<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 September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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.)
303 Second Street, South Tower
San Francisco, California 94107
(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. [X] Yes [_] No
The number of shares of Common Stock, par value $.001 per share, of NorthPoint
Communications Group, Inc. outstanding as of October 31, 2000 was 133,452,767.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements............................................................. 2
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................... 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 33
Item 2. Changes in Securities and Use of Proceeds..................................................... 33
Item 3. Defaults Upon Senior Securities............................................................... 33
Item 4. Submission of Matters to a Vote of Security Holders........................................... 33
Item 5. Other Information............................................................................. 33
Item 6. Exhibits and Reports on Form 8-K.............................................................. 34
</TABLE>
NorthPoint Communications Group, Inc. and Verizon Communications will file
a joint proxy statement/prospectus and other documents regarding the proposed
business combination transaction referenced in the following information with
the Securities and Exchange Commission. Investors and security holders are
urged to read the proxy statement/prospectus, when it becomes available, because
it will contain important information. A definitive joint proxy
statement/prospectus will be sent to stockholders of NorthPoint Communications
Group, Inc. seeking their approval of the proposed transaction. Investors and
security holders may obtain a free copy of the definitive joint proxy
statement/prospectus (when it is available) and other documents filed by
NorthPoint Communications Group, Inc. and Verizon Communications with the
Commission at the Commission's web site at www.sec.gov. The definitive joint
proxy statement/prospectus and these other documents may also be obtained for
free by NorthPoint stockholders by directing a request to: NorthPoint
Communications Group, Inc., 303 Second Street, South Tower, San Francisco, CA
94107, Attn: Investor Relations, (415) 403-4003, email:
[email protected].
1
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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)
September 30, December 31,
-------------- -------------
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 52,690 $ 95,019
Short-term investments 97,636 115,034
Accounts receivable, net of an allowance of $12,864 and $834, respectively 14,914 6,829
Amounts due from affiliated companies 15,133 --
Unbilled revenue 7,465 3,729
Inventories 7,574 4,439
Prepaid expenses and other assets 35,700 19,555
--------- ---------
Total current assets 231,112 244,605
Property and equipment:
Networking equipment 271,951 117,625
Central office collocation space improvements 106,006 61,637
Computers and software 112,965 40,739
Leasehold improvements 23,055 14,176
Furniture, fixtures and office equipment 12,624 10,192
--------- ---------
Total property and equipment 526,601 244,369
Less accumulated depreciation and amortization (71,628) (17,245)
--------- ---------
Property and equipment, net 454,973 227,124
Long-term investments 51,691 6,740
Deposits 435 691
--------- ---------
Total assets $ 738,211 $ 479,160
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, including related party payables of $0 and $6,161, respectively $ 53,842 $ 56,004
Accrued expenses and other liabilities 35,888 26,023
Capital lease obligations, current portion, net of unamortized debt discount
of $265 and $265, respectively 2,377 1,027
--------- ---------
Total current liabilities 92,107 83,054
Capital lease obligations, long-term portion, net of unamortized debt discount
of $133 and $332, respectively 3,560 1,653
Deferred long-term credits 11,914 1,392
Notes payable 400,000 --
Term loan 85,000 85,000
--------- ---------
Total liabilities 592,581 171,099
--------- ---------
Commitments and contingencies (Note 3)
Stockholders' equity:
Convertible preferred stock, $0.001 par value; 24,276,843 and 101,250,000 shares authorized at
September 30, 2000 and December 31, 1999, respectively; 150,000 and 0 shares issued and
outstanding at September 30, 2000 and December 31, 1999, respectively (liquidation
preference of $150,000 at September 30, 2000) -- --
Common stock, $0.001 par value; 281,250,000 shares authorized at September 30, 2000 and December
31, 1999; 133,321,089 and 126,469,210 shares issued and outstanding at September 30, 2000 and
December 31, 1999, respectively (the December 31, 1999 shares issued and outstanding includes
2,466,724 shares of Class B common stock that converted into common stock in March 2000) 133 126
Warrants 2,619 8,701
Additional paid-in capital 690,572 525,294
Deferred stock compensation (8,704) (12,405)
Accumulated other comprehensive income 3,312 330
Accumulated deficit (542,302) (213,985)
--------- ---------
Total stockholders' equity 145,630 308,061
--------- ---------
Total liabilities and stockholders' equity $ 738,211 $ 479,160
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
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NORTHPOINT COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in 000's, except share and per share amounts)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 23,955 $ 5,734 $ 68,329 $ 9,521
Operating expenses:
Network expenses 48,925 13,547 123,357 25,280
Selling, marketing, general and administrative (excludes stock
compensation expense of $1,264, $1,404, $3,726 and $4,211,
respectively) 65,946 34,158 176,419 72,398
Amortization of deferred stock compensation 1,264 1,404 3,726 4,211
Depreciation and amortization 25,914 5,226 54,616 9,426
------------ ------------ ------------ -----------
Total operating expenses 142,049 54,335 358,118 111,315
------------ ------------ ------------ -----------
Loss from operations (118,094) (48,601) (289,789) (101,794)
Interest income 2,551 4,709 12,399 7,973
Interest expense (17,121) (2,554) (44,733) (13,825)
Equity in net loss of affiliated companies (3,031) -- (5,061) --
Taxes and other expenses (622) (45) (1,132) (99)
------------ ------------ ------------ -----------
Net loss (136,317) (46,491) (328,316) (107,745)
------------ ------------ ------------ -----------
Cumulative dividend on convertible preferred stock (938) -- (938) --
------------ ------------ ------------ -----------
Net loss applicable to common stockholders $ (137,255) $ (46,491) $ (329,254) $ (107,745)
============ ============ ============ ===========
Net loss per common share - basic and diluted $(1.03) $(.37) $(2.51) $(1.37)
============ ============ ============ ===========
Weighted average shares used in computing net loss per
common share - basic and diluted 132,989,264 124,486,783 131,378,001 78,867,684
============ ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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NORTHPOINT COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000's)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
September 30,
------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(328,316) $(107,745)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 54,616 9,426
Amortization of deferred stock compensation 3,726 4,211
Amortization of debt discount 199 4,414
Equity in net loss of affiliated companies 5,061 --
Changes in assets and liabilities:
Accounts receivable (8,085) (2,810)
Amounts due from affiliated companies (15,133) --
Unbilled revenue (3,736) (1,227)
Inventories (3,135) (2,778)
Prepaid expenses and other assets (16,145) (8,845)
Deposits 256 (201)
Accounts payable (2,162) (4,185)
Accrued expenses and other liabilities 9,865 22,075
Deferred charges 10,522 (189)
--------- ---------
Net cash used in operating activities (292,467) (87,854)
Cash flows from investing activities:
Sale (purchase) of short-term investments 17,059 (167,125)
Purchase of long-term investments (42,191) (5,000)
Purchase of property and equipment (277,907) (101,310)
--------- ---------
Net cash used by investing activities (303,039) (273,435)
Cash flows from financing activities:
Proceeds from issuance of common and preferred stock 154,677 482,667
Borrowings on line of credit -- 55,000
Payments on line of credit borrowings -- (55,725)
Proceeds from notes payable 400,000 5,600
Principal payments on capital lease obligations (1,500) (957)
--------- ---------
Net cash provided by financing activities 553,177 486,585
Net increase (decrease) in cash and equivalents (42,329) 125,296
Cash and equivalents at beginning of period 95,019 10,955
--------- ---------
Cash and equivalents at end of period $ 52,690 $ 136,251
========= =========
Supplemental cash flow information and noncash activities:
Fixed assets obtained through capital leases $ 4,559 $ --
========= =========
Warrants issued for bridge loan, capital lease and with issuance of equity $ -- $ 4,530
========= =========
Conversion of convertible promissory note to Class B common stock $ -- $ 5,600
========= =========
Common stock issued for investment $ 4,500 $ --
========= =========
Income taxes paid $ 40 $ 12
========= =========
Interest paid $ 37,264 $ 8,113
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
NORTHPOINT COMMUNICATIONS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Basis of Presentation
The Company
NorthPoint Communications, Inc. was formed in May 1997 to provide high
speed network and data transport services, allowing network service providers,
including Internet service providers, 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 condensed consolidated financial statements include the accounts
of NorthPoint Communications Group, Inc. and its wholly-owned subsidiary
NorthPoint Communications, Inc., together with its wholly-owned subsidiary
NorthPoint Communications of Virginia, 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 financial data as of September 30, 2000 and for the three
and nine months ended September 30, 2000 and September 30, 1999, have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The December 31, 1999 balance sheet was
derived from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. However, the Company
believes that the disclosures are adequate to make the information presented not
misleading. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
In the opinion of management, the accompanying condensed consolidated
financial statements reflect all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair statement of the
Company's financial condition, the results of its operations and its cash flows
for the periods indicated. The results of operations for the three and nine
months ended September 30, 2000 are not necessarily indicative of the operating
results for the full year.
2. Summary of Significant Accounting Policies
Business risks and credit concentrations
The Company's operations are subject to significant risks and
uncertainties including competitive, financial, developmental, operational,
technological, regulatory and other risks associated with an emerging business.
The Company sells its services on a wholesale basis to network service
providers. For the three months ended September 30, 2000, two network service
provider customers accounted for 23% of revenue. These two customers accounted
for 7% of accounts receivable at September 30, 2000.
The Company is dependent upon a small number of major suppliers and
service providers.
Reclassifications
Certain prior year balances have been reclassified to conform with the
current year presentation.
5
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NORTHPOINT COMMUNICATIONS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Cash and cash equivalents
The Company considers all highly liquid investments, primarily commercial
paper, with an original maturity of three months or less at the date of purchase
to be cash equivalents.
A portion of the Company's cash deposits is restricted since it supports
letters of credit that the Company has provided to secure office space. The
balance of restricted cash at September 30, 2000 and December 31, 1999 was
$4,040,400 and $4,365,400, respectively.
Short-term and long-term investments
Short-term and long-term investments are accounted for in accordance with
Statement of Financial Accounting Standards No. 115 Accounting for Certain
Investments in Debt and Equity Securities. This statement requires that
securities be classified as "held to maturity," "available-for-sale" or
"trading," and the securities in each classification be accounted for at either
amortized cost or fair market value, depending upon their classification. The
Company classifies its investments as held-to-maturity and available-for-sale.
Held-to-maturity securities are reported at amortized cost. Available-for- sale
securities are carried at fair value, with the unrealized gains and losses, net
of tax, reported as other comprehensive income, a separate component of
stockholders' equity. At the time of sale, any gains or losses will be
recognized as a component of operating results. The Company recorded an increase
in other comprehensive income of $2,982,000 for the nine month period ended
September 30, 2000 related to the net unrealized gains of certain available-for-
sale investments.
Inventories
Inventories consist of communications equipment that will be installed at
subscriber locations. Inventories are accounted for using the first-in first-out
method at the lower of cost or market.
Property and equipment
Property and equipment, including property and equipment under capital
leases, are recorded at cost and are depreciated using the straight-line method
over the shorter of their useful lives or, for leased assets, the remaining
lease term. The estimated useful life is three years for software, and five
years for all other property and equipment. Maintenance and repairs are charged
to expense as incurred, and improvements and betterments are capitalized. When
assets are retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in operations in the period in which they are realized.
Revenues
Revenues from transport services are recognized when the services are
provided. Payments received in advance of providing services are recorded as
deferred revenue until the period such services are provided. Revenues related
to installation services are recognized when the installation is completed.
Recognition of revenue is also deferred in certain other circumstances, as
described in footnote 8.
Earnings (loss) per share
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 common stockholders 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. See the Condensed
Consolidated Statements of Operations for computed amounts.
The dilutive effect of options and warrants has not been considered as
their effect would be antidilutive for all periods presented.
