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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-27525
DSL.NET, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1510312
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
545 Long Wharf Drive
New Haven, Connecticut 06511
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(Address of principal executive offices) (Zip Code)
(203) 772-1000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
--- ---
As of November 10, 1999, the registrant had 58,363,313 shares of Common
Stock outstanding.
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DSL.NET, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
------
Part I - Financial Information
<S> <C>
Item 1. Financial Statements ................................................................. 3
Balance Sheets at September 30, 1999 and
December 31, 1998................................................................. 3
Statements of Operations for the three months ended September 30, 1999
and 1998, the nine months ended September 30, 1999 and the period
from inception (March 3, 1998) through September 30, 1998 ....................... 4
Statements of Cash Flows for the nine months ended September 30, 1999 and
the period from inception (March 3, 1998) through September 30, 1998.... 5
Notes to Financial Statements....................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................... 12
Part II - Other Information
Item 1. Legal Proceedings.................................................................... 13
Item 2. Changes in Securities and Use of Proceeds............................................ 13
Item 4. Submission of Matters to a Vote of Security Holders.................................. 14
Item 6. Exhibits and Reports on Form 8-K..................................................... 14
Signatures..................................................................................... 15
Exhibit Index.................................................................................. 16
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DSL.NET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED)
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 32,538,471 $ 39,479
Marketable securities 10,528,055 --
Accounts receivable (net of allowance of $36,000 at September
30, 1999) 97,457 30,597
Prepaid expenses and other current assets 1,896,360 --
------------ ------------
Total current assets 45,060,343 70,076
Fixed assets, net 16,146,456 284,338
Other assets 931,189 15,566
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Total assets $ 62,137,988 $ 369,980
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 754,257 $ 231,073
Accrued liabilities 4,473,852 16,219
Deferred revenue 61,532 5,392
Current portion of capital leases payable 527,385 16,494
Current portion of notes payable 160,752 66,667
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Total current liabilities 5,977,778 335,845
Long-term portion of capital leases 761,790 --
Notes payable 1,286,014 350,000
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Total liabilities 8,025,582 685,845
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Commitments and contingencies (Note 1)
Redeemable convertible preferred stock
Convertible preferred stock, $0.001 par value; 18,962,500 shares authorized;
Series A convertible preferred stock; 225,000 and 0 shares
issued and outstanding respectively 225,000 --
Series B convertible preferred stock; 6,500,000 and 0 shares
issued and outstanding respectively 15,424,999 --
Series C convertible preferred stock; 2,785,516 and 0 shares
issued and outstanding respectively 9,940,391 --
Series D convertible preferred stock; 2,963,672 and 0 shares
issued and outstanding respectively 30,967,786 --
Series E convertible preferred stock; 939,086 and 0 shares
issued and outstanding respectively 18,458,168 --
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Total redeemable convertible preferred stock 75,016,344 --
Stockholders' equity (deficit)
Common stock, $0.0005 par value; 55,925,000 and 508,963,394
shares authorized; 14,223,110 and 16,795,800 shares issued and
outstanding 7,112 8,398
Additional paid-in capital 8,775,192 2,465,374
Deferred compensation (12,375,876) --
Accumulated deficit (17,310,366) (2,789,637)
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Total stockholders' (deficit) equity (20,903,938) (315,865)
------------ ------------
Total liabilities and stockholders' (deficit) equity 62,137,988 369,980
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
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DSL.NET, INC.
