================================================================================
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, 2002
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 October 24, 2002 the registrant had 64,929,899 shares of Common Stock
outstanding.
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DSL.net, Inc.
INDEX
Page
Number
------
Part I - Financial Information
Item 1. Consolidated Financial Statements .................................3
Consolidated Balance Sheets (unaudited) at December 31, 2001
and September 30, 2002.......................................3
Consolidated Statements of Operations (unaudited) for the three
and nine months ended September 30, 2001 and 2002............4
Consolidated Statements of Cash Flows (unaudited) for the
nine months ended September 30, 2001 and 2002................5
Notes to Consolidated Financial Statements.......................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................17
Item 3. Quantitative and Qualitative Disclosures about Market Risk........29
Item 4. Controls and Procedures...........................................29
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders...............29
Item 6. Exhibits and Reports on Form 8-K..................................30
Signature....................................................................31
Certifications...............................................................31
Exhibit Index................................................................33
2
Part I - Financial Information
Item 1. Consolidated Financial Statements
DSL.net, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
ASSETS December 31, September 30,
2001 2002
--------- ---------
Current assets:
Cash and cash equivalents $ 19,285 $ 16,126
Restricted cash 346 282
Accounts receivable (net of allowances of $3,844 and $998 at
December 31, 2001 and September 30, 2002, respectively) 5,856 4,732
Deferred costs 1,131 812
Prepaid expenses and other current assets 2,235 1,947
--------- ---------
Total current assets 28,853 23,899
Fixed assets, net 36,861 26,305
Goodwill and other intangible assets 14,741 11,923
Other assets 569 914
--------- ---------
Total assets $ 81,024 $ 63,041
========= =========
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,327 $ 4,060
Accrued salaries 907 866
Accrued liabilities 9,636 5,761
Deferred revenue 3,966 3,736
Current portion of capital leases payable 2,902 2,710
Current portion of bridge loan payable 3,531 --
--------- ---------
Total current liabilities 25,269 17,133
Capital leases payable 4,560 2,538
--------- ---------
Total liabilities 29,829 19,671
--------- ---------
Commitments and contingencies (Note 8)
Preferred stock, 20,000,000 preferred shares authorized:
20,000 shares designated as Series X, mandatorily redeemable convertible preferred stock,
$.001 par value, 10,000 and 20,000 shares ($10,115 and $21,715 liquidation preference) issued
and outstanding as of December 31, 2001 and September 30, 2002, respectively 436 6,467
15,000 shares designated as Series Y, mandatorily redeemable convertible preferred stock,
$.001 par value, 6,469 and 15,000 shares ($6,475 and $15,930 liquidation preference) issued
and outstanding as of December 31, 2001 and September 30, 2002, respectively 34 3,594
Stockholders' equity:
Common stock, $.0005 par value; 200,000,000 and 400,000,000 shares authorized;
64,851,462 and 64,929,899 shares issued and outstanding as of December 31, 2001
and September 30, 2002, respectively 32 32
Additional paid-in capital 300,757 309,708
Deferred compensation (1,667) (728)
Accumulated deficit (248,397) (275,703)
--------- ---------
Total stockholders' equity 50,725 33,309
--------- ---------
Total liabilities, mandatorily redeemable convertible preferred stock and stockholders' equity $ 81,024 $ 63,041
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
3
DSL.net, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
Revenue $ 11,724 $ 11,262 $ 30,894 $ 34,239
------------ ------------ ------------ ------------
Operating expenses:
Network (excluding $7, $7, $22 and $22 12,628 8,179 36,347 25,516
of stock compensation, respectively)
Operations (excluding $30, $12, $149 and $41
of stock compensation, respectively) 6,526 1,865 43,719 5,712
General and administrative (excluding $111, $58, $339
and $226 of stock compensation, respectively) 5,279 2,305 21,108 9,081
Sales and marketing (excluding $221, $218, $656 and
$648 of stock compensation, respectively) 2,467 1,870 11,505 4,644
Stock compensation 369 295 1,166 937
Depreciation and amortization 6,353 5,138 22,370 15,526
------------ ------------ ------------ ------------
Total operating expenses 33,622 19,652 136,215 61,416
------------ ------------ ------------ ------------
Operating loss (21,898) (8,390) (105,321) (27,177)
Interest income (expense), net 18 (70) 648 (306)
Other (expense) income, net (32) 2 (34) 177
------------ ------------ ------------ ------------
Net loss $ (21,912) $ (8,458) $ (104,707) $ (27,306)
============ ============ ============ ============
Net loss applicable to common stockholders:
Net loss $ (21,912) $ (8,458) $ (104,707) $ (27,306)
Dividends on preferred stock -- (1,050) -- (2,523)
Accretion of preferred stock, net of issuance costs -- (3,011) -- (7,068)
------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (21,912) $ (12,519) $ (104,707) $ (36,897)
============ ============ ============ ============
Net loss per share, basic and diluted $ (0.34) $ (0.19) $ (1.64) $ (0.57)
============ ============ ============ ============
Shares used in computing net loss per share,
basic and diluted 64,136,948 64,887,681 63,755,377 64,833,595
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
4
DSL.net, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
---------------------------
2001 2002
--------- ---------
Cash flows from operating activities:
Net loss $(104,707) $ (27,306)
Reconciliation of net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 22,370 15,526
Amortization of deferred debt issuance costs 77 9
Stock compensation expense 1,166 937
Restructuring charges and write-down of fixed assets 29,781 --
Impairment charges for write-down of goodwill 3,955 --
Loss on sale/write-off of fixed assets 286 356
Decrease / (increase) in other assets 1,234 (345)
Net changes in current assets and liabilities:
(Increase) / decrease in accounts receivable, net (1,782) 1,149
Decrease in prepaid and other current assets 819 608
(Decrease) in accounts payable (8,309) (266)
(Decrease) in accrued salaries (652) (41)
Increase / (decrease) in accrued liabilities 586 (3,972)
Increase / (decrease) in deferred revenue 1,625 (274)
--------- ---------
Net cash (used in) operating activities (53,551) (13,619)
--------- ---------
Cash flows provided by (used in) investing activities:
Purchases of property and equipment (4,573) (1,328)
Proceeds from sales of property and equipment 144 85
Acquisitions of businesses and customer lines (1,797) (1,150)
Decrease in restricted cash 3,730 63
--------- ---------
Net cash (used in) investing activities (2,496) (2,330)
--------- ---------
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock for stock option
exercises and employee stock purchase plan 46 14
Proceeds from preferred stock issuance, net -- 15,000
Principal payments under notes and capital lease obligations (5,971) (2,224)
--------- ---------
Net cash (used in) provided by financing activities (5,925) 12,790
--------- ---------
Net (decrease) in cash and cash equivalents (61,972) (3,159)
Cash and cash equivalents at beginning of period 72,324 19,285
--------- ---------
Cash and cash equivalents at end of period $ 10,352 $ 16,126
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
5
DSL.net, Inc.
Notes to Consolidated Financial Statements
(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. Certain prior period amounts have been
reclassified to conform to the 2002 presentation. The consolidated financial
statements ("financial statements") at September 30, 2002 and for the three and
nine months ended September 30, 2001 and 2002 are unaudited, but in the opinion
of management, include all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation of its
financial position and operating results. Operating results for the three months
and nine months ended September 30, 2002 are not necessarily indicative of
results that may be expected for any future periods.
Network and operations expenses, which were previously reported as a
combined amount on the consolidated statements of operations, have been
separated into two components: (1) network expenses and (2) operations expenses.
Network expenses include costs related to network engineering and network
operations personnel, costs for telecommunications lines between customers,
central offices, network service providers and the Company's network, costs for
rent and power at the Company's central offices, costs to connect to the
Internet, costs of customer line installations and the costs of customer premise
equipment when sold to customers. Operations expenses include costs related to
customer care, customer provisioning, customer billing, customer technical
assistance, purchasing, headquarters facilities operations, operating systems
maintenance and support and other related overhead expenses.
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 financial statements for the year ended
December 31, 2001. Accordingly, footnote disclosures that would substantially
duplicate the disclosures contained in the Company's December 31, 2001 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 ("SEC"). 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, 2001 and the Company's unaudited
financial statements and related notes included in the Company's Quarterly
Reports on Form 10-Q for the periods ended March 31, 2002 and June 30, 2002, all
of which have been filed with the SEC.
B. Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting
Bulletin ("SAB") No. 101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS", which
requires that four basic criteria be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred or
services rendered; (3) the fee is fixed and determinable; and (4) collectibility
is reasonably assured. Determination of criteria (3) and (4) are based on
management's judgments regarding the fixed nature of the fee charged for
services rendered and products delivered and the collectibility of those fees.
C. Earnings (Loss) Per Share
Basic earnings (loss) 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.
6
DSL.net, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
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 dilutive conversion of the Company's outstanding preferred stock. The
diluted earnings per share amount is the same as the basic earnings per share
amount because the Company had a net loss during each period presented and the
impact of the assumed exercise of the stock options and warrants and the assumed
conversion of preferred stock would have been anti-dilutive.
2. Liquidity
As reflected in 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, 2001, the Company incurred operating losses of approximately
$115,895,000 and negative operating cash flows of approximately $62,990,000
during the year ended December 31, 2001. During the nine months ended September
30, 2002, the Company incurred operating losses of approximately $27,177,000 and
negative operating cash flows of approximately $13,619,000. These operating
losses and negative operating cash flows have been financed primarily by
proceeds from equity issuances. The Company had accumulated deficits of
approximately $248,397,000 at December 31, 2001 and approximately $275,703,000
at September 30, 2002.
The Company expects its operating losses, net operating cash outflows and
capital expenditures to continue during the remainder of 2002 and through 2003.
The Company completed rounds of private equity and bridge loan financings
totaling approximately $35 million as follows: approximately $20 million in the
fourth quarter of 2001, $10 million in March 2002, and $8.5 million in May 2002
(which, after cancellation of the bridge loans, yielded net proceeds of
approximately $5 million) (Note 10). The Company believes that its existing cash
and cash equivalents, and cash expected to be generated from operations will be
sufficient to fund its operating losses, capital expenditures, lease payments
and working capital requirements through the end of 2003, based on its current
business plans and projections. The Company intends to use these cash resources
to finance its capital expenditures and for working capital and other general
corporate purposes. The Company may also use a portion of these cash resources
to acquire complementary businesses, customers and other assets, including the
proposed acquisition of network assets and associated subscriber lines from
Network Access Solutions Corporation and certain of its affiliates ("NAS") (Note
14). However, the Company may need to obtain additional financing in order to
complete certain acquisitions or operate its business after certain
acquisitions. If additional financing is necessary, it may be raised through
some combination of borrowings (including borrowings under the proposed bank
credit facility described in Note 14), leasing, or the sale of equity or debt
securities. The amounts actually expended for these purposes will vary
significantly depending on a number of factors, including market acceptance of
the Company's services, revenue growth, cash generated from operations,
improvements in operating productivity, the availability of additional debt or
equity financing, the extent and timing of entry into new markets, and
availability and prices paid for acquisitions. Failure to generate sufficient
revenue, contain certain discretionary spending or achieve certain other
business plan objectives could have a material adverse effect on the Company's
results of operations and financial position, or cause the Company to pursue
additional financing or strategic alternatives, or to dispose of or discontinue
some or a significant portion of its operations.