6
<PAGE>
NORTHPOINT COMMUNICATIONS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Recently issued accounting pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 provides guidance for revenue recognition under certain
circumstances. Implementation of SAB 101 has been delayed by the Securities and
Exchange Commission until the fourth quarter of the fiscal year beginning after
December 15, 1999. The Securities and Exchange Commission issued a "Frequently
Asked Questions and Answers" document (the "FAQ") in October 2000. Accordingly,
the Company is continuing to evaluate the impact of SAB 101 and the FAQ on its
financial statements and related disclosures.
In April 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" (the "Interpretation").
This Interpretation clarifies the application of Opinion 25 for certain stock
compensation issues including the definition of employee for purposes of
applying Opinion 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option, and the accounting for an exchange of
stock compensation awards in a business combination. This Interpretation is
effective July 1, 2000. The adoption of FASB Interpretation No. 44 did not have
a significant effect on the financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. In July 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No.
137 deferred the effective date of SFAS No. 133 until fiscal years beginning
after June 15, 2000. The Company will adopt SFAS No. 133 during its year ending
December 31, 2001. The Company is currently evaluating the impact of adopting
SFAS No. 133 on its financial statements and is unable to predict the impact at
this time.
3. Commitments and Contingencies
The Company is subject to state public utilities commission, Federal
Communications Commission and court decisions as they relate to the
interpretation and implementation of the Telecommunications Act, the
interpretation of competitive local exchange carrier ("CLEC") interconnection
agreements in general and the Company's interconnection agreements in
particular. In some cases the Company may be bound by the results of ongoing
proceedings of these bodies or the legal outcomes of other contested
interconnection agreements that are similar to the Company's agreements. The
Company cannot estimate the effect, if any, of these proceedings.
The Company together with, in some instances, some of its directors and
officers, may from time to time be the subject of claims or named as a defendant
or co-defendant in various legal actions involving breach of contract and
various other claims incident to the conduct of its businesses. At this time,
management does not expect the Company to suffer any material liability by
reason of such actions, nor does it expect that such actions will have a
material effect on the Company's liquidity or operating results.
4. Common Stock
From July 1, 2000 to September 30, 2000, the Company granted to employees
options to purchase an aggregate of 1,425,610 shares of common stock at exercise
prices from $8.8125 to $11.813 per share, which was at fair market value at the
time of grant.
5. Convertible Preferred Stock
On September 5, 2000, the Company issued an aggregate of 150,000 shares of
non-voting Series A 9% convertible preferred stock in a private placement to
Bell Atlantic Corporation (d/b/a Verizon Communications) ("Verizon") for an
aggregate purchase price of $150,000,000.
7
<PAGE>
NORTHPOINT COMMUNICATIONS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Stock Warrants
Contingent warrants
The Company has issued warrants to purchase up to 212,568 shares of its
common stock at a price of $1.5689 per share to one of its shareholders, which
are exercisable upon the achievement of certain milestones by the holder of the
warrants. The value of the warrants will be determined using a Black-Scholes
model and will be recorded once the milestones have been reached and the
warrants are no longer contingent.
7. Business Developments
On August 7, 2000, Verizon, Verizon Ventures I Inc. ("Parent"), a wholly-
owned subsidiary of Verizon, Verizon Ventures II Inc. ("Merger Subsidiary"), a
direct, wholly-owned subsidiary of Parent, and NorthPoint Communications Group,
Inc. ("NorthPoint") entered into an Agreement and Plan of Merger (the "Merger
Agreement"). Pursuant to the terms of the Merger Agreement, Verizon will
contribute its DSL business to Parent, consisting of the assets, equipment,
installed lines, employees and contracts, among other things, used in its
digital subscriber line ("DSL") business, and $800 million in cash in exchange
for shares of Parent common stock. Of the cash investment, $450 million will be
used to fund Parent's capital expenditures and operations and $350 million will
be distributed to NorthPoint stockholders. At the effective time of the Merger
("Effective Time"), Merger Subsidiary will merge (the "Merger") with and into
NorthPoint. Each share of NorthPoint common stock issued and outstanding
immediately prior to the Effective Time will be cancelled and converted into one
share of Parent common stock and outstanding NorthPoint warrants and options
will be converted into warrants and options of Parent. In addition to the
conversion of their shares of NorthPoint common stock into Parent common stock,
holders of issued and outstanding NorthPoint common stock at the Effective Time
will receive a total of $350 million, payable to such stockholders on a pro rata
basis, or approximately $2.50 per share. As a result of these transactions,
Verizon will hold 55% of the common stock of Parent and the stockholders of
issued and outstanding NorthPoint common stock immediately prior to the
Effective Time will hold the remaining 45% of Parent common stock. The
transactions contemplated by the Merger Agreement are subject to the approval of
the stockholders of NorthPoint and other customary closing conditions, such as
regulatory approvals. Parent will use the "NorthPoint" name and brand and will
be publicly traded on Nasdaq.
Concurrently with entering into the Merger Agreement, Verizon issued to
NorthPoint a commitment letter pursuant to which Verizon is obligated to provide
to NorthPoint a $200 million senior secured debt facility on January 1, 2001 if
the transactions contemplated by the Merger Agreement have not been consummated
by that date. On September 5, 2000, Verizon purchased $150 million of non-
voting 9% Convertible Preferred Stock of NorthPoint ("NorthPoint Preferred
Stock"). Upon termination of the waiting period pursuant to the Hart-Scott-
Rodino Antitrust Improvements Act of 1976 (the "Act"), the NorthPoint Preferred
Stock will obtain voting rights. The NorthPoint Preferred Stock will
automatically convert to NorthPoint common stock at the time of the closing of
the Merger and is convertible into NorthPoint common stock at any time following
the termination of the waiting period pursuant to the Act at Verizon's option.
The Merger Agreement further provides that, following the closing of the
Merger, upon the exercise of any NorthPoint option or warrant that was
outstanding at the Effective Time (all of which will be converted into Parent
options and warrants), Parent will issue to Verizon such number of shares of
common stock as are necessary to allow Verizon to maintain its percentage
ownership as of the Effective Time.
The transactions contemplated by the Merger Agreement are subject to the
receipt of regulatory approvals, the satisfaction of all conditions set forth in
the Merger Agreement, including termination of the waiting period pursuant to
the Act, and compliance with other closing conditions customarily included in
similar merger transactions.
8. Business Risks and Uncertainties
The Company markets its services through network service providers for
resale to their business and consumer end-users. Two customers accounted for
23% of the Company's revenues in the quarter ended September 30, 2000.
Recently, a number of the Company's privately held, consumer-focused network
service provider customers, including large customers, have experienced
significant difficulties in raising the capital necessary to operate and grow
their businesses and are not current in their payment for the Company's
services. Prior to the Company's third quarter earnings release on October 26,
2000, the Company did not recognize revenue earned from certain network service
provider customers during the third quarter which could not satisfy the
Company's revenue recognition standards. The Company received additional facts
after the October 26, 2000 third quarter earnings release that indicated certain
of its privately-held, consumer-focused internet service providers, including
Flashcom, Inc., did not have sufficient long-term financial resources to assure
the Company that they would be able to make timely payment for its services.
Therefore, the Company has revised its third quarter results as required by SEC
regulations. The Company's revenue for the third quarter was reduced to
$23,955,000 compared to the $30,092,000 reported on October 26, 2000 as a result
of the Company's decision not to recognize revenue from sales to these
delinquent network service provider customers.
8
<PAGE>
NORTHPOINT COMMUNICATIONS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenue related to customers that do not demonstrate the ability to pay
for services in a timely manner will be recorded as revenue only when all
previous accounts receivable for these customers have been paid and when cash
is received for new services. It is possible that additional network service
provider customers may experience significant difficulties in raising the
capital necessary to operate and grow their businesses and may be unable to pay
for the Company's services in the future on a timely basis. The Company's
network service provider customers' inability to pay these past due amounts, and
to make timely payments for our services in the future, may materially and
adversely affect the Company's operating results and financial condition.
9. Related Parties
The Company provides operations support systems and associated services to
the NorthPoint Canada Communications and VersaPoint joint ventures for fees
specified in the agreements with those joint ventures. Amounts due from these
affiliated companies primarily represent the fees associated with providing the
operations support systems and also include reimbursement for certain other
expenses paid by the Company on behalf of the joint ventures. The Company
charged $15,132,923 to the joint ventures for the nine months ended September
30, 2000, which also represents the amounts due from these affiliates at
September 30, 2000.
In June 2000, the Company made an equity investment in Communication
Technology Services Inc. ("CTS"). CTS provides installation services for the
Company. The Company paid CTS a total of $3,414,316 for services provided
during the three months ended September 30, 2000. As of September 30, 2000,
$908,695 in additional charges were accrued.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis of NorthPoint's financial condition
and results of operations should be read in conjunction with our condensed
consolidated financial statements and related notes included elsewhere in this
report. In the discussion below, we refer to the period from inception (May 16,
1997) to December 31, 1997 as "1997".
Certain statements set forth below constitute "forward-looking statements."
Such forward-looking statements involve certain risks and uncertainties
including, but not limited to, those discussed herein under "Risk Factors" that
may cause actual results to differ materially from those expressed or implied in
any forward-looking statement. Investors and prospective investors are
cautioned not to place undue reliance on such forward-looking statements. We
disclaim any obligation to update the forward-looking statements contained
herein to reflect future events or developments. 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, which we collectively 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 offer network and data transport services
for residential end users as well.
As of September 30, 2000, we provided services in 54 metropolitan areas,
spanning 109 metropolitan statistical areas, in the United States and we intend
to offer service in a total of over 60 metropolitan areas, spanning 110
metropolitan statistical areas by the end of 2000. 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 targeted
markets. As of September 30, 2000, we had secured space in over 1,800 central
offices and were providing services from 1,624 of those central offices. We
plan to offer service from an additional 76 central offices by the end of 2000
to allow us to achieve blanket coverage in our 54 markets as well as 6
additional targeted markets. In addition, we deployed a fully redundant point-
to-point national ATM backbone connection between NorthPoint's local DSL
networks. We intend to expand the coverage of our networks in these markets
over time by installing equipment in additional central offices.
We are currently providing or have entered into agreements to provide our
services to more than 175 network service providers. As of September 30, 2000,
we had connected 87,300 of their end users to our networks. Upon completion of
our planned expansion, our networks will be able to reach approximately 5.5
million businesses and 45 million households, including more than 80% of the
small- and medium-sized businesses in our 60 markets.
Since inception on May 16, 1997, our principal activities have included:
. developing our business plans;
. procuring governmental authorizations and space in central offices;
. raising capital and hiring management and other key personnel;
. working on the design and development of our network architecture and
operations support systems;
. acquiring equipment and facilities;
. negotiating interconnection agreements; and
. selling and marketing our services to network service providers.
As a result of our development activities, we have experienced operating
losses. We expect to experience increasing operating losses as we expand our
operations.
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Financial performance varies from market to market, and the time when we will
achieve positive 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;
. the commercial acceptance of our services; and
. the rate at which we can provision lines.
EBITDA is a measure of financial performance commonly used in the
telecommunications industry. It is defined as earnings before net interest,
taxes, amortization of deferred stock compensation, depreciation and
amortization. Other companies' definition of EBITDA may differ from ours. 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.
Assuming the closing of the proposed Merger occurred on December 31, 2000, the
combined DSL operations of NorthPoint and Verizon are expected to include the
following:
. a broadband network, comprised of more than 3,000 unique operational
central offices, passing approximately 63 million homes and businesses
in 163 metropolitan statistical areas (MSAs);
. more than 600,000 DSL lines;
. wholesale relationships with Verizon Online, AOL, UUNET and Genuity
and strategic marketing relationships with RadioShack, Microsoft,
Staples, Blockbuster and other industry leaders;
. approximately 3,000 employees; and
. broadband ventures in Europe through VersaPoint and Canada through
NorthPoint Canada Communications.
