<PAGE> 1
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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 JUNE 30, 2000
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 000-26313
NETWORK PLUS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 04-3430576
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
234 COPELAND STREET, 02169
QUINCY, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICER)
</TABLE>
(617) 786-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(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)
outstanding on August 9, 2000 was 60,192,364.
--------------------------------------------------------------------------------
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<PAGE> 2
FORM 10-Q
THREE AND SIX MONTHS ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Network Plus Corp.
Unaudited Condensed Consolidated Balance Sheets as of June
30, 2000 and December 31, 1999......................... 2
Unaudited Condensed Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 2000 and
1999................................................... 3
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2000 and 1999........ 4
Notes to Unaudited Condensed Consolidated Financial
Statements............................................. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................... 13
PART II -- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.......... 13
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 14
Item 6. Exhibits and Reports on Form 8-K................... 14
Exhibit Index............................................... 15
Signatures.................................................. 16
</TABLE>
1
<PAGE> 3
PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETWORK PLUS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $132,586 $ 43,031
Accounts receivable, net of allowance for doubtful
accounts of $2,331 and $2,624, respectively............ 49,483 31,814
Prepaid expenses.......................................... 2,161 489
Other current assets...................................... 1,107 958
-------- --------
Total current assets................................... 185,337 76,292
Property and equipment, net................................. 221,401 101,944
Other assets................................................ 734 1,117
Investment.................................................. 1,554 3,333
Intangible assets, net...................................... 1,966 3,286
-------- --------
Total assets........................................... $410,992 $185,972
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................... $ 49,725 $ 48,704
Accrued liabilities....................................... 12,492 6,370
Current portion of capital lease obligations.............. 11,835 11,346
-------- --------
Total current liabilities.............................. 74,052 66,420
Long-term debt and capital lease obligations................ 35,491 28,188
Long-term note payable to stockholder....................... 1,875 1,875
Other long-term liabilities................................. 303 208
Commitments
Redeemable 7 1/2% Series A cumulative convertible preferred
stock, $.01 par value, 500 shares authorized, 250 and no
shares, respectively, issued and outstanding.............. 122,012 --
Stockholders' equity
Common stock, $0.01 par value, 150,000 shares authorized,
60,037 and 54,795 shares, respectively, issued and
outstanding............................................ 600 548
Additional paid-in capital.................................. 264,606 138,767
Stock subscription receivable............................... -- (155)
Warrants.................................................... 4,249 4,405
Other comprehensive income (loss)........................... (946) 833
Accumulated deficit......................................... (91,250) (55,117)
-------- --------
Total stockholders' equity............................. 177,259 89,281
-------- --------
Total liabilities and stockholders' equity............. $410,992 $185,972
======== ========
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
2
<PAGE> 4
NETWORK PLUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues........................................ $ 54,427 $ 36,313 $104,686 $ 69,894
Operating expenses
Costs of services............................. 41,562 29,771 82,416 56,317
Selling, general and administrative
expenses................................... 27,490 12,404 47,543 23,120
Depreciation and amortization................. 6,560 1,844 11,309 2,828
-------- -------- -------- --------
75,612 44,019 141,268 82,265
-------- -------- -------- --------
Operating loss.................................. (21,185) (7,706) (36,582) (12,371)
Other income (expense)
