SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ............. to ...................
Commission File Number 000-26147
ZIPLINK, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3457219
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
900 Chelmsford Street,Tower 1, Fifth Floor
Lowell, Massachusetts 01851
(Address of principal executive offices)
(Zip Code)
(978) 551-8100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes[X] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
CLASS OUTSTANDING AT NOVEMBER 5, 1999
Common Stock, par value $.001 per share 12,737,361 shares
ZIPLINK, INC.
FORM 10-Q
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets at September 30, 1999 (Unaudited)
and December 31, 1998 3
Statements of Operations for the Three Months
Ended September 30, 1999 and 1998 and the Nine Months
Ended September 30, 1999 and 1998 (Unaudited) 4
Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 (Unaudited) 5
Notes to Financial Statements (Unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 2. Changes in Securities and Use of Proceeds 15
ITEM 3. Defaults Upon Senior Securities 15
ITEM 4. Submission of Matters to a Vote of Security Holders 15
ITEM 5. Other Information 15
ITEM 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
EXHIBIT INDEX 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZIPLINK, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Caption
SEPTEMBER 30, DECEMBER 31,
1999 1998
----- ----
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents............................... $21,617 $512
Accounts receivable, net.............................. 1,287 679
Prepaid expenses and other current assets............... 1,379 71
---------- ------------
Total current assets............................... 24,283 1,262
---------- ------------
Property and equipment, net................................ 8,217 9,803
Other assets............................................... 1,841 109
---------- ------------
Total assets....................................... $34,341 $11,174
========== ============
LIABILITIES AND STOCKHOLDERS'/MEMBERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of convertible debentures............. $ - $ 500
Current portion of capital lease obligation............. 459 465
Accounts payable........................................ 1,672 1,077
Accrued expenses........................................ 942 1,686
Deferred revenue........................................ 97 120
Amounts due to affiliates, net.......................... - 476
---------- ------------
Total current liabilities.......................... 3,170 4,324
Note payable to a bank..................................... - 17,600
Convertible debentures, less current portion............... - 7,000
Capital lease obligation, less current portion............. - 339
---------- ------------
Total liabilities.................................. 3,170 29,263
---------- ------------
Stockholders'/Members' Equity (Deficit):
Common stock, $.001 par value, 50,000 shares authorized,
12,717 shares issued and outstanding at
September 30, 1999...................................... 13 -
Additional paid-in capital................................. 60,558 -
Accumulated deficit/members' deficit....................... (29,322) (18,089)
Deferred compensation (78) -
---------- ------------
Total stockholders'/members' equity (deficit).............. 31,171 (18,089)
---------- ------------
Total liabilities and stockholders'/members' equity
(deficit)....................................... $ 34,341 $11,174
========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE FINANCIAL STATEMENTS.
3
ZIPLINK, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Caption
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ----------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues................................ $ 3,403 $ 1,767 $ 9,196 $ 5,050
----------- ------------ -------------- -------------
Costs and Expenses:
Cost of revenues..................... 2,615 1,676 6,323 4,581
Selling, general and administrative.. 2,250 1,356 5,165 3,925
Depreciation and amortization........ 1,003 677 2,781 1,710
----------- ------------ -------------- -------------
Total costs and expenses........ 5,868 3,709 14,269 10,216
----------- ------------ -------------- -------------
Loss from operations............ (2,465) (1,942) (5,073) (5,166)
----------- ------------ -------------- -------------
Other Income (Expenses):
Interest expense..................... (18) (383) (622) (955)
Interest income...................... 290 8 395 32
Other income (expense) .............. - (144) (38) (144)
----------- ------------ -------------- -------------
272 (519) (265) (1,067)
----------- ------------ -------------- -------------
Net loss........................ $ (2,193) $ (2,461) $ (5,338) $ (6,233)
=========== ============ ============== =============
Net Loss per Unit (Note 5):
Net Loss per unit -
Basic and diluted.............. $ - $ (0.25) $ - $ (0.63)
=========== ============ ============== =============
Weighted average units -
