our business, prospects, financial condition
and results of operations.

As a competitive telecommunications company, we are subject to FCC
regulation for our contractual, or interconnection, arrangements with the
traditional telephone companies, or incumbent local exchange carriers, in our
markets, but the scope of this regulation is uncertain because it is the subject
of ongoing court and administrative proceedings. Several parties have brought
court challenges to the FCC's interconnection rules, including the rules that
establish the terms under which a competitive telecommunications company may use
portions of a traditional telephone company's network. Although the Supreme
Court recently held that the FCC has the authority to adopt interconnection
rules and specifically upheld several of these rules, other rules are still
being considered by the courts. If a rule that is beneficial to our business is
struck down, it could harm our ability to compete. In particular, the courts
have not yet resolved the lawfulness of the methodology that the FCC established
to determine the price that competitive telecommunications companies would have
to pay traditional telephone companies for use of the traditional telephone
companies' networks. The courts may determine that the FCC's pricing rules are
unlawful, which would require the FCC to establish a new pricing methodology. If
this occurs, the new pricing methodology that the FCC adopts may result in our
having to pay a higher price to traditional telephone companies if we were to
use a portion of their networks in providing our services, and this could have a
detrimental effect on our business.

In response to the Supreme Court's decision vacating certain portions of
the FCC's rules implementing provisions of the Telecommunications Act, the FCC
revisited the requirements imposed upon traditional telephone companies that
they make available certain network elements for use by competitive telephone
companies such as NorthPoint. In its decision in September 1999, the FCC
reaffirmed and strengthened the requirements imposed upon traditional telephone
companies to make available unbundled network elements and affirmed the
availability of those network elements utilized by NorthPoint in the provision
of its services. The FCC's decision is subject to review by the courts and
further consideration by the FCC in subsequent proceedings. Any reversal or
material change in the unbundling rules with regard to those elements used by
NorthPoint would have a material adverse effect on NorthPoint's ability to
provide its services.

Recently, various traditional telephone companies have requested the FCC to
grant them regulatory relief in the provision of data transmission services,
including DSL services, which would allow the traditional telephone companies to
compete more directly

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<PAGE>

with DSL providers such as NorthPoint. In response, the FCC initiated a
comprehensive proceeding to review Advanced Services, including DSL issues. That
proceeding has resulted in a number of rulemakings and orders that enhance the
ability of competitive DSL companies like NorthPoint to, among other things,
access DSL-capable unbundled copper loops, access and utilize various forms of
central office collocation space, provide a variety of DSL services to end-users
by setting open rules for spectrum compatibility, and access "shared-lines" by
requiring the traditional telephone companies to provide access to the high-
frequency portion of existing voice service lines to DSL competitive companies
like NorthPoint for the provision of high speed DSL services. The decision with
respect to shared-lines is not final, is subject to review by the courts and the
FCC, and is subject to implementation on a state-by-state basis. We anticipate
the traditional telephone companies will require six to nine months to implement
the requirements (including technical trials) of the FCC decision. The benefits
of this decision may be diluted or delayed if the implementation processes are
protracted or frustrated through legal challenges, arbitrations, or other
actions in any given state.

Our Debt Creates Financial and Operating Risk That Could Limit the Growth of Our
Business

As of June 30, 2000, we had approximately $490,601,000 of indebtedness and
$126,059,000 of stockholders' equity.

The degree to which we are leveraged could have important consequences to
holders of our common stock, including, but not limited to, the following:

. our ability to obtain additional financing or refinancing in the
future for capital expenditures, repayment of outstanding
indebtedness, working capital, acquisitions, general corporate or
other purposes may be materially limited or impaired;

. our cash flow, if any, may be unavailable for building our business,
as a substantial portion of our cash flow may be dedicated to the
payment of principal and interest on our indebtedness or other
indebtedness that we may incur in the future, and our failure to
generate sufficient cash flow to service such indebtedness could
result in a default;

. our debt agreements will contain restrictions and financial covenants
which, if we fail to meet them, could result in our indebtedness
being declared due prematurely, at a time when we could not make the
required payments;

. our leverage may make us more vulnerable to economic downturns, may
limit our ability to withstand competitive pressures and may reduce
our flexibility in responding to changing business and economic
conditions; and

. we may from time to time be more highly leveraged than many of our
competitors, which may place us at a competitive disadvantage.

We Rely on Our Intellectual Property Which We May Be Unable to Protect, or We
May Be Found to Infringe the Rights of Others

Our success depends in part on our ability to protect our proprietary
intellectual property. In addition, we may be sued over intellectual property
rights. These lawsuits, or our inability to protect our intellectual property
rights, could have a material adverse effect on our business, prospects,
financial condition and results of operations.

