SEC Info - Concentric Network Corp - IPO: ‘424A’ on 7/3/97

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Concentric Network Corp – IPO: ‘424A’ on 7/3/97

As of: Thursday, 7/3/97 · Accession #: 1012870-97-1236 · File #: 333-27241

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 7/03/97  Concentric Network Corp           424A                   1:389K                                   Donnelley R R & S… 13/FA

Initial Public Offering (IPO): Prospectus — Rule 424(a)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424A        424(A) Prospectus                                     98    642K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Additional Information Balance Sheets Bridge Loans Business Capitalization Certain Transactions Common Stock Company, The Competition Concentric Network, The Cost of revenue Dependence upon New and Enhanced Services Description of Capital Stock Development Dilution Direct Placements Dividend Policy Employee Stock Plans Experts Future Capital Needs; Uncertainty of Additional Financing General and administrative Index to Financial Statements Intuit Key Customer Applications Legal Matters Legal Proceedings Liquidity and Capital Resources Management Management of Potential Growth and Expansion Management's Discussion and Analysis of Financial Condition and Results of Operations Marketing and sales Net interest expense Net loss Network equipment write-off Notes to Financial Statements Offering, The Preferred Stock Principal Stockholders Prospectus Summary Registration Rights Report of Ernst & Young LLP, Independent Auditors Rescission Offers Revenue Risk Factors Risks of Technological Change and Evolving Industry Standards Sales and Marketing Selected Financial Data Series A Agreement Services Shares Eligible for Future Sale Statement of Operations Statements of Cash Flows Statements of Common Stock Subject to Rescission and Stockholders' Equity (Deficit) Statements of Operations The Company The Concentric Network The Offering Underwriting VPNs Warrants Williams Transaction
1	1st Page - Filing Submission
"	Common Stock
"	Underwriting
2	The Concentric Network
3	Prospectus Summary
"	The Company
4	The Offering
"	Direct Placements
6	Risk Factors
7	Management of Potential Growth and Expansion
8	Dependence upon New and Enhanced Services
10	Competition
11	Risks of Technological Change and Evolving Industry Standards
12	Legal Proceedings
14	Future Capital Needs; Uncertainty of Additional Financing
18	Rescission Offers
20	Dividend Policy
21	Capitalization
22	Dilution
23	Selected Financial Data
"	Statement of Operations
24	Management's Discussion and Analysis of Financial Condition and Results of Operations
25	Revenue
"	Cost of revenue
"	Development
"	Marketing and sales
"	General and administrative
"	Net interest expense
26	Net loss
"	Network equipment write-off
29	Liquidity and Capital Resources
31	Business
34	Services
"	VPNs
39	Key Customer Applications
"	Intuit
41	Sales and Marketing
47	Management
52	Employee Stock Plans
56	Certain Transactions
57	Series A Agreement
"	Bridge Loans
59	Williams Transaction
60	Principal Stockholders
62	Description of Capital Stock
"	Preferred Stock
"	Warrants
63	Registration Rights
65	Shares Eligible for Future Sale
69	Legal Matters
"	Experts
70	Additional Information
74	Index to Financial Statements
75	Report of Ernst & Young LLP, Independent Auditors
76	Balance Sheets
77	Statements of Operations
78	Statements of Common Stock Subject to Rescission and Stockholders' Equity (Deficit)
79	Statements of Cash Flows
81	Notes to Financial Statements

424A 1st Page of 98 TOC ↑Top Previous Next ↓Bottom Just 1st
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION, DATED JULY 3, 1997

Filed Pursuant to Rule 424(a)
Registration No. 333-27241

3,000,000 SHARES

[LOGO OF CONCENTRIC NETWORK CORPORATION]

COMMON STOCK

-----------

All of the 3,000,000 shares of Common Stock offered hereby are being sold
by Concentric Network Corporation ("Concentric" or the "Company"). Prior to
this offering, there has been no public market for the Common Stock of the
Company. It is currently estimated that the initial public offering price will
be between $10.00 and $12.00 per share. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
The shares of Common Stock have been approved for quotation on the Nasdaq
National Market under the symbol "CNCX," subject to official notice of
issuance.

Williams Communications Group, Inc. and Bay Networks, Inc. have agreed to
purchase directly from the Company, in a private placement that will occur
concurrently with the closing of this offering, shares of Common Stock having
an aggregate purchase price of approximately $18.0 million. All of such shares
will be unregistered shares purchased at the per share Price to Public set
forth below. See "Direct Placements."

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.

-----------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

[Download Table]

Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
--------------------------------------------------------------------------------

Per Share.................................. $ $ $
--------------------------------------------------------------------------------
Total(3)................................... $ $ $

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(1) For information regarding indemnification of Underwriters, see
"Underwriting."
(2) Before deducting expenses of the offering payable by the Company, estimated
at $1,000,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days from the date hereof, to purchase up to 450,000 additional shares of
Common Stock on the same terms set forth above, solely to cover over-
allotments, if any. If such option is exercised in full, the total Price to
Public will be $ , the Underwriting Discounts and Commissions will be
$ , and Proceeds to Company will be $ . Including the Direct
Placements, the total Proceeds to Company will be $ , or $ if the
over-allotment is exercised in full. See "Underwriting."

-----------

The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole and in part and to certain other
conditions. It is expected that delivery of such shares will be made at the
offices of UBS Securities LLC, 299 Park Avenue, New York, New York on or about
, 1997.

-----------

UBS SECURITIES
UNTERBERG HARRIS
WHEAT FIRST BUTCHER SINGER

, 1997

424A 2nd Page of 98 TOC 1st Previous Next ↓Bottom Just 2nd
THE CONCENTRIC NETWORK

[ARTWORK APPEARS HERE]

The Concentric network employs an advanced, geographically dispersed ATM and
frame relay backbone, SuperPOPs in 14 major metropolitan areas and 132 secondary
and tertiary POPs in other cities, allowing dial up network access in the U.S.
and Canada. The Company also offers network access to its customers while they
travel in Japan through a roaming agreement with NTT PC Communications, Inc. The
Company is working to establish an international network based on Concentric's
network technology and expertise and the telecommunications infrastructure of
TMI Telemedia International, Ltd., a subsidiary of Telecom Italia SpA, to
deliver a range of compatible network services worldwide.

CONCENTRICVIEW/TM
ConcentricView is a Web-based monitoring
tool that provides up-to-date network information
to Concentric's corporate customers.

[ARTWORK APPEARS HERE]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE
PRICE OF THE COMMON STOCK OF THE COMPANY INCLUDING STABILIZING
BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF
PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

[CONCENTRICNETWORK CORPORATION APPEARS ON LEFT MARGIN]

424A 3rd Page of 98 TOC 1st Previous Next ↓Bottom Just 3rd
PROSPECTUS SUMMARY

The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information, including "Risk Factors" and
the Financial Statements and Notes thereto, appearing elsewhere in this
Prospectus. Except as otherwise noted or as the context otherwise requires, all
information in this Prospectus (i) gives effect to the conversion of all
outstanding shares of Preferred Stock into shares of Common Stock that will
occur automatically immediately prior to the closing of the offering, (ii)
gives effect to the reincorporation of the Company from Florida to Delaware
prior to the closing of the offering, (iii) gives effect to a one-for-15
reverse split of the Company's Common Stock and Preferred Stock and the
conversion of all shares of Class B Common Stock into shares of Common Stock,
which will occur prior to the closing of the offering, and (iv) assumes no
exercise of the Underwriters' over-allotment option. See "Description of
Capital Stock" and "Underwriting." In addition, all share numbers herein assume
that no stockholder receiving the Rescission Offer, which Rescission Offer will
be made as promptly as practicable following the closing of the offering,
exercises its right to rescind its purchase of shares of the Company's Common
Stock. See "Rescission Offers." Certain terms used in this Prospectus are
defined in the Glossary of Terms beginning on page G-1.

THE COMPANY

Concentric provides tailored, value-added Internet Protocol ("IP") based
network services for businesses and consumers. To provide these services, the
Company utilizes its low/fixed latency, high-throughput network, employing its
advanced network architecture and the Internet. Concentric's service offerings
for enterprises include virtual private networks ("VPNs"), dedicated access
facilities ("DAFs") and Web hosting services. These services enable enterprises
to take advantage of standard Internet tools such as browsers and high-
performance servers for customized data communications within an enterprise and
between an enterprise and its suppliers, partners and customers. These services
combine the cost advantages, nationwide access and standard protocols of public
networks with the customization, high performance, reliability and security of
private networks. Among the current enterprise customers are Acer America
Corporation, Inc., Intuit, Inc., Total Entertainment Network, WebTV Networks,
Inc. and Ziff-Davis Publishing Co. Concentric's service offerings for consumers
and small office/home office customers include local Internet dial-up access,
Web hosting services and online multiplayer gaming.

Industry analysts expect the market size for both value-added IP data
networking services and Internet access to grow rapidly as businesses and
consumers increase their use of the Internet, intranets and privately managed
IP networks. The total market for these services is projected to grow from $1.2
billion in 1996 to approximately $22.7 billion in the year 2000, with
approximately $10.4 billion in the enterprise market segment and $12.3 billion
in the consumer market segment.

The Concentric network employs an advanced, geographically dispersed ATM and
frame relay backbone, SuperPOPs in 14 major metropolitan areas and 132
secondary and tertiary POPs in other cities, allowing dial-up network access in
the U.S. and Canada. In addition, the Company can provide analog dial-up, frame
relay, fractional T-1, T-1 and DS3 access to the network. The Concentric
network is engineered and managed to provide superior quality of service,
balancing several key performance criteria. The Company provides guaranteed
levels of service for DAFs to enterprise customers, and targets performance
benchmarks for connection success rates, latency levels and throughput for all
of its service offerings. Concentric also believes that a major advantage of
its network architecture is its ability to perform adaptive call processing
("ACP"), which is designed to enable the tuning of network parameters and
traffic routing to meet the latency, throughput, security, and reliability
requirements of a specific customer or application on a call-by-call basis.
Concentric is currently deploying the ACP technology in its network and is
planning to commercially introduce these capabilities during the second half of
1997.

In addition to strong network performance capabilities, the Company believes
that several factors distinguish its ability to provide value-added network
services. These factors include: (i) excellent service quality; (ii) rapid
development time and flexibility in meeting custom applications requirements;
(iii) responsive customer support and effective account management, available
24 hours per day, seven days per week through the Company's 142 customer
service personnel; and (iv) the Company's technical expertise in devising cost-
effective network solutions for customers.

424A 4th Page of 98 TOC 1st Previous Next ↓Bottom Just 4th
The Company's objective is to become the leading provider of value-added IP-
based network services worldwide. In order to achieve its goal, the Company is
implementing business strategies which capitalize on a number of opportunities
in the marketplace and a large and growing IP network access market. Key
strategies include: (i) rapidly providing cost-effective, tailored network
solutions; (ii) optimizing network utilization; (iii) employing leveraged
marketing through strategic partners; (iv) offering next generation network
services; and (v) deploying network services internationally.

The Company aggressively pursues strategic alliances with a variety of
companies. Key partners currently include Bay Networks, Inc., Microsoft
Corporation, Netscape Communications, Inc. ("Netscape"), PictureTel
Corporation, Racal-Datacom, Inc. and TMI Telemedia International, Ltd., a
subsidiary of Telecom Italia, SpA ("TMI"). The Company is continuing to expand
its value-added services, and plans to introduce RemoteLink, a remote access
service designed to help businesses reduce the high costs of telecommunications
charges and user support associated with building, deploying and maintaining
their own remote access WAN, in mid-1997. In addition, Concentric is in early
stage trials for videoconferencing services and IP-based telephony services.
The Company is also working with TMI to establish an international network
based on the Company's network technology and expertise and TMI's global
telecommunications infrastructure.

The Company was incorporated in Florida in 1991 under the name Engineered
Video Concepts, Inc., changed its name to Concentric Research Corporation in
1992 and commenced network operations in 1994. In 1995, the Company changed its
name to Concentric Network Corporation. Unless the context otherwise requires,
"Concentric" and the "Company" refer to Concentric Network Corporation. The
address of the Company's principal executive offices is 10590 N. Tantau Avenue,
Cupertino, CA 95014, and its telephone number at that address is (408) 342-
2800.

Concentric Network Corporation, The Concentric Network, Concentric
RemoteLink, ConcentricView, ConcentricHost, FlexChannel, FullChannel, Powered
by Concentric Network, and PremierConnect are among the trademarks of the
Company. This Prospectus contains other product names, trade names and
trademarks of the Company and of other organizations.

THE OFFERING

[Download Table]

Common Stock offered by the Company................ 3,000,000 shares(1)
Common Stock to be outstanding after the offering.. 12,206,316 shares(2)
Use of Proceeds.................................... For expansion of network
and data center
operations, to fund
operating losses and for
working capital and other
general corporate
purposes. In addition, the
Company expects to use a
portion of the proceeds to
fund the repurchase of
shares tendered in
connection with rescission
offers.
Proposed Nasdaq National Market Symbol............. CNCX

--------
(1) Excludes shares to be sold by the Company to certain strategic investors
concurrent with the closing of this offering. See "Direct Placements."
(2) Includes an assumed 1,636,363 shares to be issued to certain strategic
investors concurrent with the closing of this offering (assuming an initial
public offering price of $11.00 per share) and excludes 149,739 shares to
be repurchased by the Company from certain stockholders who are not
officers, directors or affiliates of the Company at the per share Price to
Public. See "Direct Placements." Excludes 3,154,447 shares issuable upon
exercise of options and warrants outstanding at June 30, 1997 at a weighted
average exercise price of $10.27 per share. See "Description of Capital
Stock--Warrants."

DIRECT PLACEMENTS

Williams Communications Group, Inc. and Bay Networks, Inc. have agreed to
purchase from the Company, in a private placement that will occur concurrently
with the closing of this offering, shares of Common Stock with an aggregate
purchase price of approximately $18.0 million (including approximately $3.0
million in cancellation of indebtedness). Such purchasers will pay to the
Company a per share amount equal to the Price to Public set forth on the cover
page of this Prospectus. See "Direct Placements" and "Certain Transactions--
Williams Transaction."

424A 5th Page of 98 TOC 1st Previous Next ↓Bottom Just 5th
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

[Enlarge/Download Table]

PERIOD FROM
MAY 1, 1991 THREE MONTHS ENDED
(INCEPTION) YEAR ENDED DECEMBER 31, MARCH 31,
THROUGH DEC. 31, ------------------------------------ --------------------
1992 1993 1994 1995 1996 1996 1997
---------------- ------- ------- -------- -------- --------- ---------

STATEMENT OF OPERATIONS
DATA:
Revenue................. $ -- $ 23 $ 442 $ 2,483 $ 15,648 $ 1,533 $ 9,154
Cost of revenue......... -- 130 2,891 16,168 47,945 7,256 15,744
Network equipment write-
off(1) ................ -- -- -- -- 8,321 -- --
Total operating
expenses............... 28 1,114 1,784 7,602 22,503 4,196 7,021
----- ------- ------- -------- -------- --------- ---------
Loss from operations.... (28) (1,221) (4,233) (21,287) (63,121) (9,919) (13,611)
Net loss................ $ (28) $(1,245) $(4,290) $(22,008) $(66,381) $ (10,380) $ (14,681)
===== ======= ======= ======== ======== ========= =========
Pro forma net loss per
share(2)............... $ (11.92) $ (1.98)
======== =========
Weighted average shares
used in computing pro
forma net loss per
share(2)............... 5,567 7,398
======== =========

[Download Table]

MARCH 31, 1997
------------------------
PRO FORMA
ACTUAL AS ADJUSTED(3)
-------- --------------

BALANCE SHEET DATA:
Working capital (deficit)............................ $(24,705) $ 22,355
Property and equipment, net.......................... 53,227 53,227
Total assets......................................... 61,438 108,498
Long-term debt and capital lease obligations, less
current portion..................................... 35,349 35,349
Stockholders' equity (deficit)....................... (10,619) 36,441

[Download Table]

THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1996 1996 1996 1996 1997
--------- -------- --------- -------- ---------

QUARTERLY STATEMENT OF
OPERATIONS DATA:
Revenue................... $ 1,533 $ 2,489 $ 4,193 $ 7,433 $ 9,154
Cost of revenue........... 7,256 11,782 11,913 16,994 15,744
Network equipment write-
off(1)................... -- -- -- 8,321 --
Total operating expenses.. 4,196 5,475 5,464 7,368 7,021
-------- -------- -------- -------- --------
Loss from operations...... (9,919) (14,768) (13,184) (25,250) (13,611)
Net loss.................. $(10,380) $(15,420) $(14,473) $(26,108) $(14,681)
======== ======== ======== ======== ========

--------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 of Notes to Financial Statements.
(2) The pro forma net loss per share computation gives retroactive effect to
the conversion of the outstanding Preferred Stock into Common Stock upon
the closing of the offering. See Note 1 of Notes to Financial Statements
for an explanation of the calculation of pro forma net loss per share.
(3) Adjusted to reflect the receipt by the Company of the estimated aggregate
net proceeds of $47.1 million (including approximately $3.0 million in
cancellation of indebtedness) from the sale of 3,000,000 shares of Common
Stock offered hereby and an assumed 1,636,363 shares offered in the Direct
Placement at an assumed initial public offering price of $11.00 per share
and excludes 149,739 shares to be repurchased by the Company from certain
stockholders who are not officers, directors or affiliates of the Company
at the per share Price to Public. See "Use of Proceeds" and "Direct
Placements."

424A 6th Page of 98 TOC 1st Previous Next ↓Bottom Just 6th
RISK FACTORS

An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors, in addition to the other information set forth in this
Prospectus, in connection with an investment in the Common Stock offered
hereby. The Prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities
Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Those statements appear in a number of places in this
Prospectus and include statements regarding the intent, belief or current
expectations of the Company or its directors or officers with respect to,
among other things: (i) trends affecting the Company's financial condition or
results of operation; and (ii) the Company's business and growth strategies.
Prospective investors are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties,
and that actual results may differ materially from those projected, expressed
or implied, in the forward-looking statements as a result of various factors.
The accompanying information contained in this Prospectus, including without
limitation the information set forth under the headings "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," identifies important factors that could cause such
differences. Such forward-looking statements speak only as of the date of this
Prospectus, and the Company cautions potential investors not to place undue
reliance on such statements.

LIMITED OPERATING HISTORY; CONTINUING OPERATING LOSSES

The Company was incorporated in 1991, commenced network operations in 1994
and completed initial deployment of its current network architecture and use
of an advanced ATM backbone network in late 1996. Accordingly, the Company has
a limited operating history upon which an evaluation of the Company and its
prospects can be based. In addition, a majority of the Company's senior
management team have been working together at the Company for less than two
years. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets. To address these risks, the Company must, among other things, respond
to competitive developments, continue to attract, retain and motivate
qualified persons, and continue to upgrade its technologies and commercialize
its network services incorporating such technologies. There can be no
assurance that the Company will be successful in addressing such risks and the
failure to do so could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has
incurred net losses and experienced negative cash flow from operations since
inception and expects to continue to operate at a net loss and experience
negative cash flow at least through 1998, although the Company's ability to
achieve profitability and positive cash flow from operations is dependent upon
the Company's ability to substantially grow its revenue base and achieve other
operating efficiencies. The Company experienced net losses of approximately
$4.3 million, $22.0 million and $66.4 million for the years ended December 31,
1994, 1995 and 1996, respectively, and a net loss of $14.7 million for the
three months ended March 31, 1997. At March 31, 1997, the Company had an
accumulated deficit of approximately $108.6 million. There can be no assurance
that the Company will be able to achieve or sustain revenue growth,
profitability or positive cash flow on either a quarterly or an annual basis.
At December 31, 1996, the Company had approximately $37.0 million of gross
deferred tax assets comprised primarily of net operating loss carryforwards.
The Company believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability
of the deferred tax assets such that a full valuation allowance has been
recorded. These factors include the Company's history of net losses since its
inception and the fact that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology. The
Company believes that, based on the current available evidence, it is more
likely than not that the Company will not generate taxable income through
1998, and possibly beyond, and accordingly will not realize the Company's
deferred tax assets through 1998 and possibly beyond. In addition, the
utilization of net operating losses may be subject to a substantial annual
limitation due to the "change in ownership" provisions of the Internal Revenue
Code of 1986 and similar state provisions. The Company will continue to assess
the realizability of the deferred tax assets based on actual and forecasted
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 8 of Notes to Financial
Statements.

FLUCTUATIONS IN OPERATING RESULTS

The Company's operating results have fluctuated in the past and may in the
future fluctuate significantly depending upon a variety of factors, including
the timely deployment and implementation of expansion of the

424A 7th Page of 98 TOC 1st Previous Next ↓Bottom Just 7th
Concentric network and new network architectures, the incurrence of related
capital costs, the receipt of new value-added network services and consumer
services subscriptions and the introduction of new services by the Company and
its competitors. Additional factors that may contribute to variability of
operating results include: the payment of statutory interest related to the
recission offer; the pricing and mix of services offered by the Company;
customer retention rate; market acceptance of new and enhanced versions of the
Company's services; changes in pricing policies by the Company's competitors;
the Company's ability to obtain sufficient supplies of sole- or limited-source
components; user demand for network and Internet access services; balancing of
network usage over a 24-hour period; and general access services. In response
to competitive pressures, the Company may take certain pricing or marketing
actions that could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company's
expense levels are relatively fixed in the short term and are based, in part,
upon the Company's estimates of growth of its business. As a result,
variations in the timing and amounts of revenues could have a material adverse
effect on the Company's quarterly operating results. Due to the foregoing
factors, the Company believes that period-to-period comparisons of its
operating results are not necessarily meaningful and that such comparisons
cannot be relied upon as indicators of future performance. In the event that
the Company's operating results in any future period fall below the
expectations of securities analysts and investors, the trading price of the
Company's Common Stock would likely be materially and adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

CUSTOMER CONCENTRATION

The Company currently derives a substantial portion of its total revenue
from a single customer. For the year ended December 31, 1996 and the three
months ended March 31, 1997, revenue from WebTV Networks, Inc. ("WNI")
represented approximately 10.1% and 32.7%, respectively, of the Company's
revenue. The Company's current agreement to provide services to WNI expires on
December 1, 1997. After such date, the agreement continues in effect until
terminated by either party, which may occur at any time on or after September
30, 1997 upon one hundred twenty (120) days' notice. Although the Company
currently is negotiating a new agreement with WNI, there can be no assurance
such negotiations will be successfully concluded. While the Company expects
revenue from WNI to decrease as a percentage of revenue in future periods, the
Company believes that revenue derived from a limited number of current and
future customers may continue to represent a significant portion of its
revenue. As a result, the loss of one or more of the Company's major customers
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, there can be no assurance
that revenue from customers that have accounted for significant revenue in
past periods, individually or as a group, will continue, or if continued, will
reach or exceed historical levels in any future period. See Note 1 of Notes to
Financial Statements.

MANAGEMENT OF POTENTIAL GROWTH AND EXPANSION

As of December 31, 1995, the Company had 96 employees and 47 independent
contractors, and as of December 31, 1996, the Company had 246 employees and 46
independent contractors. As of March 31, 1997, the Company had 280 employees
and 48 independent contractors. The growth and expansion of the Company's
business and its service offerings have placed, and are expected to continue
to place, a significant strain on the Company's management, operational and
financial resources. The Company has recently expanded and upgraded its
network to use an ATM backbone. The Company plans to continue to substantially
expand its network in the future. There can be no assurance that the Company
will be able to add services at the rate or according to the schedule
presently planned by the Company. To manage its growth, the Company must,
among other things, (i) continue to implement and improve its operational,
financial and management information systems, including its billing, accounts
receivable and payable tracking, fixed assets and other financial management
systems; (ii) hire and train additional qualified personnel; and (iii)
continue to expand and upgrade its network infrastructure. Demands on the
Company's network infrastructure and technical support resources have grown
rapidly with the Company's expanding customer base, and the Company may in the
future experience difficulties meeting the demand for its access services and
technical support. There can be no assurance that the Company's technical
support or other resources will be sufficient to facilitate the Company's
growth. As the Company strives to increase total network utilization and to
optimize this utilization by targeting both business and consumer users to
balance the network's usage throughout a 24-hour period, there will be
additional demands on the Company's customer support, sales and marketing
resources. Any failure of the Company to manage its growth effectively could
have a material adverse effect on the Company's business, financial condition
and results of operations.

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DEPENDENCE UPON NEW AND UNCERTAIN MARKETS

The markets for tailored, value-added network services for businesses and
consumers offered by the Company, including Internet access, are in the early
stages of development. Since these markets are relatively new and because
current and future competitors are likely to introduce competing services or
products, it is difficult to predict the rate at which the market will grow,
if at all, or whether new or increased competition will result in market
saturation. Certain critical issues concerning commercial use of tailored
value-added services and Internet services, including security, reliability,
ease and cost of access and quality of service, remain unresolved and may
impact the growth of such services. If the markets for the services offered by
the Company, including Internet access, fail to grow, grow more slowly than
anticipated, or become saturated with competitors, the Company's business,
financial condition and results of operations would be materially adversely
affected. See "-- Competition," "-- Dependence upon New and Enhanced
Services," and "-- Risks of Technological Change and Evolving Industry
Standards."

DEPENDENCE UPON NEW AND ENHANCED SERVICES

The Company has recently introduced new enterprise service offerings,
including the introduction of value-added, IP-based communication services to
enterprises. The failure of these services to gain market acceptance in a
timely manner or at all could have a material adverse effect on the business,
financial condition and results of operations of the Company. Introduction by
the Company of new or enhanced services with reliability, quality or
compatibility problems could significantly delay or hinder market acceptance
of such services, which could adversely affect the Company's ability to
attract new customers and subscribers. The Company's services may contain
undetected errors or defects when first introduced or as enhancements are
introduced. There can be no assurance that, despite testing by the Company or
its customers, errors will not be found in new services after commencement of
commercial deployment, resulting in additional development costs, loss of, or
delays in, market acceptance, diversion of technical and other resources from
the Company's other development efforts and the loss of credibility with the
Company's customers and subscribers. Any such event could have a material
adverse effect on the Company's business, financial condition and results of
operations. Additionally, if the Company is unable to achieve balanced network
utilization over a 24-hour period, the Concentric network could become
overburdened at certain periods during the day, which could adversely affect
the quality of service provided by the Company. Conversely, due to the high
fixed cost nature of Concentric's infrastructure, under-utilization of the
Concentric network during certain periods of the day could adversely affect
the Company's ability to provide cost-efficient services at other times. The
failure of the Company to achieve balanced network utilization, because of
either over- or under-utilization could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Services."

DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY

The Company relies on other companies to supply certain key components of
its network infrastructure, including telecommunications services and
networking equipment, which, in the quantities and quality demanded by the
Company, are available only from sole or limited sources. AT&T Corp. ("AT&T"),
MCI Telecommunications, Inc. ("MCI"), WorldCom, Inc. ("WorldCom") and PacWest
Telecomm, Inc. are the primary providers to the Company of data communications
facilities and capacity. AT&T is the sole provider of the frame relay backbone
of the Concentric network, and MCI is the sole provider of the ATM backbone of
the Concentric network. The Company is also dependent upon local exchange
carriers ("LECs") to provide telecommunications services to the Company and
its customers. The Company from time to time has experienced delays in
receiving telecommunications services, and there can be no assurance that the
Company will be able to obtain such services on the scale and within the time
frames required by the Company at an affordable cost, or at all. Any failure
to obtain such services on a timely basis at an affordable cost would have a
material adverse effect on the Company's business, financial condition and
results of operations.

The routers, switches and modems the Company uses are supplied by Bay
Networks, Inc. through Racal-Datacom, Inc. ("Racal"). In addition, Racal acts
as a systems integrator. The servers primarily used in the Company's network
infrastructure are supplied solely by Sun Microsystems, Inc. The Company
purchases these components pursuant to purchase orders placed from time to
time, does not carry significant inventories of these components and

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has no guaranteed supply arrangements for such components. The Company's
suppliers also sell products to the Company's competitors and may in the
future themselves become competitors of the Company. There can be no assurance
that the Company's suppliers will not enter into exclusive arrangements with
the Company's competitors or stop selling their products or components to the
Company at commercially reasonable prices or at all.

Expansion of network infrastructures by the Company and others is placing,
and will continue to place, a significant demand on the Company's suppliers,
some of which have limited resources and production capacity. In addition,
certain of the Company's suppliers, in turn, rely on sole or limited sources
of supply of components included in their products. Failure of the Company's
suppliers to adjust to meet such increasing demand may prevent them from
continuing to supply components and products in the quantities and quality and
at the times required by the Company, or at all. The Company's inability to
obtain sufficient quantities of sole- or limited-source components or to
develop alternative sources if required could result in delays and increased
costs in expanding, and overburdening of, the Company's network
infrastructure, which would have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company also is dependent on its suppliers' ability to provide necessary
products and components that comply with various Internet and
telecommunications standards and that interoperate with products and
components from other vendors. Any failure of the Company's sole- or limited-
source suppliers to provide products or components that comply with Internet
standards or that interoperate with other products or components used by the
Company in its network infrastructure could have a material adverse effect on
the Company's business, financial condition and results of operations.

Certain of the Company's suppliers, including the regional Bell operating
companies ("RBOCs") and other LECs, currently are subject to tariff controls
and other price constraints that in the future may be changed. In addition,
regulatory proposals are pending that may affect the prices charged by the
RBOCs and other LECs to the Company. Any such regulatory changes could result
in increased prices of products and services, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "-- Dependence upon New and Enhanced Services" and "-- Risks
of Technological Change and Evolving Industry Standards."

DEPENDENCE UPON NETWORK INFRASTRUCTURE

The Company's success will depend upon the capacity, reliability and
security of its network infrastructure. The Company currently derives a
significant portion of its revenue from customer subscriptions. The Company
expects that a substantial portion of its future revenues will be derived from
the provision of tailored value-added network services to its customers. The
Company must continue to expand and adapt its network infrastructure as the
number of users and the amount of information they wish to transfer increase,
and as customer requirements change. The Company's current projections of
utilization of the Concentric network require rapid expansion of the capacity
of the network to avoid capacity constraints that would adversely affect the
performance of the system. The expansion and adaptation of the Company's
network infrastructure will require substantial financial, operational and
management resources. There can be no assurance that the Company will be able
to expand or adapt its network infrastructure to meet additional demand or its
customers' changing requirements on a timely basis, at a commercially
reasonable cost, or at all. In addition, if demand for usage of the Concentric
network were to increase faster than projected or were to exceed the Company's
current forecasts, the network could experience capacity constraints, which
would adversely affect the performance of the system. Any failure of the
Company to expand its network infrastructure on a timely basis or adapt it to
either changing customer requirements or evolving industry standards, or
capacity constraints experienced by the Concentric network for any reason,
could have a material adverse effect on the Company's business, financial
condition and results of operations. Currently, the Company has a transit
agreement with networkMCI, Inc. to support the exchange of traffic between the
Concentric network and the Internet. The Company connects to the MCI Internet
via a DS3 (45 Mbps) link from its Bay City Data Center and another DS3 link
from its Cupertino Data Center. The failure of the MCI Internet backbone, or
either or both data centers, or any other link in the delivery chain, and
resulting interruption in the Company's operations would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- The Concentric Network."

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COMPETITION

The market for tailored value-added network services is extremely
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company believes
that its ability to compete successfully depends upon a number of factors,
including market presence; the capacity, reliability, low latency and security
of its network infrastructure; technical expertise and functionality,
performance and quality of services; customization; ease of access to and
navigation of the Internet; the pricing policies of its competitors and
suppliers; the variety of services; the timing of introductions of new
services by the Company and its competitors; customer support; the Company's
ability to support industry standards; and industry and general economic
trends.

The Company's current and prospective competitors generally may be divided
into the following five groups: (i) telecommunications companies, such as
AT&T, MCI, Sprint, Inc., WorldCom, the RBOCs and various cable companies; (ii)
online services providers, such as America Online, Inc. ("America Online"),
CompuServe Incorporated ("CompuServe"), the Microsoft Network ("MSN") of
Microsoft Corporation ("Microsoft"), and Prodigy Services Company ("Prodigy");
(iii) Internet service providers ("ISPs"), such as BBN Corporation ("BBN"),
NETCOM On-Line Communications Services, Inc. ("NETCOM"), PSINet, Inc. ("PSI"),
and other national and regional providers; (iv) nonprofit or educational
Internet connectivity providers; and (v) Web server farms such as Internet
Direct and Exodus. Many of these competitors have greater market presence,
engineering and marketing capabilities, and financial, technological and
personnel resources than those available to the Company. As a result, they may
be able to develop and expand their communications and network infrastructures
more quickly, adapt more swiftly to new or emerging technologies and changes
in customer requirements, take advantage of acquisition and other
opportunities more readily, and devote greater resources to the marketing and
sale of their products and services than can the Company. In addition to the
companies named above, various organizations have entered into or are forming
joint ventures or consortiums to provide services similar to those of the
Company.

The Company believes that new competitors, including large computer
hardware, software, media and other technology and telecommunications
companies, will enter the tailored value-added network services market,
resulting in even greater competition for the Company. Certain of such
telecommunications companies and online services providers are currently
offering or have announced plans to offer Internet or online services or to
expand their network services. Certain companies, including America Online,
BBN and PSI, have also obtained or expanded their Internet access products and
services as a result of acquisitions. Such acquisitions may permit the
Company's competitors to devote greater resources to the development and
marketing of new competitive products and services and the marketing of
existing competitive products and services. In addition, the ability of some
of the Company's competitors to bundle other services and products with
virtual private network services or Internet access services could place the
Company at a competitive disadvantage. Certain companies are also exploring
the possibility of providing or are currently providing high-speed data
services using alternative delivery methods such as over the cable television
infrastructure, through direct broadcast satellites and over wireless cable.

The Company currently plans to apply for certificates of authority to become
a CLEC in selected states. To the extent the Company obtains such
authorizations and commences CLEC operations, it will compete with the
incumbent LEC and additional CLECS providing telecommunications services in
these markets. For all new entrants, including the Company, the market for
local exchange services is extremely competitive. Local telecommunications
services offered by the Company will compete principally with services offered
by the incumbent LEC serving that area. Incumbent LECs, such as the RBOCs,
currently dominate their local telephone markets. Such companies have
financial, managerial and technical resources that substantially exceed those
of the Company and have long-standing relationships with their customers.
While the 1996 Telecom Act provides increased business opportunities to CLECs,
it also allows incumbent LECs increased pricing flexibility for their
services. Increased price competition from incumbent LECs could have a
material adverse effect on the Company's CLEC operations and, in turn, on the
Company's results of operations and financial condition to the extent its CLEC
operations are a material portion of its business. Furthermore, upon the
satisfaction of certain regulatory conditions, the RBOCs currently are
expected to be able to offer long distance services in their home markets in
addition to local service, which would afford their local customers "one-stop
shopping" for telecommunications services. The Company also expects to face
increased competition in the provision of local exchange services from other
CLECs, cable television companies, electric utilities,

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microwave carriers, wireless telephone system operators, AT&T, MCI, Sprint,
WorldCom and other long distance carriers who may choose to enter the local
exchange market by resale of incumbent LEC facilities.

As a result of increased competition and vertical and horizontal integration
in the industry, the Company could encounter significant pricing pressure,
which in turn could result in significant reductions in the average selling
price of the Company's services. For example, certain of the Company's
competitors that are telecommunications companies may be able to provide
customers with reduced communications costs in connection with their Internet
access services or private network services, reducing the overall cost of
their solutions and significantly increasing price pressures on the Company.
There can be no assurance that the Company will be able to offset the effects
of any such price reductions with an increase in the number of its customers,
higher revenue from enhanced services, cost reductions or otherwise. In
addition, the Company believes that the Internet access and online services
businesses are likely to encounter consolidation in the near future, which
could result in increased price and other competition in these industries and,
potentially, the virtual private networks industry. Increased price or other
competition could result in erosion of the Company's market share and could
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that the Company will
have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully. See "-- Management of
Potential Growth and Expansion" and "Business -- Competition."