We expect to consummate the Merger by mid-2001.
Factors Affecting Future Operations
Revenues. We derive our revenues from monthly recurring and nonrecurring
charges to internet service providers, long-distance and local telephone
companies and data service providers, which we collectively call network service
providers. Monthly recurring revenues consist of end user line fees, based upon
the number of installed lines, 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 of new end users and in some cases, for end-user modems or other
electronic equipment. Prior to the quarter ended September 30, 1999, we had sold
only minimal amounts of end-user modems or other electronic equipment. Currently
we sell a significant amount of such equipment to support the needs of our
growing network service provider partner base.
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 business class services generally range
from $75 per month for 144 kilobits per second service to $250 per month for 1.5
megabits per second service, before volume discounts. Pricing for residential
class service is approximately $40 per month. 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 decline for any given speed of service, we expect that the
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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.
Although our current network buildout will be largely completed by the end
of 2000, further development and expansion of our business will require
significant expenditures. 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, once we have deployed our network in a market, we will incur
additional expenditures during the buildout phase of any market, many of which
will be dependent upon orders to connect new end users. These success-based
capital expenditures include DSL line cards, incremental digital subscriber line
access multiplexer and network test equipment, and line cards for our electronic
switches in our metropolitan node. These network expenditures will continue to
increase as we add installed lines and end users. However, once a market is
fully built out, a substantial majority of the capital expenditures in that
market will be tied to incremental customer and end-user growth. We will also
incur capital expenditures for building additional metropolitan nodes in certain
markets and for expanding our network control center in the San Francisco Bay
Area. In addition to the capital expenditures required to enter a market, we
will be required to fund each market's cash flow deficit as we build our
customer base.
In addition to developing our networks, we will use our capital to cover our
operations, sales and market development expenses incurred in developing and
servicing our networks.
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. On occasion, we
will participate in various sales promotions with our customers by advancing
market development funds to assist in their marketing efforts, particularly for
new markets. These costs are deferred and amortized over the estimated duration
of the promotion's effect in those markets. Additionally, we incur other costs
associated with administrative overhead, office leases and bad debt. In general,
we reserve for bad debt expense based upon our experience and estimates of
collectability. Because our history is limited it is possible that, on occasion,
we may have to increase our bad debt reserves in excess of our past experience.
The timing of these increases if any, could affect future quarterly results. 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. Stock compensation arises as
a result of the granting of stock options to employees with exercise prices
below the fair values at the date of grant. The deferred compensation is being
amortized over the vesting period of the associated options.
Depreciation and Amortization. We expect depreciation and amortization
expense to increase significantly as more of our
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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 are 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.
Recent Developments
Recently, a number of our privately held, consumer-focused network service
provider customers have experienced significant difficulties in raising the
capital necessary to operate and grow their businesses and are not current in
their payment for our services. Prior to our third quarter earnings release on
October 26, 2000, we did not recognize revenue earned from certain network
service provider customers during the third quarter which could not satisfy our
revenue recognition standards. We received additional facts after the October
26, 2000 third quarter earnings release that indicated certain of our privately-
held, consumer-focused internet service providers, including Flashcom, Inc., did
not have sufficient long-term financial resources to assure us that they would
be able to make timely payment for our services. Therefore, we have revised our
third quarter results as required by SEC regulations. Our revenue for the third
quarter was reduced to $23,955,000 compared to the $30,092,000 reported on
October 26, 2000 as a result of our decision not to recognize revenue from sales
to these delinquent network service provider customers.
In addition, we recognized increased bad debt and other operating expenses
related to these network service provider customers. As a result, our EBITDA
loss for the quarter ended September 30, 2000 was increased to $90,916,000
million compared to the $79,210,000 reported on October 26, 2000.
These network service provider customers account for approximately 26,700
of our 87,300 installed lines at September 30, 2000. We have halted the
installation of in-process lines ordered by these customers and we may also
decide to disconnect end users that are purchasing their services from
delinquent network service provider customers. If this occurs, we cannot
assure you that these end users will continue to purchase our services through
another one of our network service provider customers and we may lose the
lines served by such end users.
We will recognize additional revenue from these customers only when all
previous accounts receivable balances for these customers have been paid and
when cash is received for new services. We are continuing our efforts to obtain
payments, but we cannot assure you that these efforts will be successful. It is
possible that additional network service provider customers may experience
significant difficulties in raising the capital necessary to operate and grow
their businesses and may be unable to pay for our services in the future on a
timely basis. Our network service provider customers' inability to pay these
past due amounts, and to make timely payments for our services in the future,
may materially and adversely affect our business, operating results and
financial condition.
We are also currently attempting to arrange for the direct transfer of
lines serviced by delinquent network service provider customers to other well-
financed, publicly-traded network service provider customers and considering a
variety of other alternatives with respect to these delinquent network service
provider customers, such as the discontinuation of adding new end users,
requiring prepayments for future services and sending notices of termination
of service. We note, however, that should any of our network service provider
customers become subject to reorganization or bankruptcy proceedings, we
cannot assure you that we will ultimately collect sums owed to us by these
customers and it remains uncertain what consequence, if any, bankruptcy
proceedings would have on lines installed for such customers. Moreover, should
the particular network service provider customer become subject to
reorganization or bankruptcy proceedings, we cannot assure you that we will be
able to retain payments or other consideration received by us prior to such
reorganization or bankruptcy proceeding. Even if we are able to move these end
users to other network service provider customers, it will require a
significant amount of our resources, which may impair our ability to install
new lines as they are ordered. Any of these circumstances could adversely
affect our business, operating results and financial condition.
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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. Revenues for the quarter ended September 30, 2000 were
approximately $23,955,000, 57% of which consisted of recurring revenues.
Revenues for the quarter ended September 30, 1999 were approximately $5,734,000,
53% of which consisted of recurring revenues. For the nine months ended
September 30, 2000 and September 30, 1999, revenues were $68,329,000 and
$9,521,000, respectively, of which 56% consisted of recurring revenues for the
nine months ended September 30, 2000 and 60% consisted of recurring revenues for
the nine months ended September 30, 1999. The increase in revenues is due to the
expansion of our installed end user base that has occurred over the past year.
We expect that non-recurring revenues as a percentage of total revenues will
decrease over time as we add end users to our networks.
Recently, a number of our privately held, consumer-focused network service
provider customers, including large customers, have experienced significant
difficulties in raising the capital necessary to operate and grow their
businesses and are not current in their payment for our services. Prior to our
third quarter earnings release on October 26, 2000, we did not recognize revenue
earned from certain network service provider customers during the third quarter
which could not satisfy our revenue recognition standards. We received
additional facts after the October 26, 2000 third quarter earnings release that
indicated certain of our privately-held, consumer-focused internet service
providers, including Flashcom, Inc., did not have sufficient long-term financial
resources to assure us that they would be able to make timely payment for our
services. Therefore, we have revised our third quarter results as required by
SEC regulations. Our revenue for the third quarter was reduced to $23,955,000
compared to the $30,092,000 reported on October 26, 2000 as a result of our
decision not to recognize revenue from sales to these delinquent network service
provider customers. Total services for which we did not recognize equivalent
revenue for these delinquent network service provider customers in the third
quarter were $8,977,000. We will recognize additional revenue from these
customers only when all previous accounts receivable balances for these
customers have been paid and when cash is received for new services.
Network Expenses. Network expenses were approximately $48,925,000 for the
quarter ended September 30, 2000 and $13,547,000 for the quarter ended September
30, 1999. For the nine months ended September 30, 2000 and September 30, 1999,
network expenses were $123,357,000 and $25,280,000, respectively. 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
costs, costs of end user modems, 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, connect new end users and interconnect
existing partners to our network.
Selling, Marketing, General and Administrative Expenses. Selling,
marketing, general and administrative expenses were approximately $65,946,000
for the quarter ended September 30, 2000 and $34,158,000 for the quarter ended
September 30, 1999. For the nine months ended September 30, 2000 and September
30, 1999, selling, marketing, general and administrative expenses were
$176,419,000 and $72,398,000, respectively. 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. These expenses
during the quarter ended September 30, 2000 also included an increase of
$2,453,000 in the reserve for bad debts and a write-off of $3,750,000 in
pre-paid marketing expenses.
Amortization of Deferred Stock Compensation. Amortization of deferred
stock compensation was $1,264,000 for the quarter ended September 30, 2000 and
$1,404,000 for the quarter ended September 30, 1999. For the nine months ended
September 30, 2000 and September 30, 1999, amortization of deferred stock
compensation was $3,726,000 and $4,211,000, respectively. This reduction in
deferred stock compensation expense is due to the attrition of those employees
to whom such options were granted. The unamortized balance of $8,704,000 at
September 30, 2000 will be amortized over the remaining vesting period of each
grant.
Depreciation and Amortization. Depreciation and amortization expenses were
approximately $25,914,000 for the quarter ended September 30, 2000 and
$5,226,000 for the quarter ended September 30, 1999. For the nine months ended
September 30, 2000 and September 30, 1999, depreciation and amortization was
$54,616,000 and $9,426,000, respectively. 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 primarily due to the additional property and
equipment that has been acquired and placed into service as we continue to build
out our networks.
Interest Income and Expense. The interest income for the quarter ended
September 30, 2000 was $2,551,000 and was earned primarily from the proceeds
raised in the sale of our preferred stock in September 2000. Interest income for
the quarter ended September 30, 1999 was $4,709,000. This interest income was
earned primarily from the proceeds raised in the initial public offering in May
1999. Interest income was $12,399,000 for the nine months ended September 30,
2000 and $7,973,000 for the nine months ended September 30, 1999.
Interest expense for the quarter ended September 30, 2000 was $17,121,000
and primarily represents the interest associated
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with our senior notes sold in February 2000 and also our senior credit
facilities, which we closed in December 1999. Interest expense for the quarter
ended September 30, 1999 was approximately $2,554,000. Interest expense for the
quarter ended September 30, 1999 primarily represents the interest associated
with our senior credit facility. Interest expense was $44,733,000 for the nine
months ended September 30, 2000 and $13,825,000 for the nine months ended
September 30, 1999.
Equity in Net Loss of Affiliated Companies. There was no equity in net loss
of affiliates during 1999 as there were no investments in affiliates. For the
quarter ended September 30, 2000, equity in net loss of affiliates was
$3,031,000. For the nine months ended September 30, 2000, equity in net loss of
affiliates was $5,061,000. This net loss primarily represents our shares of the
net losses of the European and Canadian joint ventures that were formed during
the first quarter of 2000.
Taxes and Other Expenses. Taxes and other expenses were approximately
$622,000 for the quarter ended September 30, 2000 and $45,000 for the quarter
ended September 30, 1999. For the nine months ended September 30, 2000 and
September 30, 1999, taxes and other expenses were $1,132,000 and $99,000,
respectively. These taxes primarily represent state corporation, business and
jurisdictional taxes that have been paid or accrued.
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
$277,907,000 for the nine months ended September 30, 2000 and $101,310,000 for
the nine months ended September 30, 1999. Although we have no material
commitments for capital expenditures for the remainder of 2000, we plan to make
total capital expenditures in 2000 estimated at approximately $325,000,000 to
develop our network. We expect that our capital expenditures related to the
purchase of infrastructure equipment necessary for the development and expansion
of our networks and the development of new regions will be less in future
periods while capital expenditures related to the addition of subscribers in
existing regions will increase. We will also incur capital expenditures for
building additional metropolitan nodes in certain markets and for expanding our
network control center in the San Francisco Bay Area.
