<PAGE> 1
================================================================================
UNITED STATES 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, 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, QUINCY, MASSACHUSETTS 02169
(Address of principal executive officer) (Zip Code)
</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, par value $0.01 per
share, outstanding on November 3, 2000 was 61,819,726.
================================================================================
<PAGE> 2
FORM 10-Q
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
September 30, 2000 and December 31, 1999.............. 2
Unaudited Condensed Consolidated Statements of
Operations for the Three and Nine Months Ended
September 30, 2000 and 1999........................... 3
Unaudited Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended September 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............................................... 14
PART II -- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........... 15
Item 6. Exhibits and Reports on Form 8-K.................... 15
Signatures.................................................. 16
</TABLE>
1
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETWORK PLUS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............................. $ 71,759 $ 43,031
Accounts receivable, net of allowance for doubtful
accounts of $1,955 and $2,624, respectively........... 52,359 31,814
Prepaid expenses....................................... 1,324 489
Other current assets................................... 2,450 958
-------- --------
Total current assets.............................. 127,892 76,292
Property and equipment, net................................. 256,065 101,944
Other assets................................................ 18,348 1,117
Investment.................................................. 1,233 3,333
Intangible assets, net...................................... 1,513 3,286
-------- --------
Total assets...................................... $405,051 $185,972
======== ========
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable....................................... $ 52,977 $ 48,704
Accrued liabilities.................................... 14,017 6,370
Current portion of capital lease obligations........... 15,483 11,346
-------- --------
Total current liabilities......................... 82,477 66,420
Long-term debt and capital lease obligations................ 30,578 28,188
Long-term note payable to stockholder....................... 1,875 1,875
Other long-term liabilities................................. 355 208
COMMITMENTS
Redeemable 7 1/2% Series A Cumulative Convertible
Preferred Stock, par value $0.01 per share, 500 shares
authorized: 250 and no shares issued and outstanding,
respectively; aggregate liquidation preference of
$127,467 on September 30, 2000........................ 122,422 --
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 150,000 shares
authorized, 61,474 and 54,795 shares, respectively,
issued and outstanding................................ 614 548
Additional paid-in capital.................................. 268,419 138,767
Stock subscription receivable............................... -- (155)
Warrants.................................................... 11,553 4,405
Other comprehensive income (loss)........................... (1,267) 833
Accumulated deficit......................................... (111,975) (55,117)
-------- --------
Total stockholders' equity........................ 289,766 89,281
-------- --------
Total liabilities, preferred stock and
stockholders' equity............................ $405,051 $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 NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues.............................................. $ 62,158 $ 39,381 $166,844 $109,275
Operating expenses
Costs of services................................ 48,528 31,851 130,944 88,168
Selling, general and administrative expenses..... 27,443 12,983 74,986 36,103
Depreciation and amortization.................... 7,780 2,386 19,089 5,214
-------- -------- -------- --------
83,751 47,220 225,019 129,485
-------- -------- -------- --------
Operating loss........................................ (21,593) (7,839) (58,175) (20,210)
Other income (expense)
Interest income.................................. 1,992 929 5,034 1,091
Interest expense................................. (947) (987) (3,559) (2,302)
Other income (expense)........................... (176) 162 (158) 201
-------- -------- -------- --------
869 104 1,317 (1,010)
-------- -------- -------- --------
Net loss before income taxes.......................... (20,724) (7,735) (56,858) (21,220)
Provision for income taxes............................ -- 2,770 -- 961
-------- -------- -------- --------
Net loss.............................................. (20,724) (10,505) (56,858) (22,181)
Preferred stock dividends and accretion of
offering expenses and discount................. 2,576 7,569 4,838 10,725
-------- -------- -------- --------
Net loss applicable to common stockholders............ $(23,300) $(18,074) $(61,696) $(32,906)
======== ======== ======== ========
Net loss per share applicable to common stockholders
Basic and diluted................................... $ (0.39) $ (0.33) $ (1.06) $ (0.68)
======== ======== ======== ========
Weighted average shares outstanding Basic and
