DSL NET INC
10-Q, 2000-11-14
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)
Previous: HAWAIIAN VINTAGE CHOCOLATE CO INC, NT 10-Q, 2000-11-14
Next: DSL NET INC, 10-Q, EX-11, 2000-11-14



================================================================================

                       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, 2000

                                       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.
                                  -------------
             (Exact name of registrant as specified in its charter)


               Delaware                                     06-1510312
               --------                                     ----------
    (State or other jurisdiction of                      (I.R.S. Employer
    incorporation or organization)                      Identification No.)


           545 Long Wharf Drive
          New Haven, Connecticut                                 06511
          ----------------------                                 -----
 (Address of principal executive offices)                     (Zip Code)


                                 (203) 772-1000
                                 --------------
              (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  X  No
                                                ---    ---

     As of November 13, 2000, the registrant had 65,988,655 shares of Common
Stock outstanding.

================================================================================
<PAGE>


                                  DSL.NET, INC.

                                      INDEX


                                                                           Page
                                                                          Number
                                                                          ------

                         Part I - Financial Information

Item 1.        Consolidated Financial Statements ..........................  3

               Consolidated Balance Sheets at December 31, 1999 and
                 September 30, 2000........................................  3

               Consolidated Statements of Operations for the Three
                 and Nine Months Ended September 30, 1999 and 2000.........  4

               Consolidated Statements of Cash Flows for the Nine
                 Months Ended September 30, 1999 and 2000..................  5

               Notes to Consolidated 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 6.        Exhibits and Reports on Form 8-K............................ 13

Signature         ......................................................... 14

Exhibit Index     ......................................................... 15


                                      -2-

<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

<TABLE><CAPTION>
                                                  DSL.NET, INC.

                                           CONSOLIDATED BALANCE SHEETS

                                                                               SEPTEMBER 30,        DECEMBER 31,
                                                                                   2000                1999
                                                                                   ----                ----
                                                     ASSETS                     (UNAUDITED)
<S>                                                                          <C>                  <C>
Current assets:
      Cash and cash equivalents                                              $  106,945,286      $   66,178,261
      Marketable securities                                                       2,031,732          13,274,183
      Accounts receivable (net of allowances of $375,099 and $62,603,
        respectively)                                                             2,924,812             318,516
      Prepaid expenses and other current assets                                   1,563,976           1,043,935
                                                                             --------------      --------------
      Total current assets                                                      113,465,806          80,814,895
Fixed assets (net of accumulated depreciation and amortization of
      $13,155,438 and $1,787,747, respectively)                                  85,651,608          32,664,924
Goodwill and other intangible assets (net of accumulated amortization
      of $2,564,669 and $63,306, respectively)                                   23,841,153           3,420,135
Other assets                                                                      2,334,731             731,818
                                                                             --------------      --------------
      Total assets                                                           $  225,293,298      $  117,631,772
                                                                             ==============      ==============

                                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
      Accounts payable                                                       $   16,546,795      $    9,587,186
      Accrued liabilities                                                        11,446,362           3,173,173
      Accrued salaries                                                            1,830,178             848,841
      Deferred revenue                                                            1,182,420             234,061
      Current portion of capital leases payable                                   3,072,034             715,953
      Current portion of notes payable                                            1,537,157             281,316
                                                                             --------------      --------------
      Total current liabilities                                                  35,614,946          14,840,530

Capital lease obligation                                                          8,346,815             892,906
Notes payable                                                                     2,501,424           1,165,450
                                                                             --------------      --------------
      Total liabilities                                                          46,463,185          16,898,886
                                                                             --------------      --------------
Commitments and contingencies

Stockholders' equity
Common stock, $0.0005 par value; 200,000,000 shares authorized;
      65,984,017 and 58,382,196 shares issued and outstanding, respectively          32,992              29,191
Additional paid-in capital                                                      286,341,174         141,245,583
Deferred compensation                                                            (4,507,837)        (13,361,940)
Accumulated deficit                                                            (103,036,216)        (27,179,948)
                                                                             --------------      --------------
      Total stockholders' equity                                                178,830,113         100,732,886
                                                                             --------------      --------------
Total liabilities and stockholders' equity                                   $  225,293,298      $  117,631,772
                                                                             ==============      ==============

            THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

                                                       -3-
</TABLE>
<PAGE>
<TABLE><CAPTION>
                                                      DSL.NET, INC.

