-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KS9WktvhvZG3J8RXdN5F+Rc1weVwaxWskuo+BLYFWlHwX9QIcC9OCaDP2H3kFKL5 EXb2Af7MXQ+due9bT2jr4A== 0001065633-99-000005.txt : 19990518 0001065633-99-000005.hdr.sgml : 19990518 ACCESSION NUMBER: 0001065633-99-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETWORK PLUS CORP CENTRAL INDEX KEY: 0001065633 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 043430576 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-64663 FILM NUMBER: 99628711 BUSINESS ADDRESS: STREET 1: 234 COPELAND ST CITY: QUINCY STATE: MA ZIP: 02169 BUSINESS PHONE: 6177864000 MAIL ADDRESS: STREET 1: 234 COPELAND ST CITY: QUINCY STATE: MA ZIP: 02169 FORMER COMPANY: FORMER CONFORMED NAME: NETWORK PLUS INC DATE OF NAME CHANGE: 19980709 10-Q 1 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1999 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to _____________ Commission file number 333-64663 ------------------ NETWORK PLUS CORP. - ------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) DELAWARE 04-3430576 - ---------------------------------------------- ------------------------- (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 234 COPELAND STREET QUINCY, MASSACHUSETTS 02169 - ---------------------------------------------- ------------------------- (Address of Principal Executive Officer) (Zip Code) (617) 786-4000 - ------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) NONE - ------------------------------------------------------------------------- (Former Name, Former Address and Formal Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] The registrant had no voting or non-voting common stock held by non- affiliates as of May 17, 1999. The number of shares of the registrant's Common Stock ($0.01 par value) outstanding on May 17, 1999 was 10,000,000. 2 FORM 10-Q THREE MONTHS ENDED MARCH 31, 1999 INDEX Page Number ------ PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NETWORK PLUS CORP. Unaudited Condensed Consolidated Balance Sheets March 31, 1999 and December 31, 1998..................... 3 Unaudited Condensed Consolidated Statements of Operations Three Months Ended March 31, 1999 and 1998............... 4 Unaudited Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 1999 and 1998............... 6 Notes to Unaudited Condensed Consolidated Financial Statements................................................ 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................... 10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................ 15 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................................... 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................... 16 SIGNATURES.................................................. 17 EXHIBIT INDEX............................................... 18 3 PART 1 ITEM 1. FINANCIAL STATEMENTS
NETWORK PLUS CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) (unaudited) March 31, Dec. 31, 1999 1998 --------- --------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,578 $ 12,197 Accounts receivable, net of allowance for doubtful accounts of $1,172 and $513, respectively 20,683 16,112 Prepaid expenses 877 760 Deferred taxes 277 277 Other current assets 3,214 1,704 -------- --------- Total current assets 28,629 31,050 PROPERTY AND EQUIPMENT, NET 41,370 15,822 OTHER ASSETS 726 821 INVESTMENT 2,500 - DEFERRED TAXES 2,985 1,175 -------- --------- TOTAL ASSETS $76,210 $ 48,868 ======== ========= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable $17,230 $ 11,402 Accrued liabilities 3,526 2,617 Current portion of capital lease obligations 7,703 863 -------- --------- Total current liabilities 28,459 14,882 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 20,096 3,147 LONG-TERM NOTE PAYABLE TO STOCKHOLDER 1,961 1,925 DEFERRED TAX LIABILITY 491 491 COMMITMENTS AND CONTINGENCIES REDEEMABLE PREFERRED STOCK 13.5% series A cumulative due 2009, $.01 par value, 50,000 shares authorized, 40,000 shares issued and outstanding (liquidation preference of 36,700 35,146 $43,226) STOCKHOLDERS' DEFICIT Common stock, $.01 par value, 20,000,000 shares authorized, 10,000,000 shares issued and outstanding 100 100 Additional paid-in capital - - Warrants 4,359 4,359 Accumulated deficit (15,956) (11,182) -------- --------- Total stockholders' deficit (11,497) (6,723) -------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $76,210 $ 48,868 ======== =========
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 4 NETWORK PLUS CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
Three Months Ended March 31, ------------------ 1999 1998 -------- -------- Revenue $ 33,581 $ 25,202 Operating expenses Cost of services 26,546 18,836 Selling, general and administrative expenses 10,716 5,544 Depreciation and amortization 984 468 --------- --------- 38,246 24,848 --------- --------- Operating income (loss) (4,665) 354 Other income (expense) Interest and dividend income 141 3 Interest expense (521) (285) Other income 18 21 --------- --------- (362) (261) --------- --------- Net income (loss) before income taxes (5,027) 93 Provision (credit) for income taxes (1,810) 9 --------- --------- Net income (loss) (3,217) 84 Preferred stock dividends and accretion of offering expenses and discount 1,554 - --------- --------- Net income (loss) applicable to common stockholders $ (4,771) $ 84 ========= ========= Net income (loss) per share applicable to common stockholders - basic and diluted $ (0.48) $ 0.01 ========= ========= Weighted average shares outstanding - basic and diluted 10,000 10,000 ========= =========
