-----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, HfeZYxYeuEZRQ3C/V3dA4NEtScQk+/uLBOwR8AcrUU5HMZDqv3Swwtxd9xN2vuRk XaVar3fNG7Q4HYLjL3wI5Q== 0001065633-99-000008.txt : 19991117 0001065633-99-000008.hdr.sgml : 19991117 ACCESSION NUMBER: 0001065633-99-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 000-26313 FILM NUMBER: 99756485 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 September 30, 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 0-26313 ------------------ 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 Office) (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 number of shares of the registrant's Common Stock ($0.01 par value) held by non-affiliates on November 12, 1999 was 9,220,184. 2 FORM 10-Q THREE MONTHS ENDED September 30, 1999 INDEX Page Number PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NETWORK PLUS CORP. Unaudited Condensed Consolidated Balance Sheets September 30, 1999 and December 31, 1998......................... 3 Unaudited Condensed Consolidated Statements of Operations Three Months and Nine Months Ended September 30, 1999 and 1998... 4 Unaudited Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 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.................................. 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 17 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................. 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................... 19 SIGNATURES.......................................................... 20 EXHIBIT INDEX....................................................... 21 3 PART 1 ITEM 1. FINANCIAL STATEMENTS NETWORK PLUS CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) (unaudited)
Sept. 30, Dec. 31, 1999 1998 --------- --------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 59,961 $ 12,197 Accounts receivable, net of allowance for doubtful accounts 31,193 16,112 Deferred tax asset - 277 Other current assets 2,356 2,464 --------- --------- Total current assets 93,510 31,050 PROPERTY AND EQUIPMENT, NET 71,626 15,822 OTHER ASSETS 942 821 INVESTMENT 2,569 - DEFERRED TAX ASSET - 1,175 --------- --------- TOTAL ASSETS $168,647 $ 48,868 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 24,099 $ 11,402 Accrued liabilities 7,164 2,617 Current portion of capital lease obligations 9,223 863 --------- --------- Total current liabilities 40,486 14,882 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 29,995 3,147 LONG-TERM NOTE PAYABLE TO STOCKHOLDER 2,040 1,925 DEFERRED TAX LIABILITY - 491 COMMITMENTS AND CONTINGENCIES REDEEMABLE PREFERRED STOCK 13.5% series A cumulative due 2009, $.01 par value - 35,146 STOCKHOLDERS' EQUITY Common stock, $.01 par value 545 100 Additional paid-in capital 135,504 - Other comprehensive income 69 - Warrants 4,452 4,359 Accumulated deficit (44,444) (11,182) --------- --------- Total stockholders' equity (deficit) 96,126 (6,723) --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $168,647 $ 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 Nine Months Ended Sept. 30, Ended Sept. 30, ------------------- ------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Revenues $ 39,381 $ 27,283 $109,275 $ 79,588 Operating expenses Cost of services 31,851 20,475 88,168 59,235 Selling, general and administrative expenses 12,983 8,092 36,103 20,094 Depreciation and amortization 2,386 498 5,214 1,449 --------- --------- --------- --------- 47,220 29,065 129,485 80,778 --------- --------- --------- --------- Operating loss (7,839) (1,782) (20,210) (1,190) Other income (expense) Interest and dividend income 929 48 1,091 61 Interest expense (987) (202) (2,302) (781) Other income 162 29 201 65 --------- --------- --------- --------- 104 (125) (1,010) (655) --------- --------- --------- --------- Net loss before income taxes (7,735) (1,907) (21,220) (1,845) Provision for income taxes 2,770 295 961 428 --------- --------- --------- --------- Net loss (10,505) (2,202) (22,181) (2,273) Preferred stock dividends and accretion of offering expenses and discount 7,569 498 10,725 498 --------- --------- --------- --------- Net loss applicable to common stockholders $(18,074) $ (2,700) $(32,906) $ (2,771) ========= ========= ========= ========= Net loss per share applicable to common stockholders - basic and diluted $ (0.33) $ (0.06) $ (0.68) $ (0.06) ========= ========= ========= ========= Weighted average shares outstanding - basic and diluted 54,440 45,333 48,369 45,333 ========= ========= ========= ========= Comprehensive Loss: Net loss (10,505) (2,202) (22,181) (2,273) Unrealized gain (loss) on investment securities, net of tax (1,408) - 69 - ---------- --------- --------- --------- Comprehensive loss (11,913) (2,202) (22,112) (2,273) 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 Nine Months Ended Sept. 30, Ended Sept. 30, ------------------ ------------------ 1999 1998 1999 1998 -------- -------- -------- -------- Proforma data: Historical loss before income taxes $ (7,735) $ (1,907) $(21,220) $ (1,845) Pro forma provision for income taxes 2,770 - 961 - --------- --------- --------- --------- Pro forma net loss (10,505) (1,907) (22,181) (1,845) Historical preferred stock dividends and accretion of offering expenses and discount 7,569 498 10,725 498 --------- --------- --------- --------- Pro forma net loss applicable to common stockholders $(18,074) $ (2,405) $(32,906) $ (2,343) ========= ========= ========= ========= Pro forma net loss per share applicable to common stockholders - basic and diluted $ (0.33) $ (0.05) $ (0.68) $ (0.05) ========= ========= ========= ========= 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)