As of September 30, 2000, we had an accumulated operating deficit of
$542,302,000 and cash, cash equivalents and short-term investments of
$150,326,000.
Net cash used in operating activities was $292,467,000 for the nine months
ended September 30, 2000 and $87,854,000 for the nine months ended September 30,
1999. The net cash used in operations for the nine months ended September 30,
2000 was primarily due to net losses. The net cash used in operations for the
nine months ended September 30, 1999 was primarily due to net losses, offset in
part by increases in accrued expenses.
Net cash used in investing activities was $303,039,000 for the nine months
ended September 30, 2000 and $273,435,000 for the nine months ended September
30, 1999. Investing activities were principally acquisitions of property and
equipment in 2000. Investing activities were principally purchases of securities
and acquisitions of property and equipment in 1999.
Net cash provided by financing activities was approximately $553,177,000
for the nine months ended September 30, 2000 and relates to the proceeds from
the sale of our senior notes and the sale of common and preferred stock. Net
cash provided by financing activities was approximately $486,585,000 for the
nine months ended September 30, 1999, of which $482,667,000 related to the
issuance of common and preferred stock, $55,000,000 related to borrowings, and
$5,600,000 related to proceeds from a convertible promissory note, offset
primarily by the repayment of a $50,000,000 bridge loan.
Concurrently with entering into the Merger Agreement, Verizon issued to
NorthPoint a commitment letter pursuant to which Verizon is obligated to provide
to NorthPoint a $200 million senior secured debt facility on January 1, 2001 if
the transactions contemplated by the Merger Agreement have not been consummated
by that date.
In addition, on September 5, 2000, Verizon purchased $150 million of non-
voting 9% Convertible Preferred Stock of NorthPoint ("NorthPoint Preferred
Stock"). Upon termination of the waiting period pursuant to the Hart-Scott-
Rodino Antitrust Improvements Act of 1976 (the "Act"), the NorthPoint Preferred
Stock will obtain voting rights. The NorthPoint Preferred Stock will
automatically convert to NorthPoint common stock at the time of the closing of
the Merger and is convertible into NorthPoint common stock at any time following
the termination of the waiting period pursuant to the Act at Verizon's option.
Pursuant to the Merger Agreement, at the time of closing of the Merger, Verizon
will invest $450 million in NorthPoint. Any amounts previously funded by Verizon
pursuant to the commitment letter or the purchase of preferred stock will be
offset against the $450 million payable at closing.
On February 3, 2000, we issued senior notes in the aggregate principal
amount of $400 million. These notes bear interest at a
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fixed annual rate of 12 7/8% to be paid in cash every six months and mature on
February 15, 2010. Net proceeds from these notes were approximately $387.5
million.
On December 9, 1999 we entered into a secured credit facility with a
syndicate of lenders. The secured credit facility consists of the following:
. Revolving credit facility in an amount up to $55,000,000. The
revolving credit facility is used for general corporate purposes.
As of the date of this report, we have not borrowed any amount
under the revolving credit facility.
. Delayed draw term loan facility in the amount of $110,000,000. As
of the date of this report, we have not borrowed any amount of
the delayed draw term loan facility but we are required to borrow
the entire facility on or before December 9, 2000.
. Term loan facility in the amount of $85,000,000. We borrowed the
entire term loan facility amount on December 9, 1999.
The secured credit facility also provides for the issuance of letters of
credit on our behalf by the lenders.
Borrowings under the secured credit facility are collateralized by a
first priority lien against substantially all of our assets. Our obligations
under the secured credit facility are guaranteed by all of our subsidiaries and
collateralized by a first priority lien on the assets of those subsidiaries. We
further pledged to the lenders under the secured credit facility all of the
capital stock of NorthPoint Communications, Inc. held by us. The lenders under
the secured credit facility have agreed that the liens collateralizing the
secured credit facility may also collateralize an additional $50,000,000 of
additional borrowings in the event the secured credit facility is extended, but
the lenders have no obligation to provide such additional financing.
Loans under the facilities bear interest at floating rates based on the
prime rate or the London Interbank Offered Rate (LIBOR) plus, in each case, an
additional interest rate margin.
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.), Excite@Home, Verio Inc., Cable
& Wireless USA, Inc., Concentric Network Corporation, ALC Communications
Corporation (an affiliate of Global Crossing Holdings Limited), 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 $30,000,000 and $20,000,000, respectively, of our stock in
this offering.
We believe that our current capital resources and lines of credit will be
sufficient for the funding and working capital requirements needed for the
deployment of our networks in our 60 targeted markets and to support operating
needs through the end of 2001. However, we may decide to seek additional capital
depending upon the demand for our services and regulatory, technological and
competitive developments, including additional financial market developments and
new opportunities, in our industry. Our future cash requirements for developing,
deploying and enhancing our networks and operating our business, as well as our
revenues and our need for additional financing, will depend on a number of
factors, including:
. alterations to the schedule, targets or scope of our network rollout
plan, including the number of markets entered and the services
offered;
. changes to our plans or projections or such plans or projections prove
to be inaccurate;
. the rate at which customers purchase and pay for our services and the
pricing of such services;
. the financial condition of our customers;
. unanticipated opportunities, including acquisitions of or investments
in other companies or businesses;
. the level of marketing required to acquire and retain customers and to
attain a competitive position in the marketplace;
. the rate at which we invest in engineering and development with
respect to existing and future technology; or
. the timing and closing of the proposed merger with Verizon's DSL
business.
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. We believe
that current capital market conditions, particularly for our industry, reduce
our ability to obtain such additional financing. In addition, the revenue
recognition issues that we
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are reporting in this report may make it more difficult for us to access the
capital markets. 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.
Year 2000 Compliance
We believe that our computer systems and software are year 2000
compliant. 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 requested assurances
regarding year 2000 compliance from our equipment and software vendors and the
traditional telephone companies. We have also learned that the traditional
telephone companies have informed the Federal Communications Commission that
they are year 2000 compliant. We requested that they provide assurances of their
year 2000 compliance directly to us. Furthermore, we have not experienced any
year 2000 problems and we have not been informed of any material year 2000
problems by our customers and vendors. Our aggregate historical costs for year
2000 analysis, planning and remediation have not been material to date and,
based on the tests we have performed on our computer systems and software and
assurances received from our vendors and the traditional telephone companies, we
do not expect to incur material costs to resolve year 2000 issues in the future.
Recently Issued Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 provides guidance for revenue recognition under certain
circumstances. Implementation of SAB 101 has been delayed by the Securities and
Exchange Commission until the fourth quarter of the fiscal year beginning after
December 15, 1999. The Securities and Exchange Commission issued a "Frequently
Asked Questions and Answers" document (the "FAQ") in October 2000. Accordingly,
NorthPoint is continuing to evaluate the impact of SAB 101 and the FAQ on its
financial statements and related disclosures.
In April 2000, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation - an interpretation of APB Opinion No. 25" (the
"Interpretation"). This Interpretation clarifies the application of Opinion 25
for certain stock compensation issues including the definition of employee for
purposes of applying Opinion 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option, and the
accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000. The adoption of FASB
Interpretation No. 44 did not have a significant effect on the financial
condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivatives and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. In July
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133."
SFAS No. 137 deferred the effective date of SFAS No. 133 until fiscal years
beginning after June 15, 2000. The Company will adopt SFAS No. 133 during its
year ending December 31, 2001. The Company is currently evaluating the impact of
adopting SFAS No. 133 on its financial statements and is unable to predict the
impact at this time.
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 NorthPoint'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. Some of these risks and uncertainties include, without
limitation:
. our dependence on strategic third parties to market and resell our
services;
. intense competition for our service offerings;
. our ability to collect receivables from certain key customers;
. our ability to retain end users that are serviced by delinquent
network service provider customers;
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. dependence on growth in demand for DSL-based services;
. our ability to raise additional capital;
. the failure to close the proposed merger with Verizon Communications'
DSL business in a timely manner;
. Verizon Communications' right to terminate the merger agreement in the
event that we fail to satisfy any of the conditions to closing;
. our potential inability to obtain, or meet conditions imposed for,
requisite governmental approvals for closing the proposed merger;
. the failure of our stockholders to approve the merger;
. costs related to the merger;
. the risk that NorthPoint's and Verizon's DSL businesses will not be
integrated successfully;
. our failure to realize anticipated benefits of the merger; and
. other economic, business, competitive and/or regulatory risks and
uncertainties detailed herein and in our other Securities and Exchange
Commission filings.
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 set forth herein and included in our other
Securities and Exchange Commission filings. Prospective investors are cautioned
not to place undue reliance on such forward-looking statements. We disclaim any
obligation to update information contained in any forward-looking statement.
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Risk Factors
In addition to the other information contained herein, you should carefully
consider the following risk factors in evaluating our company.
Because We Have a Limited Operating History, It Is Difficult to Evaluate Our
Business
We were formed in May 1997 and began offering commercial services in the
San Francisco Bay Area in March 1998. Because of our limited operating history,
you have limited operating and financial data about our company upon which to
base an evaluation of our performance and an investment in our company.
You should consider the risks, expenses and difficulties we may encounter,
including those frequently encountered by early stage companies in new and
rapidly evolving industries. As a result, we may be unable to:
. develop our operational support systems and other information
technology systems;
. obtain central office space and suitable copper wire loops;
. expand our customer base;
. raise additional capital;
. maintain adequate control of our expenses;
. attract and retain qualified personnel;
. enter into and implement interconnection agreements with
traditional telephone companies, some of which are our competitors
or potential competitors;
. expand the geographic coverage of our network;
. obtain governmental authorizations to operate as a competitive
telecommunications company in new markets;
. continue to upgrade our technologies and enhance our product
features; and
. respond to technological changes and competitive industry
conditions.
We Expect Our Losses and Negative Cash Flow to Continue
To date, we have incurred substantial operating losses, net losses and
negative cash flow on both an annual and quarterly basis. For the year ended
December 31, 1999, we had operating losses of approximately $168,426,000, net
losses of $183,698,000, and negative cash flow from operating and investing
activities of $439,571,000. For the nine months ended September 30, 2000, we had
operating losses of approximately $289,789,000, net losses of $328,316,000, and
negative cash flow from operating and investing activities of $595,506,000. We
cannot assure our investors that we will ever achieve profitability or generate
positive cash flow.
We expect our operating expenses will increase, especially in the areas of
operations, sales and marketing, as we develop and expand our business and, as a
result, we will need to increase our revenue to become profitable. If our
revenue does not grow as expected or increases in our expenses are not in line
with our plans, there could be a material adverse effect on our business,
prospects, financial condition and results of operations.
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We Cannot Predict Whether We Will be Successful Because Our Business Model Is
Unproven and Our Industry Is Developing
Our business strategy is unproven. To be successful, we must, among
other things, develop and market data networks and services that are widely
accepted by our customers and their end users at prices that will yield a
profit. Because our business and the overall demand for high speed data
communications services are in the early stages of development, we are unsure
whether or when our DSL services will achieve commercial acceptance.
Our Failure to Achieve or Sustain Market Acceptance at Desired Pricing Levels
Could Impair Our Ability to Achieve Profitability or Positive Cash Flow
Prices for digital communication services have fallen historically, a
trend we expect will continue. Accordingly, we cannot predict to what extent we
may need to reduce our prices to remain competitive or whether we will be able
to sustain future pricing levels as our competitors introduce competing services
or similar services at lower prices. Our failure to achieve or sustain
acceptance at desired pricing levels could impair our ability to achieve
profitability or positive cash flow, which would have a material adverse effect
on our business, prospects, financial condition and results of operations.
