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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 June 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.
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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 X No
--- ---
As of August 11, 2000, the registrant had 65,874,882 shares of Common Stock
outstanding.
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<PAGE>
DSL.NET, INC.
INDEX
<TABLE><CAPTION>
Page
Number
------
Part I - Financial Information
<S> <C> <C>
Item 1. Consolidated Financial Statements ................................................... 3
Consolidated Balance Sheets at December 31, 1999 and
June 30, 2000.................................................................... 3
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 1999 and 2000........................................................... 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 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........................... 11
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds............................................ 12
Item 4. Submission of Matters to a Vote of Security Holders.................................. 13
Item 6. Exhibits and Reports on Form 8-K..................................................... 14
Signatures ..................................................................................... 15
Exhibit Index ..................................................................................... 16
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DSL.NET, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE><CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
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ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 134,695,782 $ 66,178,261
Marketable securities 4,221,723 13,274,183
Accounts receivable (net of allowances of $275,099 and $62,603, 1,777,302 318,516
respectively)
Prepaid expenses and other current assets 1,788,882 1,043,935
------------- -------------
Total current assets 142,483,689 80,814,895
Fixed assets (net of accumulated depreciation and amortization of
$8,412,713 and $1,787,747, respectively) 74,710,305 32,664,924
Goodwill and other intangible assets (net of accumulated amortization
of $1,083,884 and $63,306, respectively) 25,454,399 3,420,135
Other assets 1,556,604 731,818
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Total assets $ 244,204,997 $ 117,631,772
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,362,944 $ 9,587,186
Accrued liabilities 8,547,963 3,173,173
Accrued salaries 2,020,685 848,841
Deferred revenue 980,175 234,061
Current portion of capital leases payable 1,088,075 715,953
Current portion of notes payable 1,458,492 281,316
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Total current liabilities 31,458,334 14,840,530
Capital lease obligation 1,602,705 892,906
Notes payable 2,909,515 1,165,450
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Total liabilities 35,970,554 16,898,886
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Commitments and contingencies
Stockholders' equity
Common stock, $0.0005 par value; 200,000,000 shares authorized;
65,829,009 and 58,382,196 shares issued and outstanding, 32,914 29,191
respectively
Additional paid-in capital 288,012,515 141,245,583
Deferred compensation (7,006,124) (13,361,940)
Accumulated deficit (72,804,862) (27,179,948)
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Total stockholders' equity
208,234,443 100,732,886
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Total liabilities and stockholders' equity $ 244,204,997 $ 117,631,772
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
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DSL.NET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE><CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 3,785,626 $ 135,985 $ 5,522,932 $ 184,173
------------ ------------ ------------ ------------
Operating expenses:
Network and operations 19,327,314 1,218,171 30,695,286 1,482,628
Sales and marketing 7,814,040 1,106,214 12,802,275 1,235,589
General and administrative 5,648,314 1,028,829 9,352,255 1,554,013
Stock compensation 664,524 1,794,545 2,192,960 2,616,805
------------ ------------ ------------ ------------
Total operating expenses 33,454,192 5,147,759 55,042,776 6,889,035
------------ ------------ ------------ ------------
Operating loss (29,668,566) (5,011,774) (49,519,844) (6,704,862)
------------ ------------ ------------ ------------
Interest (income), net (2,372,340) (201,141) (3,893,565) (207,615)
Other (income), net (9,593) 0 (1,362) 0
------------ ------------ ------------ ------------
Net loss $(27,286,633) $ (4,810,633) $(45,624,917) $ (6,497,247)
============ ============ ============ ============
Exchange of Preferred Stock 0 11,998,000 0 11,998,000
------------ ------------ ------------ ------------
Loss applicable to common stock $(27,286,633) $(16,808,633) $(45,624,917) $(18,495,247)
============ ============ ============ ============
Net loss per share-basic and diluted $ (0.45) $ (2.45) $ (0.78) $ (3.63)
============ ============ ============ ============
Shares used in computing net loss per share 61,257,149 6,874,276 58,475,800 5,088,380
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
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DSL.NET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE><CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (45,624,914) $ (6,497,247)
Reconciliation of net loss to net cash used in operating activities:
Depreciation and amortization 7,706,209 236,282
Non-cash compensation expense 2,192,960 2,616,805
Net changes in current assets and liabilities:
Increase in accounts receivable (1,011,408) (35,440)
Increase in other current assets (394,145) (304,912)
Increase in other assets (283,417) (896,338)
Increase in accounts payable 6,231,556 1,198,993
Increase in accrued liabilities 2,870,076 890,075