Nine Months Ended Sept. 30, ------------------- 1999 1998 -------- -------- Cash flows from operating activities: Net loss $(22,181) $ (2,274) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 5,214 1,449 Loss (gain) on disposal of fixed assets 18 (8) Provision for losses on accounts receivable 1,143 1,134 Interest payable on note payable to stockholder 115 - Changes in assets and liabilities: Accounts receivable (16,224) 877 Deferred taxes 961 - Other current assets 108 (808) Other assets (120) (293) Accounts payable 12,698 (2,345) Accrued liabilities 3,338 400 --------- --------- Net cash used for operating activities (14,930) (1,868) Cash flows from investing activities: Capital expenditures (25,453) (5,160) Proceed from sale of fixed assets - 17 Equity investment (2,500) (2) Refund of exercise price of Tel-Save common stock Warrants - 1,470 Sale of Tel-Save common stock - 8,030 --------- --------- Net cash provided by (used for) investing activities (27,953) 4,355 Cash flows from financing activities: Proceeds from sale and leaseback of fixed assets 4,516 - Net borrowings on line of credit - (4,510) Payments on debt and capital lease obligations (4,891) (5,292) Distribution to stockholders (3) (5,003) Loan from stockholder - 1,875 Payment on stockholder loans - (1,755) Net proceeds from preferred stock offering - 37,500 Redemption of preferred stock (46,371) - Net proceeds from issuance of common stock 136,896 - Other financing activity 500 - --------- --------- Net cash provided by financing activities 90,647 22,815 --------- --------- Net increase in cash 47,764 25,302 Cash and cash equivalents at beginning of period 12,197 1,502 --------- -------- Cash and cash equivalents at end of period $ 59,961 $ 26,804 ========= ======== Noncash Investing and Financing Activities: Fixed assets acquired under capital leases $ 39,973 $ - ========= ======== 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 1. BASIS OF PRESENTATION On July 15, 1998, Network Plus Corp. (the "Company") 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 45,333,333 shares of the common stock. Accordingly, Network Plus, Inc. became a wholly-owned subsidiary of the Company. On June 29, 1999 the Company commenced its initial public offering of common stock which began trading on the Nasdaq National Market on June 30, 1999. The proceeds from the initial public offering were received in July 1999. The Company's condensed consolidated financial statements reflect the financial position and condensed results of operations of its wholly-owned subsidiary, Network Plus, Inc. All intercompany transactions have been 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 for the three and nine months ended September 30, 1998 and 1999 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. The balance sheet data as of December 31, 1998 has been derived from the Company's audited financial statements as of December 31, 1998. These financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 1998 which are contained in the Company's Form 10-K for such year end as well as the Registration Statement on Form S-1 (File No. 333-79479) effective June 29, 1999. The results of operations for the three and nine months ended September 30, 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 DSL 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 is accounted for as a marketable security. 8 The Company classifies this security as "available for sale". Adjustments to reflect changes in unrealized gains and losses are recorded as other comprehensive income totaling $69,000 for the period ending September 30, 1999. 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 available based on a calculation of accounts receivables, and the additional $30 million is available immediately. Interest is payable monthly at one percent above the prime rate. The New Revolving Credit Facility, as amended, 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 debt-to-revenue ratios. The Company pledged the NorthPoint common stock as additional collateral under the amendment. At September 30, 1999, there were no borrowings outstanding under the New Revolving Credit Facility. Upon the close of the Company's initial public offering in July 1999, the Company repaid the then outstanding balance of $10.0 million. 4. CAPITAL LEASE OBLIGATIONS Capital lease obligations consist of the following:
Sept. 30, December 31, 1999 1998 ---------- ------------ (in thousands) Capital lease obligations $39,218 $ 4,010 Less current portion (9,223) (863) -------- -------- $29,995 $ 3,147 ======== ========