STATEMENTS OF OPERATIONS
(unaudited)
FOR THE PERIOD
<TABLE>
<CAPTION>
FROM INCEPTION
THREE MONTHS ENDED (MARCH 3, 1998)
SEPTEMBER 30, NINE MONTHS THROUGH
------------------------------ ENDED SEPTEMBER 30,
1999 1998 SEPTEMBER 30, 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 317,492 $ 9,999 $ 501,665 $ 13,488
------------ ------------ ------------ ------------
Operating expenses:
Network and operations 2,274,605 30,771 3,757,233 31,476
Sales and marketing 2,092,383 13,823 3,327,972 15,220
General and administrative 1,391,064 89,764 2,945,077 93,660
Stock compensation 796,109 -- 3,412,914 --
------------ ------------ ------------ ------------
Total operating expenses 6,554,161 134,358 13,443,196 140,356
------------ ------------ ------------ ------------
Operating loss (6,236,669) (124,359) (12,941,531) (126,868)
------------ ------------ ------------ ------------
Interest expense (income), net (620,341) 502 (827,956) 734
Other expense (income), net 5,156 -- 5,156 --
------------ ------------ ------------ ------------
Net loss $ (5,621,484) $ (124,861) $(12,118,731) $ (127,602)
============ ============ ============ ============
Exchange of preferred stock -- -- 11,998,000 --
------------ ------------ ------------ ------------
Loss applicable to common stock $ (5,621,484) $ (124,861) $(24,116,731) $ (127,602)
============ ============ ============ ============
Net loss per share-basic and diluted $ (0.66) $ (0.02) $ (3.87) $ (0.03)
============ ============ ============ ============
Shares used in computing net loss per share 8,478,493 5,089,634 6,230,836 5,089,634
============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE>
DSL.NET, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
NINE MONTHS (MARCH 3, 1998)
ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(12,118,731) $ (127,602)
Reconciliation of net loss to net cash used in operating activities:
Depreciation 722,788 --
Non-cash compensation expense 3,412,914 --
Net changes in current assets and liabilities:
Accounts receivable (66,860) (3,857)
Prepaids and other current assets (296,360) --
Other assets (919,117) (30,566)
Accounts payable 523,200 25,415
Accrued liabilities 3,307,633 --
Deferred revenue 56,140 --
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Net cash provided by (used in) operating activities (5,378,393) (136,610)
------------ -----------
Cash flows from investing activities:
Purchase of marketable securities (10,528,055) --
Purchase of fixed assets (16,584,906) (32,583)
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Net cash used in investing activities (27,112,961) (32,583)
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Cash flows from financing activities:
Proceeds from preferred stock issuance 62,668,573 50,000
Proceeds from equipment notes payable 1,559,878 122,699
Proceeds from equipment credit facility 1,446,766 --
Proceeds from stock option exercises 3,499 --
Payments on equipment notes payable (66,667) --
Amortization of deferred debt issuance costs 22,160 --
Principal payments under capital lease obligation (193,863) (3,506)
Payments of stock offering costs (450,000) --
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Net cash provided by financing activities 64,990,346 169,193
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Net increase in cash and cash equivalents 32,498,992 --
Cash and cash equivalents at beginning of period 39,479 --
------------ -----------
Cash and cash equivalents at end of period $ 32,538,471 $ --
============ ============
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for interest $ (827,956) $ 734
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
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DSL.NET, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. Summary of Significant Accounting Policies
A. Basis of Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements.
Actual results may differ from those estimates.
The financial statements at September 30, 1999, for the three months ended
September 30, 1999 and 1998, for the nine months ended September 30, 1999 and
for the period from inception (March 3, 1998) through September 30, 1998 are
unaudited, but include all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation of
financial position and operating results. Operating results for the three and
nine month periods ended September 30, 1999 are not necessarily indicative of
results that may be expected for any future periods.
The accompanying unaudited interim financial statements have been prepared
with the assumption that users of the interim financial information have either
read or have access to the Company's audited financial statements for the year
ended December 31, 1998. Accordingly, footnote disclosures which would
substantially duplicate the disclosures contained in the Company's December 31,
1998 audited financial statements have been omitted from these unaudited interim
financial statements. These financial statements have been prepared in
accordance with the instructions to Form 10-Q and the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such instructions, rules and regulations. While management believes
the disclosures presented are adequate to make these financial statements not
misleading, these financial statements should be read in conjunction with the
Company's audited financial statements and related notes included in the
prospectus relating to the Company's initial public offering, which has been
filed with the Securities and Exchange Commission.
B. Earnings (Loss) Per Share
Basic earnings per share is computed by dividing income or loss applicable
to common shareholders by the weighted average number of shares of the Company's
common stock outstanding during the period, after giving consideration to shares
subject to repurchase.
Diluted earnings per share is determined in the same manner as basic
earnings 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. In addition, income
or loss is adjusted for dividends and other transactions relating to preferred
shares for which conversion is assumed. The diluted earnings per share amount
has not been reported because the Company has a net loss and the impact of the
assumed exercise of the stock options and warrants and the assumed preferred
stock conversion is not dilutive.