DEPENDENCE UPON THIRD-PARTY MARKETING, DISTRIBUTION AND ENGINEERING
RELATIONSHIPS

An important element of the Company's strategy is to develop relationships
with leading companies to enhance Concentric's engineering, marketing and
distribution efforts. The Company has OEM agreements with Netscape Corporation
("Netscape") and Microsoft pursuant to which the Company is entitled to
distribute and modify these companies' browsers. The customization of browsers
by the Company is an integral part of its current tailored VPN offerings. The
Netscape agreement expires in December 1998 and the Microsoft agreement
expires in March 1999. The Company has an agreement with Intuit, Inc.
("Intuit") for the development, operation and maintenance of a VPN that is the
integrated access, dial-up network and infrastructure used by purchasers of
Quicken, Turbo Tax and other Intuit software products to access the Quicken
Financial Network Website and upgrade to full Internet access. The Intuit
contract may be terminated at the election of Intuit upon six months prior
notice of an election to terminate. The Company relies on these relationships
for acquisition of consumer customers. The termination of or failure to renew
any of these agreements or the inability of the Company to enter into similar
relationships with others could have a material adverse effect on the
Company's business, financial condition and results of operation. The Company
has an outsourcing agreement with Critical Technologies Incorporated ("CTI"),
a subsidiary of Williams Communications Group, Inc., that enables the Company
to use CTI employees for the operational support of the Concentric network.
The Company's use of CTI employees and CTI engineering expertise were integral
to its development of the Concentric network and continue to be integral to
ongoing operation of the Company's network operations center. Pursuant to the
agreement with CTI, all of the CTI employees currently working for Concentric
will become employees of Concentric at the termination of the agreement in
October 2000. Termination of any of these agreements or the failure of the
Company to renew any of the agreements upon termination on terms acceptable to
the Company could result in a material adverse affect on the Company's
business, financial condition and results of operations. See "Business -- Key
Customer Applications."

RISKS OF TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS

The markets for the Company's services are characterized by rapidly changing
technology, evolving industry standards, changes in customer needs, emerging
competition and frequent new product and service introductions. The Company's
future success will depend, in part, on its ability to effectively use leading
technologies; to continue to develop its technical expertise; to enhance its
current networking services; to develop new services that meet changing
customer needs; to advertise and market its services; and to influence and
respond to emerging industry standards and other technological changes in a
timely and cost-effective basis. There can be no assurance that the Company
will be successful in effectively using new technologies, developing new
services or enhancing its existing services on a timely basis, or that such
new technologies or enhancements will achieve market acceptance. The Company's
pursuit of necessary technological advances may require substantial time and
expense, and there can be no assurance that the Company will succeed in
adapting its network service business to alternate access devices and
conduits. An integral

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part of the Company's strategy is to design its network in order to meet the
requirements of emerging standards such as 56.6 Kbps modems and applications
such as IP-based interactive video and voice conferencing communications.
Failure of the Company, for technological or other reasons, to develop and
introduce new or enhanced services that are compatible with industry standards
and that satisfy customer requirements would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- The Concentric Network."

The Company believes that its ability to compete successfully is also
dependent upon the continued compatibility and interoperability of its
services with products and architectures offered by various vendors. Although
the Company intends to support emerging standards in the market for Internet
access, there can be no assurance that industry standards will be established
or, if they become established, that the Company will be able to conform to
these new standards in a timely fashion and maintain a competitive position in
the market. Specifically, the Company's services rely on the continued
widespread commercial use of TCP/IP. Alternative open protocol and proprietary
protocol standards have been or are being developed. If any of these
alternative protocols become widely adopted, there may be a reduction in the
use of TCP/IP, which could render the Company's services obsolete and
unmarketable. Additionally, two of the leading modem manufacturers, Rockwell
and US Robotics, have proposed different, incompatible standards for 56.6 Kbps
modems. The Company currently plans to accommodate both standards to the
extent it can do so cost effectively. The failure of the Company to anticipate
the prevailing standard, or the failure of a common standard to emerge could
have a material adverse effect on the Company's business and results of
operations. In addition, there can be no assurance that services or
technologies developed by others will not render the Company's services or
technology uncompetitive or obsolete.

The Company faces the risk of fundamental changes in the way Internet access
is delivered. Currently, Internet services are accessed primarily by computers
connected by telephone lines. Recently, several companies announced the
development and planned sale of cable television modems, wireless modems and
satellite modems to provide access to the Internet. Cable television,
satellite and wireless modems have the ability to transmit data at
substantially faster speeds than the modems the Company and its subscribers
currently use. In addition, wireless modems have the potential to reduce the
cost of network services. As the Internet becomes accessible through these
cable television, wireless and satellite modems and by screen-based
telephones, television or other consumer electronic devices, or subscriber
requirements change the way Internet access is provided, the Company will have
to develop new technology or modify its existing technology to accommodate
these developments. The Company's pursuit of these technological advances may
require substantial time and expense, and there can be no assurance that the
Company will succeed in adapting its Internet access business to alternate
access devices and conduits.

LEGAL PROCEEDINGS

On April 22, 1997, a complaint was filed in the Los Angeles County,
California Superior Court against the Company and other unnamed defendants by
Sattel Communications LLC ("Sattel"). The complaint alleges claims for breach
of contract, breach of the covenant of good faith and fair dealing, unfair
business practices, fraud and negligent misrepresentation. Sattel claims that
the Company is in breach of an agreement to pay for up to $4.3 million of DSS
Switches from Sattel for use in the Company's network. The Complaint also
seeks unspecified consequential and punitive damages. On April 29, 1997,
Sattel served the Company with an Application for Writ of Attachment, seeking
to secure a lien on the Company's assets up to an amount of $3.6 million. At a
hearing held on June 25, 1997, the Court granted the writ. The Company intends
to post a bond in the amount of the writ, thereby precluding Sattel from
executing on the writ. No trial date has been set in the matter.

In late April and early May, 1997, three putative securities class action
complaints were filed in the United States District Court, Central District by
certain stockholders of Diana Corporation ("Diana"), the parent corporation of
Sattel, alleging securities fraud related to plaintiffs' purchase of shares of
Diana Common Stock in reliance upon allegedly misleading statements made by
defendants, Diana, Sattel and certain of their respective affiliates, officers
and directors. Concentric was named as a defendant in the complaint in
connection with certain statements made by Diana and officers of Diana related
to Concentric's purchase of network switching equipment from Diana's Sattel
subsidiary. The complaints do not appear to allege that Concentric made any
false or misleading statements. The plaintiffs seek unspecified compensatory
damages.

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While the ultimate outcome of such litigation is uncertain, the Company
believes it has meritorious defenses to the claims and intends to conduct
vigorous defenses. An unfavorable outcome in these matters could have a
material adverse effect on the Company's financial condition. In addition,
even if the ultimate outcomes are resolved in favor of the Company, the
defense of such litigation could entail considerable cost and the diversion of
efforts of management, either of which could have a material adverse effect on
the Company's results of operations. See "Business -- Legal Proceedings" and
Note 10 of Notes to Financial Statements.

RISK OF SYSTEM FAILURE

As the Company expands its network and usage grows, increased stress will be
placed upon network hardware and traffic management systems. While the
Company's network has been designed with redundant backbone circuits to allow
traffic re-routing, there can be no assurance that the Company will not
experience failures relating to individual network points of presence ("POPs")
or even catastrophic failure of the entire network. Moreover, the Company's
operations are dependent upon its ability to protect its network
infrastructure against damage from fire, earthquakes, floods, mudslides, power
loss, telecommunications failures and similar events. A significant portion of
the Company's computer equipment, including critical equipment dedicated to
its Internet access services, is located at its facilities in Bay City,
Michigan, and Cupertino, California. In addition, the Company's modems and
routers that serve large areas of the United States are located in such
cities. The Company's network operations center, which manages the entire
network, is in St. Louis, Missouri. Despite precautions taken by the Company,
the occurrence of a natural disaster or other unanticipated problems at the
Company's network operations center, at its hubs (sites at which the Company
has located routers, switches and other computer equipment that make up the
backbone of the Company's network infrastructure) or at a number of the
Company's POPs has from time to time in the past caused, and in the future
could cause, interruptions in the services provided by the Company. In
addition, failure of the Company's telecommunications providers to provide the
data communications capacity in the time frame required by the Company as a
result of a natural disaster or operational disruption or for any other reason
could cause interruptions in the services provided by the Company. Any damage
or failure that causes interruptions in the Company's operations could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- The Concentric Network."

SYSTEM SECURITY RISKS

Despite the implementation of network security measures, the core of the
Company's network infrastructure is vulnerable to computer viruses, break-ins
and similar disruptive problems caused by its customers or Internet users.
Computer viruses, break-ins or other problems caused by third parties could
lead to interruptions, delays or cessation in service to the Company's
customers and subscribers. Furthermore, such inappropriate use of the network
by third parties could also potentially jeopardize the security of
confidential information stored in the computer systems of the Company and its
customers, which may result in liability to the Company and also may deter
potential subscribers. Although the Company intends to continue to implement
industry-standard security measures, such measures occasionally have been
circumvented in the past, and there can be no assurance that measures
implemented by the Company will not be circumvented in the future. The costs
and resources required to eliminate computer viruses and alleviate other
security problems may result in interruptions, delays or cessation of service
to the Company's customers that could have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Management of Potential Growth and Expansion," "-- Dependence upon New and
Enhanced Services," "-- Risks of Technological Change and Evolving Industry
Standards," "Use of Proceeds" and "Business -- Services."

DEPENDENCE UPON KEY PERSONNEL; NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL

The Company's success depends to a significant degree upon the continued
contributions of its executive management team, including Henry R. Nothhaft,
the Company's President and Chief Executive Officer, and John K. Peters, the
Company's Executive Vice President and General Manager, Network Services
Division. The loss of the services of Messrs. Nothhaft or Peters could have a
material adverse effect on the Company. The Company does not have employment
agreements with any of its senior officers, including Messrs. Nothhaft or
Peters. Nor does the Company carry key man life insurance on the life of any
such persons. The Company's success will also depend upon the continued
service of the other members of its senior management team and technical,
marketing and sales

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personnel. The Company's employees may voluntarily terminate their employment
with the Company at any time, and competition for qualified employees is
intense. The Company's success also depends upon its ability to attract and
retain additional highly qualified management, technical, sales and marketing
and customer support personnel. The process of locating such personnel with
the combination of skills and attributes required to carry out the Company's
strategy is often lengthy. The loss of the services of key personnel, or the
inability to attract additional qualified personnel, could have a material
adverse effect upon the Company's results of operations, development efforts
and ability to complete the expansion of its network infrastructure. Any such
event could have a material adverse effect on the Company's business,
financial condition and results of operations. See "-- Management of Potential
Growth and Expansion" and "Management."

RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION

A key component of the Company's strategy is its planned expansion into
international markets. In particular, the Company has entered into an
agreement with TMI Telemedia International Ltd., a subsidiary of Telecom
Italia SpA ("TMI"), to establish an international network based on
Concentric's network technology and expertise and TMI's existing
telecommunications infrastructure to deliver a range of compatible network
services worldwide. If the companies are not able to successfully deploy
Concentric's technology over TMI's infrastructure, or if Concentric is
unsuccessful in transferring its knowledge to TMI employees, the Company's
international strategy may be delayed and the Company's business, results of
operation or financial condition could be materially adversely affected. To
date, the Company has only limited experience in working with TMI to develop
versions of its products and marketing and distributing its products
internationally. There can be no assurance that the Company will be able to
successfully market, sell and deliver its products in these markets. In
addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks inherent in doing business on
an international level, such as unexpected changes in regulatory requirements,
export restrictions, export controls relating to encryption technology,
tariffs and other trade barriers, difficulties in staffing and managing
foreign operations, longer payment cycles, problems in collecting accounts
receivable, political instability, fluctuations in currency exchange rates,
seasonal reductions in business activity during the summer months in Europe
and certain other parts of the world and potentially adverse tax consequences
that could adversely impact the success of the Company's international
operations. There can be no assurance that one or more of such factors will
not have a material adverse effect on the Company's future international
operations and, consequently, on the Company's business, financial condition
and results of operations. See "Business -- Sales and Marketing."

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING

The Company currently anticipates that its available cash resources combined
with the net proceeds of the offering, the Direct Placements and existing
lease and credit facilities, and funds from operations will be sufficient to
meet its anticipated working capital and capital expenditure requirements for
the next 12 months. However, there can be no assurance that such resources
will be sufficient for its anticipated working capital and capital expenditure
requirements. The Company may need to raise additional funds through public or
private debt or equity financings in order to take advantage of unanticipated
opportunities, including more rapid international expansion or acquisitions of
complementary businesses or technologies, or to develop new products or
otherwise respond to unanticipated competitive pressures. The Company may also
raise additional funds through public or private debt or equity financings if
such financings become available on favorable terms. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
then current stockholders of the Company may be reduced and such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Company's Common Stock. If additional funds are raised through
the issuance of debt securities, such securities would have certain rights,
preferences and privileges senior to holders of Common Stock and the terms of
such debt could impose restrictions on the operations of the Company. There
can be no assurance that additional financing will be available on terms
favorable to the Company, or at all. If adequate funds are not available or
are not available on acceptable terms, the Company may not be able to take
advantage of unanticipated opportunities, develop new products or otherwise
respond to unanticipated competitive pressures. Such inability could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

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RISKS ASSOCIATED WITH ACQUISITIONS

The Company may seek to acquire assets or businesses complementary to its
operations, although no specific acquisitions are currently in negotiation or
planned. Any such future acquisitions would be accompanied by the risks
commonly encountered in acquisitions of companies. Such risks include, among
other things, the difficulty of assimilating the operations and personnel of
the acquired companies, the potential disruption of the Company's business,
the inability of the Company's management to maximize the financial and
strategic position of the Company by the incorporation of acquired technology
or business into the Company's service offerings, the difficulty of
maintaining uniform standards, controls, procedures and policies, the
potential loss of key employees of acquired companies, and the impairment of
relationships with employees and customers as a result of changes in
management. No assurance can be given that any acquisition by the Company will
or will not occur, that if an acquisition does occur it will not materially
and adversely affect the Company or that any such acquisition will be
successful in enhancing the Company's business. If the Company proceeds with
one or more significant acquisitions in which the consideration consists of
cash, a substantial portion of the Company's available cash, including
proceeds of this offering, could be used to consummate the acquisitions. If
the Company were to consummate one or more acquisitions in which the
consideration consisted of stock, stockholders of the Company could suffer
significant dilution of their interests in the Company. Many business
acquisitions must be accounted for as a purchase for financial reporting
purposes. Most of the businesses that might become attractive acquisition
candidates for the Company are likely to have significant goodwill and
intangible assets, and acquisition of these businesses, if accounted for as a
purchase, would typically result in substantial amortization of goodwill
charges to the Company.

GOVERNMENT REGULATION

Value-Added Network and Internet Service Providers. The Federal
Communications Commission (the "FCC") currently does not regulate value-added
network software or computer equipment related services that transport data or
voice messages over telecommunication facilities. The Company provides value-
added IP-based network services, in part, through data transmissions over
public telephone lines. These transmissions are governed by regulatory
policies establishing charges and terms for wireline communications. Operators
of these types of value-added networks that provide access to regulated
transmission facilities only as part of a data services package currently are
excluded from regulations that applies to "telecommunications carrier" and as
such the Company is not currently subject to direct regulation by the FCC or
any other governmental agency, other than regulations applicable to businesses
generally. However, in the future the Company could become subject to
regulation by the FCC or another regulatory agency as a provider of basic
telecommunications services.

Currently, the FCC is reviewing its regulatory positions and could seek to
impose common carrier regulation on the network transport and communications
facilities aspects of an enhanced or information service package. Further, the
FCC could conclude that the Company's protocol conversions, computer
processing, and interaction with customer-supplied information are
insufficient to afford the Company the benefits of the enhanced or information
service classification, and thereby may seek to regulate some segments of the
Company's activities as basic telecommunications services. While state public
utility commissions generally have declined to regulate enhanced or
information services, some states have continued to regulate particular
aspects of enhanced services in limited circumstances, such as where they are
provided by local exchange carriers ("LECs"). Moreover, the public service
commissions of certain states continue to review potential regulation of such
services. There can be no assurance that regulatory authorities of states
within which Concentric makes its Internet access, Intranet and VPN services
available will not seek to regulate aspects of these activities as
telecommunications services. Changes in the regulatory environment relating to
the Internet connectivity market, including regulatory changes that directly
or indirectly affect telecommunications costs or increase the likelihood or
scope of competition from the RBOCs or other telecommunications companies,
could affect the prices at which the Company may sell its services. The
Company cannot predict the impact, if any, that future regulation or
regulatory changes may have on its business and there can be no assurance that
such future regulation or regulatory changes will not have a material adverse
effect on the Company's business, results of operations and financial
condition.

424A 16th Page of 98 TOC 1st Previous Next ↓Bottom Just 16th
Competitive Local Exchange Carriers. The Company currently plans to apply
for certificates of authority to become a CLEC in selected states. To the
extent the Company obtains such authorizations and commences CLEC operations,
the telecommunications services provided by such operations will be subject to
regulation by federal, state and local governmental agencies. At the federal
level, the FCC has jurisdiction over interstate telecommunications services.
State regulatory commissions exercise jurisdiction over intrastate services.
Additionally, municipalities and other local government agencies may regulate
limited aspects of the Company's business, such as use of rights-of-way.
Typically start-up telecommunications carriers are not as heavily regulated as
incumbent LECs. For example, under current regulations, the Company would not
be subject to price cap or rate of return regulation by the FCC. However, the
Telecommunications Act of 1996 (the "1996 Telecom Act") requires the FCC to
establish a subsidy mechanism for universal telephone service to which the
Company will be required to contribute based on its telecommunications
revenues and requires all LECs, including CLECs, to make services available
for resale by other carriers, provide nondiscriminatory access to rights-of-
way, offer reciprocal compensation for termination of local telecommunication
traffic and provide dialing parity and telephone number portability, and
ensure that their services are accessible to and usable by persons with
disabilities. The 1996 Telecom Act retains for individual states the authority
to impose their own regulations of local exchange services, including state
universal service subsidy programs, so long as this regulation is not
inconsistent with the requirements of the 1996 Telecom Act. The Company is
unable to predict the final form of such regulation and its potential impact
on the Company. In its provision of interstate, international and intrastate
services as a CLEC, the Company generally will be subject to tariff filing
requirements setting forth the terms, conditions and prices for services,
prior to offering telecommunications services. At the state level, the Company
will also be subject to state certification proceedings as a CLEC. These
certifications generally require a showing that the carrier has adequate
financial, managerial and technical resources to offer the proposed services
consistent with the public interest. Under some state statutes changes in the
ownership of the Company's outstanding voting securities also may trigger
additional state public utility commission approval. For example, in certain
jurisdictions an investor who acquires as little as ten percent or more of the
Company's voting securities may have to obtain prior approval of the
acquisition of such securities because such ownership might be deemed to
constitute an indirect controlling interest in the CLEC. While uncommon,
challenges to these tariffs and certificates by third parties could cause the
Company to incur substantial legal and administrative expenses. Many states
also have additional regulatory requirements such as minimum service quality
reporting and customer service requirements and uniform LEC accounting
requirements.

Although the 1996 Telecom Act eliminates legal barriers to entry into the
CLEC market, no assurance can be given that changes in current or future
regulations adopted by the FCC or state regulators or other legislative or
judicial initiatives relating to the telecommunications industry would not
have a material adverse effect on the Company's ability to offer such
services. With the passage of the 1996 Telecom Act and the anticipated
increase in the level of competition faced by incumbent LECs, the FCC could
grant incumbent LECs substantial pricing flexibility with regard to interstate
access services. It is also anticipated that the prices incumbent LECs charge
for access services will be substantially reduced as a result of the FCC's
reform of the current access charge regime and the adoption of universal
service rules. Similarly, a number of states have allowed incumbent LECs rate
and tariff flexibility, particularly for services deemed subject to
competition. Such price competition could significantly and adversely affect
the Company's CLEC operations which could, in turn, adversely affect the
Company's results of operations and financial condition to the extent its CLEC
operations are a material portion of its business.

DEPENDENCE ON TECHNOLOGY; PROPRIETARY RIGHTS

424A 17th Page of 98 TOC 1st Previous Next ↓Bottom Just 17th
Internet, which is subject to a variety of risks. Such risks include but are
not limited to the substantial uncertainties that exist regarding the system
for assigning domain names and the status of private rules for resolution of
disputes regarding rights to domain names. There can be no assurance that the
Company will continue to be able to employ its current domain names in the
future or that the loss of rights to one or more domain names will not have a
material adverse effect on the Company's business and results of operations.

Although the Company does not believe that it infringes the proprietary
rights of any third parties, there can be no assurance that third parties will
not assert such claims against the Company in the future or that such claims
will not be successful. The Company could incur substantial costs and
diversion of management resources with respect to the defense of any claims
relating to proprietary rights, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Furthermore, parties making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief that
could effectively block the Company's ability to license its products in the
United States or abroad. Such a judgment would have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the Company is obligated under certain agreements to indemnify the
other party in connection with infringement by the Company of the proprietary
rights of third parties. In the event the Company is required to indemnify
parties under these agreements, it could have a material adverse effect on the
business, financial condition and results of operations of the Company. In the
event a claim relating to proprietary technology or information is asserted
against the Company, the Company may seek licenses to such intellectual
property. There can be no assurance, however, that licenses could be obtained
on commercially reasonable terms, if at all, or that the terms of any offered
licenses would be acceptable to the Company. The failure to obtain the
necessary licenses or other rights could have a material adverse effect on the
Company's business, financial condition and results of operations.

POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK

The law relating to the liability of online service providers, private
network operators and Internet service providers for information carried on or
disseminated through the facilities of their networks is currently unsettled.
Several lawsuits seeking a judgment of such liability are pending. In one case
brought against an Internet service provider, Religious Technology Center v.
Netcom On-Line Communication Services, Inc., the United States District Court
for the Northern District of California ruled in a preliminary phase that
under certain circumstances Internet service providers could be held liable
for copyright infringement. The case has not reached final judgment. Although
no claims have been asserted against the Company to date, there can be no
assurance that such claims will not be asserted in the future, or if asserted,
will not be successful. The Telecommunications Act of 1996 prohibits and
imposes criminal penalties and civil liability for using an interactive
computer service for transmitting certain types of information and content,
such as indecent or obscene communications. The indecency provision has been
declared unconstitutional by the United States District Court for the Eastern
District of Pennsylvania, which has issued a preliminary injunction against
its enforcement. The United States Supreme Court has recently heard arguments
with respect to the indecency provision and is expected to announce a decision
during the current term of Court. Numerous states have adopted or are
currently considering similar types of legislation. The imposition upon the
Company, Internet service providers or Web server hosts of potential liability
for materials carried on or disseminated through their systems could require
the Company to implement measures to reduce its exposure to such liability,
which may require the expenditure of substantial resources or the
discontinuation of certain product or service offerings. Further, the costs
incurred in defending against any such claims and potential adverse outcomes
of such claims could have a material adverse effect on the Company's financial
condition and results of operations. The Company believes that it is currently
unsettled whether the Telecommunications Act of 1996 prohibits and imposes
liability for any services provided by the Company should the content of
information transmitted be subject to the statute.

SUBSTANTIAL CONTROL BY OFFICERS AND DIRECTORS AND THEIR AFFILIATES

Following the offering and the Direct Placements, the Company's officers and
directors and their affiliates will beneficially own or control approximately
35.0% of the outstanding shares of Common Stock (33.8% if the over-allotment
option is exercised in full). As a result, the Company's officers, directors
and their affiliates will have the

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ability to significantly influence the election of the Company's Board of
Directors and the outcome of corporate actions requiring stockholder approval.
See "Principal Stockholders."

RESCISSION OFFERS

The Company intends to commence approximately 30 days after the
effectiveness of the Offering made hereby, a rescission offer (the "Rescission
Offer") pursuant to a registration statement filed under the Securities Act of
1933, as amended (the "Act") and pursuant to the state securities laws of the
States of California, Florida, Illinois, Missouri, Ohio, Texas, and Wisconsin,
covering convertible debentures and Common Stock sold to investors which may
have been sold in violation of the registration requirements of the federal
and state securities laws, which represent an aggregate of 78,835 shares as of
June 30, 1997 (the "Rescission Stock"). Because of the frequency and number of
sales, including the number of persons who received offers and who purchased
shares, the private placement exemption under the Act may not have been
available for the Company's prior sales of the Rescission Stock. The Company
will offer to rescind such prior sales by repurchasing the Rescission Stock at
the price per share paid therefor (a range of $3.75 per share to $30.00 per
share) plus interest thereon at the statutory rate as the case may be from the
date of purchase by the purchaser to the expiration of the Rescission Offer.
The Rescission Offer will expire approximately 30 days after the effectiveness
of the registration statement with respect to the Rescission Stock. Under such
Rescission Offer, the Company would be required to make an aggregate payment
of approximately $1.0 million plus the aggregate amount of interest thereon as
described above, if all offerees accept the offer. The Company currently
expects to use a portion of the proceeds from this offering to make such
payments, if any are required. Offerees who do not accept the Rescission Offer
will, for purposes of applicable federal and state securities laws, be deemed
to hold registered shares under the Act which will be freely tradeable in the
public market as of the effective date of the registration statement with
respect to the Rescission Stock. The Act does not expressly provide that a
Rescission Offer will terminate a purchaser's right to rescind a sale of stock
which was not registered under the Act as required. Accordingly, should the
Rescission Offer be rejected by any or all offerees, the Company may continue
to be contingently liable under the Act for the purchase price of Rescission
Stock up to an aggregate amount of approximately $1.0 million plus statutory
interest of approximately $200,000.

In addition, options issued pursuant to the Company's 1995 Stock Incentive
Plan for Employees and Consultants (the "1995 Plan") and nonplan options for
the purchase of Common Stock were issued to approximately 150 to 200 people in
California in 1995 and 1996 for which the Company was unable to rely on the
exemption provided by Section 25102(f) of the California Corporations Code. In
March 1996, the Company was denied a permit for these issuances by the
California Commissioner of Corporations as a result of the Company's having
had two classes of Common Stock with differing voting rights. In addition, a
smaller number of options were issued to optionees in other states, including
Michigan, Missouri, Virginia, Washington and Florida, for which the Company
may not have had available an exemption from qualification. Also, the November
17, 1995, grant of options for the purchase of 60,000 shares of Common Stock
to employees of Critical Technologies Incorporated was not qualified and may
not have had an exemption available under the Blue Sky laws of California. The
aforementioned options are potentially subject to rescission, and the Company
intends to include them in its planned Rescission Offer discussed above. Under
such Rescission Offer, the Company could be required to make an aggregate
payment of up to approximately $767,000 for such grants. The Company currently
expects to use a portion of the proceeds from this offering to make such
payments, if any are required.

As of the date hereof, management is not aware of any claims for rescission
against the Company. While the Company will offer to rescind the securities
sales and grants, there are no assurances that the Company will not otherwise
be subject to possible penalties or fines relating to these issuances. The
Company believes the Rescission Offer will provide it with additional
meritorious defenses to any such future claims. See "Risk Factors--Rescission
Offers," "Use of Proceeds," "Shares Eligible for Future Sale" and Note 5 of
Notes to the Financial Statements.

ANTI-TAKEOVER PROVISIONS

Certain provisions of Delaware law and the Company's Amended and Restated
Certificate of Incorporation and Bylaws could make it more difficult for a
third party to acquire, and could discourage a third party from attempting to
acquire, control of the Company. Certain of these provisions allow the Company
to issue Preferred Stock with rights

424A 19th Page of 98 TOC 1st Previous Next ↓Bottom Just 19th
senior to those of the Common Stock without any further vote or action by the
Stockholders, eliminate cumulative voting and impose various procedural and
other requirements that could make it more difficult for Stockholders to
effect certain corporate actions. Additionally, the Company's Certificate of
Incorporation provides for these classes of directors, to be elected in a
staggered basis. One class is elected each year with each class serving a
three year term, enabling management to exercise significant control over the
Company's affairs. Such charter provisions could limit the price that certain
investors might be willing to pay in the future for shares of the Company's
Common Stock or Preferred Stock and may have the effect of delaying or
preventing a change in control of the Company. The issuance of Preferred Stock
also could decrease the amount of earnings and assets available for
distribution to the holders of Common Stock or could adversely affect the
rights and powers, including voting rights, of the holders of the Common
Stock. See "Certain Transactions," "Description of Capital Stock --Common
Stock" and "-- Preferred Stock."

NO PRIOR PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE

There has been no public market for the Company's Common Stock prior to the
offering. Although application has been made to the Nasdaq National Market for
listing of the Common Stock, there can be no assurance that an active trading
market will develop or be sustained or that the market price of the Common
Stock will not decline below the initial public offering price. The initial
public offering price will be determined through negotiations between the
Company and the Underwriters and may not be indicative of the market price for
the Common Stock following the offering. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price. Even if an active trading market does develop, the market price of the
Common Stock following this offering may be highly volatile. Factors such as
variations in the Company's revenue, earnings and cash flow and announcements
of new service offerings, technological innovations or price reductions by the
Company, its competitors or providers of alternative services could cause the
market price of the Common Stock to fluctuate substantially. In addition, from
time to time the stock markets have experienced significant price and volume
fluctuations that particularly have affected companies in the technology and
telecommunications sectors and resulted in changes in the market price of the
stocks of many companies that have been unrelated or disproportionate to the
operating performance of those companies. Such broad market fluctuations, as
well as a shortfall in revenue earnings compared to securities analysts'
expectations, changes in analysts' recommendations or projections, and general
economic and market conditions may adversely affect the market price of the
Common Stock following this offering.

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

Sales of substantial numbers of shares of Common Stock in the public market
could adversely affect the market price of the Common Stock and make it more
difficult for the Company to raise funds through equity offerings in the
future. A substantial number of outstanding shares of Common Stock and other
shares of Common Stock issuable upon exercise of outstanding stock options and
warrants will become available for resale in the public market at prescribed
times. Prior to this offering there has been no public market for the
Company's securities. Upon completion of the offering, in addition to the
shares sold in the offering, approximately 175,603 shares, which are not
subject to lock-up agreements, will be immediately eligible for resale in the
public market without restriction under the Act. The remaining 9,030,713
shares of Common Stock held by existing stockholders are subject to lock-up
agreements with the Representatives. Of the shares of Common Stock subject to
lock-up agreements, approximately 7,471,166 shares may not be sold or
transferred until 360 days after the Effective date, approximately 1,428,708
shares may not be sold or transferred until 180 days after the Effective Date
and approximately 130,839 shares may not be sold or transferred until 90 days
after the Effective Date. None of the shares subject to such lock-up
agreements may be sold or transferred during the applicable lock-up period
without the consent of the underwriters except for transfers pursuant to gifts
or certain partnership distributions and similar transfers in which the
transferee enters into a substantially similar lock-up agreement. Upon the
expiration of the lock-up agreements, all of such locked-up shares will become
eligible for sale either 360, 180 or 90 days, respectively, after the
Effective Date subject to the provisions of Rules 144(k), 144 or 701. UBS
Securities LLC may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements.
The holders of approximately 7,296,253 shares of Common Stock are entitled to
certain registration rights with respect to such shares. In addition, the
Company intends to register the shares of Common Stock reserved for issuance
under the Company's 1995 Stock Incentive Option Plan, 1996 Stock Plan, 1997
Stock Plan and 1997 Employee Stock Purchase Plan following the date of this
Prospectus. See "Shares Eligible for Future Sale" and "Description of Capital
Stock -- Registration Rights."

424A 20th Page of 98 TOC 1st Previous Next ↓Bottom Just 20th
IMMEDIATE AND SUBSTANTIAL DILUTION

Purchasers of the Common Stock offered hereby will suffer an immediate and
substantial dilution, in the amount of $7.86 per share, in the net tangible
book value per share of the Common Stock from the initial public offering
price. See "Dilution."
USE OF PROCEEDS

Assuming an initial public offering price of $11.00 per share, the net
proceeds from the sale of the shares of Common Stock offered hereby, after
deducting the underwriting discount and estimated offering expenses are
estimated to be approximately $29,690,000 (approximately $34,294,000 if the
Underwriters' over-allotment is exercised in full) and the proceeds from the
sale of Common Stock in the Direct Placements concurrently with the closing of
this offering are estimated to be approximately $17.4 million (including
approximately $3.0 million in cancellation of indebtedness).

The Company currently plans to use $3.0 million of the net proceeds from
this offering and the Direct Placements for capital expenditures associated
with expanding the Company's network and data center operations, $3.0 million
to pay license fees to a strategic partner and $2.0 million to repay the
promissory notes issued to a stockholder of the Company in June 1997. See
"Certain Transactions--Bridge Loans." The balance of the proceeds will be used
to fund operating losses and for working capital requirements or for other
general corporate purposes. Additionally, the Company currently expects that a
portion of the proceeds may also be used to fund the repurchase of shares of
the Company tendered in connection with the Company's Rescission Offer in an
amount up to $1.0 million plus approximately $200,000 of statutory interest
with respect to shares of Common Stock issued upon conversion of the
convertible debentures and an amount up to $767,000 with respect to the
options issued under the 1995 Plan. See "Rescission Offer." In addition,
approximately $1.7 million of the proceeds will be used to repurchase
approximately 149,739 shares of common stock from certain stockholders who are
not officers, directors or affiliates of the Company at the per share Price to
Public. Proceeds from the offering also may be used for possible acquisitions
of businesses or technology that expand, complement or are otherwise related
to the Company's current services, although no specific acquisitions are
currently in negotiation or planned. Pending such uses, the proceeds will be
invested in short-term, investment grade, interest-bearing securities.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain all of its earnings, if any, for use
in its business and does not anticipate paying any cash dividends in the
foreseeable future.

DIRECT PLACEMENTS

Williams Communications Group, Inc. and Bay Networks, Inc. have agreed to
purchase directly from the Company, in a private placement that will occur
concurrently with the closing of this offering (the "Direct Placements"),
shares of Common Stock with an aggregate purchase price of approximately $18.0
million (including approximately $3.0 million in cancellation of
indebtedness). All of such shares will be unregistered and will be purchased
at a per share amount equal to the per share Price to Public set forth on the
cover page of this Prospectus. At an assumed offering price of $11.00, such
purchasers would purchase an aggregate of 1,636,363 shares of Common Stock.
Such investors have agreed with the Company and with the Underwriters that
they will not sell or otherwise dispose of any Common Stock acquired in the
Direct Placements until at least one year after the closing of this offering.
See "Certain Transactions--Williams Transaction."

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CAPITALIZATION

The following table sets forth (i) the actual capitalization of the Company
derived from its financial statements as of March 31, 1997, (ii) such
capitalization presented to reflect on a pro forma basis the conversion of
Class B Common Stock and Preferred Stock into Common Stock (based on the
conversion ratios then in effect), and (iii) such pro forma capitalization as
adjusted to reflect the sale by the Company of (a) 3,000,000 shares of Common
Stock pursuant to this offering at an assumed public offering price of $11.00
per share and the receipt by the Company of the estimated net proceeds
therefrom, after deducting underwriting discounts and estimated offering
expenses and (b) an assumed 1,636,363 shares of Common Stock in the Direct
Placements at an assumed price of $11.00 per share. The capitalization
information set forth in the table below is qualified by the more detailed
Financial Statements and Notes thereto included elsewhere in this Prospectus
and should be read in conjunction with such Financial Statements and Notes.

[Download Table]

MARCH 31, 1997
--------------------------------------
PRO FORMA
ACTUAL(1) PRO FORMA(1) AS ADJUSTED(2)
--------- ------------ --------------
(IN THOUSANDS)

Capital lease obligations, excluding
current portion(3)..................... $ 35,349 $ 35,349 $ 35,349
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value
(7,333,333 shares authorized;
4,901,231 shares issued and
outstanding actual; 10,000,000 shares
authorized, none outstanding pro
forma and pro forma as adjusted)..... 96,323 -- --
Common Stock, $0.001 par value
(13,343,333 shares authorized;
1,395,788 shares issued and
outstanding actual; 100,000,000
shares authorized pro forma and pro
forma as adjusted; 6,410,836 shares
outstanding pro forma; 11,047,199
shares outstanding pro forma as
adjusted)............................ 1,958 98,281 145,341
Deferred compensation................. (267) (267) (267)
Accumulated deficit................... (108,633) (108,633) (108,633)
--------- --------- ---------
Total stockholders' equity (deficit).. (10,619) (10,619) 36,441
--------- --------- ---------
Total capitalization.................... $ 24,730 $ 24,730 $ 71,790
========= ========= =========

--------
(1) Excludes 483,749 shares of Common Stock issued after March 31, 1997 and
3,154,447 shares issuable upon exercise of options and warrants
outstanding at June 30, 1997 at a weighted average exercise price of
$10.27 per share. In addition, the foregoing tables exclude the Common
Stock subject to rescission. Therefore such shares are excluded from the
number of shares outstanding and the purchase price thereof is excluded
from total consideration paid for shares. See "Description of Capital
Stock--Warrants."
(2) Includes an assumed 1,636,363 shares to be issued to certain strategic
investors concurrent with the closing of this offering (assuming a public
offering price of $11.00 per share) and excludes 149,739 shares to be
repurchased by the Company from certain stockholders who are not officers,
directors or affiliates of the Company at the per share Price to Public.
See "Direct Placements."
(3) See Note 3 of Notes to Financial Statements.

