SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 3, 2000
NEXTLINK COMMUNICATIONS, INC.
(Exact name of registrant as specified in charter)
Delaware 000-22939 91-1738221
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)
1505 Farm Credit Drive, McLean, Virginia 22102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 703-547-2000
Not Applicable
(Former name or former address, if changed from last report)
Item 5. Other Events
(a) NEXTLINK Communications, Inc. ("NEXTLINK") and Concentric Network
Corporation ("Concentric") have entered into a definitive agreement to merge
(the "Merger") whereby all the issued and outstanding common stock of Concentric
will be exchanged for $45 of NEXTLINK common stock. The value of NEXTLINK common
stock will be based on the 20-day average trading price (average stock price) of
NEXTLINK common stock prior to closing, subject to a collar. The collar provides
that the exchange ratio will not be less than 0.495 (if NEXTLINK's average stock
price exceeds $90.91), or more than 0.650 (if NEXTLINK's average stock price in
less than $69.23). Based on NEXTLINK's closing stock price of $78.50 on January
7, 2000, the last trading day prior to the announcement of the transaction, the
exchange ratio would be 0.5732 NEXTLINK shares per Concentric share.
The Boards of Directors of NEXTLINK and Concentric have unanimously
approved the Merger. The majority of NEXTLINK's voting stockholders have agreed
to approve the transaction. The Merger will become effective subject to approval
by Concentric stockholders and regulatory approval.
The Merger provides that both NEXTLINK and Concentric will merge into
Newco, the surviving corporation of the Merger.
(b) On February 3, 2000, NEXTLINK entered into a $1,000,000,000 Credit
and Guaranty Agreement (the "Credit Facility") with various lenders, Goldman
Sachs Credit Partners L.P., as syndication agent, Toronto Dominion (Texas),
Inc., as administrative agent, Barclays Bank PLC, and The Chase Manhattan
Bank, as co-documentation agents and Goldman Sachs Credit Partners L.P., and
TD Securities (USA) Inc., as joint lead arrangers, and certain subsidiaries
of NEXTLINK, as guarantors. Up to $125 million of the Credit Facility is
secured by a pledge of the stock of certain of the NEXTLINK's subsidiaries,
and will be secured by substantially all of the assets of those subsidiaries
and NEXTLINK.
The Credit Facility consists of a Tranche A Term Loan in the aggregate
amount of up to $387,500,000, a Tranche B Term Loan in the aggregate amount
of up to $225,000,000, and a Revolving Facility in the aggregate amount of up
to $387,500,000. In addition, the Credit Facility may be increased by up to
an additional $1,000,000,000 under certain circumstances.
Up to approximately $125,000,000 of the proceeds from the Credit Facility
will be used to finance capital expenditures, to provide working capital and for
other general corporate purposes. The remainder will be used to provide purchase
money financing for the construction, acquisition or improvement of
Telecommunication Assets (as defined in the Credit Facility).
Item 7. Financial Statements and Exhibits.
CONCENTRIC'S HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS
Concentric's Historical Consolidated Financial Statements -
Nine Months Ended September 30, 1999
CONCENTRIC NETWORK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
1999 1998
--------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 82,982 $ 98,988
Short term investments ................................................... 70,396 52,226
Current portion of restricted cash ....................................... 142,809 19,125
Accounts receivable, net ................................................. 19,689 13,714
Other current assets ..................................................... 8,562 3,058
--------- ---------
Total current assets ............................................ 324,438 187,111
Property and equipment, net ................................................... 73,927 64,268
Restricted cash, net of current portion ....................................... 8,881 17,113
Goodwill and other intangible assets .......................................... 16,190 20,364
Long term investments ......................................................... 22,206 --
Other assets .................................................................. 11,087 9,401
--------- ---------
Total assets ....................................... $ 456,729 $ 298,257
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ......................................................... $ 27,419 $ 26,342
Accrued compensation and other employee benefits ......................... 3,269 2,024
Other current liabilities ................................................ 10,915 4,559
Current portion of capital lease obligations ............................. 6,377 6,543
Deferred revenue ......................................................... 4,828 3,104
--------- ---------
Total current liabilities ....................................... 52,808 42,572
Capital lease obligations, net of current portion ............................. 6,788 10,434
Notes payable ................................................................. 146,354 146,021
Other long term liabilities ................................................... 98 --
Commitments
Redeemable exchangeable preferred stock ....................................... 173,372 156,105
Convertible redeemable preferred stock ........................................ 39,223 --
Stockholders' equity (deficit):
Common stock ............................................................. 363,684 190,076
Accumulated deficit ...................................................... (324,981) (246,055)
Deferred compensation .................................................... (617) (896)
--------- ---------
Total stockholders' equity (deficit) ............................ 38,086 (56,875)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 456,729 $ 298,257
========= =========
CONCENTRIC NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenue ............................................. $ 38,082 $ 21,579 $ 101,175 $ 57,725
--------- --------- --------- ---------
Costs and expenses:
Cost of revenue ................................ 34,711 22,906 93,894 60,834
Development .................................... 2,596 2,100 7,953 5,405
Marketing and sales ............................ 13,734 11,494 37,308 29,279
General and administrative ..................... 3,822 2,547 10,566 6,811
Amortization of goodwill and other intangible
assets ....................................... 1,392 1,100 4,175 2,449
Acquisition related charges .................... -- -- -- 1,291
Write off of in-process technology ............. -- -- -- 5,200
--------- --------- --------- ---------
Total costs and expenses ................... 56,255 40,147 153,896 111,269
--------- --------- --------- ---------
Loss from operations ................................ (18,173) (18,568) (52,721) (53,544)
Net interest expense and other ...................... (1,920) (2,390) (7,775) (10,885)
--------- --------- --------- ---------
Loss before extraordinary item ...................... (20,093) (20,958) (60,496) (64,429)
Extraordinary gain on early retirement of debt ...... -- -- -- 3,042
--------- --------- --------- ---------
Net loss ............................................ (20,093) (20,958) (60,496) (61,387)
Preferred stock dividends and accretion ............. (7,115) (5,279) (18,430) (6,556)
--------- --------- --------- ---------
Net loss attributable to common stockholders $ (27,208) $ (26,237) $ (78,926) $ (67,943)
========= ========= ========= =========
Net loss per share:
Loss before extraordinary item ................. $ (0.48) $ (0.71) $ (1.56) $ (2.23)
Extraordinary gain ............................. -- -- -- 0.11
--------- --------- --------- ---------
Net loss ....................................... (0.48) (0.71) (1.56) (2.12)
Preferred stock dividends and accretion ........ (0.17) (0.18) (0.47) (0.23)
--------- --------- --------- ---------
Net loss attributable to common stockholders $ (0.65) $ (0.89) $ (2.03) $ (2.35)
========= ========= ========= =========
Shares used in computing net loss per share
attributable to common stockholders .............. 41,789 29,388 38,920 28,858
========= ========= ========= =========
CONCENTRIC NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
Nine Months Ended
September 30,
----------------------
1999 1998
--------- ---------
Operating Activities:
Net loss .......................................................................... $ (78,926) $ (67,943)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation ............................................................. 20,207 17,618
Amortization of deferred interest, cost of revenue and marketing and sales
related to issuance of warrants ........................................ 1,163 912
Amortization of goodwill and other intangible assets ..................... 4,174 2,450
Amortization of financing costs .......................................... 473 392
Amortization of other deferred assets .................................... 1,554 2,538
Amortization of deferred compensation .................................... 280 280
Preferred stock dividends and accretion .................................. 18,429 6,556
Gain on early retirement of debt ......................................... -- (3,042)
Write-off of in-process technology ....................................... -- 5,200
Changes in current assets and liabilities:
Accounts receivable ........................................................... (6,718) (3,679)
Other current assets .......................................................... (420) 629
Prepaid expenses .............................................................. (4,256) (333)
Accounts payable .............................................................. 1,077 2,222
Accrued compensation and other employee benefits .............................. 1,245 (791)
Deferred revenue .............................................................. 1,723 175
Other current liabilities ..................................................... 6,705 3,616
--------- ---------
Net cash used in operating activities ................................ (33,290) (33,200)
--------- ---------
Investing Activities:
Net change in restricted cash ..................................................... (123,684) --
Additions of property and equipment ............................................... (28,919) (11,288)
Proceeds from sale of property and equipment ...................................... 135 --
Net change in notes receivable .................................................... (830) --
Net change in short term investments .............................................. (18,170) (17,251)
Net change in long term investments ............................................... (22,206) --
Cash investment in network services businesses, net of cash acquired .............. -- (25,077)
--------- ---------
Net cash used in investing activities ................................ (193,674) (53,616)
--------- ---------
Financing Activities:
Net change in restricted cash ..................................................... 8,232 7,313
Repayment of notes payable ........................................................ -- (1,960)
Repayment of lease obligations to a related party ................................. -- (3,079)
Repayment of lease obligations to a related party-early retirement of debt ........ -- (24,750)
Repayment of lease obligations .................................................... (5,144) (5,015)
Proceeds from issuances of stock and warrants ..................................... 161,668 2,528
Proceeds from issuances of redeemable exchangeable preferred stock ................ -- 144,250
Proceeds from issuances of convertible redeemable preferred stock ................. 50,000 --
Deferred financing costs .......................................................... (3,798) (320)
--------- ---------
Net cash provided by financing activities ............................ 210,958 118,967
--------- ---------
Net change in cash and cash equivalents ................................................ (16,006) 32,151
Cash and cash equivalents at beginning of period ....................................... 98,988 119,959
--------- ---------
Cash and cash equivalents at end of period ............................................. $ 82,982 $ 152,110
========= =========
Supplemental Disclosures of Noncash Investing and Financing Activities:
Capital lease obligations incurred with a related party ........................... $ -- $ 1,285
========= =========
Capital lease obligations incurred ................................................ $ 1,294 $ 4,485
========= =========
Supplemental Disclosures of Cash Flow Information:
Interest paid ..................................................................... $ 10,950 $ 12,499
========= =========
Item 7(a)
CONCENTRIC NETWORK CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
These unaudited condensed consolidated financial statements and the related
footnote information have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the Company's
management, the accompanying unaudited interim condensed financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information for the periods presented.
The results for the interim period ended September 30, 1999 are not necessarily
indicative of results to be expected for the entire year ending December 31,
1999 or future operating periods.
All share and per share information presented herein, except as noted, and in
the Company's condensed consolidated financial statements has been retroactively
restated to reflect a two-for-one stock split of the Company's common stock on
May 21, 1999, paid in the form of a stock dividend, to holders of record on
April 30, 1999.
2. Cash, Cash Equivalents and Short Term Investments
The Company considers all highly liquid investments with an original maturity
(at date of purchase) of three months or less to be the equivalent of cash for
the purpose of balance sheet and statement of cash flows presentation.
Investments with maturities between three and twelve months are considered to be
short term investments. Management determines the appropriate classification of
its investments in debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Company's debt securities have
been classified and accounted for as available-for-sale. These securities are
carried at fair value and unrealized gains and losses have not been material to
date. Realized gains and losses and declines in value judged to be other than
temporary on available-for-sale securities are included in interest income and
have not been material to date. Cash and cash equivalents are held primarily
with four financial institutions.
3. Net Loss Per Share
Basic and diluted net loss per share have been computed in accordance with the
Financial Accounting Standards Board issued Statement No. 128, "Earnings Per
Share". Net loss per share is computed using the weighted average number of
shares of common stock outstanding. Common stock equivalent shares from stock
options and warrants are not included as the effect is antidilutive.