6
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Under the Company's certificate of incorporation, each outstanding share of
preferred stock converted into 2.666 shares of common stock upon the closing of
the Company's initial public offering of common stock on October 12, 1999.
In January 1999, the Company declared a 1,909.09:1 stock split of its common
stock. In May 1999, the Company declared a 2:1 stock split of its common stock.
In July 1999, the Company declared a 0.333:1 stock dividend on its common stock.
The financial statements have been restated to reflect these splits and
dividend.
2. Cash Equivalents And Marketable Securities
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents. The carrying
value of cash equivalents at September 30, 1999 was approximately $28,419,000.
The Company considers its investment portfolio to be available-for-sale
securities as defined in Statement of Financial Accounting Standards ("SFAS")
No. 115. Marketable securities as of September 30, 1999 consisted of debt
securities and certificates of deposit with maturities of five months to a year.
Securities are available for sale and are carried at fair value. The unrealized
losses on the securities as of September 30, 1999 were approximately $5,000.
3. Stockholders' Equity
In July 1999, the Company entered into strategic relationships with Staples
and Microsoft. As part of these strategic relationships, the Company received
equity investments totaling approximately $18,500,000.
After September 30, 1999, the Company completed its initial public offering
of 8,226,000 shares of common stock at an initial public offering price of $7.50
per share. Net proceeds to the Company from the initial public offering were
approximately $55,896,000 after deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company. As a result of the
initial public offering, 35,759,798 shares of common stock were issued upon the
conversion of all of the Company's preferred stock.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the financial
statements and the related notes thereto included elsewhere in this Form 10-Q
and the audited financial statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the prospectus relating to the Company's initial public offering,
which has been filed with the Securities and Exchange Commission.
OVERVIEW
We provide high-speed data communications and Internet solutions using
digital subscriber line (DSL) technology to small and medium sized businesses in
second and third tier cities. We began providing service in May 1998 and we
provided service or had installed equipment in 52 cities as of September
30, 1999.
We have incurred operating losses and net losses for each month since our
formation. For the periods ended September 30, 1999 and December 31, 1998, we
have experienced net cash outflows for operating and investing activities. As of
September 30, 1999 and December 31, 1998, we had accumulated deficits of
approximately $17,310,000 and $2,790,000, respectively. We intend to
substantially increase our operating expenses and capital expenditures in an
effort to rapidly expand our network infrastructure and service areas. We expect
to incur substantial operating losses, net losses and net operating cash
outflows during our network build-out and during the initial penetration of each
new market we enter. Our losses and net operating cash outflows are expected to
continue and to increase as we expand our operations.
RESULTS OF OPERATIONS
REVENUE. Revenue increased to approximately $317,000 for the three months
ended September 30, 1999 from approximately $10,000 for the three months ended
September 30, 1998. Revenue increased to approximately $502,000 for the nine
months ended September 30, 1999 from approximately $13,000 for the period from
inception (March 3, 1998) through September 30, 1998. These increases were
primarily attributable to the increased number of customers subscribing for our
services, resulting from our increased sales and marketing efforts and the
expansion of our network. We expect revenue to increase in future periods as we
expand our network within our existing regions, deploy our network into new
regions and increase our sales and marketing efforts in all of our regions.
NETWORK AND OPERATIONS. Network and operations expenses increased to
approximately $2,275,000 for the three months ended September 30, 1999 from
approximately $31,000 for the three months ended September 30, 1998. Network and
operations expenses increased to approximately $3,757,000 for the nine months
ended September 30, 1999 from approximately $31,000 for the period from
inception (March 3, 1998) through September 30, 1998. These increases were
primarily attributable to the expansion of our network, increased number of
customers subscribing for our services, increased costs resulting from the
addition of personnel and costs incurred in connection with our applications for
regulatory approvals in various states. We expect network and operations costs
to increase significantly in future periods as we increase our markets and
customer base.
Depreciation expense was approximately $490,000 and a negligible amount for
the three months ended September 30, 1999 and 1998, respectively. Depreciation
expense increased to approximately $723,000 for the nine months ended September
30, 1999 from a negligible amount for the period from inception (March 3, 1998)
to September 30, 1998. This expense increased as more of our network became
operational and we increased capital expenditures to expand.
