<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number: 000-29828
NORTHPOINT COMMUNICATIONS GROUP, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 52-2147716
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
222 Sutter Street
San Francisco, California 94108
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (415) 403-4003
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 [XX] No
The number of shares of Common Stock, par value $.001 per share, of
NorthPoint Communications Group, Inc. outstanding as of June 16, 1999 was
121,508,923.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Consolidated Financial Statements................................ 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 17
Item 2. Changes in Securities and Use of Proceeds........................ 17
Item 3. Defaults Upon Senior Securities.................................. 17
Item 4. Submission of Matters to a Vote of Security Holders.............. 17
Item 5. Other Information................................................ 18
Item 6. Exhibits and Reports on Form 8-K................................. 18
</TABLE>
2
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
NORTHPOINT COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in 000's, except share and per share amounts)
<TABLE>
<CAPTION>
(Unaudited)
December 31, March 31,
1998 1999
-------- ------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,956 $ 52,908
Accounts receivable, net 523 814
Prepaid expenses and other assets 2,649 5,300
-------- --------
Total current assets 14,128 59,022
Property and equipment:
Networking equipment 26,041 44,885
Central office collocation space improvements 15,599 22,002
Computers and software 2,489 3,942
Leasehold improvements 1,366 1,356
Furniture, fixtures and office equipment 1.927 2,203
-------- --------
Total property and equipment 47,422 74,388
Less accumulated depreciation and amortization (1,344) (2,731)
-------- --------
Property and equipment, net 46,078 71,657
Deposits 296 344
-------- --------
Total assets $ 60,502 $131,023
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 9,379 $ 12,865
Accrued expenses 5,481 14,512
Deferred revenue 189 -
Capital lease obligations, current portion net of unamortized debt discount
of $265 and $265, respectively 925 950
Line of credit borrowings, net of unamortized debt discount of $2,303 and $2,862,
respectively 48,422 47,138
Note payable - 5,600
-------- --------
Total current liabilities 64,396 81,065
Capital lease obligations, long-term portion, net of unamortized debt discount
Of $598 and $531, respectively 2,640 2,364
-------- --------
Total liabilities 67,036 83,429
Commitments and contingencies (Note 6)
Stockholder's equity (deficit):
Convertible preferred stock, $0.001 par value; 49,060,250 and 101,250,000 shares
authorized at December 31, 1998 and March 31, 1999, respectively;
38,499,054 and 79,263,693 shares issued and
outstanding at December 31, 1998 and March 31, 1999,
respectively, liquidation preference of $91,564 38 79
Common stock, $0.001 par value; 112,500,000 and 281,250,000 shares
authorized at December 31, 1998 and March 31, 1999, respectively;
24,592,950 and 25,632,243 shares issued and
outstanding at December 31, 1998 and March 31, 1999, respectively 25 26
Warrants 5,232 7,144
Additional paid-in capital 31,480 111,878
Deferred stock compensation (13,022) (17,894)
Accumulated deficit (30,287) (53,639)
-------- --------
Total stockholders' equity (deficit) (6,534) 47,594
-------- --------
Total liabilities and stockholders' equity (deficit) $ 60,502 $131,023
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
NORTHPOINT COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in 000's, except share and per share amounts)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
---------
1998 1999
---- ----
<S> <C> <C>
Revenues $ 35 $ 1,283
Operating expenses:
Network expenses 145 3,932
Selling, marketing, general and administrative 1,542 14,379
Amortization of deferred stock compensation 200 1,592
Depreciation and amortization 77 1,387
----------- -----------
Total operating expenses 1,964 21,290
----------- -----------
Loss from operations (1,929) (20,007)
Interest income 106 238
Interest expense (47) (3,583)
----------- -----------
Net loss ($1,870) ($23,352)
============ ===========
Net loss per common share - basic and diluted ($0.08) ($0.94)
============ ===========
Weighted average shares used in computing net loss per
common share - basic and diluted 24,345,000 24,908,053
============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
NORTHPOINT COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
---------
1998 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,870) ($23,352)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 77 1,387
Amortization of deferred stock
compensation 200 1,592
Amortization of debt discount 17 1,419
Changes in assets and liabilities:
Accounts receivable (34) (290)
Prepaid expenses and other assets (82) (2,651)
Deposits (11) (49)
Accounts payable - 3,486
Accrued expenses 450 9,031
Deferred revenue - (189)
------- -------
Net cash (used) in operating activities (1,253) (9,616)
Cash flows from investing activities:
Purchase of property and equipment (2,196) (26,967)
------- -------
Net cash (used) by investing activities (2,196) (26,967)
Cash flows from financing activities:
Proceeds from issuance of common and preferred stock - 73,977
Payments on line of credit borrowings - (725)
Proceeds from note payable - 5,600
Principal payments on capital lease obligations (53) (317)
------- -------
Net cash provided (used) by financing activities (53) 78,535
Net (decrease) increase in cash and equivalents (3,502) 41,952
Cash and equivalents at beginning of period 9,448 10,956
------- -------
Cash and equivalents at end of period $5,946 $52,908
======= =======
Supplemental cash flow information and noncash activities:
Fixed assets obtained through capital lease $1,096 $ -
======= =======
Warrants issued for bridge loan and capital lease $ 166 $ 1,911
======= =======
Income taxes paid $ 1 $ 4
======= =======
Interest paid $ 23 $ 986
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
NORTHPOINT COMMUNICATIONS GROUP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Basis of Presentation
The Company
NorthPoint Communications Group, Inc. provides high speed network and data
transport services, allowing internet service providers (ISPs), broadband data
service providers and long distance and local phone companies (collectively,
network service providers or NSPs) to meet the rapidly increasing information
needs of small and medium-sized businesses, people who work in home offices and
telecommuters.