Our Quarterly Operating Results Are Likely to Fluctuate Significantly, Causing
Our Stock Price to be Volatile or to Decline
We cannot accurately forecast our revenue because of our limited
operating history and the emerging nature of the data communications industry in
our markets. Our revenue could fall short of our expectations if we experience
delays or cancellations by even a small number of our customers. A number of
factors are likely to cause fluctuations in our operating results, including:
. the rate at which we are able to attract and retain customers, and
whether larger customers fulfill their volume commitments to us;
. the ability of our customers to generate significant end user demand;
. the timing and willingness of traditional telephone companies to
provide and construct the required central office facilities;
. the timing and willingness of traditional telephone companies to
provide suitable copper wire loops at favorable prices;
. the prices our customers and, in turn, their end users pay for our
services;
. availability of financing to continue to fund our expansion;
. increases in provisions for bad debts;
. our ability to deploy our services on a timely basis to satisfy end
user demand;
. the mix of line orders between lower priced and higher priced lines;
. the amount and timing of capital expenditures and operating costs as
we expand our network;
. the announcement or introduction of new or enhanced services by our
competitors; and
. technical difficulties or network downtime.
As a result, it is likely that in some future quarters our operating
results will be below the expectations of securities analysts and investors. If
this happens, the trading price of our common stock would likely be materially
adversely affected.
We May Be Unable to Meet Conditions to the Closing of the Proposed Merger of Our
Business with the DSL Business of Verizon Communications
Our proposed merger with Verizon's DSL business has been approved by
the boards of directors of both NorthPoint and Verizon. However, the merger
agreement is subject to numerous conditions, including approval by the
stockholders of NorthPoint, expiration or termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and FCC and
state
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regulatory approvals. In addition, Verizon will not be required to complete the
transactions if any event has occurred which has had or is reasonably likely to
have a material adverse effect on NorthPoint or its business, operations,
properties, financial condition, assets or liabilities. We cannot assure you
that NorthPoint will not suffer a material adverse effect prior to the closing
of the merger. We also cannot assure you that we will be able to obtain or meet
all of the conditions to Verizon's obligations to complete the merger, including
receipt of all necessary regulatory approvals, and that the merger will be
consummated.
We May Fail to Realize the Anticipated Benefits of the Transactions
The success of the transactions will depend, in part, on our ability
to realize the anticipated economies of scale, growth opportunities and
synergies from combining our business with Verizon's DSL business. If we do not
recognize these anticipated benefits as a result of the transactions, the value
of our stock may decline. To realize the anticipated benefits of the
transactions, our management team must develop strategies and implement a
business plan that will:
. effectively manage new market entrance and network development;
. effectively manage the marketing and sales of the services of our
combined DSL businesses;
. successfully retain and attract key employees, including management,
during a period of transition and in light of the highly competitive
employment market;
. maintain adequate focus on existing business and operations while
working to integrate our combined DSL businesses; and
. continue to develop our DSL networks and attract and retain customers.
Integrating the operations and personnel of our respective DSL
businesses will be a complex process, and we are uncertain that we can complete
the integration rapidly or will achieve the anticipated benefits of the
transactions. The successful integration of our businesses will require, among
other things, integration of finance, human resources and sales and marketing
groups and coordination of development efforts. In addition, commercial and
technological advances resulting from the integration of technologies used by
our respective DSL networks and network support systems may not be achieved as
successfully or as rapidly as we currently anticipate, if at all. Some of the
factors contributing to the risks attendant to integration faced by us are:
. the difficulties and expenses of integrating our operations,
technology, information systems, networks and personnel while
preserving the goodwill of each business;
. the expenses associated with separating Verizon's DSL business from
its other data services operations;
. the difficulties of creating and maintaining uniform standards,
controls, procedures and policies for the two businesses being
integrated;
. the impairment of our relationships with our customers, some of which
compete with Verizon's retail Internet service provider business;
. the ability of our management to manage the substantial expansion of
the aggregate employee base and the integration of teams that have not
previously worked together, while dealing with the potential loss of
key employees of both businesses;
. the impairment of relationships with employees as a result of changes
in management, the introduction of unionized employees and
modifications to any collective bargaining agreements; and
. the different geographic locations of our respective principal
operations.
The diversion of attention of our management and any difficulties
encountered in the process of combining our DSL businesses could cause a
disruption of our business activities.
The Costs of Completing the Transactions Are Substantial and May Make it More
Difficult for Us to Achieve Profitability
We will incur substantial costs in connection with the proposed
transactions which may make it more difficult to achieve profitability in the
future. We estimates that we will indirectly incur costs associated with the
transactions, consisting of transaction
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fees for investment bankers, attorneys, accountants and other related costs
incurred by us (such nonrecurring transaction costs being recorded as goodwill
upon completion of the transactions) and additional nonrecurring restructuring
charges. There can be no assurance that we will not incur further additional
charges to reflect costs associated with the transactions, including the costs
of integrating our respective DSL operations.
The Loss of a Significant Customer Could Harm Our Business
We currently provide or have agreements to provide data transport
solutions to more than 175 network service providers. For the year ended
December 31, 1999, our two largest customers accounted for 32% of our revenues.
For the three months ended September 30, 2000, our two largest customers
accounted for 23% of our revenues. These two customers accounted for 7% of
accounts receivable at September 30, 2000. We anticipate that, as we expand our
business, we will continue to rely upon a limited number of customers for a high
percentage of our revenue and end-user lines. As a result of this concentration
of our customer base, a loss of or decrease in business from one or more of our
customers could have a material adverse effect on our business, prospects,
financial condition and results of operations.
Similarly, if our customers are unsuccessful in competing for end users
in their own intensely competitive markets or experience other financial or
operating difficulties, our business, prospects, financial condition and
results of operations would be materially adversely affected.
Many of our agreements with our customers are non-exclusive, and many of
our customers are also customers of, or have invested in, our competitors. To
the extent our significant customers strengthen their commercial relationships
with our competitors, our business would be materially adversely affected.
Our Business Will Suffer if Our Customers Are Not Successful in Marketing and
Selling Our Services
We exclusively market our services through network service providers for
resale to their business and consumer end users. A significant reduction in
the number of end users or revenues provided by one or more of our key network
service providers could materially harm our operating results in any given
period. Market or other conditions that adversely affect our network service
provider customers could result in slower revenue growth. Our agreements with
our customers are generally non-exclusive. Many of our customers also resell
services offered by our competitors. In addition, a number of our customers
have committed to provide large numbers of end-users in exchange for price
discounts. If our customers do not meet their volume commitments or otherwise
do not sell our services to as many end users as we expect, our business will
suffer. In addition, these and future relationships we may establish with
other third parties may not result in significant line orders or revenues.
Our Business Has Suffered Because of Our Customers' Recent Financial
Difficulties and Failure to Pay for Our Services
Recently, a number of our privately held, consumer-focused network service
provider customers have experienced significant difficulties in raising the
capital necessary to operate and grow their businesses and are not current in
their payment for our services. Prior to our third quarter earnings release on
October 26, 2000, we did not recognize revenue earned from certain network
service provider customers during the third quarter which could not satisfy our
revenue recognition standards. We received additional facts after the October
26, 2000 third quarter earnings release that indicated certain of our privately-
held, consumer-focused internet service providers, including Flashcom, Inc., did
not have sufficient long-term financial resources to assure us that they would
be able to make timely payment for our services. Therefore, we have revised our
third quarter results as required by SEC regulations. Our revenue for the third
quarter was reduced to $23,955,000 compared to the $30,092,000 reported on
October 26, 2000 as a result of our decision not to recognize revenue from sales
to these delinquent network service provider customers.
In addition, we recognized increased bad debt and other operating expenses
related to these network service provider customers. As a result, our EBITDA
loss for the quarter ended September 30, 2000 was increased to $90,916,000
million compared to the $79,210,000 reported on October 26, 2000.
These delinquent network service provider customers account for
approximately 26,700 of our 87,300 installed lines at September 30, 2000. We
have halted the installation of in-process lines ordered by these customers and
we may also decide to disconnect end users that are purchasing their services
from delinquent network service provider customers. If this occurs, we cannot
assure you that these end users will continue to purchase our services through
another one of our network service provider customers and we may lose the lines
served by such end users.
We will recognize additional revenue from these customers only when all
previous accounts receivable balances for these customers have been paid and
when cash is received for new services. We are continuing our efforts to obtain
payments, but we cannot assure you that these efforts will be successful. It is
possible that additional network service provider customers may experience
significant difficulties in raising the capital necessary to operate and grow
their businesses and may be unable to pay for our services in the future on a
timely basis. Our network service provider customers' inability to pay these
past due amounts, and to make timely payments for our services in the future,
may materially and adversely affect our business, operating results and
financial condition.
We are also currently attempting to arrange for the direct transfer of
lines serviced by delinquent network service provider customers to other well-
financed, publicly-traded network service provider customers and considering a
variety of other alternatives with respect to these delinquent network service
provider customers, such as the discontinuation of adding new end users,
requiring prepayments for new services and sending notices of termination of
service. We note, however, that should any of our network service provider
customers become subject to reorganization or bankruptcy proceedings, we cannot
assure you that we will ultimately collect sums owed to us by these customers
and it remains uncertain what consequence, if any, bankruptcy proceedings would
have on lines installed for such customers. Moreover, should the particular
network service provider customer become subject to reorganization or bankruptcy
proceedings, we cannot assure you that we will be able to retain payments or
other consideration received by us prior to such reorganization or bankruptcy
proceeding. Even if we are able to move these end users to other network
service provider customers, it will require a significant amount of our
resources, which may impair our ability to install new lines as they are
ordered. Any of these circumstances could adversely affect our business,
operating results and financial condition.
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We May Not Be Able to Continue to Grow Our Business If We Do Not Obtain
Significant Additional Funds
We believe our current capital resources will be sufficient for the
funding and working capital requirements needed for the deployment of our
networks in our 60 targeted markets. If we decide to accelerate the timing of
the buildout of our networks or target additional markets, we may need
significant additional funds. We expect that the actual amount and timing of
our future capital requirements, if any, will depend upon the demand for our
services and regulatory, technological and competitive developments, including
additional developments and new opportunities in our industry. These future
capital requirements may be substantial. In addition, we may seek additional
financing if:
. we make alterations to the schedule, targets or scope of our network
rollout plan, including the number of markets entered and the services
offered;
. there are changes to our plans or projections or such plans or
projections prove to be inaccurate;
. our customers purchase and pay for fewer of our services or the
pricing of such services decreases;
. the financial condition of our customers continues to deteriorate;
. we have unanticipated opportunities, including acquisitions of or
investments in other companies or businesses;
. the level of marketing required to acquire and retain customers and to
attain a competitive position in the marketplace increases;
. the rate at which we invest in engineering and development with
respect to existing and future technology increases; or
. the proposed merger with Verizon's DSL business closes later than
expected or not at all.
We may be unsuccessful in raising sufficient additional capital at all or
on terms that we consider acceptable. We believe that current capital market
conditions, particularly for our industry, reduce our ability to obtain such
additional financing. In addition, the revenue recognition issues that we are
reporting in this report may make it more difficult for us to access the
capital markets. If we are unable to obtain adequate funds on acceptable
terms, our ability to deploy and operate our networks, fund our expansion or
respond to competitive pressures could be significantly impaired. Such
limitation could have a material adverse effect on our business, prospects,
financial condition or results of operations.
Our Existing Debt May Need to be Refinanced on Possibly Less Favorable Terms
Completion of the transactions will trigger specific affirmative
obligations under our debt agreements, including among others:
. Under our existing bank credit facility, the lenders will have the
right to accelerate the payment of the principal amount and accrued
and unpaid interest on any amounts outstanding under such facility
upon completion of the transactions. As of September 30, 2000, the
principal amount plus accrued and unpaid interest under the bank
credit facility was $86,079,246.