Property and equipment under capital leases are as follows:
Sept. 30, December 31, 1999 1998 ---------- ------------ (in thousands) Telecommunications equipment $39,700 $ 3,837 Computer equipment 5,637 1,527 Motor vehicles 55 55 -------- -------- 45,392 5,419 Less accumulated amortization (5,035) (1,701) -------- -------- $40,357 $ 3,718 ======== ========
In December 1998, the Company received an $81.0 million commitment for equipment lease financing for telecommunications equipment to be acquired 9 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 entered into in the three months ended September 30, 1999 totaled $2.3 million. Also included in the new lease financing was an additional $50 received by the Company in the quarter from the lessor for the sale and leaseback of equipment acquired by the Company. 5. NET 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 net loss per share:
Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (in thousands, except per share data) Net loss applicable to common stockholders $(18,074) $(2,700) $(32,906) $(2,771) Weighted average shares outstanding, basic and diluted 54,440 45,333 48,369 45,333 ========= ========= ========= ========= Net loss per share applicable to common stockholders - basic and diluted $(0.33) (0.06) $(0.68) (0.06) ========= ========= ========= =========
Warrants for the purchase of 1,428,000 shares of common stock and stock options for the purchase of 3,930,086 shares of common stock were not included in the computation of diluted net loss per share for the three and nine months ended September 30, 1999, and warrants for the purchase of 1,405,333 shares and stock options for the purchase of 3,359,200 shares of common stock were not included in the computation of diluted net loss per share for the three and nine months ended September 30, 1998, 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%. 10 6. INCOME TAXES In September 1998, the Company converted from an S Corporation to a C Corporation. Prior to conversion to a C Corporation, income taxes were provided solely for state tax purposes totaling $295,000 for the three months ended September 30, 1998 and $428,000 for the nine months ended September 30, 1998. In accordance with the provisions of FAS 109 "Accounting for Income Taxes" the Company has fully reserved the deferred tax asset generated during the third quarter of 1999 and based on the weight of available evidence, the deferred tax recorded prior to the second quarter of 1999 were fully reserved at September 30, 1999 resulting in a provision of $2.7 million for income taxes for the quarter. The Company continues to assess the realizability of its deferred tax assets based upon relevant events and forecasts and may continue to establish valuation allowances for some or all of deferred tax assets generated in the future. 7. PREFERRED STOCK DIVIDENDS For the three months ended September 30, 1999, the Company recorded preferred stock dividends and redemption premium of $7.6 million relating to the redemption of the 13.5% Series A Cumulative Preferred Stock due 2009 ("Series A Preferred"). For the nine months ended September 30, 1999, the Company recorded preferred stock dividends and redemption premium of $10.5 million and accretion of offering expenses and discount of $286,000 on the Series A Preferred Stock. 8. 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. In June 1999, the FASB issued Statement of Financial Accounting Standard No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FAS Statement 133," which postponed the adoption date of SFAS No. 133. As such, the Company is not required to adopt the statement until fiscal year 2001. Had the Company implemented SFAS 133 for the current reporting period, there would have been no material effect on operational results. 11 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 indicated 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 Registration Statement on Form S-1 (File no. 333-79479), 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. 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 (DSL) products and services to our customers. During the second quarter of 1999, the local network switch in Cambridge and New York were deployed. On June 29, 1999 we commenced our initial public offering of 9,200,000 shares of common stock including the underwriters' exercise of their over-allotment option, which began trading on the Nasdaq National Market on June 30, 1999. The proceeds from the initial public offering were received in July 1999. RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain financial data as a percentage of revenues:
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1999 1998 1999 1998 -------- -------- -------- -------- Revenues 100.0 % 100.0 % 100.0 % 100.0 % Cost of services 80.9 75.0 80.7 74.4 Selling, general and administrative 33.0 29.7 33.0 25.3 Depreciation and amortization 6.1 1.8 4.8 1.8 Operating loss (19.9) (6.5) (18.5) (1.5) Other income (expense) 0.3 (0.5) (0.9) (0.8) Loss before income taxes (19.6)% (7.0)% (19.4)% (2.3)%