Basis of Presentation
The consolidated financial statements include the accounts of NorthPoint
Communications Group, Inc. and its wholly-owned subsidiary NorthPoint
Communications, Inc. Effective March 22, 1999, NorthPoint Communications, Inc.,
consummated a reorganization pursuant to which it became a wholly owned
subsidiary of NorthPoint Communications Group, Inc., a newly created holding
company. The reorganization was effected by a merger of NorthPoint
Communications, Inc. with and into NorthPoint Merger Sub, Inc., a wholly owned
subsidiary of NorthPoint Communications Group, Inc., with NorthPoint
Communications, Inc., as the surviving corporation of such merger. As a result
of the reorganization, the stockholders of NorthPoint Communications, Inc.
immediately before the reorganization became the only stockholders of Northpoint
Communications Group, Inc. immediately after the reorganization. All material
intercompany accounts and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments which, in the opinion of management, are necessary for a
fair presentation of the results of operations for the periods shown. The
results of operations for such periods are not necessarily indicative of the
results expected for the full fiscal year or for any future period.
All share and per-share amounts in the accompanying consolidated financial
statements have been restated to give retroactive effect for all periods to a
three-for-two stock split effective April 9, 1999, and a three-for-two stock
split effective April 16, 1999.
These financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
Registration Statement on Form S-1, as amended (File No. 333-73065), for the
year ended December 31, 1998. Certain prior period balances have been
reclassified to conform to current period presentation.
2. Earnings (Loss) Per Share - Basic and Diluted
The Company computes net loss per share pursuant to Statement of Financial
Accounting Standards No. 128, Earnings Per Share. Basic net loss per share is
computed by dividing income or loss applicable to holders of common stock by the
weighted average number of shares of the Company's common stock outstanding
during the period after having given consideration to shares subject to
repurchase. Diluted net loss per share is determined in the same manner as basic
net loss per share except that the number of shares is increased assuming
exercise of dilutive stock options and warrants using the treasury stock method
and conversion of the Company's convertible preferred stock.
6
<PAGE>
The following table presents the calculation of basic and diluted net loss
per share:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1999
------------- --------------
<S> <C> <C>
Net Loss $ 1,870,000 $23,352,000
----------- -----------
Basic & Diluted:
Weighted average common
shares used in computing
basic and diluted net loss
per share 24,345,000 24,908,053
----------- ----------
Basic and diluted net loss
per common share ($0.08) ($0.94)
=========== ==========
</TABLE>
The dilutive effect of options, warrants and convertible preferred
stock has not been considered because the Company has a net loss and the impact
of their assumed exercise would be antidilutive.
3. Common Stock
From January 1, 1999 to March 31, 1999, the Company granted to certain
employees options to purchase an aggregate of 4,883,933 shares of common stock
at an exercise price of $.67 to $6.67 per share. Under the provisions of APB No.
25, deferred compensation of approximately $6,465,000 will be recognized in
connection with these grants.
In connection with a bridge loan obtained by the Company, the Company
issued in February and March 1999 warrants to purchase an aggregate of 337,500
shares of common stock. The fair value of these warrants was $3,075,000 which
has been recognized as debt discount.
4. Preferred Stock
On February 19, 1999, the Company issued 37,715,357 shares of Series C
preferred stock with total proceeds of approximately $59,200,000.
In March 1999, the Company issued 1,728,408 shares of Series D-1
preferred stock with total proceeds of approximately $16,900,000. The rights and
preferences attached to the Series D-1 preferred stock are similar to those of
the Series C preferred stock, except that the Series D-1 preferred stock is non-
voting and is convertible into a non-voting class of common stock. In connection
with the initial public offering, the purchasers agreed that their Series D-1
preferred stock or common stock into which it converts will not be transferable
for a period of one year after the earlier of the date of purchase of the Series
D-1 preferred stock or the closing date of an initial public offering of
NorthPoint Communications Group, Inc. common stock. In addition, the purchasers
agreed that for a period of three years after the date of purchase of the Series
D-1 preferred stock they will not purchase or otherwise acquire shares that
would result in their direct or indirect or beneficial ownership of more than
10% of NorthPoint Communications Group, Inc. voting stock.
5. Convertible Promissory Note
In February 1999, the Company issued a subordinated convertible
promissory note in the amount of $5.6 million to a customer.
6. Commitments
In March 1999, the Company entered into several strategic marketing
agreements, mostly with stockholders, under which the Company is obligated to
contribute a total of $16 million during 1999 and $600,000 during 2000 to
support the development of a web site and other marketing activities.
7. Subsequent Events
Initial Public Offering
The Company sold 17,250,000 shares of common stock at $24 per share in its
initial public offering on May 5, 1999. Net of underwriting discounts and
commissions, the proceeds to the Company were $388,500,000.