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 5 NETWORK PLUS CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) (continued)
Three Months Ended March 31, ------------------ 1999 1998 -------- -------- Proforma data: Historical income (loss) before income taxes $ (5,027) $ 93 Pro forma provision (credit) for income taxes (1,810) 33 --------- --------- Pro forma net income (loss) (3,217) 60 Historical preferred stock dividends and accretion of offering expenses and discount 1,554 - --------- --------- Pro forma net income (loss) applicable to common stockholders $ (4,771) $ 60 ========= ========= Pro forma net income (loss) per share applicable to common stockholders - basic and diluted $ (0.48) $ 0.01 ========= =========
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 6 NETWORK PLUS CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Three Months Ended March 31, ------------------ 1999 1998 -------- ------- Cash flows from operating activities: Net income (loss) $ (3,217) $ 84 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 984 468 Provision for losses on accounts receivable 910 246 Interest payable on note payable to stockholder 36 - Changes in assets and liabilities: Accounts receivable (5,481) 114 Prepaid expenses (117) (470) Deferred taxes (1,810) - Other current assets (1,510) (2) Other assets 95 (61) Accounts payable 5,828 1,605 Accrued liabilities 909 492 --------- -------- Net cash provided by (used for) operating activities (3,373) 2,476 Cash flows from investing activities: Capital expenditures (6,601) (230) Equity investment (2,500) - --------- -------- Net cash used for investing activities (9,101) (230) Cash flows from financing activities: Proceeds from sale and leaseback of fixed assets 4,443 - Net payments on line of credit - (2,640) Payments on debt and capital lease obligations (585) (839) Distribution to stockholders (3) - --------- -------- Net cash used for financing activities 3,855 (3,479) --------- -------- Net increase (decrease) in cash (8,619) (1,233) Cash at beginning of period 12,197 1,567 --------- -------- Cash at end of period $ 3,578 $ 334 ========= ======== Noncash Investing and Financing Activities: Fixed assets acquired under capital leases $ 23,999 $ - ========= ======== Preferred stock dividends paid-in-kind $ 1,411 $ - ========= ========
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 7 NETWORK PLUS CORP. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) 1. BASIS OF PRESENTATION On July 15, 1998, Network Plus Corp. was incorporated in the state of Delaware. The stockholders of Network Plus, Inc. contributed 100% of their shares to the Company, in return for an aggregate of 10,000,000 shares of the common stock. Accordingly, Network Plus, Inc. became a wholly-owned subsidiary of the Company. The Company's consolidated financial statements reflect the financial position and results of operations of its wholly-owned subsidiary, Network Plus, Inc. All intercompany transactions are eliminated in consolidation. For periods prior to the formation of the Company on July 15, 1998, the financial statements reflect the activities of Network Plus, Inc., as it was the sole operating entity. The accompanying condensed consolidated financial statements of the Company are unaudited. In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary for a fair presentation of the Company's financial position, results of operations and cash flows at the dates and for the periods indicated, which adjustments, consist only of adjustments of a normal, recurring nature. These financial statements should be read in conjunction with the audited consolidated financial statements for the year ended of December 31, 1998 which are contained in the Company's Form 10-K for such year end. The results of operations for the three months ended March 31, 1999 are not necessarily indicative of the results to be expected for the entire year ended December 31, 1999. Certain amounts in the financial statements for the prior year have been reclassified to conform with the current year presentation. Such reclassifications had no effect on previously reported results of operations. 2. INVESTMENT On March 23, 1999, the Company entered into a market development agreement with NorthPoint Communications, Inc. ("NorthPoint") for a period of two years. Under the terms of the agreement the Company will resell xDSL products and services to businesses currently reached by NorthPoint's infrastructure. NorthPoint will provide co-marketing funds to launch this new service to the Company's customers. In addition, the agreement contains certain volume commitments subject to non-usage charges at the end of the term. The Company also made an equity investment of $2.5 million in NorthPoint, which will be accounted for on a cost basis. 8 3. REVOLVING CREDIT AGREEMENTS On October 7, 1998, the Company entered into a loan agreement with Goldman Sachs Credit Partners, L.P. and Fleet National Bank ("Fleet") for a $60 million revolving credit facility (the "New Revolving Credit Facility"), and concurrently terminated an existing $23 million facility with Fleet. The New Revolving Credit Facility has a term of 18 months. Under the New Revolving Credit Facility, $30 million of the $60 million is immediately available, while the additional $30 million is available based upon a percentage of accounts receivable. Interest is payable monthly at one percent above the prime rate. The New Revolving Credit Facility which was amended effective March 31, 1999, requires the Company, among other things, to meet minimum levels of revenues and earnings before interest, taxes, depreciation and amortization, and not to exceed certain customer turnover levels and debt to revenue ratios. At March 31, 1999, there were no borrowings outstanding under the New Revolving Credit Facility. 