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DILUTION

The net tangible book value of the Company as of March 31, 1997 was
approximately $(12,322,000), or $(1.92) per share of Common Stock. Net
tangible book value per share is equal to the Company's total tangible assets
less its total liabilities, divided by the number of shares of Common Stock
outstanding after giving pro forma effect to the conversion into Common Stock
of all Class B Common Stock and all outstanding Preferred Stock (based on the
conversion ratios then in effect). After giving effect to the sale of
3,000,000 shares of Common Stock offered hereby and an assumed 1,636,363
shares offered in the Direct Placements at an assumed public offering price of
$11.00 per share and the receipt by the Company of the estimated net proceeds
therefrom, after deducting underwriting discounts and estimated offering
expenses, but excludes the repurchase by the Company of 149,739 shares from
certain stockholders who are not officers, directors or affiliates of the
Company at the per share Price to Public, the net tangible book value of the
Company as of March 31, 1997 would have been approximately $34,738,000, or
$3.14 per share. This represents an immediate increase in net tangible book
value of $5.06 per share to existing stockholders and an immediate dilution of
$7.86 per share to new investors. The following table illustrates this per
share dilution:

[Download Table]

Assumed public offering price per share...................... $11.00
------
Net tangible book value per share before the offering and
Direct Placements(1)...................................... $(1.92)
------
Increase per share attributable to new investors in the
offering.................................................. 5.06
------
Net tangible book value per share after the offering and
Direct Placements........................................... 3.14
------
Dilution per share to new investors.......................... $ 7.86
======

The following table summarizes as of March 31, 1997, the number of shares of
Common Stock purchased from the Company, the total consideration paid to the
Company and the average price per share paid by existing stockholders, by
investors participating in the Direct Placements and by the investors
purchasing shares of Common Stock in this offering (before deducting
underwriting discounts and estimated offering expenses):

[Download Table]

SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------

Existing stockholders(1)..... 6,410,836 58.0% $ 98,281,000 65.8% $15.33
Direct placements............ 1,636,363 14.8 18,000,000 12.1 11.00
Investors in the offering.... 3,000,000 27.2 33,000,000 22.1 11.00
---------- ----- ------------ -----
Total...................... 11,047,199 100.0% $149,281,000 100.0%
========== ===== ============ =====

--------
(1) Adjusted to give effect to the conversion of all outstanding shares of
Class B Common Stock and Preferred Stock into Common Stock.

The foregoing tables (i) do not give effect to the issuance of 483,749
shares of Common Stock after March 31, 1997 pursuant to the exercise of
options and warrants, (ii) assume no exercise of the Underwriters' over-
allotment option, (iii) exclude the repurchase by the Company of 149,739
shares from certain stockholders who are not officers, directors or affiliates
of the Company at the per share Price to Public and (iv) exclude 3,154,447
shares that were issuable upon exercise of options and warrants outstanding at
June 30, 1997 at a weighted average exercise price of $10.27 per share. See
"Description of Capital Stock--Warrants." To the extent of such new issuances
and to the extent that outstanding options and warrants are exercised in the
future, there will be further dilution to new investors. In addition, the
foregoing tables exclude the Common Stock subject to rescission. Therefore
such shares are excluded from the number of shares outstanding, the purchase
price thereof is treated as a liability in calculating net tangible value and
such amount is deducted from total consideration paid for shares.

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SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the
Financial Statements and related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere herein. The selected financial data for the three years ended
December 31, 1996 are derived from financial statements of the Company which
have been audited by Ernst & Young LLP, independent auditors and included
elsewhere herein. The selected financial data for the period from May 1, 1991
(inception) through December 31, 1992 and for the year ended December 31, 1993
and for the three-month periods ended March 31, 1996 and March 31, 1997 are
derived from unaudited financial statements. The unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
which the Company considers necessary for a fair presentation of the financial
position and results of operations for these periods. The operating results
for the three months ended March 31, 1997 are not necessarily indicative of
the results to be expected for any future period. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

[Enlarge/Download Table]

PERIOD FROM
MAY 1, 1991
(INCEPTION) THREE MONTHS
THROUGH YEAR ENDED DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, --- ------------------------------------ ------------------
1992 1993 1994 1995 1996 1996 1997
------------ ------- ------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

STATEMENT OF OPERATIONS
DATA:
Revenue................. $ -- $ 23 $ 442 $ 2,483 $ 15,648 $ 1,533 $ 9,154
Costs and operating
expenses
Cost of revenue........ -- 130 2,891 16,168 47,945 7,256 15,744
Network equipment
write-off(1).......... -- -- -- -- 8,321 -- --
Development............ -- 349 534 837 2,449 340 1,025
Marketing and sales.... -- 131 639 3,899 16,609 3,120 4,936
General and
administrative........ 28 634 611 2,866 3,445 736 1,060
----- --- ------- ------- -------- -------- -------- --------
Total costs and
operating expenses.... 28 1,244 4,675 23,770 78,769 11,452 22,765
----- --- ------- ------- -------- -------- -------- --------
Loss from operations.... (28) (1,221) (4,233) (21,287) (63,121) (9,919) (13,611)
Net interest expense.... -- 24 57 721 3,260 461 1,070
----- --- ------- ------- -------- -------- -------- --------
Net loss................ $ (28) $(1,245) $(4,290) $(22,008) $(66,381) $(10,380) $(14,681)
===== === ======= ======= ======== ======== ======== ========
Pro forma net loss per
share(2)............... $ (11.92) $ (1.98)
======== ========
Weighted average shares
used in computing pro
forma net loss per
share(2)............... 5,567 7,398
======== ========

[Download Table]

DECEMBER 31,
----------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
----- ------- ------- ------- -------- ---------
(IN THOUSANDS)

BALANCE SHEET DATA:
Working capital
(deficit)............... $ -- $ (603) $(1,046) $ 8,992 $(10,868) $(24,705)
Property and equipment,
net..................... -- 675 1,303 16,289 47,927 53,227
Total assets............. -- 783 1,798 37,235 70,722 61,438
Long-term debt and
capital lease
obligations, less
current portion......... -- 491 -- 10,977 30,551 35,349
Convertible debentures... 760 1,648 70 -- --
Common stock subject to
rescission.............. -- -- 2,812 5,080 5,150 5,150
Common and preferred
stock................... 28 101 1,360 37,334 97,065 98,281
Deferred compensation.... -- -- -- -- (188) (267)
Stockholders' equity
(deficit)............... (28) (1,172) (4,203) 9,763 2,925 (10,619)

--------
(1) See Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 2 of Notes to Financial Statements.
(2) The pro forma net loss per share computation gives retroactive effect to
the conversion of outstanding Preferred Stock into Common Stock upon
closing of the offering. See Note 1 of Notes to the Financial Statements
for an explanation of the calculation of pro forma net loss per share.

424A 24th Page of 98 TOC 1st Previous Next ↓Bottom Just 24th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with financial
statements and related notes included elsewhere in this Prospectus. The
results shown herein are not necessarily indicative of the results to be
expected in any future periods. This discussion contains forward-looking
statements based on current expectations which involve risks and
uncertainties. Actual results and the timing of certain events may differ
significantly from those projected in such forward-looking statements due to a
number of factors, including those set forth in the section entitled "Risk
Factors" and elsewhere in this Prospectus.

OVERVIEW

Concentric was founded in 1991. From 1991 to mid-1993, the Company conducted
development and network services planning activities and realized no revenues.
Initially, the Company was focused on providing consumers with direct dial-up
connectivity to bulletin board services. On-line gaming and entertainment
services for consumers were commenced in July 1993 through the utilization of
a third party network infrastructure. The Company commenced operation of its
own network in late 1994.

In May 1995, new management led by Henry R. Nothhaft redefined and broadened
the Company's strategy to provide a range of Internet and tailored, value-
added IP-based network services to consumers and businesses.

The Company's revenue prior to 1996 has been primarily generated from
providing Internet access to consumers. The Company's current focus is on
developing and deploying VPNs and providing network access and Web hosting
services for enterprise customers. Contracts with enterprise customers
typically have a term ranging from one to three years. The Company expects
enterprise-related revenue to represent an increasing portion of total revenue
in future periods. The foregoing expectation is a forward-looking statement
that involves risks and uncertainties, and actual results could vary as a
result of a number of factors including the Company's operating results, the
results and timing of the Company's launch of new products and services,
governmental or regulatory changes, the ability of the Company to meet product
and project demands, the success of the Company's marketing efforts,
competition and acquisitions of complementary businesses, technologies or
products.

The Company has incurred net losses and experienced negative cash flow from
operations since inception and expects to continue to operate at a net loss
and experience negative cash flow at least through 1998, although the
Company's ability to achieve profitability and positive cash flow from
operations is dependent upon the Company's ability to substantially grow its
revenue base and achieve other operating efficiencies. The Company experienced
net losses of approximately $4.3 million, $22.0 million and $66.4 million for
the years ended December 31, 1994, 1995 and 1996, respectively and $14.7
million for the quarter ended March 31, 1997. At March 31, 1997, the Company
had an accumulated deficit of approximately $108.6 million. There can be no
assurance that the Company will be able to sustain revenue growth or to
achieve profitability or positive cash flow on either a quarterly or an annual
basis. At December 31, 1996, the Company had approximately $37.0 million of
gross deferred tax assets comprised primarily of net operating loss
carryforwards. The Company believes that, based on a number of factors, the
available objective evidence creates sufficient uncertainty regarding the
realizability of the deferred tax assets such that a full valuation allowance
has been recorded. These factors include the Company's history of net losses
since its inception and the fact that the market in which the Company competes
is intensely competitive and characterized by rapidly changing technology. The
Company believes that, based on the current available evidence, it is more
likely than not that the Company will not generate taxable income through
1998, and possibly beyond, and accordingly will not realize the Company's
deferred tax assets through 1998, and possibly beyond. In addition, the
utilization of net operating losses maybe subject to a substantial annual
limitation due to the "change in ownership" provisions of the Internal Revenue
Code of 1986 and similar state provisions. The Company will continue to assess
the realizability of the deferred tax assets based on actual and forecasted
operating results. See Note 8 of Notes to Financial Statements.

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RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996

Revenue. Revenue totaled approximately $9.2 million for the three months
ended March 31, 1997, a $7.7 million increase over revenue of approximately
$1.5 million for the three months ended March 31, 1996. This increased revenue
reflects growth in revenue from the Company's broadened product offerings to
its enterprise customers and through the Company's leveraged marketing
arrangements with its strategic partners, as well as continued growth in
revenue derived from Internet access customers. For the three months ended
March 31, 1997, revenue from WebTV Networks, Inc. ("WNI") accounted for 32.7%
of the Company's revenue. No other customer accounted for more than 10% of the
Company's revenue during the period. The Company expects revenue from WNI to
decrease both in absolute amounts and as a percentage of revenue.

Cost of Revenue. Cost of revenue consists primarily of personnel costs to
maintain and operate the Company's network, access charges from local exchange
carriers, backbone and Internet access costs, depreciation of network
equipment and amortization of related assets. Cost of revenue for the three
month period ended March 31, 1997 was approximately $15.7 million, an increase
of $8.4 million from cost of revenue of $7.3 million in the first quarter of
1996. This increase is attributable to the overall growth in the size of the
network. As a percentage of revenue, such costs declined to 172.0% of revenue
in the three months ended March 31, 1997 from 473.3% of revenue in the year
earlier period, due to increased network utilization associated with the
Company's revenue growth and lower per port costs of the Company's SuperPOP
network architecture deployed in the second half of 1996. The Company expects
its cost of revenue to continue to increase in dollar amount, while declining
as a percentage of revenue as the Company expands its customer base.

Development. Development expense consists primarily of personnel and
equipment related expenses associated with the development of products and
services of the Company. Development expense was approximately $1.0 million
and $300,000 for the three months ended March 31, 1997 and 1996, respectively.
This higher level of development expense reflects an overall increase in
personnel to develop new product offerings and to manage the overall growth in
the network. Development expense as a percentage of revenue declined to 11.2%
for the three months ended March 31, 1997 from 22.2% in the year earlier
period as a result of the Company's increased revenue. The Company expects its
development spending to continue to increase in dollar amount, but to decline
as a percentage of revenue.

Marketing and Sales. Marketing and sales expense consists primarily of
personnel expenses, including salary and commissions, costs of marketing
programs and the cost of 800 number circuits utilized by the Company for
customer support functions. Marketing and sales expense was approximately $4.9
million and $3.1 million for the three months ended March 31, 1997 and 1996,
respectively. The $1.8 million increase in 1997 reflects a substantial
investment in the customer support, marketing and sales organizations
necessary to support the Company's expanded customer base. This increase also
reflects a growth in subscriber acquisition costs, related to both increased
direct marketing efforts as well as commissions paid to distribution partners.
Additionally, the increase reflects the ramp-up of marketing efforts related
to the introduction of enterprise products and services. Marketing and sales
expense as a percentage of revenue declined to 53.9% for the three months
ended March 31, 1997 from 203.5% in the year earlier period as a result of the
Company's increased revenue. The Company expects marketing and sales
expenditures to continue to increase in dollar amount, but to decline as a
percentage of revenue.

General and Administrative. General and administrative expense consists
primarily of personnel expense and professional fees. General and
administrative expense was approximately $1.1 million and $700,000 for the
three months ended March 31, 1997 and 1996, respectively. This higher level of
expense reflects an increase in personnel and professional fees necessary to
manage the financial, legal and administrative aspects of the business.
General and administrative expense as a percentage of revenue declined to
11.6% for the three months ended March 31, 1997 from 48.0% in the year earlier
period as a result of the Company's increased revenue. The Company expects
general and administrative expense to increase in dollar amount, reflecting
its growth in operations and costs associated with being a publicly held
entity, but to decline as a percentage of revenue.

Net Interest Expense. Net interest expense was approximately $1.1 million
and $500,000 for the first quarter of 1997 and 1996, respectively. The
increase is primarily due to an increase of $31.6 million in principal amount
of capitalized lease obligations from March 31, 1996 to March 31, 1997.

424A 26th Page of 98 TOC 1st Previous Next ↓Bottom Just 26th
Net Loss. The Company's net loss increased to approximately $14.7 million
for the quarter ended March 31, 1997 as compared to approximately $10.4
million for the same quarter of 1996.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

Revenue. Revenue totaled approximately $15.6 million for the year ended
December 31, 1996, an increase of $13.1 million over 1995 revenue of
approximately $2.5 million. This increase reflects continued growth in revenue
derived from Internet access customers, as well as revenue from the Company's
broadened enterprise product offerings and through the Company's leveraged
marketing arrangements with its strategic partners.The average selling prices
of the Company's offerings for consumer Internet access services decreased by
approximately 33% beginning in April 1996 due to industry-wide adoption of
flat monthly rates for unlimited Internet access.

Cost of Revenue. Cost of revenue for the year ended December 31, 1996 was
approximately $47.9 million, an increase of $31.7 million from 1995 cost of
revenue of approximately $16.2 million. The largest component of this
increase, approximately $15.0 million, was the cost of providing virtual local
access ("VLA") service over 800 circuits. VLA service was an interim solution
for providing nationwide coverage, while the Company's SuperPOP network
architecture was being deployed. This deployment was substantially completed
in December 1996. Costs associated with VLA service are expected to be
immaterial in amount in 1997. The remainder of the increase in 1996 cost of
revenue is primarily attributable to the overall growth in the size of the
network.

Network Equipment Write-off. In 1996, the Company took a charge of
approximately $8.3 million related to the cost of certain network equipment.
The Company decided not to deploy the equipment in the network because of
concerns that the equipment would not provide the functionality and
reliability required by the Company and concerns that the equipment provider
would be unable to provide timely maintenance and support. See Note 2 of Notes
to Financial Statements.

Development. Development expense for the year ended December 31, 1996 was
approximately $2.4 million, an increase of $1.6 million over 1995 expenditures
of approximately $837,000. This higher level of development expense in 1996
primarily reflects an overall increase in personnel to develop new product
offerings and to manage the overall growth in the network.

Marketing and Sales. Marketing and sales expense for 1996 was approximately
$16.6 million, an increase of $12.7 million over 1995 expenditures of
approximately $3.9 million. This increase in marketing and sales expense
reflects a substantial investment in the customer support, marketing and sales
organizations required to support the Company's expanded customer base. This
increase also reflects a growth in subscriber acquisition costs, related to
both increased direct marketing efforts as well as commissions paid to
distribution partners. Additionally, the increase reflects the ramp-up of
marketing efforts related to the introduction of enterprise products and
services.

General and Administrative. General and administrative expense for 1996 was
approximately $3.4 million, an increase of $500,000 over 1995 expenditures of
approximately $2.9 million. This increase reflects an increase in personnel
and professional fees necessary to manage the financial, legal and
administrative aspects of the business.

Net Interest Expense. Net interest expense for 1996 was approximately $3.3
million as compared to approximately $721,000 for 1995. The increase of $2.6
million is primarily due to an increase of $27.6 million in principal amount
of the capitalized lease obligations from December 31, 1995 to December 31,
1996. This increase in interest expense was partially offset by greater
interest income from higher average cash balances resulting from equity
financings completed in late 1995 and in August 1996. See Notes 3 and 6 of
Notes to Financial Statements.

Net Loss. The Company's net loss increased to approximately $66.4 million in
1996 from approximately $22.0 million in 1995.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Revenue. Revenue totaled approximately $2.5 million for 1995, an increase of
$2.1 million, over 1994 revenue of approximately $400,000. The Company's
revenue in 1995 reflects its first full year of providing network services.
The Company's revenue in both of these years was derived entirely from the
sale of Internet access services to consumers.

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Cost of Revenue. Cost of revenue for 1995 was approximately $16.2 million,
an increase of $13.3 million over 1994 cost of revenue of approximately $2.9
million. The increase in cost of revenue from 1994 to 1995 reflected overall
higher costs associated with deploying and managing the Company's own network
infrastructure. Prior to late 1994, the Company had leased third party network
facilities and thus had not incurred significant network deployment and
maintenance expenses.

Development. Development expense for 1995 was approximately $837,000, an
increase of $303,000 over 1994 expenditures of approximately $534,000. This
higher level of development expense primarily reflected an overall increase in
personnel required to develop new products and support network growth.

Marketing and Sales. Marketing and sales expense for 1995 was approximately
$3.9 million, an increase of $3.3 million over 1994 expenditures of
approximately $639,000. This higher level of spending in 1995 reflected the
Company's new market focus on providing IP-based network services. In
connection with this new focus, the Company incurred increased expenses
related to direct subscriber acquisition, formation of a telesales group,
development of strategic relationships and marketing communications. With the
growth in subscribers, the Company added personnel to its customer support
organization.

General and Administrative. General and administrative expense for 1995 was
$2.9 million, an increase of $2.3 million over 1994 expenditures of
approximately $600,000. This increase generally reflects an increase in
personnel and professional fees necessary to manage the financial, legal and
administrative aspects of the business.

Net Interest Expense. Net interest expense for 1995 was approximately
$721,000 as compared with approximately $57,000 for 1994. This increase in net
interest expense resulted from the Company's deployment of network equipment
for its own network infrastructure beginning in late 1994 which equipment
purchases were primarily financed under capital leases. Capital lease
obligations at December 31, 1995 were $14.2 million, compared with no such
obligations at December 31, 1994.

Net Loss. The Company's net loss increased to approximately $22.0 million in
1995 from a net loss of $4.3 million in 1994.

424A 28th Page of 98 TOC 1st Previous Next ↓Bottom Just 28th
QUARTERLY RESULTS OF OPERATIONS

The Company's quarterly operating results can fluctuate from period-to-
period depending upon factors such as the success of the Company's efforts to
expand its subscriber and third party partnership base, changes in, and the
timing of, expenses relating to development and sales and marketing and
changes in pricing policies by the Company or its competitors. Management
believes that period-to-period comparisons of its financial results should not
be relied upon as an indication of future performance. The Company may
experience significant period-to-period fluctuations in operating results.

The following tables set forth the statement of operations data for each of
the nine quarters through March 31, 1997, as well as the percentage of the
Company's revenue. This information has been derived from the Company's
unaudited financial statements. In the opinion of management, the unaudited
information set forth below has been prepared on the same basis as the audited
financial statements contained herein and includes all adjustments, consisting
only of normal recurring adjustments, except for the write-off of network
equipment in the three months ended December 31, 1996, necessary to present
fairly the information set forth herein. The operating results for any quarter
are not necessarily indicative of results for any future period.

[Enlarge/Download Table]

THREE MONTHS ENDED
---------------------------------------------------------------------------------------------
1995 1996 1997
-------------------------------------- ----------------------------------------- --------
MAR. 31 JUNE 30 SEP. 30 DEC. 31 MAR. 31 JUNE 30 SEP. 30 DEC. 31 MAR. 31
------- ------- ------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)

Revenue................. $ 413 $ 632 $ 691 $ 747 $ 1,533 $ 2,489 $ 4,193 $ 7,433 $ 9,154
------- ------- ------- -------- -------- -------- -------- -------- --------
Costs and operating
expenses:
Cost of revenue........ 3,079 3,557 3,652 5,880 7,256 11,782 11,913 16,994 15,744
Network equipment
write-off............. -- -- -- -- -- -- -- 8,321 --
Development............ 126 186 239 286 340 571 692 846 1,025
Marketing and sales.... 302 474 1,260 1,863 3,120 3,868 4,045 5,576 4,936
General and
administrative........ 129 1,124 396 1,217 736 1,036 727 946 1,060
------- ------- ------- -------- -------- -------- -------- -------- --------
Total operating costs
and expenses.......... 3,636 5,341 5,547 9,246 11,452 17,257 17,377 32,683 22,765
------- ------- ------- -------- -------- -------- -------- -------- --------
Loss from operations.... (3,223) (4,709) (4,856) (8,499) (9,919) (14,768) (13,184) (25,250) (13,611)
Net interest expense.... 10 262 209 240 461 652 1,289 858 1,070
------- ------- ------- -------- -------- -------- -------- -------- --------
Net loss................ $(3,233) $(4,971) $(5,065) $ (8,739) $(10,380) $(15,420) $(14,473) $(26,108) $(14,681)
======= ======= ======= ======== ======== ======== ======== ======== ========

Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------- ------- ------- -------- -------- -------- -------- -------- --------
Costs and operating
expenses:
Cost of revenue........ 745.6 562.8 528.5 787.1 473.3 473.4 284.1 228.6 172.0
Network equipment
write-off............. -- -- -- -- -- -- -- 112.0 --
Development............ 30.5 29.4 34.6 38.3 22.2 22.9 16.5 11.4 11.2
Marketing and sales.... 73.1 75.0 182.3 249.4 203.5 155.4 96.5 75.0 53.9
General and
administrative........ 31.2 177.8 57.3 162.9 48.0 41.6 17.3 12.7 11.6
------- ------- ------- -------- -------- -------- -------- -------- --------
Total operating costs
and expenses.......... 880.4 845.0 802.7 1,237.7 747.0 693.3 414.4 439.7 248.7
------- ------- ------- -------- -------- -------- -------- -------- --------
Loss from operations.... (780.4) (745.0) (702.7) (1,137.7) (647.0) (593.3) (314.4) (339.7) (148.7)
Net interest expense.... 2.4 41.5 30.3 32.1 30.1 26.2 30.8 11.5 11.7
------- ------- ------- -------- -------- -------- -------- -------- --------
Net loss................ (782.8)% (786.5)% (733.0)% (1,169.8)% (677.1)% (619.5)% (345.2)% (351.2)% (160.4)%
======= ======= ======= ======== ======== ======== ======== ======== ========

The Company's quarterly operating results have fluctuated and will continue
to fluctuate from period to period depending upon factors such as the timely
deployment and implementation of expansion of the Concentric network and new
network architectures, the incurrence of related capital costs, the receipt of
new value-added network services and consumer services subscriptions and the
introduction of new services by the Company and its competitors. Additional
factors that may contribute to variability of operating results include: the
payment of statutory interest related to the rescission offer; the pricing and
mix of services offered by the Company; customer retention rate; market

424A 29th Page of 98 TOC 1st Previous Next ↓Bottom Just 29th
acceptance of new and enhanced versions of the Company's services; changes in
pricing policies by the Company's competitors; the Company's ability to obtain
sufficient supplies of sole- or limited-source components; user demand for
network and Internet access services; balancing of network usage over a 24-
hour period; and general access services.

In view of the significant growth of the Company's operations, the Company
believes that period-to-period comparisons of its financial results should not
be relied upon as an indication of future performance and that the Company may
experience in the future significant period-to-period fluctuations in
operating results. The Company expects to focus in the near term on building
and increasing its revenue base, which will require it to significantly
increase its expenses for personnel, marketing, network infrastructure and the
development of new services, and may adversely impact short term operating
results. As a result, there can be no assurance that the Company will be
profitable on a quarterly basis in the future and the Company believes that it
will incur losses in the near term.

LIQUIDITY AND CAPITAL RESOURCES

To date, the Company has satisfied its cash requirements primarily through
capitalized lease financings and the sale of capital stock. The Company's
principal uses of cash are to fund working capital requirements and capital
expenditures and to service its capital lease financing obligations. Net cash
used in operating activities for the three months ended March 31, 1997 and
1996 was approximately $11.1 million and $8.4 million, respectively. Net cash
used in investing activities for the three months ended March 31, 1997 and
1996 was approximately $2.5 million and $500,000, respectively. For the three
months ended March 31, 1997 and 1996, cash of approximately $1.2 million and
$800,000, respectively, was used in financing activities. Cash used in the
first quarter of 1997 is net of $1.1 million cash received from a current
investor for rights to purchase warrants, which warrants were subsequently
issued.

Net cash used in operating activities for the years ended December 31, 1996,
1995 and 1994 was approximately $42.1 million, $15.8 million and $2.6 million,
respectively. Net cash used in investing activities was approximately $7.3
million, $1.2 million and $1.0 million for 1996, 1995 and 1994, respectively.
Net cash flow provided by financing activities was approximately $48.1
million, $36.0 million and $3.7 million for 1996, 1995 and 1994, respectively.
Cash provided by financing activities in 1996 includes approximately $53.5
million net proceeds from the issuance of Series D Preferred Stock, while 1995
reflects net proceeds from the issuance of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, totaling approximately $34.8
million.

The Company used approximately $6.9 million, $1.4 million and $791,000 of
cash to purchase capital equipment and leasehold improvements in 1996, 1995
and 1994, respectively, and approximately $2.5 million in the three months
ended March 31, 1997. To date, the Company primarily has used capital lease
arrangements to finance capital equipment purchases and the principal amount
of such lease financing obligations totaled $47.7 million at March 31, 1997.
The Company currently has financing availability under the following equipment
lease facilities: (i) a master lease agreement with no minimum or maximum for
the lease financing of equipment sold and/or manufactured by Racal; (ii) a
master lease agreement which currently authorizes up to a maximum of $3.3
million in the aggregate for lease financing of telecommunications and
computer equipment which was fully utilized at March 31, 1997; and (iii) a
master lease agreement of up to a maximum of $2.0 million in the aggregate for
lease financing of telecommunications and computer equipment, of which
approximately $1.7 million had been utilized at March 31, 1997. In addition,
the Company is contemplating entering into negotiations for a lease financing
facility to finance its telecommunications and computer equipment requirements
for the remainder of 1997. See Note 3 of Notes to Financial Statements.

The Company has already made significant capital investments in its network,
data centers, development equipment and other capital assets totaling
approximately $39.1 million, $17.2 million and $800,000 in 1996, 1995 and
1994, respectively. The Company expects to make additional investments in
capital equipment to expand and enhance its network, with approximately $8.0
million of anticipated purchases of capital equipment throughout the remainder
of 1997, of which the Company plans to finance approximately $5.0 million
through capital lease arrangements. The foregoing expectation with respect to
additional capital investments is a forward-looking statement that involves
risks and uncertainties and the actual amount of capital investment could vary
materially as a result of a number of factors, including those described in
"Risk Factors--Future Capital Needs; Uncertainty of Additional

424A 30th Page of 98 TOC 1st Previous Next ↓Bottom Just 30th
Financing." In addition, the Company may be obligated to repurchase shares
tendered in connection with the Company's Rescission Offer for a maximum
liability of approximately $1.0 million plus statutory interest of
approximately $200,000 with respect to shares issued on conversion of the
convertible debentures and an amount of approximately $767,000 with respect to
certain options issued by the Company. See Note 5 of Notes to Financial
Statements and "Risk Factors--Rescission Offers."

Since the Company expects to incur additional operating losses, the Company
will rely on the following to meet its near term capital requirements: (i) the
contemplated lease financing discussed above; and (ii) the net proceeds from
this offering and the Direct Placements. The Company believes that such
financing will be sufficient to meet its anticipated cash needs for working
capital and for the acquisition of capital equipment at least for the next 12
months. However, there can be no assurance that the Company will not require
additional financing within this time frame. The Company's forecast of the
period of time through which its financial resources will be adequate to
support its operations is a forward-looking statement that involves risks and
uncertainties, and actual results could vary. The Company may be required to
raise additional funds through public or private financing, strategic
relationships or other arrangements. There can be no assurance that such
additional funding, if needed, will be available on terms attractive to the
Company, or at all. Furthermore, any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. Strategic arrangements, if necessary to raise
additional funds, may require the Company to relinquish its rights to certain
of its technologies. See "Risk Factors--Future Capital Needs; Uncertainty of
Additional Financing."

IMPACT OF ADOPTION OF NEW ACCOUNTING STANDARDS

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123"), which established a fair-value based method of
accounting for stock-based compensation plans and requires additional
disclosures for those companies that elect not to adopt the new method of
accounting. In January 1996, the Company adopted the disclosure requirements
of FAS 123. The Company accounts for stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees." The adoption of the disclosure requirements of FAS 123 did not
have a material impact on the Company's financial condition or results of
operations.

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"),
which adjusts the calculation of earnings per share under generally accepted
accounting principles. FAS 128 is effective for the Company's fiscal year
ending December 31, 1997. See Note 1 of Notes to Financial Statements for the
effect of FAS 128 on the Company's pro forma net loss per share presentation.

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BUSINESS

Concentric provides tailored, value-added Internet Protocol ("IP") based
network services for businesses and consumers. To provide these services, the
Company utilizes its low/fixed latency, high-throughput network, employing its
advanced network architecture and the Internet. Concentric's service offerings
for enterprises include virtual private networks ("VPN's"), dedicated access
facilities and Web hosting services. These services enable enterprises to take
advantage of standard Internet tools such as browsers and high-performance
servers for customized data communications within an enterprise and between an
enterprise and its suppliers, partners and customers. These services combine
the cost advantages, nationwide access and standard protocols of public
networks with the customization, high performance, reliability and security of
private networks. Among the current enterprise customers are Acer America
Corporation, Inc., Intuit, Inc., Total Entertainment Network, WebTV Networks,
Inc. and Ziff-Davis Publishing Co. Concentric's service offerings for
consumers and small office/home office customers include local Internet dial-
up access, Web hosting services and online multiplayer gaming.

INDUSTRY BACKGROUND

Development of Private Networks

Historically, the data communications services offered by public carriers
had limited security features, were expensive and did not adequately ensure
accurate and reliable transmission. As a result, many corporations established
and maintained their own private wide-area networks ("WANs") to provide
network-based services, such as transaction processing, to their customers and
to coordinate operations between employees, suppliers and business partners.
Such private WANs were frequently customized to specific applications,
business practices and user communities. As a result, these private WANs had
the capability of providing organizations and users with tailored performance
and features, security, reliability and private-label branding.

The demand for WANs has grown as a result of today's competitive business
environment. Factors stimulating the higher demand include the need to provide
broader and more responsive customer service, to operate faster and more
effectively between operating units, suppliers and other business partners,
and the need to take advantage of new business opportunities for network-based
offerings in a timely fashion. In addition, as businesses become more global
in nature, the ability to access business information across the enterprise
has become a competitive necessity.

Despite the attractive capabilities of private networks, limitations of many
private WANs have impeded or reduced the effectiveness of their use. These
networks, which traditionally have required the use of leased telephone lines
with bandwidth dedicated solely to this purpose and the purchase of vendor-
specific networking equipment, are inherently expensive to set up, operate and
maintain. Private WANs often require the development and maintenance of
proprietary software and lack cost-effective access. These aspects of
developing, deploying and maintaining such private WANs have conflicted with
the increased focus of many businesses on their core competencies, which has
prompted the outsourcing of many noncore functions. The Company believes that
many businesses have viewed as unacceptable the costs of maintaining a private
WAN infrastructure and the risks of investing in new technologies in the
absence of a single technological standard.

Emergence of the Internet

The emergence of the Internet and the widespread adoption of IP as a data
transmission standard in the 1990s, combined with deregulation of the
telecommunications industry and advances in telecommunications technology have
significantly increased the attractiveness of providing data communication
applications and services over public networks. At the same time, growth in
client/server computing, multimedia personal computers and online computing
services and the proliferation of networking technologies have resulted in a
large and growing group of people who are accustomed to using networked
computers for a variety of purposes, including e-mail, electronic file
transfers, online computing and electronic financial transactions. These
trends have led businesses increasingly to

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explore opportunities to provide IP-based applications and services within
their organization, and to customers and business partners outside the
enterprise.

Need for IP-Based Private Networks

The ubiquitous nature and relatively low cost of the Internet have resulted
in its widespread usage for certain applications, most notably Web access and
e-mail. However, usage of the Internet for mission-critical business
applications has been impeded by the limited security and unreliable
performance inherent in the structure and management of the Internet.
Additionally, emerging applications such as IP-based voice and video
applications, multiplayer gaming and certain multimedia applications require a
network that has high performance characteristics, including low and/or fixed
latency (response time) and high throughput, as well as the ability to
customize features for specific user requirements. On the Internet, latency is
frequently relatively high and variable, making it suboptimal for these
emerging applications. Although private networks are capable of offering lower
and more stable latency levels, providers of these emerging applications also
desire a network that will offer their customers full access to the Internet.
As a result, these businesses and applications providers require a network
that combines the best features of the Internet, such as openness, ease of
access and low cost made possible by the IP standard, with the advantages of a
private network, such as high security, low/fixed latency and customized
features.

Industry analysts expect the market size for both value-added IP data
networking services and Internet access to grow rapidly as businesses and
consumers increase their use of the Internet, intranets and privately managed
IP networks. The total market for these services is projected to grow from
$1.2 billion in 1996 to approximately $22.7 billion in the year 2000, with
approximately $10.4 billion in the enterprise market segment and $12.3 billion
in the consumer market segment.

THE CONCENTRIC SOLUTION

Concentric provides tailored, value-added IP-based network services for
businesses and consumers. To provide these services, the Company employs a
low/fixed latency, high-throughput network based on its advanced,
geographically dispersed ATM and frame relay backbone and the Internet.
Concentric allows enterprises to create virtual private networks providing
tailored network access, content and services to enterprise-defined end users
with higher reliability and more security than is available over the Internet.
Concentric's VPN solutions also provide the ease of access and flexibility of
public networks at a lower cost than private WANs without sacrificing
reliability or security.

The Concentric network employs an advanced, geographically dispersed ATM and
frame relay backbone, SuperPOPs in 14 major metropolitan areas and 132
secondary and tertiary POPs in other cities, allowing dial-up network access
in the U.S. and Canada. In addition, the Company can provide analog dial-up,
frame relay, fractional T-1, T-1 and DS3 access to the network. The Concentric
network is engineered and managed to provide superior quality of service,
balancing several key performance criteria. The Company provides guaranteed
levels of service for dedicated access facilities to enterprise customers, and
targets performance benchmarks for connection success rates, latency levels
and throughput for all of its service offerings. Concentric also believes that
a major advantage of its network architecture is its ability to perform
adaptive call processing ("ACP"), which is designed to enable the tuning of
network parameters and traffic routing to meeting the latency, throughput,
security, and reliability requirements of a specific customer or application
on a call-by-call basis. Concentric is currently deploying the ACP technology
in its network and is planning to commercially introduce ACP capabilities
during the second half of 1997.

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BUSINESS STRATEGY

The Company's objective is to become the leading supplier of value-added,
IP-based network services worldwide. In order to achieve this goal, the
Company is implementing a business strategy focused on the following key
principles:

Rapidly Provide Cost-Effective, Tailored Network Solutions. The Company
intends to capitalize on its expertise in developing tailored VPNs to
establish a leadership position in rapidly developing, deploying and
maintaining a range of value-added network services to meet the specific needs
of its customers. The Company utilizes a set of software and hardware
technology modules as "building blocks" to offer a variety of tailored network
services on an IP-based network architecture with minimal additional
investment in engineering and rapid time to market for businesses and
consumers. These building blocks include modules for client and system
software, dedicated and remote network connectivity, tracking and billing, Web
hosting, customer support and security.

Optimize Network Utilization. Given the fixed cost nature of Concentric's
network infrastructure, the Company strives to increase total network
utilization and to optimize this utilization by targeting both daytime
business and evening-intensive consumer users to balance the network's usage
throughout a 24-hour period. Accordingly, while the Company's current
strategic focus is on providing value-added IP-based communications services
to enterprises, the Company intends to continue partnering with multichannel
distributors to acquire and maintain a base of consumer subscribers who access
the Concentric network predominantly during non-business hours.