12 REVENUES Revenue increased $12.1 million or 44% to $39.4 million for the three months ended September 30, 1999 from $27.3 million for the same period in the prior year. The increase was primarily due to a 30% growth in long distance revenue, which comprised 88% of total revenue for the period, resulting from services to new customers and increased revenue from international wholesale traffic generated from using excess capacity on the Company's long distance switches. The resale of local service contributed $3.9 million in revenue for the period, representing 31% of the increase in total revenue for the period. For the nine month period ended September 30, 1999, revenue increased $29.7 million or 37% to $109.3 million from $79.6 million for the same period in the prior year. Long distance revenue represents 92% of revenue for the nine months ended September 30, 1999, with local service representing the remaining 8%. The Company operates in a competitive market for long distance service, which has experienced price erosion of the average rate per minute from the prior year. The Company expects this price trend to continue in the future. COST OF SERVICES Cost of services increased $11.4 million or 56% to $31.9 million for the three months ended September 30, 1999 from $20.5 million for the same period in the prior year. As a percent of revenue, cost of services increased to 81% for the three months ended September 30, 1999 from 75% for the three months ended September 30, 1998. Cost of services increased $28.9 million or 49% to $88.2 million for the nine months ended September 30, 1999 from $59.2 million for the same period in the prior year. As a percent of revenue, cost of services increased to 81% for the nine months ended September 30, 1999 from 74% for the nine months ended September 30, 1998. The increase is primarily due to the increased volume of international wholesale traffic, which has higher access, transport and termination costs as compared to other long distance traffic. In addition, the Company maintains rate agreements with various local and long distance carriers for access, termination and transport which are continually reviewed and negotiated based on changes in volume and types of traffic. These changes to rate agreements may result in credits for costs associated with prior traffic or reductions in current costs based on the mix of traffic and rate. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased $4.9 million or 60% to $13.0 million for the three months ended September 30, 1999 from $8.1 million for the same period in the prior year. As a percent of revenue, selling, general and administrative expenses increased to 33% for the three months ended September 30, 1999 from 30% for the three months ended September 30, 1998. Selling, general and administrative expenses increased $16.0 million or 80% to $36.1 million for the nine months ended September 30, 1999 from $20.1 million for the same period in the prior year. As a percent of revenue, selling, general and administrative expenses increased to 33% for the nine months ended September 30, 1999 from 25% for the nine months ended September 30, 1998. The Company employed 454 people at September 30, 1999 and 340 at September 30, 1998, resulting in an increase in payroll and related expenses of 34% for the quarter and 63% for the nine months ended September 30, 1999. The sales organization increased by 18 people for the quarter and the Company added 59 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. 13 DEPRECIATION AND AMORTIZATION Depreciation and amortization increased $1.9 million or 379% to $2.4 million for the three months ended September 30, 1999 from $498,000 for the same period in the prior year. Depreciation and amortization increased $3.8 million or 260% to $5.2 million for the nine months ended September 30, 1999 from $1.4 million for the same period in the prior year. The increase is primarily due to additional local network facilities, fiber, computer and other telecommunications equipment to support the Company's network expansion. In particular the Cambridge and New York local switch equipment brought on line during the second and third quarters of 1999 began depreciating in the third quarter. 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 decreased $96,000 or 62% to $58,000 for the three months ended September 30, 1999 from $154,000 for the same period in the prior year. Interest expense net of interest income increased $491,000 or 68% to $1.2 million for the nine months ended September 30, 1999 from $720,000 for the same period in the prior year. The increase year to date is primarily due to interest paid on the capital lease obligations and outstanding balances on the line of credit. The Company expects interest expense to increase as a result of the financing of the local network buildout. The decrease for the quarter is due to the interest earned on the process from the Company's initial public offering. NET LOSS PER SHARE Net loss per share applicable to common stockholders was $0.33 for the three months ended September 30, 1999 and $0.68 for the nine months ended September 30, 1999. Prior to the effect of the preferred stock dividend of $7.8 million and $10.7 million for the three and nine months ended September 30, 1999, respectively, the net loss per share was $0.19 and $0.46, respectively. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased to $60.0 million at September 30, 1999 from $12.2 million at December 31, 1998. The increase is primarily attributable to net proceeds from the Company's initial public offering net of cash used in operating activities and capital expenditures. 14 The Company received the net proceeds from the initial public offering and exercise of the underwriters' overallotment, totaling $136.9 million, in July 1999. In the beginning of the third quarter a portion of the proceeds were used to redeem the outstanding preferred stock for $46.4 million and repay the outstanding balance of $10.0 million on the revolving credit facility. In conjunction with the redemption of the preferred stock, the Company recorded a dividend of $7.6 million representing accrued dividends, unamortized discount and redemption premium. The Company has a revolving credit facility of $60 million. Under the terms of the agreement the Company had available borrowing of $50.5 million and no amount was outstanding at September 30, 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 September 30, 1999 totaled $2.3 million. The Company believes the proceeds from the initial public offering, availability on the existing revolving credit facility and capital lease line should be sufficient to meet its cash requirements for the next 12 months. Based on the Company's expansion plans, the Company has been in discussions with vendor and bank financing sources to provide additional capital, which will be required in the future. 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. We have developed our LOGOS operational support system with the year 2000 in mind, thus minimizing its impact. We have substantially completed the process of evaluating and implementing year 2000 compliance among our software applications and system components, and believe that these are materially compliant at September 30, 1999. The cost of making these applications and systems year 2000 compliant has not been material and has primarily been related to expanding the feature and function set of our general business systems. We will expense all expenditures as incurred, and such expenditures are not expected to have a significant impact on our ongoing results of operations or cash flows. We have also undertaken a formal survey of the year 2000 compliance status of equipment and services provided to us by our suppliers, and we believe that such equipment and services is year 2000 compliant. However, if the hardware or software comprising our network elements acquired from third- party vendors, the software applications of the long distance carriers, local exchange carriers or others on whose services we depend or with whom our systems interface, or the software applications of other suppliers, are not year 2000 compliant, it could affect our systems. This, in turn, could have a material adverse effect on us. Based on our assessments to date, we believe that we 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. We have developed contingency plans, which our management believes can be successfully implemented, if required, to address potential year 2000 issues in our internal processes. 15 There can be no assurance, however, that we will not incur significant unanticipated costs in achieving year 2000 compliance or that year 2000 issues will not have a material adverse effect on our business, results of operations and financial condition. Certain Factors That May Affect Future Operating Results The Company had operating losses for the nine months September 30, 1999 and in each of the years ending December 31, 1998, 1997, 1996 and 1995 and negative cash flow in the years ended December 31, 1998 and 1997. 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. 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 to repay its obligations on such indebtedness at maturity will 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. In addition, the terms of the indebtedness impose operating restrictions on us, which limit our flexibility and create a risk that we could default on our obligations. 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 16 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 incumbent local exchange carriers 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 and year-to-date 1999, approximately 37% and 21%, respectively, of the Company's revenue was attributable to the resale of long distance service provided by Sprint. The current agreement with Sprint terminates in August 2001, and there can be no assurance that this agreement will be extended on terms acceptable to the Company, if at all. Termination of the Company's relationship with Sprint without a replacement carrier agreement could have a material adverse effect on the Company. 