Basic and diluted ............. - 9,899 - 9,899
=========== ============ ============== ===============
Net Loss per Share (Note 5):
Net Loss per share -
Basic and diluted.............. $ (0.17) $ - $ (0.52) $ -
=========== ============ ============== ===============
Weighted average shares -
Basic and diluted.............. 12,717 - 10,297 -
=========== ============ ============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS
4
ZIPLINK, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
---- ----
Cash Flows from Operating Activities:
Net loss............................................. $(5,338) $ (6,233)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization..................... 2,781 1,710
Loss on disposal of property and equipment........ 38 144
Compensation expense associated with the granting
of options and warrants......................... 50 97
Changes in assets and liabilities
Accounts receivable, net........................ (608) (473)
Prepaid expenses and other current assets....... (358) (35)
Accounts payable................................ 595 (3,788)
Accrued expenses................................ (564) 710
Deferred revenue................................ (23) (109)
Due to affiliates............................... (476) -
------------- -----------
Net cash used in operating activities........ (3,903) (7,977)
------------- -----------
Cash Flows from Investing Activities:
Purchases of property and equipment.................. (1,233) (1,248)
Decrease (Increase) in other assets.................. 18 (8)
------------- -----------
Net cash used in investing activities........ (1,215) (1,256)
------------- -----------
Cash Flows from Financing Activities:
Net proceeds from sale of common stock............... 44,168 -
Proceeds from convertible debentures................. - 7,500
Proceeds from borrowings under notes payable......... 2,400 1,100
Payments made on notes payable to a bank............. (20,000) -
Payments of principal made on capital lease
obligation........................................ (345) (301)
------------- -----------
Net cash provided by financing activities.... 26,223 8,299
------------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents.... 21,105 (934)
Cash and Cash Equivalents, beginning of period....... 512 1,081
------------- -----------
Cash and Cash Equivalents, end of period............. $ 21,617 $ 147
============= ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest............................... $ 773 $ 754
============= ===========
Supplemental Disclosure of Non-Cash Financing and
Investing Activities:
Forgiveness of accrued compensation by
Capital Member $ 180 $ -
============= ===========
Conversion of debentures to common stock............. $ 7,500 $ -
============= ===========
Issuance of common stock for telecommunications
services.......................................... $ 2,700 $ -
============= ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE FINANCIAL STATEMENTS.
5
ZIPLINK, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. THE COMPANY AND BASIS OF PRESENTATION
THE COMPANY - ZipLink, Inc., a Delaware corporation (the "Company" or
"ZipLink"), was formed as a wholly-owned subsidiary of ZipLink, LLC on March
9, 1999. ZipLink, LLC was organized as a Connecticut limited liability
company on November 21, 1995 and reorganized as a Delaware LLC on March 9,
1999. On May 25, 1999, ZipLink, LLC was reorganized from a limited liability
company to a corporation. In connection with this reorganization, all of the
membership units in ZipLink, LLC were transferred to and merged with and into
the Company, as a result of which, all of the assets and liabilities of
ZipLink, LLC were transferred to the Company. As these entities are under
common control, the merger transaction was accounted for as a reorganization
of entities under common control similar to a pooling of interest.
BASIS OF PRESENTATION - The Company has prepared the accompanying unaudited
financial statements pursuant to the rules and regulations of the Securities
and Exchange Commission regarding interim financial reporting. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete annual financial
statements and should be read in conjunction with the audited financial
statements and notes thereto for the year ended December 31, 1998, in the
Company's Prospectus dated May 26, 1999 (the "Prospectus"), filed as part of
a Registration Statement on Form S-1, as amended (Reg. No. 333-74273). In the
opinion of the Company's management, the accompanying unaudited financial
statements contain all adjustments which are necessary to present fairly its
financial position as of September 30, 1999 and the results of its operations
and cash flows for the three and nine month periods ended September 30, 1999
and 1998, and are of a normal and recurring nature. The results of operations
for interim periods are not necessarily indicative of the operating results
to be expected for the full year.
Certain prior year account balances have been reclassified to be consistent
with the current year's presentation.