Interest income............................... 2,634 21 3,043 162
Interest expense.............................. (1,163) (795) (2,611) (1,316)
Other income (expense)........................ (10) 21 17 39
-------- -------- -------- --------
1,461 (753) 449 (1,115)
-------- -------- -------- --------
Net loss before income taxes.................... (19,724) (8,459) (36,133) (13,486)
Benefit for income taxes........................ -- -- -- (1,810)
-------- -------- -------- --------
Net loss........................................ (19,724) (8,459) (36,133) (11,676)
Preferred stock dividends and accretion of
offering expenses and discount............. 2,262 1,602 2,262 3,156
Net loss applicable to common stockholders...... $(21,986) $(10,061) $(38,395) $(14,832)
======== ======== ======== ========
Net loss per share applicable to common
stockholders
Basic and diluted............................. $ (0.37) $ (0.22) $ (0.67) $ (0.33)
======== ======== ======== ========
Weighted average shares outstanding
Basic and diluted............................. 59,358 45,422 (57,216) 45,355
======== ======== ======== ========
Comprehensive loss
Net loss...................................... $(19,724) $ (8,459) $(36,133) $(11,676)
Unrealized (loss) gain on investment
securities, net of tax..................... (946) -- (1,779) 1,477
-------- -------- -------- --------
Comprehensive (loss)............................ $(20,670) $ (8,459) $(37,912) $(10,199)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
3
<PAGE> 5
NETWORK PLUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
2000 1999
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (36,133) $(11,676)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization.......................... 11,309 2,828
Loss on disposal of fixed assets....................... 94 --
Interest expense on note payable to stockholder........ 95 75
Stock-based compensation............................... 101 --
Changes in assets and liabilities
Accounts receivable.................................. (17,669) (6,285)
Prepaid expenses..................................... (1,672) --
Deferred taxes....................................... -- (1,810)
Other current assets................................. (149) (261)
Other assets......................................... 383 74
Accounts payable..................................... 1,021 12,051
Accrued liabilities.................................. 6,122 2,992
Other liabilities.................................... 752 --
--------- --------
Net cash used for operating activities............ (35,746) (2,012)
Cash flows from investing activities:
Capital expenditures...................................... (116,142) (15,440)
Purchase of investment.................................... -- (2,500)
Proceeds from sale and leaseback of fixed assets.......... -- 4,467
--------- --------
Net cash used for investing activities............ (116,142) (13,473)
Cash flows from financing activities:
Net proceeds from revolving credit facility............... -- 10,000
Principal payments on capital lease obligations........... (6,358) (3,112)
Net proceeds from the issuance of common stock............ 128,051 --
Net proceeds form the issuance of preferred stock......... 119,750 --
Distribution to stockholders.............................. -- (3)
--------- --------
Net cash provided by financing activities......... 241,443 6,885
--------- --------
Net increase (decrease) in cash............................. 89,555 (8,600)
Cash and cash equivalents at beginning of period............ 43,031 12,197
--------- --------
Cash and cash equivalents at end of period.................. $ 132,586 $ 3,597
========= ========
Noncash Investing and Financing Activities:
Fixed assets acquired under capital leases................ $ 13,398 $ 26,582
========= ========
Preferred stock dividends paid-in-kind.................... $ 2,262 $ 3,156
========= ========
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
4
<PAGE> 6
NETWORK PLUS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of the Company
are unaudited. In the opinion of management, the accompanying condensed
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, 1999 has been derived from the Company's audited financial
statements.
These financial statements should be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 1999 which are
contained in the Company's Form 10-K, as amended, for such year end, as well as
the Registration Statements on Form S-3, as amended (File Nos. 333-32040 and
333-32042), effective April 6, 2000. The results of operations for the three and
six months ended June 30, 2000 are not necessarily indicative of the results to
be expected for the entire year ended December 31, 2000 or any future period.