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. In addition, prices for communication services have fallen historically, a trend the Company expects will continue. The Company's success will depend upon its ability to provide high-quality services at prices competitive with those charged by its competitors. 17 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. See also "Impact of Year 2000," above. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable 18 PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS CHANGES IN SECURITIES On July 1, 1999, the Company filed a Certificate of Amendment to its Certificate of Incorporation (the "Charter Amendment") that (i) increases the number of authorized shares of Common Stock to 150,000,000, (ii) divides the Board of Directors into three classes, with members of each class to serve three-year terms (except that the terms of current class I, II and III directors expire in 2000, 2001 and 2002, respectively), (iii) provides that stockholders may not act by written consent, (iv) provides that special meetings of stockholders may only be called by the Chairman, the President and the Board of Directors, (v) provides that business transacted at any special meeting will be limited to the purpose for which the meeting was called and (vi) requires the vote of 66 2/3% of the outstanding shares to modify the foregoing provisions. Under Delaware law, stockholders may not remove members of a classified Board of Directors without cause. In addition, the Company's By-laws were amended and restated (the "Restated By-laws") to reflect the foregoing provisions and to provide that stockholders must provide specified advance notice of director nominations and stockholder proposals at a meeting of stockholders. These provisions of the Charter Amendment and Restated By- Laws may have the effect of (a) discouraging, delaying or making more difficult a change in control of the Company, (b) preventing the removal of incumbent directors even if a majority of stockholders were to deem such an attempt to be in the Company's best interests and (c) making it more difficult for a stockholder to submit a proposal at a meeting of stockholders. On July 1, 1999, the Company effected a 4.5333333-for-1 split of the Common Stock (the "Stock Split"). On or about July 6, 1999, the Company redeemed all outstanding shares of its 13.5% Series A Cumulative Preferred Stock Due 2009 ("Series A Preferred"), including all accrued dividends thereon, pursuant to the terms of the Series A Preferred, and the Company adopted an Amended and Restated Certificate of Incorporation (the "Restated Charter") that eliminated all provisions of the Series A Preferred. SALES OF UNREGISTERED SECURITIES Not applicable. USE OF PROCEEDS In connection with the Company's initial public offering of Common Stock, the effective date of the Company's registration statement on Form S-1 under the Securities Act of 1933 (No. 333-79479) was June 29, 1999. 19 The following tables set forth the various expenses, all of which were borne by the Company, in connection with the sale and distribution of the securities registered. All amounts shown are estimates except for the Securities and Exchange Commission filing fee, NASD filing fee and Nasdaq National Market listing fee. SEC registration fee $ 93,132 NASD filing fee 14,875 Nasdaq National Market listing fee 95,000 Blue sky fees and expenses 1,500 Transfer Agent and Registrar fees 10,000 Accounting fees and expenses 200,000 Legal fees and expenses 350,000 Printing and mailing expenses 450,000 Miscellaneous 85,493 ---------- Total $1,300,000 ==========
None of such expenses involved direct or indirect payments to directors or officers of the Company or their associates, 10% stockholders of the Company, or affiliates of the Company. After deducting the expenses set forth in the table above and underwriting discounts and commissions of $10,304,000, the estimates net proceeds to the Company were $135,600,000. During the quarter ended September 30, 1999, the Company used the net proceeds as follows: Redemption of outstanding preferred stock $46,400,000 Repayment of amounts owed under revolving credit facility 10,000,000 Purchase and installation of property and equipment 10,000,000 Working capital 13,000,000 All amounts shown in the table above are estimates.
The remaining net proceeds were invested in short-term financial instruments. None of such uses involved direct or indirect payments to directors or officers of the Company or their associates, 10% stockholders of the Company, or affiliates of the Company. 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 September 30, 1999. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Quincy, State of Massachusetts, on November 12, 1999. NETWORK PLUS CORP. By: /s/ George Alex ------------------------------ George Alex Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 21 EXHIBIT INDEX Exhibit No. Description 27 Financial Data Schedule. EX-27 2
5 3-MOS DEC-31-1999 SEP-30-1999 59,961 0 34,453 3,260 0 93,510 80,702 9,076 168,647 40,486 32,035 0 0 545 95,581 168,647 0 39,381 0 47,220 (104) 1,575 987 (10,505) 0 (10,505) 0 0 0 (10,505) (0.33) (0.33)
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