Increase in deferred revenue 180,396 24,886
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Net cash used in operating activities (28,132,687) (2,766,896)
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Cash flows from investing activities:
Sale / (purchase) of marketable securities 9,052,460 (5,528,091)
Purchase of fixed assets (46,500,377) (6,133,618)
Acquisition of businesses, net of cash acquired (10,646,713) --
Other Investments (500,001) --
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Net cash used in investing activities (48,594,631) (11,661,709)
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Cash flows from financing activities:
Proceeds from preferred stock issuance -- 43,217,305
Proceeds from common stock issuance 141,964,889 --
Proceeds from equipment leases 1,059,361 980,370
Proceeds from credit facility 2,788,376 786,907
Payments on equipment notes payable -- (66,667)
Principal payments under capital lease obligation (567,787) (58,086)
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Net cash provided by financing activities 145,244,839 44,859,829
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Net increase in cash and cash equivalents 68,517,521 30,431,224
Cash and cash equivalents at beginning of period 66,178,261 39,479
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Cash and cash equivalents at end of period $ 134,695,782 $ 30,470,703
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
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DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 June 30, 2000 and for the three and six months
ended June 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 six month periods ended June 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 $141,181,000 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
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approximately $7,006,000 as of June 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. 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:
<TABLE><CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
---- ----
<S> <C> <C>
Pro forma revenue 8,405,000 2,478,000
Pro forma operating loss (52,517,000) (9,328,000)
Pro forma net loss applicable to common shares (48,623,000) (21,118,000)
Pro forma net loss per share,
basic and diluted $ (0.83) $ (3.93)
Shares used in computing pro forma
net loss per share 58,712,910 5,374,772
</TABLE>
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.
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 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 300 cities as of June 30, 2000.
We have incurred operating losses and net losses for each month since our
formation. For the period ended June 30, 2000, we have experienced net cash
outflows from operating and investing activities. As of June 30, 2000, we had an
accumulated deficit of approximately $72,805,000. We intend to continue to
increase our operating expenses and incur capital expenditures in an effort to
rapidly expand our network infrastructure, service areas and sales and marketing
activities. 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 $5,523,000 for the six months
ended June 30, 2000 from approximately $184,000 for the six months ended June
30, 1999. Revenue for the three months ended June 30, 2000 was approximately
$3,786,000 compared to $136,000 for the three months ended June 30, 1999. The
increase for both periods was 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. We also expect
a continuing industry trend toward free installation offerings, which may affect
the Company's upfront installation revenue in the future.
NETWORK AND OPERATIONS. Network and operations expenses increased to
approximately $30,695,000 for the six months ended June 30, 2000 from
approximately $1,483,000 for the six months ended June 30, 1999. Network and
operations expenses for the three months ended June 30, 2000 were approximately
$19,327,000 compared to $1,218,000 for the three months ended June 30, 1999. The
significant increase in total network and operations expenses was 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 network and operations costs to continue to increase in
future periods as we continue to expand our network and customer base.
Included in network and operations expenses is depreciation and amortization
of approximately $5,834,000 and $3,942,000 for the six and three month periods
ended June 30, 2000, respectively, as compared to $191,000 for the six months
ended June 30, 1999. Depreciation and amortization increased as more of our
network facilities became operational and we incurred further capital
expenditures in our expansion.
SALES AND MARKETING. Sales and marketing expenses were approximately
$12,802,000 and $1,236,000 for the six months ended June 30, 2000 and 1999,
respectively. Sales and marketing expenses for the three months ended June 30,
2000 were $7,814,000 compared to $1,106,000 for the three months ended June 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 $9,352,000 and $1,554,000 for the six months ended June 30, 2000
and 1999, respectively. General and administrative expenses were $5,648,000 for
the three months ended June 30, 2000 compared to $1,029,000 for the three months
ended June 30, 1999. The increase in general and administrative expenses were
principally the result of
8
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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
$2,193,000 and $2,617,000 for the six months ended June 30, 2000 and 1999,
respectively, and $665,000 and $1,795,000 for the three months ended June 30,
2000 and June 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 six months ended June 30,
2000 was approximately $3,894,000 as compared to approximately $208,000 for the
six months ended June 30, 1999. Net interest income was approximately $2,372,000
and $201,000 for the three months ended June 30, 2000 and 1999, respectively.