4. Stockholders' Equity
In January 1999 SBC Communications Inc. purchased, prior to the stock split,
806,679 shares of common stock for an aggregate purchase price of approximately
$19.5 million pursuant to an agreement reached between the two companies in
October 1998. In connection with the agreement, the Company has issued to SBC a
warrant to purchase an additional pre-split 906,679 shares. The warrant expires
three years from the date of issuance and is exercisable at the pre-split price
of $21.00 per share. The Company deemed the fair market value of the warrant,
using the Black-Scholes method, to be $1.9 million which is being amortized as a
marketing cost over the life of the agreement.
In February 1999 the Company effected a public offering of its common stock
pursuant to a Registration Statement on Form S-3 filed with the Securities and
Exchange Commission. The Company issued and sold 2,830,500 shares prior to the
split at $44.50 per share for net proceeds of approximately $119.4 million.
Certain selling stockholders exercised warrants to purchase directly from the
Company 800,000 shares of pre split common stock having an aggregate purchase
price of approximately $10.2 million, which shares were also registered and sold
in the public offering by such stockholders.
-4-
Item 7(a)
In June 1999 the Company issued a warrant to Microsoft Corporation
("Microsoft"), in conjunction with Microsoft's $50 million purchase of preferred
stock (see Note 8), to purchase 500,000 shares of its common stock. The warrant
expires four years from the date of issuance and is exercisable at $33.27 per
share. In connection with the issuance of the Series C Preferred the Company
issued a warrant to purchase 500,000 shares of its common stock. The Company
deemed the fair market value of the warrants, using the Black-Scholes model, to
be approximately $11.9 million and is accreting this value over four years.
In June 1999 the Company amended an agreement with TMI Telemedia International,
Ltd. ("TMI") and in connection with the agreement, the Company issued a warrant
to purchase 50,000 shares of its common stock. The warrant expires in January
2001 and is exercisable at $25.1875 per share. The Company deemed the fair
market value of the warrant, using the Black-Scholes method, to be $504,000,
which was written off as other expense in June 1999.
5. Equity Investments
In January 1999 the Company purchased approximately $10.0 million of common
stock from Covad Communications, Inc. ("Covad") and certain Covad stockholders
at Covad's initial public offering price. In April 1999 the Company purchased
approximately $5.0 million of Class B Common Stock from NorthPoint
Communications Group, Inc. ("NorthPoint"). In July 1999 the Company purchased
approximately $5.0 million of Series A Convertible Preferred Stock from
Register.com, Inc. ("Register.com"). In August 1999 the Company purchased
approximately $2.0 million of Series B Preferred Stock from Asia Online, Ltd.
("Asia Online").
6. Acquisitions
On February 5, 1998, the Company acquired all of the outstanding stock of
InterNex Information Services, Inc. ("InterNex"). The transaction was accounted
for using the purchase method of accounting. The total purchase price of
approximately $23.9 million consisted of a $15.5 million cash payment upon
closing and the assumption of approximately $8.4 million of InterNex's
liabilities (including acquisition costs).
A summary of the purchase price allocation is as follows (in thousands):
Current and other assets .............................. $ 1,348
Computer and telecommunications equipment ............. 4,784
Goodwill .............................................. 9,496
Other intangible assets ............................... 3,080
Write-off of in process technology .................... 5,200
-------
Total purchase price allocation .......... $23,908
=======
Goodwill is being amortized over five years. Other intangible assets include
developed technology, assembled workforce and customer lists and are being
amortized over their useful lives ranging from two to four years.
In May 1998, the Company acquired Delta Internet Services, Inc. ("DeltaNet") in
a transaction that was accounted for as a pooling of interests. The Company
issued approximately 452,000 pre-split shares of its common stock to DeltaNet
shareholders in exchange for all outstanding DeltaNet shares. The Company also
assumed outstanding DeltaNet options and warrants which were converted to
options and warrants to purchase approximately 196,000 and 14,000 pre-split
shares, respectively, of the Company's common stock. The consolidated results of
operations for the three and nine months ended September 30, 1998 include an
acquisition related charge of $1.3 million primarily related to severance costs,
reserves for redundant facilities and assets and professional fees.
In August 1998, the Company acquired all of the outstanding stock of AnaServe,
Inc. ("AnaServe"). The transaction was accounted for using the purchase method
of accounting. The total purchase price of approximately $13.0 million consisted
of a $9.6 million cash payment upon closing and the assumption of approximately
$3.4 million of AnaServe's liabilities (including acquisition costs).
A summary of the purchase price allocation is as follows (in thousands):
-5-
Item 7(a)
Current and other assets .............................. $ 467
Computer and telecommunications equipment ............. 497
Goodwill .............................................. 11,630
Other intangible assets ............................... 416
-------
Total purchase price allocation .......... $13,010
=======
Goodwill is being amortized over five years. Other intangible assets include
developed technology, assembled workforce and customer lists and are being
amortized over their useful lives ranging from one to four years.
7. Early Retirement of Debt
On March 31, 1998, the Company retired a portion of debt in the form of capital
lease obligations to a related party. The Company paid $24.8 million for
extinguishment of debt. The Company recognized an extraordinary gain of $3.0
million in connection with this transaction.
8. Convertible Redeemable Preferred Stock
In June 1999, the Company issued 50,000 shares of Series C 7% Convertible
Redeemable Preferred Stock due 2010 ("Series C Preferred") to Microsoft for $50
million. Each share of Series C Preferred has a liquidation preference of $1,000
per share. Dividends on the Series C Preferred accrue at the rate of 7% per
annum of the liquidation preference thereof and are payable quarterly in arrears
commencing on September 1, 1999. Dividends are payable in cash, except that on
each dividend payment date dividends may be paid, at the Company's option, by
the issuance of additional shares of Series C Preferred having an aggregate
liquidation preference equal to the amount of such dividends.
The Series C Preferred is redeemable at the option of the Company, in whole or
in part, at any time on or after June 1, 2003 at redemption rates commencing
with 105.125% declining to 100% on June 1, 2010. The Series C Preferred is
subject to mandatory redemption at its liquidation preference, plus accumulated
and unpaid dividends on September 1, 2010. The holder of any Series C Preferred
has the right, at its option, to convert at any time any shares of Series C
Preferred into shares of common stock at the conversion price of $39.924.
The Company is accreting the Series C Preferred to its liquidation preference
through the due date of the Series C Preferred. The accretion for the quarter
and year-to-date period ended September 30, 1999 was approximately $888,000.
9. Consent Agreements
In July 1999, the Company solicited and received consents of more than a
majority of the Company's outstanding 12 3/4% Senior Notes due 2007 ("12 3/4%
Senior Notes") and the outstanding 13 1/2% Series B Redeemable Exchangeable
Preferred Stock due 2010 ("Series B Preferred"). The consents allow the Company
to increase its permitted investments under the Indenture relating to the 12
3/4% Senior Notes and the Certificate of Designation relating to the Series B
Preferred. In August, the Company paid consent fees of approximately $3.8
million to the holders who delivered consents prior to the expiration date of
such consents.
10. Income Taxes
The Company accounts for income taxes using the liability method in accordance
with Financial Accounting Standards Board Statement No. 109, "Accounting for
Income Taxes" ("FAS 109"). No provision for income taxes is expected for 1999 as
the Company expects to incur a net loss for the year and does not meet the
criteria for recognizing an income tax benefit under the provisions of FAS 109.
11. Commitments
-6-
Item 7(a)
In May 1999, the Company signed an agreement to lease space in Irvine,
California for an office and data center. The lease expires in June 2004. The
average annual rent over the term of the lease is approximately $411,000.
In June 1999, the Company signed an agreement through which Microsoft will
provide services to certain of the Company's customers and the Company will
purchase $7.5 million worth of advertising during the term of the three year
agreement.
In September 1999, the Company announced that it had reached an agreement to
acquire Internet Technology Group plc, a provider of Internet access for
consumers and dedicated access and hosting for businesses in the UK and Europe.
The transaction is valued at approximately $217.0 million, consisting of 50%
cash and 50% Concentric stock. The Company has placed $123.7 million into
restricted cash pending completion of this transaction.
In November 1999, the Company signed an agreement to sublease office space in
San Jose, California from November 1999 through March 2002 for approximately
$1.2 million per year.
12. Subsequent Events
In October 1999 the Company acquired substantially all of the assets of 9 Net
Avenue, Inc., a provider of web hosting services, for approximately $51.8
million in stock and cash and assumed approximately $9.9 million in liabilities.
In October 1999 the Company purchased approximately $5.0 million of Series C
Preferred stock from Corio, Inc.