. Under the indenture related to our 12 7/8% senior notes due 2010 with
principal amount of $400 million, within ten days after the completion
of the transactions, the "new" NorthPoint will be obligated to offer
to purchase all of the outstanding notes at a price equal to 101% of
the principal amount plus accrued and unpaid interest. As of September
30, 2000, the aggregate principal amount plus accrued and unpaid
interest on the outstanding notes was $406,631,507.
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These provisions will require the "new" NorthPoint to raise additional
funds through the issuance of additional debt or equity or through an amendment
to its debt facility or indenture on terms that may not be as favorable as under
its current debt arrangements. A failure to raise such additional funds would
have a material adverse effect on the "new" NorthPoint.
Our Business Activities and Our Ability to Raise Additional Funds Are Limited by
Covenants Contained in Our Financing Agreements and the Indenture
Our debt agreements, including our secured credit facility, the indenture
governing our senior notes and other financing agreements contain and will
contain restrictions on our activities and financial covenants with which we
will be required to comply. If we fail to comply with these requirements, or if
we experience a material adverse effect on our business, operations, properties,
financial condition, assets or liabilities, we would be in default and our debt
could be declared immediately due and payable. We may be unable to make such
required payments, or to raise sufficient funds from other sources.
In addition, the terms of proposed new indebtedness or other funding may
not be permitted by the terms of our current financing agreements, including our
secured credit facility and the indenture. This may impair our ability to
develop our business. If we fail to raise sufficient funds, we may be required
to modify, delay or abandon some of our expansion plans, which could have a
material adverse effect on our business, prospects, financial condition and
results of operations.
We Need to Make Significant Capital Expenditures, and the Amounts, Timing and
Returns are Uncertain
In 2001, we expect to make significant capital expenditures, estimated at
approximately $125,000,000, to develop our business and deploy our services and
systems. This estimate does not take into account any necessary changes in our
plans as a result of the closing of the Verizon merger. We may also need to make
additional capital expenditures in connection with our broadband ventures in
Europe and Canada and the acquisition of other companies. In addition, the
amount and timing of these expenditures are uncertain and will depend upon our
ability to execute our plans in a timely and cost-effective manner. We will need
to increase our revenue in order to earn a return from our capital expenditures.
If our revenue does not grow as expected, or capital expenditures exceed our
estimates, there could be a material adverse effect on our business, prospects,
financial condition and results of operations.
Our Failure to Manage Our Growth Effectively Could Impair Our Business
If we are successful in implementing our business plan, our operations will
expand rapidly. This rapid expansion could place a significant strain on our
management, financial and other resources. Our ability to manage future growth,
if it occurs, will depend upon our ability to:
. control costs;
. maintain regulatory compliance;
. implement and significantly expand our financial and operating
systems;
. maintain our operations support systems; and
. expand, train and manage our employee base.
We may be unable to do these things successfully. In addition, we may not
successfully obtain, integrate and use our employees and management, operating
and financial resources. Our business, prospects, financial condition and
results of operations will be materially adversely affected if we are unable to
manage our growth effectively.
The Data Communications Industry Is Undergoing Rapid Technological Changes and
New Technologies May Be Superior to the Technology We Use
The data communications industry is subject to rapid and significant
technological change, including continuing developments in DSL technology, which
does not presently have widely accepted standards, and alternative technologies
for providing high speed data communications such as cable modem technology. As
a consequence:
. we will rely on third parties, including some of our competitors and
potential competitors, to develop and provide us with access to
communications and networking technology;
. our success will depend on our ability to anticipate or adapt to new
technology on a timely basis; and
. we expect that new products and technologies will emerge that may be
superior to, or may not be compatible with, our products and
technologies.
If we fail to adapt successfully to technological changes or obsolescence
or fail to obtain access to important technologies, our business, prospects,
financial condition and results of operations could be materially adversely
affected.
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Our Success in Attracting and Retaining Customers Significantly Depends on Our
Ability to Obtain Central Office Space from Traditional Telephone Companies
As we grow, we may be unable to secure central office space for our
equipment in the central offices of traditional telephone companies on a timely
basis or at all. In some cases, although physical central office space is
available, traditional telephone companies have claimed that they must refurbish
space to make it suitable for our equipment--for example, by adding separate
entrances, removing asbestos or obsolete machinery, or increasing power supply
and air conditioning--which in some cases has made the cost to obtain that
physical central office space prohibitively expensive. We expect physical
central office space to become increasingly scarce due to increasing demand from
a growing number of competitive telecommunications companies.
Even when space is available, we may face delays ranging from four months
to more than a year after we place an order before space for our equipment is
made available. If our applications for physical central office space are
rejected, or the costs or delays associated with obtaining central office space
become too expensive, our expansion plans could be adversely affected, which
could have a material adverse effect on our business, prospects, financial
condition and results of operations.
Broad service availability is also important to our customers and potential
customers that want to provide Internet access or other data services on a
national or regional basis. Our inability to obtain physical central office
space in a timely manner could have a material adverse effect on our ability to
attract and retain customers.
Any disputes with traditional telephone companies over the types of
equipment we seek to install in the central office space could also delay our
installation and even impair our ability to provide service in the manner we
deem appropriate. These delays or refusals could have a material adverse effect
on our business, prospects, financial condition and results of operations.
Our Success Depends on Interconnection Agreements With Traditional Telephone
Companies in Each of Our Markets
The success of our strategy depends on our ability to enter into and renew
interconnection agreements with traditional telephone companies in each of our
target markets on a timely basis. Delays in obtaining additional interconnection
agreements would postpone our entry into a market, which could have a material
adverse effect on our business, prospects, financial condition and results of
operations.
Interconnection agreements have limited terms of two to three years and we
cannot assure you that existing or new agreements will be extended or negotiated
on terms favorable to us. Interconnection agreements are also subject to state
commission, FCC and judicial oversight. These government bodies may modify the
terms or prices of our interconnection agreements in ways that adversely affect
our business, prospects, financial condition and results of operations.
In addition, as the FCC modifies, changes and implements rules related to
unbundling and collocation, we generally have to renegotiate our interconnection
agreements with the traditional telephone companies in order to implement those
new or modified rules. We may be unable to timely renegotiate these agreements,
or we may be forced to arbitrate and litigate with the traditional telephone
company agreement terms that fully comply with FCC rules. As a result, although
the FCC may implement rules or policies designed to speed or improve our ability
to provide services, we may not be able to timely implement those rules or
policies.
Our Business Could Suffer if High Quality Copper Lines Are Not Available or Cost
Us More Than We Expect
We significantly depend on the quality of the copper lines and the
traditional telephone companies' maintenance of such lines. We cannot assure
you that we will be able to obtain the copper lines and the services we
require from the traditional telephone companies at quality levels, prices,
terms and conditions satisfactory to us. Our failure to do so would have a
material adverse effect on our business, prospects, financial condition and
results of operations.
Under federal law, traditional telephone companies have an obligation to
negotiate with us in good faith to enter into interconnection agreements,
including agreements on the price at which we can obtain suitable lines from
these telephone companies. If no agreement can be reached, either side may
petition the applicable state commission to arbitrate remaining disagreements.
These arbitration proceedings can last up to nine months. Moreover, the state
commission must approve any interconnection agreement resulting from negotiation
or arbitration, and any party may appeal an adverse decision by the state
commission to federal district court. The potential cost in resources and delay
from this process could harm our ability to compete in certain markets, and
there is no guarantee that a state commission would resolve disputes, including
pricing disputes, regarding our access to suitable lines in our favor. Moreover,
the FCC rules governing pricing standards for access to the networks of the
traditional telephone companies are currently being challenged in federal court.
One federal court has overturned the FCC's pricing methodology in part.
Requests for Supreme Court review of this decision are pending. If the
challenge to the FCC's pricing rules is upheld by the courts, the FCC may
adopt a new pricing methodology that would require us to pay a higher price to
traditional telephone companies for access to suitable lines. This could
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have a detrimental effect on our business.
We have not yet established a history of ordering and obtaining the
provisioning and repair of very large volumes of lines from any traditional
telephone company. We also depend on cooperation from traditional telephone
companies for repair of transmission facilities. The traditional telephone
companies in turn rely significantly on unionized labor. Labor-related issues
and actions on the part of the traditional telephone companies have in the past,
and may in the future, adversely affect traditional telephone companies'
provision of services and network components that we order.
Our dependence on the traditional telephone companies has caused and could
continue to cause us to encounter delays in establishing our networks,
provisioning lines and upgrading our services. These delays could adversely
affect our relationships with our customers, harm our reputation or otherwise
have a material adverse effect on our business, prospects, financial condition
and results of operations.
We Depend on Market Acceptance for DSL-Based Services
The demand for small- and medium-sized business, telecommuter and
residential Internet access is in the early stages of development. Because we
offer services to a new and evolving market and because current and future
competitors are likely to introduce competing services, it is difficult for us
to predict the rate at which the demand for our services will grow. Various
providers of high-speed digital communications services are testing products
from various suppliers for various applications, and it is unclear if DSL will
offer the same or more attractive price-performance characteristics. If the
demand for our services fail to develop, grow more slowly than anticipated or
become saturated with competitors, our business, prospects, financial condition
and results of operations could be materially adversely affected.
We Depend on Our Billing, Customer Service and Information Support Systems,
Which Need Further Development
Sophisticated information and processing systems are vital to our growth
and ability to monitor costs, bill customers, process customer orders and
achieve operating efficiencies. Our plans for the development and implementation
of our operations support systems rely, for the most part, on acquiring products
and services offered by third-party vendors and integrating those products and
services in-house to produce efficient operational solutions. However, we may
not successfully identify all of our information and processing needs or
implement these systems on a timely basis or at all, and these systems may not
perform as expected. If our plans for the development and implementation of our
operations support systems do not proceed as expected, or if these systems, once
implemented, fail to perform as expected, our business prospects, financial
condition and results of operations could be materially adversely affected.
In addition, our right to use these systems is dependent upon license
agreements with third-party vendors. Some of those agreements may be cancelable
by the vendor and the cancellation or nonrenewal of these agreements may have a
material adverse effect on our business, prospects, financial condition and
results of operations.
Similar issues are applicable to the operations support systems and other
systems of our customers, and to the interface between our systems and those of
our customers. Therefore, failures at our customers could also have a material
adverse effect on our business, prospects, financial condition and results of
operations.
We May Be Unable to Expand Our Network Services Effectively and Provide High
Performance to a Substantial Number of End Users
Due to the limited deployment of our services, the ability of our DSL
network to connect and manage a substantial number of end users at high
transmission speeds is still unknown. While peak digital data transmission
speeds across our DSL network to and from the central office and the end user
can exceed 1.5 megabits per second, the actual data transmission speeds over our
network could be significantly slower due to:
. the type of DSL technology deployed;
. the distance an end user is located from a central office;
. the configuration of the telecommunications line being used;
. the gauge of the copper lines; and
. the presence and severity of interfering transmissions on nearby
lines.
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For example, we are not certain whether we can successfully deploy higher
DSL speeds through digital loop carrier systems which, because they connect
copper lines to a fiber link, currently limit DSL service to a maximum speed of
144 kilobits per second.
Because we rely on traditional telephone companies to overcome technical
limitations associated with loop carrier systems, we cannot assure you that we
will be able to successfully deploy high speed DSL service to all areas in which
we provide service. As a result, our network may not be able to achieve and
maintain the highest possible digital transmission speed. Our failure to achieve
or maintain high speed digital transmissions would have a material adverse
effect on our business, prospects, financial condition and results of
operations.