The increases were primarily due to increases in our cash balances as a result
of the issuance of preferred and common stock.
NET LOSS. Net loss was approximately $45,625,000 and $6,497,000 for the six
months ended June 30, 2000 and 1999, respectively, and $27,287,000 and
$4,811,000 for the three months ended June 30, 2000 and June 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 $138,918,000 as of June 30, 2000. Our
working capital as of June 30, 2000 was approximately $111,025,000.
Net cash provided by financing activities for the six months ended June 30,
2000 was approximately $145,245,000. 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 $141,181,000, 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 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 June 30, 2000,
approximately $1,448,000 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, the Company's 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%. As of
June 30, 2000, amounts outstanding under the term loan bore interest at the
annual rate of 10.5% and are secured by a lien on certain of our equipment. 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. Annual minimum office facility operating lease payments under these
leases are approximately $2,455,000 in 2000, $3,350,000 in 2001, $3,375,000 in
2002, $2,310,000 in 2003 and $1,199,000 in 2004.
For the six months ended June 30, 2000, the net cash used in our operating
activities was approximately $28,133,000. This cash was used for 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 as we expand our operations.
Net cash used in investing activities for the six months ended June 30, 2000
was approximately $48,595,000. Approximately $46,500,000 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 $9,052,000.
9
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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 $46,500,000 for the six months
ended June 30, 2000. We currently anticipate spending an aggregate of
approximately $30 million for capital expenditures for the balance of 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 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 through the first
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.
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 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 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 and operations or respond to competitive pressures
would be significantly impaired.
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
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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. Management does not expect the application of FIN 44 to 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
need to achieve sustained market acceptance of our services at desired pricing
levels; (iv) competition; (v) our extremely limited operating history, which
makes it difficult to evaluate our business and prospects; (vi) the difficulty
of predicting the new and rapidly evolving high-speed data communications
industry; (vii) our history of, and expectation of additional, losses and
negative operating cash flow; (viii) our unproven business model, which may not
be successful; (ix) our ability to negotiate, enter into and renew
interconnection and collocation agreements with traditional local telephone
companies; (x) the possibility of disappointing quarterly revenue or operating
results, which could cause the price of our common stock to fall; (xi)
regulatory, legislative and judicial developments, which could adversely affect
the way we operate our business; (xii) our reliance on outside vendors and
service providers, including the traditional local telephone companies; and
(xiii) 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.
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, 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.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
We sold 7,200,000 shares of our common stock in our initial public offering,
pursuant to our final prospectus dated October 6, 1999. This prospectus was
contained in our Registration Statement on Form S-1 (SEC File No. 333-80141),
which was declared effective by the Securities and Exchange Commission on
October 5, 1999. All of the shares of common stock covered by the Registration
Statement were sold. The initial public offering closed on October 12, 1999 and
the sale of 1,026,000 additional shares pursuant to the exercise of the
overallotment option granted to the underwriters closed on November 8, 1999. Net
proceeds to DSL.net, excluding the exercise of the overallotment option and
after deduction of underwriting discounts and commissions and offering expenses
payable by DSL.net, approximated $48.5 million and net proceeds from the
exercise of the overallotment option, after deduction of underwriting discounts
and commissions and offering expenses payable by DSL.net, approximated $7.2
million. The aggregate amount of expenses incurred by DSL.net through June 30,
2000 in connection with the issuance and distribution of the shares of common
stock offered and sold in the initial public offering, including the exercise of
the overallotment option, was approximately $5.9 million, including $4.1 million
in underwriting discounts and commissions, and $1.8 million in other expenses.
None of the expenses paid by DSL.net in connection with the initial public
offering or the exercise of the overallotment option were paid, directly or
indirectly, to directors, officers, persons owning ten percent or more of
DSL.net's equity securities, or affiliates of DSL.net. As of June 30, 2000, we
have used approximately $21.3 million of the net proceeds from our initial
public offering for working capital purposes and approximately $34.4 million for
the build out of our network and other capital expenditures. As of June 30,
2000, all proceeds from the initial public offering have been applied.