7
<PAGE>
Common Stock
From April 1, 1999 to June 16, 1999, the Company granted to certain
directors and employees options to purchase an aggregate of 2,868,775 shares of
common stock at an exercise price of $18.00 to $43.25 per share, which was
determined to be the fair value of the stock at the time of the grants.
On April 5, 1999, the Company paid off a bridge loan and therefore all
remaining unamortized debt discount of $2,862,000 will be recognized as interest
expense in 1999. As of June 16, 1999, warrants to issue a total of 2,925,000
shares of common stock were issued under the bridge loan, none of which have
been exercised.
Upon the initial public offering of the Company's stock, the convertible
promissory note (see note 5) was converted into 311,111 shares of Class B common
stock.
Preferred Stock
In April 1999, NorthPoint Communications Group, Inc. issued 2,239,766
shares of Series D-1 preferred stock with total proceeds of $21,900,000. At the
time of the Company's initial public offering, these shares in addition to the
1,728,408 Series D-1 shares issued in March 1999 (see note 4), automatically
converted into 2,155,613 shares of Class B common stock of the Company at a
conversion price of $18.
Credit Facility
On April 5, 1999, the Company entered into a secured credit facility with
two banks consisting of:
. a $10,000,000 senior first priority secured term loan, all of which was
drawn down on the closing date;
. a $50,000,000 senior first priority secured revolving credit facility
that will convert into a senior first priority secured term loan within
six months, $5,000,000 of which was drawn down on the closing date; and
. a $40,000,000 second priority secured term loan, all of which was drawn
down on the closing date.
The secured credit facility matures on the fifth anniversary of its closing
date. On April 27, 1999, the Company entered into an amendment to the secured
credit facility to increase the amount available under the senior first priority
secured revolving credit facility to $60,000,000.
The total amounts outstanding under the senior first priority secured loans
bear interest, in the absence of an event of default, at our option at:
. the LIBOR rate plus four and one-half percent per year; or
. the greater of the prime rate or the federal funds rate as announced by
The Wall Street Journal plus four percent per year.
The total amounts outstanding under the second priority secured term loan
bear interest, in the absence of an event of default, at the Company's option
at:
. the LIBOR rate plus eight percent per year; or
. the greater of the prime rate or the federal funds rate as announced by
The Wall Street Journal plus seven and one-half percent per year.
Borrowings under the senior secured credit facility are restricted based upon
the Company's leverage ratio and the value of the Company's telecommunications
assets from time to time.
8
<PAGE>
The capital stock of NorthPoint Communications, Inc., held by NorthPoint
Communications Group, Inc. is pledged as collateral under the senior secured
credit facility, as are substantially all of the Company's consolidated assets.
Microsoft Investment and Warrant
At the time of the initial public offering, Microsoft purchased common
shares for $30 million and the Company granted Microsoft a warrant to purchase
$30 million of Class B common stock at an exercise price per share of $36. This
warrant is exercisable immediately and will expire five years after the initial
public offering. The Company has determined the fair value of the Microsoft
warrant using a Block-Scholes Model. The fair value of $2,619,000 will be
recorded in the second quarter of 1999 as a contra equity account in additional
paid-in capital.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the condensed
consolidated unaudited financial statements and the related notes thereto
included elsewhere in this Form 10-Q and the consolidated audited financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1998 included in the Company's Registration Statement on Form S-1, as amended
(File No. 333-73065).
Certain statements set forth below constitute "forward-looking statements."
Such forward-looking statements involve known and unknown risks, uncertainties,
and other factors including, but not limited to, those discussed herein and in
our Registration Statement on Form S-1, as amended (File No. 333-73065), that
may cause the actual results, performance or achievements of the Company, or
industry results to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Given these uncertainties, investors and prospective investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update information contained in any forward-
looking statement. See "Forward-Looking Statements."
Overview
We are a national provider of high speed, local data network services. Our
networks use digital subscriber line, or DSL, technology to enable data
transport over telephone company copper lines at guaranteed speeds up to 25
times faster than common dial-up modems. We market our network and data
transport services to internet service providers, long-distance and local
telephone companies and data service providers, whom we call network service
providers. Our customers can use our fast, secure and reliable data networks to
provide continuously connected, economical Internet access and other data-
intensive applications to end users. These end users are typically small- and
medium-sized businesses with up to 500 employees, people who work in home
offices, and telecommuters.
We are currently providing services in 19 metropolitan areas in the United
States and intend to offer service in a total of 28 metropolitan areas by the
end of this year. We have been and expect to be the first, or one of the first,
to offer DSL services in these markets. Our networks consist principally of
digital communications equipment that we own and install in telephone company
offices known as "central offices" and existing copper telephone lines that we
lease to connect our equipment with end users' premises. We will initially
install our equipment in the central offices with the highest density of small-
and medium-sized businesses in our 28 markets. We have already secured space in
over 770 of those central offices and paid for collocation space improvements in
these offices. We intend to expand the coverage of our networks in these
markets over time by installing equipment in additional central offices.
Upon completion of our planned expansion, our networks will be able to
reach approximately four million businesses and 30 million households, including
more than 80% of the small- and medium-sized businesses in our 28 markets. We
have already obtained required regulatory approvals, including competitive local
exchange carrier authorizations, to offer services in each of those markets. We
are currently providing or have entered into agreements to provide our services
to more than 120 network service providers and have connected over 5,100 of
their end users to our networks.