SALES AND MARKETING. Sales and marketing expenses were approximately
$2,092,000 and $14,000 for the three months ended September 30, 1999 and 1998,
respectively. Sales and marketing expenses increased to approximately $3,328,000
for the nine months ended September 30, 1999 from approximately $15,000 for the
period from inception (March 3, 1998) through September 30, 1998. These
increases were principally attributable to an increase in marketing and
promotional activities and increases in sales and marketing
8
<PAGE>
personnel. Sales and marketing expenses are expected to increase significantly
as we continue to expand our business into new markets.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
approximately $1,391,000 and $90,000 for the three months ended September 30,
1999 and 1998, respectively. General and administrative expenses increased to
approximately $2,945,000 for the nine months ended September 30, 1999 from
approximately $94,000 for the period from inception (March 3, 1998) through
September 30, 1998. The increases in general and administrative expenses were
principally the result of increases in the number of employees and the
development of our operating infrastructure.
STOCK COMPENSATION. We incurred stock compensation expenses of approximately
$796,000 and $0 for the three months ended September 30, 1999 and 1998,
respectively. For the nine months ended September 30, 1999 and the for period
from inception (March 3, 1998) through September 30, 1998, we recorded a total
of approximately $3,413,000 and $0 of stock compensation expenses, respectively.
The expenses incurred in the nine months ended September 30, 1999 consisted of
charges and amortization related to stock options and restricted stock granted
to employees, directors and advisors of the Company during the first nine months
of 1999.
The unamortized deferred compensation balance of approximately $12,376,000
as of September 30, 1999 will be amortized over the remaining vesting period of
each grant. As of September 30, 1999, options to purchase 5,656,240 shares of
common stock were outstanding under the Company's 1999 Stock Plan, which were
exercisable at a weighted average exercise price of $1.42 per share.
INTEREST EXPENSE (INCOME) NET. Net interest income for the three months
ended September 30, 1999 was approximately $620,000, as compared to interest
expense of approximately $500 for the three months ended September 30, 1998. Net
interest income was approximately $828,000 for the nine months ended September
30, 1999, compared to interest expense of approximately $700 for the period from
inception (March 3, 1998) through September 30, 1998. These increases in net
interest income were primarily due to an increase in our cash balances as a
result of the issuance of preferred stock in 1999 and, to a lesser extent, the
repayment of debt.
NET LOSS. Net loss was approximately $5,621,000 and $125,000 for the three
months ended September 30, 1999 and 1998, respectively. Net loss increased to
approximately $12,119,000 for the nine months ended September 30, 1999 from
approximately $128,000 for the period from inception (March 3, 1998) through
September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our capital expenditures and operations primarily with the
proceeds from stock issuances and borrowings. We had cash, cash equivalents and
marketable securities of approximately $43,067,000 as of September 30, 1999. Our
working capital as of September 30, 1999 was approximately $39,083,000.
Net cash provided by financing activities for the nine months ended
September 30, 1999 was approximately $64,990,000. This cash primarily resulted
from the sale of preferred stock and borrowings under our lease facilities and
our credit line. We have used, and intend to continue using, the proceeds from
these financings primarily to implement our business plan and for working
capital.
In January 1999, we received net proceeds of approximately $3,302,000 from
the sale of shares of Series A preferred stock and certain warrants to new
stockholders. In April 1999, we received net proceeds of approximately
$9,940,000 from the sale of shares of Series C preferred stock to our principal
stockholders and others. In May 1999, we received net proceeds of approximately
$29,961,000 from the sale of shares of Series D preferred stock to our principal
stockholders and others. In July 1999, we received net proceeds of
9
<PAGE>
approximately $18,458,000 from the sale of shares of Series E preferred stock to
two strategic partners. In addition, in July 1999, we received approximately
$1,007,000 in connection with repayment of a note, including interest at 6.0%,
from an officer in connection with the purchase of Series D preferred stock in
June 1999. Upon the closing of the initial public offering of the Company's
common stock on October 12, 1999, all outstanding shares of our preferred stock
converted automatically into shares of common stock.