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. 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 $60,000
revolving credit facility (as amended the "Senior Credit Facility"). Under the
Senior Credit Facility, $30,000 of the $60,000 is immediately available, while
the additional $30,000 is available based upon a percentage of accounts
receivable. Interest is payable monthly at one percent above the prime rate. The
Senior Credit Facility requires the Company, among other things, to meet minimum
levels of revenues and earnings before interest, taxes, depreciation and
amortization and debt to revenue ratios, places the Company in default in the
event of a material adverse change in the Company's business and restricts our
ability to pay dividends. In March 2000, the Senior Credit Facility was extended
for 90 days and was terminated by the Company on June 29, 2000. There were no
amounts outstanding under the Senior Credit Facility on June 30, 2000 and
December 31, 1999.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
ESTIMATE JUNE 30, DECEMBER 31,
USEFUL LIFE 2000 1999
------------- -------- ------------
<S> <C> <C> <C>
Network infrastructure and equipment........ 5 and 10 $109,633 $ 50,276
years
Computer equipment.......................... 3-5 years 9,758 5,228
Office furniture and equipment.............. 7 years 2,923 1,975
Software.................................... 3 years 7,060 6,325
Motor vehicles.............................. 5 years 456 256
Leasehold improvements...................... Term of Lease 13,949 7,959
Construction in progress.................... 98,038 40,355
-------- --------
241,817 112,374
Less accumulated depreciation and
amortization.............................. (20,416) (10,430)
-------- --------
$221,401 $101,944
======== ========
</TABLE>
5
<PAGE> 7
NETWORK PLUS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
4. DEBT AND CAPITAL LEASE OBLIGATIONS
Debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Notes payable............................................... $ 50 $ 200
Capital lease obligations................................... 47,276 39,334
Less current portion........................................ (11,835) (11,346)
-------- --------
$ 35,491 $ 28,188
======== ========
</TABLE>
Property and equipment under capital leases are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Network infrastructure and equipment........................ $46,228 $34,770
Computer equipment.......................................... 3,641 2,062
Motor vehicles.............................................. 336 99
Construction in progress.................................... 9,820 9,696
------- -------
60,025 46,627
Less accumulated amortization............................... (8,333) (4,004)
------- -------
$51,692 $42,623
======= =======
</TABLE>
5. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss applicable to Network Plus
Corp. common stock -- basic and
diluted............................... $(21,986) $(10,061) $(38,395) $(14,832)
Shares used in loss per share basic and
diluted............................... 59,358 45,422 57,216 45,355
Net loss per share applicable to common
stockholders -- basic and diluted..... $ (0.37) $ (0.22) $ (0.67) $ (0.33)
======== ======== ======== ========
</TABLE>
Warrants for the purchase of 1,366 and 1,428 shares and stock options for
the purchase of 4,353 and 4,066 shares of common stock were not included in the
computation of net loss per share for the three months and six months ended June
30, 2000 and 1999, respectively, because inclusion of such shares would have an
anti-dilutive effect. In addition, the conversion of the convertible preferred
stock to 3,592 shares of common stock was not included in the computation of net
loss per share for the three and six months ended June 30, 2000, because
inclusion of such shares would have an anti-dilutive effect.
6
<PAGE> 8
NETWORK PLUS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
6. NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accountants Bulletin No. 101, "Revenue Recognition in Financial Statements"
subsequently updated by SAB 101A and SAB 101B ("SAB 101"). SAB 101 summarizes
certain of the SEC's view in applying generally accepted accounting principles
to revenue recognition in financial statements. The Company is required to adopt
SAB 101 no later than the fourth quarter of fiscal 2000. The Company does not
anticipate any impact of SAB 101 on its results of operations and financial
position.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of previously fixed stock options or awards, and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000.
7. SEGMENT INFORMATION
The Company has two reportable segments which management operates as
distinct sales organizations: these two segments are segregated by the type of
customer base to whom services are provided. The two customer base types are:
retail telecommunications and data services, and wholesale telecommunications.
The Company measures and evaluates its two reportable segments based on revenues
and costs of services. The retail telecommunications and data services segment
provides local and long distance services including voice and data transport,
enhanced and custom calling features, colocation, and DSL services. This segment
focuses on selling these services to end user customers, such as businesses and
residences. The wholesale telecommunications segment provides transport and
termination services. This segment focuses on selling these services to large
communication carriers, who utilize the Company's excess capacity to provide
telephone voice services to their customers.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
2000 1999 2000 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Retail telecommunications and data services...... $33,092 $22,643 $ 60,953 $44,722
Wholesale telecommunications..................... 21,335 13,670 43,733 25,172
------- ------- -------- -------
Total revenues..................................... $54,427 $36,313 $104,686 $69,894
======= ======= ======== =======
Costs of services:
Retail telecommunications and data services...... $22,553 $17,533 $ 42,956 $33,163
Wholesale telecommunications..................... 19,009 12,238 39,460 23,154
------- ------- -------- -------
Total costs of services............................ $41,562 $29,771 $ 82,416 $56,317
======= ======= ======== =======
</TABLE>
8. RECENT FINANCING
On April 12, 2000, the Company sold in concurrent underwritten public
offerings (i) 5,000 shares of common stock for aggregate net proceeds of
$122,892 to the Company and $13,400 to certain selling stockholders and (ii)
2,500 depositary shares, each representing 1/10 of a share of 7 1/2% series A
cumulative convertible preferred stock for aggregate net proceeds to the Company
of $119,750. Each depositary share is initially convertible into 1.4368 shares
of common stock.