In April 1999, we received a letter from one of our competitors, Covad
Communications Group, Inc., indicating that it had been informed of allowance of
a United States patent application. According to Covad's letter, their patent
application related to digital subscriber loop implementations supporting (a) a
bandwidth of 128 kbps or 144 kbps combined with (b) a bandwidth greater than 128
or 144 kbps. The patent described in Covad's letter has now issued. We have
received a copy of the patent. We have not yet evaluated fully the validity or
relevance of the patent to our business. If the patent is valid, and if we
infringe this patent, we could be required to obtain a license under the patent.
While Covad has indicated that we may be interested in obtaining a license from
them at the appropriate time, we cannot be certain that such a license, if
needed, would be available on commercially acceptable terms.

A System Failure or Breach of Network Security Could Delay or Interrupt Service
to Our Customers

The reliability of our transmission services in our markets would be
impaired by a natural disaster or other unanticipated interruption of service or
damage at any of our facilities. Additionally, failure of a traditional
telephone company or other service provider to provide communications capacity
required by us, as a result of a natural disaster, operational disruption or for
any other reason, could cause interruptions in our services. Damage or failure
that causes interruptions in our services could have a material adverse effect
on our business, prospects, financial condition and results of operations.

Our network may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Unauthorized

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access could also potentially jeopardize the security of confidential
information stored in the computer systems of our customers, which might result
in liability to our customers, and also might deter potential customers.
Although we intend to implement security measures that are standard within the
telecommunications industry, we may be unable to implement such measures in a
timely manner or, if and when implemented, our security measures may be
circumvented. Eliminating computer viruses and alleviating other security
problems may require interruptions, delays or cessation of service to our
customers and these customers' end users. Any of the foregoing factors relating
to network security could have a material adverse effect on our business,
prospects, financial condition and results of operations.

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<PAGE>

Our Business Could Suffer from a Reduction or Interruption from Our Equipment
Suppliers or Other Third Parties on Whom We Rely for Installation and Provision
of Field Service

We plan to purchase all of our equipment from various vendors and outsource
the installation and field service of our networks to third parties. We also
depend on the availability of fiber optic transmission facilities from third
parties to connect our equipment within and between metropolitan areas. Any
reduction of or interruption from our equipment suppliers, such as Copper
Mountain Network, Inc., from which we purchase most of our digital subscriber
line access equipment, or interruption in service from any significant installer
or field service provider, such as Lucent Technologies, Inc., which has
installed and maintained our equipment in all of our markets, could have a
disruptive effect on our business, prospects, financial condition and results of
operations.

In addition, the pricing of the equipment we purchase may substantially
increase over time, increasing the costs we pay in the future, or decrease over
time, providing later entrants to our industry with a cost advantage over us.
The availability and pricing of the equipment we purchase would be adversely
affected if our suppliers were to compete with us, or if our competitors enter
into exclusive or restrictive arrangements with our suppliers. It could take a
significant period of time to establish relationships with alternative suppliers
for each of our technologies and substitute their technologies into our network.

Uncertain Federal and State Tax and Other Surcharges on Our Services May
Increase Our Payment Obligations

Telecommunications providers are subject to a variety of complex federal
and state surcharges and fees on their gross revenues from interstate and
intrastate services, including regulatory fees, and surcharges related to the
support of universal service. A finding that we misjudged the applicability of
the surcharges and fees could increase our payment obligations and have a
material adverse effect on our business, prospects, financial condition and
results of operations.

Claims of Interference Could Harm Our Ability to Deploy Our Services

Certain technical laboratory tests and field experience indicate that some
types of DSL, in particular, asymmetrical DSL-in which data transport to the end
user is faster than transport from the end user-may cause interference with and
be interfered with by other signals present in a traditional telephone company
copper plant. Citing this potential interference, some traditional telephone
companies have imposed restrictions on the use of DSL technology over their
copper lines. However, we do not believe that our symmetrical DSL technology
equipment, which permits the same speed of data transport to and from the end
user, poses interference risks. If traditional telephone companies were to
restrict our use of our technology or equipment in the future, our business,
prospects, financial condition and results of operations could be materially
adversely affected.

Our Stock Price May Be Volatile

The trading price of our common stock has been and is likely to continue to
be highly volatile. Our stock price is likely to be volatile and may fluctuate
substantially due to factors such as:

. our historical and anticipated quarterly and annual operating
results;

. variations between our actual results and analyst and investor
expectations;

. announcements by us or others and developments affecting our
business;

. investor perceptions of our company and comparable public companies;
and

. conditions and trends in the data communications and Internet-related
industries.

In particular, the stock market has from time to time experienced
significant price and volume fluctuations affecting the common stocks of
technology companies, which may include data communications and Internet-related
companies. These fluctuations may result in a material decline in the market
price of our common stock.