In March 1999, we entered into a 36-month lease facility to finance the
purchase of up to an aggregate of $2,000,000 of equipment. Amounts financed
under this lease facility bear an interest rate of 8% or 9%, depending on the
type of equipment, and are secured by the financed equipment. There was
approximately $1,004,000 outstanding on this lease facility at September 30,
1999. In addition, during the nine months ended September 30, 1999, we purchased
certain software and equipment under other capital leases, which are being
repaid over periods ranging from 24 months to 36 months. There was approximately
$370,000 outstanding on these capital leases at September 30, 1999.
In May 1999, we established a line of credit, which allows us to borrow up
to an aggregate of $5,000,000. This line of credit expires in May 2000, at which
time amounts outstanding will convert into a term loan, which will be repayable
over 36 months. Amounts borrowed under this line of credit generally bear
interest at the sum of 1% plus the higher of the bank's prime rate of interest
or the federal funds rate plus 0.5%. As of September 30, 1999, amounts
outstanding under this line of credit bore interest at the annual rate of 9.25%
and were secured by a lien on certain of our equipment. Borrowings under the
line of credit are restricted based on the value of the equipment securing the
line of credit. In addition, the line of credit also contains certain covenants,
including covenants requiring us to maintain certain financial ratios and
limitations relating to, among other things, new indebtedness, the creation of
liens, types of investments, mergers, consolidations and the transfer of all or
substantially all of our assets. As of September 30, 1999, approximately
$3,553,000 was available under this line of credit. We are currently negotiating
additional bank and vendor financing facilities.
In February 1999, we leased office space in New Haven, Connecticut. Annual
minimum lease payments under this lease are approximately $192,000 for 1999,
approximately $745,000 for each of the years 2000 through 2004, and
approximately $279,000 for 2005.
For the nine months ended September 30, 1999, the net cash used in our
operating activities was approximately $5,378,000. This cash was used for a
variety of operating expenses, including salaries, consulting and legal
expenses, network operations, marketing and promotional activities and overhead
expenses. Our net operating cash outflows are expected to continue and to
increase as we expand our operations.
Net cash used in investing activities for the nine months ended September
30, 1999 was approximately $27,113,000. Of this amount, approximately
$16,585,000 was used primarily for the purchase of equipment and payment of
collocation costs and approximately $10,528,000 was used for the purchase of
marketable securities.
The development and expansion of our business requires significant capital
expenditures. The principal capital expenditures incurred to enter each market
include the procurement, design and construction of the space in traditional
telephone companies' central offices where we deploy our equipment, and the
purchase and installation of all necessary equipment. Capital expenditures,
including collocation fees, were approximately $16,585,000 for the nine months
ended September 30, 1999. We currently anticipate spending an aggregate of
approximately $60,000,000 for capital expenditures for the balance of 1999 and
for 2000. The planned capital expenditures are primarily for the procurement,
design and construction of central office spaces and the purchase and
installation of the equipment necessary for us to provide our services, as well
as for the continued development of our information and management systems,
including our operations support systems. The actual amounts and timing of our
capital expenditures will vary depending on the speed at which we are able to
expand and implement our network and could differ materially both in amount and
timing from our current plans.
10
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Since September 30, 1999, we completed our initial public offering,
resulting in proceeds to the Company of approximately $55,896,000, net of
offering expenses. We intend to use these proceeds to continue building our
network and for working capital and other general corporate purposes. We may
also use a portion of the net proceeds to acquire complementary businesses,
although we have no definitive agreements to do so at this time. The amounts
actually expended for these purposes will vary significantly depending on a
number of factors, including revenue growth, if any, and the extent and timing
of our entry into target markets and capital expenditures.
We believe that the proceeds from our initial public offering, together with
our existing cash and short-term investments, amounts available under our
equipment lease and credit facilities, and cash generated from operations will
be sufficient to fund our operating losses, capital expenditures, lease payments
and working capital requirements through 2000.
We expect our operating losses, net operating cash outflows and capital
expenditures to increase substantially as we expand our network. We expect that
additional financing will be required in the future. We may attempt to raise
financing through some combination of commercial bank borrowings, leasing,
vendor financing and the sale of equity or debt securities.