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and related notes of Network Plus
(the "Company") included herein as well as the consolidated financial statements
and notes and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Company's Form 10-K as amended, for the
fiscal year ended December 31, 1999 (the "1999 10-K") as well as the
registration statements on Form S-3, as amended (File Nos. 333-32040 and
333-32042), effective April 6, 2000 (collectively the "S-3 Registration
Statements"). In addition to historical information, the following discussion
and other information in this report contains forward-looking information that
involves risks and uncertainties. For this purpose, any statement that is not a
statement of historical fact is forward-looking information, including without
limitation statements concerning the Company's future capital requirements,
sufficiency of available capital and availability of additional financing.
Without limiting the generality of the foregoing, words such as "believes,"
"anticipates," "expects" and similar expressions identify forward-looking
statements. 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
1999 10-K and the S-3 Registration Statements and below under "Certain Factors
That May Affect Future Operating Results."
OVERVIEW
Network Plus is a network-based communications provider offering a
comprehensive suite of broadband data, telecommunications and e.Commerce hosting
services. The Company's services include local and long distance voice,
high-speed data, Internet and web and managed server hosting. The Company
currently utilizes digital subscriber line, or DSL, technology to provide
high-speed data and Internet access and provides local and long distance
services using voice over digital subscriber line, or VoDSL, technology. The
Company currently serves small and medium-sized business customers principally
in the northeastern and southeastern regions of the United States.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data as a percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30 JUNE 30
-------------- --------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues.................................................... 100.0% 100.0% 100.0% 100.0%
Costs of services........................................... 76.4 82.0 78.7 80.6
Selling, general and administrative......................... 50.5 34.2 45.4 33.1
Depreciation and amortization............................... 12.1 5.1 10.8 4.0
Operating loss.............................................. (38.9) (21.2) (34.9) (17.7)
Other income (expense)...................................... 2.7 (2.1) 0.4 (1.6)
Net loss before income taxes................................ (36.2)% (23.3)% (34.5)% (19.3)%
</TABLE>
Three and Six Months Ended June 30, 2000 Compared to The Three and Six Months
Ended June 30, 1999.
Revenues
Revenues increased $18.1 million, or 50%, to $54.4 million for the three
months ended June 30, 2000 from $36.3 million for the same period in the prior
year. Revenues from the sale of local services represented 24% of total revenue
for the period ended June 30, 2000, contributing $13.1 million in revenues, as
compared to 14% of total revenue for the same period in the prior year. Revenues
generated from international wholesale traffic, which results from utilizing
excess capacity on our long distance switches, represented 39% of total
revenues, generating $21.3 million in revenues, for the three months ended June
30, 2000 as compared to 45%
8
<PAGE> 10
for the same period in the prior year. Revenues from retail long distance
services represented 29% of total revenue or $16.0 million for the period ended
June 30, 2000 as compared to 37% of total revenue for the same period in the
prior year. Revenue from data services increased to 7% of total revenue,
totaling $3.7 million, for the period ended June 30, 2000, from 4% for the same
period in the prior year.
For the six month period ended June 30, 2000, revenue increased $34.8 million,
or 50%, to $104.7 million from $69.9 million for the same period in the prior
year. Local service revenue represents 19% of year to date revenues compared to
7% for the same period in the prior year. Local lines in service at June 30,
2000 increased 228% to 117,500 from 35,983 lines in service at June 30, 1999.
International wholesale revenue represents 42% of year to date revenue compared
to 36% for the same period in the prior year. We operate in a competitive market
for long distance service, which has experienced price erosion of the average
rate per minute from the prior year. We expect this price trend to continue in
the future.
Costs of Services
Costs of services increased $11.8 million, or 40%, to $41.6 million for the
three months ended June 30, 2000 from $29.8 million for the same period in the
prior year. As a percentage of revenues, costs of services decreased to 76% for
the three months ended June 30, 2000 from 82% for the three months ended June
30, 1999. Costs of service increased $26.1 million, or 46%, to $82.4 million for
the six months ended June 30, 2000 from $56.3 million for the same period in the
prior year. As a percent of revenue, cost of service decreased to 79% for the
six month period ended June 30, 2000 from 81% for the six month period ended
June 30, 1999.