Since inception on May 16, 1997 and through the quarter ended March 31,
1998, our principal activities have included:
. developing our business plans;
9
<PAGE>
. procuring governmental authorizations and space in central offices;
. raising capital, hiring management and other key personnel;
. working on the design and development of our network architecture and
operations support systems;
. acquiring equipment and facilities; and
. negotiating interconnection agreements.
As a result of our development activities, we have experienced operating losses.
We expect to experience increasing operating losses as we expand our operations.
We introduced our commercial services in March 1998 in the San Francisco Bay
Area. We subsequently launched service in 18 additional markets, including the
greater Los Angeles area, Boston, New York, Chicago, San Diego, Washington,
D.C., Dallas, Detroit, Houston, Cleveland, Austin, Atlanta, Baltimore,
Philadelphia, Pittsburgh, Miami/Fort Lauderdale, St. Louis and Tampa/St.
Petersburg. We intend to offer our services in 9 additional metropolitan areas
by year-end. Deployment of our networks will require significant upfront capital
expenditures. We have targeted for this year an initial 900 central offices
necessary to roll out services in our 28 targeted markets and, subsequently, an
additional 350 central offices that will allow us to achieve blanket coverage in
these markets.
The principal capital expenditures we incur when we enter any market
include:
. the establishment of a metropolitan node -- a facility at which we aggregate
and disseminate data traffic in each metropolitan area -- and the purchase
and installation of electronic switching equipment for that node;
. the procurement, design and construction of the collocation cage in each
central office;
. the purchase and installation of the network management and network test
equipment in those cages; and
. the capitalized cost of the installation of such equipment.
In addition, we incur operating, sales and market development expenses in
order to enter a new market. Once we have deployed our network in a market, the
majority of our additional capital expenditures are dependent upon orders to
connect new end users. These success-based capital expenditures include DSL line
cards, incremental digital subscriber line access multiplexers and network test
equipment, and line cards for our electronic switches in our metropolitan node.
In addition to the capital expenditures required to enter a market, we are
required to fund each market's cash flow deficit as we build our customer base.
Financial performance will vary from market to market, and the time when we
will achieve positive earnings before interest, taxes, depreciation and
amortization (EBITDA), if at all, will depend on factors such as:
. the size of the addressable market;
. the level of upfront sales and marketing expenses;
. the number and sequencing of central offices built out;
. the cost of the necessary infrastructure;
. the timing of market entry; and
. the commercial acceptance of our services.
EBITDA is a measure of financial performance commonly used in the
telecommunications industry, but other companies may calculate it differently
from us. You should not construe it as an alternative to operating income as an
indicator of our operating performance or as an alternative to cash flows from
operating activities as a measure of liquidity.
Factors Affecting Future Operations
Revenues
We derive our revenues from monthly recurring and nonrecurring charges to
our wholesale customers. Monthly recurring revenues consist of end user line
fees for the network service providers' end users connected to our networks and
interconnection fees for each connection to our metropolitan node in each
market. Nonrecurring revenues include charges for the installation and
activation of new end users and in some cases, for end-user modems or other
electronic equipment. Our revenues consist almost exclusively of service
revenues. We currently sell only minimal amounts of end user modems or other
electronic equipment.
We seek to price our services competitively in relation to those of the
traditional telephone companies and other competitive telecommunications
companies in each market. Current standard end user line prices that we charge
to our network service providers for our services generally range from $75 per
month for 160 kilobits per second service to $250 per month for 1.5 megabits per
second service, before volume discounts. Although pricing will be an important
part of our strategy, we believe that customer relationships, customer care and
consistent quality will be the key to generating customer loyalty. During the
past several years, market prices for many telecommunications services have been
declining, which is a trend that we believe will likely continue. As prices
10
<PAGE>
decline for any given speed of service, we expect that the total number of end
users and the proportion of our end users purchasing our higher-speed, higher-
priced services will increase. The cost to upgrade an end user's speed is
generally minimal.
Network Expenses
Our network expenses consist of nonrecurring and monthly recurring charges
for the commodity transport elements we choose to lease rather than own.
Nonrecurring network expenses include transport and loop installation fees. We
expect these costs will be largely related to the activation of new central
offices and new end users. Monthly recurring network expenses include loop fees,
rent, power and other fees charged by traditional telephone companies,
competitive telecommunications companies and other providers. As our customer
and end user base grows, we expect the largest element of network expenses to be
traditional telephone company charges for leased copper lines, which have
historically been $3 to $40 per line per month, depending on the identity of the
traditional telephone company and the location of the lines.
Selling, Marketing, General and Administrative Expenses
Our selling, marketing, general and administrative expenses primarily
consist of costs related to selling, marketing, customer care, provisioning,
billing, regulatory, corporate administration, network engineering and
maintenance. Additionally, we incur other costs associated with administrative
overhead, office leases and bad debt. We expect that our selling, marketing,
general and administrative costs will grow significantly as we expand our
operations and that administrative overhead will be a large portion of these
expenses during the start-up phase of our business. However, we expect these
expenses to decline as a percentage of our revenues as we build our customer
base and the number of end users connected to our networks increases.