                                          CONSOLIDATED STATEMENTS OF OPERATIONS
                                                       (unaudited)


                                                         THREE MONTHS ENDED                   NINE MONTHS ENDED
                                                            SEPTEMBER 30,                       SEPTEMBER 30,
                                                    -------------------------------     -------------------------------
                                                       2000              1999               2000             1999
                                                       ----              ----               ----             ----
<S>                                                 <C>               <C>               <C>               <C>
Revenue                                             $   5,860,857     $     317,492     $   11,383,789    $     501,665
                                                    -------------     -------------     --------------    -------------

Operating expenses:
       Network and operations                          23,328,424         2,274,605         54,023,710        3,757,233
       Sales and marketing                              6,895,667         2,092,383         19,697,942        3,327,972
       General and administrative                       6,714,222         1,391,064         16,066,477        2,945,077
       Stock compensation                                 486,353           796,109          2,679,313        3,412,914
                                                    -------------     -------------     --------------    -------------
       Total operating expenses                        37,424,666         6,554,161         92,467,442       13,443,196
                                                    -------------     -------------     --------------    -------------
Operating loss                                        (31,563,809)       (6,236,669)       (81,083,653)     (12,941,531)
                                                    -------------     -------------     --------------    -------------
Interest (income), net                                 (1,334,564)         (620,341)        (5,228,129)        (827,956)
Other loss, net                                             2,110             5,156                748            5,156
                                                    -------------     -------------     --------------    -------------
       Net loss                                     $ (30,231,355)    $  (5,621,484)    $  (75,856,272)   $ (12,118,731)
                                                    =============     =============     ==============    =============
Exchange of Preferred Stock                                     0                 0                  0       11,998,000
                                                    -------------     -------------     --------------    -------------
Loss applicable to common stock                     $ (30,231,355)    $  (5,621,484)    $  (75,856,272)   $ (24,116,731)
                                                    =============     =============     ==============    =============
Net loss per share-basic and diluted                $       (0.48)    $       (0.66)    $        (1.27)   $       (3.87)
                                                    =============     =============     ==============    =============
Shares used in computing net loss per share            62,373,498         8,478,493         59,784,516        6,230,836
                                                    =============     =============     ==============    =============

                THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

                                                           -4-
</TABLE>
<PAGE>
<TABLE><CAPTION>
                                               DSL.NET, INC.

                                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                (unaudited)


                                                                               NINE MONTHS ENDED
                                                                                 SEPTEMBER 30,
                                                                     ------------------------------------
                                                                           2000                1999
                                                                           ----                ----
<S>                                                                  <C>                  <C>
Cash flows from operating activities:
     Net loss                                                        $   (75,856,272)     $   (12,118,731)

     Reconciliation of net loss to net cash used in operating activities:
         Depreciation and amortization                                    13,939,023              744,948
         Non-cash compensation expense                                     2,679,313            3,412,914
         Net changes in current assets and liabilities:
              Increase in accounts receivable                             (2,158,918)             (66,860)
              Increase in other current assets                              (169,239)            (296,360)
              Increase in other assets                                    (1,061,544)            (919,117)
              Increase in accounts payable                                 5,415,407              523,200
              Increase in accrued liabilities                              5,577,285            3,307,633
              Increase in deferred revenue                                   382,641               56,140
                                                                     ---------------      ---------------
                  Net cash used in operating activities                  (51,252,304)          (5,356,233)
                                                                     ---------------      ---------------
Cash flows from investing activities:

         Sale / (purchase) of marketable securities                       11,242,451          (10,528,055)
         Purchase of fixed assets                                        (51,980,577)         (16,584,906)
         Acquisition of businesses, net of cash acquired                 (10,646,713)                  --
         Other investments                                                  (500,001)                  --
                                                                     ---------------      ---------------
                  Net cash used in investing activities                  (51,884,840)         (27,112,961)
                                                                     ---------------      ---------------
Cash flows from financing activities:
         Proceeds from preferred stock issuance                                   --           62,218,573
         Proceeds from common stock issuance                             142,305,260                3,499
         Proceeds from equipment notes payable                               484,560            1,559,878
         Proceeds from credit facility                                     2,921,824            1,446,766
         Payments on equipment notes payable                                      --              (66,667)
         Principal payments under capital lease obligations
           and credit facility                                            (1,807,475)            (193,863)
                                                                     ---------------      ---------------
                  Net cash provided by financing activities              143,904,169           64,968,186
                                                                     ---------------      ---------------