The increase in costs of services of 40% and 46% for the three month and
six month periods ended June 30, 2000, respectively compared to the same periods
in the prior year is due to the increase in total revenues of 50% for both
periods. The decrease in costs of services as a percent of revenue is due to the
change in the mix of services provided as revenue from local service and data
services increased as a percent of total revenue. As the deployment of our local
network continues and the facilities become operational, the costs associated
with the co-location facilities, including rent and access charges, are
reflected in cost of services. These costs are generally fixed and will result
in fluctuations in margin in the future as a result the fully available capacity
is not immediately utilized in these co-locations.
Selling, General and Administrative
Selling, general and administrative expenses increased $15.1 million, or
122%, to $27.5 million for the three months ended June 30, 2000 from $12.4
million for the same period in the prior year. As a percentage of revenues,
selling, general and administrative expenses increased to 51% for the three
months ended June 30, 2000 from 34% for the same period in the prior year.
Selling, general and administrative expenses increased $24.4 million, or 106%,
to $47.5 million for the six month period ended June 30, 2000 from $23.1 million
for the same period in the prior year. We employed 886 people at June 30, 2000,
compared with 395 at June 30, 1999, resulting in an increase in payroll and
related expenses of 114% for the quarter and 94% year to date. The sales
organization increased by 190 people as compared to the prior period, and we
added 139 people to support the build-out of our local network. We expect
selling, general and administrative expenses to continue to increase as we add
employees to support our anticipated growth. Other selling, general and
administrative expenses increased as a result of our growth in revenues and the
expansion of the infrastructure to support future growth. Costs associated with
the co-location facilities including rent, access and leased line charges for
facilities which are not fully deployed are included in selling, general and
administrative expenses. We expect these charges to increase until the
co-location facilities become operational at which time the related costs are
reclassified to costs of services.
Depreciation and Amortization
Depreciation and amortization increased $4.7 million, or 256%, to $6.5
million for three months ended June 30, 2000 from $1.8 million for the same
period in the prior year. Depreciation and amortization increased $8.5 million,
or 300%, to $11.3 million for six months ended June 30, 2000 from $2.8 million
for the six months ended June 30, 1999. The increase is primarily due to
additional local network facilities, fiber, computer and other
telecommunications and data services equipment to support our network expansion.
We
9
<PAGE> 11
expect the depreciation and amortization expense to increase as we bring
additional local network facilities on-line, including the Southeast switch
facilities, and as we make additional investments in our network and operational
infrastructure.
Interest
Interest income net of interest expense increased $2.2 million to $1.5
million for the three months ended June 30, 2000 from a net interest expense of
$774,000 for the same period in the prior year. Interest income net of expense
increased $1.6 million to $432,000 for the six months ended June 30, 2000 from a
net interest expense of $1.2 million for the same period prior year. The
increase is primarily due to the investment of capital obtained from the common
and preferred stock offerings in April 2000. We expect interest income to
decrease as the capital raised from the offerings are used in the continued
buildout of the local network and to fund operating activities.
Net Loss and Net Loss Applicable to Common Stockholders
As a result of the increase in selling, general and administrative
expenses, depreciation and amortization, and net interest income noted above, we
incurred a net loss of $19.7 million and $36.1 million for the three and six
months ended June 30, 2000, respectively compared to $8.5 million and $11.7
million for the same periods in the prior year.
The effect of the preferred stock dividends and accretion of offering
expenses of $2.3 million for the three months ended June 30, 2000 and $1.6
million for the three months ended June 30, 1999 contributed to net losses
applicable to common stockholders, which were $22.0 million for the period ended
June 30, 2000 and $10.1 million for the same period in the prior year. There
were no dividends or accretion of offering expenses during the first three
months of 2000, accordingly, for the six months ended June 30, 2000, net loss
was increased by $2.3 million resulting in net loss applicable to common
shareholders of $38.4 million. For the six months ended June 30, 1999 the
Company accrued dividends and accretion of offering expenses of $3.2 million
contributing to net losses applicable to common shareholders, which were $14.8
million for this period. Dividends payable on the convertible preferred stock
sold by us in our April 12, 2000 offering and our anticipated increase in net
losses will result in increased net loss applicable to common stockholders in
the future.