Our capital requirements may vary based upon the timing and the success of
implementation of our business plan and as a result of regulatory, technological
and competitive developments or if:
o demand for our services or our cash flow from operations is less than
or more than expected;
o our development plans or projections change or prove to be inaccurate;
o we make any acquisitions; or
o we accelerate deployment of our network or otherwise alter the schedule
or targets of our business plan implementation.
We cannot assure you that we will be able to raise sufficient debt or equity
capital on terms that we consider acceptable, if at all. If we are unable to
obtain adequate funds on acceptable terms, our ability to deploy and operate our
network, fund our expansion or respond to competitive pressures would be
significantly impaired.
IMPACT OF YEAR 2000
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. In order to distinguish
21st century dates from 20th century dates, the date code field needs to be
expanded to 4 digits. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with these Year 2000
requirements. The use of software and computer systems that are not Year 2000
compliant could result in system failures or miscalculations resulting in
disruptions of operations, including among other things, a temporary inability
to process transactions, send invoices, or engage in normal business activities.
Since we have been recently organized, we have been able to build our
internal business systems with Year 2000 compliance in mind. We are seeking
assurance from vendors that new business systems and services which we purchase
will be Year 2000 compliant. We have not reviewed our non-information technology
systems for year 2000 issues relating to embedded microprocessors.
Based on the foregoing, we do not believe that our current service offerings
and our business systems will not be Year 2000 compliant. Failure of our
business systems or current service offerings to operate properly with regard to
the Year 2000 and thereafter could require us to incur significant unanticipated
expenses to remedy any problems or replace affected vendors and could have a
material adverse effect on our business operating results and financial
condition.
11
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We can provide no assurance that our vendors, including the traditional
local telephone companies, will be Year 2000 compliant or that Year 2000
problems among our target customers will not negatively impact their decision to
buy our service. We are in the process of conducting a Year 2000 compliance
check of traditional local telephone companies and other vendors. Any Year 2000
related disruption of operations of the traditional local telephone companies or
other providers would likely have a material adverse impact on our business,
operation results, and financial condition. Furthermore, Year 2000 issues may
affect the purchasing decisions of our customers as companies expend significant
resources to correct their current systems for Year 2000 compliance.
To date, we have not incurred significant costs in order to comply with Year
2000 requirements and we do not believe we will incur significant costs in the
foreseeable future. We plan to determine the risks associated with a reasonably
likely worse-case scenario and intend to formulate a contingency plan prior to
December 31, 1999 to address these risks.
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The statements contained in this
report which are not historical facts may be deemed to contain forward-looking
statements. These statements relate to future events or our future financial
performance, and are identified by terminology such as "may," "might," "will,"
"should," "expect," "scheduled," "plan," "intend," "anticipate," "believe,"
"estimate," "potential," or "continue" or the negative of such terms or other
comparable terminology. These statements are subject to a variety of risks and
uncertainties, many of which are beyond our control, which could cause actual
results to differ materially from those contemplated in these forward-looking
statements. In particular, the risks and uncertainties include those described
under "Risk Factors" in our prospectus dated October 6, 1999, as supplemented on
November 2, 1999, which has been filed with the Securities and Exchange
Commission. The risks and uncertainties include, among other things, (i) our
extremely limited operating history, which makes it difficult to evaluate our
business and prospects; (ii) the difficulty of predicting the new and rapidly
evolving high-speed data communications industry; (iii) our history of, and
expectation of additional, losses and negative operating cash flow and need to
obtain significant additional funds on acceptable terms by 2001; (iv) our
unproven business model, which may not be successful; (v) our failure to achieve
or sustain market acceptance at desired pricing levels, which could impair our
ability to achieve profitability or positive cash flow; (vi) our ability to
negotiate, enter into and renew interconnection and collocation agreements with
traditional local telephone companies; (vii) the possibility of disappointing
quarterly revenue or operating results, which could cause the price of our
common stock to fall; (viii) the intense competition in the high-speed data
communications industry, which may negatively affect the number of our customers