4. CAPITAL LEASE OBLIGATIONS Capital lease obligations consist of the following: March 31, December 31, 1999 1998 --------- ------------ Capital lease obligations $ 27,799 $ 4,010 Less current portion (7,703) (863) -------- -------- $ 20,096 $ 3,147 ======== ======== Property and equipment under capital leases are as follows: March 31, December 31, 1999 1998 --------- ------------ Telecommunications equipment $23,786 $ 3,837 Computer equipment 5,364 1,527 Motor vehicles 55 55 -------- -------- 29,205 5,419 Less accumulated amortization (2,309) (1,701) -------- -------- $26,896 $ 3,718 ======== ======== In December 1998, the Company received an $81,000 commitment for equipment lease financing for telecommunications equipment to be acquired through December 31, 1999. Depending on the type of equipment, the lease term will either be for three or five years. All of the leases to be entered into will contain bargain purchase options upon conclusion of the lease term. Leases were entered into in the three months ended March 31, 1999 totaling $28,442 included $4,443 for refinancing of previously existing leases. Also included in the new lease financing was an additional $3,462 received by the Company from the lessor for the sale and leaseback of equipment acquired by the Company in 1998. 9 5. NET INCOME (LOSS) PER SHARE The computations of basic and diluted earnings per common share are based upon the weighted average number of common shares outstanding and potentially dilutive securities. Potentially dilutive securities for the Company include stock options and warrants. The following table sets forth the computation of basic and diluted income (loss) per share:
Three Months Ended Three Months Ended March 31, 1999 March 31, 1998 ------------------ ----------------- Net income (loss) applicable to Network Plus Corp. common stock - basic and diluted $(4,771) $84 Shares used in net income (loss) per share - basic and diluted 10,000,000 10,000,000 ============ ============ Net income (loss) per share applicable to common stockholders - basic and diluted $(0.48) $0.01 ============ ============
Warrants for the purchase of 310,000 shares and stock options for the purchase of 868,566 shares of common stock were not included in the computation of diluted net loss per share for the three months ended March 31, 1999 because inclusion of such shares would have an anti-dilutive effect. Pro forma net loss per share reflecting the Company's conversion from an S Corporation to a C Corporation is presented using an estimated effective income tax rate of approximately 35% to 41%. 6. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities", was issued, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This statement is effective for the quarters in the Company's fiscal year 2000. Had the Company implemented SFAS 133 in the current period, financial position and results of operations would not have been affected. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion and analysis should be read in conjunction with Network Plus Corp. unaudited condensed consolidated financial statements and related notes included herein as well as the consolidated financial statements and notes included in the Company's Form 10-K for the fiscal year ended December 31, 1998. In addition to historical information, the following discussion contains forward-looking information that involves risks and uncertainties. The Company's actual results could differ materially from those anticipated by such forward-looking information due to competitive factors, risk associated with the Company's expansion plans and other factors discussed in the Company's Form 10-K for the year ended December 31, 1998 and below under "Certain Factors That May Affect Future Operating Results". OVERVIEW Network Plus, founded in 1990, is a network-based communications provider offering broadband data and communications services, including domestic and international long-distance service, dedicated high-speed digital communications services utilizing Digital Subscriber Line, or DSL, technology, local exchange service and enhanced voice and Internet services. Our customers consist primarily of small and medium-sized businesses located in major markets in the northeastern and southeastern regions of the United States. We believe that our increasing focus on DSL and other data services will help us acquire new customers and cross-sell data, local and other services to existing long distance customers. During the first quarter of 1999, long distance network switches were deployed in Chicago and Los Angeles. In addition, we entered into a market development agreement with NorthPoint to offer digital subscriber line (xDSL) products and services to our customers. RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain financial data as a percentage of revenues:
Three Months Ended March 31, ------------------- 1999 1998 -------- -------- Revenues 100.0 % 100.0 % Cost of services 79.1 74.7 Selling, general and administrative 31.9 22.0 Depreciation and amortization 2.9 1.9 Operating income (loss) (13.9) 1.4 Other income (expense) (1.1) (1.0) Income (loss) before income taxes (15.0)% 0.4 %
11 THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 REVENUES Revenue increased $8.4 million or 33% to $33.6 million for the three months ended March 31, 1999 from $25.2 million for the same period in the prior year. The increase was due to a 32% increase in long distance revenue, which comprised 92% of total revenue for the period resulting from services to new customers and increased revenue from existing customers. The resale of local service contributed $2.4 million in revenue for the period, representing 29% of the increase in total revenue for the period. COST OF SERVICES Cost of services increased $7.7 million or 41% to $26.5 million for the three months ended March 31, 1999 from $18.8 million for the same period in the prior year. As a percent of revenue, cost of services increased to 79% for the three months ended March 31, 1999 from 75% for the three months ended March 31, 1998. The increase in spending is primarily due to the increased volume of international wholesale traffic, which has higher origination, transport and termination costs as compared to other long distance traffic. The Company expects the percent of long distance traffic associated with international traffic to decrease and consequently the cost of long distance traffic will decrease. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased $5.2 million or 93% to $10.7 million for the three months ended March 31, 1999 from $5.5 million for the same period in the prior year. As a percent of revenue, selling, general and administrative expenses increased to 32% for the three months ended March 31, 1999 from 22% for the three months ended March 31, 1998. The Company employed 397 people at March 31, 1999 from 200 at March 31, 1998 resulting in an increase in payroll and related expenses of 99%. The sales organization increased by 119 people for the period and the Company added 35 people to support the building of its local network. Other selling, general and administrative expenses increased as a result of the Company's revenue growth and infrastructure to support future growth. DEPRECIATION AND AMORTIZATION Depreciation and amortization increased $516,000 or 110% to $984,000 for the three months ended March 31, 1999 from $468,000 for the same period in the prior year. The increase is primarily due to additional computer and telecommunications equipment to support the Company's network expansion. The depreciation and amortization expense is expected to increase as the current local network projects are brought on-line and as additional investments are made in the Company's network switches. INTEREST Interest expense net of interest income increased $98,000 or 35% to $380,000 for the three months ended March 31, 1999 from $282,000 for the same period in the prior year. The increase is primarily due to interest paid on the capital lease obligations. INCOME TAXES In September 1998, the Company converted from an S Corporation to a C Corporation. As a result the Company received a $1.8 million tax benefit for the losses incurred for the three months ended March 31, 1999. Prior to conversion, income taxes were provided solely for state tax purposes totaling $9,000 for the three months ended March 31, 1998. 12 PREFERRED STOCK DIVIDENDS For the three months ended March 31, 1999, the Company accrued preferred stock dividends of $1.4 million and accretion of offering expenses and discount of $143,000 on the Series A Preferred Stock. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased to $3.6 million at March 31, 1999 from $12.2 million at December 31, 1998. The decrease is primarily attributable to cash used in operating activities of $3.4 million, capital expenditures of $2.2 million which were not financed under the lease line described below, and the investment in NorthPoint of $2.5 million. The Company has a revolving credit facility of $60 million, which was amended effective March 31, 1999. Under the terms of the agreement the Company has available borrowing of $47.9 million at March 31, 1999. There was no outstanding debt under the revolving credit facility at March 31, 1999. In addition, the Company has a $81 million lease commitment available through December 31, 1999 for the acquisition of computer and telecommunications equipment. Leases entered into in the three months ended March 31, 1999 totaled $24.0 million. The Company believes the availability on the existing revolving credit facility and capital lease line should be sufficient to meet its cash requirements for the next 12 months. IMPACT OF YEAR 2000 Many computer systems experience problems handling dates beyond the year 1999. Therefore, some computer hardware and software will need to be modified prior to the year 2000 in order to remain functional. The Company is currently assessing the implication of Year 2000 issues on operations, in order to determine the extent to which the Company may be adversely affected. Based on the internal assessment, which is substantially complete, the Company believes that the majority of its software applications will be Year 2000 compliant by June 30, 1999. However, there can be no assurance that all systems will function adequately beginning in the year 2000. There can also be no assurance that the Company