EBITDA. EBITDA was negative $14.6 million for the three months ended June
30, 2000 compared to negative $931,000 for the three months ended June 30, 1999.
EBITDA for the six months ended June 30, 2000 was negative $25.2 million
compared to negative $9.5 million for the same period in the prior year. This
increase was due to the rapid implementation of our local network and
infrastructure to support future growth.
LIQUIDITY AND CAPITAL RESOURCES
On April 12, 2000, we sold in concurrent underwritten public offerings (i)
5,000,000 shares of common stock for aggregate net proceeds of $122.9 million to
us and $13.4 million to certain selling stockholders and (ii) 2,500,000
depositary shares, each representing 1/10 of a share of 7 1/2% series A
cumulative convertible preferred stock, for aggregate net proceeds to us of
$119.8 million. Each depositary share is initially convertible into 1.4368
shares of our common stock.
On August 11, 2000, we received a commitment from Goldman Sachs Credit
Partners L.P., FleetBoston Robertson Stephen, Inc., DLJ Capital Bridge Finance,
Inc. and Fleet National Bank to provide a new senior secured credit facility in
a total principal amount of up to $225 million. Borrowings under the new senior
secured credit facility will bear interest at a rate generally equal to the
lesser of (a) prime (or, if greater, the federal fund rate plus 0.5%) plus 4% or
(b) the Eurodollar rate plus 6.5% per annum, increasing by 0.75% per annum
commencing on June 30, 2001 and each fiscal quarter thereafter. We will be
required to pay certain fees and issue certain warrants to the lenders in
connection with this facility. All outstanding amounts under this facility must
be repaid in full by June 30, 2002, at which time we expect to seek to replace
this facility.
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<PAGE> 12
This new senior secured credit facility will replace our previous $60
million Fleet/Goldman senior credit facility which we terminated on June 29,
2000. No amounts were outstanding under the senior credit facility on June 30,
2000. We currently intend to use this new facility for working capital, the
purchase and acquisition of telecommunications assets and general corporate
purposes. We expect this facility to become available by October 2000. The
closing of the new senior credit facility is subject to the execution of
definitive agreements and customary closing conditions including no material
adverse change in our business, and there can be no assurance this facility will
become available on the proposed terms or at all. In the event this facility
does not become available, we anticipate that we will need to seek alternative
sources of financing or, if no such financing is available on acceptable terms,
scale back or delay our expansion plans.
Total assets were $411.0 million at June 30, 2000 compared to $186.0
million at December 31, 1999. Cash and cash equivalents were $132.6 million at
June 30, 2000 compared to $43.0 million at December 31, 1999. Net cash used for
operating activities was $35.9 million during the six months ended June 30, 2000
as compared to $2.0 million during the six months ended June 30, 1999. Capital
expenditures were $116.0 million and $15.4 million for the six months ended June
30, 2000 and June 30, 1999, respectively.
Our strategic initiatives include the deployment of additional local and
long distance switches, the co-location of network equipment, the offering of
new services such as local exchange and data services, the expansion of our
sales force and other personnel, and significant investment in our information
technology systems. These initiatives will require a substantial amount of
capital for the installation of network switches and related equipment, fiber,
personnel additions and funding of operating losses and working capital.
Our ability to meet our projected growth will require substantial cash
resources. We estimate that the anticipated expansion of our network
infrastructure from July 1, 2000 through year-end 2000 and in 2001, including
the addition of co-locations, switches, e.Commerce data centers and other
network elements and our anticipated funding of negative cash flow from
operating activities through year-end 2000 and in 2001, will require significant
additional capital. Furthermore, if we acquire other businesses, we may require
additional financing. We expect the proceeds of our common stock and convertible
preferred stock offerings in April 2000, and proposed financing arrangements and
cash flow from operations to provide sufficient capital to fund our operations
for the next 12 months.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
subsequently updated by SAB 101A and SAB 101B ("SAB 101"). SAB 101 summarizes
certain of the SEC's view in applying generally accepted accounting principles
to revenue recognition in financial statements. The Company is required to adopt
SAB 101 no later than the fourth quarter of fiscal 2000. The Company is
currently evaluating the impact of SAB 101 on its results of operations and
financial position.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of previously fixed stock options or awards, and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000.