2. INITIAL PUBLIC OFFERING
On June 1, 1999, the Company completed its initial public offering ("IPO") of
3,500,000 shares of common stock at $14.00 per share. Total proceeds to the
Company were approximately $44.2 million, net of offering costs of
approximately $4.8 million. Concurrent with the closing of the IPO, $7.5
million of convertible debentures were converted into 807,143 shares of
common stock. The Company utilized $20.0 million of the net proceeds from the
offering to repay outstanding indebtedness under its line of credit with
Fleet Bank. This facility was terminated after the closing of the IPO.
3. SIGNIFICANT CUSTOMER
WebTV Networks, Inc., a wholly-owned subsidiary of Microsoft Corporation,
represented approximately 62%, 68%, 72% and 65% of the Company's revenues
during the three and nine month periods ended September 30, 1999 and 1998,
respectively; and 55% and 85% of the Company's accounts receivable at
September 30, 1999 and December 31, 1998, respectively.
6
4. NET LOSS PER SHARE AND NET LOSS PER UNIT
The Company has adopted SFAS No. 128, Earnings Per Share. Basic net loss per
common share/unit is computed using the weighted average number of shares of
common stock/units outstanding during the period. Diluted net loss per common
share/unit is the same as basic net loss per common share/unit since the
effects of the Company's potential common stock/unit equivalents are
antidilutive. Antidilutive securities, which consist of options, warrants and
convertible debentures that are not included in diluted net loss per
share/unit were 780,112 shares for the three and nine month periods ended
September 30, 1999 and 404,989 units for the three and nine month periods
ended September 30, 1998.
The following tables present information necessary to calculate net loss per
share/unit:
Three Months Ended
September 30, 1999
------------------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
--------------- ----------------- --------------
Basic net loss per share:
Loss available to common stockholders $ (2,193) 12,717 $ (0.17)
==============
Effect of dilutive securities:
Stock options/warrants - -
--------------- -------------
Diluted net loss per share $ (2,193) 12,717 $ (0.17)
=============== ============= ==============
7
Nine Months Ended
September 30, 1999
------------------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
--------------- ----------------- -- --------------
Basic net loss per share:
Loss available to common stockholders $ (5,338) 10,297 $ (0.52)
==============
Effect of dilutive securities:
Stock options/warrants - -
--------------- -----------------
Diluted net loss per share $ (5,338) 10,297 $ (0.52)
=============== ================= ==============
Three Months Ended
September 30, 1998
------------------------------------------------------
Earnings Unit Per Unit
(Numerator) (Denominator) Amount
--------------- ----------------- -- --------------
Basic net loss per unit:
Loss available to unit members $ (2,461) 9,899 $ (0.25)
==============
Effect of dilutive securities:
Unit options/warrants - -
Convertible debentures - -
--------------- -----------------
Diluted net loss per unit $ (2,461) 9,899 $ (0.25)
=============== ================= ==============
Nine Months Ended
September 30, 1998
------------------------------------------------------
Earnings Unit Per Unit
(Numerator) (Denominator) Amount
--------------- ----------------- -- --------------
Basic net loss per unit:
Loss available to unit members $ (6,233) 9,899 $ (0.63)
==============
Effect of dilutive securities:
Unit options/warrants - -
Convertible debentures
--------------- -----------------
Diluted net loss per unit $ (6,233) 9,899 $ (0.63)
=============== ================= ==============
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Any statements in this quarterly report concerning the Company's business
outlook or future economic performance, anticipated profitability, revenues,
expenses or other financial items, and network or service offering growth,
together with other statements that are not historical facts, are
"forward-looking statements" as that term is defined under the Federal
Securities Laws. Any forward-looking statements are estimates, reflecting the
best judgement of the party making such statements based upon currently
available information and involve a number of risks, uncertainties and other
factors which could cause actual results to differ materially from those
stated in such statements. Risks, uncertainties and factors which could
affect the accuracy of such forward-looking statements are identified in the
public filings made by the Company with the Securities and Exchange
Commission, and forward-looking statements contained in this Form 10-Q or in
other public statements of the Company should be considered in light of those
factors.