Employ Leveraged Marketing Through Strategic Partners. The Company actively
seeks to form alliances with certain software developers, gaming companies,
and telecommunications service and equipment suppliers that have substantially
greater marketing, distribution and sales resources than does the Company and
that have a large installed customer base. These alliances facilitate the
cost-effective acquisition of consumer and business customers and increase
Concentric's network utilization. These marketing relationships are developed
and enhanced through the bundling of Concentric's IP-based network services
with the products and services offered by the strategic partners. These
relationships may involve customized browsers, registration services and
specialized pricing, commissions and billing programs. To date, Concentric has
established such strategic relationships with a number of companies, including
Acer America Corporation, Bay Networks, Inc., Intuit, Inc., Microsoft
Corporation, Netscape, PictureTel Corporation ("PictureTel"), Racal-Datacom,
Inc., Total Entertainment Network, Inc. ("TEN"), Telecom Italia and WebTV
Networks, Inc. ("WNI"). See "--Key Customer Applications" and "Sales and
Marketing."

Offer Next Generation Network Services. The Company is continuing to expand
the value-added network services that it makes available to its customers.
Towards this end, the Company is in early stage trials with providers of video
conferencing and IP-based telephony services that require the low/fixed
latency characteristics afforded by the Concentric network. Additionally, the
Company is applying for licenses to become a Competitive Local Exchange
Carrier ("CLEC") in selected states. The Company believes that successful
implementation of its CLEC strategy will enable the Company to reduce its
local access charges, as well as to expand its range of services.

Deploy Network Services Internationally. The Company believes that its
enterprise customers increasingly will require their network solutions
providers to offer network services on a global basis. Pursuant to an
agreement with TMI Telemedia International, Ltd., a subsidiary of Telecom
Italia SpA ("TMI"), entered into in August 1996, the Company is working to
establish an international network based on Concentric's network technology
and expertise and TMI's existing telecommunications infrastructure to deliver
a range of compatible network services worldwide. TMI currently has a
telecommunications network deployed in over 40 countries worldwide.
Additionally, the Company entered into a roaming services agreement in June
1997 with NTT PC Communications, Inc. ("NTT PC"), a leading provider of IP
services in Japan. The roaming services agreement allows Concentric customers
to use the NTT PC network to access their internet accounts in Japan and
allows members of the NTT PC network to access their internet accounts in the
United States and Canada. While the Company does not expect to generate
significant revenue from deployment of international network services until at
least 1998, the Company believes that the ability to deliver network solutions
globally will be a key competitive factor in its industry.

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SERVICES

Concentric provides tailored, value-added IP-based network services for
businesses and consumers. To provide these services, the Company employs a
low/fixed latency high-throughput network based on an advanced, geographically
dispersed ATM and frame relay backbone and the Internet.

Enterprise Solutions

For businesses, the Company has developed a set of enterprise services
including VPNs, dedicated and remote access services and Web hosting services.

VPNs. Concentric's VPN solutions enable its customers to deploy tailored,
IP-based mission-critical business applications for internal enterprise,
business-to-business and business-to-customer data communications on the
Concentric network while also affording high-speed access to the Internet.
Concentric offers its customers a secure network on which to communicate and
access information between an organization's geographically dispersed
locations; collaborate with external groups or individuals, including
customers, suppliers, and other business partners and use the Web to access
information on the Internet and communicate with other Web users. The
Company's VPN solutions allow the enterprise customer to tailor the type of
access, services and information that various users of the VPN are afforded
according to the specific needs of the enterprise.

The Company's VPN building blocks include modules for client and system
software, network connectivity (high-speed dedicated access lines, remote
access services and dial-up accounts), tracking and billing, Web hosting
(intranet, Web, e-mail, news or other servers), customer support and security.
VPN customers may choose to use one or more of the elements individually or in
tandem with existing or third-party components to create a customized
networking solution that is generally superior in terms of price, performance
and time to market to the option of building and maintaining a private
network. Key benefits include rapid implementation time, lower operating and
maintenance costs, minimal capital investment, higher quality of service
overall and 24-hour network and customer support.

For example, starting in October 1995 the Company created and now maintains
the VPN used by Intuit customers using a customized version of the Netscape
Navigator browser bundled with Quicken for Windows, Quickbooks, ProTax and
TurboTax. The bundled software allows a Quicken customer to click on an icon
that launches Netscape, and takes the user directly to Quicken Financial
Network Website. On the Web page Quicken customers will find useful financial
advice, information from Intuit's bank and financial institution partners,
answers to commonly asked technical questions and tips on how to tap the full
potential of Intuit's financial products. See "--Key Customer Applications."

Pricing options for enterprise solutions are a combination of standard
prices and standard charges for integration of the Company's VPN building
blocks into a comprehensive package. VPN services are priced by combining
elements such as dedicated access facilities and Web hosting with customer
support, software and other Concentric building blocks. The pricing is
standard for each service, but may be combined as a package with quantity
discounts.

Dedicated Access Facilities. In January 1997, the Company began offering
dedicated access facilities ("DAFs") as a stand-alone product targeted at
businesses that desire single or multipoint high-speed, dial-up and/or
dedicated connections to distributed locations such as regional offices,
warehouses, manufacturing facilities and/or to the Internet. DAF products are
primarily targeted at providing intranet connectivity amongst distributed
enterprise locations with the additional benefit of Internet access if desired
by the customer. The Company provides a full range of connectivity options,
allowing the customer to order the appropriate amount of bandwidth to meet its
networking requirements. In addition, Concentric offers its DAF customers a
guarantee on the quality of service and performance of these facilities.
Furthermore, Concentric believes it is the only network service provider to
bill customers based on average usage levels rather than peak usage levels.

Concentric also performs around-the-clock monitoring of network performance
and enables its customers to monitor their network as well through the
Company's proprietary ConcentricView software. ConcentricView is a

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distributed Web-based network management tool that enables a customer to
monitor usage on a call-by-call basis and performance of that portion of the
Concentric network bandwidth supporting the customer's applications. The
Company believes it is the only network services provider to offer this
service.

Concentric has four offerings in its dedicated access product line:
FullChannel T-1, FullChannel T-1 Protected, FlexChannel and LECFrame Relay.

FULLCHANNEL T-1 PRICING

[Enlarge/Download Table]

ONE-TIME FEE AVERAGE USAGE LEVEL MONTHLY FEE(1)
------------ ------------------- --------------

$3,000.00 0-64Kbps $1,095.00
$3,000.00 64-128Kbps $1,595.00
$3,000.00 128-256Kbps $2,095.00
$3,000.00 256-384Kbps $2,395.00
$3,000.00 384Kbps + $2,695.00
------------------------------------------------------------------------------------------

FULLCHANNEL T-1 PROTECTED PRICING

[Enlarge/Download Table]

ONE-TIME FEE AVERAGE USAGE LEVEL MONTHLY FEE(1)
------------ ------------------- --------------

$3,000.00 384Kbps + $2,095.00
------------------------------------------------------------------------------------------

FLEXCHANNEL PRICING

[Enlarge/Download Table]

ONE-TIME FEE FRACTIONAL T-1 BANDWIDTH MONTHLY FEE(1)
------------ ------------------------ --------------

$3,000.00 128Kbps $ 895.00
$3,000.00 256Kbps $1,295.00
$3,000.00 384Kbps $1,595.00
$3,000.00 512Kbps $1,895.00
--------------------------------------------------------------------------------------

LECFRAME RELAY PRICING(2)

[Download Table]

ONE-TIME FEE FRAME RELAY CIR(3) MONTHLY FEE(1)
------------ ----------- ------- --------------

$2,000.00 56Kbps 32Kbps $ 395.00
$2,000.00 128Kbps 64Kbps $ 795.00
$2,000.00 256Kbps 128Kbps $ 995.00
$2,000.00 512Kbps 256Kbps $1,095.00

(1) Monthly billing based on average usage.
(2) Offer varies by region.
(3) Committed Information Rate.

FullChannel T-1 pricing is based on average utilization pricing. The
customer's usage is measured at five-minute intervals throughout the month,
and the average of all of those measurements is used to determine the
customer's bill at the end of the month. This is the appropriate choice for
those customers who have fluctuating and/or uncertain bandwidth consumption
patterns.

FullChannel T-1 Protected gives a customer a fixed price for a full 1.5
megabits of bandwidth. This is an economical choice for those customers who
recognize in advance that their bandwidth throughput requirements will equal
T-1 levels.

FlexChannel gives a customer the opportunity to purchase a fractional
portion of a T-1 for a fixed monthly fee. This is the appropriate choice for
the customers who know that their bandwidth requirements are going to be
consistently less than a full T-1.

LECFrame Relay is based on various LECs' Frame Relay facilities. Although
Concentric does not offer service level guarantees over LECFrame Relay,
Concentric does guarantee the committed information rate ("CIR"). This

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offering gives a lower cost, lower performance network service for those
customers for whom performance is less imperative.

Web Hosting Services. The Company's Web hosting services were introduced in
March 1997, and are targeted at businesses that are implementing high-
performance intranet, Web, e-mail, gaming, chat or other types of services.
Concentric offers a wide range of hosting solutions structured to meet the
needs of small businesses to very large enterprises. By outsourcing its Web
hosting requirements to Concentric, an enterprise can reduce costs while
increasing reliability and performance of its servers.

Web hosting consists of providing and/or managing the necessary equipment to
allow companies to operate Web sites. The components of Web hosting are the
server; a workstation or PC that runs the Website; the facility to host the
server; high speed Internet access for hosted servers; server and power backup
to ensure 24 hour functionality; and maintenance to ensure ongoing operation
of the server. Concentric also bundles Web hosting software and network
services to provide businesses with complete Internet presence solutions.

WEB HOSTING PRICING

[Download Table]

CONCENTRIC NETWORK SMALL
SHARED HOSTING SERVICES ENTERPRISE HOSTING
----------------------- ------------------

Internet Access Yes
Address Virtual Domain
Email Accounts 10
Web site storage 30 MB
Monthly Throughput 1000 MB
Set-up Fee $100.00
Monthly Price $59.95

DEDICATED CO-LOCATED SERVER PRICING

[Download Table]

INTERNET CONNECTION MONTHLY PRICE
------------------- -------------

1 Mbps Priority Bandwidth $1,500.00
2 Mbps Priority Bandwidth $2,500.00
4 Mbps Priority Bandwidth $4,500.00
Dedicated 10 Mbps Ethernet $6,000.00
Setup Fee $1,000.00

Pursuant to a Co-Marketing Services Agreement, a Trademark License Agreement
and a Software License Agreement executed as of June 23, 1997 (the
"Agreements"), the Company entered into a strategic business arrangement with
Netscape to design, develop and operate Netscape Virtual Office by Concentric,
to offer customers hosted private Intranet services that can be accessed from
anywhere on the Internet. The service is being adapted from Concentric's
ConcentricHost product and will use Netscape's SuiteSpot software features.
These Intranet services are designed to give an individual or small business
with an Internet connection the ability to establish a "Virtual Office" that
is accessible through Netscape's Internet site. Launch of the service
currently is planned for late 1997. The Agreements have an initial term of two
years, which may be renewed for up to two additional one year terms. Pursuant
to the Agreements, the Netscape Virtual Office by Concentric will feature the
latest versions of Netscape SuiteSpot server software family for Web,
messaging and collaboration applications. The service is to be jointly
designed by the Company and Netscape and will be developed, hosted and
maintained by the Company. Upon execution of the Agreements the Company made a
$2.0 million down payment to Netscape. See "Certain Transactions--Bridge
Loans."

Netscape Virtual Office by Concentric is being designed to give individual
professionals, small businesses and project groups a private online presence
that can be shared with co-workers or other specified users. This online
Intranet center would serve as a user's entry point to a wide variety of
online information management services, such as HTML email accounts, internal
and external Web sites, private discussion forums and project collaboration,

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without the cost of extensive hardware, software and technical personnel. To
take advantage of these services, the user would only need Internet access and
Netscape Communicator client software. In order to create a "Virtual Office,"
the user or office manager would sign up for the monthly service on the
Netscape Internet site. The user would initially specify basic information,
project parameters, a list of people who can access the Virtual Office, and
credit card information for payment. Once all information is specified, the
user's Virtual Office would be automatically configured.

Remote Access Service. The Company's remote access services ("RAS"), are
marketed as Concentric RemoteLink, and were released commercially in mid-1997.
RemoteLink services are targeted at businesses that have employees in remote
locations. RemoteLink enables an enterprise's salespeople and other mobile
employees, telecommuters and business partners to dial into an enterprise's
corporate network resources and use them as if they were connected locally,
thus increasing their potential productivity and allowing for information to
be available on a real-time basis across the enterprise. Concentric's
RemoteLink is designed to be highly customizable and has the ability to
interface with existing Company network infrastructure. Additionally,
RemoteLink is being designed to support multiple layers of security including
privacy encryption, local and remote firewalls and network access security.

The Company believes that RemoteLink will help businesses significantly
reduce the high costs of telecommunications charges and user support
associated with building, deploying and maintaining their own remote access
WAN, typically based on remote access servers or modem pools, 800 circuits and
router links to the Internet. In addition, the enterprise utilizes
Concentric's high-performance network, combined with T1 or fractional T1 links
to the enterprise LAN, offering more reliable and faster access. Concentric
RemoteLink offers support for remote users 24 hours a day, seven days a week.
See "Risk Factors--Dependence on New and Enhanced Services."

Consumer Services

Concentric provides its individual and small office/home office ("SOHO")
customers with a broad range of Internet access options and Web hosting e-
mail, chat, File Transfer Protocol ("FTP"), Gopher and online shareware
services. Users can choose from 800-number, telnet and direct dial services.
Concentric offers the Netscape Navigator or Microsoft Internet Explorer
browser to its users when they sign up for dial-up or 800-number service.

INTERNET ACCESS PRICING

[Download Table]

PLAN MONTHLY FEE ADDITIONAL TIME
---- ----------- ---------------

Starter Plan $ 7.95 $1.95/hr after 5 hrs
Standard Plan $19.95 No charges for additional time.
Unlimited active access for one
monthly fee.
800-number Plan $10.00 $5/hr after 2 hrs
Inbound Internet Plan $10.00 No charges for additional time.
Unlimited active access for one
monthly fee.

WEB HOSTING PRICING

[Download Table]

CONCENTRIC NETWORK
SHARED HOSTING SERVICES HOME OFFICE HOSTING
----------------------- -------------------

Internet Access Yes
Address Subdomain
Email Accounts 5
Web site storage 5 MB
Monthly Throughput 300 MB
Set-up Fee $50.00
Monthly Price $29.95

Concentric also offers a variety of shell accounts, including PPP, SLIP and
UNIX, as access solutions to users who do not require a graphical user
interface. Shell accounts also enable users who already have Internet access
to set up extra mailboxes or post their own Website. Shell account services
currently are priced at $10.00 per month.

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The Company also offers DAFs to its SOHO and individual customers. These
customers use these facilities to connect their Web servers to the Concentric
network (and hence to the Internet) or to offer dedicated connection to an
internal SOHO local area network.

The Company also offers consumers value-added services, including a
collection of online multiplayer games and premium products targeted to
vertical segments such as the SOHO and family market. This includes the
upselling of discounted products and services in such areas as education,
retail products, telephony, and travel services with such partners as
Infonautics, Amazon.com, Inc. and QuadraCom, LLC. Such arrangements not only
provide a profitable monthly revenue stream but also increase customer
retention. Additional value-added products/services being reviewed by the
Company for potential introduction include premium service levels, critical
file disk back-up/recovery, hard drive maintenance software, virus protection,
and long distance and faxing services.

Game Gateway. Concentric launched its Game Gateway in June 1997 as a broad
offering of online multiplayer games, affording consumers access to a number of
the major online gaming networks with the convenience of a single billing
account, login identification and password. The Game Gateway is offered to the
public via the Internet and provides access to 27 online games from 4 game
networks, including Engage, Gamestorm (Kesmai), Oceanline (Infogrames) and
Online Entertainment PLC.

The Game Gateway offers a unified packaged solution of major online game
networks focusing on ease of use and advanced functionality. Game Gateway
customers are offered a free CD-ROM with additional value added offerings
including free content, game software and free time online. The Company's
relationship with Unified Gamers Online, LLC provides the Game Gateway with
experts that manage tournaments and other game-oriented activities like chats
and message boards. Concentric currently charges $1.75 per hour for all games
accessed through the Game Gateway.

CUSTOMERS

The following is a representative list of the Company's customers during the
last 12 months.

Acer America Corporation Netlink, LTD
Ameritech Services, Inc. Netscape Communications Corporation
Bascom Global Internet Services, Inc. On Command Corporation
Bay Networks, Inc. Peapod L.P.
Books That Work PictureTel Corporation
Corel Corporation SCP Communications
Electronic Data Systems Corporation SMC Communications LLC
ENGAGE Games Online, Inc. Scopus Technology, Inc.
The Groovey Corporation Sega of America, Incorporated
Hewlett-Packard Company Surfers Unlimited LLC
Imagesoft Technologies, Inc. Toshiba America Information Systems
Investools, Inc. Total Entertainment Network
Infonautics Corporation WebTV Networks, Inc.
Intuit, Inc. You Bet! On-Line Entertainment
Microsoft Corporation Ziff-Davis Publishing Co.

During the year ended December 31, 1996 and the three months ended March 31,
1997, revenue from WebTV accounted for 10.1% and 32.7%, respectively, of the
Company's revenue. See "Risk Factors--Customer Concentration."

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KEY CUSTOMER APPLICATIONS

The Company aggressively pursues business alliances with a variety of
companies. Through these partners, the Company seeks to expand its enterprise
and consumer customer base and increase the 24 hour utilization of the
Concentric network. The following is a summary of selected strategic
relationships:

Intuit. Intuit Inc. ("Intuit"), a financial software and Web-based
services company, is a market leader in personal and small business
financial software. Intuit's mission is to change for the better how people
and small businesses manage their financial lives, and to change for the
better how financial providers reach, sell, and serve their customers and
prospects. Intuit views its Websites as a key channel for communicating
with its customers, and as a vehicle to provide personal finance,
investment and tax related financial information. Concentric and Intuit
partnered in October 1995 to launch the integrated Internet access to the
Quicken Financial Network and the Internet. The Internet access capability
included both a virtual private network service designed to provide Intuit
customers subsidized access to select Intuit Web sites and the ability to
upgrade to full access to the Internet. Intuit has bundled tailored
versions of the Netscape Navigator browser in its fiscal year 1996 and 1997
releases of Quicken, TurboTax, ProTax and Quickbooks. Concentric designed
and implemented tailored registration and network access software to
provide Intuit customers with seamless, subsidized access to select Intuit
Web sites. Concentric provides an easy, Web-based upgrade process for
customers desiring full Internet access and e-mail services. Customers are
billed for network time through Concentric's billing systems. In addition,
Concentric provides private-labeled customer service to Intuit customers
with full network access on a twenty-four hour a day, seven day a week
basis.

WebTV Networks Inc. WebTV Networks Inc. ("WNI") provides the world's
first high-quality Internet solution for television. In the fall of 1996,
WNI's licensees, Sony Electronics, Inc. and Philips Electronics introduced
a plug-and-play set-top box that enables Internet browsing from a
television. As part of the WNI service, Concentric and WNI jointly designed
and implemented a national virtual private dial-up network solution to
connect WebTV Network(TM) users to the Internet, utilizing Concentric's
network. The WebTV(TM) Internet terminal, combined with the virtual private
network, allows anyone to browse the Internet from the comfort of their
living room.

You Bet! On-Line Entertainment. You Bet! On-Line Entertainment ("You
Bet!") is a technology company that facilitates live events and is focused
on content development, network deployment, and event management via a
cross-platform environment. You Bet! is a service organization providing
horse players instant access to live racing, information, and wagering
worldwide via a private, secure online environment. The Company's initial
service, the You Bet! Racing Network is focused on the emerging market for
home wagering on domestic horse racing. The application, which runs on the
Concentric network, involves the synchronization of audio, video and data
feeds that are accumulated at a single point. The multicast application is
supported by a secure front-end processor and maintained at the Concentric
data centers. A closed community group has access to the multicast
information, which consists of live races, track calls, live odds, past
performance, secured wagering from a pari-mutuel escrow account and
handicap information. Concentric believes it was chosen as the network
provider by You Bet! because of its expertise in developing back-end
systems and its ability to deploy and manage a virtual private network.
Concentric will collect hourly usage fees from You Bet!

Total Entertainment Network. Total Entertainment Network ("TEN") operates
a popular Internet-based game network that enables consumers to play PC
multi-player titles from packaged software marketed in major computer
retail outlets. In addition to the games, TEN offers a number of community
arenas that include chat areas, player profiles, rankings, contest,
tournaments and editorial content. Concentric believes it was chosen as the
preferred provider for network services because of its ability to deliver a
reliable, high performance, low/fixed latency network that is essential for
the advanced features of top-performing action multi-player games. TEN
utilizes Concentric's advanced ATM backbone and distributed data centers to
connect game players dialing into the Concentric Network with a series of
TEN game servers co-located at Concentric's data centers. Concentric
collects an hourly fee from TEN for network usage.

PictureTel Corporation. PictureTel Corporation ("PictureTel"), a leading
provider of video conferencing products, and Concentric have signed a
Letter of Agreement which specifies both parties' intent to negotiate final
agreements concerning a business relationship regarding plans to enable
PictureTel desktop and room video

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conferencing systems to communicate over the Concentric network. Both
Concentric and PictureTel currently have trial systems installed and
operating over the Concentric network. Preliminary results demonstrate that
the low/fixed latency and high throughput of the Concentric network
delivers superior quality for both desktop and room video conferencing over
IP-routed networks.

THE CONCENTRIC NETWORK

The Concentric network employs an advanced, geographically dispersed ATM and
frame relay backbone, 14 SuperPOPs in many major metropolitan areas plus a
total of 132 secondary and tertiary POPs in other cities, allowing local dial-
up access to the network to users in the U.S. and Canada. In addition, the
Company can provide analog dial-up, frame relay, fractional T-1, T-1 and DS3
access to the network. The Concentric network currently supports 28.8 Kbps
(V.34) modems and is evaluating plans to upgrade to 56.6 Kbps modem access.
The Concentric network is managed via a centralized network control center in
St. Louis, Missouri. Two data centers (located in Bay City, Michigan and
Cupertino, California) house the servers that support logon/authentication,
billing, e-mail, Internet access, Web services and other network services.

The Concentric SuperPOPs are designed to support both dial-up and dedicated
access services within a broad geographic region. Typically, a SuperPOP will
utilize one or more CLECs and LECs to aggregate dial traffic within a 50-200
mile radius of the SuperPOP and terminate it at the SuperPOP. This strategy
allows Concentric to offer users local call coverage within the SuperPOP
region without having to deploy individual POPs in each local calling area.
All the calls are terminated at the modem equipment at the regional SuperPOP.
This results in broader call coverage, lower costs due to the typically lower
rates from CLECs and economies of scale from larger modem installations, lower
maintenance costs, and easier capacity upgrades since equipment is located in
a single location within a region.

DAFs from customer locations in a region are terminated in the SuperPOP as
well. Typically, Fractional T-1, T-1, and T-3 circuits are terminated directly
into SuperPOP router equipment (via CSU/DSUs). Frame access is terminated via
aggregated LEC Frame Access circuit(s). Both dial and dedicated traffic is
then aggregated by the routers/switches in the SuperPOP and directed to the
Concentric ATM backbone via one or more T-3 ATM links.

Traditional network designs allocate dedicated network resources to specific
classes of applications. For example, separate network resources (or networks)
might be dedicated to transaction processing applications versus Internet
applications. Concentric believes that a major advantage of its network
architecture is the ability of the network to support adaptive call processing
("ACP"). ACP is designed to allow a common set of network resources to be used
for different applications on a call-by-call basis. Performance and
functionality for the user is improved, because each end-user receives the
needed services on a customized basis instead of relying on a "one-size-fits-
all" network approach. Furthermore, the Company believes that ACP will reduce
costs by making it possible to optimize network usage on a call-by-call basis
to provide only the services actually needed. Using software implemented by
Bay Networks, Inc. in accordance with Concentric specifications, ACP is
designed to enable the tuning of network parameters and traffic routing to
meet the level of latency, throughput, security/privacy, and reliability
requirements of a specific customer or application on a call-by-call basis.
The initial release of ACP will utilize the phone number dialed by the
subscriber to determine the configuration parameters and protocol support
required by the access modems and communications servers. Concentric is
currently deploying the software technology in its network and is planning to
commercially introduce the initial ACP capabilities during the second half of
1997.

Some applications, such as Web browsing and file transfer require high
throughput, but can tolerate moderate and variable latency, while others, such
as mission-critical business applications, multiplayer gaming and voice and
video conferencing, require low/fixed latency. Still others, such as
transaction processing, require fast connect/disconnect times, may require
high levels of security and are indifferent to latency levels. Traditional
static network access technologies and backbone architectures cannot cost-
effectively manage these varied requirements in a single network. The
Concentric network has been designed to be able to solve this problem by
incorporating software intelligence in both its access and backbone
technologies to adapt the network's connection setup and data transfer
properties to the nature of the user's application requirements on a call-by-
call or service-by-service basis.

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The Concentric network also offers its customers the security, reliability
and management features that companies require in their own private networks.
Varying layers of security and encryption are supported and tailored to
specific customer requirements. The network design includes a standard
security layer and is compatible with most types of custom security
applications. Further, security is provided at both the edge of the network
and internally based on embedded firewall and encryption techniques. The
Concentric network features co-location of network access and switching
equipment in "hardened" facilities, direct connections to carrier facilities,
a resilient ATM/frame relay backbone, dual data processing centers, and
redundancy within data centers to substantially enhance its uptime
performance.

Network managers, customer service, and technical support staff require near
real-time access to information about the performance and quality of their
networks. In traditional private networks, this information is provided by
network management, trouble reporting/tracking, and management information
systems. Customers usually sacrifice a great deal of control and have access
to less information when using a public network instead of a private network.
It has been difficult for public network providers to provide their major
customers with information regarding network performance that relates to that
customer's usage without either compromising other customers' proprietary
information or compromising the integrity of the network itself. Concentric
has developed a set of non-intrusive software tools and reporting mechanisms,
distributed to DAF enterprise customers as ConcentricView. ConcentricView
allows a customer's network manager to monitor network performance and quality
and to adequately support inquiries for help from their users. Web browsers
and file transfer tools are used to provide access to much of this
information. In some cases, custom integration of Concentric's network
management and trouble tracking/reporting systems will be provided to
customers.

SALES AND MARKETING

The Company focuses on marketing its services to two distinct market
segments: enterprise and consumer. By attracting enterprise customers who use
the network primarily during the daytime, and consumer customers who use the
network primarily at night, the Company is able to more fully utilize its
network infrastructure by having some customers online during the day and the
others, using the same modem pools, online during the evening. The Company has
developed a multi-tiered sales strategy consisting of leveraged third party
distribution channels, inbound and outbound telesales, value-added resellers
and direct sales.

Leveraged Third Party Distribution. The Company has positioned itself as a
key network services provider for companies that bundle network access in
their products or services. For example, the Company's network service is
bundled with Intuit's Quicken, TurboTax and Quickbooks products, Microsoft
Office 97 and with WebTV and Sega Saturn Internet access devices.
Additionally, the Company is one of the Internet services providers listed on
the Netscape Navigator and Microsoft Internet Explorer browser registration
servers.

Telesales. The Company uses an inbound telesales group to answer calls from
potential consumers/subscribers and to sign up customers. Inbound telesales
representatives also proactively upsell premium products and services. The
Company also uses an outbound telesales group to sell DAFs and high-end
hosting products to small and medium-sized businesses. Both the inbound and
outbound telesales groups forward leads to the direct sales force when
appropriate.

Value-Added Resellers. The Company has also begun to establish sales
channels through value-added resellers. These resellers are companies that
sell equipment or other components for full-service network solutions to
medium and large businesses. Value-added resellers such as Racal-Datacom,
Inc., which employs more than 500 direct sales, sales-support and network
services people, are compensated for selling Concentric's enterprise service
offerings in conjunction with their other products. These relationships enable
the VARs to provide more comprehensive solutions to their customers while
affording the Company the benefit of the VAR's large sales force without
incurring the costs of maintaining a large sales force of its own.

Direct Sales Force. For large and complex enterprise solutions and to
acquire, support and retain distribution channel partners, the Company employs
11 direct sales people located in Cupertino and Orange County, California,
Dallas, Texas, and the New York metropolitan area to provide national direct
sales coverage. The Company's direct sales force is supported by inside
sales/account managers and systems engineers.

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Concentric markets its enterprise services to information service ("IS")
professionals. In addition, the Company uses print advertising in targeted
industry publications to build awareness and acquire leads for its VARs and
its direct sales team. The Company is also planning to launch in the second
half of 1997 a large direct response effort (direct mail/outbound
telemarketing) targeting enterprise IS managers and senior management of
multilocation companies, and companies with large numbers of mobile and
telecommuting employees.

In the consumer market, the Company focuses on direct mail to targeted
audiences; establishment of customer referral programs; and co-marketing such
as packaging literature with MasterCard mailers and Intuit software. In
addition, the Company has implemented on-line programs, such as a Website
"home" where they can learn how to use the service, how to use the Internet,
and how to find information quickly, designed to increase customer retention.
The Company is also implementing programs to sell additional products and
services to its consumer customers. Additionally, the Company is generating
advertising revenue on its growing Website traffic in direct ad banner
placements as well as in shared revenue relationships with content partners
such as Excite, Inc., Lycos, Inc., and Classifieds2000, Inc.

The Company employs public relations personnel in-house and works with an
outside public relations agency to provide broad coverage in network computer
and vertical industry publications. The Company participates in industry trade
shows based on the size and vertical makeup of the trade show audience.
Planned shows in 1997 include E3, NetWorld + InterOp and Fall Internet World.
The Company also participates in trade shows with its strategic marketing
partners such as Racal-Datacom to promote the sale of Concentric products and
services.

As of March 31, 1997, the Company employed 63 persons in sales and
marketing. The Company is in the process of expanding its sales and marketing
staff. The Company's sales operations are conducted from its principal office
in Cupertino, California and by its field sales personnel in Orange County,
California, Dallas, Texas and the New York metropolitan area.

CUSTOMER SUPPORT

Concentric believes that a high level of customer support is critical to
attracting and retaining its enterprise and consumer customers. The Company
maintains a customer support call center at its Saginaw, Michigan, facility.
Concentric offers several levels of customer support all of which are
available 24 hours per day, seven days per week. The basic level of customer
support includes support for customers on installing and using their software,
customer communications and customer training. Premier level service programs
guarantee an exceptional performance standard, offer supplemental support
training, and provide monthly reports on operations. Private label support
gives businesses a premier level of support provided by their own customer
service team who answer calls with that customer's company name. Customer
support is provided by e-mail, telephone, Website and online chat.

As of March 31, 1997, the Company employed 142 persons in customer support.
In addition, the Company outsources supplemental customer support to
Concentric customers and their end-users.

COMPETITION

The market for tailored value-added network services is extremely
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company believes
that its ability to compete successfully depends upon a number of factors,
including market presence; the capacity, reliability, low latency and security
of network infrastructure; technical expertise and functionality, performance
and quality of services; customization; ease of access to and navigation of
the Internet; the pricing policies of its competitors; the variety of
services; the timing of introductions of new services by the Company and its
competitors; customer support; the Company's ability to support industry
standards; and industry and general economic trends.

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connectivity providers; and (v) Web server farms such as Internet Direct and
Exodus. Many of these competitors have greater market presence, engineering
and marketing capabilities, and financial, technological and personnel
resources than those available to the Company. As a result, they may be able
to develop and expand their communications and network infrastructures more
quickly, adapt more swiftly to new or emerging technologies and changes in
customer requirements, take advantage of acquisition and other opportunities
more readily, and devote greater resources to the marketing and sale of their
products than can the Company. In addition, various organizations, including
certain of those identified above, have entered into or are forming joint
ventures or consortiums to provide services similar to those of the Company.

The Company believes that new competitors, including large computer
hardware, software, media and other technology and telecommunications
companies will enter the value added network services markets, resulting in
even greater competition for the Company. Certain of such telecommunications
companies and online services providers are currently offering or have
announced plans to offer Internet or online services or to expand their
Internet access services. Certain companies, including America Online, BBN and
PSI, have also obtained or expanded their Internet access products and
services as a result of acquisitions. Such acquisitions may permit the
Company's competitors to devote greater resources to the development and
marketing of new competitive products and services and the marketing of
existing competitive products and services. In addition, the ability of some
of the Company's competitors to bundle other services and products with VPN
and consumer network services could place the Company at a competitive
disadvantage. Certain companies are also exploring the possibility of
providing high-speed data services using alternative delivery methods such as
over the cable television infrastructure, through direct broadcast satellite
technology and by wireless cable.

The Company currently plans to apply for licenses to become a CLEC in
selected states. To the extent the Company obtains such licenses and commences
CLEC operations, it will compete with the incumbent LEC and additional CLECS
providing telecommunications services in these markets. For all new entrants,
including the Company, the market for local exchange services is extremely
competitive. Local telecommunications services offered by the Company will
compete principally with services offered by the incumbent LEC serving that
area. Incumbent LECs, such as the RBOCs, currently dominate their local
telephone markets. Such companies have financial, managerial and technical
resources that substantially exceed those of the Company and have long-
standing relationships with their customers. While the 1996 Telecom Act
provides increased business opportunities to CLECs, it also allows incumbent
LECs increased pricing flexibility for their services. Increased price
competition from incumbent LECs could have a material adverse effect on the
Company's CLEC operations and, in turn, on the Company's results of operations
and financial condition to the extent its CLEC operations are a material
portion of its business. Furthermore, upon the satisfaction of certain
regulatory conditions, the RBOCs currently are expected to be able to offer
long distance services in their home markets in addition to local service,
which would afford their local customers "one-stop shopping" for
telecommunications services. The Company also expects to face increased
competition in the provision of local exchange services from other CLECs,
cable television companies, electric utilities, microwave carriers, wireless
telephone system operators, AT&T, MCI, Sprint, WorldCom and other long
distance carriers who may choose to enter the local exchange market by resale
of incumbent LEC facilities.

As a result of increased competition in the industry and vertical and
horizontal integration in the industry, the Company could encounter
significant pricing pressure, which in turn could result in significant
reductions in the average selling price of the Company's services. For
example, certain of the Company's competitors that are telecommunications
companies may be able to provide customers with reduced communications costs
in connection with their Internet access services or private network services,
reducing the overall cost of their solutions and significantly increasing
price pressures on the Company. There can be no assurance that the Company
will be able to offset the effects of any such price reductions with an
increase in the number of its customers, higher revenue from enhanced
services, cost reductions or otherwise. In addition, the Company believes that
the Internet access and online services businesses are likely to encounter
consolidation in the near future, which could result in increased price and
other competition in these industries and, potentially, the virtual private
networks industry. Increased price or other competition could result in
erosion of the Company's market share and could have a material adverse effect
on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will have the financial resources,
technical expertise or marketing and support capabilities to continue to
compete

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successfully. See "Risk Factors--Competition," "--Risks of Growth and
Expansion" and "--Future Capital Needs; Uncertainty of Additional Financing"
and "Business--Competition."

GOVERNMENT REGULATION

Value-Added Network and Internet Service Providers. The FCC currently does
not regulate value-added network software or computer equipment related
services that transport data or voice messages over telecommunication
facilities. The Company provides value-added IP-based network services, in
part, through data transmissions over public telephone lines. These
transmissions are governed by regulatory policies establishing charges and
terms for wireline communications. Operators of these types of value-added
networks that provide access to regulated transmission facilities only as part
of a data services package are currently excluded from regulations that
applies to "telecommunications carrier" and as such the Company is not
currently subject to direct regulation by the FCC or any other governmental
agency, other than regulations applicable to businesses generally. However, in
the future the Company could become subject to regulation by the FCC or
another regulatory agency as a provider of basic telecommunications services.

Currently, the FCC is reviewing its regulatory positions and could seek to
impose common carrier regulation on the network transport and communications
facilities aspects of an enhanced or information service package. Further, the
FCC could conclude that the Company's protocol conversions, computer
processing, and interaction with customer-supplied information are
insufficient to afford the Company the benefits of the enhanced or information
service classification, and thereby may seek to regulate some segments of the
Company's activities as basic telecommunications services. While state public
utility commissions generally have declined to regulate enhanced or
information services, some states have continued to regulate particular
aspects of enhanced services in limited circumstances, such as where they are
provided by LECs. Moreover, the public service commissions of certain states
continue to review potential regulation of such services. There can be no
assurance that regulatory authorities of states within which Concentric makes
its Internet access, Intranet and VPN services available will not seek to
regulate aspects of these activities as telecommunications services. Changes
in the regulatory environment relating to the Internet connectivity market,
including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood or scope of competition
from the RBOCs or other telecommunications companies, could affect the prices
at which the Company may sell its services. The Company cannot predict the
impact, if any, that future regulation or regulatory changes may have on its
business and there can be no assurance that such future regulation or
regulatory changes will not have a material adverse effect on the Company's
business, results of operations and financial condition.