Net increase in cash and cash equivalents                                 40,767,025           32,498,992
Cash and cash equivalents at beginning of period                          66,178,261               39,479
                                                                     ---------------      ---------------

Cash and cash equivalents at end of period                           $   106,945,286      $    32,538,471
                                                                     ===============      ===============

Supplemental disclosure:
Fixed assets financed under capital leases                           $    10,203,799      $            --
                                                                     ===============      ===============

         THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

                                                    -5-
</TABLE>
<PAGE>

                                  DSL.NET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2000
                                   (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, 2000 and for the three and nine
months ended September 30, 2000 and 1999 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, 2000 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, 1999. Accordingly, footnote disclosures which would
substantially duplicate the disclosures contained in the Company's December 31,
1999 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 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
Company's Annual Report on Form 10-K for the year ended December 31, 1999, 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.
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 is not dilutive.

2.  Stockholders' Equity

     In March 2000, the Company completed a public offering of 5,750,000 shares
of common stock, including the exercise of the underwriters' overallotment
option, at an offering price of $26.00 per share. Net proceeds to the Company
from this offering were approximately $141,273,000 after deducting underwriting
discounts and commissions and offering expenses payable by the Company.

      In the first quarter, the Company recorded non-cash compensation expense
of $870,000 relating to the vesting of stock options held by members of the
Company's former advisory board. The advisory board was dissolved in the first
quarter of 2000 and, therefore, the unamortized deferred compensation balance of
$4,163,000 related to unvested stock options held by advisory board members was
reclassified against additional paid-in capital. The Company's remaining
unamortized deferred compensation balance of

                                      -6-
<PAGE>

approximately $4,508,000 as of September 30, 2000, relating to stock options and
restricted stock held by employees and directors, is being amortized over the
respective remaining vesting periods.

     In conjunction with the Company's acquisition of Vector Internet Services,
Inc. (VISI), described in note 3 below, the Company issued purchase
consideration that included 286,392 shares of common stock having a value of
$2,315,000 at the time of the acquisition. The Company also assumed VISI
employee stock options that can be exercised for 898,926 shares of DSL.net, Inc.
common stock. These options were valued at $6,654,000 at the time of the
acquisition.

3.  Acquisitions

     On April 3, 2000, the Company acquired certain assets and liabilities of
Trusted Net Media Holdings, LLC (Trusted Net). The acquisition was accounted for
under the purchase method of accounting and, accordingly, the purchase price has
been allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition. The approximate net purchase
price of $2,500,000, excluding transaction costs, consisted of cash payments at
closing of approximately $2,097,000; amounts due to selling stockholders after
the closing of approximately $350,000; and net liabilities assumed of
approximately $53,000. In addition, the Company incurred transaction costs
associated with the acquisition of approximately $150,000. The purchase price,
including the net liabilities assumed, of $2,650,000 has been recorded as
goodwill and is being amortized on a straight-line basis over its estimated
useful life of five years. The results of the acquired operations of Trusted Net
have been included in the consolidated results of the Company from the date of
acquisition.

     On May 26, 2000, the Company acquired Vector Internet Services, Inc.
(VISI), an Internet solution provider based in Minneapolis, Minnesota. The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. The approximate net purchase price of $19,969,000, excluding
transaction costs, consisted of cash payments at closing of approximately
$8,800,000; amounts due to selling stockholders after the closing of
approximately $2,200,000; common stock valued at $2,315,000; and the assumption
of VISI employee stock options, which were valued at $6,654,000. In addition,
the Company incurred transaction costs associated with the acquisition of
approximately $425,000.

     The purchase consideration of the assets acquired and liabilities assumed
were allocated based on the fair values as follows: Net assets acquired,
$130,000; customer base, $7,878,000; and goodwill, $12,386,000. The customer
base was valued based on the expected future net cash flows from customers
discounted back to the present value taking into account the expected life cycle
of the customer relationships. This amount is being amortized on a straight-line
basis over its estimated useful life of three years. The excess of the purchase
price over the net identifiable assets has been recorded as goodwill and is
being amortized on a straight-line basis over its estimated useful life of five
years.