-7-
Item 7(a)
Concentric's Historical Consolidated Financial Statements -
Year Ended December 31, 1998
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Concentric Network Corporation
We have audited the accompanying consolidated balance sheets of Concentric
Network Corporation as of December 31, 1997 and 1998, and the related
consolidated 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, 1998. Our audits also included the financial
statement schedule included in Item 14. These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Concentric Network Corporation at December 31, 1997 and 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the financial information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
January 25, 1999, except for Note 15,
as to which the date is February 1, 1999
-8-
Item 7(a)
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
December 31,
1997 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 119,959 $ 98,988
Short term investments ........................................................... -- 52,226
Current portion of restricted cash ............................................... 19,125 19,125
Accounts receivable, net of allowances of $80 in 1997 and $690 in 1998 ........... 4,549 13,714
Prepaid expenses and other current assets ........................................ 3,871 3,058
--------- ---------
Total current assets .................................................... 147,504 187,111
--------- ---------
Property and equipment:
Computer and telecommunications equipment ........................................ 71,942 89,668
Software ......................................................................... 1,519 5,427
Furniture and fixtures and leasehold improvement ................................. 2,984 11,357
--------- ---------
76,445 106,452
Accumulated depreciation and amortization ........................................ 22,735 42,184
--------- ---------
Total property and equipment ............................................ 53,710 64,268
--------- ---------
Restricted cash, net of current portion ............................................... 33,400 17,113
Goodwill and other intangible assets, net of current portion .......................... -- 20,364
Other assets .......................................................................... 9,875 9,401
--------- ---------
Total assets .................................................... $ 244,489 $ 298,257
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................................................................. $ 10,144 $ 26,342
Accrued compensation and other employee benefits ................................. 1,577 2,024
Other current liabilities ........................................................ 4,917 4,559
Current portion of capital lease obligations, including $13,600 in 1997 to a
related party .................................................................. 15,326 6,543
Deferred revenue ................................................................. 1,435 3,104
--------- ---------
Total current liabilities ............................................... 33,399 42,572
--------- ---------
Capital lease obligations, including $32,373 in 1997 to a related party, net of current
portion ............................................................................ 33,595 10,434
--------- ---------
Notes payable ......................................................................... 145,577 146,021
--------- ---------
Commitments and contingencies
Redeemable exchangeable preferred stock ............................................... -- 156,105
--------- ---------
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; issuable in series:
Authorized shares--10,000 in 1997 and 1998
Issued and outstanding shares--none in 1997 and 1998 ......................... -- --
Common stock, $0.001 par value; issuable in classes:
Authorized shares--100,000 in 1997 and 1998
Issued and outstanding shares--14,139 in 1997 and 15,144 in 1998 ............. 182,721 190,076
Accumulated deficit ................................................................... (149,534) (246,055)
Deferred compensation ................................................................. (1,269) (896)
--------- ---------
Total stockholders' equity (deficit) .................................... 31,918 (56,875)
--------- ---------
Total liabilities and stockholders' equity (deficit) ............ $ 244,489 $ 298,257
========= =========
-9-
Item 7(a)
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years Ended December 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
Revenue .................................................................. $ 15,648 $ 45,457 $ 82,807
Costs and expenses:
Cost of revenue ..................................................... 47,945 61,439 85,352
Network equipment write-off ......................................... 8,321 -- --
Development ......................................................... 2,449 4,850 7,734
Marketing and sales, including $2,448, $2,600 and $1,085 to a related
party for the years ended December 31, 1996, 1997 and 1998,
respectively ...................................................... 16,609 24,622 39,793
General and administrative .......................................... 3,445 4,790 10,398
Amortization of goodwill and other intangible assets ................ -- -- 3,842
Acquisition-related charges ......................................... -- -- 1,291
Write-off of in-process technology .................................. -- -- 5,200
--------- --------- ---------
Total costs and expenses ...................................... 78,769 95,701 153,610
Loss from operations ..................................................... (63,121) (50,244) (70,803)
Other income (expense) ................................................... -- 1,233 (750)
Interest income .......................................................... 614 1,217 9,975
Interest expense, including $3,065, $6,197 and $1,272 to related parties
for the years ended December 31, 1996, 1997 and 1998, respectively .... (3,874) (7,788) (23,570)
--------- --------- ---------
Loss before extraordinary item ........................................... (66,381) (55,582) (85,148)
Extraordinary gain on early retirement of debt ........................... -- -- 3,042
--------- --------- ---------
Net loss ................................................................. (66,381) (55,582) (82,106)
Preferred stock dividends and accretion .................................. -- -- (11,958)
--------- --------- ---------
Net loss attributable to common stockholders ............................. $ (66,381) $ (55,582) $ (94,064)
========= ========= =========
Net loss per share (pro-forma 1996 and 1997, historical 1998):
Loss before extraordinary item ...................................... $ (13.46) $ (5.63) $ (5.86)
Extraordinary gain .................................................. -- -- .21
--------- --------- ---------
Net loss ................................................................. (13.46) (5.63) (5.65)
Preferred stock dividends and accretion .................................. -- -- (.82)
--------- --------- ---------
Net loss per share attributable to common stockholders ................... $ (13.46) $ (5.63) $ (6.47)
========= ========= =========
Shares used in computing net loss and net loss attributable to common
stockholders per share (pro-forma 1996 and 1997, historical 1998) ..... 4,937 9,872 14,547
========= ========= =========
-10-
Item 7(a)
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION AND
STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
Stockholders' Equity (Deficit)
------------------------------
Common Stock
Subject to
Rescission Preferred Stock Common Stock
---------- ------------------ ------------------ Accumulated
Shares Amount Shares Amount Shares Amount Deficit
------ ------ ------ ------ ------ ------ -------
Balance at December 31, 1995 ............ 445 $ 5,080 2,078 $ 35,695 1,388 $ 1,639 $ (27,571)
Issuance of Class A common stock ..... -- -- -- -- -- 1 --
Conversion of debentures to Class A
common stock ....................... 10 70 -- -- -- -- --
Exercise of options .................. -- -- -- -- 5 22 --
Conversion of note to Series C
preferred stock (net of issuance
costs) ............................. -- -- 123 2,960 -- -- --
Issuance of Series D preferred stock
(net of issuance costs) ............ -- -- 2,451 48,533 -- -- --
Conversion of note to Series D
preferred stock .................... -- -- 249 5,072 -- -- --
Warrants issued to purchase Series D
preferred stock .................... -- -- -- 2,955 -- -- --
Deferred compensation resulting from
grant of options ................... -- -- -- -- -- 188 --
Net loss ............................. -- -- -- -- -- -- (66,381)
--- ------- ----- -------- ----- --------- ---------
Balance at December 31, 1996 ......... 455 5,150 4,901 95,215 1,393 1,850 (93,952)
Issuance of Class A common stock for
services ........................... -- -- -- -- 5 17 --
Conversion of Class B common to
Series A preferred stock ........... -- -- 7 -- (7) -- --
Conversion of Series A, B, C and D
preferred to Class A common stock .. -- -- (5,693) (99,604) 5,693 99,604 --
Shares issued upon the initial public
offering (net of issuance costs) ... -- -- -- -- 4,945 52,757 --
Shares issued in a private placement . -- -- -- -- 1,246 14,950 --
Conversion of note to Class A common
stock .............................. -- -- -- -- 253 3,041 --
Repurchase of Class A common stock in
connection with the initial public
offering ........................... -- -- -- -- (185) (2,217) --
Shares issued subject to dilution
ratios ............................. -- -- 484 -- -- -- --
Exercise of options to purchase stock -- -- -- -- 65 243 --
Exercise of warrants to purchase stock -- -- 301 3,281 309 1,201 --
Warrants issued to purchase stock .... -- -- -- 1,108 -- 5,370 --
Deferred compensation resulting from
grant of options ................... -- -- -- -- -- 1,303 --
Amortization of deferred compensation -- -- -- -- -- -- --
Expiration of statutes of limitations
on common stock subject to
rescission ......................... (422) (4,602) -- -- 422 4,602 --
Repurchase of shares for cancellation
in connection with Rescission Offer (33) (548) -- -- -- -- --
Net loss ............................. -- -- -- -- -- -- (55,582)
--- ------- ----- -------- ----- --------- ---------
Balance at December 31, 1997 ............ -- $ -- -- $ -- 14,139 $ 182,721 $(149,534)
Stockholders' Equity (Deficit)
------------------------------
Total
Stockholders'
Deferred Equity
Compensation (Deficit)
------------ ---------
Balance at December 31, 1995 ............ $ -- $ 9,763
Issuance of Class A common stock ..... -- 1
Conversion of debentures to Class A
common stock ....................... -- --
Exercise of options .................. -- 22
Conversion of note to Series C
preferred stock (net of issuance
costs) ............................. -- 2,960
Issuance of Series D preferred stock
(net of issuance costs) ............ -- 48,533
Conversion of note to Series D
preferred stock .................... -- 5,072
Warrants issued to purchase Series D
preferred stock .................... -- 2,955
Deferred compensation resulting from
grant of options ................... (188) --
Net loss ............................. -- (66,381)
------- --------
Balance at December 31, 1996 ......... (188) 2,925
Issuance of Class A common stock for
services ........................... -- 17
Conversion of Class B common to
Series A preferred stock ........... -- --
Conversion of Series A, B, C and D
preferred to Class A common stock .. -- --
Shares issued upon the initial public
offering (net of issuance costs) ... -- 52,757
Shares issued in a private placement . -- 14,950
Conversion of note to Class A common
stock .............................. -- 3,041
Repurchase of Class A common stock in
connection with the initial public
offering ........................... -- (2,217)
Shares issued subject to dilution
ratios ............................. -- --
Exercise of options to purchase stock -- 243
Exercise of warrants to purchase stock -- 4,482
Warrants issued to purchase stock .... -- 6,478
Deferred compensation resulting from
grant of options ................... (1,303) --
Amortization of deferred compensation 222 222
Expiration of statutes of limitations
on common stock subject to
rescission ......................... -- 4,602
Repurchase of shares for cancellation
in connection with Rescission Offer -- --
Net loss ............................. -- (55,582)
------- --------
Balance at December 31, 1997 ............ $(1,269) $ 31,918
-11-
Item 7(a)
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION AND
STOCKHOLDERS' EQUITY (DEFICIT)--(Continued)
(In thousands)
Stockholders' Equity (Deficit)
Common Stock ------------------------------
Subject to Total
Rescission Preferred Stock Common Stock Stockholders'
---------- --------------- ------------ Accumulated Deferred Equity
Shares Amount Shares Amount Shares Amount Deficit Compensation (Deficit)
------ ------ ------ ------ ------ ------ ------- ------------ ---------
Amortization of deferred
compensation ................... -- $ -- -- $ -- -- $ -- $ -- $ 373 $ 373
Common stock issued under stock
purchase plan .................. -- -- -- -- 74 781 -- -- 781
Common stock issued in acquisition
of DeltaNet Services, Inc. ..... -- -- -- -- 226 1,147 (2,457) -- (1,310)
Exercise of options to purchase
common stock ................... -- -- -- -- 612 3,527 -- -- 3,527
Exercise of warrants for no cash
consideration .................. -- -- -- -- 93 -- -- -- --
Warrants issued to purchase stock . -- -- -- -- -- 1,900 -- -- 1,900
Net loss .......................... -- -- -- -- -- -- (82,106) -- (82,106)
Preferred stock dividends and
accretion ...................... -- -- -- -- -- -- (11,958) -- (11,958)
-- ---- -- ---- ------ -------- --------- ----- --------
Balance at December 31, 1998 ...... -- $ -- -- $ -- 15,144 $190,076 $(246,055) $(896) $(56,875)
== ==== == ==== ====== ======== ========= ===== ========
-12-
Item 7(a)
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
OPERATING ACTIVITIES
Net loss ..................................................................... $ (66,381) $ (55,582) $ (82,106)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................... 7,528 16,852 24,442
Amortization of deferred interest, cost of revenue and marketing and
sales related to issuance of warrants ................................. 1,942 1,720 1,210
Amortization of goodwill and other intangible assets .................... -- -- 3,842
Amortization of deferred financing costs related to 12 3/4% Senior Notes -- -- 526
Amortization of other deferred assets ................................... -- -- 3,025
Amortization of deferred compensation ................................... -- 658 373
Gain on early retirement of debt ........................................ -- -- (3,042)
Write-off of in-process technology ...................................... -- -- 5,200
Loss on disposal of equipment ........................................... -- 162 --
Network equipment write-off ............................................. 8,321 -- --
Changes in current assets and liabilities:
Prepaid expenses and other current assets ............................ (57) (3,581) 1,009
Accounts receivable .................................................. (1,734) (2,700) (7,140)
Accounts payable ..................................................... 5,129 (7,287) 7,408
Accrued compensation and other employee benefits ..................... 484 863 (315)
Deferred revenue ..................................................... 1,097 197 509
Other current liabilities ............................................ 1,546 2,795 (1,575)
--------- --------- ---------
Net cash used in operating activities ...................... (42,125) (45,903) (46,634)
INVESTING ACTIVITIES
Additions of property and equipment ....................................... (6,889) (6,130) (23,489)
Increase in refundable deposits ........................................... (442) -- (1,200)
Decrease (increase) in note receivable .................................... -- (370) 100
Purchase of short term investments ........................................ -- -- (52,226)
Acquisition of InterNex Information Services, Inc., net of cash acquired .. -- -- (15,452)
Acquisition of AnaServe, Inc., net of cash acquired ....................... -- -- (9,625)
--------- --------- ---------
Net cash used in investing activities ...................... (7,331) (6,500) (101,892)
FINANCING ACTIVITIES
Proceeds from notes payable ............................................... 6,300 155,000 --
Change in restricted cash ................................................. -- (52,525) 16,287
Repayment of lease obligations to a related party ......................... (4,561) (10,039) (3,079)
Repayment of lease obligations to a related party--early retirement of
debt .................................................................... -- -- (24,750)
Repayment of lease obligations ............................................ (886) (1,517) (7,079)
Repayment of notes payable ................................................ (1,300) (2,000) (1,960)
Repurchase of common stock ................................................ -- (2,765) --
Deferred financing costs .................................................. -- (5,006) (320)
Proceeds from issuance of redeemable exchangeable preferred stock, net
of issuance costs ....................................................... -- -- 144,148
Proceeds from issuances of stock and warrants ............................. 48,506 73,557 4,308
--------- --------- ---------
Net cash provided by financing activities .................. 48,059 154,705 127,555
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ............................. (1,397) 102,302 (20,971)
Cash and cash equivalents at beginning of period ............................. 19,054 17,657 119,959
--------- --------- ---------
Cash and cash equivalents at end of period ................................... $ 17,657 $ 119,959 $ 98,988
========= ========= =========
-13-
Item 7(a)
CONCENTRIC NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(In thousands)
Years Ended December 31,
------------------------
1996 1997 1998
---- ---- ----
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Stock exchanged for notes payable, including accrued interest ............ $ 8,082 $ 3,041 $ --
Capital lease obligations incurred with a related party .................. 30,945 23,042 1,285
Capital lease obligations incurred ....................................... 2,136 -- 5,363
Reduction of accounts payable through capital lease obligations incurred . -- 2,000 --
Convertible debentures exchanged for stock ............................... 70 -- --
Issuance of warrants ..................................................... 2,955 5,370 1,900
Purchase of property and equipment through accounts payable .............. 6,344 -- --
Accretion of dividends and financing costs related to Redeemable
Exchangeable Preferred Stock ......................................... -- -- 11,958
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid ............................................................ $ 2,807 $ 5,728 $22,609
-14-
Item 7(a)
CONCENTRIC NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
The Company
Concentric Network Corporation (the Company or Concentric) was incorporated in
the state of Florida in 1991 and reincorporated into Delaware in 1997. The
Company operates primarily in one business segment in the United States.