We plan to employ a regional sales team in each market we enter. To attract
and retain a highly qualified sales force, we plan to offer our sales and
customer care personnel a compensation package consisting of commissions and
stock options. We expect to incur significant selling and marketing costs as we
continue to expand our operations. In addition, we plan to offer sales
promotions, especially in the first few years as we establish our market
presence.
Amortization of Deferred Stock Compensation
Deferred stock compensation arises as a result of the granting of stock
options to employees with exercise prices per share determined to be below the
fair values per share for financial reporting purposes of our common stock at
dates of grant. The deferred compensation is being amortized over the vesting
period of the applicable options.
Depreciation and Amortization
We expect depreciation and amortization expense to increase significantly
as more of our network becomes operational and as we increase capital
expenditures to expand our network. Depreciation and amortization expense
includes:
. depreciation of network infrastructure equipment;
. depreciation of information systems, furniture and fixtures;
. amortization of improvements to central offices, network control center
facilities and corporate facilities;
. amortization of central office collocation space improvements; and
. amortization of software.
Taxation
We have not generated any taxable income to date and therefore have not
paid any federal income taxes since inception. State taxes were limited to
nominal amounts. Use of our net operating loss carryforwards, which begin to
expire in 2003, may be subject to limitations under Section 382 of the Internal
Revenue Code of 1986, as amended. We have recorded a full valuation allowance on
the deferred tax asset, consisting primarily of net operating loss
carryforwards, because of uncertainty regarding its recoverability.
Results of Operations
As a result of the development and rapid growth of the Company's business
during the periods presented, the period-to-period comparisons of the Company's
results of operations are not necessarily meaningful and should not be relied
upon as an indication of future performance.
Revenues
We commercially introduced our services in March 1998 and recognized
$35,000 in revenues for the quarter ended March 31, 1998. Revenues for the
quarter ended March 31, 1999 were approximately $1,283,000, 75% of which
consisted of recurring revenues. The increase in revenues is due to the
expansion of our installed end user base that has occurred over the past year.
11
<PAGE>
Network Expenses
Network expenses were approximately $145,000 for the quarter ended March
31, 1998 and $3,932,000 for the quarter ended March 31, 1999. These costs
consisted primarily of monthly rental costs for lines between end users and
central offices, between central offices and our metropolitan nodes, between our
metropolitan nodes and our network service providers, end user line installation
and costs charged to us by the traditional telephone companies. The increase in
network expenses reflects the growth in our network as we expand into new
markets and connect new end users.
Selling, Marketing, General and Administrative Expenses
Selling, marketing, general and administrative expenses were approximately
$1,542,000 for the quarter ended March 31, 1998 and $14,379,000 for the quarter
ended March 31, 1999. These expenses consisted primarily of salaries and related
expenses for the development of our business, network architecture and software,
the establishment of our management team and the development of corporate
identification, promotional and advertising materials. As the staffing levels
and operations of the Company have expanded over the past year, so have these
operating expenses to support such growth.
Amortization of Deferred Stock Compensation
Amortization of deferred stock compensation was $200,000 for the quarter
ended March 31, 1998 and $1,592,000 for the quarter ended March 31, 1999. This
increase in deferred stock compensation expense is due to the recruitment of new
employees. The unamortized balance of $17,894,000 at March 31, 1999 will be
amortized over the remaining vesting period of each grant.
Depreciation and Amortization
Depreciation and amortization expenses were approximately $77,000 for the
quarter ended March 31, 1998 and $1,387,000 for the quarter ended March 31,
1999. Such expenses consisted primarily of depreciation of network equipment,
information systems, office equipment, furniture and fixtures and amortization
of leasehold improvements. The increase in depreciation and amortization is due
to the additional property and equipment that has been acquired for the
development of our networks.
Interest Income and Expense
We incurred minimal interest expense for the quarter ended March 31, 1998.
Interest expense for the quarter ended March 31, 1999 was approximately
$3,583,000. Interest expense for the quarter ended March 31, 1999 includes
amortization of $1,419,000 related to debt discount recorded in conjunction with
the issuance of bridge loan warrants and equipment lease warrants. The remainder
of the interest expense primarily represents the interest associated with the
bridge loan. Interest income was approximately $106,000 for the quarter ended
March 31, 1998 and $238,000 for the quarter ended March 31, 1999. The interest
income for the quarter ended March 31, 1998 was earned primarily from the
proceeds raised in the Series B preferred stock financing in August 1997. The
interest income for the quarter ended March 31, 1999 was earned primarily from
the proceeds raised in the Series C preferred stock financing in February 1999.
Liquidity and Capital Resources
Our operations have required substantial capital investment for the
procurement, design and construction of our central office collocation space
improvements and cages, the purchase of telecommunications equipment and the
design and development of our networks. Capital expenditures were approximately
$2,196,000 for the quarter ended March 31, 1998 and $26,967,000 for the quarter
ended March 31, 1999.
Although we have no material commitments for capital expenditures during
1999, we plan to make total capital expenditures in 1999 estimated at
$130,000,000 to $160,000,000 to develop our networks. In each market, we will
initially target the central offices with the highest density of small- and
medium-sized businesses. We will expand into other central offices when we
obtain adequate demand or volume commitments from our customers. We will also
incur capital expenditures for building a metropolitan node in each market and
for expanding our network control center in San Francisco.
