<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 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.
<PAGE> 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
<PAGE> 3
PART 1
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
NETWORK PLUS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
<CAPTION>
Sept. 30, Dec. 31,
1999 1998
--------- ---------
<S> <C> <C>
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
========= =========
<F1>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
NETWORK PLUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<CAPTION>
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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)
<F1>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
</TABLE>
<PAGE> 5
<TABLE>
NETWORK PLUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
(continued)
<CAPTION>
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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)
========= ========= ========= =========
<F1>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
</TABLE>
<PAGE> 6
<TABLE>
NETWORK PLUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Nine Months
Ended Sept. 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
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 $ -
========= ========
<F1>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
</TABLE>
<PAGE> 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.
<PAGE> 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
<TABLE>
Capital lease obligations consist of the following:
<CAPTION>
Sept. 30, December 31,
1999 1998
---------- ------------
(in thousands)
<S> <C> <C>
Capital lease obligations $39,218 $ 4,010
Less current portion (9,223) (863)
-------- --------
$29,995 $ 3,147
======== ========
</TABLE>
<TABLE>
Property and equipment under capital leases are as follows:
<CAPTION>
Sept. 30, December 31,
1999 1998
---------- ------------
(in thousands)
<S> <C> <C>
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
======== ========
</TABLE>
In December 1998, the Company received an $81.0 million commitment for
equipment lease financing for telecommunications equipment to be acquired
<PAGE> 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.
<TABLE>
The following table sets forth the computation of basic and diluted net
loss per share:
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
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)
========= ========= ========= =========
</TABLE>
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%.
<PAGE> 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.
<PAGE> 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
<TABLE>
The following table sets forth for the periods indicated certain financial
data as a percentage of revenues:
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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)%
</TABLE>
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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
<PAGE> 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.
<PAGE> 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
<PAGE> 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.
<PAGE> 19
<TABLE>
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.
<S> <C>
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
==========
</TABLE>
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.
<TABLE>
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:
<S> <C>
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
<F1>
All amounts shown in the table above are estimates.
</TABLE>
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.
<PAGE> 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)
<PAGE> 21
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 59,961
<SECURITIES> 0
<RECEIVABLES> 34,453
<ALLOWANCES> 3,260
<INVENTORY> 0
<CURRENT-ASSETS> 93,510
<PP&E> 80,702
<DEPRECIATION> 9,076
<TOTAL-ASSETS> 168,647
<CURRENT-LIABILITIES> 40,486
<BONDS> 32,035
0
0
<COMMON> 545
<OTHER-SE> 95,581
<TOTAL-LIABILITY-AND-EQUITY> 168,647
<SALES> 0
<TOTAL-REVENUES> 39,381
<CGS> 0
<TOTAL-COSTS> 47,220
<OTHER-EXPENSES> (104)
<LOSS-PROVISION> 1,575
<INTEREST-EXPENSE> 987
<INCOME-PRETAX> (10,505)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,505)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,505)
<EPS-BASIC> (0.33)
<EPS-DILUTED> (0.33)
</TABLE>