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), digital subscriber line services (DSL), remote access and Web hosting.
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.
Basis Of Presentation And Preparation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Use of Estimates
The preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in these consolidated financial
statements and accompanying notes. Actual results could differ materially from
those estimates.
Cash, Cash Equivalents and Short Term Investments
The Company considers all highly liquid investments with an original maturity
(at date of purchase) of three months or less to be the equivalent of cash for
the purpose of balance sheet and statement of cash flows presentation.
Investments with maturities between three and twelve months are considered to be
short term investments. Management determines the appropriate classification of
its investments in debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Company's debt securities have
been classified and accounted for as available-for-sale. These securities are
carried at fair value and unrealized gains and losses have not been material to
date. Comprehensive net loss per share is not materially different from net loss
for all years presented. Realized gains and losses and declines in value judged
to be other than temporary on available-for-sale securities are included in
interest income and have not been material to date. Cash and cash equivalents
are held primarily with three financial institutions.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
related assets as follows: computer and telecommunications equipment: three to
five years; purchased software: three to five years; furniture and fixtures:
eight to ten years; and leasehold improvements: the shorter of the remaining
term of the related leases or the estimated economic useful lives of the
improvements. Equipment under capital leases is amortized over the shorter of
the expected useful life or the related lease term (see Note 4).
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 revenue. 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
-15-
Item 7(a)
The Company typically offers its enterprise customers credit terms. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally does not require collateral. Credit losses have historically been
insignificant.
Advertising Costs
The Company expenses the costs of advertising as incurred except for
direct-response advertising costs meeting certain specific criteria. To date, no
direct-response advertising costs have been capitalized.
Income Taxes
The Company accounts for income taxes using the liability method in accordance
with Financial Accounting Standards Board Statement No. 109, "Accounting for
Income Taxes" (FAS 109).
Basic and Diluted Net Loss Per Share
Basic and diluted net loss per share have been computed in accordance with the
Financial Accounting Standards Board issued Statement No. 128, "Earnings Per
Share."
Except as noted below, net loss per share is computed using the weighted average
number of shares of common stock outstanding excluding common stock subject to
rescission. Common stock equivalent shares from convertible preferred stock and
from stock options and warrants are not included as the effect is antidilutive.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No.
98 (SAB No. 98) which was issued in February 1998, common and common equivalent
shares issued by the Company for nominal consideration during any of the periods
for which a statement of operations was presented in the Company's initial
public offering registration statement have been included in the calculation of
basic and diluted net loss per share for all such periods in a manner similar to
a stock split.
Pro forma net loss per share gives effect, even if antidilutive, to common
equivalent shares from convertible preferred shares that were automatically
converted to common shares upon the closing of the Company's initial public
offering (using the as-if-converted method). The following table sets forth the
computation of basic and diluted loss per share, on a historical and pro forma
basis.
Twelve Months Ended
-------------------
December 31,
1996 1997 1998
---- ---- ----
(In thousands, except per share data)
NUMERATOR:
Net loss before extraordinary item ....................................... $(66,381) $(55,582) $(85,148)
Extraordinary gain on early retirement of debt ........................... -- -- 3,042
-------- -------- --------
Net loss ................................................................. (66,381) (55,582) (82,106)
======== ======== ========
Preferred stock dividends and accretion .................................. -- -- (11,958)
-------- -------- --------
Numerator for basic and diluted loss per share ........................... $(66,381) $(55,582) $(94,064)
======== ======== ========
DENOMINATOR:
Denominator for basic and diluted earnings per share--weighted average
shares (historical) ................................................... 1,391 6,665 14,547
======== ======== ========
Adjustments to reflect the effect of the assumed conversion of convertible
preferred stock from the date of issuance ............................. 3,546 3,207
======== ========
Denominator for basic and diluted earnings per share--weighted average
shares (pro forma) .................................................... 4,937 9,872
======== ========
Basic and diluted net loss per share (historical):
Loss before extraordinary item ...................................... $ (47.72) $ (8.34) $ (5.86)
-------- -------- --------
Extraordinary gain .................................................. -- -- .21
-------- -------- --------
Net loss ............................................................ (47.72) (8.34) (5.65)
======== ======== ========
Preferred stock dividends and accretion ............................. -- -- (.82)
-------- -------- --------
Net loss attributable to common stockholders ........................ $ (47.72) $ (8.34) $ (6.47)
======== ======== ========
Basic and diluted net loss per share (pro forma) ......................... $ (13.46) $ (5.63)
======== ========
Stock-Based Compensation
-16-
Item 7(a)
The Company accounts for employee stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB Opinion No. 25), and has adopted the "disclosure only"
alternative described in Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123).
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," the Company continually reviews long-lived assets to assess
recoverability based upon undiscounted cash flow analysis. Impairments, if any,
are recognized in operating results in the period in which a permanent
diminution in value is determined (see Note 3).
Customer Concentrations
The Company currently derives a substantial portion of its total revenue from a
single customer. For the years ended December 31, 1996, 1997 and 1998, revenue
from WebTV Networks, Inc. represented approximately 10.1%, 33.4% and 26.8%,
respectively, of the Company's total revenue.
Sole or Limited Sources of Supply
The Company relies on other companies to supply certain key components of their
network infrastructure. These components include critical telecommunications
services and networking equipment, which, in the quantities and quality demanded
by us, are available only from sole- or limited-sources. Four companies provide
the data communications facilities and capacity for the Company. The Company is
also dependent upon local exchange carriers to provide telecommunications
services to the Company and its customers. The Company has experienced delays
from time to time in receiving telecommunications services from these suppliers.
There can be no assurance that such services on the scale and within the time
frames required by the Company at an affordable cost will be attainable. Any
failure to obtain such services on a sufficient scale, on a timely basis and at
an affordable cost would have a material adverse effect on the business,
financial condition and results of operations of the Company.
The Company purchases its network equipment primarily from five vendors. Two
companies also act as systems integrators. One company is the sole supplier of
the servers primarily used in the Company's network infrastructure. The Company
purchases these components pursuant to purchase orders placed from time to time
with these suppliers. The Company does not carry significant inventories of
these components and has no guaranteed supply arrangements for such components.
The Company's suppliers also sell products to competitors and may in the future
themselves become competitors. There can be no assurance that suppliers will not
enter into exclusive arrangements with competitors or stop selling their
products or components to the Company at commercially reasonable prices, or at
all.
2. Cash, Cash Equivalents and Short-Term Investments
The following table summarizes the Company's available-for-sale securities at
amortized cost, which approximates fair value, as of December 31, 1998 (in
thousands):
U.S. Corporate securities............................. $25,132
-------
Total included in cash and cash equivalents....... 25,132
=======
U.S. Treasury securities.............................. $17,424
U.S. Corporate securities............................. 34,802
-------
Total included in short-term investments.......... $52,226
=======
As of December 31, 1998, there are no investments with maturities greater than
12 months. The Company's U.S. Corporate securities include commercial paper. The
Company's cash equivalents and short term investments have generally been held
until maturity. The Company's cash and cash equivalents at December 31, 1997
consisted primarily of money market funds and U.S. Corporate Securities.
3. Network Equipment Write-off
-17-
Item 7(a)
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 (see Note 12).
4. Commitments
Operating Leases
The Company has an agreement with a related party through which such related
party makes available the premises at which the Company's POP sites throughout
the United States are located. POP sites are locations where certain
telecommunications switching and related equipment are installed. This agreement
expires in December 2000, and the amount of the payments is based, among other
things, on the number of POP sites maintained by the Company, subject to certain
minimums. Costs of approximately $1,622,000, $1,326,000 and $1,267,000 were
incurred during the years ended December 31, 1996, 1997 and 1998, 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. Costs of approximately $1,246,000 were incurred during the
year ended December 31, 1998 for these facilities. The expiration dates
associated with these agreements range from December 1998 to January 2000.
The Company leases its facilities and certain office equipment under
non-cancelable operating leases which expire at various dates through January
2006. Total rent expense for all operating leases was approximately $2,060,000,
$2,418,000 and $4,743,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.
Future minimum lease commitments for all noncancellable operating leases with
initial terms of one year or more consists of the following at December 31, 1998
are (in thousands):
1999...................................................... $ 4,257
2000...................................................... 4,030
2001...................................................... 3,248
2002...................................................... 2,533
2003...................................................... 2,513
Thereafter................................................ 5,164
-------
Total.................................... $21,745
=======
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, $1,443,000 and
$536,000 at December 31, 1996, 1997 and 1998, respectively. In March 1998, the
Company retired a portion of the capital lease obligations to the related party.
The Company paid $24,750,000 for the extinguishment of the debt. The Company
recognized an extraordinary gain of $3,042,000 in connection with this
transaction. Subsequent to March 1998, the related party sold its stockholdings
in the Company and is no longer considered a related party.
In September 1995, the Company entered into a master lease agreement with a
third party for an equipment lease line. The term of the lease is 36 months and
provides for monthly payments of approximately $114,000 as of December 31, 1998.
-18-
Item 7(a)
Assets capitalized under capital leases totaled approximately $61,927,000 and
$28,068,000 at December 31, 1997 and 1998, respectively, and are included in
computer and telecommunications equipment. Accumulated amortization for assets
capitalized under capital leases totaled approximately $18,542,000 and
$8,356,000 at December 31, 1997 and 1998, respectively. Amortization of leased
assets is included in depreciation and amortization expense. The Company has
granted a security interest in all equipment under capital lease agreements.
Future minimum lease payments under capital lease obligations at December 31,
1998 are as follows (in thousands):
1999..................................................... $7,285
2000..................................................... 6,257
2001..................................................... 4,312
2002..................................................... 1,956
Thereafter............................................... 504
-------
Total minimum lease payments.................... 20,314
Less amount representing interest........................ 3,337
-------
Present value of net minimum lease payments..... 16,977
Less current portion of capital leases................... 6,543
-------
Long-term portion of capital leases..... $10,434
=======
Other
The Company has a noncancellable 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 noncancellable 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 noncancellable 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, which expired in June 1998. The Company had incurred expenses,
through the life of the agreement, of approximately $3,700,000, $8,100,000 and
$4,143,000 for the years ended December 31, 1996, 1997 and 1998, respectively,
related to these other services. The agreement was renewed in August 1998 and
provides for minimum payments of $6,000,000 per year over its term, expiring
July 2000. The Company incurred expenses of approximately $3,042,000 related to
the new agreement for the five month period ended December 31, 1998.