OVERVIEW
ZipLink, Inc. is a national provider of wholesale Internet access services to
developers and vendors of Internet appliances and local, regional and
national Internet service providers.
The Company derives a significant portion of its revenues from the provision
of wholesale Internet access services for Internet appliances, including
Internet connectivity, subscriber authentication, e-mail filtering and
forwarding and other specially developed services. One customer, WebTV
Networks, Inc. ("WebTV"), accounts for most of the Company's revenues from
Internet appliance services. In October, 1999, the Company and WebTV extended
the current contract through December 31, 2002. The Company also provides
wholesale national dial-up Internet access and enhanced services, including
digital subscriber line service where available, under the brand name
ZipDial, to Internet service providers. The Company's services enable
Internet service providers to quickly and inexpensively expand their existing
geographic coverage and offer national dial-up Internet access, without
investing in costly infrastructure. Some of the Company's customers in the
ZipDial program offer free Internet access to their subscribers or PC's
bundled with Internet connectivity.
Revenues for wholesale Internet access services provided to Internet
appliance and ZipDial customers are recognized monthly as services are
provided. In most cases, the Company receives a fixed price per subscriber
per month when a subscriber uses ZipLink for connectivity. The Company also
receives a usage based fee from ZipDial customers providing free Internet
access to their subscribers and from a portion of WebTV subscribers. In
addition, the Company may receive fees associated with start-up software
development costs and network access availability.
The Company also derives revenues from the provision of direct Internet
access under the ZipLink name to a limited number of retail users and
continues to devote minimal resources to marketing in this area. Revenues
from these users are derived from service subscriptions and are recognized
monthly.
Since inception, the Company has incurred net losses and experienced negative
cash flow from operations. The Company's cumulative net loss as of September
30, 1999 was $29.3 million. The
9
Company expects to continue to operate at a net loss and experience negative
cash flow for the foreseeable future given the level of planned operating
activities and capital expenditures. The Company's ability to achieve
profitability and positive cash flow from operations is dependent upon its
ability to substantially grow its revenue base through expansion of its
ZipDial program and an increase in sales of access services for Internet
appliances, and its ability to expand the network and achieve operating
efficiencies. The Company plans to make significant capital expenditures to
expand its network and to increase its operating expenses based in large part
on its estimate of potential future revenues. If the Company's future
revenues fall short of its estimates or if its operating expenses exceed its
expectations, then the Company may never obtain or sustain profitability.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of revenues for the three months and nine months ending September
30, 1999 and 1998:
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 76.8 94.9 68.8 90.7
Selling, general and administrative 66.1 76.7 56.2 77.7
Depreciation and amortization 29.5 38.3 30.2 33.9
----------- ----------- ----------- -----------
Loss from operations (72.4) (109.9) (55.1) (102.3)
Other income (expense), net 8.0 (29.4) (2.9) (21.1)
----------- ----------- ----------- -----------
Net loss (64.4)% (139.3)% (58.0)% (123.4)%
=========== =========== =========== ===========
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES. Revenues increased 92.6% to $3.4 million for the three months ended
September 30, 1999 from $1.8 million for the three months ended September 30,
1998, an increase of $1.6 million. This increase was due to an increase in
revenues from WebTV from $1.2 million to $2.1 million, an increase in ZipDial
and other program revenues, including revenues from free Internet access
providers and direct retail users, from $568,000 to $1.1 million, and
$200,000 of revenues from development fees.
COST OF REVENUES. Cost of revenues consists primarily of telecommunications
costs and collocation costs for super points of presence. Cost of revenues
increased 56.0% to $2.6 million for the three months ended September 30, 1999
from $1.7 million for the three months ended September 30, 1998.