The Sale of Shares or the Perception of Future Sales Could Depress Our Stock
Price

Sales of a large number of shares of common stock in the market or the
perception that sales may occur could cause the market price of our common stock
to drop. As of June 30, 2000, we had 132,508,520 shares of common stock
outstanding. Of these common shares, substantially all are freely tradeable,
except for any such shares held at any time by an "affiliate" of NorthPoint, as

30
<PAGE>

defined under Rule 144 under the Securities Act. These shares may be sold in the
future without registration under the Securities Act to the extent permitted by
Rule 144 or an exemption under the Securities Act.

In addition, holders of shares of common stock representing approximately
48% of the currently outstanding shares of common stock have agreed to vote
their shares in support of the merger with Verizon Communications' DSL business
and not to sell any shares, subject to limited exceptions, until the closing.

Our Principal Stockholders and Management Own a Significant Percentage of
NorthPoint, and Will Be Able to Exercise Significant Influence

Our executive officers and directors and principal stockholders together
beneficially own approximately 50% of our common stock. These stockholders, if
they vote together, will be able to exercise significant influence over all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. Upon consummation of the
proposed merger with Verizon's DSL business, Verizon will own 55% of the common
stock of the new NorthPoint. This concentration of ownership may also delay or
prevent a change in control of NorthPoint.

Our Certificate of Incorporation and Bylaws Contain Provisions That Could Delay
or Prevent a Change In Control of NorthPoint

Certain provisions of our certificate of incorporation and bylaws could
make it more difficult for a third party to acquire control of NorthPoint, even
if a change in control would be beneficial to stockholders. Our certificate of
incorporation allows our board of directors to issue, without stockholder
approval, preferred stock with terms set by the board of directors. The
preferred stock could be issued quickly with terms that delay or prevent a
change in control of NorthPoint or make removal of management more difficult.
Also, the issuance of preferred stock may cause the market price of the common
stock to decrease.

If Unexpected Year 2000 Issues Arise, We May Incur Significant Costs and Our
Business Could Suffer

The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a result, computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. Although we have not experienced any
year 2000 problems and have not been informed of any material year 2000 problems
by our customers and vendors, we cannot assure you that our systems or the
systems of other companies on whose services we depend or with whom our systems
interconnect will not experience unexpected year 2000 problems during the course
of the year. This could result in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities. This could, in turn, have a material adverse effect on our business,
prospects, financial condition and results of operations.

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<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are currently exposed to the impact of interest rate changes and changes
in market values of investments through our investment portfolio. The majority
of our debt is in the form of fixed interest rate obligations. Our principal
exposure to financial market fluctuations relates to our secured credit
facility, which is floating rate debt. We do not believe a hypothetical 10%
adverse rate change in our variable rate debt obligations would be material to
our results of operations.

We believe our market risk exposure with regard to marketable debt
securities in our investment portfolio is limited to changes in quoted market
prices for such securities. Based upon the composition of our marketable debt
securities at June 30, 2000, we do not believe a hypothetical 10% adverse change
in quoted market prices would be material to our results of operations.

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<PAGE>

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

We are not currently involved in any pending legal proceedings that
individually, or in the aggregate, are material to us.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

During the three month period ended June 30, 2000, we have issued and sold
unregistered securities as follows:

We issued an aggregate of 391,304 shares of common stock in a private
placement on June 20, 2000 to a company in which we made a strategic investment.
The shares we issued were subject to certain restrictions on transfer and
constitute restricted securities within the meaning of Rule 144 promulgated
under the Securities Act of 1933. We received a preferred equity interest in
this company in consideration of our issuance of common shares and a cash
investment of $2.5 million that we made in such company.

No underwriters were used in connection with these sales and issuances. The
issuance of these securities was exempt from registration under the Securities
Act pursuant to Section 4(2) thereof, on the basis that the transaction did not
involve a public offering.

(d) Report of Offering of Securities and Use of Proceeds Therefrom:

In May 1999, we commenced and completed a firm commitment underwritten
initial public offering of 17,250,000 shares of our common stock, including
2,250,000 shares related to the underwriters' overallotment option, at a price
of $24.00 per share. The shares were registered with the Securities and Exchange
Commission pursuant to a Registration Statement on Form S-1 (File No. 333-
73065), which was declared effective on May 5, 1999. The public offering was
underwritten by a syndicate of underwriters led by Goldman, Sachs & Co., Morgan
Stanley Dean Witter and Credit Suisse First Boston as their representatives.
After deducting underwriting discounts and commissions of $25,500,000 and
expenses of $2,000,000, we received net proceeds of $386,500,000. As of June 30,
2000, we had used all of the estimated aggregate net proceeds of $386,500,000
from our initial public offering as follows:

<TABLE>
<S> <C>
Purchase and installation of machinery and equipment $359,756,000
Purchases of real estate $ 0
Acquisition of other business(es) $ 0
Repayment of indebtedness $ 0
Working capital and other purposes $ 26,744,000
Temporary Investments $ 0
------------

Total $386,500,000
============
</TABLE>

The foregoing amounts represent our best estimate of our use of proceeds
for the period indicated. The use of proceeds from the offering does not
represent a material change in the use of proceeds described in our Registration
Statement on Form S- 1, as amended (File No. 333-73065). None of the net
proceeds of the offering were paid directly or indirectly to any director or
officer of NorthPoint Communications Group, Inc., persons owning 10% or more of
any class of our equity securities or any of our affiliates.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

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<PAGE>

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

On May 9, 2000, we held an Annual Meeting of Stockholders at which the
following proposals were voted on by the stockholders:

1. Election of three directors to Class I of the board of directors to
serve for a three-year term to expire at the 2003 Annual Meeting of
Stockholders. The votes cast for or withheld as to each nominee are set forth
below.

NOMINEE FOR WITHHELD
------- --- --------

Elizabeth A. Fetter 118,775,787 184,356
Reed E. Hundt 118,828,095 132,048
Michael W. Malaga 118,831,077 129,066

2. To approve amendments to our certificate of incorporation to (1)
reduce the number of authorized shares of capital stock from 382,500,000 to
305,526,843, (2) reduce the number of authorized shares of preferred stock from
101,250,000 to 24,276,843, (3) declassify all such authorized shares of
preferred stock so as to make them available for future issuance, in one or more
series of preferred stock, the rights, preferences and privileges of which will
be determined by the board of directors from time to time in the future, and (4)
amend Article IV of our certificate of incorporation to eliminate all provisions
applicable to the previously designated series of preferred stock, of which no
shares remain outstanding.

VOTES
-----
For 89,489,601
Against 7,523,099
Abstentions 190,949
Broker Non-Votes 21,756,494

3. To approve two amendments to the NorthPoint Communications Group, Inc.
Amended and Restated 1999 Stock Plan which will (1) increase the number of
shares of common stock reserved for issuance under the 1999 Plan by an
additional 10,000,000 shares, and (2) revise the automatic share increase
provisions of the 1999 Plan so that the number of shares of common stock
reserved under the 1999 Plan will be automatically increased on March 22 of each
year during the term of the 1999 Plan, commencing with March 22, 2001, by an
amount equal to 5% of the total number of shares of common stock outstanding on
the day of such increase.

VOTES
-----
For 82,002,500
Against 15,004,648
Abstentions 201,201
Broker Non-Votes 21,756,494

4. To ratify the appointment of PricewaterhouseCoopers LLP as our
independent accountants for the year ending December 31, 2000.

VOTES
-----
For 118,762,862
Against 153,229
Abstentions 44,052
Broker Non-Votes 0

ITEM 5. OTHER INFORMATION.

None.

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<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits:

The following exhibits are included as part of this Report:

Exhibit
No. Description of Exhibit
--- ----------------------

3.2 Amended and Restated Bylaws of NorthPoint Communications Group,
Inc.

10.38 Employment Agreement dated June 1, 2000, between NorthPoint
Communications, Inc. and Michael W. Malaga.

10.39 Employment Agreement dated June 27, 2000, between NorthPoint
Communications, Inc. and Shellye Archambeau.

10.40 Amendment No. 2 to Employment Agreement dated June 1, 2000,
between NorthPoint Communications, Inc. and Nancy J. Hemmenway.

10.41 Amendment No. 1 to Employment Agreement dated June 1, 2000,
between NorthPoint Communications, Inc. and Michael Parks.

10.42 Amendment No. 2 to Employment Agreement dated June 1, 2000,
between NorthPoint Communications, Inc. and Steven J. Gorosh.

27.1 Financial Data Schedule for the three months ended June 30, 2000.

(b) Reports on Form 8-K:

Form 8-K filed August 8, 2000, Item Nos. 5 and 7, announcement of entering
into an Agreement and Plan of Merger dated as of August 8, 2000, among Bell
Atlantic Corporation (d/b/a Verizon Communications), Verizon Ventures I Inc.,
Verizon Ventures II, Inc. and NorthPoint Communications Group, Inc.

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<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.

NORTHPOINT COMMUNICATIONS GROUP, INC.
Registrant

Dated: August 14, 2000 By: /s/ ELIZABETH A. FETTER
--------------------------------------
Elizabeth A. Fetter
Chief Executive Officer and President

Dated: August 14, 2000 By: /s/ MICHAEL P. GLINSKY
--------------------------------------
Michael P. Glinsky
Executive Vice President and
Chief Financial Officer