Our Success Depends on Our Retention of Executive Officers and Other Key
Personnel and Our Ability to Hire Additional Key Personnel
We are managed by a small number of executive officers. Competition for
qualified executives in the data communications services industry is intense,
and there are a limited number of persons with comparable experience. We depend
upon our executive officers because we believe there are few managerial
personnel with qualifications to swiftly implement a business plan integrating
DSL technology with the existing telephone infrastructure. Any of our executive
officers may terminate his or her employment with us at any time. We do not have
"key person" life insurance policies on any of our executive officers. The loss
of these key individuals could have a material adverse effect on our business,
prospects, financial condition and results of operations.
We believe that our success will depend in large part on our ability to
retain and attract qualified technical, marketing, managerial and other
personnel. Additionally, we believe an effective sales force is critical to our
success. The industry in which we compete is characterized by a high level of
employee mobility and aggressive recruiting of skilled personnel. We may be
unable to hire or retain necessary personnel in the future. Our inability to
attract and retain key personnel would have a material adverse effect on our
business, prospects, financial condition and results of operations.
The Industry in Which We Operate is Highly Competitive, and We May Not Be Able
to Compete Effectively, Especially Against Established Competitors With
Significantly Greater Financial Resources
We face competition from many competitors with significantly greater
financial resources, well-established brand names and larger customer bases. We
also expect competition to intensify in the future. We expect significant
competition from traditional and new telephone and telecommunications companies,
including national long distance carriers, cable modem service providers,
Internet service providers, on-line service providers, and wireless and
satellite data service providers.
Other Competitive Telecommunications Companies, Some With Greater Financial
Resources, Compete in the Same Areas for the Same Customers. Other competitive
telecommunications companies have entered and may continue to enter the industry
and offer high speed data services using a business strategy similar to ours.
Some competitors, including those focusing on data transport such as Rhythms
NetConnections Inc., HarvardNet Inc., @Link Networks L.L.C., New Edge Networks,
Covad Communications Group, Inc., BlueStar Communications, JATO, Telocity, Vitts
Network, DSL.net and Network Access Solutions Corporation, have begun to offer
DSL-based access services, and others are likely to do so in the future.
Finally, traditional voice-based telephone companies such as BTI Telecom,
Hyperion, MCG, McLeod Communications, Allegiance and Network Plus, are starting
to offer high speed data services. Certain of our customers have made
investments in our competitors, which may enhance their relationships with these
competitors at our expense. The Telecommunications Act of 1996 specifically
grants any competitive local exchange carrier, or competitive telecommunications
company, the right to negotiate interconnection agreements with traditional
telephone companies, or incumbent local exchange carriers. The
Telecommunications Act also allows competitive telecommunications companies to
enter into interconnection agreements which are identical in all respects to
ours. In addition, some competitive telecommunications companies have extensive
fiber networks in many metropolitan areas primarily providing high speed digital
and voice circuits to large corporations, and have interconnection agreements
with traditional telephone companies pursuant to which they have acquired space
in traditional telephone companies' central offices in many of our markets. As a
result, our customers may contract with other competitive telecommunications
companies, which may decrease our customers' demand for our services.
Traditional Telephone Companies With Greater Resources Than Ours May
Directly Compete in Our Service Areas. The traditional telephone companies have
an established brand name and reputation for high quality in their service
areas, possess significant capital to deploy DSL equipment rapidly, have their
own copper lines and can bundle digital data services with their existing analog
voice services to achieve economies of scale in serving customers. In addition,
most traditional telephone companies have established or are establishing their
own Internet service provider businesses, and all of the largest traditional
telephone companies that are present in our target markets are conducting market
trials of or have commenced offering DSL-based access services. For example,
Verizon Communications, BellSouth, Cincinnati Bell, Pacific Bell and
Southwestern Bell are offering services in some territories in which we offer
services, U S WEST is offering commercial DSL services and Ameritech has
announced commercial DSL services in some areas of Michigan and Illinois. We
recognize that the traditional telephone
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companies have the potential to quickly deploy DSL services and are in a
position to offer service from central offices where we may be unable to secure
space in traditional telephone companies' central offices. In addition, the FCC
is considering establishing requirements for separate subsidiaries through which
the traditional telephone companies could provide DSL service on a largely
deregulated basis. As a result, we expect traditional telephone companies to be
strong competitors in each of our target markets.
National Long Distance Carriers May Begin to Compete for Our Small- and
Medium-Sized Business Customers. Many of the leading traditional national long
distance carriers, including MCI WorldCom, Inc., AT&T Corp. and Sprint
Corporation, are expanding their capabilities to support high speed, end-to-end
data networking services. They also have interconnection agreements with many of
the traditional telephone companies and a number of spaces in traditional
telephone companies' central offices from which they could begin to offer
competitive DSL services. The newer national long distance carriers, such as
Level 3 Communications, Inc., The Williams Companies, Inc. and Qwest
Communications International, Inc. are building and managing high speed fiber-
based national data networks and partnering with Internet service providers to
offer services directly to the public. These companies could modify their
current business focus to include small- and medium-sized business customers
using DSL or other technologies in combination with their current fiber
networks. Sprint has already launched services in Las Vegas and Charlotte.
Cable Modem Service Providers May Offer High Speed Internet Access at More
Competitive Rates Than Ours, Forcing Us to Lower Our Prices. Cable modem service
providers, such as At Home Corporation and Road Runner, Inc. (with their cable
partners), are deploying high speed internet access services over hybrid fiber
coaxial cable networks. Where deployed, these networks provide similar and in
some cases higher speed Internet access than we provide. They also offer these
services at lower price points than our services. Actual or prospective cable
modem service provider competition may have a significant negative effect on our
ability to secure customers and may create downward pressure on the prices we
can charge for our services.
Internet Service Providers, Our Targeted Customers, May Begin to Provide
DSL Services Directly. Internet service providers, such as Verio Inc., Genuity,
UUNET (a subsidiary of MCI WorldCom, Inc.), Sprint, Concentric Network
Corporation, MindSpring Enterprises, Inc. and PSINet, Inc., provide Internet
access to residential and business customers, generally using the existing
telephone system. Some regional Internet service providers, such as HarvardNet
Inc., BlueStar Communications, New Edge Networks, @Link Networks L.L.C.,
InterAccess Co., Vitts Networks Inc. and Prism Solutions, Inc., have begun
offering DSL-based services. Internet service providers could become competing
high speed data service providers if they attain certification as competitive
telecommunications companies in the states in which they planned to operate.
On-line Service Providers, Our Targeted Customers, May Begin to Provide DSL
Services Directly. On-line service providers, such as America Online, Inc.,
Compuserve (a subsidiary of America Online), Microsoft Network, Prodigy, Inc.,
and WebTV Networks, Inc. (a subsidiary of Microsoft), provide, over the Internet
and on proprietary on-line services, content and applications ranging from news
and sports to consumer video conferencing. These services are designed for broad
consumer access over telecommunications-based transmission media, which enable
digital services to be provided to the significant number of consumers who have
personal computers with modems. In addition, on-line service providers provide
Internet connectivity, ease-of-use and consistency of environment. Many of these
on-line service providers have developed their own access networks for modem
connections. AOL has announced that it will purchase DSL services from Verizon
Communications and SBC Communications. If these on-line service providers were
to extend their owned access networks to DSL, they would be our competitors.
Wireless and Satellite Data Service Providers May Begin to Offer Wireless
and Satellite-Based Internet Connectivity, Also Competing Against Us. Wireless
and satellite data service providers are developing wireless and satellite-based
Internet connectivity. We may face competition from terrestrial wireless
services, including multi-channel multipoint distribution systems, local
multipoint distribution systems, wireless communication service and point-to-
point microwave systems. The FCC had adopted new rules to permit multi-channel
multipoint distribution system licensees to use their systems to offer two-way
services, including high speed data, rather than solely to provide one-way
video services. The FCC also has auctioned local multipoint distribution
system licenses in all markets for wireless systems, which can be used for
high speed data services. In addition, companies such as Teligent, Inc.,
Advanced Radio Telecom Corp., NEXTLINK and WinStar Communications, Inc. hold
point-to-point and/or point-to-multipoint microwave licenses to provide fixed
wireless services such as voice, data and video conferencing.
We also may face competition from satellite-based systems. Motorola
Satellite Systems, Inc., Hughes Communications, Inc. (a subsidiary of General
Motors Corporation), Teledesic LLC and others have filed applications with the
FCC for global satellite networks which can be used to provide broadband voice
and data services.
In January 1997, the FCC allocated 300 MHz of spectrum in the 5 GHz band
for unlicensed devices to provide short-range, high speed wireless digital
communications. These frequencies must be shared with incumbent users without
causing interference. Although the allocation is designed to facilitate the
creation of new wireless local area networks, it is too early to predict what
kind of equipment might ultimately be manufactured and for what purposes it
might be used.
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The telecommunications industry is subject to rapid and significant changes
in technology, and we cannot predict the effect of technological changes on our
business, such as continuing developments in DSL technology and alternative
technologies for providing high speed data communications. These technological
developments in the telecommunications industry could have a material adverse
effect on our competitive position and therefore on our business, prospects,
financial condition and results of operations.
Industry Consolidation Could Make Competing More Difficult
Consolidation of companies offering high speed local data transport is
occurring through acquisitions, joint ventures and licensing arrangements
involving our competitors and our customers' competitors. As a company with
limited operating history, we cannot assure that we will be able to compete
successfully in an increasingly consolidated industry. Any heightened
competitive pressures that we may face may have a material adverse effect on our
business, prospects, financial condition and results of operations.
Additionally, because we rely on our customers' marketing channels to provide
our services to business and residential end users, if our customers are
adversely affected by consolidation and integration in the market, our business,
prospects, financial condition and results of operations could be materially
adversely affected.
Our Services Are Subject to Uncertain Government Regulation, and Changes in
Current or Future Laws or Regulations Could Restrict the Way We Operate Our
Business
We are subject to federal, state and local regulation of our
telecommunications business. With the passage of the Telecommunications Act in
1996, Congress sought to foster competition in the telecommunications industry
and to promote the deployment of advanced telecommunications technology.
Implementation of the Telecommunications Act is the subject of ongoing
administrative proceedings at the federal and state levels, litigation in
federal and state courts, and legislation in federal and state legislatures. We
cannot predict the outcome of the various proceedings, litigation and
legislation or whether or to what extent these proceedings, litigation and
legislation may adversely affect our business, prospects, financial condition
and results of operations.
As a competitive telecommunications company, we are subject to FCC
regulation for our contractual, or interconnection, arrangements with the
traditional telephone companies, or incumbent local exchange carriers, in our
markets, but the scope of this regulation is uncertain because it is the subject
of ongoing court and administrative proceedings. Several parties have brought
court challenges to the FCC's interconnection rules, including the rules that
establish the terms under which a competitive telecommunications company may use
portions of a traditional telephone company's network. Although the Supreme
Court held that the FCC has the authority to adopt interconnection rules and
specifically upheld several of these rules, other rules are still being
considered by the courts. If a rule that is beneficial to our business is
struck down, it could harm our ability to compete. In particular, the Eighth
Circuit has overturned in part the methodology that the FCC established to
determine the price that competitive telecommunications companies would have
to pay traditional telephone companies for use of the traditional telephone
companies' networks. The requests for Supreme Court review are pending. If
challenges to the FCC's pricing rules are upheld, the FCC may establish a new
pricing methodology. This may result in our having to pay a higher price to
traditional telephone companies if we were to use a portion of their networks
in providing our services, and this could have a detrimental effect on our
business.
The FCC is continually revisiting rules and regulations that are critical
to our ability to provide service and to exploit access to unbundled copper
loops and shared copper loops. In the last several years, as part of a
proceeding examining the availability of advanced data services, the FCC has
passed several rules that enhance the ability of competitive DSL companies
like NorthPoint to, among other things, access DSL-capable unbundled copper
loops, access and utilize various forms of central office collocation space,
provide a variety of DSL services to end-users by setting open rules for
spectrum compatibility, and access "shared-lines" by requiring the traditional
telephone companies to provide access to the high-frequency portion of
existing voice service lines to DSL competitive companies like NorthPoint for
the provision of high speed DSL services. The decision with respect to shared-
lines is still subject to review by the courts and implementation of line
sharing capabilities, including technical and operational trials, are still
underway at the incumbent Local Exchange Carriers Final pricing rules for
shared lines, which we anticipate and depend upon to be lower than the rates
for stand-alone lines, are yet to be finalized by State Commissions. As a
result, the benefits of the FCC's line sharing decision may be diluted or
delayed if the implementation processes are protracted or frustrated through
legal challenges, arbitrations, or other actions in any given state.
Our Debt Creates Financial and Operating Risk That Could Limit the Growth of Our
Business
As of September 30, 2000, we had approximately $491,335,000 of indebtedness
and $145,630,000 of stockholders' equity.
The degree to which we are leveraged could have important consequences to
holders of our common stock, including, but not limited to, the following:
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. our ability to obtain additional financing or refinancing in the future
for capital expenditures, repayment of outstanding indebtedness, working
capital, acquisitions, general corporate or other purposes may be
materially limited or impaired;
. our cash flow, if any, may be unavailable for building our business, as
a substantial portion of our cash flow may be dedicated to the payment
of principal and interest on our indebtedness or other indebtedness that
we may incur in the future, and our failure to generate sufficient cash
flow to service such indebtedness could result in a default;
. our debt agreements will contain restrictions and financial covenants
which, if we fail to meet them, could result in our indebtedness being
declared due prematurely, at a time when we could not make the required
payments;
. our leverage may make us more vulnerable to economic downturns, may
limit our ability to withstand competitive pressures and may reduce our
flexibility in responding to changing business and economic conditions;
and
. we may from time to time be more highly leveraged than many of our
competitors, which may place us at a competitive disadvantage.
We Rely on Our Intellectual Property Which We May Be Unable to Protect, or We
May Be Found to Infringe the Rights of Others
Our success depends in part on our ability to protect our proprietary
intellectual property. In addition, we may be sued over intellectual property
rights. These lawsuits, or our inability to protect our intellectual property
rights, could have a material adverse effect on our business, prospects,
financial condition and results of operations.
In April 1999, we received a letter from one of our competitors, Covad
Communications Group, Inc., indicating that it had been informed of allowance of
a United States patent application. According to Covad's letter, their patent
application related to digital subscriber loop implementations supporting (a) a
bandwidth of 128 kbps or 144 kbps combined with (b) a bandwidth greater than 128
or 144 kbps. The patent described in Covad's letter has now issued. We have
received a copy of the patent. We have not yet evaluated fully the validity or
relevance of the patent to our business. If the patent is valid, and if we
infringe this patent, we could be required to obtain a license under the patent.
While Covad has indicated that we may be interested in obtaining a license from
them at the appropriate time, we cannot be certain that such a license, if
needed, would be available on commercially acceptable terms.
A System Failure or Breach of Network Security Could Delay or Interrupt Service
to Our Customers
The reliability of our transmission services in our markets would be
impaired by a natural disaster or other unanticipated interruption of service or
damage at any of our facilities. Additionally, failure of a traditional
telephone company or other service provider to provide communications capacity
required by us, as a result of a natural disaster, operational disruption or for
any other reason, could cause interruptions in our services. Damage or failure
that causes interruptions in our services could have a material adverse effect
on our business, prospects, financial condition and results of operations.
Our network may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Unauthorized access could also potentially jeopardize
the security of confidential information stored in the computer systems of our
customers, which might result in liability to our customers, and also might
deter potential customers. Although we intend to implement security measures
that are standard within the telecommunications industry, we may be unable to
implement such measures in a timely manner or, if and when implemented, our
security measures may be circumvented. Eliminating computer viruses and
alleviating other security problems may require interruptions, delays or
cessation of service to our customers and these customers' end users. Any of the
foregoing factors relating to network security could have a material adverse
effect on our business, prospects, financial condition and results of
operations.
Our Business Could Suffer from a Reduction or Interruption from Our Equipment
Suppliers or Other Third Parties on Whom We Rely for Installation and Provision
of Field Service
We plan to purchase all of our equipment from various vendors and outsource
the installation and field service of our networks to third parties. We also
depend on the availability of fiber optic transmission facilities from third
parties to connect our equipment within and between metropolitan areas. Any
reduction of or interruption from our equipment suppliers, such as Copper
Mountain Network, Inc., from which we purchase most of our digital subscriber
line access equipment, or interruption in service from any significant installer
or field service provider, such as Lucent Technologies, Inc., which has
installed and maintained our equipment in all of our markets, could have a
disruptive effect on our business, prospects, financial condition and results of
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operations.
In addition, the pricing of the equipment we purchase may substantially
increase over time, increasing the costs we pay in the future, or decrease over
time, providing later entrants to our industry with a cost advantage over us.
The availability and pricing of the equipment we purchase would be adversely
affected if our suppliers were to compete with us, or if our competitors enter
into exclusive or restrictive arrangements with our suppliers. It could take a
significant period of time to establish relationships with alternative suppliers
for each of our technologies and substitute their technologies into our network.
Uncertain Federal and State Tax and Other Surcharges on Our Services May
Increase Our Payment Obligations
Telecommunications providers are subject to a variety of complex federal
and state surcharges and fees on their gross revenues from interstate and
intrastate services, including regulatory fees, and surcharges related to the
support of universal service. A finding that we misjudged the applicability of
the surcharges and fees could increase our payment obligations and have a
material adverse effect on our business, prospects, financial condition and
results of operations.
Claims of Interference Could Harm Our Ability to Deploy Our Services
Certain technical laboratory tests and field experience indicate that some
types of DSL, in particular, asymmetrical DSL-in which data transport to the end
user is faster than transport from the end user-may cause interference with and
be interfered with by other signals present in a traditional telephone company
copper plant. Citing this potential interference, some traditional telephone
companies have imposed restrictions on the use of DSL technology over their
copper lines. However, we do not believe that our symmetrical DSL technology
equipment, which permits the same speed of data transport to and from the end
user, poses interference risks. If traditional telephone companies were to
restrict our use of our technology or equipment in the future, our business,
prospects, financial condition and results of operations could be materially
adversely affected.
Our Stock Price May Be Volatile
The trading price of our common stock has been and is likely to continue to
be highly volatile. Our stock price is likely to be volatile and may fluctuate
substantially due to factors such as:
. our historical and anticipated quarterly and annual operating
results;
. variations between our actual results and analyst and investor
expectations;
. announcements by us or others and developments affecting our
business;
. investor perceptions of our company and comparable public
companies; and
. conditions and trends in the data communications and Internet-
related industries.
In particular, the stock market has from time to time experienced
significant price and volume fluctuations affecting the common stocks of
technology companies, which may include data communications and Internet-related
companies. These fluctuations may result in a material decline in the market
price of our common stock.
The Sale of Shares or the Perception of Future Sales Could Depress Our Stock
Price
Sales of a large number of shares of common stock in the market or the
perception that sales may occur could cause the market price of our common stock
to drop. As of September 30, 2000, we had 133,321,089 shares of common stock
outstanding. Of these common shares, substantially all are freely tradeable,
except for any such shares held at any time by an "affiliate" of NorthPoint, as
defined under Rule 144 under the Securities Act. These shares may be sold in the
future without registration under the Securities Act to the extent permitted by
Rule 144 or an exemption under the Securities Act.
In addition, holders of shares of common stock representing approximately
51% of the currently outstanding shares of common stock have agreed to vote
their shares in support of the merger with Verizon Communications' DSL business
and not to sell any shares, subject to limited exceptions, until the closing.
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Our Principal Stockholders and Management Own a Significant Percentage of
NorthPoint, and Will Be Able to Exercise Significant Influence
Our executive officers and directors and principal stockholders together
beneficially own approximately 50% of our common stock. These stockholders, if
they vote together, will be able to exercise significant influence over all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. Upon consummation of the
proposed merger with Verizon's DSL business, Verizon will own 55% of the common
stock of the new NorthPoint. This concentration of ownership may also delay or
prevent a change in control of NorthPoint.
Our Certificate of Incorporation and Bylaws Contain Provisions That Could Delay
or Prevent a Change In Control of NorthPoint
Certain provisions of our certificate of incorporation and bylaws could
make it more difficult for a third party to acquire control of NorthPoint, even
if a change in control would be beneficial to stockholders. Our certificate of
incorporation allows our board of directors to issue, without stockholder
approval, preferred stock with terms set by the board of directors. The
preferred stock could be issued quickly with terms that delay or prevent a
change in control of NorthPoint or make removal of management more difficult.
Also, the issuance of preferred stock may cause the market price of the common
stock to decrease.
If Unexpected Year 2000 Issues Arise, We May Incur Significant Costs and Our
Business Could Suffer
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a result, computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. Although we have not experienced any
year 2000 problems and have not been informed of any material year 2000 problems
by our customers and vendors, we cannot assure you that our systems or the
systems of other companies on whose services we depend or with whom our systems
interconnect will not experience unexpected year 2000 problems during the course
of the year. This could result in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities. This could, in turn, have a material adverse effect on our business,
prospects, financial condition and results of operations.
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. The majority
of our debt is in the form of fixed interest rate obligations. Our principal
exposure to financial market fluctuations relates to our secured credit
facility, which is floating rate debt. 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 September 30, 2000, we do not believe a hypothetical 10% adverse
change in quoted market prices would be material to our results of operations.
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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 September 30, 2000, we have issued
and sold unregistered securities as follows:
We issued an aggregate of 150,000 shares of Series A 9% convertible
preferred stock in a private placement on September 5, 2000 to Verizon
Communications for an aggregate purchase price of $150,000,000. The shares we
issued constitute restricted securities within the meaning of Rule 144
promulgated under the Securities Act of 1933.
No underwriters were used in connection with these sales and
issuances. The issuance of these securities was exempt from registration under
the Securities Act pursuant to Section 4(2) thereof, on the basis that the
transaction did not involve a public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
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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
--- ----------------------
3.3 Certificate of Designation of 9% Convertible Preferred Stock of
NorthPoint Communications Group, Inc.
10.43 Amendment to Credit Agreement dated as of August 29, 2000 among
NorthPoint Communications, Inc., NorthPoint Communications Group,
Inc., Certain Subsidiaries of NorthPoint Communications, Inc., as
Guarantors, Various Lenders, Goldman Sachs Credit Partners, L.P.,
Canadian Imperial Bank of Commerce, and Newcourt Commercial Financial
Corporation
27.1 Financial Data Schedule for the three months ended September 30, 2000.
(b) Reports on Form 8-K:
Form 8-K filed August 8, 2000, Item Nos. 5 and 7, announcement of entering
into an Agreement and Plan of Merger dated as of August 8, 2000, among Bell
Atlantic Corporation (d/b/a Verizon Communications), Verizon Ventures I Inc.,
Verizon Ventures II, Inc. and NorthPoint Communications Group, Inc.
Form 8-K filed August 15, 2000, Item Nos. 5 and 7, attaching the Agreement
and Plan of Merger dated as of August 8, 2000, among Bell Atlantic Corporation
(d/b/a Verizon Communications), Verizon Ventures I Inc., Verizon Ventures II,
Inc. and NorthPoint Communications Group, Inc.
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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: November 20, 2000 By: /s/ ELIZABETH A. FETTER
--------------------------------------
Elizabeth A. Fetter
Chief Executive Officer and
President
Dated: November 20, 2000 By: /s/ MICHAEL P. GLINSKY
--------------------------------------
Michael P. Glinsky
Executive Vice President and
Chief Financial Officer
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