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company had operating losses for the three and six months ended June
30, 2000 and in each of the last five years and negative cash flow from
operations for the three and six months ended June 30, 2000 and in the year
ended December 31, 1999. The Company expects to incur significant expenditures
in connection with the acquisition, development and expansion of its network
infrastructure, product offerings, information technology systems and employee
base. As a result, the Company expects to incur significant future operating
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<PAGE> 13
losses and negative cash flow. If its revenues do not increase significantly or
the increase in its expenses is greater than expected, the Company may not
achieve or sustain profitability or generate positive cash flow in the future.
The Company's ability to meet its projected growth will require substantial
cash resources. The Company's ability to satisfy future capital needs will
depend upon its ability to enter into a new credit facility, renegotiate or
replace its equipment lease facilities, and raise any additional required
capital. The Company can give no assurance that it will be able to close the new
senior secured credit facility and renegotiate or replace its credit and
equipment lease facilities on acceptable terms or at all. Additional financing
may also place significant limits on its financial and operating flexibility or
may not be available. Failure to obtain future financing when needed or on
acceptable terms could cause the Company to delay or abandon its development and
expansion plans and could materially adversely affect its growth and ability to
compete.
The Company has a significant amount of indebtedness outstanding and, as a
result of its growth strategy, expects to incur significant additional
indebtedness in the future. The Company's ability to make cash payments with
respect to its outstanding or future indebtedness and to repay its obligations
on such indebtedness at maturity or failure 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 the Company, which limit its flexibility and create a risk that
it could default on its 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 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. No assurance can be given that any
or all of the requisite agreements can be obtained on satisfactory terms and
conditions.
The Company has limited experience providing Internet access, broadband
data including VODSL and DSL, web and managed server hosting and local services
on its own network. There can be no assurance that these 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, 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 and upon third parties for other
services. 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.
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, and 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
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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.
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.
We depend upon Verizon (formerly Bell Atlantic) to provide services related
to moving traffic onto our network and for repair service. Our results of
operations could be adversely affected by the continuation of the labor strike
at Verizon.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Convertible Preferred Stock Offering
On April 12, 2000, the Company designated 500,000 shares of its previously
undesignated preferred stock as 7 1/2% Series A Cumulative Convertible Preferred
Stock (the "convertible preferred stock") and issued 250,000 shares of the
convertible preferred stock in a registered public underwritten offering. The
convertible preferred stock was issued by the Company in the form of 2,500,000
depositary shares, liquidation preference $50 per depositary share. Each
depositary share represents 1/10 of a share of convertible preferred stock.
The following is a summary of certain terms of the convertible preferred
stock. For a complete description of the terms of the convertible preferred
stock, reference is made to the Certificate of Designations incorporated by
reference as an exhibit hereto.
The convertible preferred stock is subordinated to the Company's existing,
and any future, indebtedness, but ranks pari passu with any existing or future
preferred stock and has priority over the Company's Common Stock.
Dividends on the convertible preferred stock are payable quarterly and
accumulate at a rate of 7 1/2% per annum per share on a liquidation preference
of $500 per share, or $37.50 per annum per share. Dividends may, at the
Company's option, be paid in cash, shares of Common Stock or a combination
thereof. If the Company elects to pay a dividend with Common Stock, the market
price of the Company's Common Stock for purposes of calculating the number of
shares required to satisfy the dividend payment will be equal to 95% of the
average of the closing price of the Common Stock on the five trading days
preceding the dividend payment date. The number of shares of Common Stock to be
delivered to the holders of the convertible preferred stock will be the amount
of the dividend payment divided by the market price of the Common Stock
determined as described above. The first dividend payment of $8.229 per share of
convertible preferred stock was paid in July 2000 resulting in the issuance by
the Company of an aggregate of 145,000 shares of common stock.