Substantially all of this increase was due to an increase in
telecommunications costs reflecting the expansion of our network
infrastructure and, to a lesser extent, higher maintenance expenses and costs
related to development revenues.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses consist primarily of salaries, professional services, marketing and
promotional materials to expand the Company's revenue base and other costs
related to sales, finance and administrative functions. Selling, general and
administrative expenses increased 65.9% to $2.3 million for the three
10
months ended September 30, 1999 from $1.4 million for the three months ended
September 30, 1998. This increase was primarily due to salaries and
administrative expenses associated with the growth in the ZipDial program and
new marketing and advertising programs, partially offset by a reduction in
professional services.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased 48.2% to $1.0
million for the three months ended September 30, 1999 from $0.7 million for
the three months ended September 30, 1998. Substantially all of this increase
resulted from the effect of additional capital assets purchased and placed in
service during 1998 and, to a lesser extent, additional capital assets
purchased and placed in service during 1999.
INTEREST EXPENSE. Interest expense decreased to $18,000 for the three months
ended September 30, 1999 from $383,000 for the three months ended September
30, 1998. Substantially all of this decrease was due to the repayment of
$20.0 million of indebtedness outstanding under the Company's line of credit
in June 1999, and reduction of interest expense due to the conversion of
convertible debentures to common stock concurrent with the closing of the
Company's IPO.
INTEREST INCOME. Interest income increased to $290,000 for the three months
ended September 30, 1999 from $8,000 for the three months ended September 30,
1998. Substantially all of this increase was due to the investment of the net
proceeds to the Company from the IPO in the form of commercial paper and
repurchase agreements.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
REVENUES. Revenues increased 82.1% to $9.2 million for the nine months ended
September 30, 1999 from $5.1 million for the nine months ended September 30,
1998, an increase of $4.1 million. This increase was due to an increase in
revenues from WebTV from $3.3 million to $6.6 million, an increase in ZipDial
and other program revenues, including revenues from free Internet access
providers and direct retail users, from $1.8 million to $2.4 million, and
$200,000 of revenues from development fees.
COST OF REVENUES. Cost of revenues increased 38.0% to $6.3 million for the
nine months ended September 30, 1999 from $4.6 million for the nine months
ended September 30, 1998. This increase was primarily due to an increase in
telecommunications costs and, to a lesser extent, an increase in collocation
costs, higher maintenance expenses and costs related to development revenues.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 31.6% to $5.2 million for the nine months ended September
30, 1999 from $3.9 million for the nine months ended September 30, 1998. This
increase was primarily due to salaries and administrative expenses associated
with the growth in the ZipDial program and new marketing and advertising
programs, partially offset by a reduction in professional services.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased 62.6% to $2.8
million for the nine months ended September 30, 1999 from $1.7 million for
the nine months ended September 30, 1998. Substantially all of this increase
resulted from the effect of additional capital assets purchased and placed in
service during 1998 and, to a lesser extent, additional capital assets
purchased and placed in service during 1999.
11
INTEREST EXPENSE. Interest expense decreased to $622,000 for the nine months
ended September 30, 1999 from $955,000 for the nine months ended September
30, 1998. Substantially all of this decrease was due to the repayment of
$20.0 million of indebtedness outstanding under the Company's line of credit
in June 1999, and reduction of interest expense due to the conversion of
convertible debentures to common stock concurrent with the closing of the
Company's IPO.
INTEREST INCOME. Interest income increased to $395,000 for the nine months
ended September 30, 1999 from $32,000 for the nine months ended September 30,
1998. Substantially all of this increase was due to the investment of the net
proceeds to the Company from the IPO in the form of commercial paper and
repurchase agreements.
LIQUIDITY AND CAPITAL RESOURCES
Working capital (deficit) was $21.1 million and $(3.0) million at September
30, 1999 and December 31, 1998, respectively. The Company had cash and cash
equivalents totaling $21.6 million and $512,000 at September 30, 1999 and
December 31, 1998, respectively. The Company currently invests in commercial
paper and repurchase agreements backed by U.S. Treasury securities that are
highly liquid, of high-quality investment grade, and have maturities of less
than three months with the intent to make such funds readily available for
operating purposes.