     The results of the VISI operations have been included in the consolidated
results of the Company from the date of acquisition. The following table sets
forth the unaudited pro forma consolidated financial information of the Company,
giving effect to the acquisition of VISI, as if the transaction occurred at the
beginning of the periods presented:

                                                 Nine Months Ended September 30,
                                                 -------------------------------
                                                       2000              1999
                                                       ----              ----
Pro forma revenue                                  14,266,000         4,093,000
Pro forma operating loss                          (83,506,000)      (16,679,000)
Pro forma net loss applicable to common shares    (78,278,000)      (27,854,000)
Pro forma net loss per share,
     basic and diluted                               $  (1.31)         $  (4.27)
Shares used in computing pro forma
     net loss per share                            59,943,936         6,517,228


                                      -7-
<PAGE>

     The pro forma results are not necessarily indicative of the actual results
of operations that would have been obtained had the acquisition taken place at
the beginning of the respective periods or the results that may occur in the
future.

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 DSL.net 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 our Annual Report on Form 10-K for the year ended December 31, 1999,
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,
primarily located in second and third tier cities. We began providing service in
May 1998 and offered service in over 350 cities as of September 30, 2000.

    We have incurred operating losses and net losses for each month since our
formation. For the period ended September 30, 2000, we have experienced net cash
outflows from operating and investing activities. As of September 30, 2000, we
had an accumulated deficit of approximately $103,036,000. We intend to incur
significant operating expenses and additional capital expenditures in expanding
our network infrastructure. 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 as we expand our operations and
penetrate new markets.

RESULTS OF OPERATIONS

    REVENUE. Revenue increased to approximately $11,384,000 for the nine months
ended September 30, 2000 from approximately $502,000 for the nine months ended
September 30, 1999. Revenue for the three months ended September 30, 2000 was
approximately $5,861,000 compared to $317,000 for the three months ended
September 30, 1999. The increases for both periods were primarily attributable
to the increased number of customers subscribing for our services and
contributions from acquired businesses. We expect revenue to continue to
increase in future periods as we expand our network and increase our sales and
marketing efforts.

    NETWORK AND OPERATIONS. Network and operations expenses increased to
approximately $54,024,000 for the nine months ended September 30, 2000 from
approximately $3,757,000 for the nine months ended September 30, 1999. Network
and operations expenses for the three months ended September 30, 2000 were
approximately $23,328,000 compared to $2,275,000 for the three months ended
September 30, 1999. The significant increases in total network and operations
expenses were primarily attributable to the expansion of our network, increased
number of customers subscribing for our services and increased costs resulting
from the addition of personnel. We expect that network and operations costs will
increase in future periods as we expand our network and increase the customer
base.

    Included in network and operations expenses is depreciation and amortization
of approximately $10,114,000 and $4,280,000 for the nine and three month periods
ended September 30, 2000, respectively, as compared to $573,000 and $382,000 for
the nine and three month periods ended September 30, 1999, respectively.
Depreciation and amortization increased as we incurred further capital
expenditures in our expansion and more of our network facilities became
operational in the second and third quarters.

    SALES AND MARKETING. Sales and marketing expenses were approximately
$19,698,000 and $3,328,000 for the nine months ended September 30, 2000 and
1999, respectively. Sales and marketing expenses for the three months ended
September 30, 2000 were $6,896,000 compared to $2,092,000 for the three months
ended September 30, 1999. The significant increases in total sales and marketing
expense were principally attributable to an increase in marketing and
promotional activities and increases in sales and marketing personnel. Sales and
marketing expenses are expected to increase as we continue to expand our
business.

    GENERAL AND ADMINISTRATIVE. General and administrative expenses were
approximately $16,066,000 and $2,945,000 for the nine months ended September 30,
2000 and 1999, respectively. General and administrative

                                      -8-
<PAGE>

expenses were $6,714,000 for the three months ended September 30, 2000 compared
to $1,391,000 for the three months ended September 30, 1999. The increases in
general and administrative expenses were principally the result of increases in
the number of employees, development of our operating infrastructure and
amortization of intangible assets related to recent acquisitions.

    STOCK COMPENSATION. We incurred stock compensation expenses of approximately
$2,679,000 and $3,413,000 for the nine months ended September 30, 2000 and 1999,
respectively, and $486,000 and $796,000 for the three months ended September 30,
2000 and September 30, 1999, respectively. These expenses consisted of charges
and amortization related to stock options and restricted stock granted to our
employees, directors and advisors.