Competitive Local Exchange Carriers. The Company currently plans to apply
for certificates of authority to become a CLEC in selected states. To the
extent the Company obtains such authorizations and commences CLEC operations,
the telecommunications services provided by such operations will be subject to
regulation by federal, state and local governmental agencies. At the federal
level, the FCC has jurisdiction over interstate telecommunications services.
State regulatory commissions exercise jurisdiction over intrastate services.
Additionally, municipalities and other local government agencies may regulate
limited aspects of the Company's business, such as use of rights-of-way.
Typically start-up telecommunications carriers are not as heavily regulated as
incumbent LECs. For example, under current regulations, the Company would not
be subject to price cap or rate of return regulation by the FCC. However, the
Telecommunications Act of 1996 (the "1996 Telecom Act") requires the FCC to
establish a subsidy mechanism for universal telephone service to which the
Company will be required to contribute based on its telecommunications
revenues and requires all LECs, including CLECs, to make services available
for resale by other carriers, provide nondiscriminatory access to rights-of-
way, offer reciprocal compensation for termination of local telecommunication
traffic and provide dialing parity and telephone number portability, and
ensure that their services are accessible to and usable by persons with
disabilities. The 1996 Telecom Act retains for individual states the authority
to impose their own regulations of local exchange services, including state
universal service subsidy programs, so long as this regulation is not
inconsistent with the requirements of the 1996 Telecom Act. The Company is
unable to predict the final form of such regulation and its potential impact
on the Company. In its provision of interstate, international and intrastate
services as a CLEC, the Company generally will be subject to tariff filing
requirements setting forth the terms, conditions and prices for services,
prior to offering telecommunications services. At the state level, the Company
will also be subject to state certification proceedings as a CLEC. These
certifications generally require a

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showing that the carrier has adequate financial, managerial and technical
resources to offer the proposed services consistent with the public interest.
Under some state statutes changes in the ownership of the Company's
outstanding voting securities also may trigger additional state public utility
commission approval. For example, in certain jurisdictions an investor who
acquires as little as ten percent or more of the Company's voting securities
may have to obtain prior approval of the acquisition of such securities
because such ownership might be deemed to constitute an indirect controlling
interest in the CLEC. While uncommon, challenges to these tariffs and
certificates by third parties could cause the Company to incur substantial
legal and administrative expenses. Many states also have additional regulatory
requirements such as minimum service quality reporting and customer service
requirements and uniform LEC accounting requirements.

PROPRIETARY RIGHTS

The Company's success and ability to compete is dependent in part upon its
technology, although the Company believes that its success is more dependent
upon its technical expertise than its proprietary rights. The Company
principally relies upon a combination of copyright, trademark and trade secret
laws and contractual restrictions to protect its proprietary technology. It
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization or to develop similar
technology independently, and there can be no assurance that such measures
have been, or will be, adequate to protect the Company's proprietary
technology or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. The Company operates a material portion of its business over the
Internet, which is subject to a variety of risks. Such risks include but are
not limited to the substantial uncertainties that exist regarding the system
for assigning domain names and the status of private rules for resolution of
disputes regarding rights to domain names. There can be no assurance that the
Company will continue to be able to employ its current domain names in the
future or that the loss of rights to one or more domain names will not have a
material adverse effect on the Company's business and results of operations.

Although the Company does not believe that it infringes the proprietary
rights of any third parties, there can be no assurance that third parties will
not assert such claims against the Company in the future or that such claims
will not be successful. In addition, participants in the Company's industry
also rely upon trade secret law. The Company could incur substantial costs and
diversion of management resources with respect to the defense of any claims
relating to proprietary rights which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Furthermore, parties making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief which
could effectively block the Company's ability to license its products in the
United States or abroad. Such a judgment would have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the Company is obligated under certain agreements to indemnify the
other party in connection with infringement by the Company of the proprietary
rights of third parties. In the event a claim relating to proprietary
technology or information is asserted against the Company, the Company may
seek licenses to such intellectual property. There can be no assurance,
however, that licenses could be obtained on commercially reasonable terms, if
at all, or that the terms of any offered licenses will be acceptable to the
Company. The failure to obtain the necessary licenses or other rights could
have a material adverse effect on the Company's business, financial condition
and results of operations.

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EMPLOYEES

As of March 31, 1997, Concentric had 280 employees and 48 independent
contractors, including 63 persons in sales and marketing, 91 persons in
network operations and development, 142 in customer support and 32 in finance
and administrative functions. The Company believes that its future success
will depend in part on its continued ability to attract, hire and retain
qualified personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be able to identify, attract, and retain
such personnel in the future. None of the Company's employees is represented
by a labor union, and management believes its employee relations are good.

PROPERTIES

The Company's executive offices are located in Cupertino, California, under
a lease that expires in April 1998. The Company also leases network operations
and customer support facilities in Bay City, Michigan, and Saginaw, Michigan,
respectively, under leases expiring in December 1997 and December 2001,
respectively. The Saginaw lease obligates the Company to pay up to $1.25
million to restore the building in the event of any damage or destruction to
it during the lease term, without any rent abatement for loss of use. The
Company believes that its existing facilities are adequate for its current
needs.

LEGAL PROCEEDINGS

While the ultimate outcome of such litigation is uncertain, the Company
believes it has meritorious defenses to the claims and intends to conduct
vigorous defenses. An unfavorable outcome in these matters could have a
material adverse effect on the Company's financial condition. In addition,
even if the ultimate outcomes are resolved in favor of the Company, the
defense of such litigation could entail considerable cost and the diversion of
efforts of management, either or which could have a material adverse effect on
the Company's results of operations. See "Risk Factors--Legal Proceedings" and
Note 10 of Notes to Financial Statements.

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MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND SENIOR MANAGEMENT

The following table sets forth certain information as of March 31, 1997,
with respect to the executive officers and directors of the Company, as well
as certain members of its senior management.

[Download Table]

NAME AGE POSITION
-----------------------------------------------------------------------------

Henry R. Nothhaft............. 52 President, Chief Executive Officer and
Director
John K. Peters................ 49 Executive Vice President and General
Manager, Network Services Division
Michael F. Anthofer........... 45 Senior Vice President and Chief Financial
Officer
William Etheredge............. 50 Senior Vice President of Sales
George D. Carr................ 52 Vice President of Field Sales
Eileen A. Curtis.............. 48 Vice President of Customer Relations
Scott G. Eagle................ 38 Vice President of Consumer Marketing
Donald C. Schutt.............. 51 Vice President of Michigan Operations
Warren A. Smith............... 46 Vice President of Software Engineering
James L. Isaacs............... 37 Vice President of Product Management
Mark W. Fisher................ 36 Vice President of Corporate Marketing
Louis P. Bender, III(1)....... 50 Director
Robert W. Doede(1)............ 57 Director
Vinod Khosla(2)............... 42 Director
Randy A. Maslow............... 42 Director
Terence M. O'Toole............ 38 Director
Franco Regis(1)............... 41 Director
Gary E. Rieschel(2)........... 41 Director

--------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.

Henry R. Nothhaft joined the Company as President and Chief Executive
Officer in May 1995 and became a Director of the Company in August 1995. From
1989 to August 1994, Mr. Nothhaft was President, Chief Executive Officer and a
Director of David Systems, Inc. ("David Systems"), a networking company. From
1983 to 1989, Mr. Nothhaft held various positions with DSC Communications
Corporation ("DSC"), including Senior Vice President of Marketing, President
of the Digital Switch Corporation subsidiary, President of the Business
Network Systems Group and a Corporate Director of DSC. From 1979 to 1983, Mr.
Nothhaft was Vice President of Domestic Marketing and Vice President of Sales
for GTE Telenet Communications Corporation (now Sprint). Mr. Nothhaft has an
M.B.A. in Information Systems Technology from George Washington University and
a B.S. degree from the U.S. Naval Academy.

John K. Peters joined the Company in May 1995 as an independent consultant.
Mr. Peters was named Executive Vice President and General Manager, Network
Services Division of the Company in June 1995. From 1993 to August 1995, Mr.
Peters served as President of Venture Development Consulting, a consulting
firm specializing in new communications, information services and software
businesses. From 1988 to 1993, Mr. Peters was Vice President and Chief
Operating Officer of Pacific Bell Information Services, Inc. Prior to that,
Mr. Peters spent three years as Vice President of Application Services for
Telestream Corporation. In 1981, Mr. Peters co-founded Integrated Office
Systems, Inc., a communications and information systems company. From 1976 to
1980, Mr. Peters was Vice President of Advanced Network Services for GTE
Telenet Communications Corporation. Mr. Peters has an M.B.A. from Stanford
Graduate School of Business and a B.S. degree in Statistics from Stanford
University.

Michael F. Anthofer joined the Company in January 1996 as Vice President and
Chief Financial Officer and became a Senior Vice President in November 1996.
From January 1991 to December 1995, Mr. Anthofer served as an Executive Vice
President and Chief Financial Officer of Shared Resource Exchange, Inc., a
privately held digital switching platform and PBX supplier. Prior to 1991, Mr.
Anthofer held various executive positions, including Vice President, Corporate
Business Planning, Vice President, Business Network Group and Vice President,
Network Products Group, at DSC. Mr. Anthofer has an M.B.A. and a B.S. degree
from the University of California, Berkeley.

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William C. Etheredge joined the Company in March 1997 as the Senior Vice
President of Sales. From May 1991 to March 1997, Mr. Etheredge served first as
Vice President of Sales and Marketing and then as Vice President of Sales for
Meridian Data, Inc., a provider of networked CD-ROM database creation and
retrieval software and network servers. From July 1990 to May 1991, he served
as Vice President of Strategic Accounts for Maxtor Corporation. From June 1985
to June 1990, he served first as Vice President US Sales and Marketing and
then Vice President Western Region for Memorex-Telex Corporation. Mr.
Etheredge has an M.B.A. degree from Bowling Green University and a B.A. degree
from Westminster College.

George D. Carr joined the Company in June 1995 as an independent consultant.
In September 1995 Mr. Carr became Vice President of Sales. From June 1993 to
June 1995, Mr. Carr was Vice President of Sales and Marketing of David
Systems/ChipCom. From June 1989 to June 1993, Mr. Carr was VP of Operations
and International Sales of David Systems. From December 1983 to June 1989, Mr.
Carr was VP of Operations and Service of David Systems. Mr. Carr has a B.A.
degree from Loyola Marymount.

Eileen A. Curtis joined the Company in November 1994 as an independent
consultant. She became Customer Relations Manager in January 1995, Director of
Customer Relations in September 1995 and Vice President, Customer Relations in
November 1996. From August 1987 to July 1993, Ms. Curtis was employed by Cox
Communications Saginaw, Inc. and served in various positions including
Marketing and Public Relations Manager, Administrative Manager and Customer
Service Manager. Ms. Curtis has a B.S. degree from Central Michigan
University.

Scott G. Eagle joined the Company in March 1996 as Vice President of
Consumer Marketing. From November 1993 to February 1996, Mr. Eagle was the
Vice President, Strategic Marketing Development for MFS Intelenet, Inc., a
start-up division of MFS Communications Company, Inc. From February 1989 to
November 1993, Mr. Eagle was the Vice President of Marketing for the
Woodbridge Group, a marketer of consumer package goods. Prior to February
1989, Mr. Eagle served in various marketing management positions with The
Procter & Gamble Company. Mr. Eagle has a B.S. degree from the University of
Pennsylvania, Wharton School of Business.

Donald C. Schutt joined the Company in February 1994 as Vice President of
Sales and Marketing and was appointed Chief Operations Officer later that
year. Mr. Schutt was named Vice President and General Manager, Bay City
Operations in August 1995. His title was changed to Vice President of Michigan
Operations in March 1996. From 1964 to 1985, Mr. Schutt held various
management positions with General Motors, after which Mr. Schutt served until
1989 as Vice President for Sales and Marketing for Gentex Corporation. From
1989 to 1993, Mr. Schutt was President and Chief Executive Officer of AMPM,
Inc., a full-service advertising agency, and retains a 54 percent interest in
such entity. Mr. Schutt has a B.S. degree in Marketing from Ferris University.

Warren A. Smith joined the Company in April 1996 as Vice President, Software
Engineering. From October 1992 to April 1996, Mr. Smith was the Director of
Engineering at NetManage, Inc., a software company. From July 1987 to July
1992, Mr. Smith was the Director of Distributed Computing Technology for Sun
Microsystems, Inc. From March 1983 to July 1987, Mr. Smith was the Western
Regional Manager of SEI Information Technology an engineering consulting firm.
Mr. Smith has a B.S. degree from California State University, Sacramento.

James L. Isaacs joined the Company in October 1995 as the Director of
Product Management. In March 1997, he became Vice President of Product
Management. From July 1988 to October 1995, Mr. Isaacs held various positions
at Apple Computer, including Group Manager Product Marketing, Apple On Line
Services Division and Business Development Manager of Apple On Line Services
Division. Mr. Isaacs has an M.B.A. degree from the University of California,
Berkeley and an A.B. degree from Stanford University.

Mark W. Fisher joined the Company in June 1997 as Vice President of
Corporate Marketing. From July 1996 to June 1997, Mr. Fisher was General
Manager and Vice President, Marketing of Pacific Bell Internet Services, a
wholly owned subsidiary of Pacific Bell. From June 1995 to August 1996, Mr.
Fisher was Vice President, Marketing of Pacific Bell Internet Services. From
1989 to May 1995, Mr. Fisher held various data product marketing and data
center operations positions at Pacific Bell. Mr. Fisher has an M.B.A. from the
University of California at Berkeley and a B.S. in mechanical engineering from
the U.S. Naval Academy.

424A 49th Page of 98 TOC 1st Previous Next ↓Bottom Just 49th
Louis P. Bender, III has been a Director of the Company since June, 1997.
Since November 1996 he has been President, Americas Region of Racal Data
Group. Prior to such time, Mr. Bender served as Vice President, Business
Development at Bull Electronics, a business unit of Group Bull in Angers,
France. Prior to Bull Electronics, Mr. Bender held the position of Vice
President, Worldwide Sales at AVEX Electronics. Mr. Bender has bachelor's
degrees in Electrical Engineering and Business Administration from the State
University of New York and Monroe College, respectively.

Robert W. Doede has been a Director of the Company since June 1997. Mr.
Doede is chairman of FundMinder Inc., an investment advisory firm, and has
served in that position since December 1991. He holds a B.A. degree from Yale
College and a doctorate of economics from the University of Chicago.

Vinod Khosla has been a Director of the Company since April 1995. Mr. Khosla
has been a General Partner with the venture capital firm of Kleiner Perkins
Caufield & Byers from February 1986 to the present. Mr. Khosla was a co-
founder of Daisy Systems and the founding Chief Executive Officer of Sun
Microsystems, Inc. Mr. Khosla also serves on the boards of Excite, Inc.,
PictureTel, The 3DO Company, and Spectrum Holobyte. He has a B.S.E. from the
Indian Institute of Technology in New Delhi, an M.S.E. from Carnegie Mellon
University, and an M.B.A. from the Stanford Graduate School of Business.

Randy A. Maslow joined the Company in March 1994 as an independent
consultant and subsequently served as Vice President for Business Development
from September 1994 through February 1996. He has been a director of the
Company since January 1995. Since February 1996, Mr. Maslow has been Managing
Director of Electric Ventures, Inc., a venture finance firm in the interactive
services industry. Prior to joining Concentric, Mr. Maslow was a co-founder
and managing partner of the RAM Group, a venture finance and business
development consulting firm in the online services and electronic publishing
industries. From 1982 through 1989, Mr. Maslow was a corporate attorney in
private practice. Mr. Maslow has a B.A. degree from Cornell University and a
J.D. from Rutgers Law School.

Terence M. O'Toole has been a Director of the Company since April 1995. Mr.
O'Toole is a Managing Director at Goldman, Sachs & Co. Mr. O'Toole joined
Goldman, Sachs & Co. in 1983, became a general partner in 1992 and a Managing
Director in 1996. Mr. O'Toole serves on the boards of directors of AMF Group,
Inc., Insilco Corporation, and Western Wireless Corporation. He has a B.S.
degree from Villanova University and an M.B.A. from the Stanford University
Graduate School of Business.

Franco Regis has been a Director of the Company since October 1996. Since
1994, Mr. Regis has been a Director of Business Development and Strategic
Planning at Telecom Italia, SpA, the telephone operating company of Italy.
From 1992 to 1994, Mr. Regis was a Director of Budget and Control for the
business division of Telecom Italia. Mr. Regis has an engineering degree from
the Rome State University.

Gary E. Rieschel has been a Director of the Company since October 1996. Mr.
Rieschel is a Senior Vice President at SOFTBANK Holdings, having joined that
company in January 1996. Mr. Rieschel was Vice President for N-Cube
Corporation from August 1994 through December 1995. He was Sales Director at
Cisco Systems, Inc. from July 1993 through October 1994. Prior to this, Mr.
Rieschel was a General Manager and Sales Director at Sequent Computer for over
nine years. Mr. Rieschel has an M.B.A. from Harvard Graduate School of
Business and a B.A. in biology from Reed College.

Members of the Board of Directors are elected each year at the Company's
annual meeting of stockholders, and serve until the following annual meeting
of stockholders and until their respective successors have been elected and
qualified.

Voting Agreements

Pursuant to a Stockholder Agreement entered into in connection with the
Company's sale of Series A Preferred Stock, as amended and restated in
connection with the issuance of Series B Preferred Stock and Series B
warrants, each of Kleiner Perkins Caufield & Byers VII, KPCB VII Founders Fund
and KPCB Information Sciences Zaibatsu

424A 50th Page of 98 TOC 1st Previous Next ↓Bottom Just 50th
Fund II (collectively, the "Kleiner Entities"), Mr. Collins-Rector, Mr. Chad
Shackley, Intuit and GS Capital Partners, L.P. ("GSCP") has agreed to vote all
its capital stock, except for any Series B Preferred Stock, to elect as
directors the Chief Executive Officer of the Company and two other individuals
designated by GSCP and the Kleiner Entities. This voting obligation terminates
as to each such stockholder upon the earlier of (i) such stockholder no longer
beneficially owning any shares of Stock, as defined in such Stockholder
Agreement, and (ii) the closing of a public offering resulting in at least $15
million in gross proceeds to the Company and reflecting a corporation
valuation of at least $50 million. In addition, GSCP and the Kleiner Entities
have delivered irrevocable proxies to Intuit to vote their Series B Preferred
shares for an Intuit director designee in the event that Intuit fully
exercises its warrants to purchase Series B shares. The latter proxies
terminate upon the earliest of (a) Intuit's ceasing to hold at least half of
its Series B shares, (b) the conversion of all Series B Preferred Stock into
Common Stock, and (c) the closing of a public offering resulting in at least
$15 million in gross proceeds to the Company and reflecting a corporation
valuation of at least $50 million.

Pursuant to a Shareholder Agreement entered into in connection with the
Company's sale of Series D Preferred Stock, each of Racal, TMI and SOFTBANK
has agreed, until the earlier of (i) the date on which the number of
outstanding Series D Preferred shares falls below certain specified minimums
and (ii) the occurrence of a qualified public offering of the Company's Common
Stock, to vote the shares of Common Stock and Preferred Stock controlled by
them to elect as Directors that number of Series D Directors provided for in
the Amended and Restated Articles of Incorporation, to be designated in
accordance with the respective holdings of the three parties. Currently, each
of Racal, TMI and SOFTBANK is entitled to designate one director, and each of
the three agrees to vote all shares of Common Stock and Preferred Stock
controlled by it to elect the designees of the other two parties.

Each of the foregoing voting arrangements will terminate upon completion of
the offering.

Pursuant to a Governance Agreement entered into among GSCP, the Kleiner
Entities, Intuit, Mr. Collins-Rector, Mr. Shackley and the Company (the
"Government Agreement"), Mr. Collins-Rector and Mr. Shackley are jointly
enabled to designate one member of the Company's Board of Directors. The
Governance Agreement also obligates the Company to use reasonable efforts to
maintain such designee on the Board of Directors until the earlier to occur of
(i) one year after the closing of the Company's initial public offering, (ii)
the expiration or full release of Mr. Collins-Rector and Mr. Shackley from any
lock-up restrictions granted to the underwriters in connection with such
initial public offering, or (iii) the sale of all or substantially all of the
assets of the Company or the merger, acquisition or other reorganization of
the Company in which more than 50% of the voting power of the Company is
disposed of. Initially, such designee is Robert W. Doede.

Director Compensation

Directors are reimbursed for certain reasonable expenses incurred in
attending Board or committee meetings. Officers of the Company are elected
annually by the Board of Directors and serve at its discretion. The Company
has entered into indemnification agreements with each member of the Board of
Directors and certain of its officers providing for the indemnification of
such person to the fullest extent authorized, permitted or allowed by law.

Compensation Committee

The Company's Board of Directors currently has a Compensation Committee that
reviews and approves the compensation and benefits to be provided to the
officers, directors, employees, and consultants of the Company, administers
the Company's 1993 Incentive Stock Option Plan, 1995 Stock Incentive Plan for
Employees and Consultants, and Amended and Restated 1996 Stock Plan, and will
administer the 1997 Stock Plan and 1997 Employee Stock Purchase Plan, which
are to take effect upon closing of the Company's initial public offering. The
Compensation Committee currently consists of Messrs. Khosla and Rieschel.

Audit Committee

The Company's Board of Directors currently has an Audit Committee that
monitors the corporate financial reporting and the internal and external
audits of the Company, reviews and approves material accounting policy
changes, monitors internal accounting controls, to recommend engagement of
independent auditors, reviews related-party transactions and performs other
duties as prescribed by the Board of Directors. The Audit Committee currently
consists of Messrs. Bender, Regis and Doede.

424A 51st Page of 98 TOC 1st Previous Next ↓Bottom Just 51st
EXECUTIVE COMPENSATION

Summary Compensation. The following table sets forth in summary form the
compensation earned by the Company's Chief Executive Officer, and the four
most highly compensated executive officers (the "Named Officers") during 1996.

[Enlarge/Download Table]

LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- ------------
SECURITIES ALL OTHER
OTHER ANNUAL UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) ($)(3)
--------------------------- ---------- --------- ---------------- ------------ ------------

Henry R. Nothhaft....... 184,808 -- -- -- 3,105
President and Chief
Executive Officer
John K. Peters.......... 184,273 -- -- -- 3,076
Executive Vice
President and General
Manager, Network
Services Division
Michael F. Anthofer..... 136,336 20,000 155,212(2) 43,333(4) 1,545
Senior Vice President
and Chief Financial
Officer
George D. Carr.......... 105,000 25,897(1) -- 6,666(4) 1,761
Vice President of Field
Sales
Scott G. Eagle.......... 114,337 -- 82,396(2) 30,000(4) 1,347
Vice President of
Marketing

--------
(1) Reflects sales commissions.
(2) Reflects relocation expense payments.
(3) Reflects Company contributions to an employee 401(k) plan and term life
insurance premiums paid by the Company.
(4) Includes certain options that were granted at higher fair market values
earlier in 1996 and repriced by amendment in April 1996 to reflect lower
fair market values at that time.

[Enlarge/Download Table]

POTENTIAL
REALIZABLE
VALUE AT
INDIVIDUAL GRANTS(3) ASSUMED ANNUAL
----------------------------------------------------------- RATES OF STOCK
PERCENT OF MARKET PRICE
NUMBER OF TOTAL PRICE OF APPRECIATION
SECURITIES OPTIONS SECURITIES FOR OPTIONS
UNDERLYING GRANTED TO EXERCISE UNDERLYING TERM(2)
OPTIONS EMPLOYEES PRICE OPTIONS ON EXPIRATION --------------
NAME GRANTED(1)(3) IN 1996 PER SHARE DATE OF GRANT DATE 5%($) 10%($)
---- ------------- ---------- --------- ------------- ---------- ------ -------

Henry R. Nothhaft....... -- -- -- -- -- -- --
John K. Peters.......... -- -- -- -- -- -- --
Michael F. Anthofer..... 33,333 7.9% $3.75 $3.75 12/31/2004 59,681 142,947
10,000 2.4 $3.75 $4.80 12/31/2006 40,687 87,000
George D. Carr.......... 3,333 0.8 $3.75 $3.75 2/28/2005 6,891 16,973
3,333 0.8 $3.75 $4.80 12/31/2006 13,561 28,997
Scott G. Eagle.......... 30,000 7.1 $3.75 $3.75 3/31/2005 62,024 152,769

Option Grants During 1996. The following table sets forth for each of the
Named Officers certain information concerning stock options granted during
1996.

--------
(1) Options vest with respect to 25% of the shares on the first anniversary
date of grant and the remaining 75% vests monthly over the succeeding
three years.
(2) Potential Realizable Value is based on the assumption that the Common
Stock of the Company appreciates at the annual rate shown (compounded
annually) from the date of grant until the expiration of the option term.
These numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth.
(3) Excludes 74,666, 63,466, 43,333, 16,666 and 3,333 shares subject to
options granted to Messrs. Nothhaft, Peters, Anthofer, Carr and Eagle,
respectively, subsequent to 1996.
(4) These options were granted at an exercise price determined by the Board of
Directors to be equal to the fair market value of the Company's shares on
the date of grant. The Company's Common Stock was not traded publicly at
the time of the option grants to the Named Officers. The options were
granted at higher fair market values earlier in 1996 and repriced by
amendment in April to reflect fair market values at that time.

424A 52nd Page of 98 TOC 1st Previous Next ↓Bottom Just 52nd
Aggregate Option Exercises in 1996 and Year-End Option Values. The following
table sets forth for each of the Named Officers certain information concerning
the number of shares subject to both exercisable and unexercisable stock
options as of December 31, 1996. Also reported are values for "in-the-money"
options that represent the positive spread between the respective exercise
prices of outstanding options and the fair market value of the Company's
Common Stock as of December 31, 1996. No Named Officer exercised options
during 1996.

[Download Table]

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT 12/31/96(#) 12/31/96($)(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------

Henry R. Nothhaft........... 73,210 76,124 76,871 79,930
John K. Peters.............. 59,832 67,101 62,824 70,456
Michael F. Anthofer......... -- 43,333 -- 45,500
George D. Carr.............. 2,917 13,750 3,063 14,438
Scott G. Eagle.............. -- 30,000 -- 31,500

--------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 31, 1996 ($4.80 per
share) and the exercise price of the Named Officer's option.

EMPLOYEE STOCK PLANS

1995 Stock Incentive Plan for Employees and Consultants. The Company's 1995
Stock Incentive Plan for Employees and Consultants (the "1995 Plan") provides
for the granting to employees of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
for the granting to employees and consultants of nonstatutory stock options,
stock appreciation rights ("SARs") and restricted stock awards ("RSAs"). No
SARs or RSAs have been granted under the 1995 Plan. The 1995 Plan was approved
by the Board of Directors in September 1995 and Stockholders in September
1995, and an amendment decreasing the number of shares thereunder from 840,000
to 762,600 was approved by the Board of Directors in February 1996. The 1995
Plan was terminated effective October 4, 1996, and no further grants are being
made thereunder except to the extent that an exchange of options under the
Company's 1993 Incentive Stock Option Plan for options under the 1995 Plan,
which exchange was begun in October 1995, is continuing and has not yet been
completed. A total of 762,600 shares of Common Stock are reserved for issuance
pursuant to the 1995 Plan. As of June 30, 1997, options to purchase 346,500
shares of Common Stock at a weighted exercise price of $3.75 per share were
outstanding under the 1995 plan.

The 1995 Plan is administered by a committee of the Board of Directors,
which committee is required, once the Company's Common Stock becomes publicly
traded, to be constituted to comply with Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended, and applicable laws. The
administrator has the power to determine the terms of the options granted,
including the exercise price, the number of shares subject to the option and
the exercisability thereof, and the form of consideration payable upon
exercise. Options granted under the 1995 Plan are not generally transferable
by the optionee, and each option is exercisable during the lifetime of the
optionee only by such optionee. Incentive stock options granted under the 1995
Plan must generally be exercised within three months of the end of an
optionee's status as an employee or consultant of the Company, or within 12
months after such optionee's termination by death or disability, but in no
event later than the expiration of the option's term, which may not exceed ten
years. The exercise price of all options granted under the 1995 Plan must be
at least equal to the fair market value of the Common Stock on the date of
grant. With respect to any participant who owns stock possessing more than 10%
of the voting power of all classes of the Company's outstanding capital stock,
the exercise price of any option must equal at least 110% of the fair market
value on the grant date and the term of the option must not exceed five years.
The term of all other options granted under the 1995 Plan may not exceed 10
years.

The 1995 Plan provides that in the event of a recapitalization, stock split,
stock dividend, combination or reclassification or other increase or decrease
in the number of issued shares of Common Stock without consideration, the
number of shares subject to each outstanding stock option, as well as the
exercise price are appropriately adjusted as determined by the Committee.

Amended and Restated 1996 Stock Plan. The Company's Amended and Restated
1996 Stock Plan (the "Restated 1996 Plan") provides for the granting to
employees of incentive stock options within the meaning of Section 422 of

424A 53rd Page of 98 TOC 1st Previous Next ↓Bottom Just 53rd
the Code, and for the granting to employees, directors and consultants of
nonstatutory stock options and stock purchase rights ("Rights"). The 1996 Plan
was initially approved by the Board of Directors effective as of December
1996. It was amended and restated in May 1997 and will be presented to the
Stockholders for their approval at the 1997 annual meeting. Unless terminated
sooner, the Restated 1996 Plan will terminate automatically in December 2006.
A total of 793,333 shares of Common Stock are currently reserved for issuance
pursuant to the Restated 1996 Plan. As of June 30, 1997, options to purchase
627,780 shares of Common Stock at a weighted average exercise price of $6.30
per share were outstanding, and 165,553 shares of Common Stock remained
available for future grant under the Restated 1996 Stock Plan.

The Restated 1996 Plan may be administered by a committee of the Board of
Directors constituted to comply with applicable laws (the "Committee") or by
the Board itself. The Board or Committee (the "Administrator") has the power
to determine the terms of the options or Rights granted, including the
exercise price, the number of shares subject to each option or Right, the
exercisability thereof, or any vesting acceleration or waiver of forfeiture
conditions. The Administrator may determine the form of payment upon exercise,
including cash, check, promissory note, other shares, cashless exercise or a
combination of the foregoing. The Board has the authority to amend, suspend or
terminate the Restated 1996 Plan, provided that no such action may impair the
rights of any optionee or Right holder without that person's consent.

Options and Rights granted under the Restated 1996 Plan are not generally
transferable by the optionee or Right holder other than by will or the laws of
descent and distribution, and each option and Right is exercisable during the
lifetime of the optionee or Right holder only by such optionee or Right
holder. The form of option agreement currently in use provides that options
generally must be exercised within 90 days of the end of optionee's status as
an employee, director or consultant of the Company. Under the Plan, options
must be exercised within twelve months after such optionee's termination by
death or disability, but in no event later than the expiration of the option's
term. In the case of Rights, unless the Administrator determines otherwise,
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
disability). The purchase price for shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator but in no case more slowly than 20% per year over five years.
Generally, options vest 25% after one year and 1/36 per month thereafter. The
exercise price of all incentive stock options granted under the Restated 1996
Plan must be at least equal to the fair market value of the Common Stock on
the date of grant. The exercise price of nonstatutory stock options and Rights
must at least be equal to 85% of the fair market value of the Common Stock on
the date of grant. With respect to any participant who owns stock possessing
more than 10% of the voting power of all classes of the Company's outstanding
capital stock, the exercise price of any incentive or nonstatutory stock
option granted must equal at least 110% of the fair market value on the grant
date. The term of an incentive stock option granted to such a 10% Stockholder
must not exceed five years. The term of other options granted under the
Restated 1996 Plan may not exceed ten years.

The Restated 1996 Plan provides that in the event of a merger of the Company
with or into another corporation, a sale of substantially all of the Company's
assets or a like transaction involving the Company, each option shall be
assumed or an equivalent option substituted by the successor corporation. If
the outstanding options are not assumed or substituted as described in the
preceding sentence, the Administrator shall provide for the optionee or Right
holder to have the right to exercise the option or Right as to all of the
optioned stock, including shares as to which it would not otherwise be
exercisable. If the Administrator makes an option or Right exercisable in full
in the event of a merger or sale of assets, the Administrator shall notify the
optionee or Right holder that the option or Right shall be fully exercisable
for a period of fifteen days from the date of such notice, and the option or
Right will terminate upon the expiration of such period. The forms of option
agreement and restricted stock purchase agreement currently in use provide for
a 180-day lockup of the optionee's or Right holder's shares in the event of
the Company's initial public offering. The option exercise notice and the
restricted stock purchase agreement also grant the Company a right of first
refusal (prior to the initial public offering) on the sale or transfer of any
shares purchased pursuant to an option or Right, other than transfers by gift,
operation of law or certain family transfers.

424A 54th Page of 98 TOC 1st Previous Next ↓Bottom Just 54th
1997 Stock Plan. The Company's 1997 Stock Plan (the "1997 Plan") provides
for the granting to employees of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), and for the granting to employees, directors and consultants
of nonstatutory stock options and stock purchase rights ("Rights"). The 1997
Plan will be presented to the Board of Directors and to the stockholders in
June 1997. Unless terminated sooner, the 1997 Plan will terminate
automatically in 2007. A total of 1,500,000 shares of Common Stock are
currently reserved for issuance pursuant to the 1997 Plan.

The 1997 Plan may be administered by a committee of the Board of Directors
(the "Committee") or by the Board itself. In the case of options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code, the Committee shall consist of two or more "outside
directors" within the meaning of Section 162(m) of the Code. The Board or
Committee (the "Administrator") has the power to determine the terms of the
options or Rights granted, including the exercise price, the number of shares
subject to each option or Right, the exercisability thereof, and the form of
consideration payable upon such exercise. In addition, the Administrator has
the authority to amend, suspend or terminate the 1997 Plan, provided that no
such action may impair the rights of any optionee or Right holder without such
person's consent under the 1997 Plan.

Except in connection with his or her initial engagement with the Company, no
employee, director or consultant may be granted options or Rights for more
than 500,000 shares in any one fiscal year. Options and Rights granted under
the 1997 Plan are not generally transferable by the optionee or Right holder,
and each option and Right is exercisable during the lifetime of the optionee
or Right holder only by such optionee or Right holder. Options granted under
the 1997 Plan must generally be exercised within three months of the end of
optionee's status as an employee, director or consultant of the Company, or
within twelve months after such optionee's termination by death or disability,
but in no event later than the expiration of the option's term. In the case of
Rights, unless the Administrator determines otherwise, the restricted stock
purchase agreement shall grant the Company a repurchase option exercisable
upon the voluntary or involuntary termination of the purchaser's employment
with the Company for any reason (including death or disability). The purchase
price for shares repurchased pursuant to the restricted stock purchase
agreement shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company. The
repurchase option shall lapse at a rate determined by the Administrator. The
exercise price of all incentive stock options granted under the 1997 Plan must
be at least equal to the fair market value of the Common Stock on the date of
grant. The exercise price of nonstatutory stock options and Rights granted
under the 1997 Plan is determined by the Administrator, but with respect to
nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the exercise
price must at least be equal to the fair market value of the Common Stock on
the date of grant. With respect to any participant who owns stock possessing
more than 10% of the voting power of all classes of the Company's outstanding
capital stock, the exercise price of any incentive stock option granted must
equal at least 110% of the fair market value on the grant date and the term of
such incentive stock option must not exceed five years. The term of other
incentive stock options granted under the 1997 Plan may not exceed ten years.

The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets
or a like transaction involving the Company, each option shall be assumed or
an equivalent option substituted by the successor corporation. If the
outstanding options are not assumed or substituted as described in the
preceding sentence, the Administrator shall provide for the optionee or Right
holder to have the right to exercise the option or Right as to all of the
optioned stock, including shares as to which it would not otherwise be
exercisable. If the Administrator makes an option or Right exercisable in full
in the event of a merger or sale of assets, the Administrator shall notify the
optionee or Right holder that the option or Right shall be fully exercisable
for a period of fifteen days from the date of such notice, and the option or
Right will terminate upon the expiration of such period.

1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock
Purchase Plan (the "1997 Purchase Plan") will be presented to the Board of
Directors and to the stockholders in June 1997. A total of 500,000 shares of
Common Stock has been reserved for issuance under the 1997 Purchase Plan. The
1997 Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, consists of 24-month offering periods beginning

424A 55th Page of 98 TOC 1st Previous Next ↓Bottom Just 55th
on the first trading day on or after February 15 and August 15 of each year,
except for the first such offering period, which commences on the first
trading day on or after the Company's initial public offering effective date
of the and ends on the last trading day. Each offering period contains four
six-month purchase periods. The 1997 Purchase Plan is administered by the
Board of Directors or by a committee appointed by the Board. Employees are
eligible to participate if they are customarily employed by the Company or any
designated subsidiary for at least 20 hours per week and more than five months
in any calendar year. The 1997 Purchase Plan permits eligible employees to
purchase Common Stock through payroll deductions of up to 10% of an employee's
compensation (excluding overtime, shift premium, and other bonuses and
incentive compensation), up to a maximum of $25,000 for all offering periods
ending within the same calendar year. No employee may purchase more than
25,000 shares in any purchase period. The price of stock purchased under the
1997 Purchase Plan is 85% of the lower of the fair market value of the Common
Stock at the beginning of the offering period or at the end of the current
purchase period. Employees may end their participation at any time during an
offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with the
Company.