diluted............................................. 60,428 54,440 58,287 48,369
======== ======== ======== ========
Comprehensive loss
Net loss......................................... $(20,724) $(10,505) $(56,858) $(22,181)
Unrealized gain (loss) on investment securities,
net of tax..................................... (321) (1,408) (2,100) 69
-------- -------- -------- --------
Comprehensive loss.................................... $(21,045) $(11,913) $(58,958) $(22,112)
======== ======== ======== ========
</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>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
2000 1999
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................... $ (56,858) $(22,181)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization........................ 19,089 5,214
Loss on disposal of fixed assets..................... 94 18
Interest payable on note payable to stockholder...... 147 115
Compensation charge on stock options................. 101 --
Changes in assets and liabilities:
Accounts receivable............................... (20,545) (15,081)
Prepaid expenses.................................. (835) --
Deferred taxes.................................... -- 961
Other current assets.............................. (1,492) 108
Other assets...................................... (292) (120)
Accounts payable.................................. 4,273 12,698
Accrued liabilities............................... 7,647 3,338
Other liabilities................................. 1,079 --
--------- --------
Net cash used for operating activities....... (47,592) (14,930)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................... (156,678) (25,453)
Purchase of investment................................. -- (2,500)
Proceeds from sale and leaseback of fixed assets....... -- 4,516
--------- --------
Net cash used for investing activities....... (156,678) (23,437)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations........ (9,405) (4,891)
Costs incurred in connection with debt facility........ (5,998)
Net proceeds from the issuance of common stock....... 128,651 136,896
Net proceeds from the issuance (redemption) of
preferred stock..................................... 119,750 (45,871)
Distribution to stockholders........................... -- (3)
--------- --------
Net cash provided by financing activities.... 232,998 86,131
Net increase in cash........................................ 28,728 47,764
Cash at beginning of period................................. 43,031 12,197
--------- --------
Cash at end of period....................................... $ 71,759 $ 59,961
========= ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Fixed assets acquired under capital leases............. $ 14,853 $ 39,973
========= ========
Redeemable preferred stock dividends, paid and accrued
in common shares...................................... $ 4,838 $ --
========= ========
</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 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 annual report on 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 nine months ended September 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 September 27, 2000, the Company entered into a credit and guaranty
agreement with Goldman Sachs Credit Partners L.P., Fleet Securities, Inc., DLJ
Bridge Finance, Inc. and Fleet National Bank for a $225,000 revolving credit
facility (the "New Senior Credit Facility"). The New Senior Credit Facility
matures in June 2002. Under the New Senior Credit Facility, up to $225,000 is
available based upon a percentage of eligible accounts receivable and eligible
net property. Interest is payable quarterly in arrears on the last day of the
quarter at six and one-half percent above the LIBOR rate for the first four
quarters increasing .75% each quarter for the remaining term of the loan. A
commitment fee of 0.5% is charged on the undrawn portion of the facility. The
New Senior Credit Facility requires the Company, among other things, to meet
minimum levels of revenues and earnings before interest, taxes, depreciation and
amortization, debt to revenue ratios, performance levels, and places the Company
in default in the event of a material adverse change in the Company's business
and restricts the Company's ability to pay dividends. The New Senior Credit
Facility is collateralized by substantially all of the assets of the Company.
There were no amounts outstanding under the New Senior Credit Facility on
September 30, 2000.
In connection with the New Senior Credit Facility, the Company issued
warrants entitling the holders to purchase in aggregate 3,854 shares of the
Company's Common Stock at an exercise price of $7.01 per share. Upon issuance of
the warrants, 72.73% of the warrants were exercisable, with 13.64% exercisable
on a pro rata basis with each amount drawn by the Company on the first $100,000
of loans under the New Senior Credit Facility, and the remaining 13.63%
exercisable at any time on or after the date the amount drawn by the Company
under the credit agreement exceeds $100,000. The cost of the currently
exercisable warrants valued at $10,941, using the Black Sholes option pricing
model, is included in other long term assets and is amortized over the term of
the loan. The cost of the currently unexercisable warrants will be determined
using the variable costing method when the warrants become exercisable.