In November 1995, the Company entered into a two-year service agreement under
which a third party provided substantially all of the network analysis and
deployment and maintenance of POP sites. In 1997, the third party was purchased
by Williams Communication, Group Inc. (Williams), a stockholder of the Company
that also has a seat on the Board of Directors of the Company, and the agreement
was extended to December 31, 2000. The Company will reimburse Williams for its
employee compensation and direct costs for services provided. Related party
payments to Williams for these services were approximately $1,884,000 and
$4,848,000 for the years ended December 31, 1997 and 1998, respectively. At the
end of the agreement, Williams is obligated to transfer to the Company those
personnel, resources, and facilities used to support the Company's network
analysis, POP site deployment, and maintenance.
In August 1997, the Company entered into a five-year service and equipment
agreement under which Williams, a related party, will provide telecommunication
services and equipment. The agreement provides for minimum payments as follows:
$1.2 million in 1998, $2.5 million in 1999, $7.0 million in 2000, $6.5 million
in 2001 and $4.0 million in 2002. At the election of Williams, $2.0 million of
the minimum payments may be paid by the issuance of common stock of the Company
at the then-current fair market value. The Company made payments totaling
$4,843,000 for the year ended December 31, 1998 related to this agreement, of
which $4,311,000 relates to the purchase of equipment from Williams.
-19-
Item 7(a)
5. Convertible Debentures and Notes Payable
Bridge Loans
At December 31, 1995, convertible debentures in the amount of $70,000,
representing 9,802 shares of common stock, were outstanding. The conversion of
these debentures into shares of common stock subject to rescission was completed
in March 1996.
In 1995, the Company issued convertible notes totaling $7,000,000 to
shareholders of which $4,000,000, plus accrued interest, was converted into
Series B convertible preferred stock in December 1995. The remaining $3,000,000
outstanding at December 31, 1995 was converted into Series C convertible
preferred stock in February 1996.
In June 1997, the Company borrowed $3 million from a related party in the form
of a 10% convertible secured promissory note (the Secured Note). The Secured
Note automatically converted into 253,403 shares of common stock upon the
closing of the Public Offering at a per share conversion price equal to the
Public Offering price of $12.00. In connection with the Secured Note, the
Company issued a warrant to purchase 63,351 shares of common stock at an
exercise price of $6.00 per share (see Note 8).
Notes Payable
In December 1997, the Company issued 150,000 units (collectively, the Units),
each consisting of $1,000 principal amount of 12 3/4% Senior Notes (the 12 3/4%
Senior Notes) due 2007 and one warrant (a Warrant), each Warrant entitling the
holder thereof to purchase 6.34 shares of common stock at $10.86 per share and
such Warrants expire on December 15, 2007 (see Note 8) for aggregate cash
proceeds of $150,000,000. Approximately $52,525,000 of the cash proceeds was
placed in a escrow account to fund the first six interest payments in accordance
with the Senior Note agreement which is classified as restricted cash. As of
December 31, 1998, the Company had $36,238,000 remaining in the escrow account
restricted for future interest payments.
The Warrants resulted in the right of the holders to purchase 951,108 shares of
the Company's common stock. The Company deemed the fair value of the warrants,
using the Black-Scholes method, to be approximately $4,440,000 which was
recorded as a discount on the 12 3/4% Senior Notes. The discount is being
amortized as interest expense over the term of the 12 3/4% Senior Notes.
Amortization expense was $17,000 and $444,000 for the years ended December 31,
1997 and 1998, respectively.
The 12 3/4% Senior Notes will be redeemable at the option of the Company, in
whole or in part, at any time on or after December 15, 2002, at the redemption
rates (expressed as a percentage of the principal amount) commencing with
106.375% on December 15, 2002 and declining to 100% on December 15, 2005, plus
accrued interest to the date of redemption. In addition, on or prior to December
15, 2000, the Company may redeem up to 35% of the original aggregate principal
amount of the 12 3/4% Senior Notes at a redemption price of 112.75% of the
principal amount, together with accrued and unpaid interest to the date of
redemption with the net cash proceeds of one or more public equity offerings or
the sale of common stock to a strategic investor, provided that at least 65% of
the original aggregate principal amount of the 12 3/4% Senior Notes remain
outstanding.
In connection with the issuance of the 12 3/4% Senior Notes, the Company
incurred approximately $5,300,000 of debt issuance costs which are classified as
other assets. These costs are being amortized as interest expense over the term
of the 12 3/4% Senior Notes. Amortization expense was $526,000 for the year
ended December 31, 1998.
-20-
Item 7(a)
6. Common Stock Subject to Rescission
In August 1993, the Company commenced sales of convertible debentures and
certain additional shares of its common stock. Through March 31, 1995, sales of
convertible debentures aggregated $4,260,000, and issuance of common stock
aggregated $890,000. The sale of common stock and sale of and/or conversion of
debentures into common stock was not made pursuant to a registration statement
filed under the Securities Act of 1933 (the Act) or any filings pursuant to the
laws of any of the states in which such sales occurred (State Blue Sky Laws).
Although at the time the Company believed the sale and conversion, if
applicable, of these securities was exempt from the provisions of the Act and
applicable State Blue Sky Laws, it appears that the appropriate exemptions may
not have been available. As a result, on September 30, 1997, the Company made
rescission offers (the "Rescission Offer") to certain purchasers of these
securities who are entitled to a return of the consideration paid for their
stock or debentures. As such, these shares have been classified as common stock
subject to rescission in the accompanying financial statements. Additionally,
options issued pursuant to the Company's 1995 Stock Incentive Plan to Employees
and Consultants and non-plan options were issued in various states for which the
Company may not have had an available exemption under state laws. Such options
are potentially subject to rescission and the Company has included them in the
Rescission Offer. As of December 31, 1997, statutes of limitations under federal
and state securities laws applicable to the shares which may have been issued
without securities laws exemptions have lapsed and the Rescission Offer had
expired. Pursuant to the Rescission Offer, the Company offered to rescind the
issuance of shares and options as to which the applicable statute of limitations
had not run. There can be no assurances that the Company will not otherwise be
subject to additional liabilities with respect to such issuances. The Company
repurchased 32,423 shares of Common Stock subject to the Rescission Offer for
$548,000 and paid related interest charges of $125,000. Based upon the above,
the Company has reclassified the remaining rescission liability and shares into
stockholders' equity.
7. Stockholders' Equity
Initial Public Offering and Direct Placements
Effective July 30, 1997, the Company reincorporated under the laws of the state
of Delaware. In addition, the Company authorized 100,000,000 shares of its
common stock. Upon closing of the initial public offering (the Public Offering),
all outstanding shares of Series A, B, C, and D convertible preferred stock and
Class B common stock were converted into common stock.
On August 1, 1997, the Company effected its Public Offering of common stock. The
offering consisted of 4,300,000 shares of common stock issued to the public at
$12.00 per share. Concurrent with the closing of the Public Offering, certain
strategic investors, including Williams, purchased directly from the Company
1,499,236 shares of common stock having an aggregate purchase price of
approximately $18 million (including the cancellation of approximately $3
million in indebtedness). Such shares are unregistered shares and were purchased
at the Public Offering price of $12.00 per share.
In connection with the direct purchase, the Company issued warrants to one of
the strategic investors to purchase 291,667 shares of the Company's common stock
at $6.00 per share (see Note 8). In September, the underwriters exercised an
option to purchase an additional 645,000 shares of common stock at the Public
Offering price of $12.00 per share to cover over-allotments in connection with
the Public Offering.
Redeemable Exchangeable Preferred Stock
In June 1998, the Company completed a $150 million private placement of 13 1/2%
Series A Senior Redeemable Exchangeable Preferred Stock due 2010 (Series A
Preferred). In September 1998, the Company issued 154,657 shares of its 13 1/2%
Series B Senior Redeemable Exchangeable Preferred Stock due 2010 (Series B
Preferred) in exchange for all outstanding shares of the Series A Preferred
pursuant to a registered exchange offer. Each share of Series B Preferred has a
liquidation preference of $1,000 per share. Dividends on the Series B Preferred
accrue at a rate of 13 1/2% per annum of the liquidation preference thereof and
are payable quarterly in arrears commencing on September 1, 1998. Dividends are
payable in cash, except that on each dividend payment date occurring on or prior
to June 1, 2003, dividends may be paid, at the Company's option, by the issuance
of additional shares of Series B Preferred having an aggregate liquidation
preference equal to the amount of such dividends. For the year ended December
31, 1998, the Company issued a total of 9,865 shares of Series B Preferred Stock
as payment of the quarterly dividends. Series B Preferred Stock has no voting
rights.
-21-
Item 7(a)
The Series B Preferred is redeemable at the option of the Company, in whole or
in part, at any time on or after June 1, 2003, at redemption rates (expressed as
a percentage of the liquidation preference) commencing with 106.75% on June 1,
2003 and declining to 100% on June 1, 2008, plus accumulated and unpaid
dividends to the date of redemption. In addition, prior to June 1, 2001, the
Company may, at its option, redeem up to a maximum of 35% of the initially
issued Series B Preferred from the net proceeds of one or more public equity
offerings or the sale of common stock to a strategic investor. The Series B
Preferred is subject to mandatory redemption at its liquidation preference, plus
accumulated and unpaid dividends on June 1, 2010.
On any scheduled dividend payment date, the Company may, at its option, exchange
in whole but not in part the then outstanding shares of Series B Preferred for
13 1/2% Senior Subordinated Debentures due 2010 (Exchange Debentures) with a
principal amount equal to the aggregate liquidation preference of the Preferred
Stock. If the Exchange Debentures were issued, they would mature on June 1,
2010. Interest on the Exchange Debentures would be payable semi-annually in
arrears. Interest payable on or prior to June 1, 2003 may be paid in the form of
additional Exchange Debentures valued at the principal amount thereof.
The Company is accreting the Series B Preferred to its liquidation preference
through the due date of the Series B Preferred. The accretion for the year ended
December 31, 1998 was approximately $11,676,000. In connection with the issuance
of Series A Preferred and Series B Preferred, the Company incurred approximately
$5,852,000 of issuance costs. These costs are being accreted over 12 years which
amounted to $282,000 for the year ended December 31, 1998.
Stock Option Plans
1995 Stock Incentive Plan for Employees and Consultants. The Company's 1995
Stock Incentive Plan for Employees and Consultants (the 1995 Plan) provided for
the granting to employees of incentive stock options and for the granting to
employees and consultants of nonstatutory stock options, stock appreciation
rights (SARs) and restricted stock awards (RSAs). No SARs or RSAs have been
granted under the 1995 Plan. The 1995 Plan was terminated effective October 4,
1996. As of December 31, 1998, options to purchase 162,157 shares of common
stock at a weighted exercise price of $3.75 per share were outstanding under the
1995 plan of which 102,910 options were vested.
Amended and Restated 1996 Stock Plan. The Company's Amended and Restated 1996
Stock Plan (the Restated 1996 Plan) provides for the granting to employees of
incentive stock options and for the granting to employees, directors and
consultants of nonstatutory stock options and stock purchase rights (Rights).