Net cash used in operating activities was $3.9 million and $8.0 million for
the nine months ended September 30, 1999 and 1998, respectively. Net cash
used in operating activities for the nine months ended September 30, 1999 was
primarily attributable to the Company's net loss, increase in accounts
receivable, decreases in accrued expenses and decreases in amounts due to
affiliates, partially offset by depreciation and amortization and increases
in accounts payable. Net cash used in operating activities for the nine
months ended September 30, 1998 was primarily attributable to the Company's
net loss and decrease in accounts payable, partially offset by depreciation
and amortization and an increase in accrued expenses.
Net cash used in investing activities was $1.2 million and $1.3 million for
the nine months ended September 30, 1999 and 1998, respectively. Principal
investments were for capital expenditures, which amounted to $1.2 million for
each of the nine months ended September 30, 1999 and 1998.
Net cash provided by financing activities was $26.2 million and $8.3 million
for the nine months ended September 30, 1999 and 1998, respectively. Net cash
provided by financing activities for the nine months ended September 30, 1999
include $44.2 million in proceeds received in June 1999 from the IPO of
3,500,000 shares of common stock at $14.00 per share, net of underwriting
discount and other offering expenses. In addition, concurrent with the
closing of the IPO, $7.5 million of convertible debentures were converted
into 807,143 shares of common stock. The Company utilized $20.0 million of
the net proceeds from this offering to repay outstanding indebtedness under
its line of credit with Fleet Bank. This facility was terminated after the
closing of the IPO. Net cash provided by financing activities for the nine
months ended September 30, 1998 include $7.5 million of proceeds received
from convertible debentures issued to Nortel Networks to facilitate the
Company's network build-out and upgrade its network infrastructure.
12
The Company is currently seeking to obtain one or more debt financings
aggregating between $5.0 million and $15.0 million to be used for capital
expenditures, working capital and other general corporate purposes. Capital
expenditures in 1999 are expected to be approximately $8.0 million primarily
for the expansion of the Company's network infrastructure and an increase in
the Company's area of service coverage. Subject to its capital resources, the
Company currently expects that its capital expenditures will be substantially
higher in future periods in connection with the expansion of its network
capacity and the increase in its area of service coverage.
The Company believes that funds provided by operations and its existing cash
and cash equivalent balances will be sufficient to meet its anticipated
working capital and capital expenditure requirements for at least the next 12
months. The Company anticipates that it will need to raise significant
additional capital for the period after the next 12 months through public or
private debt or equity financings or other sources in order to execute its
business plan. There can be no assurance that the Company would be able to
obtain such financing on reasonable terms, if at all.
YEAR 2000 CONVERSION
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a result, the
Company's computer programs that have date-sensitive software and software of
companies into which its network is interconnected may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in system
failures or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices or engage in similar normal business activities.
The Company relies on its computer systems for authentication of our
wholesale customers onto its network, e-mail and web services, billing and
customer support activities and network monitoring. The Company is currently
in the process of reviewing its products and services, as well as its
internal management information systems and non-information technology
systems in order to identify and modify those products, services and systems
that are not Year 2000 compliant. A member of the senior management team has
been identified to lead the Year 2000 Compliance Project and the Company has
retained a national consulting firm to assess the Company's Year 2000
Compliance Project. In addition, the Company has contacted each of its
suppliers and significant customers to ascertain their Year 2000 status.
The Company defines the term "Year 2000 Compliance" to mean the assurance
that its customers will not be negatively impacted, nor will there be any
disruption in service, by dates prior to, during, or after the year 2000.
Phase I of this project involves doing a full inventory of all equipment,
computer hardware, and software. Based upon this inventory, all equipment,
computer hardware, and software components have or will be tested for Year
2000 Compliance. Phase II of this project involves evaluation of the results
of these tests. Any equipment, computer hardware, or software component that
is found to be non-compliant will then be upgraded, rewritten, or replaced as
required to achieve compliance. The Company has nearly completed its testing
and has replaced or corrected some non-compliant equipment and software.