Unless previously redeemed or repurchased, the convertible preferred stock
is convertible at the option of the holders at any time prior to April 1, 2012,
into shares of Common Stock at a rate, subject to adjustment in certain events,
of 14.368 shares of Common Stock for each share of convertible preferred stock.
The Company will be entitled to redeem the convertible preferred stock after
April 10, 2005, by paying cash, Common Stock
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<PAGE> 15
or a combination thereof, at the Company's option. From April 10, 2005 until
June 30, 2006, the redemption price for each share will equal $518.75 plus
accumulated and unpaid dividends. The redemption price will decline ratably each
year beginning on April 1, 2006, until it equals $500.00 on April 1, 2010 and
thereafter will remain at $500.00 until redeemed. If the Company elects to pay
the redemption price with Common Stock, the market price of the Common Stock for
purposes of calculating the number of shares required to satisfy the redemption
payment will be equal to 95% of the average of the closing price of the Common
Stock on the ten trading days following the end of the notice period specified
in the redemption notice. The number of shares of Common Stock to be delivered
to the holders of convertible preferred stock will be the amount of the
redemption payment divided by the market price of the Common Stock determined as
described above.
Upon the occurrence of a change of control, as defined in the Certificate
of Designations governing the convertible preferred stock, each holder of the
convertible preferred stock has the right to require the Company to purchase all
or a portion of the holder's convertible preferred stock at a price equal to the
liquidation preference plus accumulated and unpaid dividends. The Company may
pay the redemption price in respect of the change of control purchase obligation
in cash or Common Stock or a combination thereof. If the Company pays the
redemption price in Common Stock, the market price of the Common Stock will be
determined the same way as if the convertible preferred stock were being
redeemed by the Company.
The Company will be required to redeem all the remaining shares of the
convertible preferred stock on April 1, 2012. In the event of the liquidation,
dissolution or winding up of the Company's business, holders of the convertible
preferred stock are entitled to receive the liquidation preference of $500 per
share plus all accrued and unpaid dividends. Except as may be required by
Delaware law, or if the Company fails to pay dividends for six quarters, the
convertible preferred stock will have no voting rights.
The payment of dividends or other distributions on the Common Stock is
subject to the declaration and payment of preferential dividends on the
convertible preferred stock. Upon a liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the rights of the holders of
Common Stock are subordinate to the rights of holders of convertible preferred
stock to receive their aggregate liquidation preference. Accordingly, the
issuance of convertible preferred stock may adversely affect the rights of the
holders of Common Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2000 Annual Meeting of Stockholders held on June 6, 2000,
the following proposals were adopted by the stockholders of the Company by the
votes specified below:
<TABLE>
<CAPTION>
AGAINST OR BROKER
PROPOSAL FOR WITHHELD ABSTAIN NON-VOTES
-------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
1. Election of one Class I Director to serve for
a three-year term:
Robert T. Hale, Jr............................ 52,980,792 671,195 -- --
2. Ratification of the selection of
PricewaterhouseCoopers LLP as the Company's
independent accountants for the current fiscal
year.......................................... 53,628,859 5,419 17,709 --
</TABLE>
In addition to the Directors elected at the Annual Meeting, the term of
office of the following Directors also continued following the meeting: Robert
T. Hale, James J. Crowley, David D. Martin and Joseph C. McNay.
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 June 30, 2000.
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------- -----
<C> <S>
4.3(1) Certificate of Designation for 7 1/2% Series A Cumulative
Convertible Preferred Stock.
4.4(1) Deposit Agreement for Depositary Shares representing 7 1/2%
Series A Cumulative Convertible Preferred Stock, among the
Registrant, American Stock Transfer & Trust Company, as
Depositary, and the Holders from time to time of the
Depositary Shares, dated as of April 6, 2000 filed herewith
as Exhibit 4.4).
27 Financial Data Schedule.
</TABLE>
---------------
(1) Incorporated by reference to the Company's Form 8-A filed with the
Securities and Exchange Commission on April 13, 2000.
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<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
August 11, 2000.
NETWORK PLUS CORP.
By: /s/ ROBERT COBUZZI
------------------------------------
Robert Cobuzzi
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
16