The Restated 1996 Plan has been terminated. As of December 31, 1998, options to
purchase 678,846 shares of common stock at a weighted average exercise price of
$6.40 per share were outstanding of which 246,460 were vested.
The Restated 1996 Plan provides that in the event of a merger of the Company
with or into another corporation, a sale of substantially all of the Company's
assets or a like transaction involving the Company, each option shall be assumed
or an equivalent option substituted by the successor corporation. If the
outstanding options are not assumed or substituted as described in the preceding
sentence, the Restated 1996 Plan provides the optionee or Right holder to have
the right to exercise the option or Right as to all of the optioned stock,
including shares as to which it would not otherwise be exercisable.
1997 Stock Plan. The Company's 1997 Stock Plan (the 1997 Plan) provides for the
granting to employees of incentive stock options and for the granting to
employees, directors and consultants of nonstatutory stock options and stock
purchase rights (Rights). The 1997 Plan was approved by the Board of Directors
on June 6, 1997 and by the stockholders on June 30, 1997. An amendment
increasing the number of shares thereunder from 1,500,000 to 2,250,000 was
approved by the Board of Directors on April 10, 1998, 1998 and the Stockholders
on May 20, 1998. Unless terminated sooner, the 1997 Plan will terminate
automatically in 2007. Options granted under the 1997 Plan must generally be
exercised within three months of the end of optionee's status as an employee,
director or consultant of the Company, or within twelve months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option's term. The exercise price of all incentive stock
options granted under the 1997 Plan must be at least equal to the fair market
value of the common stock on the date of grant. The exercise price of
nonstatutory stock options and Rights granted under the 1997 Plan is determined
by the 1997 Plan's Compensation Committee, but with respect to nonstatutory
stock options intended to qualify as "performance-based compensation," the
exercise price must at least be equal to the fair market value of the common
stock on the date of grant. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of the Company's
outstanding capital stock, the exercise price of any incentive stock option
granted must equal at least 110% of the fair market value on the grant date and
the term of such incentive stock
-22-
Item 7(a)
option must not exceed five years. The term of other incentive stock options
granted under the 1997 Plan may not exceed ten years. A total of 2,250,000
shares of common stock are currently reserved for issuance pursuant to the 1997
Plan. As of December 31, 1998, options to purchase 2,113,929 shares of common
stock at a weighted average exercise price of $18.21 per share were outstanding
of which 111,909 were vested, and 96,582 shares of common stock remained
available for future grants under the 1997 Plan.
The 1997 Plan provides that in the event of a merger of the Company with or into
another corporation, a sale of substantially all of the Company's assets or a
like transaction involving the Company, each option shall be assumed or an
equivalent option substituted by the successor corporation. If the outstanding
options are not assumed or substituted as described in the preceding sentence,
the 1997 Plan provides for the optionee or Right holder to have the right to
exercise the option or Right as to all of the optioned stock, including shares
as to which it would not otherwise be exercisable.
1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock Purchase
Plan (the 1997 Purchase Plan) was approved by the Board of Directors on June 6,
1997 and by the stockholders on June 30, 1997. A total of 500,000 shares of
common stock has been reserved for issuance under the 1997 Purchase Plan. The
1997 Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, consists of 24-month offering periods beginning on the
first trading day on or after February 15 and August 15 of each year, except for
the first such offering period, which commenced on August 4, 1997 and ended on
February 13, 1998. Each offering period contains four six-month purchase
periods. Employees are eligible to participate if they are customarily employed
by the Company or any designated subsidiary for at least 20 hours per week and
more than five months in any calendar year. The 1997 Purchase Plan permits
eligible employees to purchase common stock through payroll deductions of up to
10% of an employee's compensation (excluding overtime, shift premium, and other
bonuses and incentive compensation), up to a maximum of $25,000 for all offering
periods ending within the same calendar year. No employee may purchase more than
25,000 shares in any purchase period. The price of stock purchased under the
1997 Purchase Plan is 85% of the lower of the fair market value of the common
stock at the beginning of the offering period or at the end of the current
purchase period. Employees may end their participation at any time during an
offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with the
Company. During the year ended December 31, 1998, 74,142 shares were purchased
under the 1997 Purchase Plan at a weighted average price of $10.54 per share.
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 Company issued options to purchase 179,300 shares of common stock in
December 1996, 40,267 shares of common stock in January 1997, 216,733 shares of
common stock in June 1997, and repriced 181,473 options in July 1997. The
Company recorded deferred compensation, for financial reporting purposes, of
approximately $188,000 in 1996 and $1,303,000 for the year ended December 31,
1997, with respect to such option grants to reflect the difference between the
exercise price and the deemed fair value for financial reporting purposes of
these shares. Amortization of this deferred compensation was $0, $222,000 and
$373,000 for the years ended December 31, 1996, 1997 and 1998, respectively. The
amortization of this deferred compensation will continue over the four year
vesting period of the associated stock options.
-23-
Item 7(a)
The following table summarizes stock option activity under all of the Plans:
Number of Price Per
Shares Share
------ -----
Balance at December 31, 1995.............. 807,083 $ 3.75--$ 33.00
Granted.............................. 421,620 $3.75
Exercised............................ (4,483) $ 3.75--$ 9.00
Canceled............................. (95,218) $ 3.75--$ 30.00
---------
Balance at December 31, 1996.............. 1,129,002 $ 3.75--$ 33.00
Granted.............................. 1,472,338 $ 3.75--$ 11.25
Exercised............................ (64,544) $3.75
Canceled............................. (244,630) $ 3.75--$ 11.25
---------
Balance at December 31, 1997.............. 2,292,166 $ 3.75--$ 30.00
Granted.............................. 1,883,958 $ 9.88--$ 75.89
Exercised............................ (611,694) $ 3.75--$ 20.87
Canceled............................. (247,831) $ 3.75--$ 75.89
---------
Balance at December 31, 1998.............. 3,316,599 $ 3.75--$ 75.89
=========
The weighted average fair value of options granted during 1996, 1997 and 1998
was $0.87, $1.87 and $12.67, respectively.
The following table summarizes information concerning currently outstanding and
exercisable options as of December 31, 1998:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Number Average
Number Contractual Exercise Exercisable Exercise
Exercise Prices Outstanding Life Price and Vested Price
--------------- ----------- ---- ----- ---------- -----
$3.75....................................... 565,168 7.31 $ 3.75 374,715 $ 3.75
$6.00....................................... 311,828 8.04 $ 6.00 131,443 $ 6.00
$8.85--$9.30................................. 218,564 8.47 $ 9.13 78,058 $ 9.15
$9.88--$11.25................................ 515,066 8.86 $ 11.04 111,409 $ 11.21
$12.45--$30.00............................... 1,693,688 9.38 $ 20.26 72,812 $ 14.47
$37.95--$75.89............................... 12,285 8.46 $ 60.07 6,539 $ 60.30
--------- -------
Total....................................... 3,316,599 774,976
========= =======
-24-
Item 7(a)
Stock-Based Compensation
Pro forma information regarding results of operations and loss per share is
required by FAS 123 for awards granted after December 31, 1994 as if the Company
had accounted for its stock-based awards to employees under a valuation method
permitted by FAS 123. The value of the Company's stock-based awards to employees
in 1995 and 1996 was estimated using the minimum value method. Options granted
after the Public Offering have been valued using the Black-Scholes option
pricing model. Among other things, the Black-Scholes model considers the
expected volatility of the Company's stock price, determined in accordance with
FAS 123, in arriving at an option valuation. The minimum value method does not
consider stock price volatility. Further, certain other assumptions necessary to
apply the Black-Scholes model may differ significantly from assumptions used in
calculating the value of options granted in 1995 and 1996 under the minimum
value method.
The fair value of the Company's stock-based awards to employees was estimated
assuming no expected dividends and the following weighted average assumptions:
1996 1997 1998
---- ---- ----
Expected volatility..................... N/A .250 .935
Expected life of options in years....... 4.0 3.3 3.49
Risk-free interest rate................. 6.3% 6.0% 5.0%
Expected dividend yield................. 0.00% 0.00% 0.00%
For pro forma purposes, the estimated minimum value of the Company's stock-based
awards to employees is amortized over the options' vesting period. If the
Company had elected to recognize compensation cost based on the fair value of
the options granted at grant date as prescribed by FAS 123, net loss and net
loss per share would have increased to the pro forma amounts indicated in the
table below (in thousands except per share amounts):
Year Ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
Net loss attributable to common stockholders as reported..................... $(66,381) $(55,582) $ (94,064)
Net loss attributable to common stockholders--pro forma...................... $(66,605) $(56,224) $(100,030)
Net loss per share attributable to common stockholders--as reported.......... $ (13.46) $ (5.63) $ (6.47)
Net loss per share attributable to common stockholders--pro forma............ $ (13.49) $ (5.70) $ (6.88)
8. Warrants to Purchase Common Stock
In connection with the Company's Public Offering, all of the outstanding
warrants to purchase preferred stock were converted to warrants to purchase
common stock. The following warrants to purchase shares of the Company's common
stock were outstanding at December 31, 1998:
Warrants Outstanding
--------------------
Number Weighted Average Year
Exercise Prices of Shares Exercise Price Expires
--------------- --------- -------------- -------
$19.49..................................................................... 877,718 $ 19.49 1999
$3.75-$26.87............................................................... 185,742 $ 20.42 2000
$6.00-$68.30............................................................... 439,668 $ 6.19 2002
$10.86..................................................................... 951,108 $ 10.86 2007
---------
2,454,236
=========
The Company is obligated to issue a warrant to purchase 906,679 shares to SBC
Communications Inc. in connection with an agreement signed in October 1998. The
warrant will be issued upon the closing of the SBC Financing Agreement (See Note
14).
-25-
Item 7(a)
The above warrants were issued at various times over the last several years in
connection with a service agreements, a capital lease agreement, several debt
and equity financings and a reseller agreement The Company has deemed the fair
market value of such warrants, using the Black-Scholes method, to be $822,000,
$61,000, $5,700,000, $2,623,000 and $1,900,000, respectively. The Company is
amortizing the value of the warrants over the term of the related agreements
which range from one to ten years. Amortization expense for the years ended
December 31, 1996, 1997 and 1998 was $1,942,000, $1,720,000 and $767,000,
respectively. The Company has reserved the amount of shares necessary to meet
the exercise of these warrants.
9. 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 $45,000, $158,000 and $266,000 to the plan during the years
ended December 31, 1996, 1997 and 1998, respectively.
10. Income Taxes
As of December 31, 1998, the Company had federal and state net operating loss
carryforwards of approximately $208,000,000 and $138,000,000, respectively. The
net operating loss carryforwards will expire at various dates beginning in the
years 2003 through 2018, if not utilized.
Significant components of the Company's deferred tax assets and liabilities for
federal and state income taxes of December 31, 1997 and 1998 are as follows (in
thousands):
1997 1998
---- ----
Deferred tax assets:
Net operating loss carryforwards............... $55,000 $85,000
Write-off of network equipment................. 4,000 4,000
Other, net..................................... 1,000 3,000
-------- --------
Total deferred tax assets........................... 60,000 92,000
-------- --------
Deferred tax liabilities:
Other, net..................................... 2,000 2,000
-------- --------
Net deferred tax assets............................. 58,000 90,000
Valuation allowance................................. (58,000) (90,000)
-------- --------
$ -- $ --
======== ========
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 1999, and possibly beyond, and
accordingly will not realize the Company's deferred tax assets through 1999 and
possibly beyond. The Company will continue to assess the realizability of the
deferred tax assets based on actual and forecasted operating results. In
addition, the utilization of net operating losses may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses before
utilization.