As of March 31, 1999, we had an accumulated operating deficit of
$53,639,000 and cash and cash equivalents of $52,908,000.
Net cash used in operating activities was $1,253,000 for the quarter ended
March 31, 1998 and $9,616,000 for the quarter ended March 31, 1999. The net cash
used in operations was primarily due to net losses, offset in part by increases
in accrued expenses and accounts payable. The net cash used in investing
activities was $2,196,000 for the quarter ended March 31, 1998 and $26,967,000
for the quarter ended March 31, 1999, primarily due to acquisitions of property
and equipment. Net cash provided by financing activities was minimal for the
quarter ended March 31, 1998. Net cash used by financing activities was
approximately $78,535,000 for the quarter ended March 31, 1999, of which
$73,977,000 related to the issuance of common and preferred stock and $5,600,000
related to borrowings, offset in part by the repayment of certain capital lease
obligations and line of credit borrowings totaling approximately $1,042,000.
12
<PAGE>
Our working capital deficiency as of March 31, 1999 was $22,043,000. Of
this amount, $47,138,000, after debt discount of $2,862,000, consisted of a line
of credit borrowings from Morgan Stanley Bridge Loan Fund, L.L.C. ("MSBLF")
which we obtained in July 1998. We repaid our borrowings under this line of
credit in full in early April 1999 with the proceeds from the initial drawdown
on our $110,000,000 senior secured credit facility.
On April 5, 1999, we entered into a secured credit facility with Goldman
Sachs Credit Partners L.P. and Newcourt Commercial Finance Corporation
consisting of:
. a $10,000,000 senior first priority secured term loan, all of which we drew
down on the closing date;
. a $50,000,000 senior first priority secured revolving credit facility that
will convert into a senior first priority secured term loan within six
months, $5,000,000 of which we drew down on the closing date; and
. a $40,000,000 second priority secured term loan, all of which we drew down on
the closing date.
On April 27, 1999, we entered into an amendment to the secured credit
facility under which the senior first priority secured revolving credit facility
was increased by $10,000,000. The secured credit facility matures on the fifth
anniversary of its closing date. The total amounts outstanding under the senior
first priority secured loans bear interest, in the absence of an event of
default, at our option at:
. the LIBOR rate plus four and one-half percent per year; or
. the greater of the prime rate or the federal funds rate as announced by The
Wall Street Journal plus four percent per year.
The total amounts outstanding under the second priority secured term loan
bear interest, in the absence of an event of default, at our option at:
. the LIBOR rate plus eight percent per year; or
. the greater of the prime rate or the federal funds rate as announced by The
Wall Street Journal plus seven and one-half percent per year.
Borrowings under the secured credit facility are restricted based upon our
leverage ratio and the value of our telecommunications assets from time to time.
We have used and intend to use the proceeds of the secured credit facility:
. to continue building our networks;
. to repay the MBLSF bridge loan and other indebtedness;
. to fund working capital; and
. for general corporate purposes.
We pledged to the lenders under the secured credit facility all of the
capital stock of NorthPoint Communications, Inc. held by NorthPoint
Communications Group, Inc. We and our subsidiaries also pledged as additional
collateral under the secured credit facility all of our personal property.
In March and April 1999, we issued and sold an aggregate of 3,968,174
shares of Series D-1 preferred stock with total proceeds of approximately
$38,800,000. Purchasers of our Series D-1 preferred stock included ICG Services,
Inc. (an affiliate of ICG Communications, Inc.), At Home Corporation, Verio
Inc., Cable & Wireless USA, Inc., Concentric Network Corporation, ALC
Communications Corporation (an affiliate of Frontier Corporation), Network Plus
Corporation and Netopia, Inc.
In May 1999, we sold 17,250,000 shares of our common stock at $24 per share
in our initial public offering. Net of underwriting discounts and commissions,
the proceeds to us were $388,500,000. Microsoft Corporation and Tandy
Corporation purchased $30 million and $20 million, respectively, of our stock in
this offering. We believe that proceeds from this offering, together with
existing capital resources, the investments from our strategic partners and
proceeds from our secured credit facility, will be sufficient to fund our
expansion and operating deficits through the middle of 2000. However, we may
decide to seek additional capital earlier than the middle of 2000, the timing of
which will depend upon market conditions, among other things. The actual amount
and timing of our future capital requirements may differ materially from our
estimates as a result of, among other things, the demand for our services and
regulatory, technological and competitive developments, including additional
market developments and new opportunities, in our industry. We may also need
additional financing if:
. we alter the schedule, targets or scope of our network rollout plan;
13
<PAGE>
. our plans or projections change or prove to be inaccurate; or
. we acquire other companies or businesses.
We may obtain additional financing through commercial bank borrowings, equipment
financing or the private or public sale of equity or debt securities.
We may be unsuccessful in raising sufficient additional capital. In
particular, we may be unable to raise additional capital on terms that we
consider acceptable, that are within the limitations contained in our financing
agreements and that will not impair our ability to develop our business. If we
fail to raise sufficient funds, we may need to modify, delay or abandon some of
our planned future expansion or expenditures, which could have a material
adverse effect on our business, prospects, financial condition and results of
operations.