will not incur significant unanticipated costs in achieving Year 2000 compliance. Though limited testing of systems has been performed to date, the Company had developed its systems with Year 2000 in mind, thus minimizing its impact. The Company may conduct further testing and or an external audit following the conclusion of its internal assessment. To date there have been a limited number of hours devoted to Year 2000 issues, with no additional cost expended in systems upgrades directly relating to Year 2000 issues. Present estimates for further expenditures of both employee time and expenses to address Year 2000 issues are not expected to have a material impact on the operations and cash flows of the Company. All expenditures will be expensed as incurred and they are not expected to have a significant impact on the Company's ongoing results of operations. If the hardware or software comprising the Company's network elements acquired from third-party vendors, the software applications of the long distance carriers, local exchange carriers or others on whose services the Company depends or with whom the Company's systems interface, or the software applications of other suppliers, are not Year 2000 compliant, it 13 could affect the Company's systems, which could have a material adverse effect on the Company. The Company is undertaking a formal survey of the Year 2000 compliance status of its suppliers, with responses indicating Year 2000 compliance at this time. Based on its assessments to date, the Company believes that it will not experience any material disruption as a result of Year 2000 issues in internal processes, information processing or interfacing with key customers, or with processing orders and billing. The Company has developed contingency plans which management believes can be successfully implemented, if required, to address potential Year 2000 issues in the Company's internal processes. There can be no assurance, however, that Year 2000 issues will not have a material adverse effect on the Company's business, results of operations and financial condition. New Accounting Pronouncements In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities", was issued, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This statement is effective for the quarters in the Company's fiscal year 2000. Had the Company implemented SFAS 133 in the current period, financial position and results of operations would not have been affected. Certain Factors That May Affect Future Operating Results The Company had operating losses for the three months ended March 31, 1999 and in each of the years ending December 31, 1998, 1997, 1996 and 1995 and negative cash flow for the three months ended March 31, 1999 and in the years ended December 31, 1998 and 1997, and there can be no assurance that the Company will achieve or sustain profitability or generate positive cash flow in the future. The Company expects to incur significant expenditures in the future in connection with the acquisition, development and expansion of its network, information technology systems, employee base, services and customer base. To the extent the Company's cash needs exceed the Company's available cash and existing borrowing availability, the funding of these expenditures will be dependent upon the Company's ability to raise substantial financing. The Company's ability to meet its projected growth is dependent upon its ability to secure substantial additional financing in the future. There can be no assurance that additional financing will be available to the Company or, if available, that it can be obtained on a timely basis, on terms acceptable to the Company, and within the limitations contained in the Company's commercial lending agreements and the Preferred Stock Certificate of Designation. Failure to obtain such financing could result in the delay or abandonment of the Company's development and expansion plans and could have a material adverse effect on the Company. The Company will have a significant amount of indebtedness outstanding and, as a result of its growth strategy, expects to incur additional indebtedness in the future. The Company's ability to make cash payments with respect to its outstanding indebtedness and the Series A Preferred Stock, and to repay its obligations on such indebtedness and preferred stock at maturity, will 14 depend on its future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond the Company's control. The Company's future performance will depend, in large part, upon its ability to implement and manage its growth effectively. The Company's rapid growth has placed, and in the future will continue to place, a significant strain on its administrative, operational and financial resources. Failure to retain and attract additional qualified sales and other personnel, including management personnel who can manage the Company's growth effectively, and failure to successfully integrate such personnel, could have a material adverse effect on the Company. To manage its growth successfully, the Company will also have to continue to improve and upgrade operational, financial, accounting and information systems, controls and infrastructure as well as expand, train and manage its employee base. In the event the Company is unable to upgrade its financial controls and systems adequately to support its anticipated growth, the Company could be materially adversely affected. The Company's success will