The net valuation allowance increased by approximately $21,000,000 in 1997 and
$32,000,000 in 1998.
-26-
Item 7(a)
11. Related Party Transactions--Other
A former officer of the Company is a majority shareholder of a vendor of the
Company. The Company incurred marketing fees to the vendor totaling $2,448,000,
$2,600,000 and $1,085,000 in the years ended December 31, 1996, 1997, and 1998,
respectively.
12. Contingencies
In late April and early May, 1997, three putative securities class action
complaints were filed in the United States District Court, Central District by
certain stockholders of Diana Corporation (Diana), the parent corporation of
Sattel Communications LLC (Sattel), alleging securities fraud related to
plaintiffs' purchase of shares of Diana Common Stock in reliance upon allegedly
misleading statements made by defendants, Diana, Sattel and certain of their
respective affiliates, officers and directors (Diana Suit). The Company was
named as a defendant in the complaint in connection with certain statements made
by Diana and officers of Diana related to the Company's purchase of network
switching equipment from Diana's Sattel subsidiary. The plaintiffs seek
unspecified compensatory damages (See Note 15).
While the ultimate outcome of such litigation is uncertain, the Company believes
it has meritorious defenses to the claims and intends to conduct a vigorous
defense. An unfavorable outcome in this matters could have a material adverse
effect on the Company's financial condition. In addition, even if the ultimate
outcomes is resolved in favor of the Company, the defense of such litigation
could entail considerable cost and the diversion of efforts of management,
either or which could have a material adverse effect on the Company's results of
operations.
Sattel Settlement
On April 22, 1997, a complaint was filed in the Los Angeles County, California
Superior Court against the Company and other unnamed defendants by Sattel
Communications LLC (Sattel). Sattel's complaint alleged that the Company was in
breach of an agreement to pay for up to $4.3 million of DSS Switches from Sattel
for use in the Company's network and also sought unspecified consequential and
punitive damages. On July 11, 1997, the Company settled the complaint with
Sattel in the amount of $4.4 million. The Company also purchased 32,986 shares
of the Company's common stock held by Sattel on the day after the closing of the
offering at the Public Offering price. In August, 1997 the Company made cash
payments to Sattel totaling approximately $4.8 million, to satisfy its
obligations pursuant to the settlement agreement and the repurchase of common
stock. Upon the settlement of the Sattel complaint, the Company recorded
$970,000 of other income related to the reversal of previously established
reserves.
13. Business Combinations
On February 5, 1998, the Company acquired all of the outstanding stock of
InterNex Information Services, Inc. (InterNex). The transaction was accounted
for using the purchase method of accounting. The total purchase price of
approximately $23.9 million consisted of a $15.5 million cash payment upon
closing and the assumption of approximately $8.4 million of InterNex's
liabilities (including acquisition costs).
A summary of the purchase price allocation is as follows (in thousands):
Current and other assets.................................. $ 1,348
Computer and telecommunications equipment................. 4,784
Goodwill.................................................. 9,496
Other intangible assets................................... 3,080
Write-off of in process technology........................ 5,200
-------
Total purchase price allocation...................... $23,908
=======
Goodwill arising from the acquisition is being amortized on a straight-line
basis over 5 years. Other intangible assets include developed technology,
assembled workforce and customer lists and are being amortized over their useful
lives ranging from two to four years.
-27-
Item 7(a)
In May 1998, the Company acquired Delta Internet Services, Inc. ("DeltaNet") in
a transaction that was accounted for as a pooling of interests. The Company
issued approximately 226,000 shares of its common stock to DeltaNet shareholders
in exchange for all outstanding DeltaNet shares. The Company also assumed
outstanding DeltaNet options and warrants which were converted to options and
warrants to purchase approximately 98,000 and 7,000 shares, respectively, of the
Company's common stock. The results of operations of DeltaNet for the period
from April 1, 1998 through December 31, 1998 are included in the consolidated
results of operations. The Company's historical consolidated financial
statements prior to the combination have not been restated to reflect the
financial results of DeltaNet as these results are not material. The
consolidated results of operations for the year ended December 31, 1998 include
an acquisition related charge of $1.3 million primarily related to severance
costs, reserves for redundant facilities and assets and professional fees.
In August 1998, the Company acquired all of the outstanding stock of AnaServe,
Inc. ("AnaServe"). The transaction was accounted for using the purchase method
of accounting. The total purchase price of approximately $13.0 million consisted
of a $9.6 million cash payment upon closing and the assumption of approximately
$3.4 million of AnaServe's liabilities (including acquisition costs).
A summary of the purchase price allocation is as follows (in thousands):
Current and other assets..................................... $ 467
Computer and telecommunications equipment.................... 497
Goodwill..................................................... 11,630
Other intangible assets...................................... 416
-------
Total purchase price allocation......................... $13,010
=======
Goodwill is being amortized over five years. Other intangible assets include
developed technology, assembled workforce and customer lists and are being
amortized over their useful lives ranging from one to four years.
The following unaudited pro forma information represents the combined results of
operations as if the acquisitions of InterNex, DeltaNet and AnaServe had
occurred as of the beginning of the periods presented and does not purport to be
indicative of what would have occurred had the acquisitions been made as of that
date or the results which may occur in the future.
Year ended December 31,
1996 1997 1998
---- ---- ----
(In thousands,
except per share data)
Pro forma net revenues............................................................... $ 25,958 $ 61,424 $ 89,435
Pro forma net loss attributable to common stockholders............................... (78,769) (71,351) (92,967)
Pro forma net loss per share attributable to common stockholders..................... (15.26) (7.07) (6.37)
The pro forma results include the historical operations of the Company and the
historical operations of the acquired businesses adjusted to reflect certain pro
forma adjustments, including the amortization of intangible assets, totaling
$5.6 million during the years ended December 31, 1996 and 1997, and $1,724,000
during the year ended December 31, 1998. The pro forma results do not include
the write-off of purchased research and development of $5.2 million since it is
considered a non-recurring adjustment.
-28-
Item 7(a)
14. Strategic Relationship
In October 1998, the Company entered into a strategic business arrangement
(Commitment Agreement) with SBC Communications Inc. (SBC) to integrate
Concentric's Internet-based business data services and technology into SBC's
"Online Office" portfolio of data products and services for business customers.
In connection with this arrangement, SBC agreed to acquire 906,679 shares of
Concentric common stock either on the open market or from the Company at a price
of $24.15 per share (SBC Financing Agreement). In December 1998, SBC purchased
100,000 shares of the Company's common stock in two open market purchases. The
Company also agreed to issue a warrant to SBC to purchase an additional 906,679
shares. The warrant expires three years from the date of issuance and will be
exercisable at $21 per share. The Company used the Black-Scholes method to
determine the fair market value of the warrant and allocated $1,900,000 of the
warrant value to the Commitment Agreement which will be amortized over the life
of the Commitment Agreement.
15. Subsequent Event
Public Offering
On January 15, 1999, the Board of Directors authorized the Company to proceed
with a public offering of the Company's common stock.
Litigation
On January 24, 1999, the Company agreed in principle to settle the Diana Suit
for $750,000. The settlement is contingent upon court approval and certain other
conditions.
Equity Investment
On January 22, 1999, the Company purchased approximately $10.0 million of common
stock from Covad Communications in a private placement.
SBC Financing Agreement
On January 29, 1999, SBC purchased 806,679 shares of common stock from the
Company in connection with the SBC Financing Agreement for net proceeds of
approximately $19,500,000 and issued SBC a warrant to purchase 906,679 shares of
the Company's common stock at an exercise price of $21.00 per share.
-29-
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Combined Financial Statements of NEXTLINK and
Concentric
The following unaudited pro forma condensed combined financial statements
combine the historical consolidated balance sheets and statements of operations
of NEXTLINK and Concentric, including their respective subsidiaries after giving
effect to the merger. The unaudited pro forma condensed combined balance sheet
as of September 30, 1999, set forth below gives effect to the Merger as if it
occurred on September 30, 1999. The unaudited pro forma condensed combined
statement of operations for the year ended December 31, 1998 and the nine months
ended September 30, 1999, give effect to the Merger as if it occurred January 1,
1998. These statements are prepared on the basis of accounting for the Merger as
a purchase business combination and are based on the notes set forth in the
notes to these unaudited pro forma condensed combined financial statements.
The following unaudited pro forma financial information has been prepared from,
and should be read in conjunction with, the audited historical consolidated
financial statements of NEXTLINK and Concentric. The unaudited pro forma
condensed combined financial statements are not necessarily indicative of the
financial position or operating results that would have occurred had the Merger
been completed on September 30, 1999 or at the beginning of the period for which
the Merger is being given effect, nor is it necessarily indicative of future
financial position or operating results.
Item 7(b)
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Combined Financial Statements of NEXTLINK and
Concentric
The following unaudited pro forma condensed combined financial statements
combine the historical consolidated balance sheets and statements of operations
of NEXTLINK and Concentric, including their respective subsidiaries after giving
effect to the merger. The unaudited pro forma condensed combined balance sheet
as of September 30, 1999, set forth below gives effect to the Merger as if it
occurred on September 30, 1999. The unaudited pro forma condensed combined
statement of operations for the year ended December 31, 1998 and the nine months
ended September 30, 1999, give effect to the Merger as if it occurred January 1,
1998. These statements are prepared on the basis of accounting for the Merger as
a purchase business combination and are based on the notes set forth in the
notes to these unaudited pro forma condensed combined financial statements.
The following unaudited pro forma financial information has been prepared from,
and should be read in conjunction with, the audited historical consolidated
financial statements of NEXTLINK and Concentric. The unaudited pro forma
condensed combined financial statements are not necessarily indicative of the
financial position or operating results that would have occurred had the Merger
been completed on September 30, 1999 or at the beginning of the period for which
the Merger is being given effect, nor is it necessarily indicative of future
financial position or operating results.
