<PAGE> 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.
<PAGE> 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
<PAGE> 3
<TABLE>
PART 1
ITEM 1. FINANCIAL STATEMENTS
<CAPTION>
NETWORK PLUS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
March 31, Dec. 31,
1999 1998
--------- ---------
<S> <C> <C>
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
======== =========
</TABLE>
<F1>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
<PAGE> 4
<TABLE>
NETWORK PLUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<CAPTION>
Three Months
Ended March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
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
========= =========
</TABLE>
<F1>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
<PAGE> 5
<TABLE>
NETWORK PLUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
(continued)
<CAPTION>
Three Months
Ended March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
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
========= =========
</TABLE>
<F1>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
<PAGE> 6
<TABLE>
NETWORK PLUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Three Months
Ended March 31,
------------------
1999 1998
-------- -------
<S> <C> <C>
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 $ -
========= ========
</TABLE>
<F1>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<TABLE>
The following table sets forth the computation of basic and diluted income
(loss) per share:
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
------------------ -----------------
<S> <C> <C>
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
============ ============
</TABLE>
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.
<PAGE> 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
<TABLE>
The following table sets forth for the periods indicated certain financial
data as a percentage of revenues:
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
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 %
</TABLE>
<PAGE> 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.
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<PAGE> 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
<PAGE> 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.
<PAGE> 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
<PAGE> 18
EXHIBIT INDEX
Exhibit number Title
- -------------- ------------------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001065633
<NAME> NETWORK PLUS CORP.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,578
<SECURITIES> 0
<RECEIVABLES> 22,195
<ALLOWANCES> 1,172
<INVENTORY> 0
<CURRENT-ASSETS> 28,629
<PP&E> 46,452
<DEPRECIATION> 5,082
<TOTAL-ASSETS> 76,210
<CURRENT-LIABILITIES> 28,459
<BONDS> 22,057
36,700
0
<COMMON> 100
<OTHER-SE> (11,597)
<TOTAL-LIABILITY-AND-EQUITY> 76,210
<SALES> 33,581
<TOTAL-REVENUES> 33,581
<CGS> 0
<TOTAL-COSTS> 38,246
<OTHER-EXPENSES> 362
<LOSS-PROVISION> 911
<INTEREST-EXPENSE> 521
<INCOME-PRETAX> (5,027)
<INCOME-TAX> (1,810)
<INCOME-CONTINUING> (3,217)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,217)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