depend upon its ability to develop and expand its network infrastructure and support services in order to offer local telecommunication services, Internet access and other services. Executing the Company's business strategy will require that the Company enter into agreements, on acceptable terms and conditions, with various providers of infrastructure capacity, in particular, interconnection agreements with ILECs and peering agreements with internet service providers ("ISPs"). No assurance can be given that all of the requisite agreements can be obtained on satisfactory terms and conditions. The Company's strategy includes offering additional telecommunications services, including DSL and other digital services, local service and Internet access. The Company has limited experience providing DSL and other digital services, local services on its own network and Internet access. There can be no assurance that the Company's future services will receive market acceptance in a timely manner, if at all, or that prices and demand for these services will be sufficient to provide profitable operations. The Company relies on other companies to supply certain key components of its network infrastructure, including telecommunications services including DSL services, network capacity and switching and networking equipment, which, in the quantities and quality demanded by the Company, are available only from sole or limited sources. The Company is also dependent upon ILECs and other carriers to provide telecommunications services and facilities to the Company and its customers. There can be no assurance that the Company will be able to obtain such services or facilities on the scale and within the time frames required by the Company at an affordable cost, or at all. In 1998, approximately 37% of the Company's revenue was attributable to the resale of long distance service provided by Sprint. The current agreement with Sprint was renegotiated, effective March 1999, and terminates in February 2000, and there can be no assurance that this agreement will be extended on terms acceptable to the Company, if at all. Early termination of the Company's relationship with Sprint could have a material adverse effect on the Company. 15 The Company operates in a highly competitive environment and currently does not have a significant market share in any of its markets. Most of its actual and potential competitors have substantially greater financial, technical, marketing and other resources (including brand or corporate name recognition) than the Company. Also, the continuing trend toward business alliances in the telecommunications industry and the absence of substantial barriers to entry in the data and Internet services markets could give rise to significant new competition. The Company's success will depend upon its ability to provide high-quality services at prices competitive with those charged by its competitors. Telecommunications services are subject to significant regulation at the Federal, state, local and international levels, affecting the Company and its existing and potential competitors. Delays in receiving required regulatory approvals or the enactment of new and adverse legislation, regulations or regulatory requirements may have a material adverse effect on the Company's financial condition, results of operations and cash flow. In addition, future legislative, judicial and regulatory agency actions could alter competitive conditions in the markets in which the Company is operating or intends to operate in ways that are materially adverse to the Company. The telecommunications industry has been, and is likely to continue to be, characterized by rapid technological change, frequent new service introductions and evolving industry standards. Increases or changes in technological capabilities or efficiencies could create an incentive for more competitors to enter the facilities-based local exchange business in which the Company intends to compete. Similarly, such changes could result in lower retail rates for telecommunications services, which could have a material adverse effect on the Company's ability to price its services competitively or profitably. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable 16 PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS During the quarter ended March 31, 1999, the Company issued to employees options to purchase an aggregate of 123,266 shares of common stock with exercise prices ranging from $15 to $50 per share. These securities were issued under Section 4(2) of the Securities Act of 1933 of Rule 701 thereunder. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS The exhibits listed on the Exhibit Index are filed herewith. (b) REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the three months ended March 31, 1999. 17 SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Quincy, State of Massachusetts, on May 17, 1999. NETWORK PLUS CORP. By: /s/ George Alex ------------------------------ George Alex Executive Vice President and Chief Financial Officer 18 EXHIBIT INDEX Exhibit number Title - -------------- ------------------------------ 27 Financial Data Schedule EX-27 2
5 0001065633 NETWORK PLUS CORP. 3-MOS DEC-31-1999 MAR-31-1999 3,578 0 22,195 1,172 0 28,629 46,452 5,082 76,210 28,459 22,057 36,700 0 100 (11,597) 76,210 33,581 33,581 0 38,246 362 911 521 (5,027) (1,810) (3,217) 0 0 0 (3,217) (0.48) (0.48)
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