    INTEREST INCOME, NET. Net interest income for the nine months ended
September 30, 2000 was approximately $5,228,000 as compared to approximately
$828,000 for the nine months ended September 30, 1999. Net interest income was
approximately $1,335,000 and $620,000 for the three months ended September 30,
2000 and 1999, respectively. The increases were primarily due to increases in
our cash balances as a result of the issuance of common stock in the year 2000
and the issuance of preferred and common stock in 1999.

    NET LOSS. Net losses were approximately $75,856,000 and $12,119,000 for the
nine months ended September 30, 2000 and 1999, respectively, and $30,231,000 and
$5,621,000 for the three months ended September 30, 2000 and September 30, 1999,
respectively.

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 $108,977,000 as of September 30, 2000.
Our working capital as of September 30, 2000 was approximately $77,851,000.

    Net cash provided by financing activities for the nine months ended
September 30, 2000 was approximately $143,904,000. This cash primarily resulted
from the sale of our common stock. During March, 2000, we completed a public
offering of 5,750,000 shares of our common stock, resulting in proceeds to the
Company of approximately $141,273,000, net of underwriting discounts and
commissions and offering expenses payable by the Company. We have used, and
intend to continue using, the proceeds from our financing activities primarily
to implement our business plan and for working capital.

     In July 2000, the Company entered into a 48-month lease agreement with an
equipment vendor to finance the purchase of network equipment. The Company has
leased $8,900,000 under this agreement. Amounts financed under this lease
facility bear an interest rate of 12% and are secured by the financed equipment.
At September 30, 2000, approximately $8,665,000 was outstanding under this lease
facility.

    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. At September 30,
2000, approximately $1,310,000 was outstanding under this lease facility.
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.

    In May 2000, our bank line of credit expired and the amounts outstanding,
approximately $4,376,000, converted to a 36-month term loan. Amounts borrowed
under this term loan generally bear interest at the sum of 1% plus the higher of
the bank's prime rate of interest and the federal funds rate plus 0.5%, and are
secured by a lien on certain of our equipment. As of September 30, 2000, amounts
outstanding under the term loan bore interest at the annual rate of 10.5%. The
term loan 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 a result of the development of our operating infrastructure and recent
acquisitions, payments due on our office facility operating leases have
increased. Minimum office facility operating lease payments under these leases
are approximately $858,000 in the fourth quarter of 2000, $3,350,000 in 2001,
$3,375,000 in 2002, $2,310,000 in 2003 and $1,199,000 in 2004.

    For the nine months ended September 30, 2000, the net cash used in our
operating activities was approximately $51,252,000. This cash was used for
operating expenses, including salaries, consulting and legal

                                      -9-
<PAGE>

expenses, network operations, marketing and promotional activities and overhead
expenses. Our net operating cash outflows are expected to continue as we expand
our operations.

    Net cash used in investing activities for the nine months ended September
30, 2000 was approximately $51,885,000. Approximately $51,981,000 was used
primarily for the purchase of equipment and payment of collocation costs and
approximately $11,147,000 was used for acquisitions and investments (excluding
$2,550,000 which is payable by the Company to selling stockholders at future
dates), which was partially offset by proceeds from the sale of marketable
securities of approximately $11,242,000.

    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 $51,981,000 for the nine months
ended September 30, 2000. We currently anticipate spending to approximate
$5,000,000 to $10,000,000 for capital expenditures during the fourth quarter of
2000. The planned capital expenditures are primarily for 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
operational support systems. The actual amounts and timing of our capital
expenditures will vary depending on the speed at which we expand and implement
our network and could differ materially both in amount and timing from our
current plans.

    We believe that our existing cash and short-term investments, amounts
available under our equipment lease facilities and cash generated from
operations, will be sufficient to fund our operating losses, capital
expenditures, lease payments and working capital requirements into the second
half of 2001. We intend to use these cash resources to continue building our
network and for working capital and other general corporate purposes. We may
also use a portion of these cash resources to acquire complementary businesses
or other assets. The amounts actually expended for these purposes will vary
significantly depending on a number of factors, including revenue growth, if
any, planned capital expenditures, and the extent and timing of our entry into
target markets.

    We expect our operating losses, net operating cash outflows and capital
expenditures to continue as we expand our network and operations. We expect that
additional financing will be required during 2001. 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 acquisitions; or

     o    we accelerate or delay 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 and operations or respond to competitive pressures
would be significantly impaired.