5
<PAGE> 7
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
ESTIMATE SEPTEMBER 30, DECEMBER 31,
USEFUL LIFE 2000 1999
------------- ------------- ------------
<S> <C> <C> <C>
Network infrastructure and equipment.............. 5 and 10 $114,449 $ 50,276
years
Computer equipment................................ 3-5 years 11,442 5,228
Office furniture and equipment.................... 7 years 3,435 1,975
Software.......................................... 3 years 11,034 6,325
Motor vehicles.................................... 5 years 584 256
Leasehold improvements............................ Term of Lease 17,412 7,959
Construction in progress.......................... 125,452 40,355
-------- --------
283,808 112,374
Less accumulated depreciation and amortization.... (27,743) (10,430)
-------- --------
$256,065 $101,944
======== ========
</TABLE>
4. DEBT AND CAPITAL LEASE OBLIGATIONS
Debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
Note payable................................... $ 50 $ 200
Capital lease obligations...................... 46,011 39,334
Less current portion........................... (15,483) (11,346)
-------- --------
$ 30,578 $ 28,188
======== ========
</TABLE>
Property and equipment under capital leases are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
Network infrastructure and equipment........... $ 45,167 $ 34,770
Computer equipment............................. 3,697 2,062
Motor vehicles................................. 630 99
Construction in progress....................... 11,986 9,696
-------- --------
61,480 46,627
Less accumulated depreciation.................. (10,333) (4,004)
-------- --------
$ 51,147 $ 42,623
======== ========
</TABLE>
5. PREFERRED STOCK
On April 12, 2000, the Company sold 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. During the
three months ended September 30, 2000, the Company issued 145 shares of common
stock in payment of $2,262 of dividends accrued at June 30, 2000. Accrued
dividends of $2,576 were included in preferred stock at September 30, 2000,
subsequent to September 30, 2000, 346 shares of common stock were issued as
payment of such dividends.
6
<PAGE> 8
6. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss applicable to Network Plus Corp. ............ $(23,300) $(18,074) $(61,696) $(32,906)
common stock -- basic and diluted................... 60,428 54,440 58,287 48,369
Net loss per share applicable to common
stockholders -- basic and diluted................... $ (0.39) $ (0.33) $ (1.06) $ (0.68)
======== ======== ======== ========
</TABLE>
Warrants for the purchase of 4,041 and 1,428 shares and stock options for
the purchase of 5,122 and 3,930 shares of common stock were not included in the
computation of net loss per share for the three months and nine months ended
September 30, 2000 and 1999, respectively, because inclusion of such shares
would have an anti-dilutive effect. In addition, preferred stock convertible to
3,592 shares was not included in the computation of net loss per share for the
three and nine months ended September 30, 2000, because inclusion of such shares
would have an anti-dilutive effect.
7. SEGMENT INFORMATION
The Company has two reportable segments which management operates as
distinct sales organizations: these two segments are segregated by 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,
and enhanced and custom calling features. 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 telecommunications services to
their customers.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Retail telecommunications and data services........... $38,837 $22,317 $ 99,790 $ 67,039
Wholesale telecommunications.......................... 23,321 17,064 67,054 42,236
------- ------- -------- --------
Total revenues.......................................... $62,158 $39,381 $166,844 $109,275
======= ======= ======== ========
Costs of services:
Retail telecommunications and data services........... $26,405 $16,342 $ 69,361 $ 49,506
Wholesale telecommunications.......................... 22,123 15,509 61,583 38,662
------- ------- -------- --------
Total costs of services................................. $48,528 $31,851 $130,944 $ 88,168
======= ======= ======== ========
</TABLE>
8. 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
believe SAB 101 will have a material impact 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
7
<PAGE> 9
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 with December 15, 1998 or January 12, 2000. The Company does
not believe FIN 44 will have a material impact on its results of operations and
financial position.
In August 2000, the Emerging Issues Task Force issued LITF Issue No. 00-13,
"Determining whether equipment is "Integral Equipment" subject to FABB
statements No. 66, "Accounting for Sales of Real Estate" and No. 98, "Accounting
for Leases" ("LITF 00-13"). LITF 00-13 clarifies the definition of "integral
equipment" with regard to the Company's transactions with customers for the sale
of dark fiber-optic capacity. LITF 00-13 results in the Company recording such
transactions as either operating or sales-type leases. When title in the dark
fiber-optic cables transfer to the customer at completion of the lease term, the
Company accounts for such transactions as sales-type leases. All other such
transactions are recorded as operating leases.
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
Corp. (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 annual report on
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 (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
The Company, founded in 1990, 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 traditional switched access, ATM, voice over digital subscriber
line, or VoDSL, and other technologies. The Company currently serves small and
medium-sized business customers in the northeastern and southeastern regions of
the United States.
8
<PAGE> 10
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data as a percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues.............................................. 100.0% 100.0% 100.0% 100.0%
Costs of services..................................... 78.1 80.9 78.5 80.7
Selling, general and administrative................... 44.2 33.0 44.9 33.0
Depreciation and amortization......................... 12.5 6.1 11.4 4.8
Operating loss........................................ (34.7) (19.9) (34.9) (18.5)
Other income (expense)................................ 1.4 .3 .8 (.9)
Net loss before income taxes.......................... (33.3)% (19.6)% (34.1)% (19.4)%
</TABLE>
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1999.
Revenues
Revenues increased $22.8 million, or 58%, to $62.2 million for the three
months ended September 30, 2000 from $39.4 million for the same period in the
prior year. The sale of local service contributed 28% of quarter-to-date
revenues compared to 10% of quarter-to-date revenues 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 represent
36% of revenues for the three month period ended September 30, 2000 as compared
to 42% of revenues for the same period in the prior year. Revenues generated
from data services, which included colocation, DSL, Internet services and
leasing of fiber-optic capacity, totaled $6.8 million for the period,
representing 11% of the total quarter-to-date revenues. Retail long distance
revenues represent 25% of year-to-date revenue compared to 48% for the same
period in the prior year.
For the nine month period ended September 30, 2000, revenues increased
$57.5 million, or 53%, to $166.8 million from $109.3 for the same period in the
prior year. Local service revenues represents 23% of year-to-date revenues
compared to 8% in the same period in the prior year. Local lines in service at
September 30, 2000 increased 204% to 149,700 from 49,200 lines in service at
September 30, 1999. Data service revenues represent 8% of year-to-date revenues
at September 30, 2000. We expect revenues from data services to continue to
represent an increasing percentage of total revenues. International wholesale
revenues represents 38% of year-to-date revenues at September 30, 2000 which is
consistent with the same period in the prior year. Retail long distance revenues
represent 30% of year-to-date revenues compared to 53% 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 $16.6 million, or 52%, to $48.5 million for the
three months ended September 30, 2000 from $31.9 million for the same period in
the prior year. Costs of services increased $42.7 million, or 48%, to $130.9
million for the nine months ended September 30, 2000 from $88.2 million for the
same period in the prior year. As a percent of revenue, cost of services
decreased to 78% for the three month and nine month period ended September 30,
2000 from 81% for the three month and nine month period ended September 30,
1999.
The increase in costs of services of 52% and 48% for the three month and
nine month periods ended September 30, 2000 compared to the same periods in the
prior year are due primarily to the increase in total revenues of 58% and 53%
for the same three month and nine month periods. The decrease in costs of
services as a percent of revenues is due to the change in the mix of services
provided as revenues from local services and data services increased as a
percent of total revenues. As the deployment of our local network continues
9
<PAGE> 11
and the facilities become operational, the costs associated with the colocation
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 of costs incurred for capacity, which are not
immediately utilized in these colocations.
Selling, General and Administrative
Selling, general and administrative expenses increased $14.4 million, or
111%, to $27.4 million for the three months ended September 30, 2000 from $13.0
million for the same period in the prior year. As a percentage of revenues,
selling, general and administrative expenses increased to 44% for the three
months ended September 30, 2000 from 33% for the same period in the prior year.
Selling, general and administrative expenses increased $38.9 million, or 108%,
to $75.0 million for the nine month period ended September 30, 2000 from $36.1
million for the same period in the prior year. As a percentage of revenues,
selling, general and administrative expenses increased to 45% for the nine
months ended September 30, 2000 from 33% for the same period in the prior year.
We employed 855 people at September 30, 2000, compared with 454 at September 30,
1999, resulting in a increase in payroll and related expenses of 134%
quarter-to-date and 108% year-to-date. The sales organization increased by 145
people as compared to the prior period, and we added 170 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 colocation 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 colocation facilities become operational at which
time, the related costs are reclassified to costs of services.
Depreciation and Amortization
Depreciation and amortization increased $5.4 million, or 226%, to $7.8
million for three months ended September 30, 2000 from $2.4 million for the same
period in the prior year. Depreciation and amortization increased $13.9 million,
or 267%, to $19.1 million for nine months ended September 30, 2000 from $5.2
million for the nine months ended September 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.
In particular the Florida local switch and colocation equipment, which were put
into service and began depreciating during the first nine months of 2000. We
expect depreciation and amortization expense to increase as we bring additional
local network facilities on-line, including the Atlanta, Georgia switch facility
and southeast fiber rings, and as we make additional investments in our network
and operational infrastructure.
Interest
Interest income net of interest expense increased to $1.1 million for the
three months ended September 30, 2000 from a net interest expense of $58,000 for
the same period in the prior year. Interest income net of interest expense
increased $2.7 million to $1.5 for the nine months ended September 30, 2000 from
a net interest expense of $1.2 million for the same period in the prior year.
The increase in net interest income is primarily due to the investment of
capital obtained from the common and preferred stock offerings in April 2000.
Interest expense is expected to dramatically increase as the costs associated
with the new $225 million new senior secured credit facility are expensed and as
the capital raised from the common and preferred 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 revenues, operating expenses, depreciation
and amortization, and net interest income noted above, we incurred a net loss of
$20.7 million and $56.9 million for the three and nine months ended September
30, 2000, respectively compared to $10.5 million and $22.2 million for the same
periods in the prior year.
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The effect of the net loss combined with the preferred stock dividends and
accretion of offering expenses of $2.6 million for the three months ended
September 30, 2000 and $7.6 million for the three months ended September 30,
1999 resulted in net losses applicable to common stockholders of $23.3 million
for the period ended September 30, 2000 and $18.1 million for the same period in
the prior year. The Company accrued dividends and accretion of offering expenses
of $4.8 million and $10.7 million for the nine months ended September 30, 2000
and September 30, 1999, respectively, resulting in net losses applicable to
common shareholders of $61.7 million and $32.9 million, respectively. 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 $14.0 million for the three months ended
September 30, 2000 compared to negative $5.3 for the three months ended
September 30, 1999. EBITDA for the nine months ended September 30, 2000 was
negative $39.2 million compared to negative $14.8 million for the same period in
the prior year. This decline was due to the changes in revenues, network
development, operations and selling, general and administrative expenses due to
the rapid implementation of our local network and infrastructure to support
future growth.
LIQUIDITY AND CAPITAL RESOURCES
Total assets were $405.0 million at September 30, 2000 compared to $186.0
million at December 31, 1999. Cash and cash equivalents were $71.8 million at
September 30, 2000 compared to $43.0 million at December 31, 1999. Net cash used
for operating activities was $47.6 million during the nine months ended
September 30, 2000 as compared to net cash used in operating activities of $14.9
million during the nine months ended September 30, 1999. Capital expenditures
were $171.5 million for the nine months ended September 30, 2000.
On September 27, 2000 we entered into a new senior credit facility
agreement with Goldman Sachs Credit Partners, Fleet Securities, DLJ Bridge
Finance and Fleet National Bank. This facility provides up to $225 million in
total principal based on eligible receivables and eligible net property as
defined by the agreement. This facility replaced the $60 million senior credit
facility, which we allowed to expire in June, 2000. The proceeds from the new
$225 million credit facility will be used for the purchase and acquisition of
telecommunications assets and to finance working capital. All borrowings under
this facility are collateralized by substantially all of the Company's assets.
The new senior credit facility agreement imposes operating and financial
restrictions on us. These restrictions affect, and in many cases limit, among
other things, our ability to:
- pay dividends or make distributions in respect to our capital stock
- incur additional indebtedness
- make investments or other restricted payments
- sell or dispose of assets
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 redeemable 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.
Our strategic initiatives include the deployment of additional local and
long distance switches, the colocation 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.
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Our ability to meet our projected growth will require substantial cash
resources. We estimate that the anticipated expansion of our network
infrastructure, including the addition of colocations, switches, e.Commerce data
centers and other network elements and our anticipated funding of negative cash
flow from operating activities, will require significant capital. We expect the
proceeds of our common stock and convertible preferred stock offerings in April
2000, the new senior credit facility and cash flow from operations to provide
sufficient capital to fully fund our business plan. If we acquire other
businesses, fail to generate anticipated revenues, or incur operating costs that
are higher than anticipated, we may require additional financing.
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 does not
anticipate the implementation of SAB 101 to have a material impact on the
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. The Company
does not anticipate the implementation of FIN 44 to have a material impact on
the Company's financial position or results of operations.
In August 2000, the Emerging Issues Task Force issued LITF Issue No. 00-13,
"Determining whether equipment is "Integral Equipment" subject to FASB
statements No. 66, "Accounting for Sales of Real Estate" and No. 98, "Accounting
for Leases" ("LITF 00-13"). LITF 00-13 clarifies the definition of "integral
equipment" with regard to the Company's transactions with customers for the sale
of dark fiber-optic capacity. LITF 00-13 results in the Company recording such
transactions as either operating or sales-type leases. When title in the dark
fiber-optic cables transfer to the customer at completion of the lease term, the
Company accounts for such transactions as sales-type leases. All other such
transactions are recorded as operating leases.
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company had operating losses for the three and nine months ended
September 30, 2000 and in each of the last five years and negative cash flow
from operations for the three and nine months ended September 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 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 has a significant amount of indebtedness outstanding and, as a
result of its growth strategy, expects to incur significant additional
indebtedness in the future including indebtedness incurred pursuant to its $225
million new senior credit facility. The Company's ability to make cash payments
with respect to its outstanding 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
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indebtedness impose operating restrictions on the Company, which limit its
flexibility and create a risk that it could default on its obligations. In the
event of any such default of other limitations on the Company's ability to
borrow under its credit facility, the Company would be required to seek
alternative sources of funding or modify its growth strategy.
The Company's future performance will depend, in large part, upon its
ability to implement and manage its growth effectively, including growth through
acquisitions. 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 and the announced AT&T restructuring
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.
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
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facilities-based local exchange business in which the Company intends to
compete. Similarly, such changes could result in lower retail rates for
telecommunications services, which could have a material adverse effect on the
Company's ability to price its services competitively or profitably.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Issuance of Warrants to Purchase Common Stock
On September 27, 2000, the Company issued warrants entitling the holders to
purchase in aggregate 3,854,056 shares of Common Stock, par value $0.01 per
share, of the Company at a purchase price of $7.01 per share. The exercise price
is subject to adjustment for certain dividends, stock splits and dilutive stock
issuances. The warrant exercise prices is payable by cash or cancellation of
shares otherwise payable to the warrant holder. The Company granted the warrant
holders rights to register under the Securities Act of 1933 shares issued upon
exercise of the warrants. These warrants we issued in conjunction with, and as
partial consideration for, the closing of the new $225 million senior secured
credit facility. Upon the closing of the credit facility 72.73% of the warrants
were exercisable, with 13.64% exercisable on a pro rata basis with each amount
drawn by the Company on the first $100,000 of loans under the New Senior Credit
Facility and the remaining 13.63% exercisable at any time on or after the date
the amount is drawn by the Company under the credit agreement. These warrants
were issued in reliance upon the exemption from regulation provided by Section 4
(2) of the Securities Act of 1933 and/or Regulation D there under.
Since December 26, 1999, the Company has issued 1,234,406 shares of Common
Stock upon the exercise of warrants that were (i) issued and sold in the
Company's September 1998 sale of Units consisting of shares of 13.5% Series A
Cumulative Preferred Stock and warrants and (ii) issued to certain lenders in
May 31, 1999 in connection with an amendment to the Company's credit facility.
All of such warrant exercises were effected through "cashless" exercises that
did not involve the payment of additional consideration to the Company. The
shares of Common Stock issued pursuant to such warrant exercises were offered
and sold in reliance upon exemptions set forth in Sections 3(b) and 4(2) of
the Securities Act, or Regulation D promulgated thereunder, relating to sales by
an issuer not involving a public offering. No underwriters or placement agents
were involved in the issuance of Common Stock pursuant to any exercise of the
foregoing warrants.
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, 2000.
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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
November 9, 2000.
NETWORK PLUS CORP.
By: /s/ ROBERT COBUZZI
------------------------------------
Robert Cobuzzi
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------- -----
<S> <C>
10.1 Separation Agreement and Release dated as of the 12th day of
July, 2000 by and between the Company and George C. Alex
10.2* Credit and Guaranty Agreement dated a of September 27, 2000
among the Company, Network Plus, Inc. various lenders,
Goldman Sachs Credit Partners L.P., as a Joint Lead
Arranger, Book Runner and Syndication Agent, FleetBoston
Robertson Stephens Inc., as a Joint Lead Arranger, DLJ
Bridge Finance, Inc., as Documentation Agent, and Fleet
National Bank, as Collateral Agent and Administrative Agent
10.3 Pledge and Security Agreement dated as of September 27, 2000
between the Company, Network Plus, Inc. and Fleet National
Bank, as Collateral Agent for the Secured Parties
10.4 Common Stock Purchase Warrant No. FW-1 of the Company dated
September 27, 2000 issued in favor or Goldman, Sachs & Co.
10.5 Common Stock Purchase Warrant No. FW-2 of the Company dated
September 27, 2000 issued in favor of FCS Corporation
10.6 Common Stock Purchase Warrant No. FW-3 of the Company dated
September 27, 2000 issued in favor of Snoga, Inc.
10.7 Lease between Network Plus, Inc. as Tenant, and Trucks Up
LLC, as Landlord
</TABLE>
* Confidential treatment has been requested for certain portions of this
agreement.
17