Impact of Year 2000 Issue
We believe that our computer systems and software are year 2000 compliant.
However, we cannot assess the impact of potential year 2000 problems on
operators of traditional telephone systems or other service providers (such as
electric and utility) in the markets in which we operate. Because our systems
will be interconnected with those of traditional telephone companies who operate
these traditional telephone systems and other service providers, any disruption
of operations in the computer programs of these service providers would likely
have an impact on our systems in our markets. We cannot assure you that this
impact will not have a material adverse effect on our business, prospects,
financial condition and results of operations.
We have inventoried and tested our enterprise application systems,
including internally-developed and vendor-developed applications and off-the-
shelf software and hardware relating to our internal information systems, and
believe that such systems are year 2000 compliant. We have not reviewed our non-
information technology systems, such as fire alarms, elevators and badge access
systems, for year 2000 issues relating to embedded microprocessors. To the
extent that year 2000 issues exist, these systems may need to be replaced or
upgraded. Because our systems were implemented within the last two years, we do
not anticipate significant year 2000 issues to arise, although we cannot be
certain about this.
In the provision of our DSL services, we use third party equipment and
software and interact with traditional telephone companies that have equipment
and software that may not be year 2000 compliant. We have requested assurances
regarding year 2000 compliance from our equipment and software vendors and the
traditional telephone companies. We currently have received assurances from most
of our vendors and anticipate receiving assurances soon from the remaining
vendors. We have not received similar assurances from the traditional telephone
companies and do not anticipate that we will be able to do so. We plan to test
our system interfaces with at least one traditional telephone company if we are
able to obtain traditional telephone company cooperation. However, failure of
our third-party or traditional telephone company software and equipment to be
year 2000 compliant could cause us to incur significant expense in correcting
any problems that arise, impacting our business, prospects, operating results
and financial condition.
We acknowledge the criticality and importance of year 2000 compliance
within our organization. We are currently gathering year 2000 compliance and
preparedness statements from all of our business partners. We plan to test and
validate our system interfaces with partners and to develop a contingency plan
prior to the end of the third quarter of 1999. However, if our partners' systems
are not year 2000 compliant, our business, prospects, operating results and
financial condition could be adversely affected.
In the normal course of doing business with our partners and suppliers, we
establish manual back-up processes (fax, phone, e-mail, etc.) for all critical
interconnections and business functions. These manual processes are designed to
replace our automated interfaces and processes in the event of a failure. We
plan to test these contingency procedures on a frequent basis to ensure that
they work properly in support of our business. Our contingency procedures will
be available if year 2000 problems occur in any of our partner or supplier
environments. In addition, we plan to conduct back-ups of all of our mission-
critical systems in advance, with the ability to revert to previous day
transactions to ensure minimal loss of corporate data if year 2000 problems
occur in our systems.
Our aggregate historical and future costs for year 2000 analysis, planning
and remediation have not been material to date and we do not expect them to be
material in the future. However, we cannot assure that these costs will not be
greater than we currently expect. If these costs increase significantly, our
business, prospects, operating results and financial condition could be
adversely affected. Our complete internal review of and planning for year 2000
issues is anticipated to be completed by November 1, 1999.
14
<PAGE>
Forward Looking Statements
The statements contained in this report which are not historical facts may
be deemed to contain forward-looking statements, including but not limited to
deployment of the company's network in new and existing regions and the timing
and breadth of coverage in each region. Actual results may differ materially
from those anticipated in any forward-looking statements as a result of certain
risks and uncertainties, including, without limitation, the company's dependence
on strategic third parties to market and resell its services, intense
competition for the company's service offerings, dependence on growth in demand
for DSL-based services, ability to raise additional capital and other risks and
uncertainties detailed herein and in our Registration Statement on Form S-1, as
amended (File No. 333-73065). All written and oral forward-looking statements
made in connection with this report on Form 10-Q which are attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
"Risk Factors" and other cautionary statements included in our Registration
Statement on Form S-1, as amended (File No. 333-73065). We disclaim any
obligation to update information contained in any forward-looking statement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are currently exposed to the impact of interest rate changes and changes
in market values of investments through our investment portfolio. Our principal
exposure to financial market fluctuations relates to our secured credit
facility, which is floating rate debt. While we have not used derivative
financial instruments to manage our interest rate risk to date, we plan to
manage our interest rate exposure in the future through such instruments, if
necessary. We do not believe a hypothetical 10% adverse rate change in our
variable rate debt obligations would be material to our results of operations.
We believe our market risk exposure with regard to marketable debt
securities in our investment portfolio is limited to changes in quoted market
prices for such securities. Based upon the composition of our marketable debt
securities at March 31, 1999, we do not believe a hypothetical 10% adverse
change in quoted market prices would be material to our results of operations.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are not currently involved in any pending legal proceedings that
individually, or in the aggregate, are material to us.
Item 2. Changes in Securities and Use of Proceeds.
(c) Recent Sales of Unregistered Securities:
During the three month period ended March 31, 1999, we have issued and sold
unregistered securities as follows (all share numbers and prices set forth below
have been adjusted to give effect to the three-for-two stock split effected on
April 9, 1999 and the three-for-two stock split effected on April 16, 1999):
(1) We issued a subordinated convertible promissory note convertible
into 311,111 shares of Class B common stock, to Verio Inc. on March 26,
1999.