3. Stockholders' Equity
In January 2001, the Company exercised its repurchase right for 1,288,566
shares of common stock at $.001875 per share, representing the remaining
unvested shares from one of the Company's founding shareholders who had
terminated his employment. The shares were subsequently cancelled and $323,832,
or $0.2513 per share, was reclassified from deferred compensation to additional
paid-in capital and common stock.
In July 2001, the Company exercised its repurchase right for 249,937
shares of common stock at $.001875 per share, representing the remaining
unvested shares from one of the Company's founding shareholders who had
terminated his employment. The shares were subsequently cancelled and $62,809,
or $0.2513 per share, was reclassified from deferred compensation to additional
paid-in capital and common stock.
7
DSL.net, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The Company's remaining unamortized deferred compensation balance of
approximately $728,000 at September 30, 2002, relating to stock options and
restricted stock held by employees and directors, is being amortized over the
respective remaining vesting periods.
4. Restructuring
In December 2000, the Company initiated a new business plan strategy
designed to conserve its capital, reduce its losses and extend its cash
resources. This strategy included the following actions: 1) further network
expansion was curtailed; 2) network connections to certain central offices were
suspended; 3) certain facilities were vacated and consolidated; 4) operating
expenses were reduced; and 5) headcount was reduced by approximately 140
employees. These actions resulted in a restructuring charge of approximately
$3,542,000 in December 2000.
In March 2001, the Company re-evaluated its restructuring reserve related
to the corporate restructuring announced in December 2000 and recorded an
increase in the reserve of approximately $831,000, which was primarily related
to delays in subleasing its vacated facilities and additional costs pertaining
to its suspended central offices. Of that amount, approximately $440,000 was
included in network expenses and operations expenses and approximately $391,000
was included in general and administrative expenses.
In June 2001, due to the lack of liquidity in the financial markets, the
Company further re-evaluated its business plans and determined that additional
actions were necessary to further reduce its losses, further extend its cash
resources and reduce its total funding requirements. These actions included: 1)
further reductions in operating expenses; 2) closure of approximately 100
non-active and 250 active central offices; and 3) an additional
reduction-in-force of approximately 90 employees. These actions resulted in
additional restructuring charges approximating $32,503,000, which included
$3,155,000 for impairments of goodwill relating to the Company's acquisitions of
Tycho Networks, Inc. and certain assets of Trusted Net Media Holdings, LLC. The
goodwill impairment analysis was accomplished by comparing the carrying value of
the assets with the expected future net cash flows generated over the remaining
useful life of the assets. Since the carrying value was more than the expected
future net cash flows, the goodwill was reduced to the net present value of the
expected future net cash flows. Of the approximately $32,503,000 in additional
restructuring charges, approximately $27,561,000 was included in network
expenses and operations expenses; approximately $35,000 was included in sales
and marketing expenses and approximately $4,907,000 was included in general and
administrative expenses.
In September 2001, due to the lack of liquidity in the financial markets,
the Company again further re-evaluated its business plans and determined that
additional actions were necessary to further reduce its losses, further extend
its cash resources and reduce its total funding requirements. These actions
included: 1) closure of the Tycho and Trusted Net facilities in Santa Cruz,
California and Atlanta, Georgia, respectively, and 2) the decision not to
install equipment in 100 new central offices. These actions resulted in
additional restructuring charges approximating $4,748,000, which included
approximately $800,000 for impairments of goodwill relating to the Company's
acquisitions of Tycho Networks, Inc. and certain assets of Trusted Net Media
Holdings, LLC. The goodwill impairment analysis was accomplished by comparing
the carrying value of the assets with the expected future net cash flows
generated over the remaining useful life of the assets. As a result of this
analysis, expected future net cash flows were determined to be insignificant
and, as the carrying value was more than these expected future net cash flows,
the balance of goodwill was written off. Of the approximately $4,748,000 in
additional restructuring charges, approximately $3,572,000 was included in
network expenses and operations expenses and approximately $1,176,000 was
included in general and administrative expenses.
The Company's restructuring reserve balance at September 30, 2002, of
approximately $950,000, which related to various restructuring charges recorded
in 2000 and 2001, was included in the Company's accrued liabilities and
represented approximately $635,000 for anticipated costs pertaining to its
vacated facilities and approximately $315,000 for anticipated costs pertaining
to its closed central offices.
8
DSL.net, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
5. Acquisitions
During the first half of 2001, the Company acquired approximately 1,100
customer lines referred by Covad Communications, Inc. ("Covad") under the Covad
Safety Net program, for aggregate fees of approximately $696,000. These customer
line acquisitions were accounted for under the purchase method of accounting
and, accordingly, the purchase price has been allocated to the customer lines
acquired based on their estimated fair values at the date of acquisition. This
amount is being amortized on a straight-line basis over two years from the date
of purchase.
During the quarter ended June 30, 2001, the Company entered into
agreements with Covad and Zyan Communications, Inc. ("Zyan"), a California-based
ISP which had filed for bankruptcy protection; affording the Company the right
to acquire up to 4,800 Zyan customer lines whose wholesale circuit connections
were being supported by Covad. In accordance with the Covad agreement, the
anticipated purchase price of $1,467,000 for these Zyan lines was escrowed at
closing and restricted as of June 30, 2001. Ultimately, the Company was able to
contract for service with and acquire approximately 2,800 former Zyan customers,
for a purchase price of approximately $1,075,000 and as of December 31, 2001 the
remaining escrow balance of approximately $392,000 had been returned to the
Company. The Zyan customer line acquisitions were accounted for under the
purchase method of accounting and, accordingly, the purchase price was allocated
to customer lines acquired based on their estimated fair values at the date of
acquisition. This amount is being amortized on a straight-line basis over two
years from the date of purchase.
During the quarter ended March 31, 2002, the Company entered into an Asset
Purchase Agreement, dated as of January 1, 2002 (the "Broadslate Asset Purchase
Agreement"), with Broadslate Networks, Inc. ("Broadslate") for the purchase of
business broadband customer accounts and certain other assets, including certain
accounts receivable related to the customer accounts, for $800,000, subject to
certain adjustments. The Broadslate Asset Purchase Agreement provided for an
initial cash payment of $650,000, with $150,000 retained by the Company (the
"Holdback Amount"), to be paid to Broadslate after a transition period, subject
to certain adjustments, as provided for in the Broadslate Asset Purchase
Agreement. On March 26, 2002, the Company gave notice to Broadslate of its
intent to pursue an indemnity claim against the Holdback Amount for the full
amount in accordance with the provisions of the Broadslate Asset Purchase
Agreement. The claim and final settlement amount of $150,000 was applied to the
Holdback Amount as follows: (i) approximately $50,000 pertained to the Company's
request for reimbursement of a ratable portion of the purchase price paid for
certain customer lines which were not available for migration to the Company's
network, and (ii) approximately $100,000 was for amounts due to the Company from
revenue collected by Broadslate, net of related costs, during the customer
transition period as provided for in the Broadslate Asset Purchase Agreement.
The Broadslate customer line acquisitions were accounted for under the purchase
method of accounting and, accordingly, the adjusted purchase price of
approximately $750,000 was allocated to the assets acquired based on their
estimated fair values at the date of acquisition as follows: approximately
$28,000 to net accounts receivable acquired and approximately $722,000 to
approximately 522 customer lines acquired, which amount is being amortized on a
straight-line basis over two years from the date of purchase.
During the quarter ended September 30, 2002, the Company entered into an
Asset Purchase Agreement dated as of July 30, 2002 (the "Abacus Asset Purchase
Agreement") with Abacus America, Inc. ("Abacus") for the purchase of broadband
customer lines. The Abacus Asset Purchase Agreement provided for a cash payment
for each successfully migrated broadband customer line, up to a maximum payment
of approximately $844,000 and required a purchase price deposit of approximately
$211,000. Ultimately, the Company was able to migrate and acquire 1,066 lines
for a purchase price of approximately $543,000. The Abacus customer line
acquisitions were accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the customer lines
acquired based on their estimated fair values at the date of acquisition. This
amount is being amortized on a straight-line basis over two years from the date
of purchase.
9
DSL.net, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The following table sets forth the unaudited pro forma consolidated financial
information of the Company, giving effect to the acquisition of end users under
the Covad Safety Net program and the acquisition of Zyan customers, Broadslate
customers, and Abacus customers, as if the transactions occurred at the
beginning of the periods presented.
(in thousands, except share
and per share amounts)
Pro Forma
Nine Months Ended September 30,
---------------------------------
2001 2002
------------ ------------
Pro forma revenue $ 37,701 $ 35,284
Pro forma operating loss $ (101,787) $ (26,501)
Pro forma net loss $ (102,310) $ (26,788)
Pro forma net loss applicable to common stockholders $ (102,310) $ (36,379)
Pro forma net loss per share, basic and diluted $ (1.60) $ (0.56)
Shares used in computing pro forma net loss per share 63,755,377 64,833,595
The pro forma results are not necessarily indicative of the actual results
of operations that would have been obtained had the acquisitions taken place at
the beginning of the respective periods or the results that may occur in the
future.
The revenue attributable to customer lines acquired during the period was
approximately $3,336,000 and $1,392,000 for the nine months ended September 30,
2001 and 2002, respectively.
6. Goodwill and Other Intangible Assets
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
which became effective January 1, 2002, the Company has ceased to amortize
approximately $8,482,000 of goodwill. The Company recorded approximately
$2,484,000 of amortization during 2001 relating to this goodwill, and would have
recorded an equal amount in 2002. In lieu of amortization, the Company made an
initial impairment review of its goodwill during the first quarter of 2002, and
will perform annual impairment reviews thereafter, unless a change in
circumstances requires a review in the interim. The Company did not record any
goodwill impairment adjustments resulting from its initial impairment review.
The following shows the pro forma results had SFAS 142 been implemented as of
January 1, 2001:
10
DSL.net, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(dollars in thousands,
except per share amounts)
Three Months Ended
September 30,
---------------------------------
2001 2002
------------ ------------
Net loss applicable to common stockholders - as reported $ (21,912) $ (12,519)
Add back amortization of goodwill 621 --
------------ ------------
Pro forma net loss applicable to common stockholders $ (21,291) $ (12,519)
============ ============
Net loss per share, basic and diluted - as reported $ (0.34) $ (0.19)
Add back amortization of goodwill 0.01 --
------------ ------------
Pro forma net loss per share, basic and diluted $ (0.33) $ (0.19)
============ ============
(dollars in thousands,
except per share amounts)
Nine Months Ended
September 30,
---------------------------------
2001 2002
------------ ------------
Net loss applicable to common stockholders - as reported $ (104,707) $ (36,897)
Add back amortization of goodwill 1,863 --
------------ ------------
Pro forma net loss applicable to common stockholders $ (102,844) $ (36,897)
============ ============
Net loss per share, basic and diluted - as reported $ (1.64) $ (0.57)
Add back amortization of goodwill 0.03 --
------------ ------------
Pro forma net loss per share, basic and diluted $ (1.61) $ (0.57)
============ ============
Amortization expense of other intangible assets for the three and nine
months ended September 30, 2001 was approximately $1,245,000 and $4,174,000,
respectively. Amortization expense of other intangible assets for the three and
nine months ended September 30, 2002, was approximately $1,388,000 and
$4,082,000, respectively.
7. Debt
In December 2001, in conjunction with the Company's sale of shares of
mandatorily redeemable convertible Series Y Preferred Stock (the "Series Y
Preferred Stock"), the Company issued short-term promissory notes (the
"Promissory Notes") for proceeds of $3,531,000 to the Series Y Preferred
Stockholders. The Promissory Notes provided for an annual interest rate of 12%.
In May 2002, in accordance with the terms of the Series Y Purchase Agreement,
the Company sold an additional 8,531 shares of Series Y Preferred Stock for
$5,000,000 in cash and delivery of the Promissory Notes for cancellation. All
accrued interest on the Promissory Notes, of approximately $145,000, was
forgiven (Note 10).
8. Commitments and Contingencies
In certain markets where the Company has not deployed its own DSL
equipment, the Company utilizes local DSL facilities from wholesale providers,
including Covad, in order to provide service to its end-user customers. These
wholesale providers may terminate their service with little or no notice. The
failure of Covad or any of the Company's other wholesale providers to provide
acceptable service on acceptable terms could have a material adverse effect on
the Company's operations. Covad emerged from bankruptcy in
11
DSL.net, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
December 2001. However, there can be no assurance that Covad or other wholesale
providers will be successful in managing their operations and business plans.
The Company transmits data across its network via transmission facilities
that are leased from certain carriers, including AT&T and MCI WorldCom
Communications, Inc. ("WorldCom"). The failure of any of the Company's data
transport carriers to provide acceptable service on acceptable terms could have
a material adverse effect on the Company's operations. WorldCom, has filed a
voluntary petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code.
While WorldCom has announced that it expects to continue with its current
operations without adverse impact on its customers, it may not be able to do so.
The Company believes that it could transition the data transport services
currently supplied by WorldCom to alternative suppliers in thirty to sixty days,
should WorldCom announce discontinuance of such services. However, if WorldCom
was to discontinue such services without providing sufficient advance notice (at
least sixty days), the Company might not be able to transition such services in
a timely manner, which could disrupt service provided by the Company to certain
of its customers. This could result in the loss of revenue, loss of customers,
claims brought against the Company by its customers, or could otherwise have a
material adverse effect on the Company. Even if WorldCom was to provide adequate
notice of any such discontinuation of service, there can be no assurance that
the Company would be able to transition such service without a material adverse
impact on the Company or its customers, if at all.
In January 2002, the Company negotiated an amendment to its long-term
purchase commitment with AT&T for data transport services. The amendment reduced
the Company's minimum purchase commitment to $1,100,000 for the contract year
ending in November 2002 and $987,000 for the contract period ending in October
2003. The Company also has a commitment to purchase $17,600 per month of certain
additional network capacity from AT&T throughout the commitment period.
In February 2002, the Company negotiated a termination of its obligations
under its lease for vacated office space located in Milford, Connecticut. The
Company had recorded anticipated losses related to these vacated premises as
part of its restructuring charges during the year ended December 31, 2001.
Consequently, no additional costs related to this lease will be incurred during
the year ended December 31, 2002.
In September 2002, the Company reached agreement on the principal
provisions of an amendment to its contract with WorldCom for data transport
services, which contract amendment was finalized in October 2002. The contract
amendment: (i) provides for certain price reductions, (ii) reduces the Company's
minimum purchase commitment from $4,800,000 per contract year to $1,800,000 per
contract year for contract years beginning on and after June 1, 2002, and (iii)
allows the Company to include certain additional services toward meeting the
minimum purchase commitment (which were previously excluded) on a retroactive
and prospective basis. The WorldCom contract ends in November 2004.
9. Network Expenses
The following significant non-recurring transactions were recorded in
network expenses during the third quarter of 2002:
Due to certain approved local regulatory changes, one of the Company's
suppliers was authorized to back-bill for various recurring and non-recurring
charges related to the Company's facilities located in the supplier's central
offices. As a result, during the third quarter of 2002, the Company paid
approximately $432,000 in such back-billed charges, which resulted in a
corresponding increase in network expenses for the three and nine months ended
September 30, 2002.
As a result of negotiating an amendment to its contract with WorldCom for
data transport services (Note 8), the Company reversed an accrued liability of
approximately $536,000 pertaining to the minimum purchase commitment for the
contract year ended May 31, 2002, which resulted in a corresponding reduction in
network expenses for the three and nine months ended September 30, 2002.
12
DSL.net, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
10. Mandatorily Redeemable Convertible Preferred Stock
As more fully described in 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, 2001, which was filed with the SEC, the Company entered into
a Series X Preferred Stock Purchase Agreement (the "Series X Purchase
Agreement") with VantagePoint on November 14, 2001, relating to the sale and
purchase of up to an aggregate of 20,000 shares of Series X Preferred Stock at a
purchase price of $1,000 per share. On December 24, 2001, the Company entered
into a Series Y Preferred Stock Purchase Agreement (the "Series Y Purchase
Agreement") with the Series Y Investors relating to the sale and purchase of up
to an aggregate of 15,000 shares of Series Y Preferred Stock at a purchase price
of $1,000 per share.
Pursuant to the Series X Purchase Agreement, in November and December
2001, the Company sold an aggregate of 10,000 shares of Series X Preferred Stock
to VantagePoint for total proceeds of $10,000,000, before direct issuance costs
of $189,128. Pursuant to the Series X Purchase Agreement, on March 1, 2002, the
Company sold an additional 10,000 shares of Series X Preferred Stock to
VantagePoint for total proceeds of $10,000,000.
Pursuant to the Series Y Purchase Agreement, in December 2001, the Company
sold an aggregate of 6,469 shares of Series Y Preferred Stock to the Series Y
Investors for an aggregate purchase price of $6,469,000, before direct issuance
costs of approximately $300,000, which costs pertain to all funding transactions
under the Series Y Purchase Agreement.
In addition, during December 2001, the Company issued the Promissory Notes
to the Series Y Investors in the aggregate principal amount of $3,531,000 in
exchange for proceeds of $3,531,000. The Promissory Notes provided for an annual
interest rate of 12%. In May 2002, in accordance with the terms of the Series Y
Purchase Agreement, the Company sold 8,531 additional shares of Series Y
Preferred Stock for $5,000,000 in cash and delivery of the Promissory Notes for
cancellation. All accrued interest on the Promissory Notes, of approximately
$145,000, was forgiven (Note 7).
The Series X and Series Y Preferred Stock activity during the nine months
ended September 30, 2002 is summarized as follows:
(dollars in thousands)
Mandatorily
Redeemable Convertible Preferred Stock
-------------------------------------------------
Series X Series Y
---------------------- ---------------------
Shares Amount Shares Amount
-------- -------- -------- --------
Balance December 31, 2001 10,000 $ 436 6,469 $ 34
Issuance of shares 10,000 10,000 8,531 8,531
Discount on Series X and Y Preferred Stock resulting
from a beneficial conversion feature (10,000) (8,531)
Accrued dividends on Series X and Y Preferred Stock 1,600 923
Accretion of beneficial conversion feature of Series X
and Y Preferred Stock 4,431 2,637
-------- -------- -------- --------
Balance September 30, 2002 20,000 $ 6,467 15,000 $ 3,594
======== ======== ======== ========
13
DSL.net, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
11. Related Party Transactions
In January 2002, the Company entered into an Asset Purchase Agreement with
Broadslate for the purchase of business broadband customer accounts and certain
other assets, including accounts receivables related to the acquired customer
accounts, for an adjusted purchase price of approximately $750,000 (Note 5).
Certain of the Company's stockholders, including investment funds affiliated
with Columbia Capital, in the aggregate owned in excess of 10% of the capital
stock of Broadslate. An affiliate of Columbia Capital and a member of our Board
of Directors was a director of Broadslate until February 2002.
In accordance with the Series X Purchase Agreement, a group of private
investment funds affiliated with VantagePoint Venture Partners ("VantagePoint")
purchased an additional 10,000 shares of the Company's mandatorily redeemable
convertible Series X Preferred Stock ("the Series X Preferred Stock") in a
closing that occurred on March 1, 2002 (Note 10). Prior to the sale of the
additional 10,000 shares of Series X Preferred Stock, VantagePoint beneficially
owned approximately 21,956,063 shares, or approximately 34%, of the Company's
total outstanding common stock and 10,000 shares of Series X Preferred Stock.
The 20,000 shares of Series X Preferred Stock owned by VantagePoint are
convertible into approximately 111,111,111 shares of common stock. As a result,
VantagePoint beneficially owns the equivalent of 133,067,174 shares of common
stock. Two affiliates of VantagePoint are members of the Company's Board of
Directors.
In accordance with the Series Y Purchase Agreement (Note 10), in December
2001, the Company sold to Columbia Capital Equity Partners III, L.P., Columbia
Capital Equity Partners II, L.P., The Lafayette Investment Fund, L.P., Charles
River Partnership X, a Limited Partnership and N.I.G. Broadslate (collectively
with their assigns, the "Series Y Investors") 6,469 shares of its Series Y
Preferred Stock for an aggregate purchase price of $6,469,000. In addition,
during December 2001, the Company issued the Promissory Notes (Note 7) to the
Series Y Investors in the aggregate principal amount of $3,531,000 in exchange
for proceeds of $3,531,000. In May 2002, the Company sold to the Series Y
Investors 8,531 shares of Series Y Preferred Stock for total proceeds of
$8,531,000, which resulted in net proceeds of approximately $5,000,000, after
the cancellation of the Promissory Notes issued to the Series Y Investors in
December 2001. An affiliate of the Columbia Capital entities is a member of the
Company's Board of Directors.
12. Research and Development Expenditure Credits
In March 2002, the Company filed an application with the Connecticut
Department of Revenue Services for research and development expenditure credits
for the 1999 and 2000 calendar years. The credits were approved as a reduction
against the Connecticut corporation business tax. With regard to credits
approved for the 2000 calendar year, the Company was entitled to elect a cash
refund at 65 percent of the approved credit. The Company elected to receive the
2000 calendar year credit as a cash refund of approximately $1,301,000. The 1999
calendar year credit of approximately $671,000 is available as a carry forward
to offset future State of Connecticut corporation business taxes. In July of
2002, the Company received the first installment of the cash refund pertaining
to the 2000 calendar year of approximately $1,000,000, with the $301,000 balance
payable in two equal installments in July 2003 and 2004. Upon receipt of the
research and development credits, the Company was obligated to pay approximately
$402,000 to a non-audit service provider as a result of a contingent fee
arrangement for professional services in connection with obtaining such credits.
For the three and nine months ended September 30, 2002, the Company has recorded
the $1,000,000 refund as a reduction in its state corporate franchise tax
expenses which are included in general and administrative expenses and the
$402,000 related professional services fee has also been included in general and
administrative expenses.
14
DSL.net, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
13. Recently Issued Accounting Pronouncements
In July 2001, Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Other Intangible Assets" was issued. SFAS No. 142 requires that
goodwill and intangible assets with indefinite lives no longer be amortized but
instead be measured for impairment at least annually, or when events indicate
that there may be an impairment. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. With the implementation of SFAS No. 142, the
Company has discontinued amortizing approximately $8,482,000 of goodwill
associated with acquired businesses. The Company recorded approximately
$2,484,000 of amortization related to this goodwill in 2001 and would have
recorded an equal amount in 2002.
In June 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations"
was issued. SFAS No. 143 addresses financial accounting and reporting for legal
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs that result from the acquisition, construction, or
development and normal operation of a long-lived asset. Upon initial recognition
of a liability for an asset retirement obligation, SFAS No. 143 requires an
increase in the carrying amount of the related long-lived asset. The asset
retirement cost is subsequently allocated to expense using a systematic and
rational method over the asset's useful life. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The adoption of this statement is
not expected to have a material affect on the Company's financial position or
results of operations.
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-lived Assets" was issued. SFAS 144 supersedes SFAS No. 121, "Accounting
for the Impairment of Long-lived Assets to be Disposed of" and supercedes and
amends certain other accounting pronouncements. SFAS No. 144 retains the
fundamental provisions of SFAS No. 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while resolving significant implementation issues associated with SFAS
No. 121. Among other things, SFAS No. 144 provides guidance on how long-lived
assets used as part of a group should be evaluated for impairment, establishes
criteria for when long-lived assets are held for sale, and prescribes the
accounting for long-lived assets that will be disposed of other than by sale.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001.
The adoption of SFAS No. 144 has not had a material impact on the Company's
financial position and results of operations.
In June 2002, SFAS No. 146, "Accounting for Exit or Disposal Activities"
was issued. SFAS No. 146 addresses the accounting for costs to terminate a
contract that is not a capital lease, costs to consolidate facilities and
relocate employees, and involuntary termination benefits under one-time benefit
arrangements that are not an ongoing benefit program or an individual deferred
compensation contract. The provisions of the statement will be effective for
disposal activities initiated after December 31, 2002. The Company is currently
evaluating the financial impact of adoption of SFAS No. 146.
14. Subsequent Events
On October 16, 2002, the Company entered into an Asset Purchase Agreement
(the "NAS Asset Purchase Agreement") with NAS and Adelman Lavine Gold and Levin,
a Professional Corporation, as deposit escrow agent, pursuant to which the
Company agreed to acquire network assets and associated subscriber lines of NAS
for $7,000,000 in cash (subject to adjustment as specified in the NAS Asset
Purchase Agreement) and the assumption of certain liabilities in an aggregate
principal amount of no more than $10,000,000. As NAS filed a voluntary petition
for Chapter 11 reorganization in June 2002, the NAS Asset Purchase Agreement is
subject to the approval of the U.S. Bankruptcy Court of Delaware. If the
transaction is approved by the Bankruptcy Court and other closing conditions are
satisfied, the Company expects that this transaction will be completed during
the fourth quarter of 2002.
15
DSL.net, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The Company has obtained a commitment letter from a commercial bank
providing for a revolving line of credit of up to $15,000,000 for a two-year
period following the closing of the credit facility. Borrowings under the credit
facility will bear an interest rate equal to the bank's prime rate equivalent.
All amounts outstanding under the credit facility on the second anniversary of
the closing of the credit facility will be repaid in twelve equal quarterly
installments. The bank's commitment is subject to final loan documentation. The
Company's ability to borrow amounts available under the credit facility will be
subject to the bank's receipt of a like amount of guarantees from certain of the
Company's investors and/or other guarantors acceptable to the bank. Until the
closing of the credit facility, there can be no assurance that the credit
facility will be made available to the Company pursuant to the terms set forth
in the bank's commitment letter, if at all.
The Company entered into a Guarantee Agreement, dated as of October 8,
2002, with VantagePoint, one of the company's affiliates, whereby VantagePoint
agreed, subject to the completion of the acquisition of the NAS assets on the
terms set forth in the NAS Asset Purchase Agreement, the execution of final loan
documentation in accordance with the terms of the bank commitment letter and the
execution of final guarantee documentation, to provide an initial guarantee with
respect to the bank credit facility in an amount up to $5,000,000, and an
additional guarantee of up to $2,000,000 at the sole election of VantagePoint.
This guarantee will be secured by a lien on substantially all of the Company's
assets. Without the consent of VantagePoint, the Company will not be permitted
to make an initial draw-down on the bank credit facility until the Company's
unrestricted cash balance is less than $5,000,000. In connection with the
VantagePoint guarantee, the Company will issue VantagePoint a warrant to
purchase shares of the Company's common stock equal to the sum of (i) 2,950,000
and (ii) the difference between (a) 10,000,000 and (b) the aggregate number of
shares allocated to other guarantors of the bank credit facility at the time of
the closing of the credit facility. The warrant issued to VantagePoint will be
exercisable, in whole or in part from time to time, for $0.50 per share for ten
years. If the terms of the bank credit facility change from those set forth in
the bank commitment letter or the acquisition of the NAS assets either is not
completed or is completed on different terms than those set forth in the NAS
Asset Purchase Agreement, there can be no assurance that VantagePoint will
provide the guarantee under the terms set forth in the Guarantee Agreement, if
at all. Prior to the execution of the Guarantee Agreement, VantagePoint
beneficially owned 21,956,063 shares of the Company's common stock and 20,000
shares of the Company's mandatorily redeemable, convertible Series X Preferred
Stock, convertible into 111,111,111 shares of the Company's common stock. Two
affiliates of VantagePoint are members of the Company's Board of Directors.
If VantagePoint provides the guarantee and warrants are issued to them as
described above, the Company may be required to recognize a guarantee fee equal
to the calculated value of the warrants as a non-cash expense.
16
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, 2001,
which has been filed with the Securities and Exchange Commission.
OVERVIEW
We provide high-speed data communications, Internet access, and related
services to small and medium-sized businesses, primarily using digital
subscriber line, or DSL, technology. We have primarily targeted select second
and third tier cities for the deployment of our own local communications
equipment. In first tier cities, and certain other markets where we have not
deployed our own equipment, we utilize the local facilities of other carriers to
provide service.
As reflected in our audited financial statements and related notes
included in our Annual Report on Form 10-K for the year ended December 31, 2001,
we incurred operating losses of approximately $115,895,000 and negative
operating cash flows of approximately $62,990,000 during the year ended December
31, 2001. During the nine months ended September 30, 2002, we incurred operating
losses of approximately $27,177,000 and negative operating cash flows of
approximately $13,619,000. These operating losses and negative operating cash
flows have been financed primarily by proceeds from equity issuances. We had
accumulated deficits of approximately $248,397,000 at December 31, 2001 and
$275,703,000 at September 30, 2002.
We expect our operating losses, net operating cash outflows and capital
expenditures to continue during the remainder of 2002 and through 2003. We
completed rounds of private equity and bridge loan financings totaling
approximately $35 million as follows: $20 million in the fourth quarter of 2001,
$10 million in March 2002 and $8.5 million in May 2002 (which, after
cancellation of the bridge loans, yielded net proceeds of approximately $5
million). We believe that our existing cash and short-term investments, and cash
expected to be generated from operations will be sufficient to fund our
operating losses, capital expenditures, lease payments and working capital
requirements through the end of 2003, based on our current business plans and
projections. We intend to use these cash resources to finance our capital
expenditures and for working capital and other general corporate purposes. We
may also use a portion of these cash resources to acquire complementary
businesses, customers and other assets, including the proposed acquisition of
network assets and associated subscriber lines from Network Asset Solutions
Corporation and certain of its affiliates ("NAS"), discussed below. However, we
may need to obtain additional financing in order to complete certain
acquisitions or operate our business after certain acquisitions. If additional
financing is necessary, it may be raised through some combination of borrowings
(including borrowings under the proposed bank credit facility described below),
leasing or the sale of debt or equity securities. The amounts actually expended
for these purposes will vary significantly depending on a number of factors,
including market acceptance of our services, revenue growth, cash generated from
operations, improvements in operating productivity, the availability of
additional debt or equity financing, the extent and timing of entry into new
markets, and availability and prices paid for acquisitions. Failure to generate
sufficient revenue, contain certain discretionary spending or achieve certain
other business plan objectives could have a material adverse effect on our
results of operations and financial position, or cause us to pursue additional
financing or strategic alternatives, or to dispose of or discontinue some or a
significant portion of our operations.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RISKS
Financial Reporting Release No. 60, which was released in December 2001 by
the Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. We have identified the accounting principles critical to
our business and results of operations. Note 2 to our audited financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2001, which has been filed with the SEC, includes a complete
summary of the significant accounting policies and methods used in the
preparation of our financial statements. The following is a brief discussion of
the more significant accounting policies and methods used by us.
17
In addition, Financial Reporting Release No. 61, which was released in
December 2001 by the SEC, requires all companies to include a discussion to
address, among other things, liquidity, off-balance sheet arrangements,
contractual obligations and commercial commitments.
Management's discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles. The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, including the
recoverability of tangible and intangible assets, disclosure of contingent
assets and liabilities as of the date of the financial statements, and the
reported amounts of revenues and expenses during the reported period. The
markets for our services are characterized by intense competition, rapid
technological development, regulatory and legislative changes, and frequent new
product introductions, all of which could impact the future value of our assets
and liabilities.
We evaluate our estimates on an on-going basis. The most significant
estimates relate to revenue recognition, goodwill and other long-lived assets,
the allowance for doubtful accounts, income taxes, contingencies and litigation.
We base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ materially from those estimates.
Management believes the following critical accounting policies affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements:
REVENUE RECOGNITION
We recognize revenue in accordance with SEC Staff Accounting Bulletin No.
101 (SAB N0. 101), "REVENUE RECOGNITION IN FINANCIAL STATEMENTS", which requires
that four basic criteria must be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred or
services rendered; (3) the fee is fixed and determinable; and (4) collectibility
is reasonably assured. Determination of criteria (3) and (4) are based on
management's judgments regarding the fixed nature of the fee charged for
services rendered and products delivered and the collectibility of those fees.
Revenue is recognized pursuant to the terms of each contract on a monthly
service fee basis which vary based on the speed of the customer's Internet
connection and the services ordered by the customer. The monthly fee includes
phone line charges, Internet access charges, the cost of the equipment installed
at the customer's site and the other services we provide, as applicable. Revenue
that is billed in advance of the services provided is deferred until the
services are rendered. Revenue related to installation charges is also deferred
and amortized to revenue over 18 months. Related direct costs incurred (up to
the amount of deferred revenue) are also deferred and amortized to expense over
18 months. Any excess direct costs over installation charges are charged to
expense as incurred. In certain instances, we negotiate credits and allowances
for service related matters. We establish a reserve for such credits based on
historical experience.
We seek to price our services competitively. The market for high-speed
data communications services and Internet access is rapidly evolving and
intensely competitive. While many of our competitors and potential competitors
enjoy competitive advantages over us, we are pursuing a significant market that,
we believe, is currently under-served. Although pricing is an important part of
our strategy, we believe that direct relationships with our customers and
consistent, high quality service and customer support will be key to generating
customer loyalty. During the past several years, market prices for many
telecommunications services and equipment have been declining, a trend that
might continue.
GOODWILL AND OTHER LONG-LIVED ASSETS
We account for our long-lived assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144, "ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF", which
requires that long-lived assets and certain intangible assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If undiscounted expected future cash
flows are less than the carrying value of the assets, an impairment loss is to
be recognized based on the fair value of the assets.
18
Effective January 1, 2002, we adopted SFAS No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS". This statement requires that the amortization of goodwill be
discontinued and instead an impairment approach be applied. The impairment tests
were performed during the first quarter of 2002 and will be performed annually
thereafter (or more often if adverse events occur) and are based upon a fair
value approach rather than an evaluation of the undiscounted cash flows. If
impairment exists, under SFAS No. 142, the resulting charge is determined by the
recalculation of goodwill through a hypothetical purchase price allocation of
the fair value and reducing the current carrying value to the extent it exceeds
the recalculated goodwill. We did not record any goodwill impairment adjustments
resulting from our impairment review during the first quarter of 2002.
Other long-lived assets, such as identifiable intangible assets and fixed
assets, are amortized or depreciated over their estimated useful lives. These
assets are reviewed for impairment whenever events or circumstances provide
evidence that suggests that the carrying amount of the assets may not be
recoverable, with impairment being based upon an evaluation of the identifiable
undiscounted cash flow. If impaired, the resulting charge reflects the excess of
the asset's carrying cost over its fair value.
If market conditions become less favorable, future cash flows (the key
variable in assessing the impairment of these assets) may decrease and as a
result we may be required to recognize impairment charges.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We
generally sell our services directly to end users mainly consisting of small to
medium sized businesses, as opposed to selling to Internet service providers who
then resell such services. We believe that we do not have significant exposure
or concentrations of credit risk with respect to any given customer. However, if
the country or any region we service experiences an economic downturn, the
financial condition of our customers could be adversely affected, which could
result in their inability to make payments to us. This could require additional
provisions for allowances. In addition, a negative impact on revenue related to
those customers may occur.
INCOME TAX
We use the liability method of accounting for income taxes, as set forth
in Statement of Financial Accounting Standards No. 109, "ACCOUNTING FOR INCOME
TAXES". Under this method, deferred tax assets and liabilities are recognized
for the expected future tax consequences of temporary differences between the
carrying amounts and the tax basis of assets and liabilities and net operating
loss carryforwards, all calculated using presently enacted tax rates.
We have not generated any taxable income to date and, therefore, have not
paid any federal income taxes since inception. Our state and federal net
operating loss carryforwards begin to expire in 2004 and 2019, respectively. Use
of our net operating loss carryforwards may be subject to significant annual
limitations resulting from a change in control due to our sales of Series X and
Series Y preferred stock. We are currently assessing the potential impact
resulting from these transactions. We have provided a valuation allowance for
the full amount of the net deferred tax asset since management has not
determined that these future benefits will more likely than not be realized.
LITIGATION
From time to time, we may be involved in litigation concerning claims
arising in the ordinary course of our business, including claims brought by
former employees and claims related to acquisitions. We record liabilities when
a loss is probable and can be reasonably estimated. These estimates are based on
an analysis made by internal and external legal counsel who consider information
known at the time. We believe we have made reasonable estimates in the past;
however, court decisions could cause liabilities to be incurred in excess of
estimates.
RESULTS OF OPERATIONS
REVENUE. Revenue is recognized pursuant to the terms of each contract on a
monthly service fee basis. The monthly service fees vary based on the speed of
the connection and the services ordered. The monthly fee includes all phone line
charges, Internet access charges, the cost of the modem installed at the
customer's site and the other services we provide, as applicable.
19
Revenue for the three months ended September 30, 2002 decreased by 4% to
approximately $11,262,000, from approximately $11,724,000 for the three months
ended September 30, 2001. The decrease in revenue in the 2002 quarter was
primarily due to a decrease in the average number of customer lines we serviced
during the 2002 quarter as compared to the 2001 quarter. The lower number of
customer lines serviced resulted from higher than normal customer disconnects
which were attributable to a less favorable economic climate since the third
quarter of 2001 and a concerted effort by the Company to aggressively collect
past due balances from customers and disconnect customers that did not remit
past due balances. In conjunction with this effort, during the third quarter of
2002, we eliminated inactive and discontinued accounts (which had been
previously reserved for) and wrote-off approximately $4,168,000 of gross
accounts receivable balances against our allowance for doubtful accounts.
Revenue increased to approximately $34,239,000 for the nine months ended
September 30, 2002, from approximately $30,894,000 for the nine months ended
September 30, 2001. This increase was primarily due to an increase in the
average number of customers subscribing for our services during the current
nine-month period, primarily resulting from the cumulative impact of prior year
acquisitions contributing revenue for a full nine months during 2002, and
current year acquisitions. Revenue attributable to customer lines acquired
during the period was approximately $454,000 and $1,962,000 for the three months
ended September 30, 2002 and 2001, respectively. Revenue attributable to
customer lines acquired during the period was approximately $1,392,000 and
$3,336,000, for the nine months ended September 30, 2002 and 2001, respectively.
NETWORK EXPENSES. Our network expenses (which were previously included
under the heading "network and operations expenses") include costs related to
network engineering and network operations personnel, costs for
telecommunications lines between customers, central offices, network service
providers and our network, costs for rent and power at our central offices,
costs to connect to the Internet, costs of customer line installations and the
costs of customer premise equipment when sold to our customers. Our costs for
customer lines will increase as we add customers. We lease high-speed lines and
other network capacity to connect our central office equipment and our network.
In addition, costs incurred to connect to the Internet are expected to increase
as the volume of data communications traffic generated by our customers
increases.
Network expenses for the three months ended September 30, 2002 decreased
35% to approximately $8,179,000, compared to approximately $12,628,000 for the
three months ended September 30, 2001. For the nine months ended September 30,
2002, network expenses decreased 30% to approximately $25,516,000, from
approximately $36,347,000 for the nine months ended September 30, 2001. These
decreases for both periods were primarily attributable to decreased
telecommunications expenses resulting from our restructuring and cost
containment efforts during 2001.
In addition, the following significant non-recurring transactions were
recorded in network expenses during the third quarter of 2002:
Due to certain approved local regulatory changes, one of our suppliers was
authorized to back-bill us for various recurring and non-recurring charges
related to our facilities located in the supplier's central offices. As a
result, during the third quarter of 2002, we paid approximately $432,000 in such
charges, which resulted in a corresponding charge to network expenses for the
three and nine months ended September 30, 2002.
In September 2002, we reached agreement on the principal provisions of an
amendment to our contract with WorldCom for data transport services, which
contract amendment was finalized in October 2002. The contract amendment: (i)
provides for certain price reductions, (ii) reduces our minimum purchase
commitment from $4,800,000 per contract year to $1,800,000 per contract year for
contract years beginning on and after June 1, 2002, and (iii) allows us to
include certain additional services toward meeting the minimum purchase
commitment (which were previously excluded) on a retroactive and prospective
basis. Accordingly, we reversed an accrued liability of approximately $536,000
pertaining to the minimum purchase commitment for the contract year ended May
31, 2002, which resulted in a corresponding reduction in network expenses for
the three and nine months ended September 30, 2002. The WorldCom contract ends
in November 2004.
OPERATIONS EXPENSES. Our operations expenses (which were previously
included under the heading "network and operations expenses") include costs
related to customer care, customer provisioning, customer billing, customer
technical assistance, purchasing, headquarters facilities operations, operating
systems maintenance and support and other related overhead expenses.
20
Operations expenses for the three months ended September 30, 2002 were
approximately $1,865,000, compared to operations expenses for the three months
ended September 30, 2001 of approximately $6,526,000. This 71% reduction was
primarily due to decreases resulting from our restructuring and cost containment
efforts during 2001 and included reductions in restructuring charges of
approximately $3,573,000, salaries and benefits of approximately $737,000,
equipment maintenance and support of approximately $118,000, and consulting and
outsourcing services of approximately $253,000, partially offset by increases in
miscellaneous other expenses of approximately $20,000. Operations expenses for
the nine months ended September 30, 2002 were approximately $5,712,000, compared
to operations expenses for the nine months ended September 30, 2001 of
approximately $43,719,000. This 87% reduction was primarily due to decreases
resulting from our restructuring and cost containment efforts during 2001 and
included reductions in restructuring charges of approximately $31,565,000,
salaries and benefits of approximately $3,701,000, equipment maintenance and
support of approximately $952,000, consulting and outsourcing services of
approximately $1,329,000, and miscellaneous other expenses of approximately
$460,000.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses
consist primarily of costs relating to human resources, finance, executive,
administrative services, recruiting, insurance, legal and auditing services,
leased office facilities rent and bad debt expenses.
General and administrative expenses were approximately $2,305,000 for the
three months ended September 30, 2002, compared to general and administrative
expenses for the three months ended September 30, 2001 of approximately
$5,279,000. This 56% reduction was primarily due to decreases resulting from our
restructuring and cost containment efforts during 2001 and included reductions
in restructuring and impairment charges of approximately $1,176,000, salaries
and benefits of approximately $460,000, sales, use, property and other taxes of
approximately $1,396,000 (as further discussed below), bad debt expense of
approximately $235,000 and other expenses of approximately $233,000. These
reductions were partially offset by increased professional fees of approximately
$434,000 (as further discussed below) and increased insurance costs of
approximately $92,000. General and administrative expenses for the nine months
ended September 30, 2002 were approximately $9,081,000 compared to general and
administrative expenses for the nine months ended September 30, 2001 of
approximately $21,108,000. This 57% reduction was primarily due to decreases
resulting from our restructuring and cost containment efforts during 2001 and
included reductions in restructuring and impairment charges of approximately
$6,474,000, professional fees of approximately $1,107,000 (as further discussed
below), salaries and benefits of approximately $1,933,000, sales, use, property
and other taxes of approximately $1,908,000 (as further discussed below), bad
debt expense of approximately $494,000, office facilities expense of
approximately $254,000 and other expenses of approximately $313,000. These
reductions were partially offset by increased insurance costs of approximately
$456,000.
In March 2002, we filed an application with the Connecticut Department of
Revenue Services for research and development expenditure credits for the 1999
and 2000 calendar years. The credits were approved as a reduction against our
corporation business tax. With regard to credits approved for the 2000 calendar
year, we were entitled to elect a cash refund at 65 percent of the approved
credit. We elected to receive the 2000 calendar year credit as a cash refund of
approximately $1,301,000. The 1999 calendar year credit of approximately
$671,000 is available as a carry forward to offset future State of Connecticut
corporation business taxes. In July of 2002, we received the first installment
of the cash refund pertaining to the 2000 calendar year of approximately
$1,000,000, with the $301,000 balance payable in two equal installments in July
2003 and 2004. Upon receipt of the research and development credits, we were
obligated to pay approximately $402,000 to a non-audit service provider as a
result of a contingent fee arrangement for professional services in connection
with obtaining such credits. For the three and nine months ended September 30,
2002, we have recorded the $1,000,000 refund as a reduction in its state
corporate franchise tax expenses which are included in general and
administrative expenses and the $402,000 related professional services fee has
also been included in general and administrative expenses.
SALES AND MARKETING. Our sales and marketing expenses consist primarily of
expenses for sales and marketing personnel, the development of our brand name,
promotional materials, direct mail advertising and sales commissions and
incentives.
Sales and marketing expenses for the three months ended September 30, 2002
were approximately $1,870,000, compared to sales and marketing expenses for the
three months ended September 30, 2001 of approximately $2,467,000, representing
a 24% decrease. The decrease in sales and marketing expenses was primarily
attributable to decreased costs that resulted from our restructuring and cost
containment efforts during 2001, including reductions in salaries and benefits
of approximately $454,000 and professional and consulting services of
approximately $366,000. These reductions were partially offset by increased
advertising
21
and direct mail marketing expenses of approximately $78,000 and increased other
expenses of approximately $145,000. For the nine months ended September 30,
2002, sales and marketing expenses were approximately $4,644,000, compared to
sales and marketing expenses for the nine months ended September 30, 2001 of
approximately $11,505,000, representing a 60% decrease. The decrease in sales
and marketing expenses was primarily due to decreased costs that resulted from
our restructuring and cost containment efforts during 2001, including reductions
in advertising and direct mail marketing expenses of approximately $2,633,000,
salaries and benefits of approximately $2,384,000, professional and consulting
services of approximately $1,699,000 and other expenses of approximately
$145,000.
STOCK COMPENSATION. We incurred non-cash stock compensation expenses as a
result of the granting of stock and stock options to employees and directors
with exercise prices per share subsequently determined to be below the fair
values per share of our common stock for financial reporting purposes at the
dates of grant. The stock compensation, if vested, was charged immediately to
expense, while non-vested compensation is being amortized over the vesting
period of the applicable options or stock, which was generally 48 months.
Unvested options for terminated employees are cancelled and the value of such
options are recorded as a reduction of deferred compensation with an offset to
additional paid-in-capital.
Non-cash stock compensation expense was approximately $295,000 and
$369,000 for the three months ended September 30, 2002 and 2001, respectively.
For the nine months ended September 30, 2002 and 2001, non-cash stock
compensation expense was approximately $937,000 and $1,166,000, respectively.
These expenses consisted of charges and amortization related to stock options
and restricted stock granted to our employees and directors. The unamortized
balances as of December 31, 2001 and September 30, 2002 of approximately
$1,667,000 and $728,000, respectively, are being amortized over the remaining
vesting period of each grant and are expected to be fully amortized by June 30,
2003.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization is primarily
attributable to the following assets: (i) depreciation of network and operations
equipment and Company-owned DSL modems and routers installed at customer sites,
(ii) depreciation of information systems and computer hardware and software,
(iii) amortization and depreciation of the costs of obtaining, designing and
building our collocation space and corporate facilities and (iv) amortization of
intangible capitalized costs pertaining to acquired businesses and customer line
acquisitions.
Depreciation and amortization expenses were approximately $5,138,000 for
the three months ended September 30, 2002, compared to depreciation and
amortization expenses of approximately $6,353,000 for the three months ended
September 30, 2001. This 19% decrease in depreciation and amortization expenses
for the three months ended September 30, 2002 primarily resulted from
restructuring write-offs of central office equipment and impairment write-offs
of intangible assets taken during 2001. For the nine months ended September 30,
2002, depreciation and amortization expenses were approximately $15,526,000,
compared to depreciation and amortization expenses of approximately $22,370,000
for the nine months ended September 30, 2001. This 31% decrease in depreciation
and amortization expenses for the nine months ended September 30, 2002 primarily
resulted from restructuring write-offs of central office equipment and
impairment write-offs of intangible assets taken during 2001.
Also, in accordance with SFAS No. 142 (see Recently Issued Accounting
Pronouncements, discussed below), we discontinued amortization of goodwill
beginning January 1, 2002, and completed an initial impairment review during the
first quarter of 2002. We did not record any impairment adjustments resulting
from this initial impairment review. Consequently, amortization expense related
to our goodwill was approximately $621,000 higher for the three months ended
September 30, 2001 than for the three months ended September 30, 2002. For the
nine months ended September 30, 2001, amortization expense related to our
goodwill was approximately $1,863,000 higher than for the nine months ended
September 30, 2002.
Depreciation expenses pertaining to assets related to network expenses and
operations expenses were approximately $3,390,000 and $4,049,000 for the three
months ended September 30, 2002 and 2001, respectively. For the nine months
ended September 30, 2002 and 2001, depreciation expenses pertaining to assets
related to network expenses and operations expenses were approximately
$10,520,000 and $14,714,000, respectively. Depreciation and amortization
expenses pertaining to assets related to general and administrative expenses
were approximately $1,748,000 and $2,304,000 for the three months ended
September 30, 2002 and 2001, respectively. For the nine months ended September
30, 2002 and 2001, depreciation and amortization expenses pertaining to assets
related to general and administrative expenses were approximately $5,006,000 and
$7,656,000, respectively.
22
INTEREST EXPENSE (INCOME) NET. Net interest expense of approximately
$70,000 for the three months ended September 30, 2002 included approximately
$174,000 of interest expense, which was partially offset by approximately
$104,000 of interest income. For the three months ended September 30, 2001, net
interest income of approximately $18,000 included approximately $200,000 of
interest income, which was partially offset by approximately $182,000 of
interest expense. The decrease in interest income for the three months ended
September 30, 2002 as compared to the three months ended September 30, 2001 was
primarily due to lower cash and investment balances and lower interest rates in
the more recent period. The decrease in interest expense for the three months
ended September 30, 2002 compared to the three months ended September 30, 2001
primarily related to lower capital lease obligations in the current period.
Net interest expense of approximately $306,000 for the nine months ended
September 30, 2002 included approximately $579,000 of interest expense, which
was partially offset by approximately $273,000 of interest income. For the nine
months ended September 30, 2001, net interest income of approximately $648,000
included approximately $1,635,000 of interest income, which was partially offset
by approximately $987,000 of interest expense. The decrease in interest income
for the nine months ended September 30, 2002 as compared to the nine months
ended September 30, 2001 was primarily due to lower cash and investment balances
and lower interest rates in the more recent period. The decrease in interest
expense for the nine months ended September 30, 2002 compared to the nine months
ended September 30, 2001 primarily related to lower capital lease obligations in
the more recent period.
RESTRUCTURING CHARGES. In December 2000, we initiated a new business plan
strategy designed to conserve capital, reduce our losses and extend our cash
resources. This strategy included the following actions: 1) further network
expansion was curtailed; 2) network connections to certain central offices were
suspended; 3) certain facilities were vacated and consolidated; 4) operating
expenses were reduced; and 5) headcount was reduced by approximately 140
employees. These actions resulted in restructuring charges of approximately
$3,542,000 in December 2000.
In March 2001, we re-evaluated our restructuring reserve related to the
corporate restructuring announced in December 2000 and recorded an increase in
the reserve of approximately $831,000, which was primarily related to delays in
subleasing our vacated facilities and additional costs pertaining to suspended
central offices. Of that amount, approximately $440,000 was included in network
and operations expenses and approximately $391,000 was included in general and
administrative expenses.
In June 2001, due to the lack of liquidity in the financial markets, we
further re-evaluated our business plans and determined that additional actions
were necessary to further reduce our losses, further extend our cash resources
and reduce our total funding requirements. These actions included: 1) further
reductions in operating expenses; 2) closure of approximately 100 non-active and
250 active central offices; and 3) an additional reduction-in-force of
approximately 90 employees. These actions resulted in additional restructuring
and impairment charges approximating $32,503,000, which included $3,155,000 for
impairments of goodwill relating to our acquisitions of Tycho Networks, Inc. and
certain assets of Trusted Net Media Holdings, LLC. The goodwill impairment
analysis was accomplished by comparing the carrying value of the assets with the
expected future net cash flows generated over the remaining useful life of the
assets. Since the carrying value was more than the expected future net cash
flows, the goodwill was reduced to the net present value of the expected future
net cash flows. Of the approximately $32,503,000 in additional restructuring
charges, approximately $27,561,000 was included in network and operations
expenses; approximately $35,000 was included in sales and marketing expenses and
approximately $4,907,000 was included in general and administrative expenses.
In September 2001, due to the lack of liquidity in the financial markets,
we again further re-evaluated our business plans and determined that additional
actions were necessary to further reduce our losses, further extend our cash
resources and reduce our total funding requirements. These actions included: 1)
closure of the Tycho and Trusted Net facilities in Santa Cruz, California and
Atlanta, Georgia, respectively, and 2) our decision not to install equipment in
100 new central offices. These actions resulted in additional restructuring
charges approximating $4,748,000, which included approximately $800,000 for
impairments of goodwill relating to our acquisitions of Tycho Networks, Inc. and
certain assets of Trusted Net Media Holdings, LLC. The goodwill impairment
analysis was accomplished by comparing the carrying value of the assets with the
expected future net cash flows generated over the remaining useful life of the
assets. As a result of this analysis, expected future net cash flows were
determined to be insignificant and, as the carrying value was more than these
expected future net cash flows, the balance of goodwill was written off. Of the
approximately
23
$4,748,000 in additional restructuring charges, approximately $3,572,000 was
included in network and operations expenses and approximately $1,176,000 was
included in general and administrative expenses.
The restructuring reserve balance at September 30, 2002, of approximately
$950,000, which related to various restructuring charges recorded in 2000 and
2001, is included in our accrued liabilities and represents approximately
$635,000 for anticipated costs pertaining to our vacated facilities and
approximately $315,000 for anticipated costs pertaining to our closed central
offices.
NET LOSS. Net loss was approximately $8,458,000 for the three months ended
September 30, 2002, compared to net loss for the three months ended September
30, 2001 of approximately $21,912,000. For the nine months ended September 30,
2002, net loss was approximately $27,306,000, compared to net loss for the nine
months ended September 30, 2001 of approximately $104,707,000.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our capital expenditures and operations primarily with
the proceeds from the sale of stock and from borrowings, including equipment
lease financings. As of September 30, 2002, we had cash, cash equivalents and
restricted cash of approximately $16,408,000 and working capital of
approximately $6,766,000.
Net cash provided by financing activities for the nine months ended
September 30, 2002, was approximately $12,790,000. This cash primarily resulted
from the sale of our preferred stock. Net cash used by financing activities for
the nine months ended September 30, 2001 of approximately $5,925,000 was mainly
used for principal payments under the Company's then outstanding term loan and
capital lease obligations. We have used, and intend to continue using, proceeds
from our financings primarily to implement our business plan and for working
capital and general corporate purposes. We have also used, and may in the future
use, a portion of such proceeds to acquire complementary businesses, customers
and other assets, including the proposed acquisition of network assets and
associated subscriber lines from NAS discussed below.
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. In July 2000, we
entered into a 48-month lease agreement with an equipment vendor to finance the
purchase of network equipment. We have leased approximately $8,900,000 under
this agreement. Amounts financed under this agreement bear an interest rate of
12% and are secured by the financed equipment. In addition, during 1999 and
2000, we purchased and assumed through acquisition certain equipment and
computer software under other capital leases, which are being repaid over
periods ranging from 24 months to 60 months at rates ranging from 7.5% to 15%.
In the aggregate, there was approximately $7,462,000 and approximately
$5,248,000, outstanding under capital leases at December 31, 2001 and September
30, 2002, respectively.
In May 1999, we entered into a collateralized credit facility with a bank
to provide up to $5,000,000 for the purchase of telecommunications equipment,
office equipment and vehicles. The credit facility expired in May 2000 and
converted to a term loan payable over 36 months. The term loan bore interest on
outstanding borrowings at 1% over the higher of the bank's prime rate or the
federal funds rate plus 0.5%. As of June 30, 2001, amounts outstanding under
this term loan bore interest at 8.0% per annum. The term loan was secured by a
lien on certain equipment and vehicles owned by us and located at our principal
office in New Haven, CT, and imposed certain financial and other covenants
requiring us to maintain certain financial ratios and limited new indebtedness,
the creation of liens, types of investments, mergers, consolidations and the
transfer of all or substantially all of our assets. The term loan was paid off
during the third quarter of 2001.
In December 2001, in conjunction with our sale of Series Y Preferred
Stock, we issued short-term promissory notes for proceeds of $3,531,000 to the
Series Y Investors. The promissory notes provided for an annual interest rate of
12%. The promissory notes were cancelled in May 2002 in connection with the sale
of an additional 8,531 shares of series Y preferred stock to the Series Y
Investors (discussed below) and all accrued interest, approximating $145,000,
was forgiven.
On March 1, 2002, we sold 10,000 shares of Series X Preferred Stock for an
aggregate of $10,000,000 pursuant to the Series X Purchase Agreement. In May
2002, pursuant to the Series Y Purchase Agreement, we sold an aggregate of 8,531
shares of series Y preferred stock to the Series Y Investors for total proceeds
of $8,531,000. In accordance with the Series Y Purchase Agreement, the
above-mentioned promissory notes
24
were cancelled as partial payment for the series Y preferred stock, resulting in
net proceeds of approximately $5,000,000.
On October 16, 2002, we entered into an Asset Purchase Agreement (the "NAS
Asset Purchase Agreement") with NAS and Adelman Lavine Gold and Levin, a
Professional Corporation, as deposit escrow agent, pursuant to which we agreed
to acquire network assets and associated subscriber lines of NAS for $7,000,000
in cash (subject to adjustment as specified in the NAS Asset Purchase Agreement)
and the assumption of certain liabilities in an aggregate principal amount of no
more than $10,000,000. As NAS filed a voluntary petition for Chapter 11
reorganization in June 2002, the NAS Asset Purchase Agreement is subject to the
approval of the U.S. Bankruptcy Court of Delaware. If the transaction is
approved by the Bankruptcy Court and other closing conditions are satisfied, we
expect that this transaction will be completed during the fourth quarter of
2002.
We have obtained a commitment letter from a commercial bank providing for
a revolving line of credit of up to $15,000,000 for a two-year period following
the closing of the credit facility. Borrowings under the credit facility will
bear an interest rate equal to the bank's prime rate equivalent. All amounts
outstanding under the credit facility on the second anniversary of the closing
of the credit facility will be repaid in twelve equal quarterly installments.
The bank's commitment is subject to final loan documentation. The Company's
ability to borrow amounts available under the credit facility will be subject to
the bank's receipt of a like amount of guarantees from certain of our investors
and/or other guarantors acceptable to the bank. Until the closing of the credit
facility, there can be no assurance that the credit facility will be made
available to us pursuant to the terms set forth in their commitment letter, if
at all.
We entered into a Guarantee Agreement, dated as of October 8, 2002, with
VantagePoint, one of our affiliates, whereby VantagePoint agreed, subject to the
completion of the acquisition of the NAS assets on the terms set forth in the
NAS Asset Purchase Agreement, the execution of final loan documentation in
accordance with the terms of the bank commitment letter and the execution of
final guarantee documentation, to provide an initial guarantee with respect to
the bank credit facility in an amount up to $5,000,000, and an additional
guarantee of up to $2,000,000 at the sole election of VantagePoint. This
guarantee will be secured by a lien on substantially all of our assets. Without
the consent of VantagePoint, we will not be permitted to make an initial
drawdown on the bank credit facility until our unrestricted cash balance is less
than $5,000,000. In connection with the VantagePoint guarantee, we will issue
VantagePoint a warrant to purchase shares of our common stock equal to the sum
of (i) 2,950,000 and (ii) the difference between (a) 10,000,000 and (b) the
aggregate number of shares allocated to other guarantors of the bank credit
facility at the time of the closing of the credit facility. The warrant issued
to VantagePoint will be exercisable, in whole or in part from time to time, for
$0.50 per share for ten years. If the terms of the bank credit facility change
from those set forth in the bank commitment letter or the acquisition of the NAS
assets either is not completed or is completed on different terms than those set
forth in the NAS Asset Purchase Agreement, there can be no assurance that
VantagePoint will provide the guarantee under the terms set forth in the
Guarantee Agreement, if at all. Prior to the execution of the Guarantee
Agreement, VantagePoint beneficially owned 21,956,063 shares of our common stock
and 20,000 shares of our redeemable, convertible Series X Preferred Stock,
convertible into 111,111,111 shares of our common stock. Two affiliates of
VantagePoint are members of our Board of Directors
If VantagePoint provides the guarantee and warrants are issued to them as
described above, we may be required to recognize a guarantee fee equal to the
calculated value of the warrants as a non-cash expense.
As a result of the development of our operating infrastructure and
acquisitions, we have entered into certain long-term agreements providing for
fixed payments. Under our facility operating leases, minimum office facility
operating lease payments are approximately $2,294,000 in 2002, $1,707,000 in
2003, $1,609,000 in 2004 and $577,000 in 2005. We also have long-term purchase
commitments with WorldCom and AT&T for data transport services with minimum
payments due even if our usage does not reach the minimum amounts. The WorldCom
commitment began in May 2000 and was re-negotiated in October 2002, and requires
minimum purchases of $4,800,000 per contract year for the first two contract
years and $1,800,000 per contract year thereafter. The WorldCom contract ends in
November 2004. The AT&T commitment was renegotiated in January 2002, and
requires minimum purchases of $1,100,000 for the contract year ending in
November 2002 and $987,000 for the contract period ending in October 2003. We
also have a commitment to purchase $17,600 per month of certain additional
network capacity from AT&T throughout the commitment period.
We transmit data across our network via transmission facilities that are
leased from certain carriers, including AT&T and WorldCom (as described above).
The failure of any of our data transport carriers to
25
provide acceptable service on acceptable terms could have a material adverse
effect on our operations. WorldCom, has filed a voluntary petition to reorganize
under Chapter 11 of the U.S. Bankruptcy Code. While WorldCom has announced that
it expects to continue with its current operations without adverse impact on its
customers, it may not be able to do so. We believe that we could transition the
data transport services currently supplied by WorldCom to alternative suppliers
in thirty to sixty days, should WorldCom announce discontinuance of such
services. However, were WorldCom to discontinue such services without providing
sufficient advance notice (at least sixty days), we might not be able to
transition such services in a timely manner, which could disrupt service
provided by us to certain of our customers. This could result in the loss of
revenue, loss of customers, claims brought against us by our customers, or could
otherwise have a material adverse effect on us. Even were WorldCom to provide
adequate notice of any such discontinuation of service, there can be no
assurance that we would be able to transition such service without a material
adverse impact on us or our customers, if at all, or that such discontinuation
of service would not otherwise have a material adverse effect on the Company.
As part of our restructuring in December 2000, we vacated certain office
space in Milford, Connecticut and Chantilly, Virginia and did not occupy certain
space in Santa Cruz, California. During the second and third quarters of 2001,
we vacated our office space located in Atlanta, Georgia and Santa Cruz,
California. As of December 31, 2001, we had been successful in terminating our
lease for office space in Chantilly, Virginia and in assigning our lease in
Atlanta, Georgia. We have entered into a 17-month sublease agreement on our
office space in Santa Cruz, California with a one-year renewal option. In
February 2002, we were successful in terminating our obligations under the lease
for office space in Milford, Connecticut.
For the nine months ended September 30, 2002, the net cash used in our
operating activities was approximately $13,619,000. This cash was used for a
variety of operating expenses, including salaries, network operations, sales,
marketing and promotional activities, consulting and legal expenses, and
overhead expenses.
Net cash used in investing activities for the nine months ended September
30, 2002 was approximately $2,330,000. Of this amount, approximately $1,328,000
was used for the purchase of equipment, and approximately $1,150,000 was used to
acquire customer lines. These expenditures were partially offset by
approximately $85,000 in proceeds from the sale of excess equipment, and
approximately $63,000 in a decrease in restricted cash.
The development and expansion of our business has required significant
capital expenditures. Capital expenditures, including collocation fees but
excluding acquisitions, were approximately $1,328,000 and $4,573,000 for the
nine months ended September 30, 2002 and 2001, respectively, and customer line
acquisitions were approximately $1,150,000 and $1,797,000 for the nine months
ended September 30, 2002 and 2001, respectively. The actual amounts and timing
of our future capital expenditures will vary depending on the speed at which we
expand and implement our network and implement service for our customers. As a
result of our decision to suspend further deployment of our network, our planned
capital expenditures for 2002, exclusive of acquisitions, are currently expected
to be primarily for the purchase and installation at our customers' sites of the
equipment necessary for us to provide our services, as well as for the continued
development of our network and operational support systems. We currently
anticipate spending a total of approximately $200,000 to $400,000 for capital
expenditures, excluding acquisitions, during the remainder of the year ending
December 31, 2002. The actual amounts and timing of our capital expenditures
could differ materially both in amount and timing from our current plans.
We expect our operating losses, net operating cash outflows and capital
expenditures to continue during the remainder of 2002 and through 2003. We
believe that our existing cash and short-term investments, and cash generated
from operations will be sufficient to fund our operating losses, capital
expenditures, lease payments and working capital requirements through the end of
2003, based on our current business plans and projections. We intend to use our
cash resources to finance our capital expenditures and for working capital and
other general corporate purposes. We may also use a portion of these cash
resources to acquire complementary businesses, customers and other assets,
including the proposed acquisition of network assets and associated subscriber
lines from NAS. However, we may need to obtain additional financing in order to
complete certain acquisitions or operate our business after certain
acquisitions. The amounts actually expended for these purposes will vary
significantly depending on a number of factors, including the rate of market
acceptance of our services, revenue growth, cash generated from operations,
improvements in operating productivity, the availability of additional debt or
equity financing, the availability of attractive acquisition opportunities and
the extent and timing of our entry
26
into new markets. Failure to generate sufficient revenue, contain certain
discretionary spending or achieve certain other business plan objectives could
have a material adverse affect on our results of operations and financial
position.
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 additional deployment of our network or otherwise alter
the schedule or targets of our business plan implementation.
If additional financing is necessary, it may be raised through some combination
of borrowings (including borrowings under the proposed bank credit facility),
and the sale of debt or equity securities. We may not be able to raise
sufficient debt or equity capital on terms that we consider acceptable, if at
all. Our failure to generate sufficient cash from our operations, from
additional debt or equity financings or both, could cause us to pursue strategic
alternatives, or to dispose of or discontinue some or a significant portion of
our operations. Our financial statements included herein do not include any
adjustments that might result from these uncertainties.
On July 22, 2002, the Nasdaq Stock Market, Inc. ("Nasdaq") transferred the
listing of our common stock from the Nasdaq National Market to the Nasdaq
SmallCap Market. We applied for such transfer as a result of our non-compliance
with Nasdaq's Marketplace Rule 4450(a)(5), which required us to maintain a bid
price of $1.00 for at least 10 consecutive trading days during the last ninety
day period prior to July 17, 2002 in order to remain qualified for listing on
the Nasdaq National Market. On October 16, 2002, Nasdaq notified us that, while
we had not regained compliance by October 15, 2002 with the $1.00 bid price per
share requirement generally required for continued listing on the Nasdaq
SmallCap Market, we did continue to meet the initial listing requirements for
the Nasdaq SmallCap Market under Rule 4310(c)(2)(A). As a result, we had an
additional 180 calendar days, or until April 14, 2003, to comply with the
minimum bid price of $1.00 per share for 10 consecutive trading days, or such
greater number of trading days as Nasdaq may determine, in order to remain
listed on the Nasdaq SmallCap Market. If compliance with the minimum bid price
requirements cannot be demonstrated by April 14, 2003, Nasdaq has indicated that
it will provide us notice that our common stock will be de-listed from the
Nasdaq SmallCap Market. In that event, we would have the opportunity to appeal
such determination to a Listings Qualifications Panel. There can be no
assurances that we will be able to comply with the minimum bid price requirement
by April 14, 2003, if at all, or that we will continue to satisfy the other
listing requirements of the Nasdaq SmallCap Market.
In addition, in the event our common stock trades for a minimum of $1.00
per share on the Nasdaq SmallCap Market for 30 consecutive trading days by April
14, 2003 and we, at all times, have maintained compliance with all of the other
maintenance requirements for listing on the Nasdaq National Market, Nasdaq has
indicated that we may qualify to have our common stock transferred back to the
Nasdaq National Market.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, Statement of Financial Accounting Standards ("SFAS") No. 142
"GOODWILL AND OTHER INTANGIBLE ASSETS" was issued. SFAS No. 142 requires that
goodwill and intangible assets with indefinite lives no longer be amortized but
instead be measured for impairment at least annually, or when events indicate
that there may be an impairment. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. With the implementation of SFAS No. 142, we
have discontinued amortizing approximately $8.5 million of goodwill associated
with acquired businesses. We recorded approximately $2.5 million of amortization
related to this goodwill in 2001 and would have recorded an equal amount in
2002.
In June 2001, SFAS No. 143, "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS"
was issued. SFAS No. 143 addresses financial accounting and reporting for legal
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs that result from the acquisition, construction, or
development and normal operation of a long-lived asset. Upon initial recognition
of a liability for an asset retirement obligation, SFAS No. 143 requires an
increase in the carrying amount of the related long-lived asset.
27
The asset retirement cost is subsequently allocated to expense using a
systematic and rational method over the asset's useful life. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. The adoption of this
statement is not expected to have a material affect on our financial position or
results of operations.
In August 2001, SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL
OF LONG-LIVED ASSETS" was issued. SFAS 144 supersedes SFAS No. 121, "ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF" and supercedes and
amends certain other accounting pronouncements. SFAS No. 144 retains the
fundamental provisions of SFAS No. 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while resolving significant implementation issues associated with SFAS
No. 121. Among other things, SFAS No. 144 provides guidance on how long-lived
assets used as part of a group should be evaluated for impairment, establishes
criteria for when long-lived assets are held for sale, and prescribes the
accounting for long-lived assets that will be disposed of other than by sale.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001.
The adoption of SFAS No. 144 has not had a material impact on our financial
position and results of operations.
In June 2002, SFAS No. 146, "ACCOUNTING FOR EXIT OR DISPOSAL ACTIVITIES"
was issued. SFAS No. 146 addresses the accounting for costs to terminate a
contract that is not a capital lease, costs to consolidate facilities and
relocate employees, and involuntary termination benefits under one-time benefit
arrangements that are not an ongoing benefit program or an individual deferred
compensation contract. The provisions of the statement will be effective for
disposal activities initiated after December 31, 2002. We are currently
evaluating the financial impact of adoption of SFAS No. 146.
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 or
business 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, those described under "Risk Factors" in our Annual Report on
Form 10-K for the year ended December 31, 2001, which has been filed with the
Securities and Exchange Commission, and (i) fluctuations in our quarterly
operating results, which could adversely effect the price of our common stock;
(ii) our unproven business model, which may not be successful; (iii) our ability
to execute our business plan in a timely manner to generate the forecasted
financial and operating results, 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) failure to
generate sufficient revenue, contain certain discretionary spending, obtain any
additional required debt or equity financing or achieve certain other business
plan objectives could have a material adverse affect on our results of
operations and financial position, or cause us to pursue strategic alternatives
or to dispose of or discontinue some or a significant portion of our operations;
(v) risks associated with the possible removal of our common stock from the
Nasdaq SmallCap Market, which removal could adversely impact the pricing and
trading of our common stock; (vi) risks associated with acquisitions, including
difficulties in identifying and completing acquisitions, integrating acquired
businesses or assets and realizing the revenue, earnings or synergies
anticipated from any acquisitions; (vii) risks associated with the completion of
the acquisition of network assets and associated subscriber lines from NAS,
which acquisition is subject to approval by the U.S. Bankruptcy Court, which
approval may not be obtained; (viii) risks associated with our ability to close
and draw amounts under the proposed credit facility with a commercial bank; (ix)
risks associated with our reliance on two carriers, including WorldCom, to
transmit data across our network; (x 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;
(xi) our dependence on wholesale providers to provide us with local broadband
facilities in areas where we have not deployed our own equipment; (xii) the need
for us to achieve sustained market acceptance of our services at desired pricing
levels; (xiii) competition; (xiv) our limited operating history, which makes it
difficult to evaluate our business and prospects; (xv) the difficulty of
predicting the new and rapidly evolving high-speed data communications industry;
(xvi) our ability to negotiate, enter into and renew interconnection and
collocation agreements with traditional telephone companies; (xvii) regulatory,
legislative, and judicial developments, which could adversely affect the way we
operate our business; and (xviii) our ability to recruit and retain qualified
personnel, establish the necessary
28
infrastructure to support our business, and manage the growth of 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, and disclaim any 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 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 money markets and
certificates of deposit and corporate bonds.
ITEM 4. CONTROLS AND PROCEDURES
a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
have evaluated the disclosure controls and procedures (as defined in the
Securities and Exchange Act of 1934 (the "Exchange Act") Rules 13a-14(c) and
15d-14(c)) as of a date within 90 days before the filing date of this quarterly
report. Based on this evaluation, the principal executive officer and principal
financial officer concluded that our disclosure controls and procedures
effectively ensure that information required to be disclosed in our filings and
submissions under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
b) CHANGES IN INTERNAL CONTROLS
There have been no significant changes in our internal controls or, to our
knowledge, in other factors that could significantly affect these controls
subsequent to the date of evaluation of our disclosure controls and procedures
referred to above.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 5, 2002, the Company's board of directors elected to increase
number of directors from seven to eight. Pursuant to the Company's certificate
of incorporation, the holders of the Series X Preferred Stock, voting as a
separate series, are entitled to elect a majority of the total number of
directors of the Company. On September 5, 2002, the holders of Series X
Preferred Stock acted by unanimous written consent in lieu of a special meeting
to elect Kenneth S. Kharbanda, an affiliate of VantagePoint, as a Class III
director of the Company to serve until the annual meeting of stockholders to be
held in 2003 or until his successor has been duly elected and qualified or until
his earlier death, resignation or removal. Messrs. David F. Struwas, Robert G.
Gilbertson, Robert B. Hartnett, Jr., Harry F. Hopper, Paul J. Keeler, William J.
Marshall and James D. Marver each continued their respective terms of office as
members of the Company's Board of Directors.
29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
- ------------------ -------------------------------------------------------------
Exhibit No. Exhibit
- ------------------ -------------------------------------------------------------
2.01, 10.01 Asset Purchase Agreement, dated as of October 16, 2002, by
and among DSL.net, Inc. and Network Access Solutions
Corporation, Network Access Solutions LLC, NASOP, Inc., and
Adelman Lavine Gold and Levin, a Professional Corporation.
- ------------------ -------------------------------------------------------------
10.02 Guarantee Agreement dated as of October 8, 2002, between
VantagePoint Venture Partners III (Q), L.P. and DSL.net, Inc.
- ------------------ -------------------------------------------------------------
11.01 Statement of Computation of Basic and Diluted Net Loss Per
Share.
- ------------------ -------------------------------------------------------------
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on August 13, 2002,
reporting on Item 9, relating to the certifications of its Chief Executive
Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection
with the Company's quarterly report on Form 10-Q for the quarter ended June 30,
2002. The certifications were submitted to the Securities and Exchange
Commission on August 13, 2002.
30
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 J. DeSantis
--------------------------------
Robert J. DeSantis
Chief Financial Officer
Date: November 14, 2002
Certifications
I, David F. Struwas, certify that:
1. I have reviewed this quarterly report Form 10-Q, of DSL.net, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
31
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ David F. Struwas
-----------------------------------
Chairman of the Board and
Chief Executive Officer
I, Robert J. DeSantis, certify that:
1. I have reviewed this quarterly report Form 10-Q, of DSL.net, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ Robert J. DeSantis
-----------------------------------
Chief Financial Officer
32
Exhibit Index
- ------------------ -------------------------------------------------------------
Exhibit No. Exhibit
- ------------------ -------------------------------------------------------------
2.01, 10.01 Asset Purchase Agreement, dated as of October 16, 2002, by
and among DSL.net, Inc. and Network Access Solutions
Corporation, Network Access Solutions LLC, NASOP, Inc., and
Adelman Lavine Gold and Levin, a Professional Corporation.
- ------------------ -------------------------------------------------------------
10.02 Guarantee Agreement dated as of October 8, 2002, between
VantagePoint Venture Partners III (Q), L.P. and DSL.net, Inc.
- ------------------ -------------------------------------------------------------
11.01 Statement of Computation of Basic and Diluted Net Loss Per
Share.
- ------------------ -------------------------------------------------------------
33