As of September 30, 1999, the Company had spent approximately $80,000
correcting incidents of noncompliance, exclusive of internal costs. The
Company anticipates that the additional direct costs associated with its Year
2000 Compliance Project will not exceed $150,000, however, the Company cannot
assure you that its actual costs of achieving compliance will not exceed this
13
amount. While the Company expects to be Year 2000 compliant during the fourth
quarter of 1999, it cannot assure you that it will be able to timely and
successfully modify its services and systems to comply with Year 2000
requirements. Nor can the Company assure that equipment received from
suppliers will comply or that any of its suppliers, peering or transit
partners, such as MCI Worldcom, Nortel Networks or Williams Communications,
will be Year 2000 compliant in a timely manner or that there will not be
problems with technology working together. Furthermore, despite testing
performed by the Company and its suppliers and partners, the Company's
products, services and systems may contain undetected errors or defects
associated with Year 2000 related functions. In the event any material errors
or defects are not detected and fixed, or if third parties cannot timely
provide the Company with products, services or systems that meet Year 2000
requirements, the Company's business, financial condition or results of
operations could be adversely affected. Known or unknown errors or defects
that affect the operation of the Company's products, services or systems
could result in delay or loss of revenue, interruption of network services,
cancellation of customer contracts, diversion of development or network
expansion resources, damage to the Company's reputation and litigation costs.
The Company believes that the worst case scenario related to its services and
systems due to Year 2000 complications would be the failure of its entire
network. This would result in users being unable to connect to the Internet
using the Company's network until such failure was remedied. As a result of
such failure the Company's revenues would be materially adversely affected
and its customers may terminate agreements to use the Company's Internet
access services or otherwise not utilize such services.
The Company does not have a contingency plan in the event its systems fail
due to Year 2000 related problems. The Company cannot assure you that these
or other factors relating to Year 2000 compliance issues will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of the Company's investment activities is the
preservation of principal and liquidity while at the same time maximizing the
income it receives from investments without significantly increasing risk.
The Company currently invests in commercial paper and repurchase agreements
backed by U.S. Treasury securities that are highly liquid, of high-quality
investment grade, and have maturities of less than three months with the
intent to make such funds readily available for operating purposes. As such,
the Company considers its exposure to market risk to be minimal.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) - (c) Changes in Securities
None
(d) Application of Proceeds from Initial Public Offering
On June 1, 1999, the Company completed the initial public offering of
3,500,000 shares of its common stock. Net proceeds to the Company from the
initial public offering were approximately $44.2 million. From May 26, 1999,
the effective date of the initial public offering registration statement, to
September 30, 1999, the net proceeds to the Company have been applied as
follows: (i) $20.0 million for repayment of outstanding indebtedness under
the Company's line of credit, (ii) approximately $21.6 million in temporary
investments in the form of commercial paper and repurchase agreements backed
by U.S. Treasury securities, (iii) approximately $644,000 for capital
expenditures, and (iv) approximately $2.0 million for working capital.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.+ Amendment No. 4 entered into as of October 1, 1999 to
ZipLink- WebTV Network Services Agreement made and
entered into on October 23, 1996 between ZipLink, LLC
and WebTV Networks, Inc., as amended by Amendment No. 1
thereto effective as of May 13, 1997, Amendment No. 2
thereto effective as of February 1, 1998 and Amendment
No. 3 thereto effective as of March 9, 1999.
27. Financial data schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended
September 30, 1999.
-----------------
+ Confidential treatment has been requested for certain portions
of this exhibit pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 1999
ZIPLINK, INC.
By: /s/ Gary P. Strickland
------------------------
Gary P. Strickland
Chief Financial Officer
(Principal Financial and Accounting Officer
and Authorized Signatory)
16
EXHIBIT INDEX
PAGE
NUMBER
Exhibit 10.+ Amendment No. 4 entered into as of October 1, 1999 to ZipLink-WebTV 18
Network Services Agreement made and entered into on October 23, 1996
between ZipLink, LLC and WebTV Networks, Inc., as amended by
Amendment No. 1 thereto effective as of May 13, 1997, Amendment No. 2
thereto effective as of February 1, 1998 and Amendment No. 3 thereto
effective as of March 9, 1999.
Exhibit 27. Financial data schedule 22
--------------
+ Confidential treatment has been requested for certain portions
of this exhibit pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended.
17