                                      -10-
<PAGE>

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In December 1999, the staff of the Securities and Exchange Commission
issued its Staff Accounting Bulletin ("SAB") No. 101, REVENUE RECOGNITION. SAB
No. 101 provides guidance on the measurement and timing of revenue recognition
in financial statements of public companies. Changes in accounting policies to
apply the guidance of SAB No. 101, as amended by SAB No. 101B, must be adopted
by recording the cumulative effect of the change in the fiscal quarter ending
December 31, 2000. Management has not yet determined the effect SAB No. 101 will
have, if any, on our accounting policies or the amount of the cumulative effect
to be recorded from adopting SAB No. 101.

    In March 2000, The Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation--an Interpretation of Accounting Principles Board ("APB")
Opinion No. 25." FIN 44 clarifies the following: the definition of an employee
for purposes of applying APB Opinion No. 25; the criteria for determining
whether a plan qualifies as a noncompensatory plan; the accounting consequence
of various modifications to the terms of previously fixed stock options or
awards; and the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain conclusions
in FIN 44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000. The initial adoption of FIN 44 did not have a material impact
on the Company's financial position or results of operations.

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, among other
things, (i) the industry-wide trend toward free installation of service, which
adversely impacts our revenue; (ii) the challenges relating to the timely
installation of service for customers, including our dependence on traditional
telephone companies to provide acceptable telephone lines in a timely manner,
and the traditional telephone companies' reliance on unionized labor; (iii) our
ability to execute our business plan in a timely manner, which may not be
achieved if our sales force is not able to generate sufficient sales to
customers or if we are not able to install and commence service for customers in
a timely manner; (iv) our need for additional funds during 2001, which may not
be available on acceptable terms or at all, which could adversely impact our
ability to implement our business plan; (v) risks associated with acquisitions,
including difficulties in identifying and completing acquisitions, integrating
acquired businesses or assets and realizing the revenue, earning or synergies
anticipated from any acquisition; (vi) our need to achieve sustained market
acceptance of our services at desired pricing levels; (vii) competition; (viii)
our extremely limited operating history, which makes it difficult to evaluate
our business and prospects; (ix) the difficulty of predicting the new and
rapidly evolving high-speed data communications industry; (x) our history of,
and expectation of additional, losses and negative operating cash flow; (xi) our
unproven business model, which may not be successful; (xii) our ability to
negotiate, enter into and renew interconnection and collocation agreements with
traditional local telephone companies; (xiii) the possibility of disappointing
quarterly revenue or operating results, which could cause the price of our
common stock to fall; (xiv) regulatory, legislative and judicial developments,
which could adversely affect the way we operate our business; (xv) our reliance
on outside vendors and service providers, including the traditional local
telephone companies; and (xvi) our ability to recruit and retain qualified
personnel, establish the necessary infrastructure to support our business, and
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. For
additional information regarding these and other risk factors that we face, see
the disclosure contained under "Risk Factors" in our Annual Report on Form 10-K
for the year ended December 31, 1999, which has been filed with the Securities
and Exchange Commission.

                                      -11-
<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   We have no derivative financial instruments in our cash and cash equivalents.
We invest our cash and cash equivalents in investment-grade, highly liquid
investments, consisting of commercial paper, government securities, bank
certificates of deposit and corporate bonds.

   The Company's exposure to market risk for changes in interest rates relates
primarily to borrowings under the Company's bank term loan. These borrowings
bear interest at variable rates and the fair value of this indebtedness should
not be significantly affected by changes in market interest rates. An effective
increase or decrease of 10% in the current effective interest rates under the
term loan would not have a material effect on the Company's results of
operations or cash flow.































                                      -12-
<PAGE>

                           PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

      EXHIBIT
        NO.                                EXHIBIT
        ---                                -------

       11      Statement Re: Computation of Basic and Diluted Net Loss Per Share

       27      Financial Data Schedule

(b)      Reports on Form 8-K.

               None.
































                                      -13-
<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/   JOSEPH K. KEYES
                                                   -----------------------------
                                                   Joseph K. Keyes
                                                   Vice President, Finance


Date:   November 13, 2000


































                                      -14-

<PAGE>

                                  Exhibit Index

      EXHIBIT
        NO.                                EXHIBIT
        ---                                -------

        11     Statement Re: Computation of Basic and Diluted Net Loss Per Share

        27     Financial Data Schedule







































                                      -15-





© 2022 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission