DSL.net, Inc.
Filed 4/2/01
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2000
[_] 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 NUMBER)
545 LONG WHARF DRIVE, NEW HAVEN, CONNECTICUT 06511
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 772-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.0005 PAR VALUE
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 report(s)), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the Registrant, as of March 21, 2001, was
approximately $34,272,439 (based on the closing price of the Registrant's Common Stock on March 21, 2001, of $1.00 per
share).
The number of shares outstanding of the Registrant's $.0005 par value Common Stock as of March 21, 2001 was 64,779,468.
DOCUMENT INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year
ended December 31, 2000. Portions of such proxy statement are incorporated by reference into Part III of this Form 10-K.
DSL.net, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Page No.
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Part I
Item 1. Business......................................................................................3
Item 2. Properties...................................................................................15
Item 3. Legal Proceedings............................................................................15
Item 4. Submission of Matters to a Vote of Security Holders..........................................16
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................17
Item 6. Selected Consolidated Financial Data.........................................................17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........19
Item 7A. Quantitative and Qualitative Disclosure About Market Risk....................................40
Item 8. Financial Statements and Supplementary Data..................................................41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........68
Part III
Item 10. Directors and Executive Officers of the Registrant...........................................68
Item 11. Executive Compensation.......................................................................68
Item 12. Security Ownership of Certain Beneficial Owners and Management...............................68
Item 13. Certain Relationships and Related Transactions...............................................68
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................69
SIGNATURES...............................................................................................72
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PART I
ITEM 1. BUSINESS
THIS BUSINESS SECTION AND OTHER PARTS OF THIS ANNUAL REPORT ON FORM 10-K CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE SET FORTH IN "ITEM 7 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS
ANNUAL REPORT ON FORM 10-K. 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 ANNUAL REPORT ON FORM 10-K, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS OR CIRCUMSTANCES OR OTHERWISE.
GENERAL
DSL.net, Inc. ("DSL.net" or the "Company") (Nasdaq: DSLN) provides high-speed data communications, Internet access, and
related services to small and medium sized businesses, primarily using digital subscriber line, or DSL, technology. We primarily
target select second and third tier cities for the deployment of our own local DSL equipment. As of March 15, 2001, we had
installed equipment in over 375 cities. In first tier cities, and certain other markets where we have not deployed our own
equipment, we utilize the local DSL facilities of other carriers to provide service. Our networks enable data transport over
existing copper telephone lines at speeds of up to 1.5 megabits per second. Our services offer customers high-speed digital
connections and related services at prices that are attractive compared to the cost and performance of alternative data
communications services.
THE DSL.NET SOLUTION
Our services provide small and medium sized businesses, as well as branch offices of large businesses, with high-speed Internet
access and data services using DSL technology. Key elements of our solution are:
HIGH-SPEED CONNECTIONS. We offer Internet access at speeds of up to 1.5 megabits per second. Our network is
designed to provide data transmission at the same speed to and from the customer, known as symmetric data transmission, and
is also capable of providing service at different rates, known as asymmetrical data transmission. We believe that symmetric data
transmission is best suited for business applications, because business users require fast connections both to send and receive
information.
COMPLETE BUSINESS SOLUTION. We offer our customers a single point of contact for a complete solution that includes
all of the necessary equipment and services to establish and maintain digital data communications. Our primary services include
Internet access, e-mail, domain name or Internet address registration for our customers, firewalls, hosting our customers' Web
sites, and virtual private networks that connect customers' various offices. Our network is designed to enable us to individually
configure each customer's service remotely.
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ALWAYS-ON CONNECTIONS. With our service, customers can access the Internet continuously without having to dial into
the network for each use. These "always-on" connections provide customers with the ability to readily access the Internet and
transfer information. We charge our customers a flat fee per month rather than billing them based on usage.
ATTRACTIVE VALUE PROPOSITION. Our DSL services offer customers high-speed digital connections at prices that are
attractive compared to the cost and performance of alternative data communications services, such as dial-up, T1, ISDN or
frame relay lines. We believe that our services also increase the productivity of network users by decreasing the time they spend
connecting to the Internet and waiting for information downloads and transfers.
CUSTOMER SUPPORT. We provide customer support 24 hours a day, seven days a week. This support is important to
many of our small and medium sized business customers because they do not typically have dedicated internal support staff.
With our remote monitoring and troubleshooting capabilities, we continuously monitor our network. This enables us to identify
and enhance network quality, service and performance and address network problems promptly.
OUR SERVICES
We utilize DSL technology to provide reliable and cost-effective service to our customers. As part of our service offerings, we
function as our customers' Internet service provider and deliver a range of Internet-based, value-added solutions.
Our services currently include all necessary equipment, software and lines required to establish and maintain a digital Internet
connection. Our primary services include Internet access, e-mail, domain name or Internet address registration for our
customers, firewalls, hosting our customers' Web sites, and virtual private networks that connect customers' various offices. Our
Services also include collocation of customer equipment and limited alternative access solutions, including T1, ISDN and
dial-up. Our network is designed to enable us to individually configure each customer's service remotely.
Customers typically pay an installation charge and a monthly fee for the service. The monthly fee includes the cost of our
standard equipment installed at the customer's site, all phone line charges, and general Internet access services, including e-mail,
assistance in obtaining Internet addresses and services related to the registration of these addresses with various administrative
bodies. Generally, customers subscribe to our services for at least one year and are billed for services on a monthly basis.
CUSTOMERS
Our target customers are primarily small and medium sized businesses. We sell to these customers primarily on a direct basis. In
particular, we believe the following are especially attractive prospective customers:
o businesses currently using other high-speed data communications services, such as T1, ISDN and frame relay services, or
low-speed dial-up Internet access;
o professional or service-based firms that have multiple Internet service provider accounts and phone lines;
o branch office locations that require transmission of large files between locations; and
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o businesses that use data-intensive applications, such as financial services, technology, and publishing.
None of our customers accounted for more than 5% of our total revenues during the period from inception (March 3, 1998)
through December 31, 1998, or during the years ended December 31, 1999 and 2000.
SALES AND MARKETING
Our marketing professionals have developed a methodology to identify the businesses that would benefit from our services.
Once we identify businesses in a target market, we employ a targeted local marketing strategy utilizing a variety of mediums,
including print and radio, but primarily focused on direct mail. Through inbound and outbound telesales campaigns, we utilize
both internal and external sales professionals to sell our services to prospective customers. We also partner with local
information technology professionals to assist in the sale of our services.
CUSTOMER SUPPORT AND OPERATIONS
Our customer support professionals work to minimize the complexity and inconvenience of data communications and Internet
access for our customers. They provide our customers with a single point of contact for implementation, maintenance and
operations support.
IMPLEMENTATION. We manage the implementation of our service for each customer. In areas where we have installed our
own local DSL facilities, we lease the copper telephone lines from the local telephone company. These lines run from our
equipment located in the telephone company's central office to our customer. We test these lines to determine whether they
meet our specifications and work with the local telephone company to correct any problems identified by our testing. In other
areas, we utilize the local DSL facilities of other carriers, and work with these carriers to provide the DSL service. In both
cases, field service technicians install the modem and any necessary wiring inside our customers' offices and test the modem and
connection over our network.
MAINTENANCE. Our network operations center provides network surveillance for all equipment in our network. We are
able to detect and correct many of our customers' maintenance problems remotely, often before our customer is aware of the
problem. Customer-initiated maintenance and repair requests are managed and resolved primarily through our help desk. Our
information management system, which generates reports for tracking maintenance problems, allows us to communicate
maintenance problems from the customer service center to our network operations center 24 hours a day, seven days a week.
OPERATIONS SUPPORT SYSTEMS. Our operations support systems are intended to improve many of our business
processes, including customer billing, service activation, inventory control, customer care reports and maintenance reports. They
have been designed to provide us with accurate, up-to-date information in these areas. Additional enhancements and integration
of these systems will continue during 2001. We believe that our operations support systems will provide us with the flexibility to
add additional services for our customers as well as to meet our expansion goals.
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OUR NETWORK
Our network delivers high-speed Internet access and data communication services. It offers scalability, reliability, security and
high performance.
NETWORK DESIGN. The key design principles of our network are:
o INTELLIGENT END-TO-END NETWORK MANAGEMENT. Our network is designed to allow us to monitor network
components and customer traffic from a central location. We can perform network diagnostics and equipment surveillance
continuously. From our network operations center, we have visibility across our entire network, allowing us to identify and
address network problems quickly and to provide quality service and performance.
o CONSISTENT PERFORMANCE WITH THE ABILITY TO EXPAND. We have designed our network to leverage the
economics of DSL technology, to grow with our business and to provide consistent performance. We also use asynchronous
transfer mode equipment in our network, which implements high-speed, high volume transmission of data.
o SECURITY. Our network is designed to reduce the possibility of unauthorized access and to allow our customers to safely
transmit and receive sensitive information and applications. The modems we install on our customers' premises are designed to
work in conjunction with installed security systems and network servers in an effort to provide safe connections to the Internet
and a secure operating environment.
NETWORK COMPONENTS. The primary components of our network are:
o DSL MODEMS AND ON-SITE CONNECTIONS. We purchase DSL modems and provide them to our customers as
part of the service contract. We configure the DSL modem and arrange for the installation of the modem and on-site wiring
needed to connect the modem to the copper telephone line. In areas where we have deployed our own local DSL facilities, we
contract with independent field service organizations to perform these services, in addition to using a small internal staff. In areas
where we utilize the local DSL facilities of other carriers, these other carriers provide these installation services.
o COPPER TELEPHONE LINES. In areas where we have deployed our own local DSL facilities, we lease a copper
telephone line running to each customer from our equipment in the local telephone company's central office under terms
specified in our interconnection agreements with these companies. In areas where we utilize the local DSL facilities of other
carriers, the carrier leases the telephone line from the local telephone company. If we, or the other DSL carriers with whom we
work, are unable to lease, or experience delays in leasing, a sufficient number of acceptable telephone lines on acceptable
terms, our business will be harmed.
o CENTRAL OFFICE COLLOCATION. Through our interconnection agreements, we secure space to locate our equipment
in certain central offices of traditional local telephone companies and offer our services from these locations. These collocation
spaces are designed to offer the same high reliability and availability standards as the telephone companies' other central office
spaces. We install the equipment necessary to provide high-speed DSL signals to our customers in these spaces. We have
continuous access to these spaces to install and maintain our equipment located in these central offices. In first tier cities and
certain other markets where we have not deployed our own DSL
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equipment, we utilize the local DSL facilities installed in central offices by other carriers to provide high-speed DSL connections
to our customers.
o CONNECTION TO THE INTERNET. Network traffic gathered at each of our central offices is routed to one of our
regional hubs and then to the Internet. In certain areas where we offer service from more than one central office, network traffic
is routed from each central office in that area to a local hub which aggregates its traffic and the traffic from the other central
offices located in that area and routes this traffic to a regional hub. At our regional hubs, we also connect to other carriers'
networks via high speed connections. Our hubs contain extra equipment and backup power to provide backup facilities in the
event of an equipment failure and are actively monitored from our network operations center. We lease space for our hubs in
facilities designed to host network equipment. Our hubs are connected to one another via high speed data communications lines.
We have agreements with WorldCom and AT&T to provide this service. Internet connectivity is provided by a combination of
public and private peering and transit arrangements. We have presence at eight of the largest and newest national "network
access points" to facilitate this high-performance high-volume external connectivity.
o NETWORK OPERATIONS CENTER. Our network is managed from our network operations center located in New
Haven, Connecticut. We provide end-to-end network management 24 hours a day, seven days a week. This enhances our
ability to address performance and service issues before they affect the customer. From the network operations center, we can
monitor individual customer lines and the equipment and circuits in our network.
COMPETITION
We face competition from many companies with significantly greater financial resources, well-established brand names and large
installed customer bases. We expect that the level of competition in our markets may intensify in the future. We expect
competition from:
OTHER DSL PROVIDERS. Certain competitive carriers, including Covad Communications and Rhythms NetConnections,
offer DSL-based services. The 1996 Telecommunications Act specifically grants competitive telecommunications companies,
including other DSL providers, the right to negotiate interconnection agreements with traditional telephone companies, including
interconnection agreements which may be identical in all respects to, or more favorable than, our agreements. Several of the
large telecommunications companies and computer companies, such as Microsoft and Qwest, have made investments in DSL
service providers.
INTERNET SERVICE PROVIDERS. Several national and regional Internet service providers, including UUNET, Cais,
EarthLink, Verio, and America Online, offer high-speed access capabilities, along with other products and services. These
companies generally provide Internet access to residential and business customers through a host of methods, including DSL.
TRADITIONAL LOCAL TELEPHONE COMPANIES. Many of the traditional local telephone companies, including
BellSouth, SBC Communications, Qwest and Verizon, are rapidly deploying DSL-based services, either directly or through
affiliated companies. These companies have established brand names and reputations for high quality in their service areas,
possess sufficient capital to deploy DSL equipment rapidly, have their own copper telephone lines and can bundle digital data
services with their existing voice services to achieve a competitive advantage in serving customers. In addition, these companies
also offer high-speed data communications services that use other technologies. We depend on these traditional local telephone
companies to enter into agreements for interconnection and to provide us access
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to individual elements of their networks. Although the traditional local telephone companies are required to negotiate in good
faith in connection with these agreements, future interconnection agreements may contain less favorable terms and result in a
competitive advantage to the traditional local telephone companies.
NATIONAL LONG DISTANCE CARRIERS. National long distance carriers, such as AT&T, Qwest, Sprint, Williams and
WorldCom, have deployed large-scale data networks, sell connectivity to businesses and residential customers, and have high
brand recognition. They also have interconnection agreements with many of the traditional telephone companies, and many offer
competitive DSL services.
OTHER FIBER-BASED CARRIERS. Companies such as Allegiance, Choice One and Intermedia have extensive fiber
networks in many metropolitan areas, primarily providing high-speed data and voice circuits to small and large corporations.
They also have interconnection agreements with the traditional telephone companies under which they have acquired collocation
space in many large markets, which could position them to offer DSL service in those markets.
CABLE MODEM SERVICE PROVIDERS. Cable modem service providers, such as At Home and its cable partners,
RoadRunner and High Speed Access, offer high-speed Internet access over cable networks to consumers. @Work, a division
of At Home, has positioned itself to do the same for businesses. Where deployed, these networks provide high-speed local
access services, in some cases at speeds higher than DSL service. They typically offer these services at lower prices than our
services, in part by sharing the capacity available on their cable networks among multiple end users.
WIRELESS AND SATELLITE DATA SERVICE PROVIDERS. Several companies, including Motorola Satellite Systems,
Hughes Communications, Teligent and WinStar Communications, are emerging as wireless and satellite-based data service
providers. These companies use a variety of new and emerging technologies to provide high-speed data services.
The most significant competitive factors include: transmission speed, service reliability, breadth of product offerings,
price/performance, network security, ease of access and use, content and service bundling, customer support, brand
recognition, operating experience, capital availability and exclusive contracts with customers, including Internet service providers
and businesses with multiple offices. We believe our services compete favorably within our service markets with respect to
transmission speed, price/performance, ease of access and use and customer support. Many of our competitors enjoy
competitive advantages over us based on their brand recognotion, breadth of product offerings, financial resources, customer
bases, operating experience and exclusive contracts with customers.
INTERCONNECTION AGREEMENTS WITH TRADITIONAL LOCAL TELEPHONE COMPANIES
We are required to enter into and implement interconnection agreements with the traditional local telephone company in each
market in which we deploy our own local DSL equipment . These agreements govern, among other things:
o the price and other terms under which we locate our equipment in the telephone company's central offices,
o the price we pay to lease copper telephone lines,
o the special conditioning of these copper lines that the traditional telephone company provides to enable the transmission of
DSL signals,
o the price we pay to access the telephone company's transmission facilities, and
o certain other terms and conditions of our relationship with the telephone company.
Under the 1996 Telecommunications Act, the traditional local telephone companies have a statutory duty to negotiate in good
faith with us for agreements for interconnection and access to certain individual elements of their networks. This interconnection
process is subject to review and approval by the state
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regulatory commissions. We have signed interconnection agreements with BellSouth, Cincinnati Bell, Frontier, SBC
Communications, Qwest, Sprint, and Verizon or their subsidiaries, which govern our relationships in 48 states and the District of
Columbia. In addition, we are negotiating certain replacement agreements with these carriers as the current agreements' terms
expire and are also negotiating amendments to existing agreements. Future interconnection agreements may contain terms and
conditions less favorable to us than those in our current agreements and could increase our costs of operations.
During these interconnection negotiations, either the telephone company or we may submit disputes to the state regulatory
commissions for mediation and, after the expiration of the statutory negotiation period set forth in the 1996 Telecommunications
Act, we may submit outstanding disputes to the states for arbitration, as well as ask the state regulatory commissions to arbitrate
a new agreement or particulars thereof.
Under the 1996 Telecommunications Act, states have begun and, in a number of cases, completed regulatory proceedings to
determine the pricing of individual elements of their networks and services, and the results of these proceedings will determine
the price we pay for, and whether it is economically attractive for us to use, these elements and services.
Our interconnection agreements generally have terms of one or two years. Therefore, we have had to renegotiate our existing
agreements when they have expired and will have to renegotiate other existing agreements when they expire. Although we
expect to renew our interconnection agreements and believe the 1996 Telecommunications Act limits the ability of traditional
telephone companies not to renew these agreements, we may not succeed in extending or renegotiating our interconnection
agreements on favorable terms. In addition, disputes have arisen and will likely arise in the future as a result of differences in
interpretations of the interconnection agreements. These disputes have, in the past, delayed the deployment of our networks.
Finally, the interconnection agreements are subject to state regulatory commission, FCC and judicial oversight. These
government authorities may modify the terms of the interconnection agreements in ways that hurt our business.
GOVERNMENT REGULATIONS
A significant portion of the services that we offer are subject to regulation at the federal and/or state levels. The Federal
Communications Commission, or FCC, and state public utility commissions regulate telecommunications common carriers,
which are companies that offer telecommunications services to the public or to all prospective users on standardized rates and
terms. Our DSL data transport services are common carrier services.
While we serve many of our customers using transport facilities that we own or lease, in some areas where we do not have the
necessary facilities we provide our Internet access and other services using the local DSL facilities of another carrier. The FCC
has determined that Internet service providers, such as us, who are using another carrier's DSL transport facilities, are not acting
as carriers. In those markets where we have not deployed our own local DSL transport facilities, our DSL services are
therefore not subject to common carrier regulation. Our ability to provide such services, however, is affected by regulations
imposed upon the carriers whose DSL facilities we utilize.
The FCC exercises jurisdiction over common carriers, and their facilities and services, to the extent they are providing interstate
or international communications. The various state utility commissions retain jurisdiction over telecommunications carriers, and
their facilities and services, to the extent they are used to provide communications that originate and terminate within the same
state. The degree of regulation varies from state to state.
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In recent years, the regulation of the telecommunications industry has been in a state of flux as the United States Congress and
various state legislatures have passed laws seeking to foster greater competition in telecommunications markets. The FCC and
state regulatory commissions have adopted many new rules to implement those new laws and to encourage competition. These
changes, which are still incomplete, have created new opportunities and challenges for us and our competitors. Certain of these
and other existing federal and state regulations are currently the subject of judicial proceedings, legislative hearings and
administrative proposals which could change, in varying degrees, the manner in which this industry operates. Neither the
outcome of these proceedings nor their impact upon the telecommunications industry or us can be predicted at this time. Indeed,
future federal or state regulations and legislation may be less favorable to us than current regulations and legislation and therefore
have a material and adverse impact on our business and financial prospects by undermining our ability to provide DSL services
at competitive prices. In addition, we may expend significant financial and managerial resources to participate in proceedings
setting rules at either the federal or state level, without achieving favorable results.
FEDERAL REGULATION AND LEGISLATION
We must comply with the requirements of a common carrier under the Communications Act of 1934, as amended, to the extent
we provide regulated interstate services. These requirements include an obligation that our charges, terms and conditions for
communications services must be "just and reasonable" and that we may not make any "unjust or unreasonable discrimination" in
our charges or terms and conditions. The FCC also has jurisdiction to act upon complaints against common carriers for failure
to comply with their statutory obligations. We are not currently subject to price cap or rate of return regulation at the federal
level and are not currently required to obtain FCC authorization for the installation, acquisition or operation of our facilities.
The FCC has established different levels of regulation for dominant and non-dominant carriers. Of domestic carriers, only the
traditional local telephone companies are classified as dominant carriers and all other providers of domestic common carrier
service, including us, are classified as non-dominant carriers. As a non-dominant carrier, we are subject to less FCC regulation
than are dominant carriers.
In October 1998, the FCC ruled that DSL and other advanced data services provided as dedicated access services in
connection with interstate services such as Internet access are interstate services subject to the FCC's jurisdiction. Accordingly,
we could offer DSL services without state regulatory authority, so long as we do not also provide local or intrastate
telecommunications services via our network. This decision allows us to provide our DSL services in a manner that potentially
reduces state regulatory obligations. However, the regulatory parameters used to define DSL service are, directly and indirectly,
subject to many pending FCC and judicial proceedings and could change in the future.
Comprehensive changes to the Communications Act of 1934 were made by the 1996 Telecommunications Act, enacted on
February 8, 1996. It represents a significant milestone in telecommunications policy by establishing competition in local
telephone service markets as a national policy. The 1996 Telecommunications Act removes many state regulatory barriers to
competition and forecloses state and local governments from creating laws preempting or effectively preempting competition in
the local telephone service market.
The 1996 Telecommunications Act places substantial interconnection requirements on the traditional local telephone companies.
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o Traditional local telephone companies are required to provide physical collocation, which allows companies such as us and
other interconnectors to install and maintain their own network termination equipment in the central offices of traditional local
telephone companies, and virtual collocation only if requested or if physical collocation is demonstrated to be technically
infeasible. This requirement is intended to enable us and other competitive carriers to deploy our equipment on a relatively
convenient and economical basis.
o Traditional local telephone companies are required to unbundle components of their local service networks so that other
providers of local service can compete for a wide range of local service customers. This requirement is designed to provide us
flexibility to purchase only the equipment we require to deliver our services.
o Traditional local telephone companies are required to establish "wholesale" rates for their services to promote resale by
competitive local exchange carriers and other competitors.
o Traditional local telephone companies are required to establish number portability, which allows a customer to retain its
existing phone number if it switches from the traditional local telephone companies to a competitive local service provider.
o Traditional local telephone companies are required to establish dialing parity, which ensures that customers will not detect a
quality difference in dialing telephone numbers or accessing operators or emergency services of competitive local service
providers.
o Traditional local telephone companies are required to provide nondiscriminatory access to telephone poles, ducts, conduits
and rights-of-way. In addition, the 1996 Telecommunications Act requires traditional local telephone companies to compensate
competitive carriers for traffic originated by them and terminated on the competitive carrier's network.
The 1996 Telecommunications Act in some sections is self-executing. The FCC issues regulations interpreting the 1996
Telecommunications Act that impose specific requirements upon which we and our competitors rely. The outcome of various
ongoing FCC rulemaking proceedings or judicial appeals of such proceedings could materially affect our business and financial
prospects by increasing the cost or decreasing our flexibility in providing DSL services.
The FCC prescribes rules applicable to interstate communications, including rules implementing the 1996 Telecommunications
Act, a responsibility it shares in certain respects with the state regulatory commissions. As part of its effort to implement the
1996 Telecommunications Act, the FCC issued an order governing interconnection, the unbundling of network elements, and
many other aspects of the relationships between new and traditional telephone companies in August 1996. The United States
Court of Appeals for the Eighth Circuit vacated many of these rules, and, in January 1999, the United States Supreme Court
reversed elements of the Eighth Circuit's ruling, finding that the FCC has broad authority to interpret the 1996
Telecommunications Act and issue rules for its implementation. Following the Supreme Court's decision, in November, 1999,
the FCC issued a modified list of the network elements that must be offered on an unbundled basis by traditional local telephone
companies, including the local copper telephone lines leased by DSL.net. This decision is currently subject to reconsideration
and to appeal.
Although the Supreme Court affirmed the FCC's authority to develop pricing guidelines in its January 25, 1999 decision, the
Supreme Court did not evaluate the specific pricing methodology adopted by the FCC for unbundled network elements.
Instead, the Supreme Court remanded the case to the Eighth Circuit for further consideration of the FCC's rules regarding its
forward-looking pricing methodology for unbundled network elements. On July 18, 2000, the Eighth Circuit, among other
findings, vacated a portion of the FCC's pricing methodology
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that likely had the effect of lowering the costs that we pay to the traditional local telephone companies for unbundled network
elements that we use to provision DSL service. The Eighth Circuit's decision has been stayed pending an appeal to the Supreme
Court, which agreed in January 2001 to hear the case. We cannot predict the possible impact of these proceedings on our
ability to provide DSL services to the public at competitive prices, if at all.
In March 1998, several traditional local telephone companies petitioned the FCC for relief from certain regulations applicable to
the DSL and other advanced data services that they provide, including their obligations to provide copper telephone lines and
resold DSL services to competitive carriers. In August 1998, the FCC concluded that DSL services are telecommunications
services and, therefore, the traditional local telephone companies are required to allow interconnection of their facilities and
equipment used to provide data transport functionality, unbundle local telecommunications lines and offer for resale DSL
services. After some of the traditional local telephone companies appealed this decision, the U.S. Court of Appeals for the
District of Columbia remanded the proceeding to the FCC for further consideration. In December 1999, the FCC reaffirmed its
conclusion on remand that traditional telephone companies are required to offer to competitive data transmission companies the
ability to interconnect and the necessary unbundled network elements to provide advanced data transmission services. This
remand order is now pending on appeal before the U.S. Court of Appeals. Any change in the August 1998 and December
1999 orders that would affect our ability to interconnect with and obtain facilities from the traditional local telephone companies
could affect our ability to provide DSL services to the public.
The traditional local telephone companies continue to urge the elimination of their unbundling obligations with respect to
advanced services in various FCC proceedings and through legislation. Recent changes in federal Congressional and executive
leadership could increase the possibility of changes in the law that could alter our relationship with these companies, and thereby
affect our ability to provide DSL services to the public.
At least two traditional telephone companies, SBC Communications and Verizon, have taken the position in state and federal
regulatory proceedings that they are not obligated to unbundle portions of their network where they construct modified or new
digital loop carrier facilities that would enable them to offer DSL services to customers who are located too far from the
traditional local telephone companies' central offices to be reached by existing DSL technologies. DSL.net and other
competitive carriers have urged state and federal regulators to require these companies to provide access to these facilities on
an unbundled basis and to hold that carriers such as us may invoke the good-faith negotiation and arbitration procedures of the
Telecommunications Act of 1996 to establish rates, terms and conditions for such access. We cannot predict the outcome of
these proceedings. If SBC and Verizon are not required to provide access on an unbundled basis, there is no guarantee that we
will be able to provide DSL service in these areas, or that we will be able to secure favorable rates, terms and conditions from
the traditional local telephone companies for access. For example, while SBC and Verizon are developing "voluntary" wholesale
DSL products for competitive local telephone companies that would utilize their respective digital loop carrier facilities, these
products would support only asymmetric DSL, and not the symmetric DSL that we primarily offer today.
In August 1998 , the FCC issued a notice of proposed rulemaking seeking comments on its tentative conclusion that traditional
local telephone companies should be permitted to create separate affiliates to provide DSL services. Under the separate affiliate
proposal, traditional local telephone companies would be required to provide wholesale service to other DSL carriers at the
same rates, terms and conditions that it provided to its separate affiliate. The outcome of this proceeding remains uncertain. In
connection with its approval of mergers, however, the FCC subsequently required two traditional local telephone companies,
SBC Communications and Verizon, to create separate affiliates to provide DSL services, as
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conditions of their mergers with Ameritech and GTE, respectively. In January 2001, the United States Court of Appeals for the
District of Columbia held that SBC may not avoid its obligations under the 1996 Telecommunications Act through the creation
of a separate advanced services affiliate. Under the terms of the FCC's conditions on the SBC-Ameritech merger, SBC may be
able to fold its separate affiliate back into the parent company as early as later this year. It remains unclear how this court
decision will affect the existing SBC and Verizon affiliates and the pending FCC proceedings. Any outcome that alters our
relationship with the traditional local telephone companies could adversely affect our ability to provide DSL services at a
competitive price.
In March 1999, the FCC strengthened its regulations that require the traditional local telephone companies to permit other
carriers to collocate all equipment necessary for interconnection. This requirement covers equipment that we use to provide
DSL data services. The FCC adopted limits on the construction standards and other conditions for collocation that may be
imposed by traditional local telephone companies. These new rules would reduce our collocation costs and expedite our ability
to provide service to new areas. In March 2000, however, the U.S. Court of Appeals for the District of Columbia vacated
some of these rules, and reconsideration of the collocation rules remains pending before the FCC. There can be no assurance
that this proceeding will produce favorable collocation rules.
In November 1999, the FCC issued an order reaffirming its prior conclusion that DSL services must be offered for resale at a
discount by traditional local telephone companies to the extent such services are offered at retail to residential and business
customers. The FCC determined, however, that advanced services provided to Internet service providers would not be subject
to resale at a discount. Accordingly, traditional telephone companies may enter into volume and term discounts for the
provisioning of DSL services with internet service providers, arguably including its own internet affiliates, without having to make
such arrangements available to other requesting competitive carriers at discounted rates. There is no guarantee that these resale
rates will compare favorably to those offered to internet service providers.
In December 1999, the FCC issued an order that requires the traditional local telephone companies to provide "line sharing" of
unbundled copper telephone lines to DSL companies. Line sharing allows a DSL company to lease the high frequency portion
of a loop over which some types of DSL data traffic is transmitted without having to lease the low frequency portion of the loop
which carries voice traffic. Line sharing is not currently available using symmetric DSL technology, which transmits data at the
same speed to and from the customer and is the technology that we primarily use in providing our service.
Also in December 1999, the FCC granted Verizon (formerly Bell Atlantic) authority to provide long distance interexchange
service in New York, a service it and the other traditional local telephone companies created by AT&T's divestiture of its local
telephone service business had previously been barred from offering. Subsequently, the FCC has authorized Southwestern Bell,
a subsidiary of SBC Communications, to provide long distance service in Texas, Kansas and Oklahoma, and numerous
additional applications are expected over the next one to two years. While we do not presently provide long distance
interexchange service, this ruling and any future similar rulings could negatively impact our business. First, Verizon and
Southwestern Bell are able to offer potentially attractive packages of local, long distance and data services. Second, the
prospect of long distance authority has served as a powerful incentive for the traditional local telephone companies to comply
with their obligations under the 1996 Telecommunications Act, including the provision of unbundled network elements and
collocation services to competitors such as us. The traditional local telephone companies may not extend to us the same level of
cooperation once they receive approval to provide long distance interexchange service.
The 1996 Telecommunications Act also directs the FCC, in cooperation with state regulators, to establish a universal service
fund that will provide subsidies to carriers that provide service to individuals that live in rural, insular, and high-cost areas. A
portion of carriers' contributions to the universal service
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fund also will be used to provide telecommunications related facilities for schools, libraries and certain rural health care
providers. The FCC released its initial order in this context in June 1997, which requires all telecommunications carriers to
contribute to the universal service fund. The FCC's implementation of universal service requirements remains subject to judicial
and additional FCC review. Additional changes to the universal service regime, which could increase our costs, could have an
adverse affect on us.
DSL.net is authorized to provide interstate telecommunications services pursuant to its access tariff filed with the FCC in April
1999. Although not required for our existing DSL data service offering, on August 6, 1999 we obtained authority from the FCC
to provide international telecommunications services originating from the United States.
STATE REGULATION
In October 1998, the FCC deemed data transmission to the Internet to be interstate services subject only to federal jurisdiction.
However, this decision is currently subject to reconsideration and appeal. Also, some of our services that are not limited to
interstate access potentially may be classified as intrastate services subject to state regulation. All of the states where we
operate, or intend to operate, require some degree of state regulatory commission approval to provide certain intrastate services
and maintain ongoing regulatory supervision. In most states, intrastate tariffs are also required for various intrastate services,
although our services are not subject to price or rate of return regulation. Actions by state public utility commissions could cause
us to incur substantial legal and administrative expenses and adversely affect our business.
We have obtained authorizations to provide local exchange and long-distance telecommunications services in all 50 states, the
District of Columbia, and Puerto Rico.
LOCAL GOVERNMENT REGULATION
In certain instances, we may be required to obtain various permits and authorizations from municipalities, such as for use of
rights-of-way, in which we operate our own local distribution facilities. Whether various actions of local governments over the
activities of telecommunications carriers such as ours, including requiring payment of franchise fees or other surcharges, pose
barriers to entry for competitive local exchange carriers which violate the 1996 Telecommunications Act or may be preempted
by the FCC is the subject of litigation. While we are not a party to this litigation, we may be affected by the outcome. If
municipal governments impose conditions on granting permits or other authorizations or if they fail to act in granting such permits
or other authorizations, the cost of providing DSL services may increase or it may negatively impact our ability to expand our
network on a timely basis and adversely affect our business.
INTELLECTUAL PROPERTY
We regard our products, services and technology as proprietary and attempt to protect them with copyrights, trademarks, trade
secret laws, restrictions on disclosure and other methods. For example, we own a federal supplemental registration and claim
rights in the name DSL.net. There can be no assurance these methods will be sufficient to protect our technology and intellectual
property. We also generally enter into confidentiality agreements with our employees and consultants, and generally control
access to and distribution of our documentation and other proprietary information. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use our proprietary information without authorization, or to develop similar
information independently. Effective patent, copyright, trademark and trade secret protection may be unavailable or limited in
certain foreign countries, and the global nature
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of the Internet makes it virtually impossible to control the ultimate destination of our technology or proprietary information.
There can be no assurance that the steps we have taken will prevent misappropriation or infringement of our technology or
proprietary information. In addition, litigation may be necessary in the future to enforce our intellectual property rights, to protect
our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse effect on our business, operating results and
financial condition. In addition, some of our information, including our competitive carrier status in individual states and our
interconnection agreements, is a matter of public record and can be readily obtained by our competitors and potential
competitors, possibly to our detriment.
EMPLOYEES
As of December 31, 2000, we had 380 employees. We believe that our future success will depend in part on our continued
ability to attract, hire and retain qualified personnel. Competition for such personnel is intense, and we may be unable to identify,
attract and retain such personnel in the future. None of our employees are represented by a labor union or are the subject of a
collective bargaining agreement. We have never experienced a work stoppage and believe that our employee relations are
good.
ITEM 2. PROPERTIES
Our headquarters consists of approximately 56,200 square feet in an office building in New Haven, Connecticut. We also lease
other offices in Milford and New Haven, Connecticut; Santa Cruz, California; Minneapolis, Minnesota; Marietta, Georgia and
Chantilly, Virginia. We have vacated the offices in Milford, Connecticut and Chantilly, Virginia, as well as certain office space in
New Haven, Connecticut, and are currently looking to sublease those premises. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations". In addition, we lease space for network equipment installations in a number of
other locations. With respect to our arrangements to use space in traditional telephone companies' central offices, please see
"BUSINESS - Interconnection Agreements with Traditional Local Telephone Companies."
ITEM 3. LEGAL PROCEEDINGS
A lawsuit for wrongful termination of employment was filed against us in the Superior Court in New Haven, Connecticut on July
29, 1999 by Frank W. Pereira, a former officer who was employed by us for less than two months. Plaintiff's claims are based
chiefly on his allegation that we terminated his employment because he allegedly voiced concerns to senior management about
the feasibility of our second and third tier city business strategy. He further alleges that our senior management knew of these
alleged flaws in the strategy. The plaintiff is principally seeking compensatory damages for wages and unvested stock options.
We deny these allegations and believe that the plaintiff's claims are without merit. We plan to defend the case vigorously.
We are also a party to legal proceedings related to regulatory approvals. We are subject to state commission, FCC and court
decisions as they relate to the interpretation and implementation of the 1996 Telecommunications Act, the interpretation of
competitive carrier interconnection agreements in general and our interconnection agreements in particular. In some cases, we
may be deemed to be bound by the results of ongoing proceedings of these bodies. We therefore may participate in
proceedings before these regulatory agencies or judicial bodies that affect, and allow us to advance, our business plans.
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From time to time, we may be involved in other litigation concerning claims arising in the ordinary course of our business,
including claims brought by former employees and claims related to acquisitions. We do not currently believe that any of the
legal claims or proceedings will result in a material adverse effect on our business, financial position, results of operations or cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended December 31, 2000 we did not submit any matters to the vote of our security holders.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 21, 2001, there were approximately 589 holders of record of our common stock. Our common stock is listed for
quotation on the Nasdaq National Market under the symbol "DSLN".
The range of high and low sales prices per share of DSL.net's common stock as reported on the Nasdaq National Market since
DSL.net's initial public offering are shown below.
QUARTER ENDED HIGH LOW
December 31, 1999 (from October 6, 1999) $25.625 $7.469
March 31, 2000 $32.563 $14.000
June 30, 2000 $22.250 $6.125
September 30, 2000 $10.375 $2.406
December 31, 2000 $3.500 $0.469
RECENT SALES OF UNREGISTERED SECURITIES
In May 2000, 102,737 shares of common stock were issued upon the cashless exercise of an outstanding warrant pursuant to
its terms. These shares of common stock were issued pursuant to an exemption from registration provided under Sections
3(a)(9) or 4(2) of the Securities Act of 1933.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and currently intend to retain any future earnings for
the future operation and expansion of our business. In addition, our credit agreement with our bank prohibits the payment of
cash dividends. Accordingly, we do not anticipate that any cash dividends will be declared or paid on our common stock in the
foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
We were incorporated on March 3, 1998 and commenced operations on March 28, 1998. The following historical data for the
period from inception (March 3, 1998) through December 31, 1998 and the years ended December 31, 1999 and December
31, 2000, except for "Other Data," has been derived from our financial statements audited by PricewaterhouseCoopers LLP,
independent accountants. Our balance sheets at December 31, 1999 and 2000 and the related statements of operations,
changes in stockholders' equity and cash flows for the period from inception (March 3, 1998) to December 31, 1998 and the
years ended December 31, 1999 and December 31, 2000 and notes thereto appear elsewhere in this annual report on Form
10-K.
You should refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the more
complete financial information included elsewhere in this annual report on Form 10-K.
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Period From
Inception (March 3,
1998) Through Year Ended Year Ended
December 31, December 31, December 31,
1998 1999 2000
---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenue ......................................... $ 31,533 $ 1,312,546 $ 17,789,410
Operating expenses:
Network and operations .................... 127,054 9,604,200 78,242,544
General and administrative ................ 2,653,544 8,036,547 25,793,932
Sales and marketing ....................... 35,961 7,543,191 26,236,619
Total operating expenses ................ 2,816,559 25,183,938 130,273,095
Operating loss .................................. (2,785,026) (23,871,392) (112,483,685)
Interest expense (income), net .................. 4,611 (1,889,312) (6,729,657)
Other expense ................................... -- 6,233 9,120
Net loss ........................................ $ (2,789,637) $ (21,988,313) $(105,763,148)
NET LOSS PER COMMON SHARE DATA:
Net Loss per common share, basic and diluted .... $ (0.55) $ (2.05) $ (1.75)
Shares used in computing net loss per share ..... 5,118,342 16,549,535 60,593,437
CASH FLOW DATA:
Used in operating activities .................... $ (153,505) $ (6,342,720) $ (74,985,739)
Used in investing activities .................... (290,082) (48,660,812) (56,717,213)
Provided by financing activities ................ 483,066 121,142,314 141,959,673
OTHER DATA:
EBITDA (A) ...................................... $ (356,010) $ (17,917,617) $ (88,137,915)
Capital expenditures ............................ 290,082 33,811,121 55,942,721
December 31,
---------------------------------------------------
1998 1999 2000
---- ---- ----
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities $ 39,479 $ 79,452,444 $ 76,434,982
Total assets .................................... 369,980 117,631,772 194,805,921
Long-term obligations (including current portion) 433,161 3,055,625 14,114,457
Total stockholders' equity (deficit) ............ (315,865) 100,732,886 149,417,439
(A) EBITDA, shown above under "Other Data," consists of net loss excluding net interest, taxes, depreciation of capital assets,
amortization of intangibles and non-cash stock compensation expense. Other companies, however, may calculate it differently
from us. We have provided EBITDA because it is a measure of financial performance commonly used for comparing
companies in the telecommunications industry in terms of operating performance, leverage, and ability to incur and service debt.
EBITDA is not a measure determined under generally accepted accounting principles. EBITDA should not be considered in
isolation from, and you should not construe it as a substitute for:
o operating loss as an indicator of our operating performance,
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o cash flows from operating activities as a measure of liquidity,
o other consolidated statement of operations or cash flows data presented in accordance with generally accepted accounting
principles, or
o as a measure of profitability or liquidity.
The above financial data includes the operating results of acquisitions from their acquisition date and consequently will effect the
comparability of such financial data from year to year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH "ITEM 6 - SELECTED
CONSOLIDATED FINANCIAL DATA" AND "ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA" THAT APPEAR ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. THIS DISCUSSION AND
ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT
ARE NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS ANNUAL
REPORT ON FORM 10-K. 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 ANNUAL REPORT ON FORM 10-K, WHETHER AS A RESULT OF
NEW INFORMATION, FUTURE EVENTS OR CIRCUMSTANCES OR OTHERWISE.
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 primarily target select second and third tier cities for the
deployment of our own local DSL equipment. We began offering commercial service in May 1998 and, as of March 15, 2001,
we had installed equipment in over 375 cities. In first tier cities, and certain other markets where we have not deployed our own
equipment, we utilize the local DSL facilities of other carriers to provide service.
We have incurred operating losses and net losses for each month since our formation. For the periods ended December 31,
1998, 1999 and 2000, we experienced net cash outflows from operating and investing activities. As of December 31, 1998,
1999 and 2000, we had accumulated deficits of approximately, $2,789,600, $27,180,000 and $132,943,100, respectively.
In an effort to increase revenue from our installed network and conserve capital, in the fourth quarter of 2000, we decided to
suspend the build-out of additional central offices and focus our efforts on increasing revenue through targeted marketing to
increase penetration in our existing service areas and by introducing more services. In addition, we decided to suspend network
connections to certain central offices, consolidate operating facilities, significantly reduce staff and curtail overall operating
expenses. As a result, in 2001, we currently expect a significant reduction in our capital expenditures and a reduction
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in the size of our operating losses, net losses and net operating cash outflows. We currently believe these actions will reduce our
monthly net cash outlay during 2001.
Our financial performance will vary, and whether and when we achieve profitability will depend on a number of factors,
including:
o development of the high-speed data communications industry and our ability to compete effectively;
o our ability to obtain additional financing to continue the implementation of our business plan;
o amount, timing and pricing of customer revenue;
o commercial acceptance of our service and attaining expected penetration within our target markets;
o our ability to recruit and retain qualified personnel;
o up front sales and marketing expenses;
o cost and utilization of our network components which we lease from other telecommunications providers, including other
competitive carriers;
o our ability to establish and maintain relationships with marketing partners;
o successful implementation and management of financial, information management and operations support systems to efficiently
and cost-effectively manage our growth; and
o favorable outcome of federal and state regulatory proceedings and related judicial proceedings, including proceedings relating
to the 1996 Telecommunications Act.
FACTORS AFFECTING FUTURE OPERATIONS
REVENUE. We derive our revenue from monthly fees and installation costs paid by customers for our services, which vary
based on the speed of the connection and the services ordered. The current 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.
During fiscal 2000, we implemented the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 101
"REVENUE RECOGNITION IN FINANCIAL STATEMENTS." As a result, installation revenue and installation costs are
now deferred and amortized to revenue and expense, respectively, over eighteen months, the estimated life of the customer
relationship. Any excess of installation cost over revenue is expensed when incurred. In certain situations we waive
non-recurring installation charges in order to obtain a customer and expense the related direct installation cost as incurred.
Management believes that implementation of SAB No. 101 will not have a significant impact on future revenue or future
operating results because installation revenue represents a small percentage of our total revenue and because the deferred
revenue is offset by the deferral of an equal amount of installation cost.
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
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believe, is currently under-served. Although pricing will be 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 we
believe will likely continue.
NETWORK AND OPERATIONS. Our network and operations expenses include costs related to personnel, monthly fees for
telecommunications lines between customers, central offices, network service providers and our network, customer line
installation, Internet access, certain depreciation and amortization expenses and other costs. 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. Additional costs are incurred to connect to the Internet. Because of significant expansion and growth of our
business during 2000, our results include various network and operations expenses, particularly depreciation and amortization
expenses, for a portion of the year. As a result, we expect to see increases in such expenses during 2001 as such expenses are
included for the full year. We also expect these costs to increase as the volume of data communications traffic generated by our
customers' increases.
The majority of our capital expenditures relate to building our network and delivering service to customers. Accordingly, the
majority of our depreciation and amortization expense, excluding amortization of goodwill and intangibles resulting from
acquisitions, is included in our network and operations expense. This expense includes:
o Depreciation of network and operations equipment and DSL modems and routers installed at customer sites;
o Depreciation of information systems, and computer hardware and software; and
o Amortization and depreciation of the costs of obtaining, designing and building our collocation space and corporate facilities.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses consist primarily of costs relating to human
resources, finance, billing, administrative services, recruiting, insurance, legal services, operating facilities rent, depreciation and
amortization of goodwill and intangibles resulting from acquisitions.
SALES AND MARKETING. Our sales and marketing expenses consist primarily of expenses for personnel, the development
of our brand name, promotional materials, advertising and sales commissions and incentives.
STOCK COMPENSATION. We incurred non-cash stock compensation expenses as a result of the granting of stock and
stock options to employees and others 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 is generally 48 months. In addition, in fiscal 2000, we recorded $870,000 of non-cash compensation
expense relating to the vesting of stock options held by members of our former advisory board.
TAXATION. We have not generated any taxable income to date and, therefore, have not paid any federal income taxes since
inception. Use of our net operating loss carryforwards, which will begin to expire in 2003, may be subject to limitations. We
have recorded a full valuation allowance on a deferred tax asset,
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consisting primarily of net operating loss carryforwards, because of uncertainty regarding their future recoverability.
RESULTS OF OPERATIONS
REVENUE. Revenue increased from approximately $32,000 for the period from March 3, 1998 (inception) to December 31,
1998 to approximately $1,313,000 for the year ended December 31, 1999 and to approximately $17,789,000 for the year
ended December 31, 2000. Revenue increased primarily due to the expansion of our network, the increased number of
customers subscribing for our services and contributions from acquired businesses, primarily Vector Internet Services, Inc. and
Tycho Networks. We currently expect revenue to increase in future periods as we increase our sales and marketing efforts in
our existing service areas and introduce additional services.
NETWORK AND OPERATIONS. Network and operations expenses increased from approximately $127,000 for the period
from March 3, 1998 (inception) to December 31, 1998 to approximately $9,604,000 for the year ended December 31, 1999
and approximately $78,243,000 for the year ended December 31, 2000. The increase in network and operations expenses
between the 1998 and 1999 periods was primarily due to the increased number of customers subscribing for our services and
other increased costs resulting from the addition of personnel, the expansion of our network and legal costs incurred in
connection with our applications for regulatory approvals in various states. The increases in these expenses between the 1999
and 2000 periods was primarily attributable to increased telecommunication costs and central office facilities costs, increases in
personnel and professional services and increased depreciation expense. These increases resulted primarily from the expansion
of our network and the increased number of customers subscribing for our services.
Network and operations expenses included depreciation expense of approximately $5,744, $1,621,000 and $15,119,000 for
the period from March 3, 1998 (inception) to December 31, 1998 and the years ended December 31, 1999 and 2000,
respectively. This expense increased as we incurred further capital expenditures in connection with our expansion and more of
our network facilities became operational.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased from approximately $2,653,000 for
the period from March 3, 1998 (inception) to December 31, 1998 to $8,037,000 for year ended December 31, 1999 and
approximately $25,794,000 for the year ended December 31, 2000. The increase in general and administrative expenses
between the 1998 and 1999 periods was principally the result of increases in the number of employees. The increases in these
expenses between the 1999 and 2000 periods were principally the result of increases in personnel and professional services,
increases in office facility rents resulting from the development of our operating infrastructure and amortization of goodwill and
other intangible assets related to acquisitions.
SALES AND MARKETING. Sales and marketing expenses increased from approximately $36,000 for the period from
March 3, 1998 (inception) to December 31, 1998 to approximately $7,543,000 for the year ended December 31, 1999 and
approximately $26,237,000 for the year ended December 31, 2000. These expenses increased primarily as a result of
increased marketing and promotional activities, including direct mail, and increases in sales and marketing personnel.
STOCK COMPENSATION. Non-cash stock compensation expenses were approximately $2,423,000 for the period from
March 3, 1998 (inception) to December 31, 1998, compared to $4,123,000 for the year ended December 31, 1999 and
$3,192,000 for the year ended December 31, 2000. These expenses
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consisted of charges and amortization related to stock options and restricted stock granted to our employees, directors and
advisors.
The unamortized balance of approximately $13,362,000 as of December 31, 1999 and $3,931,000 as of December 31, 2000,
will be amortized over the remaining vesting period of each grant. As of December 31, 1999 and 2000 options to purchase
5,874,302 and 7,318,612 shares of common stock, respectively, were outstanding, which were exercisable at weighted
average exercise prices of $2.32 and $4.07 per share, respectively.
INTEREST EXPENSE (INCOME), NET. Net interest expense of approximately $5,000 for the period from March 3, 1998
(inception) to December 31, 1998 did not include any interest income. For the year ended December 31, 1999, net interest
income of approximately $1,889,000 included $2,077,000 of interest income partially offset by $188,000 of interest expense.
Net interest income of approximately $6,730,000 for the year ended December 31, 2000 included $8,538,000 of interest
income partially offset by $1,808,000 of interest expense. The increases in interest income in 1999 and 2000 were primarily
due to an increase in our cash and investment balances resulting from the sale of preferred stock and common stock in 1999
and the sale of common stock in 2000. The increases in interest expense were related to increased debt, primarily attributable
to new capital lease obligations and other financing arrangements.
RESTRUCTURING. In the fourth quarter of 2000, we incurred approximately $3,542,000 in non-recurring charges related to
a corporate restructuring. Of that amount, approximately $448,000 related to severance costs incurred as a result of a reduction
in our workforce of approximately 140 employees. These severance costs are included in network and operations, general and
administrative and sales and marketing expenses. A charge of approximately $1,078,000 was included in general and
administrative expense for the estimated costs resulting from the consolidation of our office facilities by vacating office space
located in Milford, Connecticut, and Chantilly, Virginia and for unused office space in Santa Cruz, California. Lastly, a reserve
of approximately $2,016,000 was included in network and operations expenses for the estimated costs resulting from our
decision to not accept certain central offices' previously applied for, and to forego the completion of our build-out of certain
other central offices.
At December 31, 2000, approximately $362,000 of severance costs and approximately $1,416,000 of capitalized collocation
application fees had been charged against the restructuring reserves.
NET LOSS. Net loss of $2,790,000 for the period from March 3, 1998 (inception) to December 31, 1998 increased to
approximately $21,988,000 for the year ended December 31, 1999 and approximately $105,763,000 for the year ended
December 31, 2000.
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 December 31, 2000, we had cash and cash equivalents of
approximately $76,435,000 and working capital of approximately $46,762,000.
Net cash provided by financing activities in the periods ended 1998, 1999 and 2000 was approximately $483,000,
$121,142,000 and $141,960,000, respectively. This cash primarily resulted from the sale of our capital stock. We have used,
and intend to continue using, the proceeds from these 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 these proceeds to acquire
complementary businesses or assets.
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In August 1998, we issued a $100,000 demand note, which bore interest at the annual rate of 5.56%. As of December 31,
1998, $66,667 of principal of this note remained outstanding. This note was repaid in full in January 1999.
In November 1998, we received $350,000 from a short-term bridge note and warrant financing. These notes had an aggregate
principal amount of $350,000 and bore interest at annual rates of 5.56% or 6%. These notes were exchanged for shares of our
Series A preferred stock in January 1999.
During 1998, we also received $50,500 from the sale of capital stock to our founders.
In January 1999, we received net proceeds of approximately $3,302,000 from the sale of shares of Series A preferred stock
and certain warrants. In April 1999, we received net proceeds of approximately $9,940,000 from the sale of shares of Series C
preferred stock to our principal stockholders and others. In May 1999, we received net proceeds of approximately
$29,961,000 from the sale of shares of Series D preferred stock to our principal stockholders and others. In addition, we
received approximately $1,007,000 in connection with repayment of a note, including interest at 6.0%, from an officer in
connection with the purchase of Series D preferred stock in June 1999. In July 1999, we received net proceeds of
approximately $18,458,000 from the sale of shares of Series E preferred stock to two strategic marketing partners. In October
and November 1999, we received net proceeds of approximately $55,722,000 from the sale of shares of common stock in our
initial public offering. Upon the closing of the initial public offering of our common stock on October 12, 1999, all outstanding
shares of our preferred stock converted automatically into shares of common stock. In March 2000, we received net proceeds
of approximately $141,273,000 from the sale of 5,750,000 shares of our common stock in a public offering.
In May 2000, our $5 million bank line of credit expired and the amounts outstanding converted to a 36-month term loan.
Amounts borrowed under this term loan generally bear interest at the sum of 1% plus the higher of the bank's prime rate of
interest and the federal funds rate plus 0.5%, and are secured by a lien on certain of our equipment. As of December 31, 2000,
the $3,545,000 outstanding under the term loan bore interest at the annual rate of 10.5%. The term loan contains certain
restrictive covenants, including covenants requiring us to maintain certain financial ratios and limitations relating to, among other
things, new indebtedness, the creation of liens, types of investments, mergers, consolidations and the transfer of all or
substantially all of our assets.
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 $10,477,000 outstanding under capital leases at December 31, 2000.
As a result of the development of our operating infrastructure and recent 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 $3,514,000 in 2001, $3,542,000 in 2002, $2,556,000 in 2003, $1,450,000 in 2004 and $389,000 in
2005. In addition, under agreements with two long distance carriers providing for data transmission services, minimum payments
are approximately $8,295,000 in 2001, $10,024,000 in 2002, $9,281,000 in 2003, $4,800,000 in 2004 and
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$1,600,000 in 2005. As part of our restructuring in December 2000, we vacated certain office space in Milford, Connecticut
and Chantilly, Virginia and did not occupy certain increased space in Santa Cruz, California. We are currently seeking to
sublease these spaces. If we are successful, the fixed payments associated with facility operating leases described above will
decrease. We may not be able to sublease these facilities for lease rates that will cover our lease payments, or at all.
On December 1, 1999, we acquired Tycho Networks, which is based in Santa Cruz, California. Tycho Networks provides
Internet access, web hosting and related services throughout central coastal California. The approximate net purchase price of
$3.3 million, excluding transaction costs associated with the acquisition, consisted of cash payments at closing of $1.6 million
(including notes paid at closing of approximately $0.8 million), amounts due to the selling stockholders and others after the
closing of approximately $0.8 million, net liabilities assumed of approximately $0.5 million and other costs of approximately
$0.4 million. All amounts due to Tycho Networks selling stockholders have been paid.
On April 3, 2000, we acquired certain assets and liabilities of Trusted Net Media Holdings, LLC. This acquisition was
accounted for under the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The approximate net purchase
price of $2,500,000, excluding transaction costs, consisted of cash payments at closing of approximately $2,097,000; amounts
due to Trusted Net after the closing of approximately $350,000; and net liabilities assumed of approximately $53,000. In
addition, we incurred transaction costs associated with the acquisition of approximately $150,000.
On May 26, 2000, we acquired Vector Internet Services, Inc.("VISI"), an Internet solution provider based in Minneapolis,
Minnesota. This acquisition was accounted for under the purchase method of accounting and, accordingly, the purchase price
has been allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition.
The approximate net purchase price of $19,969,000, excluding transaction costs, consisted of cash payments at closing of
approximately $8,800,000; amounts due to selling stockholders after the closing of approximately $2,200,000; common stock
valued at $2,315,000; and the assumption of VISI employee stock options, which were valued at $6,654,000. In addition, we
incurred transaction costs associated with the acquisition of approximately $425,000.
On December 1, 2000, we acquired certain assets of Exario Networks. This acquisition was accounted for under the purchase
method of accounting and, accordingly, the purchase price has been allocated to the assets acquired based on their estimated
fair values at the date of acquisition. The approximate net purchase price of $4,463,000, excluding transaction costs, consisted
of cash payments at closing of approximately $2,902,000 and amounts due to Exario after the closing of approximately
$1,561,100. In addition, we incurred transaction costs associated with the acquisition of approximately $100,000.
In 1998, 1999 and 2000, net cash used in our operating activities was approximately $154,000, $6,343,000 and $74,986,000,
respectively. This cash was used for a variety of operating expenses, including salaries, consulting and legal expenses, network
operations and overhead expenses.
Net cash used in investing activities in 1998, 1999 and 2000 was approximately $290,000 $48,661,000 and $56,717,000,
respectively. For the year ended December 31, 1999 approximately $33,811,000 was used for purchases of equipment and
payment of collocation costs, approximately $13,274,000 was used for the purchase of marketable securities and
approximately $1,576,000 was used to acquire Tycho Networks. For the year ended December 31, 2000, approximately
$55,943,000 was used primarily for the purchase of equipment and payment of collocation costs and approximately
$14,049,000
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was used for acquisitions and investments, excluding approximately $4,034,000 which is payable by us to selling stockholders
at future dates. These expenditures were partially offset by proceeds from the sale of marketable securities of approximately
$13,274,000.
The development and expansion of our business has required significant capital expenditures. Capital expenditures, including
collocation fees, were approximately $55,493,000 for the year ended December 31, 2000. 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 delay further deployment of our network, our planned capital
expenditures for 2001 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 approximately $15,000,000 to $20,000,000 for capital expenditures during
the year ending December 31, 2001. 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 2001. Our independent
accountants have noted in their report that our sustained operating losses raise substantial doubt about our ability to continue as
a going concern. 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 into the fourth
quarter of 2001. 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 or other
assets. 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 and revenue growth, planned capital expenditures, cash generated from operations,
improvements in operating productivity, and the extent and timing of our entry into new markets.
Additional financing will be required during 2001. We do not believe that our operations will generate sufficient cash to finance
our requirements. As a result, we need to raise financing through some combination of borrowings, leasing, vendor financing and
the sale of equity or debt securities. Our capital requirements may vary based upon the timing and the success of implementation
of our business plan and as a result of regulatory, technological and competitive developments or if:
o demand for our services or our cash flow from operations is less than or more than expected;
o our development plans or projections change or prove to be inaccurate;
o we make acquisitions; or
o we accelerate or delay deployment of our network or otherwise alter the schedule or targets of our business plan
implementation.
We cannot assure you that we will be able to raise sufficient debt or equity capital on terms that we consider acceptable, if at
all. If we are unable to obtain adequate funds, we may not be able to deploy and operate our network, respond to competitive
pressures or fund our operations. Ultimately, we may be required to significantly reduce or discontinue our operations. Our
financial statements included herein do not include any adjustments that might result from this uncertainty.
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the staff of the Securities and Exchange Commission issued its Staff Accounting Bulletin ("SAB") No. 101,
"REVENUE RECOGNITION IN FINANCIAL STATEMENTS." SAB No. 101 provides guidance on the measurement and
timing of revenue recognition in financial statements of public companies. Changes in accounting policies to apply the guidance
of SAB No. 101, as amended by SAB No. 101B, must be adopted by recording the cumulative effect of the change back to
January 1, 2000.
We have adopted the revenue recognition guidelines of SAB No. 101, which changed the manner in which we recognize
installation revenue (see "REVENUE RECOGNITION IN FINANCIAL STATEMENTS" above). The cumulative effect of
adoption of SAB No. 101 resulted in deferral of installation revenues and related direct costs of approximately $176,000 at
January 1, 2000. The effect of the adoption for the year ended December 31, 2000, resulted in a deferral of installation revenue
and related direct costs of approximately $735,000.
In March 2000, The Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44 ("FIN 44"),
"ACCOUNTING FOR CERTAIN TRANSACTIONS
INVOLVING STOCK COMPENSATION--AN INTERPRETATION OF ACCOUNTING PRINCIPLES BOARD
("APB") OPINION NO. 25." FIN 44 clarifies the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a noncompensatory plan; the accounting consequence of
various modifications to the terms of previously fixed stock options or awards; and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 became effective on July 1, 2000, but certain conclusions in FIN 44
cover specific events that occurred after either December 15, 1998 or January 12, 2000. The initial adoption of FIN 44 did not
have a material impact on our financial position or results of operations.
In June 1999, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 137, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB
STATEMENT NO.133." In June 2000, the FASB issued SFAS 138, "ACCOUNTING FOR CERTAIN DERIVATIVE
INSTRUMENTS AND CERTAIN HEDGING AGREEMENTS - AN AMENDMENT TO FASB STATEMENT NO.
133." SFAS 133 established new standards of accounting and reporting for derivative instruments and hedging activities, and
required that all derivatives, including foreign currency exchange contracts, be recognized on the balance sheet at fair value. We
will adopt SFAS 133, as amended by SFAS 137 and SFAS 138, in the first quarter of 2001 and do not expect the adoption to
have a material effect on our financial condition or results of operations.
RISK FACTORS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND CERTAIN OTHER
INFORMATION
Some of the statements under "Risk Factors", "Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Business" and elsewhere in this Annual Report on Form 10-K constitute forward-looking statements. DSL.net
makes such forward-looking statements under the provisions of the "Safe Harbor" section of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. 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 evaluating these statements, you should specifically consider various factors, including the
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risks outlined under "Risk Factors". 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 Annual Report on Form 10-K, whether as a result of new information,
future events or circumstances or otherwise.
RISKS RELATING TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS AND
PROSPECTS
We commenced operations in March 1998 and began offering commercial service in Stamford, Connecticut in May 1998.
Accordingly, you have limited information about our company with which to evaluate our business, strategies and performance
and an investment in our common stock.
WE HAVE INCURRED LOSSES AND HAVE EXPERIENCED NEGATIVE OPERATING CASH FLOW TO
DATE AND EXPECT OUR LOSSES AND NEGATIVE OPERATING CASH FLOW TO CONTINUE
We have incurred significant losses and experienced negative operating cash flow for each month since our formation. We
expect to continue to incur significant losses and negative operating cash flow for the foreseeable future. If our revenue does not
grow as expected or capital and operating expenditures exceed our plans, our business, prospects, financial condition and
results of operations will be materially adversely affected. As of December 31, 2000, we had an accumulated deficit of
approximately $132,900,000. We cannot be certain if or when we will be profitable or if or when we will generate positive
operating cash flow. We expect our operating expenditures, particularly network and operations and sales and marketing
expenditures, to continue to increase as we implement our business plan. In addition, we expect to continue to make additional
capital expenditures in 2001 and in subsequent years. Our revenue, however, may not increase despite this increased spending.
Our independent accountants have noted in their report that our sustained operating losses raise substantial doubt about our
ability to continue as a going concern.
WE MUST OBTAIN ADDITIONAL FINANCING IN 2001 IF WE ARE TO CONTINUE OPERATING OUR
BUSINESS
Additional financing will be required during 2001. We expect our operating losses, net operating cash outflows and capital
expenditures to continue during 2001. Our independent accountants have noted in their report that our sustained operating
losses raise substantial doubt about our ability to continue as a going concern. 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 into the fourth quarter of 2001. We do not believe that our operations alone will
generate sufficient cash to finance our requirements. As a result, we need to raise financing through some combination of
borrowings, leasing, vendor financing and the sale of equity or debt securities. Our capital requirements may vary based upon
the timing and the success of implementation of our business plan and as a result of regulatory, technological and competitive
developments or if:
o demand for our services or our cash flow from operations is less than or more than expected;
o our development plans or projections change or prove to be inaccurate;
o we make acquisitions; or
o we accelerate or delay deployment of our network or otherwise alter the schedule or targets of our business plan
implementation.
We cannot assure you that we will be able to raise sufficient debt or equity capital on terms that we consider acceptable, if at
all. If we are unable to obtain adequate funds, we may not be able to deploy and operate our network, respond to competitive
pressures or fund our operations. Ultimately, we may be required to significantly reduce or discontinue our operations.
OUR INDEPENDENT ACCOUNTANTS HAVE RAISED QUESTIONS ABOUT OUR ABILITY TO CONTINUE AS
A GOING CONCERN IN THEIR REPORT ON OUR AUDITED FINANCIAL STATEMENTS, WHICH MAY HAVE
AN ADVERSE IMPACT ON OUR ABILITY TO RAISE ADDITIONAL CAPITAL AND ON OUR STOCK PRICE
Our independent accountants have included in their report an explanatory paragraph relating to our ability to continue as a going
concern. This explanatory paragraph includes the following language: "The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the
Company has experienced sustained operating losses that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty." The inclusion of this explanatory paragraph in the report of
our independent accountants may have an adverse impact on our ability to raise additional capital and on our stock price. We
cannot assure you that we will be able to continue as a going concern.
BECAUSE THE HIGH-SPEED DATA COMMUNICATIONS INDUSTRY IS NEW AND RAPIDLY
EVOLVING, WE CANNOT PREDICT ITS FUTURE GROWTH OR ULTIMATE SIZE
The high-speed data communications industry is in the early stages of development and is subject to rapid and significant
technological change. Since this industry is new and because the technologies available for high-speed data communications
services are rapidly evolving, we cannot accurately predict the rate at which the market for our services will grow, if at all, or
whether emerging technologies will render our services less competitive or obsolete. If the market for our services fails to
develop or grows more slowly than anticipated, our business, prospects, financial condition and results of operations could be
materially adversely affected. Many providers of high-speed data communication services are testing products from numerous
suppliers for various applications. In addition, certain industry groups are in the process of trying to establish standards which
could limit the types or speeds of the technologies we could use. Certain critical issues concerning commercial use of DSL
technology for Internet access, including security, reliability, ease and cost of access and quality of service, remain unresolved
and may impact the growth of these services.
OUR BUSINESS MODEL IS UNPROVEN, AND MAY NOT BE SUCCESSFUL
We do not know whether our business model and strategy will be successful. If the assumptions underlying our business model
are not valid or we are unable to implement our business plan, achieve the predicted level of market penetration or obtain the
desired level of pricing of our services for sustained periods, our business, prospects, financial condition and results of
operations could be materially adversely affected. We have adopted a different strategy than certain other broadband ISPs and
DSL providers. We focus on selling directly to small and medium sized businesses. Our unproven business model makes it
difficult to predict the extent to which our services will achieve market acceptance. To be successful, we must deploy our
services in a significant number of our selected markets and convince our target customers to utilize our service. In December
2000, we decided to suspend the further build-out of our
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network into new target markets and to focus our efforts on penetrating the markets in which we currently can provide service
and on adding services. It is possible that these efforts will not result in significant market penetration, favorable operating results
or profitability.
IF OUR SERVICES FAIL TO ACHIEVE OR SUSTAIN MARKET ACCEPTANCE AT DESIRED PRICING LEVELS,
OUR ABILITY TO ACHIEVE PROFITABILITY OR POSITIVE CASH FLOW WOULD BE IMPAIRED
Prices for digital communication services have fallen historically, a trend we expect will continue. Accordingly, we cannot
predict to what extent we may need to reduce our prices to remain competitive or whether we will be able to sustain future
pricing levels as our competitors introduce competing services or similar services at lower prices. If our services fail to achieve
or sustain market acceptance at desired pricing levels, our ability to achieve profitability or positive cash flow would be
impaired, which would have a material adverse effect on our business, prospects, financial condition and results of operations.
WE DEPEND ON WHOLESALE DSL PROVIDERS, SOME OF WHOM ARE COMPETITORS, TO PROVIDE US
WITH LOCAL DSL FACILITES IN AREAS WHERE WE HAVE NOT DEPLOYED OUR OWN DSL EQUIPMENT
In markets where we have not deployed our own local DSL equipment, we utilize local DSL facilities from wholesale providers,
including Covad Communications and NorthPoint Communications, in order to provide service to our end-user customers. In
these cases, we are dependent upon these wholesale carriers to provide, or arrange the provision of, the equipment and on-site
wiring required to provide local DSL services to our end-user customers, as well as to provide and maintain the local DSL line.
In general, these carriers may terminate the service they provide to us with little or no notice. These carriers may not continue to
provide us with acceptable local DSL services for our customers on the scale, at the price levels and within the time frames we
require, or at all. If we are unable to obtain acceptable DSL services from these wholesale carriers or they terminate the service
they provide us, we may be required to install our own equipment in a central office and provide and install new equipment for
our customers, or arrange for another wholesale carrier to do so. Obtaining space and provisioning equipment in a new central
office is a lengthy and costly process. We cannot assure you that we, or another carrier with whom we work, would be able to
obtain the space required in a central office on a cost effective basis, if at all, or that we could provide DSL services to such
customers on a timely basis. Our failure to install and provide services to customers on a timely basis, or the disruption in the
services provided to our customers, would likely result in the loss of many, if not all, of the customers in the affected locations,
and could result in claims brought by these customers against us. This could have a material adverse effect on our competitive
position, business, results of operations, financial position and prospects.
Certain wholesale DSL providers with whom we work offer services that compete with ours, or have other customers whose
services compete with ours. Such competing interests may affect the ability or willingness of these providers to provide us with
acceptable services on acceptable terms. In addition, certain of these providers are relatively young companies that are facing
substantial operational and financial challenges. The operational success and abilities of these carriers to operate and expand
their businesses could materially affect our business. The failure of any of these companies could cause us to lose customers and
revenue, expose us to claims and otherwise have a material adverse effect on our competitive position, business, results of
operations, financial position and prospects.
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THERE IS SUBSTANTIAL UNCERTAINTY ABOUT OUR ABILITY TO CONTINUE PROVIDING SERVICE
TO CUSTOMERS WHOSE LOCAL DSL FACILITES ARE PROVIDED BY NORTHPOINT
COMMUNICATIONS
We utilize local DSL facilities provided by NorthPoint Communications in order to provide service to certain of our end-user
customers. NorthPoint Communications is currently in bankruptcy and has notified its customers, including us, that the cessation
of its services is imminent. NorthPoint has already discontinued providing local DSL service for a number of our end-user
customers, and we believe that it will discontinue this service for the remainder of our customers who are served using its
facilities. We are working to establish interim and long-term alternatives for our affected customers. Some of these customers
are located in areas where neither we nor any of our existing wholesaler DSL providers other than NorthPoint have installed
DSL equipment. We may need to offer incentives and concessions to these customers. We may not be able to transition all of
our customers who currently obtain service through us via local DSL facilities provided by NorthPoint on a timely basis, if at all.
Any disruption in service may result in a loss of many, if not all, of these customers, and could result in claims brought by these
customers against us. This could have a material adverse effect on our competitive position, business, results of operations,
financial position and prospects.
IF WE FAIL TO RECRUIT QUALIFIED PERSONNEL IN A TIMELY MANNER AND RETAIN OUR EMPLOYEES,
WE WILL NOT BE ABLE TO EXECUTE OUR BUSINESS PLAN AND OUR BUSINESS WILL BE HARMED
To execute our business plan, we need to hire and retain a substantial number of qualified personnel, particularly sales and
marketing, engineering and other technical personnel. If we are unable to recruit qualified personnel in a timely manner or to
retain our employees, we will not be able to execute our business plan. In particular, if we are unable to recruit and retain a
sufficient number of qualified personnel, our revenue growth may be lower than we expect and our business may be harmed.
Our industry is characterized by intense competition for, and aggressive recruiting of, skilled personnel, as well as a high level of
employee mobility. Our recent reduction in workforce, together with our need for additional financing during 2001 and the
competitive nature of our industry may make it difficult to hire qualified personnel on a timely basis and to retain our employees.
OUR MANAGEMENT TEAM IS CRITICAL AND THE LOSS OF KEY PERSONNEL COULD ADVERSELY
AFFECT OUR BUSINESS
We depend on a small number of executive officers and other members of senior management to work effectively as a team, to
execute our business strategy and business plan, and to manage employees located in several offices across the United States.
The loss of key managers or their failure to work effectively as a team could have a material adverse effect on our business and
prospects. We do not have employment agreements with any of our executive officers, so any of these individuals may terminate
employment at any time.
OUR FAILURE TO ESTABLISH AND MAINTAIN THE NECESSARY INFRASTRUCTURE TO SUPPORT OUR
BUSINESS AND TO MANAGE OUR GROWTH COULD STRAIN OUR RESOURCES AND ADVERSELY AFFECT
OUR BUSINESS AND FINANCIAL PERFORMANCE
We have had significant growth in the number of markets in which we provide service, the number of customers subscribing for
our service and in the number of employees in geographically-dispersed areas. This growth has placed a significant strain on our
management, financial controls, operations, personnel
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and other resources. We have deployed operations support systems to help manage customer service, bill customers, process
customer orders and coordinate with vendors and contractors. The subsequent integration and enhancement of these systems
could be delayed or cause disruptions in service or billing. To efficiently and cost-effectively manage our
geographically-dispersed business, we must continue to successfully implement these systems on a timely basis, and continually
expand and upgrade these systems as our operations expand.
DISAPPOINTING QUARTERLY REVENUE, OPERATING RESULTS OR OPERATING STATISTICS COULD
CAUSE THE PRICE OF OUR COMMON STOCK TO FALL
Our quarterly revenue, operating results and operating statistics are difficult to predict and may fluctuate significantly from
quarter to quarter. If our quarterly revenue, operating results or operating statistics fall below the expectations of investors or
security analysts, the price of our common stock could fall substantially. Our quarterly revenue, operating results and operating
statistics may fluctuate as a result of a variety of factors, many of which are outside our control, including:
o the amount and timing of expenditures relating to the rollout of our infrastructure and services;
o regulatory developments;
o the rate at which we are able to attract customers within our target markets and our ability to retain these customers at
sufficient aggregate revenue levels;
o our ability to deploy our network on a timely basis;
o the availability of financing to continue our operations and expansion;
o technical difficulties or network service interruptions; and
o the introduction of new services or technologies by our competitors and resulting pressures on the pricing of our service.
THE FAILURE OF OUR CUSTOMERS TO PAY THEIR BILLS ON A TIMELY BASIS COULD ADVERSELY
AFFECT OUR CASH FLOW
Our target customers consist of small and medium sized businesses. We bill and collect numerous relatively small customer
accounts. We may experience difficulty in collecting amounts due on a timely basis. Our failure to collect accounts receivable
owed to us by our customers on a timely basis could have a material adverse effect on our business, financial condition and cash
flow.
OUR FAILURE TO DEVELOP AND MAINTAIN GOOD RELATIONSHIPS WITH MARKETING PARTNERS IN A
LOCAL SERVICE MARKET COULD ADVERSELY AFFECT OUR ABILITY TO OBTAIN AND RETAIN
CUSTOMERS IN THAT MARKET
In addition to marketing through our direct sales force, we rely on relationships with local marketing partners, such as integrators
of computer systems and networks and consultants. These partners recommend our services to their clients, provide us with
referrals and help us build a local presence in each
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market. We may not be able to identify, and maintain good relationships with quality marketing partners and we cannot assure
you that they will recommend our services rather than our competitors' services to their customers. Our failure to identify and
maintain good relationships with quality marketing partners could have a material adverse effect on our ability to obtain and
retain customers in a market and, as a result, our business would suffer.
OUR SUCCESS DEPENDS ON NEGOTIATING AND ENTERING INTO INTERCONNECTION
AGREEMENTS WITH TRADITIONAL TELEPHONE COMPANIES
We must enter into and renew interconnection agreements with traditional local telephone companies in each market in which
we deploy our own DSL equipment. These agreements govern, among other things, the price and other terms regarding our
location of equipment in the offices of traditional local telephone companies which house telecommunications equipment and
from which local telephone service is provided, known as central offices, and our lease of copper telephone lines that connect
those central offices to our customers. We have entered into agreements with BellSouth, Cincinnati Bell, SBC Communications,
Qwest, Sprint, Verizon or their subsidiaries, which govern our relationships in 48 states and the District of Columbia. Delays in
obtaining or renewing interconnection agreements would delay our entrance into target markets and could have a material
adverse effect on our business and prospects. In addition, disputes have arisen, and will likely arise in the future, regarding the
interpretation of these interconnection agreements. These disputes have, in the past, delayed the deployment of our network.
Our interconnection agreements generally have limited terms of one to two years and we cannot assure you that new
agreements will be negotiated on a timely basis, if at all, or that existing agreements will be extended on terms favorable to us.
Interconnection agreements must be approved by state regulators and are also subject to oversight by the FCC and the courts.
These governmental authorities may modify the terms or prices of our interconnection agreements in ways that could adversely
affect our ability to deliver service and our business and results of operations.
FAILURE TO NEGOTIATE INTERCONNECTION AGREEMENTS WITH THE TRADITIONAL LOCAL
TELEPHONE COMPANIES COULD LEAD TO COSTLY AND LENGTHY ARBITRATION WHICH MAY NOT BE
RESOLVED IN OUR FAVOR
Under federal law, traditional local telephone companies have an obligation to negotiate with us in good faith to enter into
interconnection agreements. If no agreement can be reached, either side may petition the applicable state telecommunications
regulators to arbitrate remaining disagreements. Arbitration is a costly and lengthy process that could delay our entry into
markets and could harm our ability to compete. Interconnection agreements resulting from arbitration must be approved by state
regulators. We cannot assure you that a state regulatory authority would resolve disputes in our favor.
FAILURE TO OBTAIN ADDITIONAL SPACE FOR OUR DSL EQUIPMENT IN THE LOCAL TELEPHONE
COMPANIES' CENTRAL OFFICES IN OUR TARGET MARKETS COULD ADVERSELY AFFECT OUR BUSINESS
In December 2000, we began to focus our efforts on increasing our penetration of those markets in which we can currently
provide service and providing more services. As our penetration of a target market increases, we may be required to install
additional equipment in central offices, known as collocation space. We may not be able to secure additional collocation space
in the central offices of our choice on a timely basis or on acceptable terms.
-33-
OUR SUCCESS DEPENDS ON TRADITIONAL TELEPHONE COMPANIES PROVIDING ACCEPTABLE
TRANSMISSION FACILITIES AND COPPER TELEPHONE LINES
We interconnect with and use the networks of traditional telephone companies to provide services to our customers in the
markets where we have deployed our own DSL equipment. In markets where we utilize the local DSL facilities of other carriers
to provide our service, those carriers must interconnect with and use the networks of traditional local telephone companies to
provide this service. We cannot assure you that these networks will be able to meet the telecommunications needs of our
customers or maintain our service standards. We also depend on the traditional telephone companies to provide and maintain
their transmission facilities and the copper telephone lines between our network and our customers' premises. Our dependence
on traditional telephone companies could cause delays in establishing our network and providing our services. Any such delays
could have a material adverse effect on our business. We, or the other carrier with which we work, lease copper telephone lines
running from the central office of the traditional telephone companies to each customer's location. In many cases, the copper
telephone lines must be specially conditioned by the telephone company to carry digital signals. We may not be able to obtain a
sufficient number of acceptable telephone lines on acceptable terms, if at all. Traditional telephone companies often rely on
unionized labor and labor-related issues have in the past, and may in the future, adversely affect the services provided by the
traditional telephone companies.
WE COMPETE WITH THE TRADITIONAL LOCAL TELEPHONE COMPANIES ON WHICH WE DEPEND
Many of the traditional local telephone companies, including those created by AT&T's divestiture of its local telephone service
business, have begun deploying DSL-based services. In addition, these companies also currently offer high-speed data
communications services that use other technologies. Consequently, these companies have certain incentives to delay:
o our entry into, and renewals of, interconnection agreements with them;
o our access to their central offices to install our equipment and provide our services,
o providing acceptable transmission facilities and copper telephone lines; and
o our introduction and expansion of our services.
Any such delays would negatively impact our ability to implement our business plan and harm our competitive position, business
and prospects.
In addition, the other carriers whose local DSL facilities we utilize in markets where we have not deployed our own DSL
equipment also compete with the traditional local telephone companies and rely on these companies for the same facilities and
services that we do. Any delay in the provision of acceptable transmission facilities and copper telephone lines provided by the
traditional local telephone companies to these carriers which are used in the provision of our service could negatively impact our
ability to implement our business plan and harm our competitive position, business and prospects.
Further, the prospect of these traditional local telephone companies offering DSL or other competitive high-speed data
communications services in a specific market may adversely impact our ability to obtain customers in that area and harm our
competitive position, business and prospects. These companies have established brand names and reputations for high quality in
their service areas, possess sufficient capital to deploy DSL equipment rapidly, have their own copper telephone lines and can
bundle digital data services
-34-
with their existing voice services to achieve a competitive advantage in serving customers. In addition, we depend upon these
traditional local telephone companies to provide us access to their central offices and to individual elements of their networks.
As a result, they can significantly influence the actual and perceived reliability, quality and timeliness of our services in their
service areas. The perceived relative stability of the traditional local telephone companies, particularly in light of the failure of
certain competitive telephone companies and the financial and operational issues surrounding other such companies, provides
the traditional local telephone companies a significant competitive advantage.
WE DEPEND ON TWO LONG DISTANCE CARRIERS TO CONNECT OUR NETWORK
Data is transmitted across our network via transmission facilities that we lease from WorldCom and AT&T. Failure of these
carriers to provide service or to provide quality service may interrupt the use of our services by our customers. In August 1999,
the service provided by WorldCom was interrupted for several days by a failure of their communications network. Several of
our customers were without service or had poor service during this period. We cannot be sure that the WorldCom and AT&T
service will not be interrupted in the future.
OUR SUCCESS DEPENDS ON CONTRACTORS WHO INSTALL THE EQUIPMENT AND WIRING
NECESSARY TO UTILIZE OUR SERVICE AT OUR CUSTOMERS' PREMISES
We primarily utilize contractors to install necessary equipment and wiring at our customers' premises. In markets where we
utilize the local DSL facilities of other carriers, such carriers, or their contractors, effect such installations. These installations
must be completed on a timely basis and in a cost-efficient manner. Failure to retain experienced contractors to install the
equipment and wiring or failure to complete these installations on a timely, cost-efficient basis could materially delay our growth
or damage our reputation, our business and prospects and results of operations. If we are unable to retain contractors to
provide these services, we will have to complete these installations ourselves, probably at a greater cost and with delay. We
may be required to utilize numerous contractors as we expand our operations, which may divert management attention and
result in delays in installations, cancellations, increased costs and lower quality.
INTENSE COMPETITION IN THE HIGH-SPEED DATA COMMUNICATION SERVICES MARKET MAY
NEGATIVELY AFFECT THE NUMBER OF OUR CUSTOMERS AND THE PRICING OF OUR SERVICES
The high-speed data communication services market is intensely competitive. If we are unable to compete effectively, our
business, prospects, financial condition and results of operations would be adversely affected. We expect the level of
competition to intensify in the future, due, in part, to increasing consolidation in our industry. Our competitors use various high
speed communications technologies for local access connections such as integrated services digital network, or ISDN, frame
relay, T1, DSL services and wireless, satellite-based and cable networks. We expect significant competition from:
o Other providers of DSL-based services, including Covad Communications, Network Access Solutions and Rhythms
NetConnections;
o Internet service providers, such as Cais, Vario and EarthLink, which offer high-speed access capabilities, as well as other
related products and services;
-35-
o Traditional local telephone companies, including the traditional telephone companies created by AT&T's divestiture of its local
telephone service business, which have begun deploying DSL-based services and which provide other high-speed data
communications services;
o National long distance carriers, such as AT&T and WorldCom, which are offering competitive DSL-based services;
o Cable modem service providers, such as At Home, which are offering high-speed Internet access over cable networks; and
o Providers utilizing alternative technologies, such as wireless and satellite-based data service providers.
Many of our current and potential competitors have longer operating histories, greater brand name recognition, larger customer
bases and substantially greater financial, technical, marketing, management, service support and other resources than we do.
Therefore, they may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or
customer requirements. See "Business--Competition."
WE MAY INCUR SIGNIFICANT AMOUNTS OF DEBT IN THE FUTURE TO IMPLEMENT OUR BUSINESS PLAN
AND, IF INCURRED, THIS INDEBTEDNESS WILL CREATE GREATER FINANCIAL AND OPERATING RISK
AND LIMIT OUR FLEXIBILITY
We may seek additional debt financing in the future. We are not generating sufficient revenue or operating cash flow to fund our
operations and repay existing or expected debt. We may not be able to repay our current debt or any future debt. In addition,
the terms of any future debt would likely contain additional restrictive covenants that would limit our ability to incur additional
indebtedness and place other operating restrictions on our business. If we incur additional debt, we will be required to devote
increased amounts of our cash flow to service indebtedness. This could require us to modify, delay or abandon the capital
expenditures and other investments necessary to implement our business plan.
WE MAY BE SUBJECT TO RISKS ASSOCIATED WITH ACQUISITIONS
We have made a number of asset and business acquisitions and may acquire additional assets or businesses in the future. An
acquisition may not produce the revenue, earnings or business synergies that we anticipate, and an acquired business might not
perform as we expect. If we pursue any future acquisition, our management could spend a significant amount of time and effort
in identifying and completing the acquisition and may be distracted from the operation of our business. We will probably have to
devote a significant amount of management resources to integrating any acquired business, including the business and assets that
we have already acquired, with our existing operations, and that integration may not be successful.
OUR SERVICES ARE SUBJECT TO FEDERAL, STATE AND LOCAL REGULATION AND CHANGES IN
LAWS OR REGULATIONS COULD ADVERSELY AFFECT THE WAY WE OPERATE OUR BUSINESS
The facilities we use and the services we offer are subject to varying degrees of regulation at the federal, state and/or local
levels. Changes in applicable laws or regulations could, among other things, increase our costs, restrict our access to the central
offices of the traditional telephone companies, or
-36-
restrict our ability to provide our services. For example, the 1996 Telecommunications Act, which, among other things, requires
traditional telephone companies to unbundle network elements and to allow competitors to locate their equipment in the
traditional local telephone companies' central offices, is the subject of ongoing proceedings at the federal and state levels,
litigation in federal and state courts, and legislation in federal and state legislatures. For example, FCC rules governing pricing
standards for access to the networks of the traditional local telephone companies are currently being challenged in federal court.
In addition, the traditional local telephone companies are pursuing several judicial and legislative avenues to overturn an FCC
order that found that advanced services, such as DSL, are subject to the market opening requirements of the 1996
Telecommunications Act. The FCC's collocation rules were also vacated by a federal court and are pending on remand at the
FCC. In addition, at least two traditional telephone companies, SBC Communications and Verizon, have taken the position in
state and federal regulatory proceedings that they are not obligated to unbundle portions of their network where they construct
modified or new digital loop carrier facilities that would enable them to offer DSL services to customers who are located too far
from the traditional local telephone companies' central offices to be reached by existing DSL technologies. We cannot predict
the outcome of the various proceedings, litigation and legislation or whether or to what extent these proceedings, litigation and
legislation may adversely affect our business and operations.
Decisions by the FCC and state telecommunications regulators will determine some of the terms of our relationships with
traditional telecommunications carriers, including the terms and prices of interconnection agreements, and access fees and
surcharges on gross revenue from interstate and intrastate services. Recent changes in federal Congressional and executive
leadership could increase the possibility of changes in the law that could alter our relationship with these companies, and thereby
affect our ability to provide DSL services to the public. State telecommunications regulators determine whether and on what
terms we will be authorized to operate as a competitive local exchange carrier in their state. In addition, local municipalities may
require us to obtain various permits which could increase the cost of services or delay development of our network. Future
federal, state and local regulations and legislation may be less favorable to us than current regulations and legislation and may
adversely affect our businesses and operations. See "Business-Governmental Regulations."
THE ABILITY OF THE TRADITIONAL LOCAL TELEPHONE COMPANIES TO OFFER DSL SERVICES
THROUGH LESS-REGULATED SUBSIDIARIES COULD ADVERSELY AFFECT OUR BUSINESS PLAN BY
ALTERING OUR RELATIONSHIP WITH THE LOCAL TELEPHONE COMPANIES UPON WHOSE FACILITIES
WE DEPEND FOR ACCESS TO CUSTOMERS
There exists considerable uncertainty as to the status of the FCC's policy toward the ability of the traditional local telephone
companies to provide DSL services through less-regulated subsidiaries. In August 1998, the FCC issued a notice of proposed
rulemaking seeking comments on its tentative conclusion that traditional local telephone companies should be permitted to create
separate affiliates to provide DSL services. The outcome of this proceeding remains uncertain. However, the FCC subsequently
required two traditional local telephone companies, SBC Communications and Verizon, to create separate affiliates to provide
DSL services as conditions of their mergers with Ameritech and GTE, respectively. In January 2001, the United States Court of
Appeals for the District of Columbia held that SBC may not avoid its obligations under the Telecommunications Act of 1996
through the creation of a separate advanced services affiliate. Under the terms of the FCC's conditions on the SBC-Ameritech
merger, SBC may be able to fold its separate affiliate back into the parent company as early as later this year. It remains unclear
how this court decision will affect the existing SBC and Verizon affiliates and the pending FCC proceeding. Any outcome that
alters our relationship with the traditional local telephone companies could adversely affect our ability to provide DSL services
at a competitive price. See "Business--Governmental Regulations".
-37-
UNCERTAIN TAX AND OTHER SURCHARGES ON OUR SERVICES MAY INCREASE OUR PAYMENT
OBLIGATIONS TO FEDERAL AND STATE GOVERNMENTS
Telecommunications providers are subject to a variety of federal and state surcharges and fees on their gross revenues from
interstate and intrastate services. These surcharges and fees may be increased and other surcharges and fees not currently
applicable to our services could be imposed on us. In either case, the cost of our services would increase and that could have a
material adverse effect on our business, prospects, financial condition and results of operations.
A BREACH OF OUR NETWORK SECURITY COULD RESULT IN LIABILITY TO US AND DETER
CUSTOMERS FROM USING OUR SERVICES
Our network may be vulnerable to unauthorized access, computer viruses and other disruptive problems. Any of the foregoing
problems could result in liability to us and deter customers from using our service. Unauthorized access could jeopardize the
security of confidential information stored in the computer systems of our customers. Eliminating computer viruses and alleviating
other security problems may require interruptions, delays or cessation of service to our customers, cause us to incur significant
costs to remedy the problem, and divert management attention. We can provide no assurance that the security measures we
have implemented will not be circumvented or that any failure of these measures will not have a material adverse effect on our
ability to obtain and retain customers. Any of these factors could have a material adverse effect on our business and prospects.
OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS MAY ADVERSELY AFFECT
OUR BUSINESS
We rely on unpatented trade secrets and know-how to maintain our competitive position. Our inability to protect these secrets
and know-how could have a material adverse effect on our business and prospects. We protect our proprietary information by
entering into confidentiality agreements with employees and consultants and potential business partners. These agreements may
be breached or terminated. In addition, third parties, including our competitors, may assert infringement claims against us. Any
such claims, could result in costly litigation, divert management's attention and resources, and require us to pay damages and/or
to enter into license or similar agreements under which we would be required to pay license fees or royalties.
WE MAY BE EXPOSED TO LIABILITY FOR INFORMATION CARRIED OVER OUR NETWORK OR
DISPLAYED ON WEB SITES THAT WE HOST
Because we provide connections to the Internet and host web sites for our customers, we may be perceived as being
associated with the content carried over our network or displayed on web sites that we host. We do not and cannot screen all
of this content. As a result, we may face potential liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the content carried over our network or displayed on web sites that we host. These
types of claims have been brought against providers of online services in the past and can be costly to defend regardless of the
merit of the lawsuit. The protection offered by recent federal legislation that protects online services from some claims when the
material is written by third parties is limited. Further, the law in this area remains in flux and varies from state to state. We may
also suffer a loss of customers or reputational harm based on this content or resulting from our involvement in these legal
proceedings.
-38-
RISKS RELATING TO OWNERSHIP OF OUR COMMON STOCK
OUR STOCK PRICE COULD FLUCTUATE WIDELY IN RESPONSE TO VARIOUS FACTORS, MANY OF
WHICH ARE BEYOND OUR CONTROL
The trading price of our common stock has been and is likely to continue to be highly volatile. Our stock price could fluctuate
widely in response to factors such as the following:
o actual or anticipated variations in quarterly operating results or operating statistics;
o announcements of new products or services by us or our competitors or new competing technologies;
o the addition or loss of customers;
o changes in financial estimates or recommendations by securities analysts;
o conditions or trends in the telecommunications industry, including regulatory developments;
o growth of the Internet and on-line commerce industries;
o announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
o additions or departures of our key personnel;
o future equity or debt financings by us or our announcements of such financings; and
o general market and economic conditions.
In addition, in recent years the stock market in general, and the Nasdaq National Market and the market for Internet and
technology companies in particular, have experienced large price and volume fluctuations. These fluctuations have often been
unrelated or disproportionate to the operating performance of these companies. These market and industry factors may
materially and adversely affect our stock price, regardless of our operating performance.
OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS OWN A SIGNIFICANT
PERCENTAGE OF OUR COMPANY AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER
OUR COMPANY, WHICH COULD HAVE A MATERIAL AND ADVERSE EFFECT ON THE MARKET PRICE OF
OUR COMMON STOCK
Our executive officers, directors and principal stockholders and their affiliates together controlled approximately 47.1% of our
outstanding common stock as of March 21, 2001. As a result, these stockholders, if they act together, are able to exercise
substantial control over all matters requiring stockholder approval, including the election of directors and approval of significant
corporate transactions, and can have significant influence over our affairs. This concentration of ownership may have the effect
of delaying, preventing or deterring a change in control, could deprive our stockholders of an opportunity to receive a premium
for their common stock as part of a sale and might affect the market price of our common stock.
-39-
CERTAIN PROVISIONS OF OUR CHARTER, BY-LAWS AND DELAWARE LAW MAKE A TAKEOVER
DIFFICULT
Our corporate documents and Delaware law contain provisions that might enable our management to resist a takeover. These
provisions include a staggered board of directors, limitations on persons authorized to call a special meeting of stockholders and
advance notice procedures required for stockholders to make nominations of candidates for election as directors or to bring
matters before an annual meeting of stockholders. These provisions might discourage, delay or prevent a change of control or a
change in our management. These provisions could also discourage proxy contests and make it more difficult for our
stockholders to elect directors and take other corporate actions. The existence of these provisions could limit the price that
investors might be willing to pay in the future for shares of common stock and could deprive our stockholders of an opportunity
to receive a premium for their common stock as part of a sale.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no derivative financial instruments in our cash and cash equivalents. We invest our cash and cash equivalents in
investment-grade, highly liquid investments, consisting of commercial paper, bank certificates of deposit and corporate bonds.
Our exposure to market risk for changes in interest rates relates primarily to borrowings under our bank term loan. These
borrowings bear interest at variable rates and the fair value of this indebtedness should not be significantly affected by changes in
market interest rates. An effective increase or decrease of 10% in the current effective interest rates under the term loan would
not have a material effect on our results of operations or cash flow.
-40-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of DSL.net, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes
in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of DSL.net, Inc. and its
subsidiaries at December 31, 2000 and 1999 and the results of their operations and their cash flows for the years ended
December 31, 2000 and 1999, and for the period from inception (March 3, 1998) through December 31, 1998 in conformity
with accounting principles generally accepted in the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the Company has experienced sustained operating losses that raise substantial
doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note
1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Stamford, Connecticut
February 26, 2001
-41-
DSL.NET, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------------------
1999 2000
------------- -------------
Current assets:
Cash and cash equivalents $ 65,575,301 $ 72,323,911
Restricted cash (Note 2) 602,960 4,111,071
Marketable securities 13,274,183 --
Accounts receivable (net of allowances of $63,000 and $1,353,000
at December 31, 1999 and 2000, respectively) 318,516 3,694,547
Prepaid expenses and other current assets 1,043,935 2,446,737
------------- -------------
Total current assets 80,814,895 82,576,266
Fixed assets, net (Note 3) 32,664,924 83,272,045
Goodwill and other intangible assets (Note 5) 3,420,135 26,628,577
Other assets 731,818 2,329,033
------------- -------------
Total assets $ 117,631,772 $ 194,805,921
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,587,186 $ 13,185,650
Accrued salaries 848,841 1,577,997
Accrued liabilities (Note 13) 3,173,173 14,156,468
Deferred revenue 234,061 2,353,910
Current portion of capital leases payable (Note 7) 715,953 3,037,369
Current portion of term loan payable (Note 6) 281,316 1,502,449
------------- -------------
Total current liabilities 14,840,530 35,813,843
Capital leases payable (Note 7) 892,906 7,439,949
Term loan payable (Note 6) 1,165,450 2,134,690
------------- -------------
Commitments and contingencies (Note 7)
Total liabilities 16,898,886 45,388,482
------------- -------------
Stockholders' equity (Note 9)
Common stock, $.0005 par value; 200,000,000 shares authorized;
58,382,196 and 66,002,808 shares issued and outstanding 29,191 33,001
Additional paid-in capital 141,245,583 286,258,257
Deferred compensation (13,361,940) (3,930,723)
Accumulated deficit (27,179,948) (132,943,096)
------------- -------------
Total stockholders' equity 100,732,886 149,417,439
------------- -------------
Total liabilities and stockholders' equity $ 117,631,772 $ 194,805,921
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
-42-
DSL.NET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period
From Inception
(March 3, 1998)
through Year Ended Year Ended
December 31, 1998 December 31, 1999 December 31, 2000
------------- ------------- -------------
Revenue $ 31,533 $ 1,312,546 $ 17,789,410
------------- ------------- -------------
Operating expenses:
Network and operations (including $0, $369,922
and $412,717 of stock compensation, respectively) 127,054 9,604,200 78,242,544
General and administrative (including $2,423,272,
$3,058,037 and $1,805,703 of stock compensation,
respectively) 2,653,544 8,036,547 25,793,932
Sales and marketing (including $0, $695,495 and
$973,802 of stock compensation, respectively) 35,961 7,543,191 26,236,619
------------- ------------- -------------
Total operating expenses $ 2,816,559 $ 25,183,938 $ 130,273,095
------------- ------------- -------------
Operating loss $ (2,785,026) $ (23,871,392) $(112,483,685)
Interest expense (income), net 4,611 (1,889,312) (6,729,657)
Other expense, net -- 6,233 9,120
------------- ------------- -------------
Net loss $ (2,789,637) $ (21,988,313) $(105,763,148)
------------- ------------- -------------
Exchange of preferred stock (Note 9) -- 11,998,000 --
------------- ------------- -------------
Loss applicable to common stock $ (2,789,637) $ (33,986,313) $(105,763,148)
============= ============= =============
Net loss per share-basic and diluted $ (.55) $ (2.05) $ (1.75)
============= ============= =============
Shares used in computing net loss per share 5,118,342 16,549,535 60,593,437
============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
-43-
DSL.NET, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred Stock Common Stock
------------------------------- -------------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
Initial capitalization, including retroactive
effect of stock splits 20,000 $ 50,000 5,089,634 $ 500
Exchange of preferred stock for common stock (20,000) (50,000) 7,634,451 5,862
Issuance of common stock -- -- 4,071,715 2,036
Repayment of notes receivable from officers -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1998 -- $ -- 16,795,800 $ 8,398
Issuance of warrants -- -- -- --
Deferred compensation - restricted stock -- -- -- --
Stock compensation -- -- 436,256 218
Deferred compensation - stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
Issuance of warrants -- -- -- --
Surrender of common stock -- -- (3,102,256) (1,551)
Acceleration associated with surrender -- -- -- --
Exchange of redeemable preferred stock -- -- -- --
Notes receivable from officers -- -- -- --
Repayment of notes receivable from officers -- -- -- --
Issuance of common stock - stock options -- -- 116,635 58
Issuance of common stock, net of issuance costs -- -- 8,226,000 4,113
Issuance of and conversion of redeemable
preferred stock into common stock -- -- 35,909,761 17,955
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1999 -- $ -- 58,382,196 $ 29,191
Deferred compensation - stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
Issuance of common stock - warrants -- -- 102,737 51
Issuance of common stock - employee stock
purchase plan -- -- 29,741 14
Issuance of common stock - stock options -- -- 1,451,742 727
Issuance of common stock, net of issuance costs -- -- 5,750,000 2,875
Issuance of common stock - Vector Internet
Services, Inc. acquisition -- -- 286,392 143
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 2000 -- $ -- 66,002,808 $ 33,001
=========== =========== =========== ===========
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DSL.NET, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(CONTINUED)
Notes
Additional Receivable
Paid-In from Deferred Accumulated
Capital Officers Compensation Deficit Total
------------- ----- ------------ ------------- -------------
Initial capitalization, including
Retroactive effect of stock splits $ -- $(500) $ -- $ -- $ 50,000
Exchange of preferred stock for common stock 1,444,138 -- -- -- 1,400,000
Issuance of common stock 1,021,236 -- -- -- 1,023,272
Repayment of notes receivable from officers -- 500 -- -- 500
Net loss -- -- -- (2,789,637) (2,789,637)
------------- ----- ------------ ------------- -------------
Balance at December 31, 1998 $ 2,465,374 $-- $ -- $ (2,789,637) $ (315,865)
Issuance of warrants 1,155,000 -- -- -- 1,155,000
Deferred compensation - restricted stock 3,733,854 -- (3,733,854) -- --
Stock compensation 602,369 -- -- -- 602,587
Deferred compensation - stock options 13,928,591 -- (13,928,591) -- --
Amortization of deferred compensation -- -- 2,350,325 -- 2,350,325
Issuance of warrants 112,000 -- -- -- 112,000
Surrender of common stock (778,087) -- 779,638 -- --
Acceleration associated with surrender -- -- 1,170,542 -- 1,170,542
Exchange of redeemable preferred stock (10,750,757) -- -- (2,401,998) (13,152,755)
Notes receivable from officers -- -- (999,911) -- (999,911)
Repayment of notes receivable from officers -- -- 999,911 -- 999,911
Issuance of common stock - stock options 4,315 -- -- -- 4,373
Issuance of common stock, net of issuance
costs 55,718,285 -- -- -- 55,722,398
Issuance of and conversion of redeemable
preferred stock into common stock 75,054,639 -- -- -- 75,072,594
Net loss -- -- -- (21,988,313) (21,988,313)
------------- ----- ------------ ------------- -------------
Balance at December 31, 1999 $ 141,245,583 $-- $(13,361,940) $ (27,179,948) $ 100,732,886
Deferred compensation - stock options (6,238,995) -- 6,238,995 -- --
Amortization of deferred compensation -- -- 3,192,222 -- 3,192,222
Issuance of common stock - warrants (51) -- -- -- --
Issuance of common stock - employee stock
purchase plan 182,704 -- -- -- 182,718
Issuance of common stock - stock options 851,259 -- -- -- 851,986
Issuance of common stock, net of issuance
costs 141,248,935 -- -- -- 141,251,810
Issuance of common stock - Vector Internet Services, Inc.
acquisition 8,968,822 -- -- -- 8,968,965
Net loss -- -- -- (105,763,148) (105,763,148)
------------- ----- ------------ ------------- -------------
Balance at December 31, 2000 $ 286,258,257 $-- $ (3,930,723) $(132,943,096) $ 149,417,439
============= ===== ============ ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
-45-
DSL.NET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period
From Inception
(March 3, 1998)
through Year Ended Year Ended
December 31, 1998 December 31, 1999 December 31, 2000
------------- ------------- -------------
Cash flows from operating activities:
Net loss $ (2,789,637) $ (21,988,313) $(105,763,148)
Reconciliation of net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 5,744 1,831,331 21,132,583
Bad debt expense -- 62,819 700,000
Sales Discounts -- -- 590,496
Amortization of deferred debt issuance costs -- 41,978 58,299
Stock compensation expense 2,423,272 4,123,454 3,192,222
Write-down of central offices -- -- 1,416,816
Net changes in current assets and liabilities:
Increase in accounts receivable (30,597) (320,149) (4,219,149)
Increase in prepaids and other current assets -- (943,888) (1,052,000)
Increase in other assets (15,566) (578,145) (1,055,846)
Increase in accounts payable 231,073 8,624,119 2,054,260
Increase in accrued salaries -- 848,841 729,156
Increase in accrued expenses 16,814 1,831,119 5,676,441
Increase in deferred revenue 5,392 124,114 1,554,131
------------- ------------- -------------
Net cash used in operating activities (153,505) (6,342,720) (74,985,739)
------------- ------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (290,082) (33,811,121) (55,942,721)
(Purchases) / sales of marketable securities -- (13,274,183) 13,274,183
Acquisition of subsidiary, net of cash acquired -- (1,575,508) (13,548,674)
Other investments -- -- (500,001)
------------- ------------- -------------
Net cash used in investing activities (290,082) (48,660,812) (56,717,213)
------------- ------------- -------------
Cash flows from financing activities
Initial capitalization 50,500 -- --
Proceeds from bridge financing 350,000 -- --
Proceeds from equipment credit facility -- 1,355,036 2,921,870
Proceeds from common stock issuance / exercise
of options, net -- 55,726,681 142,286,514
Proceeds from equipment notes / leases payable 124,000 1,762,754 --
Proceeds from preferred stock issuance -- 62,724,823 --
Payments on equipment notes payable (41,434) (66,667) --
Principal payments under capital lease obligations -- (360,313) (3,248,711)
------------- ------------- -------------
Net cash provided by financing activities 483,066 121,142,314 141,959,673
------------- ------------- -------------
-46-
Net increase in cash and cash equivalents 39,479 66,138,782 10,256,721
Cash and cash equivalents at beginning of period -- 39,479 66,178,261
------------- ------------- -------------
Cash and cash equivalents at end of period $ 39,479 $ 66,178,261 $ 76,434,982
============= ============= =============
Supplemental disclosure:
Cash paid:
Interest $ 2,524 $ 172,380 $ 1,477,168
============= ============= =============
Fixed assets financed under capital leases $ 22,699 $ 1,561,289 $ 10,292,727
============= ============= =============
Fixed asset purchases included in accounts payable $ -- $ 7,179,912 $ 8,136,269
============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
-47-
DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND OPERATIONS OF THE COMPANY
DSL.net, Inc. (the "Company") was incorporated in Delaware on March 3, 1998 and operations commenced March 28, 1998.
The Company provides dedicated high-speed digital communications and Internet access and related services, primarily using
digital subscriber line (DSL) technology. During the period ended December 31, 1998, the Company was considered a
development stage company in accordance with Statement of Financial Accounting Standard No. 7. As of June 30, 1999, the
Company was no longer considered a development stage enterprise.
As reflected in the accompanying financial statements for the year ended December 31, 2000, the Company incurred operating
losses of $112,483,685 and negative operating cash flows of $74,985,739 that have been financed primarily by proceeds from
equity issuances. The Company had accumulated deficits of $27,179,948 and $132,943,096 at December 31, 1999 and 2000,
respectively. Management expects operating losses and negative cash flows to continue into at least 2002. This raises
substantial doubt about the Company's ability to continue as a going concern.
The Company expects its operating losses, net operating cash flows and capital expenditures to continue during 2001.
Additional financing will be required during 2001. Management intends to seek additional financing through some combination
of borrowings, leasing, vendor financing and the sale of equity or debt securities. There can be no assurance that the Company
will be able to raise sufficient debt, equity or other capital on acceptable terms, if at all. There can therefore be no assurance that
the Company will have sufficient funds to continue its operations. These financial statements do not include any adjustments
relating to the recoverability of the carrying value of the recorded assets or the amounts of liabilities that might result from this
uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of these financial statements are as follows:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the transactions and balances of DSL.net, Inc. and its wholly
owned subsidiaries, including DSLnet Communications Delaware, Inc., DSLnet Communications, LLC, DSLnet
Communications Puerto Rico, Inc., DSLnet Communications VA, Inc., Tycho Networks, Inc. and Vector Internet Services,
Inc. All material intercompany transactions and balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
-48-
DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
period. Actual results could differ from those estimates. The markets for the Company's services are characterized by intense
competition, rapid technological development, regulatory changes, and frequent new product introductions, all of which could
impact the future value of the Company's assets.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid investments purchased with an initial maturity of three months or less to be cash
equivalents.
The Company considers its investment portfolio to be available-for-sale securities as defined in Statement of Financial
Accounting Standards ("SFAS") No. 115. Marketable securities as of December 31, 1999 consisted of debt securities and
certificates of deposit with maturities of greater than three months and no more than a year. Securities are available-for-sale and
are carried at fair value.
Included in cash and cash equivalents at December 31, 1999 and 2000 was $602,960 and $4,111,071, respectively,
representing cash restricted for future amounts due in connection with our acquisitions, subject to any post-closing adjustments.
CONCENTRATION OF CREDIT RISK AND CONCENTRATION OF DATA TRANSMISSION SERVICE
PROVIDERS
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash
equivalents, marketable securities and accounts receivable. The Company's cash and investment policies limit investments to
short-term, investment grade instruments. Concentrations of credit risk with respect to accounts receivable are limited due to the
large number of customers comprising the Company's customer base.
Data is transmitted across our network via transmission facilities that the Company leases from WorldCom and AT&T. Failure
of these carriers to provide service or to provide quality service may interrupt the use of the Company's services by its
customers. In August 1999, the service provided by WorldCom was interrupted for several days by a failure of their
communications network. The financial impact on the Company's operations related to this interruption was immaterial.
However, no assurance can be provided that the WorldCom and AT&T service will not be interrupted in the future.
FIXED ASSETS
Fixed assets are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets,
which are five years for network equipment (except for routers and modems, which are three years), three years for computer
equipment, five years for furniture, fixtures and office equipment and three years for capitalized software and vehicles.
Leasehold improvements are amortized over the shorter of the term of the related lease or the useful life of the asset.
Maintenance and repairs are charged to expense as incurred. Collocation space improvements represent payments to carriers
for infrastructure improvements within their central offices to allow the Company to install its equipment, which allows the
Company to interconnect with the carrier's network. These payments are being amortized over their estimated useful lives of five
years. The Company also installs its equipment at customer locations to enable connections to its network.
-49-
DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company, in accordance with AICPA Statement of Position 98-1, "ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE," ("SOP 98-1"), capitalizes certain
costs incurred in the development of internal use software. Internal use software has an estimated useful life of three years.
Upon disposal of fixed assets, the cost and related accumulated depreciation are removed from the accounts and the resulting
gain or loss is reflected in earnings. Fully depreciated assets are not removed from the accounts until physical disposition.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are amortized on a straight-line basis over the estimated future periods to be benefited,
ranging from three to five years. In addition, goodwill and other intangible assets are reviewed for impairment quarterly, or
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future
undiscounted cash flows of the business acquired. If the assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. To date, no
impairment has occurred.
OTHER ASSETS
As of December 31, 1999 other assets included $731,815 in refundable deposits held as security on certain lease obligations.
As of December 31, 2000 other assets included $1,829,032 in refundable deposits held as security on certain lease obligations
and $500,001 in other long-term investments.
INCOME TAXES
The Company uses 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.
REVENUE RECOGNITION
Revenue is recognized pursuant to the terms of each contract on a monthly service fee basis. Deferred revenue represents
payments received in advance of the services provided. Revenue related to installation charges is deferred and amortized to
revenue over eighteen months, the estimated life of the customer relationship. Related direct costs incurred (up to the amount of
deferred revenue) are also deferred and amortized to expense over eighteen months, any excess direct costs over installation
charges are charged to expense as incurred. In certain situations, the Company waives non-recurring installation charges in
order to obtain a sale and expenses the related direct costs as incurred (See "RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS," SAB No. 101 below).
-50-
DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121, "ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF," 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. No impairment losses have been
recognized to date.
STOCK COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25 ("APB 25") and related interpretations in accounting for its
stock option plan and stock awards with the disclosure provisions of Statement of Financial Accounting Standards No. 123
("SFAS 123"). Under APB 25, compensation expense is computed to the extent that the fair market value of the underlying
stock on the date of grant exceeds the exercise price of the employee stock option or stock award. Compensation so
computed is then recognized over the vesting period. The Company accounts for equity instruments issued to non-employees in
accordance with SFAS 123 and Emerging Issues Task Force ("EITF") 96-18.
Stock compensation expense includes amortization of deferred compensation and charges related to stock grants. Stock
compensation expense for the period ended December 31, 1998 and years ended December 31, 1999 and 2000 totaled
approximately $2,423,000, $4,123,000 and $3,192,000, respectively.
EARNINGS (LOSS) PER SHARE
The Company computes net loss per share pursuant to Statement of Financial Accounting Standards No. 128, "EARNINGS
PER SHARE." Basic net loss per share is computed by dividing income or loss applicable to common stockholders by the
weighted average number of shares of the Company's common stock outstanding during the period. Diluted net loss per share is
determined in the same manner as basic net loss per share except that the number of shares is increased assuming exercise of
dilutive stock options and warrants using the treasury stock method and dilutive conversion of the Company's preferred stock.
The following options and warrants were excluded from the calculation of earnings per share since their inclusion would be
antidilutive for all periods presented:
Shares of Common Stock
-----------------------------------------------
December 31,
-----------------------------------------------
1998 1999 2000
--------- --------- ---------
Options to purchase common stock ... -- 5,874,302 7,318,612
Warrants to purchase preferred stock
convertible to common stock ........ 233,277 -- --
Warrants to purchase common stock .. -- 194,556 83,314
--------- --------- ---------
Total ......................... 233,277 6,068,858 7,401,926
========= ========= =========
-51-
DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
COMPREHENSIVE INCOME
The Company has adopted the accounting treatment prescribed by Statement of Financial Accounting Standards No. 130,
"COMPREHENSIVE INCOME." The adoption of this statement had no material impact on the Company's financial
statements for the periods presented.
RECLASSIFICATIONS
Certain reclassifications have been made in prior years' financial statements to conform to classifications used in the current year.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No.
137, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT
NO.133." In June 2000, the FASB issued SFAS 138, "ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS
AND CERTAIN HEDGING AGREEMENTS - AN AMENDMENT TO FASB STATEMENT NO. 133." SFAS 133
established new standards of accounting and reporting for derivative instruments and hedging activities, and required that all
derivatives, including foreign currency exchange contracts, be recognized on the balance sheet at fair value. We will adopt
SFAS 133, as amended by SFAS 137 and SFAS 138, in the first quarter of 2001 and do not expect the adoption to have a
material effect on our financial condition or results of operations.
In December 1999, the staff of the Securities and Exchange Commission issued its Staff Accounting Bulletin ("SAB") No. 101,
"REVENUE RECOGNITION IN FINANCIAL STATEMENTS." SAB No. 101 provides guidance on the measurement and
timing of revenue recognition in financial statements of public companies. Changes in accounting policies to apply the guidance
of SAB No. 101, as amended by SAB No. 101B, must be adopted by recording the cumulative effect of the change as of
January 1, 2000.
During fiscal 2000, the Company adopted the revenue recognition guidelines of SAB No.101, which changed the manner in
which the Company recognizes installation revenue and related direct costs (see "REVENUE RECOGNITION" above). The
cumulative effect of adoption of SAB No. 101 resulted in deferral of installation revenues and related direct costs of
approximately $176,000 at January 1, 2000. The effect of the adoption for the year ended December 31, 2000, resulted in a
deferral of installation revenue and related direct costs of approximately $735,000. Installation revenue deferred during the
fourth quarter of 2000 was approximately $25,000. The comparable pro forma fourth quarter 1999 deferred installation
revenue and related direct costs would have been approximately $101,400. The adoption of SAB No. 101 had no impact on
net income.
-52-
DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following table sets forth the unaudited pro forma impact of SAB No. 101 adoption on previously reported quarterly
revenue at December 31, 1999 and the unaudited revenue as adjusted for each quarter of the year 2000:
Revenue as Effect of Revenue
Quarter Ended Originally Reported SAB No. 101 as Adjusted
------------- ------------------- ----------- -----------
December 31 1999 $ 810,881 $ (101,413) $ 709,468
March 31, 2000 $1,737,306 $ (333,176) $1,404,130
June 30, 2000 $3,785,626 $ (279,760) $3,505,866
September 30, 2000 $5,860,857 $ (97,128) $5,763,729
December 31, 2000 $7,140,599 $ (24,914) $7,115,685
3. FIXED ASSETS
December 31,
-----------------------------
1999 2000
------------ ------------
Network and computer equipment........................ $ 19,866,200 $ 56,423,741
Furniture, fixtures, office equipment and software ... 5,827,493 16,892,409
Vehicles ............................................. 99,189 148,257
Collocation costs .................................... 8,659,789 28,518,456
------------ ------------
34,452,671 101,982,863
Less-accumulated depreciation and amortization ....... 1,787,747 18,710,818
------------ ------------
$ 32,664,924 $ 83,272,045
============ ============
As of December 31, 1999 and December 31, 2000, the recorded cost of the equipment under capital lease was $1,862,466
and $12,312,838, respectively. Accumulated amortization for this equipment under capital lease was $222,495 and
$2,172,518 at December 31, 1999 and 2000, respectively.
As of December 31, 1999 and 2000, the Company had capitalized computer software costs of $5,046,545 and $9,665,735,
respectively, and had recorded amortization expense related to these costs of $217,644 and $2,819,057, respectively.
Depreciation and amortization expense related to fixed assets was $5,744, $1,782,003 and $16,975,382, for the period ended
December 31, 1998 and the years ended December 31, 1999 and 2000, respectively.
4. ACQUISITIONS
On December 1, 1999, the Company acquired Tycho Networks, Inc., a Santa Cruz, California based provider of Internet
access, web hosting and related services throughout central coastal California. The acquisition was accounted for under the
purchase method of accounting and, accordingly, the purchase price has been allocated to the assets acquired and liabilities
assumed based on their estimated fair values at the date of acquisition. The approximate net purchase price of $3,267,000,
excluding transaction costs, consisted of cash payments at closing of approximately $1,576,000 (including notes paid at closing
of approximately $793,000); amounts due to selling stockholders and others after the closing of approximately $802,000; net
liabilities
-53-
DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
assumed of approximately $530,000 and other costs of approximately $359,000. In addition, the Company incurred
transaction costs associated with the acquisition of approximately $125,000. Immediately prior to the acquisition, Tycho
Networks sold fixed assets with a net book value of approximately $90,000 to a related party and received notes that were
convertible into the preferred stock of the buyer. These notes were assigned an estimated fair value of $90,000. The excess of
purchase price over the fair value of net assets received, including transaction costs, of approximately $3,392,000, has been
recorded as goodwill and is being amortized over its estimated useful life of five years. The results of Tycho Networks'
operations have been included in the consolidated results of the Company from the date of acquisition.
On April 3, 2000, the Company acquired certain assets and liabilities of Trusted Net Media Holdings, LLC ("Trusted Net").
The acquisition was accounted for under the purchase method of accounting and, accordingly, the purchase price has been
allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The
approximate net purchase price of $2,500,000, excluding transaction costs, consisted of cash payments at closing of
approximately $2,097,000; amounts due to Trusted Net after the closing of approximately $350,000; and net liabilities assumed
of approximately $53,000. In addition, the Company incurred transaction costs associated with the acquisition of approximately
$150,000. The purchase price, including the net liabilities assumed, of $2,650,000 has been recorded as goodwill and is being
amortized on a straight-line basis over its estimated useful life of five years. The results of the acquired operations of Trusted
Net have been included in the consolidated results of the Company from the date of acquisition.
On May 26, 2000, the Company acquired Vector Internet Services, Inc. ("VISI"), an Internet solution provider based in
Minneapolis, Minnesota. The acquisition was accounted for under the purchase method of accounting and, accordingly, the
purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date
of acquisition. The approximate net purchase price of $19,969,000, excluding transaction costs, consisted of cash payments at
closing of approximately $8,800,000; amounts due to selling stockholders after the closing of approximately $2,200,000;
common stock valued at $2,315,000; and the assumption of VISI employee stock options, which were valued at a fair value of
$6,654,000. In addition, the Company incurred transaction costs associated with the acquisition of approximately $425,000.
The purchase consideration of the assets acquired and liabilities assumed were allocated based on the fair values as follows: Net
assets acquired, $130,000; customer base, $7,878,000; and goodwill, $12,386,000. The customer base was valued based on
the expected future net cash flows from customers discounted back to the present value taking into account the expected life
cycle of the customer relationships. This amount is being amortized on a straight-line basis over its estimated useful life of three
years. The excess of the purchase price over the net identifiable assets has been recorded as goodwill and is being amortized on
a straight-line basis over its estimated useful life of five years.
The results of the VISI operations have been included in the consolidated results of the Company from the date of acquisition.
On December 1, 2000, the Company acquired certain assets of Exario Networks, Inc. ("Exario"). The acquisition was
accounted for under the purchase method of accounting and,
-54-
DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
accordingly, the purchase price has been allocated to the assets acquired based on their estimated fair values at the date of
acquisition. The approximate net purchase price of $4,463,000, excluding transaction costs, consisted of cash payments at
closing of approximately $2,902,000 and amounts due to Exario after the closing of approximately $1,561,100. In addition, the
Company incurred transaction costs associated with the acquisition of approximately $100,000.
The purchase consideration of the assets acquired was allocated based on the fair values approximately as follows: Net assets
acquired of $57,000 and customer base of $4,506,000. The customer base was valued based on the expected future net cash
flows from customers discounted back to the present value taking into account the expected life cycle of the customer
relationships. This amount is being amortized on a straight-line basis over its estimated useful life of four years. The results of the
acquired operations of Exario have been included in the consolidated results of the Company from the date of acquisition.
The following table sets forth the unaudited pro forma consolidated financial information of the Company, giving effect to the
acquisitions of Tycho Networks, Inc. ("Tycho") and Vector Internet Services, Inc. ("VISI"), and the acquisition of certain assets
of Exario Networks, Inc. ("Exario"), as if the transactions occurred at the beginning of the periods presented (1998 and 1999
for Tycho and 1999 and 2000 for VISI and Exario). The pro forma results for 1999 and 2000 assuming the Trusted Net
acquisition had occurred at the beginning of the year would not be materially different from the reported results.
Year Ended December 31,
---------------------------------------------------
1998 1999 2000
------------- ------------- -------------
Pro forma revenue ............................. $ 380,060 $ 9,851,207 $ 24,487,979
Pro forma operating loss ...................... $ (4,198,261) $ (32,543,111) $(116,540,764)
Pro forma net loss applicable to common shares $ (4,471,839) $ (42,876,861) $(109,866,953)
Pro forma net loss per share, basic and diluted $ (0.87) $ (2.55) $ (1.81)
Shares used in computing pro forma net loss
per share ................................ 5,118,342 16,835,927 60,712,751
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.
-55-
DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows the unamortized balances of goodwill and other intangible assets:
December 31,
--------------------------------
1999 2000
----------- -----------
Tycho goodwill, net ......... $ 3,342,386 $ 2,669,187
Trusted Net, goodwill, net .. -- 2,211,683
VISI goodwill, net .......... -- 10,940,233
VISI customer lists, net .... -- 6,346,391
Exario customer lists, net .. -- 4,412,156
Other intangibles ........... 77,749 48,927
----------- -----------
$ 3,420,135 $26,628,577
=========== ===========
Amortization expense of goodwill and other intangible assets for the years ended December 31, 1999 and 2000 was $63,306
and $4,179,155, respectively. Accumulated amortization at December 31, 1999 and 2000 was $63,306 and $4,242,461,
respectively.
6. DEBT
CREDIT FACILITY
In May 1999, the Company entered into a secured credit facility (the "Credit Facility") with a bank to provide up to $5.0 million
for the purchase of telecommunications and office equipment and vehicles. The Credit Facility expired in May 2000 and
converted to a term loan payable over 36 months. The Credit Facility bears 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 December 31, 2000, amounts outstanding under this
line of credit bore interest at the annual rate of 10.5%. The Credit Facility is secured by a lien on certain equipment and vehicles
owned by the Company located at its principal office, and imposes certain financial and other covenants requiring us to maintain
certain financial ratios and limits new indebtedness, the creation of liens, types of investments, mergers, consolidations and the
transfer of all or substantially all of our assets. As of December 31, 2000, there was $3,545,095 outstanding on this term loan.
Financing costs associated with the Credit Facility of $83,868 were deferred over the four year life of the facility and term loan.
Amortization expense related to the deferred costs for the years ended December 31, 1999 and 2000 was $13,978 and
$20,967, respectively.
7. COMMITMENTS AND CONTINGENCIES
LEASES
Rent expense under operating leases was approximately $14,000, $721,000 and $2,726,000 for the period from inception
(March 3, 1998) through December 31, 1998 and for the years ended December 31, 1999 and 2000, respectively.
-56-
DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company leases space in several buildings which are used for office and network operations facilities. The Company is
obligated under various building and capital equipment leases expiring at different times through March, 2005.
The future minimum annual lease payments under the terms of such non-cancelable leases as of December 31, 2000 are as
follows:
Operating Capital
Leases Leases
----------- -----------
2001 ............................................ $ 3,514,455 $ 4,150,457
2002 ............................................ 3,541,674 3,655,504
2003 ............................................ 2,556,247 3,081,420
2004 ............................................ 1,449,915 1,705,279
2005 ............................................ 389,420 59,833
----------- -----------
Total............................................ $11,451,711 12,652,493
===========
Less-Amount representing interest ............... 2,175,174
-----------
Present value of future minimum lease payments .. $10,477,319
===========
In March 1999, the Company entered into a master lease agreement to provide up to $2,000,000 for capital equipment
purchases over an initial twelve-month period, subject to renewal options. Individual capital leases are amortized over 30 or 36
month terms and bear interest at 8% to 9% per annum. The outstanding balance under this agreement at December 31, 1999
and 2000 was approximately $921,956 and $1,168,000, respectively.
In July 2000, the Company entered into a 48-month lease agreement with an equipment vendor to finance the purchase of
network equipment. The Company has leased approximately $8,900,000 under this agreement. Amounts financed under this
lease agreement bear an interest rate of 12% and are secured by the financed equipment. The outstanding balance under this
agreement at December 31, 2000 was approximately $8,061,000.
PURCHASE COMMITMENTS
The Company has long-term purchase commitments with WorldCom and AT&T for data transport services with minimum
payments due even if the Company's usage does not reach the minimum amounts. The WorldCom commitment began on May
1, 2000 and requires minimum purchases of $4,800,000 per year for each of five years. The AT&T commitment began on
October 2, 2000 and requires minimum purchases of $3,000,000, $4,000,000 and $5,000,000 for the contract years ending
October 1, 2001, 2002 and 2003, respectively. The Company also has a commitment to purchase $81,000 per month of
certain additional network capacity from AT&T over the last two years of the same three-year contract period.
LITIGATION
The Company is involved in litigation with a former officer who claims wrongful termination of employment. The plaintiff is
principally seeking compensatory damages for wages and unvested stock options. The Company believes that the plaintiff's
claims are without merit, and plans to defend the case vigorously.
-57-
DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
From time to time, the Company may be involved in other litigation concerning claims arising in the ordinary course of its
business, including claims brought by former employees and claims related to acquisitions. The Company does not believe any
of the legal claims or proceedings will result in a material adverse effect on its business, financial position, results of operations or
cash flows.
OTHER MATTERS
The Company has entered into interconnection agreements. The agreements have terms of one to two years and are subject to
certain renewal and termination provisions by either party generally upon 30 days' notification. The Company anticipates that it
will renew such agreements beyond their initial terms. However, failure to re-negotiate interconnection agreements or delay in
negotiations could have a material adverse effect on the Company's operations.
In certain markets where the Company has not deployed its own DSL equipment, the Company utilizes local DSL facilities from
wholesale providers in order to provide service to its end-user customers. Local wholesale carriers may terminate their service
with little or no notice. Such terminations of service could have a material adverse effect on the Company's operations.
8. RELATED PARTY TRANSACTIONS
In January 1999, the Company entered into an Asset Transfer Agreement with FutureComm, Inc., whose sole shareholder is an
officer and founder of the Company. The amount paid by the Company in exchange for certain equipment, agreements, licenses
and intellectual property was approximately $28,000.
In May 1999, the Company entered into an agreement to license and implement components of an operations support system
from a software vendor. In November 2000, the Company entered into an additional agreement with this vendor settling open
matters from the earlier agreement and licensing additional software. Amounts paid under these agreements were approximately
$563,000 in 1999 and $62,000 in 2000. Two stockholders of the Company, own stock of the software vendor.
-58-
9. STOCKHOLDERS' EQUITY
COMMON STOCK TRANSACTIONS
In January 1999, the Company's Board of Directors declared a stock split of 1,909.09 shares for every outstanding common
share. The accompanying financial statements have been restated to reflect this stock split. In conjunction with this split and the
sale of Series A Preferred Stock described below, certain employment tenure and performance criteria were required of
management in order to fully vest in a portion of their founders' shares. The value attributed to these 14,857,397 non-vested
shares is reflected in deferred compensation of approximately $3,734,000.
In March 1999, the Company issued 436,256 shares of common stock to an executive officer of the Company, adjusted for
stock splits. Compensation expense of $602,587 has been recognized related to this issuance.
-59-
DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In April 1999, the Company's founding shareholders surrendered 3,102,256 shares of common stock. Such stock was
previously made subject to certain employment tenure and performance vesting criteria. In exchange, the vesting criteria on
other restricted common stock owned by the founders was removed. This share surrender and acceleration of vesting resulted
in a compensation charge of approximately $1,200,000 in the second quarter of 1999 and eliminated approximately $780,000,
or $0.25 per share, from deferred compensation.
In May 1999, the Company declared a 2:1 stock split of its common stock. The accompanying financial statements have been
restated to reflect this stock split.
In July 1999, the Company declared a 0.333:1 stock dividend on its common stock. The accompanying financial statements
have been restated to reflect this stock dividend.
On October 12, 1999, the Company completed its initial public offering of 7,200,000 shares of common stock resulting in net
proceeds to the Company of approximately $48.5 million. In addition, the underwriters exercised their over-allotment option for
1,026,000 shares, resulting in additional net proceeds to the Company of approximately $7.2 million on November 8, 1999.
In conjunction with the closing of the Company's initial public offering on October 12, 1999, all outstanding preferred stock was
converted into 35,909,761 shares of common stock.
In March 2000, the Company completed a public offering of 5,750,000 shares of common stock, including the exercise of the
underwriters' over allotment option, at an offering price of $26.00 per share. Net proceeds to the Company from this offering
were approximately $141,273,000, after deducting underwriting discounts and commissions and offering expenses payable by
the Company.
In the first quarter of 2000, the Company recorded non-cash compensation expense of $870,000 relating to the vesting of
stock options held by members of the Company's former advisory board. The advisory board was dissolved in the first quarter
of 2000 and, therefore, the unamortized deferred compensation balance of $4,163,000, related to unvested stock options held
by advisory board members was reclassified against additional paid-in capital. The Company's remaining unamortized deferred
compensation balance of approximately $3,931,000 as of December, 31 2000, relating to stock options and restricted stock
held by employees and directors, is being amortized over the respective remaining vesting periods.
In conjunction with the Company's acquisition of VISI, described in Note 4 above, the Company issued purchase consideration
that included 286,392 shares of common stock having a value of $2,315,000 at the time of the acquisition. The Company also
assumed all of the then outstanding options issued under the VISI 1997 and 1999 Stock Option Plans, which became fully
vested options to purchase an aggregate of 898,926 shares of common stock. No additional options will be granted by the
Company under the VISI stock option plans. The VISI options were valued at $6,654,000 at the time of the acquisition.
-60-
DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
COMMON STOCK RESERVED
The Company has reserved shares of common stock as follows:
December 31,
-------------------------
1999 2000
---------- ----------
1999 Stock Plan ....................... 12,247,565 10,795,814
VISI Stock Option Plans ............... -- 836,441
1999 Employee Stock Purchase Plan ..... 300,000 270,259
Stock warrants ........................ 194,556 83,314
---------- ----------
12,742,121 11,985,828
========== ==========
STOCK WARRANTS
At December 31, 1999 and 2000, the Company had outstanding stock purchase warrants to purchase 194,556 and 83,314
shares of common stock, respectively.
December 31,
-------------------
1999 2000
------- -------
Lease Warrants ............... 111,242 --
Bridge Warrants .............. 83,314 83,314
------- -------
194,556 83,314
======= =======
On May 8, 2000, 111,242 lease warrants were exercised in a cashless exercise pursuant to the terms of the lease warrant
resulting in a net issuance of 102,737 shares of common stock.
On October 6, 1999, warrants for 56,250 shares of Series A preferred stock were exercised and converted into 149,963
shares of common stock at the rate of 2.666 shares of common stock for one share of Preferred Stock, which had been
adjusted for certain subsequent dilutive issuances and stock splits, for aggregate net proceeds of $56,250.
REDEEMABLE CONVERTIBLE PREFERRED STOCK
In January 1999, the Company issued 3,500,000 shares of convertible voting preferred stock designated as Series A Preferred
Stock, together with warrants to purchase 3,500,000 shares of a prior Series B Preferred Stock (the "Warrants"), at an
exercise price of $1.00 per share, for an aggregate of $3,500,000. A total of $1,155,000 of the related proceeds has been
allocated to the Warrants.
In January 1999, the holders of $225,000 of convertible notes converted $225,000 of the notes into 225,000 shares of Series
A Preferred Stock. The remaining $125,000 of such convertible notes reduced the proceeds paid to the Company for the
Series A Preferred Stock.
In April 1999, certain holders of the Series A Preferred Stock exchanged 3,500,000 shares of Series A Preferred Stock and
the Warrants for 6,500,000 shares of Series B Preferred Stock. Cashless warrant exercises accounted for 2,525,070 of these
6,500,000 shares of Series B Preferred Stock. The exchange into the remaining 3,974,930 shares of Series B Preferred Stock,
-61-
DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
which was not contemplated in the original Series A Preferred Stock purchase agreement, afforded the holders an exchange
rate of $0.57 per share, which was lower than the deemed fair market value of the preferred stock at the time of exchange of
$3.59 per share and therefore has been treated as a beneficial non-monetary exchange under APB Opinion No. 29,
"Accounting for Non-Monetary transactions." The difference between the carrying value of the Series A Preferred Stock,
$2,272,000, and the deemed fair market value of the Series B Preferred Stock, $14,270,000, has been included in the
calculation of net loss per common share, although no assets of the Company were expended. The exchange reduced additional
paid-in capital and increased the carrying value of the Series B Preferred Stock by approximately $11,998,000 for the year
ended December 31, 1999. The exchange has been given no other accounting treatment in the 1999 financial statements of the
Company.
In April 1999, the Company issued 2,785,516 shares of convertible voting preferred stock designated as Series C Preferred
Stock at $3.59 per share for net proceeds of $9,940,000. These shares were subsequently converted into 7,426,186 shares of
common stock, representing a per share price of $1.35.
In May and June 1999, the Company issued 2,963,672 shares of convertible voting preferred stock designated as Series D
Preferred Stock at $10.46 per share for net proceeds of $29,961,000. In July 1999, we received approximately $1,007,000 in
connection with repayment of a note, including interest at 6.0%, from an officer in connection with the purchase of Series D
Preferred stock in June 1999. These shares were subsequently converted into 7,901,150 shares of common stock, representing
a per share price of $3.92.
In July 1999, the Company issued 939,086 shares of convertible voting preferred stock designated as Series E Preferred Stock
at $19.70 per share for net proceeds of approximately $18,468,000. These shares were subsequently converted into
2,503,603 shares of common stock, representing a per share price of $7.39.
The preferred stock automatically converted into shares of common stock upon the completion of the Company's initial public
offering.
10. INCOME TAXES
The Company's gross deferred tax assets and liabilities were comprised of the following:
December 31,
------------------------------------------------
1998 1999 2000
------------ ------------ ------------
Gross deferred tax asset:
Net operating loss carryforwards ..... $ 1,076,382 $ 7,462,759 $ 46,351,085
Other ................................ 53,599 554,756 3,381,268
------------ ------------ ------------
1,129,981 8,017,515 49,732,353
Gross deferred tax liability:
Depreciation ......................... 8,054 656,033 2,164,719
Other ................................ -- -- 527,713
------------ ------------ ------------
1,121,927 7,361,482 47,039,921
Valuation allowance .................. (1,121,927) (7,361,482) (47,039,921)
------------ ------------ ------------
Net deferred taxes ................... $ -- $ -- $ --
============ ============ ============
-62-
DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company has 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 as of December 31, 1998, 1999 and 2000. If the
Company achieves profitability, the deferred tax assets may be available to offset future income tax liabilities.
At December 31, 1999 and 2000 the Company had approximately $18 million and $115 million of federal and state net
operating loss carryforwards, respectively.
Approximately $1,000,000 of the net operating loss carryforward at December 31, 2000, related to stock-based
compensation deductions. Any tax benefit derived therefrom, when realized, will be accounted for as a credit to additional
paid-in capital rather than a reduction to the income tax provision. The federal and state net operating loss carryforwards expire
in various years beginning in 2009. The utilization of a portion of the net operating loss carryforwards may be subject to
limitations under the U.S. federal income tax laws.
The provision for (benefit from) income taxes reconciles to the statutory federal tax rate as follows:
December 31,
-----------------------------
1998 1999 2000
---- ---- ----
Statutory federal tax rate .................... (34.00)% (34.00)% (34.00)%
State income tax, net of federal benefit ...... (6.27) (6.27) (6.00)
Permanent differences ......................... 0.05 7.29 1.50
Other ......................................... -- 4.46 --
Deferred tax asset valuation allowance ........ 40.22 28.52 38.50
----- ----- -----
-- % -- % -- %
===== ===== =====
11. INCENTIVE STOCK AWARD PLANS
EMPLOYEE STOCK OPTION PLAN
In February 1999, the Company's Board of Directors adopted the 1999 Stock Plan (the "Stock Plan") under which employees,
directors, advisors and consultants can be granted any or all of the following: incentive stock options and non-qualified stock
options, stock appreciation rights, and stock awards. A total of 12,364,200 shares of common stock have been authorized
under the Stock Plan.
Options generally vest 25% after one year, then ratably over the next thirty-six months and are exercisable once vested for ten
years from the date of grant.
In conjunction with the acquisition of Vector Internet Services, Inc. (see Note 4), the Company also assumed all of the then
outstanding options issued under the VISI 1997 and 1999 Stock Option Plans (together with the Stock Plan, the "Plans"),
which became fully vested options to purchase an aggregate of 898,926 shares of common stock. No additional options will be
granted by the Company under the VISI stock option plans. The VISI options were valued at $6,654,000 at the time of the
acquisition.
-63-
DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A summary of activity under the Plans as of December 31, 1999 and 2000 is as follows:
Weighted Average
-----------------
Number of Fair Exercise
Shares Value Price
--------- ----- -----
Outstanding at Inception ....... -- $-- $--
Granted ........................ 7,692,879 $3.59 $2.01
Exercised ...................... (116,635) $0.04
Cancelled ...................... (1,701,942) $1.09
---------
Outstanding at December 31, 1999 5,874,302
Granted ........................ 6,142,293 $5.49 $8.31
VISI assumed ................... 898,926 $2.18
Exercised ...................... (1,451,751) $0.59
Cancelled ...................... (4,145,158) $8.66
---------
Outstanding at December 31, 2000 7,318,612
=========
The following summarizes the outstanding and exercisable options under the Plans as of December 31, 1999 and 2000:
Options Outstanding Options Exercisable
----------------------------- --------------------------
Weighted Avg.
Number Remaining Life Weighted Avg. Number Weighted Avg.
Exercise Price Outstanding (in years) Exercise Price Exercisable Exercise Price
-------------- ----------- -------------- -------------- ----------- --------------
12/31/99
$0.04-0.07 2,383,741 9.2 $0.05 96,086 $0.04
$0.39-0.53 2,127,484 9.4 $0.47 - -
$5.00-9.85 1,166,077 9.7 $7.73 - -
$16.50-18.75 197,000 9.9 $17.81 - -
12/31/00
$0.04-2.53 2,787,663 8.1 $0.66 1,425,012 $0.81
$2.72-5.00 2,712,289 9.7 $3.19 306,039 $2.99
$6.31-9.85 1,020,128 9.1 $7.04 140,002 $7.63
$10.63-14.88 584,283 8.9 $12.53 25,000 $10.63
$16.50-18.75 17,250 8.9 $17.28 4,783 $17.26
$20.94-25.94 196,999 2.2 $22.78 149,999 $22.75
If compensation expenses had been recognized based on the fair value of the options at their grant date, in accordance with
Financial Accounting Standard No. 123 ("FAS 123"), the results of operations for the years ended December 31, 1999 and
2000 would have been as follows:
Year ended December 31,
-----------------------------------
1999 2000
-------------- ---------------
Net loss:
As reported ................................ $ (21,988,313) $ (105,763,148)
Pro forma under FAS 123 .................... $ (22,426,281) $ (110,231,819)
Basic and diluted net loss per common share:
As reported ................................ $ (2.05) $ (1.75)
Pro forma under FAS 123 .................... $ (2.08) $ (1.82)
-64-
DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The estimated fair value at date of grant for options granted for the year ended December 31, 1999 ranged from $0.23 to
$16.27 per share and for the year ended December 31, 2000, $0.75 to $17.19 per share. The minimum value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average
assumptions:
December 31,
-------------------------------
1999 2000
------------ -----------
Risk free interest rate.................. 4.88%-6.09% 5.26%-6.72%
Expected dividend yield.................. None None
Expected life of option.................. 10 years 5 years
Expected volatility...................... .0001%-84.52% 75%
As additional options are expected to be granted in future years, and the options vest over several years, the above pro forma
results are not necessarily indicative of future pro forma results.
Deferred compensation of approximately $13,929,000 has been attributed to those common stock options granted during the
year ended December 31, 1999, with an exercise price below estimated fair value. Stock compensation expense is recognized
over the four year vesting period and totaled approximately $4,123,000 and $3,192,000 for the years ended December 31,
1999 and 2000, respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Company's 1999 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in
September 1999. The Purchase Plan authorized the issuance of up to a total of 300,000 shares of Common Stock to
participating employees.
All employees of the Company and all employees of any participating subsidiaries whose customary employment is more than
20 hours per week and more than three months in any calendar year are eligible to participate in the Purchase Plan. Under the
terms of the Purchase Plan, the price per share paid by each participant on the last day of the Offering Period (as defined
therein) is an amount equal to 85% of the fair market value of the Common Stock on either the first day or the last day of the
Offering Period, whichever is lower. Each employee participating in the plan may purchase a maximum of 500 shares during
each six-month offering period. The Purchase Plan terminates on December 31, 2009 or such earlier date as the Board of
Directors determines. The Purchase Plan will terminate in any case when all or substantially all of the unissued shares of stock
reserved for the purposes of the Purchase Plan have been purchased. Upon termination of the Purchase Plan all amounts in the
accounts of participating employees will be promptly refunded.
The first offering period of the Purchase Plan began on October 6, 1999 and ended on February 29, 2000. The Company
issued a total of 29,741 shares of common stock under the plan during the year ended December 31, 2000.
-65-
DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. EMPLOYEE SAVINGS PLAN 401(K)
On April 1, 2000, the Company started a 401(k) savings plan under which it matches employee contributions at 50% up to the
first 4% of their contribution. Employees may elect to participate in the plan bi-annually on the enrollment dates provided they
have been an employee for at least ninety days. The Company's contribution to the 401(k) plan during the year ended
December 31, 2000 was $219,459.
13. ACCRUED LIABILITIES
Accrued liabilities included the following:
December 31,
---------------------------
1999 2000
----------- -----------
Due to sellers
$ 602,960 $ 4,033,658
Taxes payable - other than
income taxes ........................ 434,513 3,233,353
Other accrued
liabilities ......................... 2,135,700 6,889,457
----------- -----------
Total ........................... $ 3,173,173 $14,156,468
=========== ===========
14. RESTRUCTURING
In December 2000, the Company incurred approximately $3,542,000 in non-recurring charges related to a corporate
restructuring. Of that amount, approximately $448,000 was related to severance costs incurred as a result of a reduction in its
workforce of approximately 140 employees. These severance costs are included in network and operations, general and
administrative and sales and marketing expenses. A charge of approximately $1,078,000 was included in general and
administrative expense for the estimated costs resulting from the consolidation of our facilities by vacating office space located in
Milford, Connecticut, and Chantilly, Virginia and for unused office space in Santa Cruz, California. Lastly, a charge of
approximately $2,016,000 was included in network and operations expense for the estimated costs resulting from our decision
to not accept certain central offices' previously applied for, and to forego the completion of our build-out of certain other central
offices.
At December 31, 2000, approximately $362,000 of severance costs and approximately $1,416,000 of capitalized collocation
application fees had been charged against the restructuring reserves.
-66-
DSL.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. SELECTED UNAUDITED QUARTERLY FINANCIAL DATA
The following table depicts selected quarterly unaudited financial data for the years ended December 31, 1999 and 2000.
Net Loss Per
Net Revenue Operating Loss Loss Common Share
------------ ------------ ------------ --------
Q1 1999 $ 48,188 $ (1,693,088) $ (1,686,614) $ (0.51)
Q2 1999 $ 135,985 $ (5,011,774) $ (4,810,633) $ (2.45)
Q3 1999 $ 317,492 $ (6,236,669) $ (5,621,484) $ (0.66)
Q4 1999 $ 810,881 $(10,929,861) $ (9,869,582) $ (0.21)
Q1 2000 $ 1,404,130 $(19,851,278) $(18,338,284) $ (0.33)
Q2 2000 $ 3,505,866 $(29,668,566) $(27,286,633) $ (0.45)
Q3 2000 $ 5,763,729 $(31,563,809) $(30,231,355) $ (0.48)
Q4 2000 $ 7,115,685 $(31,400,032) $(29,906,876) $ (0.47)
The 2000 quarterly revenue has been restated to reflect the impact of SAB No.101 (see Note 2).
-67-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on accounting or financial disclosure matters during
DSL.net's two most recent fiscal years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the Sections "Election of Directors," "Occupations of Directors and Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance" from the registrant's definitive proxy statement for the annual meeting of
stockholders to be held on May 23, 2000, which is to be filed with the Securities and Exchange Commission not later than 120
days after the close of the registrant's fiscal year ended December 31, 2000, is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the Sections "Compensation and Other Information Concerning Directors and Officers" and "Stock
Performance Graph" from the registrant's definitive proxy statement for the annual meeting of stockholders to be held on May
23, 2000, which is to be filed with the Securities and Exchange Commission not later than 120 days after the close of the
registrant's fiscal year ended December 31, 2000, is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the Section "Securities Ownership of Certain Beneficial Owners and Management" from the registrant's
definitive proxy statement for the annual meeting of stockholders to be held on May 23, 2001, which is to be filed with the
Securities and Exchange Commission not later than 120 days after the close of the registrant's fiscal year ended December 31,
2000, is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the Sections "Compensation and Other Information Concerning Directors and Officers" and "Certain
Relationships and Related Transactions" from the registrant's definitive proxy statement for the annual meeting of stockholders to
be held on May 23, 2001, which is to be filed with the Securities and Exchange Commission not later than 120 days after the
close of the registrant's fiscal year ended December 31, 2000, is hereby incorporated by reference.
-68-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this form 10-K.
(1) Financial Statements (see "Financial Statements and Supplementary Data" at Item 8 and incorporated herein by reference).
(2) Financial Statement Schedules -- Schedules to the Financial Statements have been omitted because the information required
to be set forth therein is not applicable or is shown in the accompanying Financial Statements or notes thereto, except for
Schedule II, Valuation and Qualifying Accounts, which is attached hereto.
(3) Exhibits.
The following exhibits are filed as part of and incorporated by reference into this Form 10-K:
EXHIBIT
EXHIBIT
NO.
2.01 Agreement and Plan of Merger, dated as of November 30, 1999, by
and among DSL.net, Inc., Long Wharf Mergeco, Inc. and Tycho
Networks, Inc. (incorporated by reference to Exhibit 2 filed with
our Form 8-K dated as of December 1, 1999).
2.02 Agreement and Plan of Merger dated as of May 25, 2000, by and
among DSL.net Inc., Greens Farms Corporation, Vector Internet
Services, Inc. and certain stockholders of Vector (incorporated
by reference to Exhibit 2 with our Form 8-K dated as of May 26,
2000).
3.01 Amended and Restated Certificate of Incorporation of DSL.net,
Inc. as amended (incorporated by reference to Exhibit 3.02 filed
with our registration statement on Form S-1 (No. 333-80141)).
3.02 Amended and Restated By-laws of DSL.net, Inc. (incorporated by
reference to Exhibit 3.03 filed with our registration statement
on Form S-1 (No. 333-80141)).
4.01 Specimen Certificate for shares of DSL.net, Inc.'s Common Stock
(incorporated by reference to the exhibit of corresponding number
filed with our registration statement on Form S-1 (No.
333-80141)).
4.02 Description of Capital Stock (contained in the Certificate of
Incorporation filed as Exhibit 3.02 with our registration
statement on Form S-1 (No. 333-80141)).
-69-
4.03 Form of Stock Purchase Warrant dated as of October 12, 1999
between DSL.net, Inc. and certain investors (incorporated by
reference to the exhibit of corresponding number filed with our
registration statement on Form S-1 (No. 333-96349)).
10.01+ Amended and Restated 1999 Stock Plan (incorporated by reference
to the exhibit of corresponding number filed with our
registration statement on Form S-1 (No. 333-80141)).
10.02+ 1999 Employee Stock Purchase Plan (incorporated by reference to
the exhibit of corresponding number filed with our registration
statement on Form S-1 (No. 333-80141)).
10.03 Amended and Restated Investors' Rights Agreement dated as of July
16, 1999 between DSL.net, Inc. and the purchasers named therein
(incorporated by reference to the exhibit of corresponding number
filed with our registration statement on Form S-1 (No.
333-80141)).
10.04 Credit Agreement dated as of May 12, 1999 by and between DSL.net,
Inc. and Fleet National Bank (incorporated by reference to
Exhibit 10.05 filed with our registration statement on Form S-1
(No. 333-80141)).
10.05* Amendment and Waiver Agreement dated June 12, 2000 to Credit
Agreement dated as of May 12, 1999 by and between DSL.net, Inc.
and Fleet National Bank.
10.06* Amendment and Waiver Agreement dated as of July 21, 2000 to
Credit Agreement dated as of May 12, 1999 by and between DSL.net,
Inc. and Fleet National Bank.
10.07 Security Agreement dated as of May 12, 1999 by and between
DSL.net, Inc. and Fleet National Bank (incorporated by reference
to Exhibit 10.06 filed with our registration statement on Form
S-1 (No. 333-80141)).
10.08 Lease Agreement dated February 5, 1999 by and between DSL.net,
Inc. and Long Wharf Drive, LLC, as amended (incorporated by
reference to Exhibit 10.07 filed with our registration statement
on Form S-1 (No. 333-96349)).
10.09 Amendment No. 1 dated June 9, 1999 to Lease Agreement by and
between DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by
reference to Exhibit 10.08 filed with our registration statement
on Form S-1 (No. 333-96349)).
10.10 Amendment No. 2 dated November 9, 1999 to Lease Agreement by and
between DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by
reference to Exhibit 10.09 filed with our registration statement
on Form S-1 (No. 333-96349)).
10.11 Amendment No. 3 dated January 20, 2000 to Lease Agreement by and
between DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by
reference to Exhibit 10.10 filed with our registration statement
on Form S-1 (No. 333-96349)).
10.12* Amendment No. 4 dated February 8, 2000 to Lease Agreement by and
between DSL.net, Inc. and Long Wharf Drive, LLC.
10.13 Amended and Restated Shareholders' Agreement, as amended, by and
among DSL.net, Inc. and certain investors (incorporated by
reference to Exhibit 10.08 filed with our registration statement
on Form S-1 (No. 333-80141)).
-70-
10.14+ Additional Compensation Agreement dated as of December 29, 1998
between DSL.net, Inc. and David Struwas (incorporated by
reference to Exhibit 10.18 filed with our registration statement
on Form S-1 (No. 333-80141)).
10.15 Amendment No. 1 to Amended and Restated Investors' Rights
Agreement (incorporated by reference to Exhibit 10.21 filed with
our registration statement on Form S-1 (No. 333-80141)).
10.16+ Vector Internet Services, Inc. 1999 Stock Option Plan
(incorporated by reference to Exhibit 4.4 filed with our
registration statement on Form S-8 (No. 333-39016))
10.17+ Vector Internet Services, Inc. 1997 Stock Option Plan
(incorporated by reference to Exhibit 4.5 filed with our
registration statement on Form S-8 (No. 333-39016))
21.01* Subsidiaries of DSL.net, Inc.
23.01* Consent of PricewaterhouseCoopers LLP.
24.01* Power of Attorney (see signature page hereto).
--------------------------
* Filed herewith
+ Indicates a management contract or any compensatory plan, contract or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed on behalf of DSL.net during the quarter ended December 31, 2000.
-71-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 29, 2001 By: /s/David F. Struwas
-------------------------
David F. Struwas
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of DSL.net, Inc., hereby severally constitute and appoint David F. Struwas, Walter
Keisch and Stephen Zamansky, and each of them singly, our true and lawful attorneys, with full power to them and each of them
singly, to sign for us in our names in the capacities indicated below, any amendments to this Annual Report on Form 10-K, and
generally to do all things in our names and on our behalf in such capacities to enable DSL.net, Inc. to comply with the provisions
of the Securities Exchange Act of 1934 and all requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title(s) Date
--------- -------- ----
/s/David F. Struwas Chairman of the Board and Chief March 29, 2001
-------------------------------- Executive Officer
David F. Struwas (Principal Executive Officer)
/s/ Walter Keisch Vice President, Finance (Principal March 29, 2001
-------------------------------- Financial and Accounting Officer)
Walter Keisch
/s/ Robert Gilbertson Director March 29, 2001
--------------------------------
Robert Gilbertson
/s/ William J. Marshall Director March 29, 2001
--------------------------------
William J. Marshall
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Signature Title(s) Date
--------- -------- ----
/s/James D. Marver Director March 29, 2001
--------------------------------
James D. Marver
/s/ William Seifert Director March 29, 2001
--------------------------------
William Seifert
/s/ Paul K. Sun Director March 29, 2001
--------------------------------
Paul K. Sun
-73-
Exhibit Index to Annual Report on Form 10-K for Fiscal Year Ended December 31, 2000
EXHIBIT
EXHIBIT
NO.
2.01 Agreement and Plan of Merger, dated as of November 30, 1999, by
and among DSL.net, Inc., Long Wharf Mergeco, Inc. and Tycho
Networks, Inc. (incorporated by reference to Exhibit 2 filed with
our Form 8-K dated as of December 1, 1999,
2.02 Agreement and Plan of Merger dated as of May 25, 2000, by and
among DSL.net Inc., Greens Farms Corporation, Vector Internet
Services, Inc. and certain stockholders of Vector (incorporated
by reference to Exhibit 2 with our Form 8-K dated as of May 26,
2000).
3.01 Amended and Restated Certificate of Incorporation of DSL.net,
Inc. as amended (incorporated by reference to Exhibit 3.02 filed
with our registration statement on Form S-1 (No. 333-80141)).
3.02 Amended and Restated By-laws of DSL.net, Inc. (incorporated by
reference to Exhibit 3.03 filed with our registration statement
on Form S-1 (No. 333-80141)).
4.01 Specimen Certificate for shares of DSL.net, Inc.'s Common Stock
(incorporated by reference to the exhibit of corresponding number
filed with our registration statement on Form S-1 (No.
333-80141)).
4.02 Description of Capital Stock (contained in the Certificate of
Incorporation filed as Exhibit 3.02 with our registration
statement on Form S-1 (No. 333-80141)).
4.03 Form of Stock Purchase Warrant dated as of October 12, 1999
between DSL.net, Inc. and certain investors (incorporated by
reference to the exhibit of corresponding number filed with our
registration statement on Form S-1 (No. 333-96349)).
10.01+ Amended and Restated 1999 Stock Plan (incorporated by reference
to the exhibit of corresponding number filed with our
registration statement on Form S-1 (No. 333-80141)).
10.02+ 1999 Employee Stock Purchase Plan (incorporated by reference to
the exhibit of corresponding number filed with our registration
statement on Form S-1 (No. 333-80141)).
10.03 Amended and Restated Investors' Rights Agreement dated as of July
16, 1999 between DSL.net, Inc. and the purchasers named therein
(incorporated by reference to the exhibit of corresponding number
filed with our registration statement on Form S-1 (No.
333-80141)).
10.04 Credit Agreement dated as of May 12, 1999 by and between DSL.net,
Inc. and Fleet National Bank (incorporated by reference to
Exhibit 10.05 filed with our registration statement on Form S-1
(No. 333-80141)).
10.05* Amendment and Waiver Agreement dated June 12, 2000 to Credit
Agreement dated as of May 12, 1999 by and between DSL.net, Inc.
and Fleet National Bank.
10.06* Amendment and Waiver Agreement dated as of July 21, 2000 to
Credit Agreement dated as of May 12, 1999 by and between DSL.net,
Inc. and Fleet National Bank.
10.07 Security Agreement dated as of May 12, 1999 by and between
DSL.net, Inc. and Fleet National Bank (incorporated by reference
to Exhibit 10.06 filed with our registration
-74-
statement on Form S-1 (No. 333-80141)).
10.08 Lease Agreement dated February 5, 1999 by and between DSL.net,
Inc. and Long Wharf Drive, LLC, as amended (incorporated by
reference to Exhibit 10.07 filed with our registration statement
on Form S-1 (No. 333-96349)).
10.09 Amendment No. 1 dated June 9, 1999 to Lease Agreement by and
between DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by
reference to Exhibit 10.08 filed with our registration statement
on Form S-1 (No. 333-96349)).
10.10 Amendment No. 2 dated November 9, 1999 to Lease Agreement by and
between DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by
reference to Exhibit 10.09 filed with our registration statement
on Form S-1 (No. 333-96349)).
10.11 Amendment No. 3 dated January 20, 2000 to Lease Agreement by and
between DSL.net, Inc. and Long Wharf Drive, LLC (incorporated by
reference to Exhibit 10.10 filed with our registration statement
on Form S-1 (No. 333-96349)).
10.12* Amendment No. 4 dated February 8, 2000 to Lease Agreement by and
between DSL.net, Inc. and Long Wharf Drive, LLC.
10.13 Amended and Restated Shareholders' Agreement, as amended, by and
among DSL.net, Inc. and certain investors (incorporated by
reference to Exhibit 10.08 filed with our registration statement
on Form S-1 (No. 333-80141)).
10.14+ Additional Compensation Agreement dated as of December 29, 1998
between DSL.net, Inc. and David Struwas (incorporated by
reference to Exhibit 10.18 filed with our registration statement
on Form S-1 (No. 333-80141)).
10.15 Amendment No. 1 to Amended and Restated Investors' Rights
Agreement (incorporated by reference to Exhibit 10.21 filed with
our registration statement on Form S-1 (No. 333-80141)).
10.16+ Vector Internet Services, Inc. 1999 Stock Option Plan
(incorporated by reference to Exhibit 4.4 filed with our
registration statement on Form S-8 (No. 333-39016))
10.17+ Vector Internet Services, Inc. 1997 Stock Option Plan
(incorporated by reference to Exhibit 4.5 filed with our
registration statement on Form S-8 (No. 333-39016))
21.01* Subsidiaries of DSL.net, Inc.
23.01* Consent of PricewaterhouseCoopers LLP.
24.01* Power of Attorney (see signature page hereto).
----------------
* Filed herewith
+ Indicates a management contract or any compensatory plan, contract or arrangement.
-75-
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directorsn and Stockholders of DSL.net, Inc.:
Our audits of the consolidated financial statements referred to in our report dated February 26, 2001 appearing in this Annual
Report on the Form 10-K of DSL.net, Inc. also included an audit of the financial statement schedule listed in Item 14(a)(2) of
this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Stamford, Connecticut
February 26, 2001
-76-
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
The following table depicts the activity in the allowance for doubtful accounts for the period from March 3, 1998 (inception) to
December 31, 1998 and for the years ended 1999 and 2000:
----------------- --------------- --------------- --------------- --------------- -------------- --------------- ---------------
Deductions
Allowance Additions Additions Additions Charged
For Balance at Charged to Charged to Charged to Against Balance at
Doubtful Beginning of Costs and Purchase Sales Valuation End of
Year Accounts Period Expenses Accounting Discounts Allowance Period
----------------- --------------- --------------- --------------- --------------- -------------- --------------- ---------------
1998 $ -- $ -- $ -- $ -- $ -- $ --
----------------- --------------- --------------- --------------- --------------- -------------- --------------- ---------------
1999 $ -- $ 62,819 $ 16,329 $ -- $ (16,545) $ 62,603
----------------- --------------- --------------- --------------- --------------- -------------- --------------- ---------------
2000 $ 62,603 $ 700,000 $ 87,000 $ 590,496 $ (87,000) $ 1,353,099
----------------- --------------- --------------- --------------- --------------- -------------- --------------- ---------------
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EXHIBIT 10.05
AMENDMENT AND WAIVER AGREEMENT
AMENDMENT AND WAIVER AGREEMENT (this "AMENDMENT AGREEMENT") dated as of June 12, 2000 by and
between DSL.net, Inc. (the "BORROWER") and Fleet National Bank (the "BANK"), amending a certain Credit Agreement by
and between the Borrower and the Bank dated as of May 12, 1999 (the "CREDIT AGREEMENT").
W I T N E S S E T H
WHEREAS, pursuant to the terms of the Credit Agreement, the Bank has made loans to the Borrower; and
WHEREAS, the Borrower has requested that the Bank waive certain Events of Defaults which exist under the Credit
Agreement and amend certain terms and conditions of the Credit Agreement; and
WHEREAS, the Bank is willing to waive such Events of Default and amend certain terms and conditions of the Credit
Agreement on the terms and conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
SS.1. DEFINITIONS. Capitalized terms used herein without definition that are defined in the Credit Agreement shall have the
same meanings herein as therein.
SS.2. RATIFICATION OF EXISTING AGREEMENTS. All of the Borrower's obligations and liabilities to the Bank as
evidenced by or otherwise arising under the Credit Agreement, the Note and the other Loan Documents, except as otherwise
expressly modified in this Amendment Agreement upon the terms set forth herein, are, by the Borrower's execution of this
Amendment Agreement, ratified and confirmed in all respects. In addition, by the Borrower's execution of this Amendment
Agreement, the Borrower represents and warrants that no counterclaim, right of set-off or defense of any kind exists or is
outstanding with respect to such obligations and liabilities.
SS.3. REPRESENTATIONS AND WARRANTIES; ACKNOWLEDGMENT. The Borrower
hereby represents and warrants to the Bank as follows:
(a) All of the representations and warranties made by the Borrower in the Credit Agreement, the Note and the other Loan
Documents are true and correct on the date hereof as if made on and as of the date hereof, except to the extent that (i) such
representations are updated as set forth on
-2-
Schedule A attached hereto or (ii) any of such representations and warranties expressly relate by their terms to a prior date and
for matters previously disclosed to the Bank in writing; and
(b) After giving effect to the transactions contemplated hereby, no Event of Default under and as defined in any of the Loan
Documents has occurred and is continuing on the date hereof.
SS.4. CONDITIONS PRECEDENT. The effectiveness of the amendments contemplated hereby shall be subject to the
satisfaction on or before the date hereof of each of the following conditions precedent:
(a) Representations and Warranties. All of the representations and warranties made by the Borrower herein, whether directly or
incorporated by reference, shall be true and correct on the date hereof, except as provided in ss.3 hereof.
(b) Performance; No Event of Default. The Borrower shall have performed and complied in all material respects with all terms
and conditions herein required to be performed or complied with by it prior to or at the time hereof, and, after giving effect to
the transactions contemplated hereby, there shall exist no Event of Default or condition which, with either or both the giving of
notice of the lapse of time, would result in an Event of Default upon the execution and delivery of this Amendment Agreement.
(c) Corporate Action. All requisite corporate action necessary for the valid execution, delivery and performance by the
Borrower of this Amendment Agreement and all other instruments and documents delivered by the Borrower in connection
therewith shall have been duly and effectively taken.
(d) Delivery. The parties hereto shall have executed and delivered this Amendment Agreement, in form and substance
satisfactory to the Bank.
(e) Fees and Expenses. The Borrower shall have paid to the Bank all reasonable fees and expenses incurred by the Bank in
connection with this Amendment Agreement, the Credit Agreement and the other Loan Documents. In addition the Borrower
shall have paid one-half of all reasonable fees and expenses incurred by the Bank in connection with the other potential financing
arrangements discussed between the Borrower and the Bank on or prior to the date hereof, including, without limitation, the
fees and expenses set forth in that certain bill from Bank's counsel dated June 26, 2000 previously delivered to Borrower (the
"June Bill").
SS.5. AMENDMENTS TO THE CREDIT AGREEMENT.
-3-
5.1. AMENDMENT TO SS.1. Section 1 of the Credit Agreement is hereby amended by adding the following new definition of
"Qualified Financial Institution" to such Section in the proper alphabetical order to read as follows:
"Qualified Financial Institution: Either (i) a licensed broker/dealer located in the United States having net capital of not less than
$1,000,000,000 or (ii) a bank or trust company organized under the laws of the United States or any state thereof having net
capital of not less than $1,000,000,000."
5.2. AMENDMENT TOSS.7.1(F). Section 7.1(f) of the Credit Agreement is hereby amended in its entirety to read as follows:
"(f) maintain (i) Borrower's primary bank operating accounts with the Bank, (ii) its Subsidiaries' primary bank operating
accounts at the locations listed on Schedule 7.1(f) hereto, and (iii) all other operating accounts solely at any office located in the
United States of any Qualified Financial Institution; and"
5.3. AMENDMENT TOSS.7.2(C). Section 7.2(c) of the Credit Agreement is hereby amended in its entirety to read as
follows:
"(c) make any Investments other than Investments in (i) marketable obligations of the United States maturing within one (1) year,
(ii) certificates of deposit, bankers' acceptances and time and demand deposits of United States banks having total assets in
excess of $1,000,000,000, (iii) securities commonly known as "commercial paper" issued by a corporation organized and
existing under the laws of the United States of America or any state thereof that at the time of purchase have been rated and the
ratings for which are not less than "P1" if rated by Moody's Investors Service, Inc., and not less than "A1" if rated by Standard
and Poor's Rating Group, (iv) Investments in money market mutual funds which invest substantially all of their assets in assets
satisfying the requirements of clauses (i), (ii) or (iii) of this subsection (c) or in repurchase agent agreements secured by any one
or more of the Investments in which the Borrower is permitted to invest pursuant to clauses (i), (ii) or (iii) of this subsection (c);
(v) Subsidiaries, (vi) other Investments existing on the date hereof and listed on Schedule 7.2(c) hereto or similar investments
maintained with the Bank, (vii) 78,370 shares of the Series F Preferred Stock of LiveVault Corporation purchased on May 22,
2000 for an aggregate purchase price of $500,000.60 or (viii) such other Investments as the Bank may from time to time
approve in writing;"
SS.6. WAIVERS. Subject to the satisfaction of the conditions set forth herein, the Bank waives those Events of Default that
have occurred under the Credit Agreement as a result of the Borrower's failure on or before July 31, 2000 to comply with those
sections of the Credit Agreement set forth on Schedule 1 attached hereto. The waiver set forth in this ss.6 shall be effective only
for those Events of Defaults contained in the existing Credit Agreement as specified in the preceding sentence
-4-
occurring on or before July 31, 2000 and such waiver shall not entitle the Borrower to any future waiver in similar or other
circumstances. Without limiting the foregoing, upon the occurrence of an Event of Default after July 31, 2000, or if an Event of
Default has occurred and is continuing on the date hereof that is not set forth on Schedule 1, the Bank shall be free in its sole
and absolute discretion to accelerate the payment in full of the Borrower's indebtedness to the Bank under the Credit
Agreement and the other Loan Documents, and may, if the Bank so elects, proceed to enforce any or all of the Bank's rights
under or in respect of the Credit Agreement and the other Loan Documents and applicable law.
SS.7. NO WAIVER BY BANK. Except as otherwise expressly provided for herein, nothing in this Amendment Agreement
shall extend to or affect in any way the Borrower's obligations or the Bank's rights and remedies arising under the Credit
Agreement or the other Loan Documents, and the Bank shall not be deemed to have waived any or all of its remedies with
respect to any Event of Default (other than an Event of Default arising under the Credit Agreement as a result of the Borrower's
failure to comply with those sections of the Credit Agreement set forth on Schedule 1 attached hereto and then only to the
extent set forth in ss.6 hereof) or event or condition which, with notice or the lapse of time, or both would become an Event of
Default and which upon the Borrower's execution and delivery of this Amendment Agreement might otherwise exist or which
might hereafter occur.
SS.8. ADDITIONAL COVENANTS. Without any prejudice or impairment whatsoever to any of the Bank's rights and
remedies contained in the Credit Agreement and the covenants contained therein, the Note or in any of the other Loan
Documents, the Borrower additionally covenants and agrees with the Bank as follows:
(a) On or before August 20, 2000, the Borrower shall pay in full all of the remaining fees and expenses due and owing under the
June Bill.
(b) The Borrower shall comply and continue to comply with all of the terms, covenants and provisions contained in the Credit
Agreement, the Note and the other Loan Documents, except as such terms, covenants and provisions are expressly modified by
this Amendment Agreement upon the terms set forth herein.
(c) The Borrower will provide to the Bank such financial information as the Bank may reasonably request from time to time and
at the Borrower's expense.
(d) The Borrower shall at any time or from time to time execute and deliver such further instruments, and take such further
action as the Bank may reasonably request, in each case further to effect the purposes of this
-5-
Amendment Agreement, the Credit Agreement, the Note and the other Loan Documents.
The Borrower expressly acknowledges and agrees that any failure by the Borrower to comply with the terms and conditions of
this ss.8 or any other provisions contained in this Amendment Agreement shall constitute an Event of Default under the Credit
Agreement.
SS.9. EXPENSES. The Borrower agrees to pay to the Bank upon demand (a) an amount equal to any and all out-of-pocket
costs or expenses (including reasonable legal fees and disbursements and appraisal expenses) incurred or sustained by the Bank
in connection with the preparation of this Amendment Agreement and related matters, including without limitation, any
reasonable legal fees in connection with any proposed amendments or financing arrangements between the Borrower and the
Bank and (b) from time to time any and all out-of-pocket costs or expenses (including reasonable legal fees and disbursements)
hereafter incurred or sustained by the Bank in connection with the administration of credit extended by the Bank to the
Borrower or the preservation of or enforcement of the Bank's rights under the Credit Agreement, the Note or the other Loan
Documents or in respect of any of the Borrower's other obligations to the Bank.
SS.10. MISCELLANEOUS.
(a) This Amendment Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of
Massachusetts.
(b) Except as otherwise expressly provided by this Amendment Agreement, all of the respective terms, conditions and
provisions of the Credit Agreement shall remain the same. It is declared and agreed by each of the parties hereto that the Credit
Agreement, as amended hereby, shall continue in full force and effect, and that this Amendment Agreement and the Credit
Agreement be read and construed as one instrument, and all references in the Loan Documents to the Credit Agreement shall
hereafter refer to the Credit Agreement, as amended by this Amendment Agreement
IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement to be executed in its name and behalf by its
duly authorized officer as an instrument under seal as of the date first written above.
FLEET NATIONAL BANK
By: /s/ Suzanne M. McKay
------------------------------
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Its: Vice President
DSL.NET, INC.
By: /s/ S. Zamansky
------------------------------
Its: Vice President
EXHIBIT 10.06
SECOND AMENDMENT AGREEMENT
SECOND AMENDMENT AGREEMENT (this "AMENDMENT AGREEMENT") dated as of July 21, 2000 by and
between DSL.net, Inc. (the "BORROWER") and Fleet National Bank (the "BANK"), amending a certain Credit Agreement by
and between the Borrower and the Bank dated as of May 12, 1999, as amended by that Amendment and Waiver Agreement
dated as of June 12, 2000 (as amended, the "CREDIT AGREEMENT").
W I T N E S S E T H
WHEREAS, pursuant to the terms of the Credit Agreement, the Bank has made loans to the Borrower; and
WHEREAS, the Borrower has requested that the Bank amend the Credit Agreement; and
WHEREAS, the Bank is willing to amend certain terms and conditions of the Credit Agreement on the terms and conditions set
forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
SS.1. DEFINITIONS. Capitalized terms used herein without definition that are defined in the Credit Agreement shall have the
same meanings herein as therein.
SS.2. RATIFICATION OF EXISTING AGREEMENTS. All of the Borrower's obligations and liabilities to the Bank as
evidenced by or otherwise arising under the Credit Agreement, the Note and the other Loan Documents, except as otherwise
expressly modified in this Amendment Agreement upon the terms set forth herein, are, by the Borrower's execution of this
Amendment Agreement, ratified and confirmed in all respects. In addition, by the Borrower's execution of this Amendment
Agreement, the Borrower represents and warrants that no counterclaim, right of set-off or defense of any kind exists or is
outstanding with respect to such obligations and liabilities.
SS.3. REPRESENTATIONS AND WARRANTIES. All of the representations and warranties made by the Borrower in the
Credit Agreement, the Note and the other Loan Documents are true and correct on the date hereof as if made on and as of the
date hereof, except to the extent that (i) such representations are updated as set forth on Schedule A attached hereto or (ii) any
of such representations and warranties expressly relate by their terms to a prior date and for matters previously disclosed to the
Bank in writing.
-2-
SS.4. CONDITIONS PRECEDENT. The effectiveness of the amendments contemplated hereby shall be subject to the
satisfaction on or before the date hereof of each of the following conditions precedent:
(a) Representations and Warranties. All of the representations and warranties made by the Borrower herein, whether directly or
incorporated by reference, shall be true and correct on the date hereof, except as provided in ss.3 hereof.
(b) Performance; No Event of Default. The Borrower shall have performed and complied in all material respects with all terms
and conditions herein required to be performed or complied with by it prior to or at the time hereof, and there shall exist no
Event of Default or condition which, with either or both the giving of notice of the lapse of time, would result in an Event of
Default upon the execution and delivery of this Amendment Agreement.
(c) Corporate Action. All requisite corporate action necessary for the valid execution, delivery and performance by the
Borrower of this Amendment Agreement and all other instruments and documents delivered by the Borrower in connection
therewith shall have been duly and effectively taken.
(d) Delivery. The parties hereto shall have executed and delivered this Amendment Agreement, in form and substance
satisfactory to the Bank.
(e) Fees and Expenses. The Borrower shall have paid to the Bank all reasonable fees and expenses incurred by the Bank in
connection with this Amendment Agreement, the Credit Agreement and the other Loan Documents.
SS.5. AMENDMENTS TO THE CREDIT AGREEMENT.
5.1. AMENDMENT TOSS.7.2(A). Section 7.2(a) of the Credit Agreement is hereby amended in its entirety to read as
follows:
"(a) create, incur or assume any Indebtedness other than (i) Indebtedness to the Bank, (ii) Indebtedness in respect of the
acquisition of property or under any Capital Lease Obligation (other than the amounts permitted under subsection (iii) hereof)
which does not exceed the sum of $5,000,000 in the aggregate, (iii) Indebtedness not exceeding the sum of $10,000,000 under
that certain Capital Lease Obligation as to which Copper Mountain Networks, Inc. ("Copper Mountain") is the lender and
provider of such funding, (iv) current liabilities of the Borrower or any of its Subsidiaries not incurred through the borrowing of
money or the obtaining of credit except credit on an open account customarily extended, (v) Indebtedness in respect
-3-
of taxes or other governmental charges contested in good faith and by appropriate proceedings and for which adequate
reserves have been taken, and (vi) Indebtedness not included above and listed on Schedule
7.2(a) hereto;"
5.2. AMENDMENT TOSS.7.2(B)(IV). Section 7.2(b)(iv) of the Credit Agreement is hereby amended by inserting the phrase
"and/orss.7.2(a)(iii)" after "ss.7.2(a)(ii)" into the third to last line ofss.7.2(b).
5.3. AMENDMENT TOSS.7.2(E). Section 7.2(e) of the Credit Agreement is hereby amended by inserting the following at the
beginning of such subsection to read as follows:
"except for that certain sale-leaseback transaction by the Borrower with Copper Mountain with respect to certain assets
previously sold by Copper Mountain to the Borrower during the period beginning on April 30, 2000 through and including July
31, 2000 having an aggregate purchase price not to exceed $3,041,316.85,"
SS.6. ADDITIONAL COVENANTS. Without any prejudice or impairment whatsoever to any of the Bank's rights and
remedies contained in the Credit Agreement and the covenants contained therein, the Note or in any of the other Loan
Documents, the Borrower additionally covenants and agrees with the Bank as follows:
(a) On or before August 20, 2000, the Borrower shall pay in full all of the remaining fees and expenses due and owing under the
June Bill.
(b) The Borrower shall comply and continue to comply with all of the terms, covenants and provisions contained in the Credit
Agreement, the Note and the other Loan Documents, except as such terms, covenants and provisions are expressly modified by
this Amendment Agreement upon the terms set forth herein.
(c) The Borrower will provide to the Bank such financial information as the Bank may reasonably request from time to time and
at the Borrower's expense.
(d) The Borrower shall at any time or from time to time execute and deliver such further instruments, and take such further
action as the Bank may reasonably request, in each case further to effect the purposes of this Amendment Agreement, the
Credit Agreement, the Note and the other Loan Documents.
The Borrower expressly acknowledges and agrees that any failure by the Borrower to comply with the terms and conditions of
this ss.6 or any other provisions
-4-
contained in this Amendment Agreement shall constitute an Event of Default under the Credit Agreement.
SS.7. EXPENSES. The Borrower agrees to pay to the Bank upon demand (a) an amount equal to any and all out-of-pocket
costs or expenses (including reasonable legal fees and disbursements and appraisal expenses) incurred or sustained by the Bank
in connection with the preparation of this Amendment Agreement and related matters, including without limitation, any
reasonable legal fees in connection with any proposed amendments or financing arrangements between the Borrower and the
Bank and (b) from time to time any and all out-of-pocket costs or expenses (including reasonable legal fees and disbursements)
hereafter incurred or sustained by the Bank in connection with the administration of credit extended by the Bank to the
Borrower or the preservation of or enforcement of the Bank's rights under the Credit Agreement, the Note or the other Loan
Documents or in respect of any of the Borrower's other obligations to the Bank.
SS.8. MISCELLANEOUS.
(a) This Amendment Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of
Massachusetts.
(b) Except as otherwise expressly provided by this Amendment Agreement, all of the respective terms, conditions and
provisions of the Credit Agreement shall remain the same. It is declared and agreed by each of the parties hereto that the Credit
Agreement, as amended hereby, shall continue in full force and effect, and that this Amendment Agreement and the Credit
Agreement be read and construed as one instrument, and all references in the Loan Documents to the Credit Agreement shall
hereafter refer to the Credit Agreement, as amended by this Amendment Agreement
-5-
IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement to be executed in its name and behalf by its
duly authorized officer as an instrument under seal as of the date first written above.
FLEET NATIONAL BANK
By: /s/ Suzanne M. McKay
---------------------------------
Its: Vice President
DSL.NET, INC.
By: /s/ S. Zamansky
---------------------------------
Its: Vice President
EXHIBIT 10.12
AMENDMENT NO. 4 TO LEASE
THIS AMENDMENT NO. 4 TO LEASE (the "Fourth Amendment") is made and entered into as of the 8th day of February,
2000 between Landlord and Tenant named below.
LANDLORD: LONG WHARF DRIVE, LLC
310 Orange Street
New Haven, CT 06511
TENANT: dsl.net, incorporated
545 Long Wharf Drive
New Haven, CT 06511
BUILDING: 545 Long Wharf Drive
New Haven, CT 06511
WHEREAS, Landlord and Tenant executed a lease (the "Initial Lease")
dated as of February 5, 1999 (as amended by the amendments more particularly described below, collectively the "Lease"), by
which Tenant leased 12,078 rentable square feet on the fifth (5th) floor of the Building; and
WHEREAS, by Amendment No. 1 to Lease dated as of June 9, 1999 (the "First Amendment"), Tenant leased an additional
19,422 rentable square feet on the fifth (5th) floor of the Building, thereby increasing the size of the entire Premises to 31,500
rentable square feet; and
WHEREAS, by Amendment No. 2 to Lease dated November 9, 1999 (the "Second Amendment"), Tenant leased an
additional 15,600 rentable square feet of space on the ninth (9th) floor in the Building (the "Ninth Floor Space"), thereby
increasing the size of the entire Premises to 47,100 rentable square feet; and
WHEREAS, by Amendment No. 3 to Lease dated January 20, 2000 (the "Third Amendment") the parties set forth, among
other things, various agreements regarding the commencement of the Lease, and costs and allowances associated with the
Construction Work and the Improvements, as said terms are defined in the Initial Lease and the First Amendment; and
WHEREAS, by this Fourth Amendment, Tenant wishes to lease an additional 9,052 rentable square feet of space on the sixth
(6th) floor in the Building ("Sixth Floor Space"), thereby increasing the size of the entire Premises to 56,152 rentable square
feet; and
WHEREAS, the term for the lease of said portion of the Sixth Floor shall commence upon the date on which Tenant receives
written notice from Landlord that the Sixth Floor Space is "Substantially Complete", as said term is defined herein (the "Sixth
Floor Commencement Date"), and end December 31, 2002 (said period being referred to hereinafter as the "Sixth Floor
Term"), unless otherwise extended, as provided for herein.
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WHEREAS, Landlord and Tenant wish to execute an amendment of the Lease stating, among other things, the new area of the
Premises, the requirement of a security deposit, the rent and term for the Sixth Floor Space, and Tenant's Proportionate Share.
NOW, THEREFORE, the parties to this Fourth Amendment, in consideration of the covenants hereinafter contained and the
sum of One Dollar ($1.00) to each party paid by the other, the receipt of which is hereby acknowledged, do covenant and
agree as follows:
1. Unless otherwise stated herein, this Fourth Amendment is effective on the Sixth Floor Commencement Date. Further, all
capitalized terms used in this Forth Amendment, but not defined herein, shall have the same meanings ascribed thereto in the
Lease.
2. The Premises shall be increased and expanded to include the Sixth Floor Space which is comprised of approximately 9,052
rentable square feet, as more particularly shown on Exhibit A attached hereto and made a part hereof. The provisions of this
paragraph shall be deemed a grant of lease.
3. Tenant shall continue to make all payments of Base Rent and Additional Rent as set forth in the Lease, and shall make all
payments of the Ninth Floor Space Rent as set forth in the Second Amendment during the Sixth Floor germ, the Ninth Floor
Space Term, and for the remaining term of the Lease. In addition to said payments, and not in lieu thereof, commencing on the
Sixth Floor Commencement Date, and continuing for the duration of the Sixth Floor Term, Tenant shall pay base rent for the
Sixth Floor Space ("Sixth Floor Space Rent") pursuant to the following schedule: One Hundred Twenty-Eight Thousand Nine
Hundred Ninety-One and 00/100 Dollars ($128,991.00) per annum (based on a per rentable square foot per annum rate of
$14.25 and 9,052 rentable square feet), which shall be payable in advance in equal monthly installments of Ten Thousand
Seven Hundred Forty-Nine and 25/100 ($10,749.25).
4. Commencing as of the Sixth Floor Commencement Date and continuing for the duration of the Sixth Floor Term, as the same
may be extended pursuant to Paragraph 5 below, the paragraph entitled "Tenant's Proportionate Share" in Paragraph 3 of the
Lease, as amended by Paragraph 4(b) of the First Amendment, and as further amended by Paragraph 8 of the Second
Amendment, is hereby amended by deleting the term "17.64% " and inserting the term "21.03% " in lieu thereof, which
percentage is obtained by dividing the number of rentable square feet in the Premises (56,152) by the number of rentable square
feet in the Building (267,052). If Tenant has not elected to extend the Sixth Floor Term as aforesaid, then as of the first day
following the expiration of the Sixth Floor Space (i.e. January 1, 2003), the term "Tenant's Proportionate Share" shall be
modified either (i) by deleting the term "21.03%" and substituting the term "11.80%" in lieu thereof in the event that the Ninth
Floor Space Term is not extended pursuant to Paragraph 8 of the Second Amendment and thereby expires concurrently with
the expiration of the Sixth Floor Space, or (ii) in the event that the Ninth Floor Space Term is extended pursuant to Paragraph 8
of the Second Amendment, by deleting the term "21.03%" and substituting the term "17.64%" in lieu thereof. Further, Tenant
shall be solely responsible for the payment of all electricity furnished to the Sixth Floor Space. If the Sixth Floor Space is
separately submetered, as may be required by Landlord in its sole discretion, Tenant shall pay for all of its electricity usage
directly to the local utility server and the costs of any submetering shall be borne by Tenant. In the event the Sixth Floor Space
is not separately metered, then the cost to Landlord
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for furnishing electricity to the Sixth Floor Space shall be deemed "Electricity Charges," as that term is defined in the Lease, and
all such Electricity Charges shall be included in "Operating Expenses," as that term is defined in the Lease.
5. Provided Tenant is not then in default under any of the terms and conditions of the Lease, as amended, Tenant shall have the
right (the "Extension Right") to extend the Sixth Floor Space Term for a period of time as shall be coterminous with the
"Expiration Date" of the Lease, as that term is defined in the Lease (the "Extension Period"). The parties hereby stipulate and
agree that the Expiration Date of the Lease and, therefore, the expiration date of the Extension Period (if exercised) is May 31,
2005. Tenant's Extension Right shall be subject to the following terms and conditions. The Extension Right shall be exercised by
Tenant delivering written notice to Landlord at least six (6) months prior to the expiration of the Sixth Floor Space Term. The
Extension Period shall be subject to all of the terms and conditions of the Lease, as amended, and the Sixth Floor Space Rent
shall remain the same as in effect during the last month prior to the Extension Period.
6. Tenant shall, upon the execution of this Lease, deposit with Landlord the sum of Ten Thousand Seven Hundred Forty-Nine
and 25/100 Dollars ($10,749.25) (the "Security Deposit"). The Security Deposit shall be in addition to, and not in lieu of, the
obligations of Tenant to deposit with Landlord certain irrevocable letter(s) of credit, as more particularly set forth in Paragraph 4
of the Initial Lease. The Security Deposit shall be held by Landlord as security for faithful performance by Tenant of all the
provisions of this Lease to be performed or observed by Tenant. If Tenant fails to pay rent or other sums due hereunder, or
otherwise defaults with respect to any provision of this Lease, Landlord may use, apply or retain all or any portion of the
Security Deposit for the payment of any rent or other sum resulting from said failure. If Landlord so uses or applies all or a
portion of the Security Deposit, Tenant shall, within ten (10) days after demand therefor deposit cash with Landlord in an
amount sufficient to restore the Security Deposit to the full amount thereof and Tenant's failure to do so shall be a material
breach of this Lease. Landlord shall not be required to keep the Security Deposit separate from its general accounts or to pay
any interest on the Security Deposit.
7. Landlord shall provide Tenant an allowance (the "Allowance") of up to Ten and 00/100 Dollars ($10.00) per rentable square
foot of the Sixth Floor Space to be applied against "Tenant's Costs", associated with the design, fixturing, or furnishing of the
Sixth Floor Space (the "Sixth Floor Improvements"). For the purposes hereof, "Tenant's Costs" shall be the contract price paid
by Landlord for the Sixth Floor Improvements, as the same may have been revised by any change orders, plus the following: (i)
permit fees; (ii) space planning and other design costs; (iii) fees of a third party construction manager; (iv) fees of architects and
engineers in connection with the design of the Sixth Floor Improvements; (v) general contractor profit and overhead; (vi)
administrative fees of Landlord in connection with overseeing the design and construction of the Sixth Floor Improvements; (vii)
the cost of installing a submeter in the Sixth Floor Space for measuring Tenant's electrical consumption; and (viii) all other costs
and expenses in connection with the design and construction of the Sixth Floor Improvements, but shall not include the cost for
any base building work. "Substantial Completion" and "Substantially Complete" shall mean that construction of the Sixth Floor
Improvements have been completed subject only to normal punch list items that will not materially interfere with Tenant's
business operations in the Sixth Floor Space.
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8. If Tenant's costs for the Sixth Floor Improvements exceed the Allowance, then Tenant shall pay Landlord such excess within
ten (10) days after receipt of such final accounting as Additional Rent. If any surplus exists from the Allowance after having been
applied toward Tenant's Costs, the same shall be retained by Landlord.
9. Tenant shall use and occupy the Sixth Floor Space as provided in Paragraph 2(c) of the Lease.
10. Throughout the Sixth Floor Space Term, in addition to the number of parking spaces allotted to Tenant pursuant to
Paragraph 1(B) of the Lease, as amended by Paragraph 3(c) of the First Amendment, and Paragraph 9 of the Second
Amendment, Landlord shall provide Tenant with two (2) (unreserved parking spaces on the property for every 1,000 rentable
square feet of the Sixth Floor Space, which, based on 9,052 rentable square feet, equates to eighteen (18) unreserved parking
spaces. Tenant shall have no further right to use said additional parking spaces following the expiration of the Sixth Floor Space
Term or any earlier termination of the Lease.
11. Each party represents to the other that it has not dealt with any broker, agent or other intermediary who is or may be
entitled to be paid a broker commission or finder's fee in connection with this Fourth Amendment other than Insignia/ESG, Inc.
("Landlord's Broker") and Sentry Commercial Real Estate Services, Inc. ("Tenant's Broker"). Landlord shall be responsible for
the payment of any such fee due Landlord's Broker in connection herewith and Landlord's Broker shall in turn be responsible
for payment of any such fee due Tenant's Broker in connection herewith pursuant to a separate agreement between Landlord'
Broker and Tenant's Broker. Each party agrees to indemnify the other and hold it harmless from all liabilities arising from breach
of the representations stated above. The representations and obligations contained in this Paragraph 11 shall survive the
termination of the Lease.
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12. Except as modified by this Fourth Amendment, the terms and provisions of the Lease are hereby confirmed and ratified,
and that instrument shall remain in full force and effect as modified herein.
IN WITNESS WHEREOF, Landlord and Tenant have signed this Fourth Amendment as of the day and year first above
written.
SIGNED, SEALED, AND DELIVERED
IN THE PRESENCE OF: LANDLORD:
LONG WHARF DRIVE, LLC
/s/ Troy M. Riccitelli By: /s/(illegible)
-------------------------- --------------------------------
Troy M. Riccitelli
Its:
-------------------------- -------------------------------
TENANT:
dsl.net, incorporated
(illegible) By: /s/ Alan Bolduc
-------------------------- --------------------------------
VP Operations
/s/ Sharon Allen Its: Authorized Signatory
--------------------------
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EXHIBIT A
Sixth Floor
545 Long Wharf Drive
New Have, CT
Existing Layout
[INSERT PLOT PLAN]
EXHIBIT 21.01
SUBSIDIARIES OF DSL.NET, INC.
Cabiai Communications, Inc., a Delaware corporation (a wholly-owned subsidiary of Tycho Networks, Inc.)
DSLnet Communications Delaware, Inc., a Delaware corporation
DSLnet Communications, LLC, a Delaware limited liability company
DSLnet Communications Puerto Rico, Inc., a Delaware corporation
DSLnet Communications VA, Inc., a Virginia corporation
Tycho Networks, Inc., a Delaware corporation
Vector Internet Services, Inc., a Delaware corporation
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-88513 and No.
333-39016) of DSL.net, Inc. of our reports dated February 26, 2001 relating to the financial statements and financial statement
schedule, which appear in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Stamford, CT
March 30, 2001