Rights granted under the 1997 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1997 Purchase Plan. The 1997 Purchase Plan
provides that, in the event of a merger of the Company with or into another
corporation or a sale of substantially all of the Company's assets, each
outstanding option shall be assumed or an equivalent option shall be
substituted for it, or the Board of Directors or its committee shall shorten
the purchase and offering periods then in progress (so that employees' rights
to purchase stock under the Plan are exercised prior to the merger or sale of
assets). The 1997 Purchase Plan will terminate in 2007. The Board of Directors
has the authority to amend or terminate the 1997 Purchase Plan, except that no
such action may adversely affect any outstanding rights to purchase stock
under the 1997 Purchase Plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of the current members of the Compensation Committee is an executive
officer of the Company.

424A 56th Page of 98 TOC 1st Previous Next ↓Bottom Just 56th
CERTAIN TRANSACTIONS

PREFERRED STOCK ISSUANCES

The Company has sold shares of its Preferred Stock in private financings
from April 1995 through June 1997 as follows (all share amounts set forth in
this "Certain Transactions" section reflect the one-for-15 reverse stock split
of the Company's Common Stock and Preferred Stock that will occur prior to the
closing of the offering but do not reflect the conversion of outstanding
shares of Preferred Stock into shares of Common Stock that will occur
automatically immediately prior to the closing of the offering): 906,454
shares of Series A Preferred Stock at an effective price of $11.00 per share;
433,638 shares of Series B Preferred Stock at an effective price of $11.00 per
share; 928,243 shares of Series C Preferred Stock at an effective price of
$27.30 per share; and 2,933,252 shares of Series D Preferred Stock at an
effective price of $20.40 per share.

[Enlarge/Download Table]

DIRECTORS, EXECUTIVE SHARES OF SHARES OF SHARES OF SHARES OF
OFFICERS AND COMMON SERIES A SERIES B SHARES OF SERIES SERIES D
5% STOCKHOLDERS STOCK PREFERRED PREFERRED C PREFERRED PREFERRED WARRANTS
-------------------- --------- --------- --------- ---------------- --------- --------

The Goldman Sachs Group,
L.P.(1)................ 167,246 453,227 216,819 123,297 14,706 57,595
Kleiner Perkins Caufield
& Byers entities(2).... 167,246 453,227 216,819 -- 14,706 148,504
TMI Telemedia
International,
Ltd.(3)................ -- -- -- -- 1,184,642 325,786
SOFTBANK Holdings(4).... -- -- -- -- 980,393 --
Racal Data Group(5)..... -- -- -- -- 490,197 491,631
Henry R. Nothhaft(6).... -- -- -- -- -- 4,902
John Peters(7).......... -- -- -- -- -- 2,451

--------
(1) Consists of securities held of record by GS Capital Partners, L.P. See
"Principal Stockholders." Includes 90,938 shares of Common Stock issued
upon exercise of warrants in April 1997 at an exercise price of $6.60 per
share, 33,344 shares of Series B Preferred Stock issued upon exercise of
warrants in April 1997 at an exercise price of $6.60 per share, and 14,706
shares of Series D Preferred Stock issued upon exercise of warrants in
April 1997 at an exercise price of $12.24 per share. GS Capital Partners
L.P. exercised such warrants at a discounted exercise price in
consideration of its early exercise. Terence M. O'Toole, a Director of the
Company, is a Managing Director of Goldman, Sachs & Co., the investment
manager for GS Capital Partners, L.P. See "Principal Stockholders."
(2) Vinod Khosla, a director of the Company, is a general partner of KPCB VII
Associates, the general partner of Kleiner Perkins Caufield & Byers VII
and KPCB VII Information Sciences Zaibatsu Fund II. Includes 90,938 shares
of Common Stock issued upon exercise of warrants in April 1997 at an
exercise price of $6.60 per share 33,344 shares of Series B Preferred
Stock issued upon exercise of warrants in April 1997 at an exercise price
of $6.60 per share, and 14,706 shares of Series D Preferred Stock issued
upon exercise of warrants in April 1997 at an exercise price of $12.24 per
share. The Kleiner Entities exercised such warrants at a discounted
exercise price in consideration of their early exercise.
(3) Franco Regis, a director of the Company, is Director of Business
Development and Strategic Planning of Telecom Italia, SpA, the parent of
TMI Telemedia International, Ltd. Includes 204,248 shares of Series D
Preferred issued upon exercise of a warrant in April 1997 at an exercise
price of $12.24 per share. TMI exercised such warrants at a discounted
exercise price in consideration of its early exercise.
(4) Gary Reischel, a director of the Company, is Senior Vice President of
SOFTBANK Holdings, Inc.
(5) Louis P. Bender III, a director of the Company, is the President, Americas
Region of Racal Data Group of Racal.
(6) Henry R. Nothhaft is the President of the Company. Represents 4,902 shares
of Series D Preferred Stock issuable upon exercise of a warrant at an
exercise price of $20.40 per share. The warrant was granted to Mr.
Nothhaft in July 1996 in consideration of a bridge loan in the amount of
$100,000. The principal and interest on such bridge loan was repaid in
full.
(7) John Peters is the Executive Vice President and General Manager Network
Operations of the Company. Represents 2,451 shares of Series D Preferred
Stock issuable upon exercise of a warrant at an exercise price of $20.40
per share. The warrant was granted to Mr. Peters in July 1996 in
consideration of a bridge loan in the amount of $50,000. The principal and
interest on such bridge loan was repaid in full.

424A 57th Page of 98 TOC 1st Previous Next ↓Bottom Just 57th
The Preferred Stock described above will convert into Common Stock upon the
closing of this Offering. Holders of the Preferred Stock are entitled to
certain registration rights with respect to the Common Stock issued or
issuable upon conversion thereof. In addition, GSCP, the Kleiner Entities and
Marc Collins-Rector are entitled to certain registration rights with respect
to shares of Common Stock held by them, and employees of Critical
Technologies, Inc. have certain piggyback registration rights with respect to
shares issuable upon exercise of certain options issued to them. See
"Description of Capital Stock--Registration Rights."

SERIES A AGREEMENT

The Preferred Stock and Warrant Purchase Agreement, dated April 20, 1995, as
amended (the "Series A Agreement") by which the Registrant sold Series A
Preferred Stock and warrants to purchase Common Stock to GSCP, Kleiner Perkins
Caufield & Byers VII and KPCB VII Founders Fund for an aggregate consideration
of approximately $10.0 million, provides that as long as GSCP and its
affiliates beneficially own five percent or more of the outstanding Common
Stock of the Registrant, Goldman, Sachs & Co. or any of its affiliates have
the right to perform all investment banking services for the Registrant on
customary terms consistent with an arms'-length transaction. The Series A
Agreement, further obligates the Registrant to complete by June 30, 1997, a
rescission offer with respect to all Common Stock and Common Stock equivalents
issued prior to April 20, 1995, and to indemnify the GSCP and the Kleiner
Entities against "rescission losses," in excess of the estimated amount of
rescission losses described in the Series A Agreement.

BRIDGE LOANS

In connection with the alliance between Intuit and the Company, GSCP and the
Kleiner Entities made bridge loans totaling $2 million to the Company on
October 16, 1995, which were rolled over into bridge loans totaling $4 million
on November 6, 1995. On November 29, 1995, GSCP made a further bridge loan of
$3 million. In consideration of these loans, GSCP and the Kleiner Entities
received warrants to purchase 181,876 shares of Series B Preferred Stock at an
exercise price of $11.00 per share. Effective as of December 20, 1995, GSCP
and the Kleiner Entities converted the principal and interest due under their
$2 million promissory notes into a total of 366,947 shares of Series B
Preferred Stock at a price of $11.00 per share. In addition, effective as of
February 1996, GSCP converted the entire amount of principal and interest on
its $3 million bridge note into 123,297 Series C Shares at an exercise price
of $24.57 per share.

On July 31, 1996, the Company closed bridge loans from GSCP and KPCB for
$300,000 each, evidenced by convertible promissory notes dated July 29, 1996.
The Company issued GSCP and KPCB each a warrant dated July 31, 1996, to
purchase 14,706 shares of Series D Preferred Stock at an exercise price of
$20.40 per share. The loans were repaid on August 21, 1996. On April 4, 1997,
the Company and GSCP and KPCB entered warrant amendment agreements reducing
the exercise price of the warrants to $12.24 per share, and the warrants were
exercised.

On July 31, 1996, the Company closed bridge loans from Henry Nothhaft, the
Company's President, Chief Executive Officer and a director, and John Peters,
the Company's Executive Vice President and President, Network Services
Division, for $100,000 and $50,000, respectively. The loans were evidenced by
promissory notes dated July 29, 1996. The Company issued Mr. Nothhaft and Mr.
Peters warrants dated July 31, 1996, to purchase 4,902 shares and 2,451
shares, respectively, of Series D Preferred Stock at an exercise price of
$20.40 per share. The loans were repaid on August 21, 1996.

On June 27, 1997, the Company closed a bridge loan with Kleiner Perkins
Caufield & Byers VII and KPCB Information Sciences Zaibatsu Fund VII for
$1,950,000 and $50,000, respectively, evidenced by promissory notes dated June
27, 1997. The Company issued each of the noteholders a warrant exercisable for
that number of shares of Common Stock equal to 50% of the principal amount of
the respective note divided by the Price to Public. The exercise price per
share for each of the warrants is 50% of the Price to Public. The proceeds
from the bridge loan will be used to finance a down-payment payable to
Netscape under agreements entered into between the Company and Netscape on
June 23, 1997. See "Business--Services."

COMMISSIONS

The Company paid commissions totaling $350,000 to Goldman, Sachs & Co. in
August 1996 in connection with the sale of shares of Series D Preferred Stock.
Terence M. O'Toole, a Director of the Company, is a Managing Director of
Goldman, Sachs & Co.

424A 58th Page of 98 TOC 1st Previous Next ↓Bottom Just 58th
WARRANT EXERCISES

Effective as of April 4, 1997, the Company entered into warrant amendment
agreements with TMI, GSCP, and the Kleiner Entities to reduce the exercise
price of certain of their warrants in return for the immediate exercise of
such warrants. The exercise price of warrants for 181,876 shares of Class A
Common Stock and 66,688 shares of Series B Preferred Stock held by GSCP and
the Kleiner Entities was reduced from $11.00 to $6.60 per share. The exercise
price of warrants for 233,660 shares of Series D Preferred Stock held by GSCP,
KPCB and TMI was reduced from $20.40 per share to $12.24 per share. Also, in
connection with the reduction of the exercise price of the GSCP and Kleiner
Entities' Common Stock warrants, the exercise price of Intuit's $1.5 million
warrant was similarly reduced to $6.60 per share, and the expiration date was
extended to December 31, 2000.

RACAL TRANSACTION

Pursuant to a master lease agreement between the Company and Racal-Datacom,
Inc. ("Racal"), effective March 31, 1995, the Company has installed networking
equipment under lease financing. The terms of the leases under the master
agreement are 48 months or 60 months, depending on the equipment. In 1996, the
Company paid Racal approximately $8.3 million in lease payments and related
charges. As of December 31, 1996, the current portion of the Company's capital
lease obligations to Racal totaled $10.2 million, and the noncurrent portion
totaled $29.2 million. As security for the lease financing, Racal has a
security interest in all leased equipment.

AMPM TRANSACTIONS

Donald C. Schutt, Vice President of Michigan Operations for the Company, is
a majority stockholder of AMPM, Inc., an advertising agency. The Company
incurred marketing fees payable to AMPM, Inc. totaling $2.5 million in 1996.
The Company believes that the fees charged by AMPM for such services are
competitive with those of similar advertising agencies.

EMPLOYMENT AND TERMINATION AGREEMENTS

In February 1996, the Company entered into a termination of services and
indemnification agreement with Marc Collins-Rector and Chad Shackley (the
"Founders"). Pursuant to such agreement Mr. Collins-Rector agreed to resign
from the Board of Directors of the Company and the Founders agreed to resign
as Company employees and to enter into lock-up agreements in the event of the
Company's initial public offering. If asked to do so by the Founders, the
Company agreed it will file a registration statement on Form S-8 or Form S-3
by certain deadlines after it becomes eligible to do so, with respect to
certain shares issuable upon exercise of the Founders' options.

Also in February 1996, the Company entered into an agreement with Randy
Maslow wherein Mr. Maslow agreed to serve as an advisor to the Board of
Directors through October 31, 1996. Pursuant to such agreement, Mr. Maslow
agreed to resign from the Board upon the effectiveness of an initial public
offering. If asked to do so by Mr. Maslow, the Company agreed it will file a
registration statement on Form S-8 or Form S-3 as soon as practicable after it
becomes eligible to do so, with respect to certain shares issuable upon
exercise of Mr. Maslow's options.

OPTIONS OF MANAGEMENT AND DIRECTORS

In August 1996, the Board of Directors amended the vesting provisions of
options to purchase 14,000 shares issued to Henry Nothhaft, President, Chief
Executive Officer and a director of the Company, on October 31, 1995, and an
option to purchase 11,900 shares issued to John Peters, Executive Vice
President and General Manager, Network Services Division, on October 31, 1995,
so the options would fully vest as of the closing date of the sale of at least
$29 million of Series D Preferred Stock of the Company, which occurred on
August 21, 1996.

In August 1996, the Company exchanged four options previously issued to
Randy Maslow, a director of the Company, for new options exercisable for an
aggregate of 46,673 shares of Class A Common Stock at $3.75 per share. The
four-year vesting schedule accelerates so that all shares vest immediately in
the event of an initial public offering or a change of control. The options
may be exercised through their expiration date regardless of when Mr. Maslow
ceases being an employee or consultant. Mr. Maslow's employment with the
Company ended on October 31, 1996.

424A 59th Page of 98 TOC 1st Previous Next ↓Bottom Just 59th
In July 1996, the Company amended the terms of options to purchase 53,341
shares of Common Stock previously issued to Donald C. Schutt, an executive
officer of the Company to decrease the exercise price to $3.75 per share and
remove certain conditions precedent to vesting of such options.

In May 1997, the Company amended options to purchase 26,666 shares of Common
Stock previously issued to Marc Collins-Rector, a founder and 5% shareholder
of the Company's Common Stock, to remove vesting conditions.

WILLIAMS TRANSACTION

On May 30, 1997, the Company signed a non-binding Memorandum of
Understanding ("MOU") with Williams Communications Group, Inc. ("WCG"), the
parent company of Critical Technologies, Inc. ("CTI"). The MOU sets forth the
terms of a two-phase investment in the Company by WCG consisting of (i) a
bridge loan made by WCG to the Company as part of phase one, (ii) WCG's
participation in the Direct Placements which are to close concurrently with
this offering as part of phase two and (iii) an expanded strategic business
relationship between the parties to be implemented in both phases. The first
phase, which closed on June 19, 1997, consisted of a $3 million loan to the
Company by WCG evidenced by a 10% convertible secured promissory note (the
"WCG Note") and the issuance to WCG of a warrant to purchase shares of the
Company's Common Stock. The WCG Note will automatically convert into shares of
the Company's Common Stock upon the closing of the offering made hereby at a
per share conversion price equal to the Price to Public in the offering made
hereby. The warrant is exercisable for that number of shares of Common Stock
equal to 25% of the shares issuable upon conversion of the WCG Note at a per
share exercise price of 50% of the Price to Public. In addition to the WCG
Note and the warrant, as part of the first phase of the investment the parties
amended and restated the Employee Services and Staffing Agreement between CTI
and the Company (the "CTI Agreement") and amended the Co-location Services
Agreement between CTI and the Company to, among other things, extend the
respective terms of such agreements until December 31, 2000 and forego a $1.1
million acquisition fee to be paid by CTI to the Company in connection with
the acquisition of CTI in exchange for the issuance by WCG of $1.1 million in
telecommunications service credits to the Company. The parties also executed a
term sheet reflecting the basic terms of a distribution agreement and an
agency agreement to be executed as part of the first phase of the investment
by which WCG may sell CTI products and services for an initial term of two
years.

The MOU contemplates that the second phase of the WCG investment will take
place concurrently with the closing of this offering and will consist of the
purchase by WCG of at least $12 million of unregistered shares of the
Company's Common Stock as part of the Direct Placements. WCG will also provide
an additional $2 million in service credits to the Company in exchange for the
Company's Common Stock which will be issued to WCG as services are rendered.
The service credits granted to the Company in both phases of this transaction
will be applied to each monthly invoice from WCG for telecommunications
services provided to the Company at a rate of 50% of the face value of
services rendered until the credits have been consumed or until five years
from the closing of this offering. The Company will also issue warrants to WCG
to purchase that number of shares of the Company's Common Stock equal to 25%
of the shares issuable in connection with the phase two investment. The
exercise price of the phase two warrants will be 50% of the Price to Public in
the offering made hereby. The MOU also provides that in the event of a change
in control of the Company, WCG shall have the right to purchase a
nonexclusive, perpetual license to use, distribute and modify all of the
intellectual property of the Company, including any copyright, patent,
license, trademark or trade secret which the Company has or obtains the right
to transfer. Under the MOU, so long as WCG owns at least 5% of the outstanding
Common Stock of the Company, WCG will be entitled to name a nominee of its
choice to a seat on the Board of Directors to be recommended to the
stockholders of the Company. Finally, upon completion of this offering, the
MOU provides that WCG and the Company will enter into an agreement whereby the
Company will agree to use its best efforts to purchase a total of at least
$21.2 million in telecommunications equipment and services from WCG during the
five year period following the offering. The terms of this MOU are non-binding
and subject to further negotiations prior to the signing of definitive
agreements for the second phase.

All future transactions among the Company and its officers, directors,
principal stockholders and their affiliates will be approved by a majority of
the Board of Directors, including a majority of the independent and
disinterested directors.

424A 60th Page of 98 TOC 1st Previous Next ↓Bottom Just 60th
PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of June 30, 1997, and assuming
conversion of Preferred Stock to Common Stock, and as adjusted to reflect the
sale of the 3,000,000 shares of Common Stock offered hereby and an assumed
1,636,363 shares to be sold in the Direct Placements, by: (i) each person who
is known by the Company to own beneficially more than 5% of the Common Stock;
(ii) each director and Named Officer of the Company; and (iii) all directors
and executive officers of the Company as a group. Except as otherwise noted,
the persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable.

[Download Table]

SHARES PERCENT BENEFICIALLY OWNED
BENEFICIALLY -----------------------------------
NAMES AND ADDRESSES OWNED BEFORE OFFERING AFTER OFFERING(1)**
------------------- ------------ --------------- -------------------

TMI Telemedia International,
Ltd.(2)..................... 1,580,968 19.6% 12.6%
Viale del Campo Boario, 56D
00153 Rome, Italy
The Goldman Sachs Group,
L.P.(3)..................... 1,089,645 14.0 8.9
85 Broad Street
New York, NY 10004
Racal-Datacom, Inc.(4)....... 1,025,349 12.5 8.1
1601 North Harrison Parkway
Sunrise, FL 333233-2899
Yoshitaka Kitao SOFTBANK
Holdings, Inc. ............. 1,026,179 13.3 8.4
10 Langley Road, Suite 403
Newton Center, MA 02159
Kleiner Perkins Caufield &
Byers Entities(5)........... 1,014,453 12.9 8.2
2750 Sand Hill Road
Menlo Park, CA 94025
Marc Collins-Rector(6)....... 649,562 8.3 5.3
2000 Benedict Canyon
Beverly Hills, CA 90210
Henry R. Nothhaft(7)......... 100,896 1.3 *
John K. Peters(8)............ 69,669 * *
Michael F. Anthofer(9)....... 15,741 * *
Scott G. Eagle(10)........... 11,667 * *
George D. Carr(11)........... 6,667 * *
Louis P. Bender III(12)...... 1,025,349 12.5 8.1
Robert W. Doede.............. -- -- --
Vinod Khosla(13)............. 1,014,453 12.9 8.2
Randy Maslow(14)............. 37,507 * *
Terence M. O'Toole(15)....... -- -- --
Franco Regis(16)............. 1,580,968 19.6 12.6
Gary E. Rieschel(17)......... 1,026,179 13.3 8.4
All current executive
officers and directors as a
group (16 persons)(18)...... 4,685,685 53.5% 35.4%

--------
* Less than 1%.
** Upon closing of the initial public offering and the Direct Placements,
Williams Communications will beneficially own a total of 1,704,545 shares
and exercisable warrants, or 13.4% of the Company.
(1) Applicable percentage ownership after this offering reflects the issuance
of 3,000,000 shares in the offering and an assumed 1,636,363 shares in
the Direct Placements and the exclusion of 149,739 shares to be
repurchased by the Company from certain stockholders who are not
officers, directors or affiliates of the Company at the price per share
Price to Public. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission, based on factors
including voting and investment power with respect to shares, subject to
the applicable community property laws. Shares of Common Stock subject to
options or warrants

424A 61st Page of 98 TOC 1st Previous Next ↓Bottom Just 61st
currently exercisable, or exercisable by August 31, 1997, are deemed
outstanding for the purpose of computing the percentage ownership of the
person holding such options or warrants, but are not deemed outstanding
for computing the percentage ownership of any other person.
(2) Includes warrants to purchase 341,001 shares of stock.
(3) Consists of securities held of record by GS Capital Partners, L.P., an
investment partnership, of which affiliates of The Goldman Sachs Group,
L.P. ("GS Group") are the general partner or investment manager. GS Group
disclaims beneficial ownership of the shares owned by GS Capital
Partners, L.P. to the extent attributable to partnership interests
therein held by persons other than GS Group and its affiliates. GS
Capital Partners, L.P. shares voting and investment power with certain of
its affiliates. Includes warrants to purchase 58,523 shares of stock.
(4) Includes warrants to purchase 512,259 shares of stock.
(5) Includes shares held by Kleiner Perkins Caufield & Byers VII, KPCB
Information Sciences Zaibatsu Fund, KCPB Information Sciences Zaibatsu
Fund II and KCPB VII Founders Fund (collectively, the "KCPB Entities").
Also includes warrants to purchase 149,432 shares held by the KCPB
Entities.
(6) Includes 80,007 shares of Common Stock issuable upon exercise of
outstanding stock options.
(7) Includes 100,896 shares of Common Stock issuable upon exercise of
outstanding stock options and warrants.
(8) Includes 69,669 shares of Common Stock issuable upon exercise of
outstanding stock options and (ii) warrants.
(9) Includes 15,741 shares of Common Stock issuable upon exercise of
outstanding stock options.
(10) Includes 11,667 shares of Common Stock issuable upon exercise of
outstanding stock options.
(11) Includes 6,667 shares of Common Stock issuable upon exercise of
outstanding stock options.
(12) Includes 1,025,349 shares and exercisable warrants held by Racal-Datacom,
Inc. See note (4). Mr. Bender is the President of Racal-Datacom, Inc. Mr.
Bender disclaims beneficial ownership of such shares.
(13) Represents shares beneficially owned by the KCPB Entities. Mr. Khosla is
an affiliate of such entities. See note (5). Mr. Khosla disclaims
beneficial ownership of such shares, except to the extent of his
pecuniary interest therein.
(14) Includes 37,507 shares of Common Stock issuable upon exercise of
outstanding stock options.
(15) Excludes 1,089,645 shares and exercisable warrants that may be deemed to
be beneficially owned by the Goldman Sachs Group, L.P. See note (3). Mr.
Terence M. O'Toole, a director of the Company, serves on the Board of
Directors as a representative of GS Capital Partners, L.P., pursuant to a
contractual arrangement. Mr. O'Toole is a Managing Director of Goldman,
Sachs & Co., the investment manager for GS Capital Partners, L.P. Mr.
O'Toole disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest therein.
(16) Includes 1,580,968 shares and exercisable warrants held by TMI Telemedia
International, Ltd. Mr. Regis is the Director of Business Development and
Strategic Planning of Telecom Italia, S.p.A., the parent of TMI Telemedia
International, Ltd. See note (2). Mr. Regis disclaims beneficial
ownership of such shares.
(17) Represents 1,026,179 shares held by Yoshitaka Kitao SOFTBANK Ventures,
Inc. Mr. Rieschel is a Senior Vice President at SOFTBANK Holdings, Inc.
Mr. Rieschel disclaims beneficial ownership of such shares.
(18) Includes shares of Common Stock issuable upon exercise of outstanding
options and warrants, and shares beneficially owned by entities
associated with Messrs. Regis, Bender, Rieschel and Khosla, as to which
they disclaim beneficial ownership. See Notes (7)-(17).

424A 62nd Page of 98 TOC 1st Previous Next ↓Bottom Just 62nd
DESCRIPTION OF CAPITAL STOCK

Upon the completion of the offering and the Direct Placements, and the
repurchase by the Company of certain shares from certain stockholders who are
not officers, directors or affiliates of the Company at the per share Price to
Public, the outstanding Common Stock of the Company will consist of 12,206,316
shares, $0.001 par value. At June 30, 1997, there were 7,719,692 shares of
Common Stock outstanding held of record by approximately 342 stockholders.

The following description of the Company's capital stock does not purport to
be complete and is subject to and qualified in its entirety by the Company's
Amended and Restated Certificate of Incorporation and Bylaws and by the
provisions of applicable Delaware law.

The Amended and Restated Certificate of Incorporation and Bylaws contain
certain provisions that are intended to enhance the likelihood of continuity
and stability in the composition of the Board of Directors and which may have
the effect of delaying, deferring, or preventing a future takeover or change
in control of the Company unless such takeover or change in control is
approved by the Board of Directors.

COMMON STOCK

A total of 100,000,000 shares of Common Stock of the Company will be
authorized upon the closing of the offering. Holders of Common Stock do not
have cumulative voting rights, and, therefore, holders of a majority of the
shares voting for the election of directors can elect all of the directors. In
such event, the holders of the remaining shares will not be able to elect any
directors.

Holders of the Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any existing or future agreements
between the Company and its debtholders. See "Dividend Policies." The Company
has never declared or paid cash dividends on its capital stock, expects to
retain future earnings, if any, for use in the operation and expansion of its
business, and does not anticipate paying any cash dividends in the foreseeable
future. In the event of the liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets legally available for distribution after payment of all debts and other
liabilities and subject to the prior rights of any holders of Preferred Stock
then outstanding.

The Common Stock has no preemptive, redemption or subscription rights. The
outstanding shares of Common Stock are, and the shares offered by the Company
will be, when issued and paid for, fully paid and nonassessable.

PREFERRED STOCK

Effective upon the closing of the offering, the Board of Directors has the
authority, without further action by the Stockholders, to issue up to
10,000,000 shares of Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any
series or the designation of such series, without any further vote or action
by the Stockholders. The issuance of Preferred Stock could adversely affect
the voting power of holders of Common Stock and the likelihood that such
holders will receive dividend payments and payments upon liquidation and could
have the effect of delaying, deferring or preventing a change in control of
the Company. The Company has no present plan to issue any shares of Preferred
Stock.

WARRANTS

As of June 30, 1997, the following warrants were outstanding (warrants noted
at items (iv) through (vii) currently are for Preferred Stock and will be
exercisable for the number of shares of Common Stock indicated below upon
conversion of Preferred Stock that will automatically occur immediately prior
to the closing of the offering):

(i) Warrants to purchase 44,935 shares of Common Stock at an exercise
price of $15.00 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on September 1, 1998.

(ii) Warrants to purchase 5,000 shares of Common Stock exercisable
through February 15, 2000, at a nominal exercise price.

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(iii) Warrants to purchase 25,536 shares of Common Stock at an exercise
price of $7.40 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on July 20, 1998.

(iv) Warrants to purchase 117,046 shares of Common Stock at an exercise
price of $10.82 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on December 11, 1998.

(v) Warrants to purchase 230,938 shares of Common Stock at an exercise
price of $6.50 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on December 31, 2000.

(vi) Warrants to purchase 130,273 shares of Common Stock at an exercise
price of $26.87 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on December 31, 2000.

(vii) Warrants to purchase 38,482 shares of Common Stock at an exercise
price of $19.49 per share (subject to adjustment for stock splits, stock
dividends and the like), which expires on June 6, 1999. Warrants to
purchase 35,915 shares of Common Stock at an exercise price of $19.49 per
share (subject to adjustment for stock splits, stock dividends and the
like), which expire on July 31, 1999. Warrant to purchase 156,072 shares of
Common Stock at an exercise price of $19.49 per share (subject to
adjustment for stock splits, stock dividends and the like), which expires
on August 21, 1999. Warrants to purchase 462,324 shares of Common Stock at
an exercise price of $19.49 per share (subject to adjustment for stock
splits, stock dividends and the like), which expire on October 31, 1999.
Warrant to purchase 184,930 shares of Series D Preferred Stock at an
exercise price of $19.49 per share (subject to adjustment for stock splits,
stock dividends and the like), which expires on March 5, 2000.

(viii) Warrants to purchase shares of Common Stock equal to 25% of the
number of shares of Common Stock issuable upon conversion of the promissory
note issued to Williams Communications Group, Inc. Such warrants are
exercisable after the close of this offering at an exercise price per share
equal to 50% of the Price to Public and expires on June 19, 2002.

(ix) Warrants to purchase 90,909 shares of Common Stock at an exercise
price per share equal to 50% of the Price to Public, which expire on June
27, 2003.

REGISTRATION RIGHTS

Pursuant to the agreement between the Company and holders of approximately
7,296,253 shares of Common Stock (the "Holders"), the Holders are entitled to
certain rights with respect to the registration of such shares under the
Securities Act. If the Company proposes to register any of its securities
under the Securities Act, either for its own account or for the account of
other security Holders exercising registration rights, such Holders are
entitled to notice of such registration and are entitled to include shares of
such Common Stock therein. Additionally, Holders of the Registrable Securities
are also entitled to certain demand registration rights pursuant to which they
may require the Company to file a registration statement under the Securities
Act at the Company's expense with respect to their shares of Common Stock, and
the Company is required to use its best efforts to effect such registration.
All of these registration rights are subject to certain conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in such registration and the right of the
Company not to effect a requested registration within six months following an
offering of the Company's securities, including the offering made hereby.

Additionally, pursuant to an agreement with Critical Technologies Inc.
("CTI"), certain employees of CTI who have been granted options to purchase an
aggregate of up to 60,000 shares of the Company's Common Stock are entitled to
certain piggyback registration rights with respect to such shares. Such rights
are subject to the right of the underwriters of an offering to limit the
number of shares included in such registration.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

Limitation of Director and Officer Liability

The Company's Certificate of Incorporation and Bylaws contain certain
provisions relating to the limitation of liability and indemnification of
directors and officers. The Company's Certificate of Incorporation provides
that directors of the Company may not be held personally liable to the Company
or its stockholders for monetary damages for a breach of fiduciary duty,
except for liability (i) for any breach of the director's duty of loyalty to
the Company or

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its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law, (iii) under
Section 174 of the Delaware General Corporation Law, relating to prohibited
dividends, distributions and repurchases or redemptions of stock, or (iv) for
any transaction from which the director derives an improper personal benefit.
However, such limitation does not limit the availability of non-monetary
relief in any action or proceeding against a director. In addition, the
Company's Certificate of Incorporation and Bylaws provide that the Company
shall indemnify its directors and officers to the fullest extent authorized by
Delaware law.

Classified Board of Directors

Upon completion of this offering, the Company's Certificate of Incorporation
will provide that, so long as the Board of Directors consists of more than two
directors, the Board of Directors will be divided into three classes of
directors serving staggered three-year terms. As a result, one-third of the
Company's Board of Directors will be elected each year.

No Stockholder Action by Written Consent

Upon completion of this offering, the Company's Certificate of Incorporation
will provide that the stockholders can take action only at a duly called
annual or special meeting of Stockholders. Stockholders of the Company will
not be able to take action by written consent in lieu of a meeting. These
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of the Company.

TRANSFER AGENT AND REGISTRAR

ChaseMellon has been appointed as the transfer agent and registrar for the
Company's Common Stock. Its telephone number for such purposes is (212) 553-
9730.

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RESCISSION OFFERS

The Company intends to commence approximately 30 days after the
effectiveness of the Offering made hereby, a rescission offer (the "Rescission
Offer") pursuant to a registration statement filed under the Securities Act of
1933, as amended (the "Act") and pursuant to the state securities laws of the
States of California, Florida, Illinois, Missouri, Ohio, Texas, and Wisconsin,
covering convertible debentures and Common Stock sold to investors which may
have been sold in violation of the registration requirements of the federal
and state securities laws, which represent an aggregate of 78,835 shares as of
June 30, 1997 (the "Rescission Stock"). Because of the frequency and number of
sales, including the number of persons who received offers and who purchased
shares, the private placement exemption under the Act may not have been
available for the Company's prior sales of the Rescission Stock. The Company
will offer to rescind such prior sales by repurchasing the Rescission Stock at
the price per share paid therefor (a range of $3.75 per share to $30.00 per
share) plus interest thereon at the statutory rate as the case may be from the
date of purchase by the purchaser to the expiration of the Rescission Offer.
The Company currently expects to use a portion of the proceeds from the
offering to make such payments, if any. The Rescission Offer will expire
approximately 30 days after the effectiveness of the registration statement
with respect to the Rescission Stock. Under such Rescission Offer, the Company
would be required to make an aggregate payment of approximately $1.0 million
plus the aggregate amount of interest thereon as described above, if all
offerees accept the offer. Offerees who do not accept the Rescission Offer
will, for purposes of applicable federal and state securities laws, be deemed
to hold registered shares under the Act which will be freely tradeable in the
public market as of the effective date of the registration statement with
respect to the Rescission Stock. The Act does not expressly provide that a
Rescission Offer will terminate a purchaser's right to rescind a sale of stock
which was not registered under the Act as required. Accordingly, should the
Rescission Offer be rejected by any or all offerees, the Company may continue
to be contingently liable under the Act for the purchase price of Rescission
Stock up to an aggregate amount of approximately $1.0 million plus statutory
interest of approximately $200,000.

In addition, options issued pursuant to the Company's 1995 Stock Incentive
Plan for Employees and Consultants (the "1995 Plan") and nonplan options for
the purchase of Common Stock were issued to approximately 150 to 200 people in
California in 1995 and 1996 for which the Company was unable to rely on the
exemption provided by Section 25102(f) of the California Corporations Code. In
March 1996, the Company was denied a permit for these issuances by the
California Commissioner of Corporations as a result of the Company's having
had two classes of Common Stock with differing voting rights. In addition, a
smaller number of options were issued to optionees in other states, including
Michigan, Missouri, Virginia, Washington and Florida, for which the Company
may not have had available an exemption from qualification. Also, the November
17, 1995, grant of options for the purchase of 60,000 shares of Common Stock
to employees of Critical Technologies Incorporated was not qualified and may
not have had an exemption available under the blue sky laws of California. The
aforementioned options are potentially subject to rescission, and the Company
intends to include them in its planned Rescission Offer discussed above. Under
such Rescission Offer, the Company could be required to make an aggregate
payment of up to approximately $767,000. The Company currently expects to use
a portion of the proceeds from the offering to make such payments, if any.

As of the date hereof, management is not aware of any claims for rescission
against the Company. While the Company will offer to rescind the securities
sales, there are no assurances that the Company will not otherwise be subject
to possible penalties or fines relating to these issuances. The Company
believes the Rescission Offers will provide it with additional meritorious
defenses to any such future claims. See "Risk Factors--Rescission Offers,"
"Use of Proceeds," "Shares Eligible for Future Sale" and Note 5 of Notes to
the Financial Statements.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have approximately
12,206,316 shares of Common Stock outstanding, after giving effect to the
automatic conversion of all outstanding shares of Preferred Stock into Common
Stock immediately prior to the closing of this offering and the repurchase by
the Company of certain shares from certain stockholders who are not officers,
directors or affiliates of the Company at the per share Price to Public, and
assuming (i) no exercise of the Underwriters' over-allotment option, and (ii)
no exercise of outstanding options or

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warrants. Effective upon the consummation of this offering, assuming no
exercise of outstanding options or warrants, the Company will have outstanding
options to purchase approximately 1,563,907 shares of Common Stock and
warrants to purchase an aggregate of approximately 1,590,540 shares of Common
Stock.