(2) On March 22, 1999, we issued an aggregate of 40,500 shares of
common stock to three consultants in exchange for recruiting and other
consulting services rendered to us.
(3) We issued an aggregate of 37,715,335 shares of Series C preferred
stock in a private placement on February 19, 1999. The consideration received
for such shares was $59,171,204.93.
(4) From January 1999 through February 1999, we granted stock options
to purchase an aggregate of 2,197,928 shares of common stock to employees,
consultants and directors with exercise prices ranging from $0.67 to $6.22
per share pursuant to our 1997 Stock Option Plan.
(5) We issued an aggregate of 1,728,406 shares of Series D-1 preferred
stock in a private placement in March 1999 to ICG Services, Inc., Verio Inc.
and Network Plus Corporation. The consideration received for such shares was
$16,899,982.00.
(6) In March 1999, we granted stock options to purchase an aggregate
of 2,686,005 shares of common stock to employees, consultants and directors
with an exercise price of $6.67 per share pursuant our 1999 Stock Plan.
No underwriters were used in connection with these sales and issuances. The
sales and issuances of these securities were exempt from registration under the
Securities Act pursuant to (1) Rule 701 promulgated thereunder on the basis that
these options were offered and sold either pursuant to a written compensatory
benefit plan or pursuant to written contracts relating to consideration, as
provided by Rule 701, or (2) Section 4(2) thereof, on the basis that the
transactions did not involve a public offering.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Effective March 22, 1999, NorthPoint Communications, Inc. consummated a
reorganization pursuant to which it became our wholly owned subsidiary. The
reorganization was effected by a merger between NorthPoint Communications, Inc.
and another Delaware corporation formed solely for this purpose, which was our
wholly owned subsidiary, with NorthPoint Communications, Inc. as the surviving
corporation of such merger. As a result of the reorganization, the stockholders
of NorthPoint Communications, Inc. immediately before the reorganization became
our only stockholders immediately after the reorganization. We own all of the
capital stock of NorthPoint Communications, Inc.
16
<PAGE>
The following matters were submitted to a vote of the security holders of
NorthPoint Communications, Inc. during the three month period ended March 31,
1999 and prior to the reorganization.
(1) Effective January 12, 1999, the stockholders approved by written
consent our Fifth Amended and Restated Certificate of Incorporation. The Fifth
Amended and Restated Certificate of Incorporation (a) effected a 1.889518-for-
one stock split in the outstanding Series C Preferred Stock, (b) increased the
authorized number of shares of Common Stock from 50,000,000 shares to 75,000,000
shares, (c) increased the authorized number of shares of Preferred Stock from
21,804,556 shares to 35,761,600 shares, (d) increased the authorized number of
shares of Series B Preferred Stock from 17,006,954 shares to 17,563,187 shares
and (e) increased the authorized number of shares of the Series C Preferred
Stock from 4,797,602 shares to 18,198,413 shares. A total of 10,820,000 shares
of Common Stock (out of 10,930,200 shares outstanding) were voted in favor of
the written consent. A total of 11,020,832 shares of Series B Preferred Stock
(out of 16,450,721 shares outstanding) were voted in favor of the written
consent. A total of 600,000 shares of Series C Preferred Stock (out of 659,970
shares outstanding) were voted in favor of the written consent.
(2) Effective March 1, 1999, the stockholders approved by written
consent the reorganization described above. A total of 10,820,000 shares of
Common Stock (out of 10,930,200 shares outstanding) were voted in favor of the
written consent. A total of 14,459,553 shares of Series B Preferred Stock (out
of 16,450,721 shares outstanding) were voted in favor of the written consent. A
total of 16,686,857 shares of Series C Preferred Stock (out of 18,009,405 shares
outstanding) were voted in favor of the written consent.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
The following exhibits are included as part of this Report:
Exhibit
No. Description of Exhibit
------- ----------------------
27.1 Financial Data Schedule for the three months ended March 31,
1999.
(b) Reports on Form 8-K:
None.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORTHPOINT COMMUNICATIONS GROUP, INC.
Registrant
Dated: June 21, 1999 By: /s/ MICHAEL W. MALAGA
--------------------------
Michael W. Malaga
Chairman of the Board and Chief Executive
Officer
Dated: June 21, 1999 By: /s/ HENRY P. HUFF
----------------------
Henry P. Huff
Chief Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 52,908
<SECURITIES> 0
<RECEIVABLES> 924
<ALLOWANCES> 110
<INVENTORY> 0
<CURRENT-ASSETS> 59,022
<PP&E> 74,388
<DEPRECIATION> 2,731
<TOTAL-ASSETS> 131,023
<CURRENT-LIABILITIES> 81,065
<BONDS> 0
0
79
<COMMON> 26
<OTHER-SE> 47,489
<TOTAL-LIABILITY-AND-EQUITY> 131,023
<SALES> 1,283
<TOTAL-REVENUES> 1,283
<CGS> 3,932
<TOTAL-COSTS> 3,932
<OTHER-EXPENSES> 17,358
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,583
<INCOME-PRETAX> (23,352)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,352)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,352)
<EPS-BASIC> (0.94)
<EPS-DILUTED> (0.94)
</TABLE>