-1-
Item 7(b)
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(Dollars in thousands, except per share amounts)
Historical Historical Historical Pro Forma Pro Forma
NEXTLINK Concentric Combined Adjustments Note Combined
Note 4
----------- ---------- ---------- ----------- ---- ---------
ASSETS
Current assets:
Cash and cash equivalents....................... $497,919 $ 82,982 $580,901 $ -- $580,901
Marketable securities........................... 1,146,055 70,396 1,216,451 375,000 3a
(16,000) 3a
651,419 3b
(11,778) 3b
850,000 3c
(9,365) 3c
(20,000) 2 3,035,727
Accounts receivable, net........................ 63,454 19,689 83,143 -- 83,143
Other current assets............................ 30,621 8,562 39,183 -- 39,183
Restricted cash................................. -- 142,809 142,809 -- 142,809
---------- -------- ---------- ----------- ----------
Total current assets....................... 1,738,049 324,438 2,062,487 1,819,276 3,881,763
Property and equipment, net........................ 953,576 73,927 1,027,503 -- 1,027,503
Goodwill on Concentric merger...................... 2,262,203 2 2,262,203
Other assets, net.................................. 408,644 58,364 467,008 209,502 2
16,000 3a
11,778 3b 704,288
Investment in fixed wireless licenses.............. 926,678 -- 926,678 -- 926,678
---------- -------- ---------- ----------- ----------
Total assets.......................... $4,026,947 $ 456,729 $4,483,676 $ 4,318,759 $8,802,435
========== ======== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Total current liabilities............................. $201,800 $52,808 $254,608 $ -- $254,608
Long-term debt........................................ 3,057,067 146,354 3,203,421 375,000 3a
651,419 3b 4,229,840
Other long-term liabilities........................... 38,087 6,886 44,973 -- 44,973
---------- -------- ---------- ----------- ----------
Total liabilities........................ 3,296,954 206,048 3,503,002 1,026,419 4,529,421
Redeemable preferred stock............................ 597,597 212,595 810,192 850,000 3c
(9,365) 3c 1,650,827
Shareholders' equity (deficit):
Common stock....................................... 1,118,535 363,684 1,482,219 2,084,224 2 3,648,759
446,000 2
(363,684) 3d
Deferred compensation.............................. (89,065) (617) (89,682) 617 3d (89,065)
Accumulated other comprehensive income............. 110,347 -- 110,347 -- 110,347
Accumulated deficit................................ (1,007,421) (324,981) (1,332,402) 324,981 3d
(40,433) 2 (1,047,854)
---------- -------- ---------- ----------- ----------
Total shareholders' equity (deficit)..... 132,396 38,086 170,482 2,451,705 2,622,187
---------- -------- ---------- ----------- ----------
Total liabilities and shareholders'
equity (deficit).................... $4,026,947 $456,729 $4,483,676 $ 4,318,759 $8,802,435
========== ======== ========== =========== ==========
-2-
Item 7(b)
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(Dollars in thousands, except per share amounts)
Historical Historical Pro Forma Pro Forma
NEXTLINK Concentric Combined Adjustments Note Combined
Note 4
----------- ----------- -------- ------------ ---- -----------
Revenue............................................... $184,302 $101,175 $285,477 $ -- $285,477
Costs and Expenses:
Operating.......................................... 156,395 76,920 233,315 -- 233,315
Selling, general and administrative................ 182,755 52,594 235,349 -- 235,349
Deferred compensation.............................. 4,711 4,711 -- 4,711
Depreciation....................................... 67,429 20,207 87,636 -- 87,636
Amortization....................................... 11,177 4,175 15,352 281,660 3e 297,012
Write-off of in-process technology................. -- -- -- 40,433 2 40,433
--------- -------- --------- --------- ---------
Total costs and expenses...................... 422,467 153,896 576,363 322,093 898,456
Loss from operations.................................. (238,165) (52,721) (290,886) (322,093) (612,979)
Net interest expense and other........................ (128,459) (7,775) (136,234) -- (136,234)
--------- -------- --------- --------- ---------
Net Loss.............................................. (366,624) (60,496) (427,120) (322,093) (749,213)
Preferred stock dividends and accretion............... (51,179) (18,430) (69,609) -- (69,609)
--------- -------- --------- --------- ---------
Net loss applicable to common shares.................. $(417,803) $(78,926) $(496,729) $(322,093) $(818,822)
========= ======== ========= ========= =========
Net loss per share (basic and diluted)................ $ (3.41) $ (2.03) $ (5.50)
========= ======== =========
Shares used in computation of net loss per share...... 122,357 38,920 148,908
========= ======== =========
Note 3f
-3-
Item 7(b)
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(Dollars in thousands, except per share amounts)
Historical Historical Pro Forma Pro Forma
NEXTLINK Concentric Combined Adjustments Note Combined
Note 4
----------- ----------- -------- ------------ ---- -----------
Revenue............................................... $139,667 $82,807 $222,474 $ -- $ 222,474
Costs and Expenses:
Operating.......................................... 123,675 65,588 189,263 -- 189,263
Selling, general and administrative................ 156,929 53,247 210,176 -- 210,176
Deferred compensation.............................. 4,993 -- 4,993 -- 4,993
Depreciation....................................... 45,638 24,442 70,080 -- 70,080
Amortization....................................... 14,616 3,842 18,458 375,547 3e 394,005
Acquisition related charges........................ -- 1,291 1,291 -- 1,291
Write-off of in-process technology................. -- 5,200 5,200 40,433 2 45,633
-------- ------- -------- --------- ---------
Total costs and expenses...................... 345,851 153,610 499,461 415,980 915,441
Loss from operations.................................. (206,184) (70,803) (276,987) (415,980) (692,967)
Net interest expense and other........................ (72,156) (14,345) (86,501) -- (86,501)
-------- ------- -------- --------- ---------
Net Loss.............................................. (278,340) (85,148) (363,488) (415,980) (779,468)
Preferred stock dividends and accretion............... (58,773) (11,958) (70,731) -- (70,731)
-------- ------- -------- --------- ---------
Net loss applicable to common shares.................. (337,113) $(97,106) $(434,219) $(415,980) $(850,199)
======== ======== ========= ========= =========
Net loss per share (basic and diluted)................ $ (3.13) $ (3.34) $ (6.33)
======== ======== =========
Shares used in computation of net loss per share...... 107,708 29,094 134,259
======== ======== =========
Note 3f
-4-
Item 7(b)
NOTES TO UNAUDITED PROFORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The unaudited pro forma condensed combined balance sheet as of
September 30, 1999, gives effect to the Merger as if it had occurred
on September 30, 1999. The unaudited pro forma combined statement of
operations for the year ended December 31, 1998 and the nine months
ended September 30, 1999, give effect to the Merger as if it had
occurred January 1, 1998. These statements are prepared on the basis
of accounting for the Mergers as purchase business combinations.
Note 2. Purchase Price and Purchase Price Allocation
The Merger will result in an allocation of purchase price to the
tangible and intangible assets of Concentric, as well as a write-off
of the portion of the purchase price allocated to in-process
technology. The transaction is not expected to result in an
incremental deferred tax liability. Such allocation reflects the
estimated fair value of assets acquired by NEXTLINK based upon
information available at the date of the accompanying unaudited pro
forma condensed combined financial statements. The allocation will be
adjusted based on the final determination of asset values and the
final purchase price.
Concentric's primary common stock outstanding and NEXTLINK's market
value per share used to calculate the exchange ratio, equivalent
NEXTLINK common stock exchanged and the resulting consideration
exchanged for Concentric common stock was based on information
available on January 7, 2000, the latest practicable date.
Concentric's outstanding options and warrants will be converted to
equivalent options and warrants of the Newco. The number of options
and warrants and the exercise prices will be adjusted such that the
Newco options and warrants issued for Concentric options and warrants
will have an equivalent intrinsic value per option and warrant. The
term and vesting of the options and warrants will not be modified.
Accordingly, the estimated fair value of these options and warrants
has been included in the determination of the purchase price. The
fair value of the options and warrants to purchase shares in Newco
was determined based on the number of options and warrants
outstanding as of January 7, 2000, the latest practicable date.
The aggregate purchase price was determined as follows (in
thousands):
Concentric common shares outstanding at January 7, 2000 ...................... 46,320
Exchange ratio ($45 per share/NEXTLINK January 7, 2000 market value per share)
0.5732
----------
Equivalent NEXTLINK common stock exchanged ................................... 26,551
NEXTLINK market value per share January 7, 2000 .............................. $ 78.50
----------
Fair value of common stock issued ........................................ $2,084,224
Fair value of Concentric liabilities at September 30, 1999 .............. 206,048
Fair value of Concentric preferred stock at September 30, 1999 .......... 212,595
Fair value of Concentric options ........................................ 157,000
Fair value of Concentric warrants ....................................... 289,000
Estimated investment banking, legal and accounting fees ................. 20,000
----------
Total consideration .......................................................... $2,968,867
==========
-5-
Item 7(b)
The aggregate purchase price was allocated to the tangible and
intangible assets of Concentric as follows (in thousands):
Fair value of assets acquired ................................................ $ 456,729
Fair value of current products and technology ................................ 105,714
Fair value of core technology ................................................ 46,323
Fair value of customer lists ................................................. 44,322
Fair value of in-process technology .......................................... 40,433
Fair value of Concentric trade name .......................................... 13,143
Preliminary goodwill ......................................................... 2,262,203
----------
Aggregate purchase price ..................................................... $2,968,867
==========
The exchange ratio of NEXTLINK common stock for Concentric common
stock is subject to change and may affect the final purchase price
if the 20-day average trading price of NEXTLINK common stock prior
to closing is less than $69.23 or greater than $90.91. Each $1
increase in the 20-day average trading price of NEXTLINK common
stock in excess of $90.91 will result in an increase in goodwill of
approximately $23 million and an annual increase of goodwill
amortization of approximately $3.29 million.
Note 3. Other Pro Forma Adjustments
a. On February 7, 2000, NEXTLINK announced the closing of a $1
billion senior secured credit facility (the facility)
syndicated to a broad group of lenders. The facility is
comprised of a $387.5 million senior secured multi-draw term
loan, a $225 million senior secured term loan and a $387.5
million revolving credit facility. Up to $125 million of the
proceeds will be used to finance capital expenditures, to
provide working capital and for other general corporate
purposes, and all remaining proceeds will be used to provide
purchase money financing for the construction, acquisition or
improvement of telecommunications assets. NEXTLINK drew down
$375 million of the term loan borrowings at closing. This
draw, net of fees related to the facility, has been included
in the pro forma adjustments.
b. On November 17, 1999, NEXTLINK issued 10 1/2% Senior Notes and
12 1/8% Senior Discount Notes (collectively the Notes) for
aggregate proceeds of $651.4 million. The proceeds from the
Notes, net of fees, have been included in the pro forma
adjustments.
c. On January 20, 2000, NEXTLINK and Forstmann Little & Co.
closed a transaction under which Forstmann Little invested
$850 million in the form of convertible redeemable preferred
stock. The preferred stock has a 3.75% dividend, and is
redeemable into NEXTLINK common stock at a conversion price of
$63.25 per share. The proceeds from this investment, net of
fees and a closing dividend, have been included in the pro
forma adjustments.
d. The pro forma adjustments reflect the elimination of
Concentric's historical common stock, deferred compensation
and accumulated deficit as of September 30, 1999.
-6-
Item 7(b)
e. The effect of allocating the aggregate purchase price to the
tangible and intangible assets of Concentric results in
additional amortization expense of $281.7 million for the
nine-month period ended September 30, 1999, and $375.5 million
for the year ended December 31, 1998. For amortization
purposes, goodwill and has been assigned a seven-year life and
all other acquired intangible assets have been assigned a
four-year life.
f. Pro forma shares outstanding used in the computation of net
loss per share is based on the exchange rate (see Note 2)
multiplied by Concentric's shares outstanding at January 7,
2000, combined with NEXTLINK's historically reported weighted
average shares outstanding.
Note 4. Reclassifications
Certain historical amounts have been reclassified to conform with
the pro forma condensed combined presentation.
-7-
(c) Exhibits.
10.1 Credit and Guaranty Agreement, dated as of February 3, 2000, among
NEXTLINK Communications, Inc., certain subsidiaries of NEXTLINK
Communications, Inc., as guarantors, various lenders, Goldman Sachs
Credit Partners L.P., as syndication agent, Toronto Dominion
(Texas), Inc., as administrative agent, Barclays Bank PLC, and The
Chase Manhattan Bank, as co-documentation agents and Goldman Sachs
Credit Partners L.P., and TD Securities (USA) Inc., as joint lead
arrangers.
23.1 Consent of Ernst & Young LLP.
99.1 Press Release of NEXTLINK Communications, Inc. date February 7,
2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NEXTLINK COMMUNICATIONS, INC.
By /s/ Gary D. Begeman
-------------------------------------
Name: Gary D. Begeman
Title: Senior Vice President, General
Counsel and Secretary
February 14, 2000