Of the Common Stock outstanding upon completion of this offering, the
3,000,000 shares of Common Stock sold in this offering will be freely
tradeable without restriction or further registration under the Securities
Act, except for any shares purchased by "affiliates" of the Company, as that
term is defined under the Securities Act and the Regulations promulgated
thereunder (an "Affiliate"). The remaining 9,206,316 shares of Common Stock
held by officers, directors, employees, consultants and other stockholders of
the Company were sold by the Company in reliance on exemptions from the
registration requirements of the Securities Act and are "restricted
securities" within the meaning of Rule 144 under the Securities Act. Any
shares of Common Stock issued upon the exercise of options or warrants held by
any of such persons will constitute restricted securities. Approximately
175,603 of the outstanding shares of Common Stock that are restricted
securities will be eligible for sale in the public market as of the date of
this Prospectus (the "Effective Date") in reliance on Rule 144(k) under the
Securities Act. The remaining 9,030,713 shares of Common Stock held by
existing stockholders are subject to lock-up agreements with the
Representatives. Of the shares of Common Stock subject to lock-up agreements,
approximately 7,471,166 shares may not be sold or transferred until 360 days
after the Effective date, approximately 1,428,708 shares may not be sold or
transferred until 180 days after the Effective Date and approximately 130,839
shares may not be sold or transferred until 90 days after the Effective Date.
None of the shares subject to such lock-up agreements may be sold or
transferred during the applicable lock-up period without the consent of the
underwriters except for transfers pursuant to gifts or certain partnership
distributions and similar transfers in which the transferee enters into a
substantially similar lock-up agreement. Upon the expiration of the lock-up
agreements, all of such locked-up shares will become eligible for sale either
360, 180 or 90 days, respectively, after the Effective Date subject to the
provisions of Rules 144(k), 144 or 701. UBS Securities LLC may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to these lock-up agreements.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially
owned restricted securities for a period of at least one year from the later
of the date such restricted securities were acquired from the Company or the
date they were acquired from an Affiliate, is entitled to sell, within any
three-month period commencing 90 days after the Effective Date, a number of
shares that does not exceed the greater of 1% of the then outstanding shares
of Common Stock (approximately 122,063 shares immediately after this offering)
or the average weekly trading volume in the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain provisions relating to the number and notice of sale and the
availability of current public information about the Company.

Further, under Rule 144(k), if a period of at least two years has elapsed
between the later of the date restricted securities were acquired from the
Company and the date they were acquired from an Affiliate of the Company, a
holder of such restricted securities who is not an Affiliate at the time of
the sale and has not been an Affiliate for at least three months prior to the
sale would be entitled to sell the shares immediately after the Effective Date
without regard to the volume and manner of sale limitations described above.
Any employee, director or consultant to the Company who purchased his or her
shares pursuant to a written compensation plan or contract is entitled to rely
on the resale provisions of Rule 701, which permits non-Affiliates to sell
their Rule 701 shares beginning 90 days after the Effective Date without
having to comply with the volume limitations and other restrictions of Rule
144 and permits Affiliates to sell their Rule 701 shares without having to
comply with the Rule 144 holding period restrictions. As of June 30, 1997,
there were outstanding options to purchase approximately 1,548,507 shares
which under certain circumstances would be available for sale pursuant to Rule
701, of which approximately 1,465,167 of the shares underlying such options
are subject to lock-up agreements. Of the approximately 1,563,907 total shares
issuable upon exercise of outstanding options, approximately 1,322,028 shares
may not be sold or transferred until 360 days after the Effective Date,
approximately 158,540 shares may not be sold or transferred until 180 days
after the Effective Date, and approximately 83,340 shares may not be sold or
transferred until 90 days after the Effective Date. Options for approximately
706,635 of the total 1,563,907 shares will be exercisable as of June 30, 1997.

In addition, the Company intends to register shares of Common Stock reserved
for issuance pursuant to its 1993 Incentive Stock Option Plan, 1995 Stock
Incentive Plan for Employees and Consultants, Amended and Restated 1996 Stock
Plan, 1997 Stock Plan and 1997 Employee Stock Purchase Plan following the
closing of this offering. Shares

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issued under the 1997 Stock Plan and 1997 Employee Stock Purchase Plan (other
than shares issued to the Affiliates) after the effective date of a
registration statement covering such shares generally may be sold immediately
in the public market, subject to vesting requirements and the lock-up
agreements described above. See "Management--Employee Stock Plans."

Prior to this offering, there has been no public market for the Common Stock
of the Company, and any sale of substantial amounts of Common Stock in the
open market, or the availability of shares for sale, may adversely affect the
market price of the Common Stock and the ability of the Company to raise funds
through equity offerings in the future.

The holders of approximately 7.3 million shares are entitled to certain
registration rights with respect to their shares. See "Description of Capital
Stock--Registration Rights."

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UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom UBS Securities LLC,
Unterberg Harris and Wheat, First Securities, Inc. are acting as
representatives (the "Representatives"), have agreed to purchase from the
Company the following respective number of shares of Common Stock:

[Download Table]

TOTAL NUMBER
UNDERWRITERS OF SHARES
------------ ------------

UBS Securities LLC..............................................
Unterberg Harris................................................
Wheat, First Securities, Inc. ..................................
---------
Total......................................................... 3,000,000
=========

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel. The
nature of the Underwriters' obligations is such that they are committed to
purchase all shares of Common Stock offered hereby if any of such shares are
purchased. The Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act.

The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the offering
price set forth on the cover page of this Prospectus, and to certain dealers
at such price less a commission not in excess of $ per share. The
Underwriters may allow and such dealers may reallow a concession not in excess
of $ per share to certain other dealers. After the public offering of the
shares of Common Stock, the offering price and other selling terms may be
changed by the Underwriters.

The Representatives have further advised the Company that, pursuant to
Regulation M under the Securities Act, certain persons participating in the
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, which may have the
effect of stabilizing or maintaining the market price of the Common Stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the Common Stock on behalf
of the Underwriters for the purpose of fixing or maintaining the price of the
Common Stock. A "syndicate covering transaction" is the bid for or the
purchase of the Common Stock on behalf of the Underwriters to reduce a short
position incurred by the Underwriters in connection with the offering. A
"penalty bid" is an arrangement permitting the Representatives to reclaim the
selling concession otherwise accruing to an Underwriter or syndicate member in
connection with the offering if the Common Stock originally sold by such
Underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed
by such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.

The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock to cover over-allotments, if any, at the
public offering price set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions. To the extent that the Underwriters
exercise this option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof which the number of shares
of Common Stock to be purchased by it shown in the above table bears to the
total number of shares of Common Stock offered hereby. The Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters.

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All officers, directors and significant stockholders of the Company who
beneficially own or have dispositive power over substantially all of the
shares of Common Stock outstanding prior to this offering, have agreed that
they will not, without the prior written consent of the Representatives,
offer, sell, contract to sell, pledge, grant any option to sell or otherwise
dispose of shares of Common Stock or securities convertible, or exchangeable
for, Common Stock, or warrants or other rights to purchase shares of Common
Stock, whether now owned or hereafter acquired, for a period of 360 days after
the date of this Prospectus. The Company has agreed that it will not, without
the prior written consent of lead managing underwriter, offer, sell or
otherwise dispose of any shares of Common Stock, for a period of 360 days
after the date of this Prospectus, except that the Company may grant
additional options and issue stock under its stock option plans and stock
purchase plans or issue shares of Common Stock upon the exercise of
outstanding stock options.

The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereof.

Concurrently with the closing of the offering, certain strategic investors
have agreed to purchase directly from the Company shares of Common Stock
having an aggregate purchase price of approximately $18.0 million (including
$3.0 in cancellation of indebtedness). The Representatives will receive a
commission payable by the Company on the sale of the shares related to the
Direct Placements equal to one-half of the underwriting discounts and
commissions payable on the shares offered in the offering. All of the shares
purchased in the Direct Placements will be purchased at the Price to Public
set forth on the cover page of this Prospectus. See "Direct Placements" and
"Certain Transactions--Williams Transaction."

Prior to this offering, there has been no public market for the Common Stock
of the Company. The initial public offering price will be determined through
negotiations among the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price, in addition to
prevailing market and economic conditions, are certain financial information
of the Company, the history of, and the prospects for, the Company and the
industry in which it competes, an assessment of the Company's management, its
past and present operations, the prospects for, and timing of, future revenues
of the Company, the present stage of the Company's development and the above
factors in relation to market values and various valuation measures of other
companies engaged in activities similar to those of the Company. The initial
public offering price set forth on the cover page of this Prospectus should
not, however, be considered an indication of the actual value of the Common
Stock. Such price is subject to change as a result of market conditions and
other factors. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the public
market subsequent to this offering at or above the initial offering price.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. Certain legal matters in connection with
the Common Stock offered hereby will be passed upon for the Underwriters by
Brobeck, Phleger & Harrison LLP, Palo Alto, California. Brobeck, Phleger &
Harrison LLP has represented the Company with respect to certain legal matters
and may continue to represent the Company from time to time.

EXPERTS

The financial statements of the Company as of December 31, 1995 and 1996 and
for each of the three years in the period ended December 31, 1996, appearing
in this Prospectus and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.

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ADDITIONAL INFORMATION

A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered hereby has been filed by the Company with the
Securities and Exchange Commission, Washington, D.C. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to such Registration Statement, exhibits and schedules. A
copy of the Registration Statement may be inspected by anyone without charge
at the Commission's principal office, 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of all or any part thereof, including any exhibit thereto,
may be obtained from the Commission upon the payment of certain fees
prescribed by the Commission. The Commission maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The
address of the site is http://www.sec.gov.

The Company intends to furnish its stockholders with annual reports
containing financial statements certified by its independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
unaudited interim financial information.

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GLOSSARY OF TERMS

56 Kbps.................... Equivalent to a single high-speed telephone
service line; capable of transmitting one voice
call or 56 Kbps of data. Currently in widespread
use by medium and large businesses primarily for
entry level high-speed data and very low-speed
video applications.

ATM........................ Asynchronous Transfer Mode. A low latency, fixed
delay information transfer standard for routing
traffic. The ATM format can be used by many
different information systems, including LANs, to
deliver traffic at varying rates, permitting a
mix of data, voice and video.

Backbone................... A centralized high-speed network that
interconnects smaller, independent networks.

Bandwidth.................. The number of bits of information that can move
through a communications medium in given amount
of time; the capacity of a telecommunications
circuit/network to carry voice, data and video
information. Typically measured in Kbps and Mbps.
Bandwidth from public networks is typically
available to business and residential end-users
in increments from 56 Kbps to T-3.

CIR........................ Committed Information Rate.--The rate, usually
expressed as a particular quantitative amount of
Kbps of Mbps of bandwidth, at which data is
guaranteed to be transmitted through a dedicated
lease line network connection.

CLEC....................... Competitive local exchange carrier. A
telecommunications company that provides an
alternative to a LEC for local transport of
private line and special access
telecommunications services.

E-mail..................... An application that allows a user to send or
receive text messages to or from any other user
with an Internet address, commonly termed an E-
mail address.

Firewall................... A system placed between networks that filters
data passing through it and removes unauthorized
traffic, thereby enhancing the security of the
network.

Frame relay................ A variable delay information transfer standard
for relaying traffic. Frame relay can be an
economical means to backhaul traffic to an ATM
network.

FTP........................ File Transfer Protocol. A protocol that allows
file transfer between a host and a remote
computer.

Internet................... A global collection of interconnected computer
networks which use TCP/IP, a common
communications protocol.

ISDN....................... Integrated Services Digital Network. An
information transfer standard for transmitting
digital voice and data over telephone lines at
speeds up to 128 Kbps.

Kbps....................... Kilobits per second. A transmission rate. One
kilobit equals 1,024 bits of information.

G-1

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LAN........................ Local Area Network. A data communications network
designed to interconnect personal computers,
workstations, minicomputers, file servers and
other communications and computing devices within
a localized environment.

Latency.................... The time that elapses between the moment when a
command is sent to the time that a response is
received. On a network, latency is due to delays
in routers or switches, congestion delays on a
crowded backbone, and the time required for
electrons to travel a great distance between
nodes on a network.

Leased line................ Telecommunications line dedicated to a particular
customer along a predetermined route.

LEC........................ Local Exchange Carrier. A telecommunications
company that provides telecommunications services
in a geographic area in which calls generally are
transmitted without toll charges.

Mbps....................... Megabits per second. A transmitting digital
information over an analog telephone line.

Modem...................... A device for transmitting digital information
over an analog telephone line.

NAP........................ Network Access Point. A location at which ISPs
exchange each other's traffic.

Online services............ Commercial information services that offer a
computer user access to a specified slate of
information, entertainment and communications
menus on what appears to be a single system.

Peering.................... The commercial practice under which nationwide
ISPs exchange each other's traffic without the
payment of settlement charges.

POPs....................... Points-of-presence. Geographic areas within which
the Company provides local access. For purposes
of this Memorandum, POPs include both physical
points of presence as well as VLA.

Router..................... A system placed between networks that relays data
to those networks based upon a destination
address contained in the data packets being
routed.

Server..................... Software that allows a computer to offer a
service to another computer. Other computers
contact the server program by means of matching
client software. In addition, such term means the
computer on which server software runs.

SuperPOP................... A SuperPOP is a Concentric POP that is directly
connected to the Concentric ATM backbone.
SuperPOPs typically support dial access from the
region surrounding the SuperPOP (typically within
200 miles of the SuperPOP) using the services of
a CLEC. SuperPOPs also support dedicated access
connections to customer locations using Local
Exchange Carrier and/or Competitive Access
Provider facilities to connect the customer to
the Concentric SuperPOP.

TCP/IP..................... Transmission Control Protocol/Internet Protocol.
A suite of network protocols that allow computers
with different architectures and operating system
software to communicate with other computers on
the Internet.

T-1........................ A data communications circuit capable of
transmitting data at 1.5 Mbps.

A data communications circuit capable of
T-3........................ transmitting data at 45 Mbps.

UNIX....................... A computer operating system frequently found on
workstations and PCs and noted for its
portability and communications functionality.

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VLA........................ Virtual local access call numbers which allow a
subscriber in a location outside the calling area
of a physical POP to place a local call to a
phone number without incurring long distance or
message unit charges.

VPN........................ Virtual Private Network. A network capable of
providing the tailored services of a private
network (i.e., low latency, high throughput,
security and customization) while maintaining the
benefits of a public network (i.e., ubiquity and
economies of scale).

World Wide Web or Web...... A system that supports easy access to documents
that have been linked across the Internet. The
documents contain links to each other, hence the
term "Web." Users do not have to know the
locations of particular documents and work
through a user friendly interface.

Webserver.................. A server connected to the Internet from which
Internet users can obtain information.

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CONCENTRIC NETWORK CORPORATION

INDEX TO FINANCIAL STATEMENTS

[Download Table]

PAGE
----

Report of Ernst & Young LLP, Independent Auditors........................ F-2
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Common Stock Subject to Rescission and Stockholders' Equity
(Deficit)............................................................... F-5
Statements of Cash Flows................................................. F-6
Notes to Financial Statements............................................ F-8

F-1

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors Concentric Network Corporation

We have audited the accompanying balance sheets of Concentric Network
Corporation as of December 31, 1995 and 1996, and the related statements of
operations, common stock subject to rescission and stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated March 14, 1997
which report contained an explanatory paragraph regarding the Company's
ability to continue as a going concern, the Company, as discussed in Note 1,
has obtained written representations from certain shareholders as to their
intent and ability to fund the operations of the Company through at least
December 31, 1997. Therefore, the conditions that raised substantial doubt
about whether the Company will continue as a going concern no longer exist.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Concentric Network
Corporation at December 31, 1995 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.

Ernst & Young LLP

San Jose, California
March 14, 1997, except for Note 1--"The Company"
and Note 5, as to which the date is June 23, 1997,
and Note 10, as to which the date is July , 1997

-------------------------------------------------------------------------------

The foregoing report is in the form that will be signed upon the completion
of the reincorporation of the Company under the laws of the State of Delaware
and the restatement of capital accounts described in Note 10 to the financial
statements.

/s/ Ernst & Young LLP

San Jose, California
July 3, 1997

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CONCENTRIC NETWORK CORPORATION

BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

[Download Table]

PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY (DEFICIT)
------------------ MARCH 31, AT MARCH 31,
1995 1996 1997 1997
-------- -------- ----------- ----------------
(UNAUDITED) (UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents... $ 19,054 $ 17,657 $ 2,841
Accounts receivable, net of
allowances including $80 in
1996 and $303 in 1997 to a
related party.............. 116 1,849 2,323
Prepaid expenses and other
current assets............. 1,167 1,722 1,689
-------- -------- ---------
Total current assets......... 20,337 21,228 6,853
Property and equipment:
Computer and telecommunica-
tions equipment............ 17,622 55,091 60,927
Software.................... 256 583 789
Furniture and fixtures and
leasehold improvements..... 833 2,130 2,612
-------- -------- ---------
18,711 57,804 64,328
Accumulated depreciation and
amortization............... 2,422 9,877 11,101
-------- -------- ---------
16,289 47,927 53,227
Other assets................. 609 1,567 1,358
-------- -------- ---------
Total assets................. $ 37,235 $ 70,722 $ 61,438
======== ======== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable............ $ 4,159 $ 16,723 $ 15,619
Accrued compensation and
other employee benefits.... 230 714 571
Other current liabilities... 617 2,163 1,882
Current portion of capital
lease obligations, includ-
ing $2,758 in 1995,$10,180
in 1996, and $10,772 in
1997 to a related party.... 3,198 11,258 12,304
Note payable to related par-
ty......................... 3,000 -- --
Deferred revenue............ 141 1,238 1,182
-------- -------- ---------
Total current liabilities.... 11,345 32,096 31,558
Capital lease obligations,
including $10,210 in 1995,
$29,167 in 1996, and $33,034
in 1997 to a related party,
net of current portion...... 10,977 30,551 35,349
Convertible debentures....... 70 -- --
Commitments and contingencies
Class A common stock subject
to rescission, $0.001 par
value:
Issued and outstanding
shares--445 in 1995, 455 in
1996 and 1997.............. 5,080 5,150 5,150
Stockholders' equity (defi-
cit):
Preferred stock, $0.001 par
value; issuable in series:
Authorized shares--4,667 in
1995 and 7,333 in 1996 and
1997
Issued and outstanding
shares--2,170 in 1995,
4,901 in 1996 and 1997;
none outstanding pro
forma--unaudited (liquida-
tion preference of $89,798
at March 31, 1997)......... 35,695 95,215 96,323 $ --
Common stock, $0.001 par
value; issuable in clas-
ses:
Authorized shares--6,677 in
1995, 13,343 in 1996 and
1997
Issued and outstanding
shares--1,388 in 1995,
1,393 in 1996 and 1,396 in
1997; 6,411 shares issued
and outstanding
pro forma--unaudited....... 1,639 1,850 1,958 98,281
Accumulated deficit.......... (27,571) (93,952) (108,633) (108,633)
Deferred compensation........ -- (188) (267) (267)
-------- -------- --------- ---------
Total stockholders' equity
(deficit)................... 9,763 2,925 (10,619) $ (10,619)
-------- -------- --------- =========
Total liabilities and stock-
holders' equity (deficit)... $ 37,235 $ 70,722 $ 61,438
======== ======== =========

See accompanying notes.

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CONCENTRIC NETWORK CORPORATION

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

[Download Table]

THREE-MONTH
YEARS ENDED DECEMBER 31, PERIODS ENDED
--------------------------- --------------------
MARCH 31, MARCH 31,
1994 1995 1996 1996 1997
------- -------- -------- --------- ---------
(UNAUDITED)

Revenue..................... $ 442 $ 2,483 $ 15,648 $ 1,533 $ 9,154
Costs and expenses:
Cost of revenue........... 2,891 16,168 47,945 7,256 15,744
Network equipment write-
off...................... -- -- 8,321 -- --
Development............... 534 837 2,449 340 1,025
Marketing and sales,
including $95, $920,
$2,448, $792, and $494 to
a related party for the
years ended December 31,
1994, 1995, and 1996, and
the three-month periods
ended March 31, 1996 and
1997, respectively....... 639 3,899 16,609 3,120 4,936
General and
administrative........... 611 2,866 3,445 736 1,060
------- -------- -------- -------- --------
Total costs and expenses.... 4,675 23,770 78,769 11,452 22,765
------- -------- -------- -------- --------
Loss from operations........ (4,233) (21,287) (63,121) (9,919) (13,611)
Interest income............. (19) (137) (614) (192) (129)
Interest expense, including
$0, $797, $3,065, $506, and
$1,061 to a related party
for the years ended
December 31, 1994, 1995,
and 1996, and the three-
month periods ended March
31, 1996 and 1997,
respectively............... 76 858 3,874 653 1,199
------- -------- -------- -------- --------
Net loss.................... $(4,290) $(22,008) $(66,381) $(10,380) $(14,681)
======= ======== ======== ======== ========
Pro forma net loss per
share...................... $ (11.92) $ (1.98)
======== ========
Shares used in computing pro
forma net loss per share... 5,567 7,398
======== ========

See accompanying notes.

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CONCENTRIC NETWORK CORPORATION

STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION AND STOCKHOLDERS' EQUITY
(DEFICIT)
(IN THOUSANDS)

[Enlarge/Download Table]

COMMON STOCK STOCKHOLDERS' EQUITY (DEFICIT) TOTAL
SUBJECT TO --------------------------------------------------- STOCK-
RESCISSION PREFERRED STOCK COMMON STOCK ACCUMU- DEFERRED HOLDERS'
------------- ---------------- -------------- LATED COMPEN- EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT SATION (DEFICIT)
------ ------ ------- -------- ------ ------ --------- -------- ---------

Balance at December 31, 1993................. -- $ -- -- $ -- 1,339 $ 101 $ (1,273) $ -- $ (1,172)
Issuance of Class A common stock............ 7 200 -- -- 5 19 -- -- 19
Issuance of stock for services.............. -- -- -- -- 8 93 -- -- 93
Stock exchanged for long-term debt.......... -- -- -- -- 31 348 -- -- 348
Contribution of shares in connection with
note settlement............................ -- -- -- -- (66) -- -- -- --
Stock options granted for debt and
services................................... -- -- -- -- -- 800 -- -- 800
Conversion of debentures to common stock.... 241 2,612 -- -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- -- (4,290) -- (4,290)
--- ------ ------ -------- ----- ------ --------- ----- --------
Balance at December 31, 1994................. 248 2,812 -- -- 1,317 1,361 (5,563) -- (4,202)
Issuance of Series A preferred stock and
common stock (net of issuance costs)....... -- -- 906 10,147 62 117 -- -- 10,264
Issuance of Series C preferred stock (net of
issuance costs)............................ -- -- 805 20,691 -- -- -- -- 20,691
Conversion of note to Series B preferred
stock...................................... -- -- 367 4,035 -- -- -- -- 4,035
Warrants issued to purchase Series B
preferred stock............................ -- -- -- 822 -- -- -- -- 822
Issuance of Class A common stock............ 23 690 -- -- -- 1 -- -- 1
Issuance of Class A common stock for
services................................... -- -- -- -- 2 19 -- -- 19
Conversion of officer's note payable for
Class B common stock....................... -- -- -- -- 7 80 -- -- 80
Warrants issued to purchase Class A common
stock...................................... -- -- -- -- -- 61 -- -- 61
Conversion of debentures to Class A common
stock...................................... 174 1,578 -- -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- -- (22,008) -- (22,008)
--- ------ ------ -------- ----- ------ --------- ----- --------
Balance at December 31, 1995................. 445 5,080 2,078 35,695 1,388 1,639 (27,571) -- 9,763
Issuance of Class A common stock............ -- -- -- -- -- 1 -- -- 1
Conversion of debentures to Class A common
stock...................................... 10 70 -- -- -- -- -- -- --
Exercise of options......................... -- -- -- -- 5 22 -- -- 22
Conversion of note to Series C preferred
stock (net of issuance costs).............. -- -- 123 2,960 -- -- -- -- 2,960
Issuance of Series D preferred stock (net of
issuance costs)............................ -- -- 2,451 48,533 -- -- -- -- 48,533
Conversion of note to Series D preferred
stock...................................... -- -- 249 5,072 -- -- -- -- 5,072
Warrants issued to purchase Series D
preferred stock............................ -- -- -- 2,955 -- -- -- -- 2,955
Deferred compensation resulting from grant
of options................................. -- -- -- -- -- 188 -- (188) --
Net loss.................................... -- -- -- -- -- -- (66,381) -- (66,381)
--- ------ ------ -------- ----- ------ --------- ----- --------
Balance at December 31, 1996................. 455 5,150 4,901 95,215 1,393 1,850 (93,952) (188) 2,925
Issuance of Class A common stock
(unaudited)................................ -- -- -- -- 3 11 -- -- 11
Warrants issued to purchase Series D
preferred stock (net of issuance costs)
(unaudited)................................ -- -- -- 1,108 -- -- -- -- 1,108
Deferred compensation resulting from grant
of options (unaudited)..................... -- -- -- -- -- 97 -- (97) --
Amortization of deferred compensation
(unaudited)................................ -- -- -- -- -- -- -- 18 18
Net loss (unaudited)........................ -- -- -- -- -- -- (14,681) -- (14,681)
--- ------ ------ -------- ----- ------ --------- ----- --------
Balance at March 31, 1997 (unaudited)........ 455 $5,150 4,901 $ 96,323 1,396 $1,958 $(108,633) $(267) $(10,619)
=== ====== ====== ======== ===== ====== ========= ===== ========

See accompanying notes.

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CONCENTRIC NETWORK CORPORATION

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

[Download Table]

OPERATING ACTIVITIES
Net loss...................... $(4,290) $(22,008) $(66,381) $(10,380) $(14,681)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............... 169 2,196 7,528 1,261 3,629
Amortization of deferred
interest and marketing and
sales related to issuance
of warrants................ -- -- 1,942 65 193
Amortization of deferred
compensation............... -- -- -- -- 18
Loss on disposal of
equipment.................. -- 29 -- -- --
Network equipment write-
off........................ -- -- 8,321 -- --
Compensation related to
stock sales and option
grants..................... 400 864 -- -- --
Stock issued for services... 93 19 -- -- --
Changes in current assets
and liabilities:
Prepaid expenses and other
current assets............ (48) (818) (57) (114) 49
Accounts receivable........ (81) (14) (1,734) (301) (474)
Accounts payable........... 1,081 3,051 5,129 (75) 624
Accrued compensation and
other employee benefits... 57 173 484 32 (143)
Deferred revenue........... -- 141 1,097 715 (57)
Other current liabilities.. (20) 539 1,546 373 (282)
------- -------- -------- -------- --------
Net cash used in operating
activities................... (2,639) (15,828) (42,125) (8,424) (11,124)
INVESTING ACTIVITIES
Additions of property and
equipment.................... (791) (1,427) (6,889) (514) (2,495)
Increase in refundable
deposits..................... -- -- (442) -- --
(Increase) decrease in note
receivable................... (255) 255 -- -- --
------- -------- -------- -------- --------
Net cash used in investing
activities................... (1,046) (1,172) (7,331) (514) (2,495)
FINANCING ACTIVITIES
Proceeds from notes payable... 298 7,000 6,300 -- --
Repayment of lease obligations
to a related party........... -- (1,609) (4,561) (492) (1,972)
Repayment of lease
obligations.................. -- -- (886) (88) (344)
Repayment of notes payable.... (324) (218) (1,300) -- --
Proceeds from sales of
convertible debentures....... 3,500 -- -- -- --
Proceeds from issuances of
stock and warrants........... 219 30,818 48,506 (211) 1,119
------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities......... 3,693 35,991 48,059 (791) (1,197)
------- -------- -------- -------- --------
Increase (decrease) in cash
and cash equivalents......... 8 18,991 (1,397) (9,729) (14,816)
Cash and cash equivalents at
beginning of period.......... 55 63 19,054 19,054 17,657
------- -------- -------- -------- --------
Cash and cash equivalents at
end of period................ $ 63 $ 19,054 $ 17,657 $ 9,325 $ 2,841
======= ======== ======== ======== ========

See accompanying notes.

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CONCENTRIC NETWORK CORPORATION

STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)

[Download Table]

THREE-MONTH
YEARS ENDED DECEMBER 31, PERIODS ENDED
----------------------- -------------------
MARCH 31, MARCH 31,
1994 1995 1996 1996 1997
------- ------- ------- --------- ---------
(UNAUDITED)

SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Stock options issued to settle note
payable........................... $ 400 $ -- $ -- $ -- $ --
Stock exchanged for notes payable,
including accrued interest........ $ 348 $ 4,115 $ 8,082 $3,010 $ --
Capital lease obligations incurred
with a related party.............. $ -- $14,578 $30,945 $2,485 $6,435
Capital lease obligations
incurred.......................... $ -- $ 1,207 $ 2,136 $ -- $ --
Reduction of accounts payable
through capital lease obligations
incurred.......................... $ -- $ -- $ -- $ -- $1,726
Convertible debentures exchanged
for stock......................... $2,612 $ 1,578 $ 70 $ -- $ --
Issuance of warrants............... $ -- $ 883 $ 2,955 $ -- $ --
Purchase of property and equipment
through accounts payable.......... $ -- $ -- $ 6,344 $ -- $ --
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Interest paid...................... $ 9 $ 850 $ 2,807 $ 401 $1,156

See accompanying notes.

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CONCENTRIC NETWORK CORPORATION

NOTES TO FINANCIAL STATEMENTS

(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

Concentric Network Corporation (the Company or Concentric) was incorporated
in the state of Florida in April 1991. Concentric provides tailored, value-
added Internet Protocol (IP) based network services for businesses and
consumers. To provide these services, the Company utilizes its low/fixed
latency, high-throughput network, employing its advanced network architecture
and the Internet. Concentric's service offerings for enterprises include
virtual private networks (VPNs), dedicated access facilities (DAFs) and Web
hosting services. These services enable enterprises to take advantage of
standard Internet tools such as browsers and high-performance servers for
customized data communications within an enterprise and between an enterprise
and its suppliers, partners and customers. These services combine the cost
advantages, nationwide access and standard protocols of public networks with
the customization, high performance, reliability and security of private
networks. Concentric's service offerings for consumers and small office/home
office customers include local Internet dial-up access, Web hosting services
and online multiplayer gaming.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Since inception, the Company has
incurred cumulative net losses of approximately $108,633,000 and has negative
working capital as of March 31, 1997. Management expects the Company to incur
additional losses and recognizes the need for an infusion of cash during the
fiscal year 1997. The Company is actively pursuing various alternatives to
secure additional financing and believes that sufficient funding will be
available to achieve its planned business objectives (see Note 10). The
Company has obtained written representations from certain shareholders as to
their intent and ability to fund operations through at least December 31,
1997.

Interim Results

The accompanying balance sheet as of March 31, 1997 and the statements of
operations and cash flows for the three months ended March 31, 1996 and 1997
and the statement of common stock subject to rescission and stockholders'
equity (deficit) for the three months ended March 31, 1997 are unaudited. In
the opinion of management, the statements have been prepared on the same basis
as the audited financial statements and include all adjustments, consisting of
normal recurring adjustments, necessary for the fair statement of interim
periods. The data disclosed in these notes to the financial statements for
these periods is also unaudited.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original
maturity (at date of purchase) of three months or less to be the equivalent of
cash for the purpose of balance sheet and statement of cash flows
presentation. Cash and cash equivalents are carried at cost which approximates
market value. There were no short-term investments at December 31, 1995 and
1996 or March 31, 1997.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
related assets as follows: computer and telecommunications equipment: three to
five years; purchased software: three to five years; furniture and fixtures:
eight to ten years; and leasehold improvements: the shorter of the remaining
term of the related leases or the estimated economic useful lives of the
improvements. Equipment under capital leases is amortized over the related
lease term (see Note 3).

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CONCENTRIC NETWORK CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)

Revenue and Customer Receivables

Revenue is recognized over the period in which services are provided,
generally monthly. Payments received in advance of services being provided are
included in deferred revenues. Substantially all end-user subscribers pay for
services with major credit cards for which the Company receives daily
remittances from the credit card carriers.

Commissions and other obligations to strategic partners through marketing
and distribution arrangements are expensed as incurred, at the time the
associated revenue is recognized.

Concentration of Credit Risk

The Company typically offers its enterprise customers credit terms. The
Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have
historically been insignificant.

Cost of Revenue

Cost of revenue includes the cost of operating the Company's network,
including telecommunications charges, personnel costs, equipment depreciation
and amortization, and related overhead.

Development

Development expenditures primarily include personnel and related overhead
expenses incurred to design, create, and test product offerings and associated
client and server tools. These expenditures are charged to operations as
incurred. The Company does not currently develop software that is sold,
licensed, or otherwise marketed. Substantially all software development
efforts by the Company are in connection with the development of its network.

Marketing and Sales

Marketing and sales expense consists primarily of personnel expenses,
including salary and commissions, costs of marketing programs and the cost of
800 number circuits utilized by the Company for customer support functions.

Advertising Costs

The Company expenses the costs of advertising as incurred except for direct-
response advertising costs meeting certain specific criteria. To date, no
direct-response advertising costs have been capitalized.

Income Taxes

The Company accounts for income taxes using the liability method in
accordance with Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes".

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

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CONCENTRIC NETWORK CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)

Net Loss Per Share (Historical)

Except as noted below, net loss per share is computed using the weighted
average number of shares of common stock outstanding excluding common stock
subject to rescission. Common stock equivalent shares from convertible
preferred stock and from stock options and warrants are not included as the
effect is antidilutive. Pursuant to the Securities and Exchange Commission
Staff Accounting Bulletins, common and common equivalent shares issued by the
Company at prices below the initial public offering price during the twelve-
month period prior to the offering have been included in the calculation as if
they were outstanding for all periods presented (using the treasury stock
method and the estimated public offering price in calculating equivalent
shares).

Per share information calculated on the above noted basis is as follows (in
thousands, except for per share amounts):

[Download Table]

THREE-MONTH
YEARS ENDED PERIODS ENDED
DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------

Net loss per share...... $ (2.18) $ (11.22) $ (32.85) $ (5.14) $ (7.25)
========= ========= ========= ========= =========
Shares used in computing
net loss per share..... 1,971,950 1,961,403 2,020,814 2,018,794 2,024,661
========= ========= ========= ========= =========

Pro Forma Net Loss Per Share and Unaudited Pro Forma Stockholders' Equity
(Deficit)

Pro forma net loss per share has been computed as described above and also
gives effect, even if antidilutive, to common equivalent shares from
convertible preferred shares that will automatically convert to common shares
upon the closing of the Company's initial public offering (using the as-if-
converted method). If the offering contemplated by the prospectus is
consummated, all of the convertible preferred stock outstanding as of the
effective date of the offering will automatically be converted into an
aggregate of 5,692,750 shares of common stock based on the number of shares of
convertible preferred stock outstanding at June 23, 1997. Unaudited pro forma
stockholders' equity (deficit) at March 31, 1997, as adjusted for the
conversion of preferred stock is disclosed on the balance sheet.

Stock-Based Compensation

The Company accounts for employee stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB Opinion No. 25), and has adopted the "disclosure only"
alternative described in Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123).

Effect of New Accounting Standard

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" (FAS 128), which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact of
FAS 128 on the calculation of primary and fully diluted earnings per share is
not expected to be material.

The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," effective January 1, 1996. The Company continually reviews
long-lived assets to assess recoverability based upon undiscounted cash flow
analysis. Impairments,

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CONCENTRIC NETWORK CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)

if any, are recognized in operating results in the period in which a permanent
diminution in value is determined (see Note 3).

Customer Concentrations

2. NETWORK EQUIPMENT WRITE-OFF

In December 1996, the Company wrote off approximately $8,321,000
representing the net book value and future commitments for certain network
equipment purchased from Sattel Communications LLC (Sattel), a stockholder of
the Company. The Company decided not to deploy the equipment in the network
because of concerns that the equipment would not provide the functionality and
reliability required by the Company and concerns that the equipment provider
would be unable to provide timely maintenance and support. Included in
accounts payable in the accompanying balance sheet at December 31, 1996 and
March 31, 1997 was $7,517,000 and $5,791,000, respectively, related to this
equipment.

3. COMMITMENTS

Operating Leases

The Company has an agreement with a third party through which such third
party makes available the premises at which the Company's POP sites throughout
the United States are located. POP sites are locations where certain
telecommunications switching and related equipment are installed. This
agreement expires in October 1999, and the amount of the payments is based,
among other things, on the number of POP sites maintained by the Company,
subject to certain minimums. Expenses of approximately $232,000, $1,155,000,
$1,622,000, $356,000, and $372,000 were incurred during the years ended
December 31, 1994, 1995, and 1996, and the three-month periods ended March 31,
1996 and 1997, respectively, for these facilities. Additionally, the Company
has agreements with three telecommunications companies to locate POP sites and
certain of such equipment at their facilities. The expiration dates associated
with these agreements range from December 1998 to January 2000. Expenses
incurred on these leases was $0 during 1996 and $162,000 for the three-month
period ended March 31, 1997.