and the pricing of our services; (ix) regulatory, legislative and judicial
developments, which could adversely affect the way we operate our business; (x)
our reliance on outside vendors and service providers, including the traditional
local telephone companies; and (xi) our ability to recruit and retain qualified
personnel and to manage the growth of our network and our operations. Existing
and prospective investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. We undertake
no obligation to update or revise the information contained in this report,
whether as a result of new information, future events or circumstances or
otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have not entered into any financial instruments that expose us to
material market risk.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party to legal proceedings related to regulatory approvals. We are
also subject to state commission, FCC and court decisions as they relate to the
interpretation and implementation or the 1996 Telecommunications Act, the
interpretation of competitive carrier interconnection agreements in general and
our interconnection agreements in particular. In some cases, we may be deemed to
be bound by the results of ongoing proceedings of these bodies. We therefore may
participate in proceedings before these regulatory agencies or judicial bodies
that affect, and allow us to advance, our business plans.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Stock
In July 1999, the Company issued an aggregate of 939,086 shares of Series E
preferred stock for aggregate consideration of $18,499,994. Each outstanding
share of Series E preferred stock converted into 2.666 shares of common stock
upon the closing of the Company's initial public offering in October 1999. In
addition, during the quarter ended September 30, 1999, the Company granted
options to purchase an aggregate of 925,407 shares of common stock to certain
employees and directors under the Company's 1999 Stock Plan at exercise prices
ranging from $7.3893 to $7.39 per share, for an aggregate exercise price of
approximately $6,838,507. In addition, 93,310 shares of common stock were issued
during the quarter ended September 30, 1999 in connection with the exercise of
outstanding options by two employees at an exercise price of $0.0375 per share,
for aggregate proceeds to the Company of approximately $3,499. No underwriters
were involved in the foregoing sales of securities. Such sales were made in
reliance upon an exemption from the registration provisions of the Securities
Act set forth in Section 4(2) thereof relative to sales by an issuer not
involving any public offering or the rules and regulations thereunder, or, in
the case of the issuance and exercise of certain options to purchase common
stock, Rule 701 under the Securities Act.
Use of Proceeds
On October 6, 1999, the Company commenced an initial public offering of
7,200,000 shares of its common stock. This offering was effected pursuant to the
Company's Registration Statement on Form S-1, which was declared effective by
the Securities and Exchange Commission (SEC File No. 333-80141) on October 5,
1999. All of the 7,200,000 shares of common stock were offered by the Company,
of which 360,000 shares were sold to Staples, Inc. and 6,840,000 were sold to
the several underwriters, for whom Deutsche Banc Alex. Brown, Donaldson, Lufkin
& Jenrette, Lehman Brothers and DLJDIRECT Inc. acted as representatives (the
"Representatives"). As part of the initial public offering, the Company granted
to the several underwriters an overallotment option to purchase up to an
additional 1,026,000 shares of common stock from the Company (the "Underwriters'
Option"). The initial public offering closed on October 12, 1999.
On November 3, 1999, the Representatives, on behalf of the several
underwriters, purchased 1,026,000 shares of common stock from the Company in
connection with the exercise of the Underwriters' Option. This purchase closed
on November 8, 1999.
The aggregate offering price of the initial public offering to the public
was $53,905,500 (exclusive of the Underwriters' Option), with proceeds to the
Company, after deduction of underwriting discounts, of $50,314,500 (before
deducting offering expenses payable by the Company). The aggregate offering
price of the Underwriters' Option exercise was $7,695,000, with proceeds to the
Company, after deduction of the underwriting discounts and commissions, of
$7,156,350. (before deducting offering expenses payable by the Company). The
Company has invested all of the net proceeds in marketable, investment-grade
securities.
13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to a Written Consent in Lieu of Special Meeting of Stockholders
dated July 2, 1999, the holders of 8,324,000 shares of the Company's common
stock (out of 10,600,000 shares outstanding) and 16,799,868 shares of the
Company's preferred stock, on an as converted basis (out of 24,948,376 shares
outstanding) approved (a) provisions for the accelerated vesting of certain
stock options under the Company's 1999 Stock Plan in connection with a
change-in-control, (b) an amendment to the Restated Certificate of Incorporation
of the Company to create a new class of preferred stock and reconstitute the
authorized shares of capital stock of the Company and certain of the rights and
preferences thereof, and (c) a Series E Preferred Stock Purchase Agreement and
the transactions contemplated thereby.