On May 26, 2000, DSL.net acquired Vector Internet Services Inc.(VISI), a
Minnesota corporation. In connection with this acquisition, an aggregate of
286,392 shares of DSL.net's common stock, $0.0005 par value per share, were
issued as partial consideration for the outstanding capital stock of VISI. In
addition, DSL.net assumed VISI employee stock options, which became exercisable
for an aggregate of 898,926 shares of DSL.net Common Stock.
An aggregate of 898,926 shares issuable in connection with the exercise of
options assumed by DSL.net in the acquisition of VISI were registered with the
Securities and Exchange Commission pursuant to a Registration Statement on Form
S-8 (SEC File No. 333-39016) filed with the Securities and Exchange Commission
on June 9, 2000.
During the quarter ended June 30, 2000, DSL.net issued 102,737 shares of
common stock pursuant to a cashless exercise of a warrant. The warrant had a
stated exercise price of $0.90 per share.
No underwriter was involved in the issuances of securities in connection
with the acquisition of VISI or the exercise of the warrant described above. The
securities were issued in reliance upon an exemption from the registration
provisions of the Securities Act of 1933, as amended (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
certain options to purchase common stock and employee stock grants, Rule 701 of
the Securities Act. The shares of DSL.net common stock issued in connection with
the acquisition of VISI and the warrant exercise are deemed restricted
securities for purposes of the Securities Act.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
DSL.net's Annual Meeting of Stockholders was held on May 25, 2000. Holders
of an aggregate of 65,023,232 shares of DSL.net common stock at the close of
business on April 17, 2000 were entitled to vote at the meeting. At such
meeting, the Company's stockholders voted as follows:
Proposal 1. To elect two members of the board of directors to serve for one
year terms as Class I directors, to elect two members of the board of directors
to serve for two year terms as Class II directors and to elect two members of
the board of directors to serve for three year terms as Class III directors,
each such director to serve for such term or until his respective successor has
been duly elected and qualified, or until his earlier death, resignation or
removal.
Total Vote for Total Vote Withheld
Director Name Each Nominee from Each Nominee
------------- ------------ -----------------
Class I Directors
-----------------
William Seifert 50,220,491 44,245
Paul K. Sun 50,220,491 44,245
Class II Directors
------------------
Robert Gilbertson 50,220,491 44,245
William J. Marshall 50,220,491 44,245
Class III Directors
-------------------
James D. Marver 50,220,491 44,245
David F. Struwas 50,220,491 44,245
No other persons were nominated, or received votes, for election as
directors of DSL.net at the 2000 Annual Meeting of Stockholders.
Proposal 2. To ratify the selection of the firm of PricewaterhouseCoopers LLP as
auditors for the fiscal year ending December 31, 2000.
Total Vote for Total Vote Against Abstentions from
Proposal 2 Proposal 2 Proposal 2
-------------- ------------------- ----------------
50,137,689 21,388 105,659
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NO. EXHIBIT
--- -------
10.01 Vector Internet Services, Inc. 1999 Stock Option Plan
(incorporated by reference to exhibit 4.4 to our registration
statement on Form S-8 (File No. 333-39016))
10.02 Vector Internet Services, Inc. 1997 Stock Option Plan
(incorporated by reference to exhibit 4.5 to our registration
statement on Form S-8 (File No. 333-39016))
11 Statement Re: Computation of Basic and Diluted Net Loss Per
Share
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on June 8,
2000, reporting on Item 2, relating to the Company's
acquisition of Vector Internet Services, Inc., which occurred
on May 26, 2000.
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/ JOSEPH K. KEYES
----------------------------
Joseph K. Keyes
Vice President, Finance
Date: August 14, 2000
15
<PAGE>
Exhibit Index
-------------
EXHIBIT
NO. EXHIBIT
--- -------
10.01 Vector Internet Services, Inc. 1999 Stock Option Plan
(incorporated by reference to exhibit 4.4 to our registration
statement on Form S-8 (File No. 333-39016))
10.02 Vector Internet Services, Inc. 1997 Stock Option Plan
(incorporated by reference to exhibit 4.5 to our registration
statement on Form S-8 (File No. 333-39016))
11 Statement Re: Computation of Basic and Diluted Net Loss Per
Share
27 Financial Data Schedule
16