The Company leases space for offices and a data center in Bay City,
Michigan. The lease expires in December 1997. Rent expense associated with the
facility was approximately $36,000, $36,000, $42,000, $9,000, and $11,000 in
the years ended December 31, 1994, 1995, and 1996, and the three-month periods
ended March 31, 1996 and 1997, respectively. In March 1996, the Company
entered into a lease agreement for office space in Saginaw, Michigan,
primarily for its customer support organization. This lease expires in
December 2001. Rent expense associated with the Saginaw facility was
approximately $129,000 in 1996 and $54,000 for the three-month period ended
March 31, 1997. The Company maintains its corporate headquarters in Cupertino,
California where it leases its facility under an operating lease that expires
in April 1998. Lease expense associated with this facility was approximately
$100,000, $267,000, $61,000, and $200,000 in the years ended December 31, 1995
and 1996, and the three-month periods ended March 31, 1996 and 1997,
respectively.

Rent expense under all operating leases of the Company totaled approximately
$268,000, $1,291,000, $2,060,000, $426,000, and $799,000 in the years ended
December 31, 1994, 1995 and 1996 and the three-month periods ended March 31,
1996 and 1997, respectively.

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NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)

Future minimum lease commitments for all noncancelable operating leases at
December 31, 1996 are as follows (in thousands):

[Download Table]

1997.............................................................. $2,283
1998.............................................................. 985
1999.............................................................. 779
2000.............................................................. 217
2001.............................................................. 217
------
Total............................................................. $4,481
======

Capital Leases

In August 1994, the Company entered into a master lease agreement under
which a related party began installing networking equipment at the Company's
POP sites and data center. This agreement became effective upon installation
and acceptance by the Company on March 31, 1995. The lease provides for
monthly payments for terms of 48 or 60 months, depending upon the type of
equipment. The Company has continued to install equipment under the terms of
this agreement, resulting in a monthly payment of approximately $896,000 and
$1,228,000 at December 31, 1996 and March 31, 1997, respectively.

In September 1995, the Company entered into a master lease agreement with a
third party for an equipment lease line against which the Company has leased
approximately $3,342,000 as of March 31, 1997. The term of the lease is 36
months and provides for monthly payments of approximately $114,000 as of March
31, 1997. The Company has granted to the third party a security interest in
all equipment leased under this agreement.

Assets capitalized under capital leases totaled approximately $15,785,000,
$48,856,000, and $52,885,000 at December 31, 1995 and 1996, and March 31,
1997, respectively, and are included in computer and telecommunications
equipment. Accumulated amortization for assets capitalized under capital
leases totaled approximately $1,787,000, $8,306,000, and $9,055,000 at
December 31, 1995 and 1996, and March 31, 1997 respectively. Amortization of
leased assets is included in depreciation and amortization expense. Future
minimum lease payments under capital lease obligations at December 31, 1996
are as follows (in thousands):

[Download Table]

1997............................................................ $15,732
1998............................................................ 15,105
1999............................................................ 11,321
2000............................................................ 6,069
Thereafter...................................................... 3,393
-------
Total minimum lease payments.................................... 51,620
Less amount representing interest............................... 9,811
-------
Present value of net minimum lease payments..................... 41,809
Less current portion of capital leases.......................... 11,258
-------
Long-term portion of capital leases............................. $30,551
=======

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NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)

Other

The Company has a noncancelable service agreement with AT&T for the
utilization of its frame relay telecommunications network. The agreement
provides for minimum payments to AT&T of approximately $300,000 per month over
its three-year term, expiring in June 1999.

The Company has a noncancelable service agreement with MCI for the
utilization of its ATM telecommunications network. The agreement provides for
minimum payments to MCI of approximately $1,200,000 per year over its term,
expiring three years after the end of an initial ramp up period but no later
than June 2000. The Company also has a noncancelable telecommunications
service agreement with MCI for other services, including dedicated access and
800 service, that provides for minimum payments of approximately $8,500,000
over the term of the agreement, expiring in June, 1998. The Company had
incurred expenses of approximately $3,700,000, $0, and $3,994,000 for the year
ended December 31, 1996 and the three-month periods ended March 31, 1996 and
1997, respectively, related to these other services.

The Company has remaining minimum prepaid royalty commitments to a vendor
for distribution of licenses of the vendor's software totaling approximately
$1,016,000 due in installments through 1997. Prepaid royalties related to this
agreement were $300,000 at December 31, 1996 and $225,000 at March 31, 1997.

In November 1995, the Company entered into a two-year service agreement
under which a third party provides substantially all of the network analysis
and deployment and maintenance of POP sites. This agreement has subsequently
been extended to October 31, 1999. The Company will reimburse the third party
for its employee compensation and direct costs for services provided. At the
end of the agreement, the third party is obligated to transfer to the Company
those personnel, resources, and facilities used to support the Company's
network analysis, POP site deployment, and maintenance. The Company, in turn,
will pay the third party $675,000 to relocate the remainder of the third
party's business to new facilities. Additionally, as part of the agreement,
the Company granted 60,000 options for its Class A common stock to employees
of such third party at an exercise price of $3.75. At March 31, 1997, all of
these options were vested.

4. CONVERTIBLE DEBENTURES AND NOTES

At December 31, 1995, convertible debentures in the amount of $70,000,
representing 9,802 shares of common stock, were outstanding. The conversion of
these debentures into shares of Class A common stock subject to rescission was
completed in March 1996.

In 1995, the Company issued convertible notes totaling $7,000,000 to
shareholders of which $4,000,000, plus accrued interest, was converted into
Series B convertible preferred stock in December 1995. The remaining
$3,000,000 outstanding at December 31, 1995 was converted into Series C
convertible preferred stock in February 1996.

5. COMMON STOCK SUBJECT TO RESCISSION

In August 1993, the Company commenced sales of convertible debentures and
certain additional shares of its common stock. Through March 31, 1995, sales
of convertible debentures aggregated $4,260,000, and issuance of common stock
aggregated $890,000. The sale of common stock and sale of and/or conversion of
debentures into common stock was not made pursuant to a registration statement
filed under the Securities Act of 1933 (the Act) or any filings pursuant to
the laws of any of the states in which such sales occurred (State Blue Sky
Laws). Although at the time the Company believed the sale and conversion, if
applicable, of these securities was exempt from the provisions of the Act and
applicable State Blue Sky Laws, it appears that the appropriate exemptions may
not

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NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)

have been available. As a result, the Company is conducting a Recission Offer
and purchasers of these securities will be entitled to a return of the
consideration paid for their stock or debentures. As such, these shares have
been classified as common stock subject to rescission in the accompanying
financial statements. Additionally, options issued pursuant to the Company's
1995 Stock Incentive Plan to Employees and Consultants (the 1995 Plan) and
non-plan options were issued in various states for which the Company may not
have had an available exemption under state laws. Such options are potentially
subject to rescission and the Company intends to include them in the
rescission offer. As of March 31, 1997, there have been no claims asserted
against the Company. Subsequent to March 31, 1997, an analysis was performed
of the statutes of limitations under federal and state securities laws
applicable to the shares which may have been issued without securities laws
exemptions and it was determined that a number of such statute of limitations
had lapsed. While the Company will offer to rescind the shares and options
pursuant to the Rescission Offer, there can be no assurances that the Company
will not otherwise be subject to possible statutory remedies for return of the
purchase price of such securities plus interest thereon totaling, as of June
23, 1997, approximately $1,200,000 related to the issuance of the stock and an
amount equal to approximately $767,000 with respect to options.

6. STOCKHOLDERS' EQUITY

On August 5, 1996, the Company amended its Articles of Incorporation to
increase the number of authorized shares of Class A common stock and preferred
stock to 13,333,333 and 7,333,333, respectively. Of the 7,333,333 authorized
shares of preferred stock, 1,000,000, 866,667, 933,333, and 4,533,333 are
designated as Series A, B, C, and D, respectively.

Preferred Stock

Preferred stock at December 31, 1996 is as follows:

[Download Table]

SHARES
ISSUED AND PAR LIQUIDATION
AUTHORIZED OUTSTANDING VALUE AMOUNT PREFERENCE
---------- ----------- ------ ----------- -----------

Series A convertible...... 1,000,000 906,454 $0.001 $10,146,987 $10,000,000
Series B convertible...... 866,667 366,946 $0.001 4,857,130 4,035,130
Series C convertible...... 933,333 928,243 $0.001 23,651,008 20,690,804
Series D convertible...... 4,533,333 2,699,588 $0.001 56,559,871 55,071,586
--------- ----------- -----------
4,904,136 $95,214,996 $89,797,520
========= =========== ===========

In April 1995, the Company agreed to sell 906,454 shares of Series A
convertible preferred stock and, as discussed below, warrants to purchase
Class A common stock for an aggregate of $10,000,000. In December 1995,
convertible notes totaling $4,000,000 and accrued interest were converted into
366,946 shares of Series B convertible preferred stock (see Note 4). In
October 1995, the Company agreed to sell 928,243 shares of Series C
convertible preferred stock. In August 1996, the Company agreed to sell
2,699,588 shares of Series D convertible preferred stock and, as discussed
below, warrants to purchase 795,051 shares of Series D convertible preferred
stock in connection with other agreements established with certain Series D
investors. Included in the sale of Series D shares was the conversion of a
June 1996 $5,000,000 bridge loan and accrued interest thereon.

The Preferred Stock and Warrant Purchase Agreement pursuant to which the
Series A convertible preferred stock was issued, as amended through August 21,
1996 (the Series A Agreement), contains certain provisions relating to
corporate governance prior to completion of a Qualified Public Offering, as
defined and as amended (see Note 10). These provisions include limiting the
size of the Company's Board of Directors to five, giving investors the right
to designate certain directors for election by the Company, and the automatic
designation for election of the Chief Executive Officer of the Company.

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NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)

The Series D Preferred Stock Purchase Agreement (the Series D Agreement)
also contains certain provisions relating to corporate governance, which are
effective as long as 20% of the shares of Series D preferred stock issued at
the initial closing remain outstanding. These provisions include a requirement
that the Board of Directors be large enough to enable the Series D holders to
designate three, four, or five board members, depending on the number of
Series D shares outstanding.

In addition, the Series A Agreement and the Series D Agreement provide that
without approval of the Series A and Series D investors, the Company may not
declare or pay dividends on common stock other than in common stock, make
loans or advances to any person except in the ordinary course of business or
under terms of a board-approved employee stock or option plan, or engage in a
transaction with an officer or director on terms better than could be obtained
from arms' length negotiations with an unrelated third party.

Each share of Series A, B, C, and D convertible preferred stock is
convertible into shares of Class A common stock initially on a one-for-one
basis, subject to adjustment for, among other things, stock splits, stock
dividends, and the issuance of additional shares of common stock and
securities convertible into common stock. Additionally, each share of Series A
convertible preferred stock is convertible into .003207 shares of Class B
common stock. The conversion price of Series A, B, C, and D convertible
preferred stock is subject to adjustment for any future issuance of common
stock at a per share price less than the exercise or conversion price. Holders
of each share of Series A, B, C, and D convertible preferred stock are
entitled to the number of votes equal to the number of shares of Class A and
Class B common stock into which the preferred stock is convertible. Holders of
Series A, B, C, and D convertible preferred stock will be entitled to receive
dividends on a pari passu basis.

Each share of Series A, B, C, and D convertible preferred stock will be
converted automatically into the number of shares of Class A common stock into
which such shares are convertible, immediately prior to the closing of a sale
of the Company's common stock to the public in a Qualified Public Offering, as
defined and as amended.

In the event of liquidation, dissolution, or winding up of the Company, each
holder of Series A, B, C, and D convertible preferred stock will be entitled
to be paid, with respect to each share of Series A, B, C, and D convertible
preferred stock held, a liquidation preference out of the assets available for
distribution to shareholders in an amount equal to $11.03, $11.00, $27.30, and
$20.40, respectively. Thereafter, holders of common stock will get pro rata
shares of an amount equal to the aggregate liquid amounts paid to Series A, B,
C, and D. Any residual assets will be distributed among the holders of common
and preferred stock as if each share of convertible preferred stock had been
converted into the number of shares of common stock issuable upon conversion
of the convertible preferred stock immediately prior to such liquidation,
dissolution, or winding up of the Company.

Warrants to Purchase Preferred Stock

In connection with a customer network services arrangement, the Company
issued warrants to purchase 136,407 shares of Series B convertible preferred
stock at an exercise price of $11.00 beginning December 11, 1995 and warrants
to purchase 128,205 shares of Series B convertible preferred stock at an
exercise price of $27.30 beginning February 27, 1996. The warrants expire at
the earlier of October 1998 or ten days from the closing of a Qualified Public
Offering of the Company's common stock meeting certain criteria. In 1995, the
Company recorded deferred sales and marketing expense of $822,000 to reflect
the value of these warrants as determined by using the Black-Scholes option
pricing method. Amortization of deferred sales and marketing expense totaled
$249,000 for the year ended December 31, 1996, and $43,000 and $69,000 for the
three-month periods ended March 31, 1996 and 1997, respectively.

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NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)

In December 1995, the Company issued warrants to purchase 181,876 shares of
Series B convertible preferred stock to certain preferred shareholders in
connection with the Series B convertible preferred stock financing. The
warrants expire three years from issuance and are exercisable at $11.00 per
share.

On June 6, 1996 and July 29, 1996, the Company received bridge loans from
various investors of $5,000,000 and $1,300,000, respectively. Included in
these transactions were the issuance of warrants to purchase 36,765 shares and
63,725 shares of Series D convertible preferred stock. These warrants expire
three years from issuance and are exercisable at $20.40 per share. The value
of these warrants, approximately $330,000, was expensed as a cost of
financing.

As part of the sale of Series D convertible preferred stock in August 1996,
the Company issued warrants to purchase 795,051 shares of Series D convertible
preferred stock to certain Series D investors. These warrants were issued in
connection with distribution, lease financing, and joint sales and marketing
agreements. These warrants will expire in three years and are exercisable at
$20.40 per share. The value of these warrants was determined by using the
Black-Scholes option pricing method. Approximately $1,369,000 and $121,000 of
this value was expensed in the year ended December 31, 1996 and the three-
month period ended March 31, 1997, respectively, with the remaining balance
being amortized over the three-year life of the warrants.

Also, in connection with the sale of Series D convertible preferred stock,
an additional 176,678 warrants to purchase Series D convertible preferred
stock were issued for net consideration of approximately $1,108,000 in March
1997. These warrants will expire in three years and are exercisable at $20.40
per share.

Common Stock

Common stock at December 31, 1996 is as follows:

[Download Table]

SHARES ISSUED
AND
AUTHORIZED OUTSTANDING PAR VALUE AMOUNT
---------- ------------- --------- ----------

Class A........................ 13,333,333 1,385,790 $0.001 $1,769,819
Class B........................ 10,024 7,117 $0.001 80,065
---------- --------- ----------
13,343,357 1,392,907 $1,849,884
========== ========= ==========

The holders of Class A common stock are entitled to one vote per share on
all matters submitted to the shareholders. The holders of Class B common stock
are entitled to 500 votes per share on all matters submitted to the
shareholders. Each share of Class B common stock will automatically be
converted into one share of Class A common stock immediately prior to the
closing of common stock in a Qualified Public Offering, as defined and as
amended. The holders of common stock do not have preemptive rights under the
Company's Articles of Incorporation to subscribe for additional shares of
common stock. See Note 10 for the conversion of Class B common stock.

Subject to the preferences of the preferred stock, the holders of common
stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available for payment. In the event of the liquidation, dissolution, or
winding up of the Company, holders of common stock are entitled to receive
ratably an amount equal to the aggregate liquidation amount paid to all
holders of preferred stock. Thereafter, any remaining assets of the Company
are shared ratably by holders of common stock, calculated assuming the
conversion of all outstanding preferred stock.

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NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)

Warrants to Purchase Common Stock

From April 20 through July 5, 1995, the Company issued warrants to purchase
181,876 shares of Class A common stock to certain preferred shareholders in
connection with the Series A convertible preferred stock financing. The
warrants expire three years from issuance and are exercisable at $11.00 per
share.

In connection with the capital lease agreements discussed in Note 3, the
Company issued warrants to purchase 67,388 shares of Class A common stock at
an exercise price of $3.75. The warrants expire over a term from July 20, 1998
to February 15, 2000. In 1995, the Company recorded deferred interest of
$61,000 to reflect the value of these warrants using the Black-Scholes option
pricing method. Amortization of deferred interest totaled $25,000 for the year
ending December 31, 1996 and $16,000 and $3,000 for the three-month periods
ended March 31, 1996 and 1997, respectively.

Stock Option Plans

The Company maintains the 1993 Incentive Stock Option Plan (the 1993 Plan),
the 1995 Plan and the 1996 Stock Plan (the 1996 Plan), collectively referred
to as the Plans. The 1996 Plan was approved by the Board of Directors on
December 30, 1996 and calls for shareholder approval within one year. The 1995
Plan was approved by the Board of Directors and shareholders in September
1995. In October 1995, the Company offered to exchange options issued under
the 1993 Plan for options under the 1995 Plan. With the inception of the 1996
Plan, no further options will be granted under the 1993 and 1995 Plans.

Among other things, the 1996 Plan provides for granting of incentive stock
options, nonstatutory stock options, and stock appreciation rights to
employees and consultants. Unless terminated sooner, the 1996 Plan will
terminate automatically in December 2006. A total of 700,000 shares of common
stock may be issued under the 1996 Plan of which 520,700 shares are available
for grant at December 31, 1996. See Note 10 for amendment and restatement of
the 1996 Plan. Options under all plans generally vest over a four-year period,
25% after one year and the remaining portion in equal monthly increments over
the remaining three years. Options generally expire within ninety days of
termination of employment or five years after full vesting has occurred.

In August 1994, the Company granted nonqualified options under individual
option agreements to purchase 106,667 shares of common stock at a per share
price of $3.75 to two of the Company's executives and majority shareholders
(53,333 options each) to settle a note payable of $400,000. This transaction
also resulted in compensation expense of $400,000 at the grant date. These
options were fully vested at the time of issuance; however, they may not be
exercised if the holder has any other unexercised options that were previously
granted to that individual. In addition, during 1994, the Company granted
other nonqualified stock options to various individuals under separate option
agreements. These options vest over periods of up to one year and expire over
periods of up to five years.

In April 1995, an additional 53,333 options to purchase Class A common stock
for $30.00 per share were issued to two of the Company's executives in
connection with their employment by the Company. These options were fully
vested upon issuance and are exercisable over five years.

In October 1995 and August 1996, the exercise price of options to purchase
182,375 shares and 46,673 shares of Class A common stock, respectively, were
repriced to $3.75 per share, the then fair value of the common stock, as
determined by the Company's Board of Directors.

The Company issued options to purchase 179,300 shares of Class A common
stock in December 1996 and 40,267 shares of common stock in January 1997. The
Company recorded deferred compensation, for financial

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NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)

reporting purposes, of approximately $188,000 in 1996 and $97,000 for the
three-month period ended March 31, 1997, with respect to such option grants to
reflect the difference between the exercise price and the deemed fair value
for financial reporting purposes of these shares. Amortization of this
deferred compensation was $0 in 1996 and $18,000 in the three-month period
ended March 31, 1997. The amortization of this deferred compensation will
continue over the four year vesting period of the associated stock options.

The following table summarizes stock option activity under all of the Plans:

[Download Table]

NUMBER OF PRICE PER
SHARES SHARE
--------- ---------------

Balance at January 1, 1994...................... 38,333 $3.75--$30.00
Granted....................................... 319,722 $3.75--$33.00
Exercised..................................... (4,933) $3.75
Canceled...................................... (666) $3.75
---------
Balance at December 31, 1994.................... 352,456 $3.75--$33.00
Granted....................................... 642,075 $3.75--$33.00
Exercised..................................... (133) $9.00
Canceled...................................... (187,315) $11 .25--$12.45
---------
Balance at December 31, 1995.................... 807,083 $3.75--$33.00
Granted....................................... 421,620 $3.75
Exercised..................................... (4,483) $3.75--$9.00
Canceled...................................... (95,218) $3.75--$30.00
---------
Balance at December 31, 1996.................... 1,129,002 $3.75--$33.00
Granted....................................... 392,014 $3.75--$15.00
Exercised..................................... (2,880) $3.75
Canceled...................................... (4,860) $3.75--$15.00
---------
Balance at March 31, 1997....................... 1,513,276 $3.75--$33.00
=========

At March 31, 1997, vested options totaled 613,130.

The following table summarizes information concerning currently outstanding
and exercisable options:

[Enlarge/Download Table]

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
WEIGHTED AVERAGE NUMBER
EXERCISE NUMBER REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE AND VESTED EXERCISE PRICE
-------- ----------- ---------------- ---------------- ----------- ----------------

$3.75 1,062,707 8.42 $ 3.75 513,110 $ 3.75
$6.00 210,414 9.76 $ 6.00 -- --
$8.25 - $33.00 240,155 8.78 $10.19 100,020 $12.87
--------- -------
Total 1,513,276 613,130
========= =======

Stock-Based Compensation

Pro forma information regarding results of operations and loss per share is
required by FAS 123 for awards granted after December 31, 1994 as if the
Company had accounted for its stock-based awards to employees under a
valuation method permitted by FAS 123. The value of the Company's stock-based
awards to employees in 1995 and

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NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)

1996 was estimated using the minimum value method. Should the Company complete
an initial public offering (IPO) of its stock, options granted after the IPO
will be valued using the Black-Scholes option pricing model. Among other
things, the Black-Scholes model considers the expected volatility of the
Company's stock price, determined in accordance with FAS 123, in arriving at
an option valuation. The minimum value method does not consider stock price
volatility. Further, certain other assumptions necessary to apply the Black-
Scholes model may differ significantly from assumptions used in calculating
the value of options granted in 1995 and 1996 under the minimum value method.

The minimum value of the Company's stock-based awards to employees was
estimated assuming no expected dividends and the following weighted average
assumptions:

[Download Table]

1995 1996
--------- ---------

Expected life.......................................... 8.5 years 8.5 years
Risk-free interest rate................................ 6.2% 6.3%

The weighted average minimum value of stock options granted during 1995 and
1996 was $0.10. Exercise prices for options outstanding as of December 31,
1996 ranged from $3.75 to $33.00. The weighted average remaining contractual
life of those options is 9.1 years. In 1996, certain options were issued at an
exercise price less than the stock price for which the weighted average
minimum value was $4.65. For pro forma purposes, the estimated minimum value
of the Company's stock-based awards to employees is amortized over the
options' vesting period. The results of applying FAS 123 to the Company's
option grants in 1995 and 1996 was not material to the results of operations
or loss per share for those years reported in the accompanying statements of
operations. Because FAS 123 is applicable only to awards granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
approximately 1998.

7. EMPLOYEE BENEFIT PLANS

Retirement Savings Plan

The Company maintains a contributory 401(k) plan that covers substantially
all employees. The Company contributes $0.30 for every $1.00 contributed by
the participant up to a maximum of 1.5% of the participants' compensation. The
Company contributed $5,000, $6,000, $45,000, $7,000, and $26,000 to the plan
during the years ended December 31, 1994, 1995, and 1996, and the three-month
periods ended March 31, 1996 and 1997, respectively.

8. INCOME TAXES

As of December 31, 1996, the Company had federal and state net operating
loss carryforwards of approximately $86,000,000 and $59,000,000, respectively.
The net operating loss carryforwards will expire at various dates beginning in
the years 2003 through 2011, if not utilized.

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CONCENTRIC NETWORK CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)

Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes of December 31, 1995 and 1996 are as
follows:

[Download Table]

1995 1996
---------- -----------

Deferred tax assets:
Net operating loss carryforwards................ $8,500,000 $32,000,000
Write-off of network equipment.................. -- 5,000,000
Other, net...................................... 500,000 1,000,000
---------- -----------
Total deferred tax assets......................... 9,000,000 38,000,000
---------- -----------
Deferred tax liabilities:
Other, net...................................... -- 1,000,000
---------- -----------
Net deferred tax assets........................... 9,000,000 37,000,000
Valuation allowance............................... (9,000,000) (37,000,000)
---------- -----------
$ -- $ --
========== ===========

The Company believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability
of the deferred tax assets such that a full valuation allowance has been
recorded. These factors include the Company's history of net losses since
inception and the fact that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology. The
Company believes that, based on the currently available evidence, it is more
likely than not that the Company will not generate taxable income through
1998, and possibly beyond, and accordingly will not realize the Company's
deferred tax assets through 1998 and possibly beyond. The Company will
continue to assess the realizability of the deferred tax assets based on
actual and forecasted operating results. In addition, the utilization of net
operating losses may be subject to a substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986 and
similar state provisions.

The net valuation allowance increased by approximately $7,000,000 in 1995
and $28,000,000 in 1996.

9. OTHER MATTERS

An officer of the Company is a majority shareholder of a vendor of the
Company. The Company incurred marketing fees to the vendor totaling $95,000,
$920,000, $2,450,000, $792,000, and $494,000 in the years ended December 31,
1994, 1995, 1996, and the three-month periods ended March 31, 1996 and 1997,
respectively.

10. SUBSEQUENT EVENTS

Initial Public Offering and Direct Placements

In May 1997, the Company's Board of Directors approved the filing of a Form
S-1 Registration Statement with the Securities and Exchange Commission
covering the proposed sale by the Company of up to 3,000,000 shares of its
common stock to the public plus an overallotment option for the underwriters.
Concurrently with the closing of this offering, certain strategic investors
have agreed to purchase directly from the Company shares of Common Stock
having an aggregate purchase price of approximately $18,000,000. All of such
shares will be unregistered shares purchased at the initial public offering
price.

F-20

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CONCENTRIC NETWORK CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)

On May 1, 1997, and June 6, 1997 the Company's Board of Directors took the
following actions which were approved by the Company's shareholders on June
30, 1997:

(i) Approved the reincorporation of the Company under the laws of the
state of Delaware (effective May 1, 1997)

(ii) Subject to the filing of the Amended and Restated Certificate of
Incorporation with the Secretary of the State of Delaware (which took place
on July , 1997) authorized a reverse stock split of one for 15 of the
Company's common stock and the conversion of all previously issued and
outstanding shares of Class B common stock into voting shares of common
stock, amended the definition of a Qualified Public Offering that would
trigger the automatic conversion of the shares of Series A, B, C, and D
convertible preferred shares and authorized the issuance additional shares
of Series B convertible preferred shares. (All capital accounts, share and
per share data in these financial statements have been retroactively
restated to reflect the stock split.)

(iii) Amended and restated the 1996 Stock Plan to increase the shares
reserved for grant thereunder to 793,333.

(iv) Adopted and approved the 1997 Stock Plan (the 1997 Plan) which
provides for the granting of incentive stock options to employees and the
granting of nonstatutory stock options and stock purchase rights to
employees, directors, and consultants of the Company. A total of 1,500,000
shares of the Company's common stock has been reserved for issuance
pursuant to the 1997 Plan. Unless terminated sooner, the 1997 Plan will
terminate automatically in 2007.

(v) Adopted and approved the 1997 Employee Stock Purchase Plan (the 1997
Purchase Plan) under which 500,000 shares of common stock have been
reserved for issuance. The 1997 Purchase Plan allows for eligible employees
to purchase stock at 85% of the lower of the fair market value of the
Company's common stock as of the first day of each six-month offering
period or at the end of the current purchase period. The Plan has 24-month
offering periods, with each offering period divided into four consecutive
six-month purchase periods. The initial offering period will commence on
the first trading day on or after the closing of the initial public
offering.

Exercise of Warrants

On April 18, 1997, certain preferred stockholders holding warrants to
purchase an aggregate number of 181,876 shares of Class A common stock and
66,688 shares of Series B convertible preferred stock at $11.00 per share,
exercised such warrants at a discounted price of $6.60 per share in
consideration of their early exercise. Additionally, certain preferred
stockholders exercised warrants to purchase an aggregate number of 233,660
shares of Series D convertible preferred stock at a price of $12.24,
discounted from the original price of $20.40. The Company received total
consideration of $4.5 million related to the exercise of these warrants.

Pro Forma Net Loss Per Share and Unaudited Pro Forma Stockholders' Equity
(Deficit)

Pro forma net loss per share has been computed as described above and also
gives effect, even if antidilutive, to common equivalent shares from
convertible preferred shares that will automatically convert to common shares
upon the closing of the Company's initial public offering (using the as-if-
converted method). If the offering contemplated by the prospectus is
consummated, all of the convertible preferred stock outstanding as of the
effective date of the offering will automatically be converted into an
aggregate of 5,692,750 shares of common stock based on the number of shares of
convertible preferred stock outstanding at June 25, 1997. Unaudited pro forma
stockholders' equity (deficit) at March 31, 1997, as adjusted for the
conversion of preferred stock is disclosed on the balance sheet.

F-21

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CONCENTRIC NETWORK CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)

(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)

Litigation

On April 22, 1997, a complaint was filed in the Los Angeles County,
California Superior Court against the Company and other unnamed defendants by
Sattel Communications LLC (Sattel). The complaint alleges claims for breach of
contract, breach of the covenant of good faith and fair dealing, unfair
business practices, fraud and negligent misrepresentation. Sattel claims that
the Company is in breach of an agreement to pay for up to $4.3 million of DSS
Switches from Sattel for use in the Company's network. The Complaint also
seeks unspecified consequential and punitive damages. On April 29, 1997,
Sattel served the Company with an Application for Writ of Attachment, seeking
to secure a lien on the Company's assets up to an amount of $3.6 million. At a
hearing held on June 25, 1997, the Court granted the writ. The Company has
reserved approximately $5,791,000 as of March 31, 1997 for such lawsuit in
case the Company is unsuccessful in its defense (see Note 3).

In late April and early May, 1997, three putative securities class action
complaints were filed in the United States District Court, Central District by
certain stockholders of Diana Corporation (Diana), the parent corporation of
Sattel, alleging securities fraud related to plaintiffs' purchase of shares of
Diana Common Stock in reliance upon allegedly misleading statements made by
defendants, Diana, Sattel and certain of their respective affiliates, officers
and directors. Concentric was named as a defendant in the complaint in
connection with certain statements made by Diana and officers of Diana related
to Concentric's purchase of network switching equipment from Diana's Sattel
subsidiary. The complaints do not appear to allege that Concentric made any
false or misleading statements. The plaintiffs seek unspecified compensatory
damages. The Company is currently unable to estimate a range of possible
losses associated with such lawsuits.

Bridge Loans

In June 1997, the Company borrowed $3 million from a third-party in the form
of a 10% convertible secured promissory note (the Secured Note) which is due
on November 30, 1997. In connection with the Secured Note, the Company will
issue a warrant to purchase shares of the Company's Common Stock (the
Warrant). The Note will automatically convert into shares of the Company's
Common Stock upon the closing of the initial public offering at a per share
conversion price equal to the initial public offering price. The Warrant,
which will expire five years from the date of grant, is exercisable for a
number of shares of Common Stock equal to 25% of the shares issuable upon
conversion of the Note at a per share exercise price of 50% of the initial
public offering price.

In June 1997, the Company borrowed $2 million from a stockholder in the form
of a 10% unsecured promissory note (the Unsecured Note). The Unsecured Note is
due no later than five days following the initial public offering. In
connection with the Unsecured Note, the Company will issue a warrant, which
will expire five years from the date of grant, to purchase shares of the
Company's Common Stock (the Warrant). The Warrant is exercisable for a number
of shares of Common Stock determined by multiplying the principal amount of
the loan by 50% and dividing that sum by the initial public offering price per
share. The exercise price will be equal to 50% of the initial public offering
price.

F-22

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CONCENTRIC NETWORK CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)

(INFORMATION AT MARCH 31, 1997 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
1996 AND 1997 IS UNAUDITED)

The Company deemed the fair value of the above warrants, using the Black-
Scholes method, to be approximately $950,000, which will be recorded as a
discount to the above promissory Notes. Such discount will be amortized to
interest expense over the estimated term of the Notes.

In June 1997, the Company entered into a software license agreement with a
third-party. The Company used the $2 million proceeds from the Unsecured Note
as a down payment to the third-party and is obligated to pay $3 million by
July 31, 1997.

F-23

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VALUE-ADDED CONCENTRIC NETWORKING SOLUTIONS

[ARTWORK APPEARS HERE]

VPN
Concentric Network specializes in building, operating and supporting virtual
private networks (VPNs) for an enterprise's customers, business partners and
employees.

[ARTWORK APPEARS HERE]

DEDICATED ACCESS
Concentric Network offers dedicated access facilities targeted at businesses
that desire single or multipoint high-speed, dial-up and/or dedicated
connections to distributed locations.

[ARTWORK APPEARS HERE]

REMOTELINK/TM/
Concentric RemoteLink flexibly and cost-effectively allows mobile or remote
employees to securely access their corporate LAN with a low cost dial-up
connection

[ARTWORK APPEARS HERE]

CONCENTRICHOST/TM/
Concentric Network hosting services offer a variety of options for consumers and
enterprises to cost-effectively tailor their Internet and Intranet presence to
their needs, with power, speed, ease and flexibility.

[ARTWORK APPEARS HERE]

GAME GATEWAY/TM/
Concentric's Game Gateway affords consumers a one-stop source to a number of the
major online game networks with the convenience of a single billing account.

[ARTWORK APPEARS HERE]

CUSTOMER SUPPORT

Concentric Network's highly-trained customer support representatives are
equipped with comprehensive diagnostic tools to provide expertise and back-up
service via the Web or directly via telephone 24 hours a day, seven days a week.

[ARTWORK APPEARS HERE]

HIGH-PERFORMANCE NETWORK

The Concentric network provides low fixed latency and high throughput for a wide
range of value-added services. Security, speed and flexibility are a central
focus.

[Concentric Network Corporation Logo Appears here]

[Concentric Network Corporation Appears along right margin]

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-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

No dealer, salesperson or other person has been authorized to give any in-
formation or to make any representation not contained in this Prospectus and,
if given or made, such information or representations must not be relied upon
as having been authorized by the Company or any Underwriter. This Prospectus
does not constitute an offer to sell or the solicitation of any offer to buy
any of the securities offered hereby in any jurisdiction to any person to whom
it is unlawful to make such offer in such jurisdiction. Neither the delivery
of this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that the information herein is correct as of any time
subsequent to the date hereof or that there has been no change in the affairs
of the Company since such date.

---------------

TABLE OF CONTENTS

[Download Table]

PAGE
----

Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Direct Placements........................................................ 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Financial Data.................................................. 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 31
Management............................................................... 47
Certain Transactions..................................................... 56
Principal Stockholders................................................... 60
Description of Capital Stock............................................. 62
Rescission Offers........................................................ 65
Shares Eligible for Future Sale.......................................... 65
Underwriting............................................................. 68
Legal Matters............................................................ 69
Experts.................................................................. 69
Additional Information................................................... 70
Glossary................................................................. G-1
Index to Financial Statements............................................ F-1

---------------

Until 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

3,000,000 SHARES

[LOGO OF CONCENTRIC NETWORK CORPORATION]

COMMON STOCK

---------------
PROSPECTUS
, 1997
---------------

UBS SECURITIES

UNTERBERG HARRIS

WHEAT FIRST BUTCHER SINGER

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘424A’ Filing	Date	First	Last	Other Filings

	6/27/03	63
	6/19/02	63
	12/31/00	58	63
	3/5/00	63
	2/15/00	62	90
	10/31/99	63	86
	8/21/99	63
	7/31/99	63
	6/6/99	63
	12/11/98	63
	9/1/98	62
	7/20/98	63	90
	12/31/97	30	83	10-K
	12/1/97	7
	11/30/97	95
	9/30/97	7		10-Q
	8/31/97	61
	7/31/97	96		S-1/A
Filed on:	7/3/97	1	75
	6/30/97	4	94	10-Q
	6/27/97	57
	6/25/97	12	95
	6/23/97	36	87	S-1/A
	6/19/97	59
	6/6/97	94
	5/30/97	59
	5/1/97	94
	4/29/97	12	95
	4/22/97	12	95
	4/18/97	94
	4/4/97	57	58
	3/31/97	5	96
	3/14/97	75
	12/31/96	6	93
	12/30/96	90
	10/31/96	58
	10/4/96	52
	8/21/96	57	87
	8/5/96	87
	7/31/96	57
	7/29/96	57	89
	6/6/96	89
	3/31/96	23	96
	2/27/96	88
	1/1/96	83
	12/31/95	6	93
	12/20/95	57
	12/11/95	88
	11/29/95	57
	11/17/95	18	65
	11/6/95	57
	10/31/95	58
	10/16/95	57
	7/5/95	90
	4/20/95	57
	3/31/95	58	86
	12/31/94	6	93
	1/1/94	91
	12/31/93	23	78
	12/31/92	23
				List all Filings

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Filing Submission 0001012870-97-001236 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Concentric Network Corp – IPO: ‘424A’ on 7/3/97

As of: Thursday, 7/3/97 · Accession #: 1012870-97-1236 · File #: 333-27241

Initial Public Offering (IPO): Prospectus — Rule 424(a)Filing Table of Contents

Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Initial Public Offering (IPO): Prospectus — Rule 424(a)
Filing Table of Contents