Pursuant to a Written Consent in Lieu of Special Meeting of Stockholders
dated July 21, 1999, the holders of 10,600,000 shares of the Company's common
stock (out of 10,600,000 shares outstanding) and 25,112,500 shares of the
Company's preferred stock, on an as converted basis (out of 26,826,548 shares
outstanding) approved (a) an amendment to the Restated Certificate of
Incorporation of the Company to increase the number of authorized shares of
common stock of the Company and (b) a split in the form of a stock dividend of
0.333 shares of the Company's common stock (rounded up to the nearest whole
share, with respect to the aggregate shares held by each stockholder) payable in
respect of each share of the Company's common stock issued and outstanding as of
the close of business on July 21, 1999.
Pursuant to a Written Consent in Lieu of Special Meeting of Stockholders
dated September 30, 1999, the following matters were approved by the holders of
14,223,110 shares of the Company's common stock (out of 14,223,110 shares
outstanding) and 32,534,766 shares of the Company's preferred stock, on an as
converted basis (out of 35,759,798 shares outstanding):
(a) The adoption of the Company's Amended and Restated By-laws;
(b) The adoption of the Company's Amended and Restated Certificate of
Incorporation;
(c) The adoption of the Company's Second Amended and Restated
Certificate of Incorporation;
(d) The adoption of the Amended and Restated 1999 Stock Plan of the
Company;
(e) The adoption of the 1999 Employee Stock Purchase Plan of the
Company; and
(f) A potential reorganization of the Company which would result in the
Company becoming a holding company with all or substantially all of
its assets being transferred to, and held and operated by, one or
more wholly-owned subsidiaries.
Upon the closing of the Company's initial public offering on October 12,
1999, 35,759,798 shares of common stock were issued upon the conversion of all
of the Company's preferred stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statement re: Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated November 1, 1999,
reporting on Item 5 - Other Events - To disclose the issuance
of a press release dated November 1, 1999; and Item 7 -
Financial Statements, Pro Forma Financial Information and
Exhibits to file that press release.
14
<PAGE>
Signature
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.
DSL.NET, INC.
By: /s/ ROBERT Q. BERLIN
---------------------------------
Robert Q. Berlin
Vice President, Strategic Planning and
Chief Financial Officer
Date: November 15, 1999
15
<PAGE>
Exhibit Index
-------------
Exhibit
Number
------
11 - Statement re: Computation of Earnings Per Share
27 - Financial Data Schedule
16
Exhibit 11
DSL.NET, INC.
Statement re: Computation of Earnings Per Share
(Unaudited)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(MARCH 3, 1998)
THREE MONTHS ENDED NINE MONTHS THROUGH
SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 SEPTEMBER 30, 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss (5,621,484) (124,861) (12,118,731) (127,602)
Exchange of preferred stock -- -- 11,998,000 --
----------- ----------- ----------- -----------
Net loss applicable to common stock (5,621,484) (124,861) (24,116,731) (127,602)
Basic and diluted:
Weighted average shares of common stock
outstanding 14,164,573 5,089,634 15,249,289 5,089,634
Less: Weighted average shares subject
to repurchase (5,686,080) -- (9,018,453) --
----------- ----------- ----------- -----------
Weighted average shares used in
computing basic and diluted net loss
per share 8,478,493 5,089,634 6,230,836 5,089,634
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.66) $ (0.02) $ (3.87) $ (0.03)
=========== =========== =========== ===========
</TABLE>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DSL.NET,
INC.'s QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DSL.NET,
INC.'s QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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<SECURITIES> 10528055
<RECEIVABLES> 133457
<ALLOWANCES> 36000
<INVENTORY> 0
<CURRENT-ASSETS> 45060343
<PP&E> 16874988
<DEPRECIATION> 728532
<TOTAL-ASSETS> 62137988
<CURRENT-LIABILITIES> 5977778
<BONDS> 0
0
75016344
<COMMON> 7112
<OTHER-SE> (20911050)
<TOTAL-LIABILITY-AND-EQUITY> 62137988
<SALES> 0
<TOTAL-REVENUES> 501665
<CGS> 0
<TOTAL-COSTS> 13443196
<OTHER-EXPENSES> 5156
<LOSS-PROVISION> 36000
<INTEREST-EXPENSE> (827956)
<INCOME-PRETAX> (12118731)
<INCOME-TAX> 0
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