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UNITED STATES
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 JUNE 30, 2001
[ ] 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: 0-29255
FASTNET CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
PENNSYLVANIA 23-2767197
------------ ----------
(State or Other Jurisdiction Of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3864 COURTNEY STREET
TWO COURTNEY PLACE, SUITE 130
BETHLEHEM, PA 18017
------------- -----
(Address of Principal Executive Offices) (Zip Code)
(610) 266-6700
--------------
(Registrant's Telephone Number, Including Area Code)
N/A
---
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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
filing requirements for the past 90 days. Yes |X| No | |
The number of shares of the registrant's Common stock outstanding as of
August 14, 2001 was 17,990,947.
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FASTNET CORPORATION
FORM 10-Q
JUNE 30, 2001
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 2000 and
June 30, 2001 (unaudited) ............................................3
Consolidated Statements of Operations (unaudited) - Three and
Six Months Ended June 30, 2000 and 2001 .............................4
Consolidated Statements of Cash Flows (unaudited) - Six months Ended
June 30, 2000 and 2001 ..............................................5
Notes to Unaudited Consolidated Financial Statements .................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...............................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..........17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................................17
Item 2. Changes in Securities and Use of Proceeds ...........................17
Item 3. Defaults Upon Senior Securities .....................................18
Item 4. Submission of Matters to a Vote of Security Holders .................18
Item 5. Other Information ...................................................19
Item 6. Exhibits and Reports on Form 8-K ....................................25
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FASTNET CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
2000 2001
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ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ................................................ $ 5,051,901 $ 4,944,489
Marketable securities .................................................... 18,455,543 7,835,068
Accounts receivable, net of allowance of $776,977 and $858,527 ........... 2,570,154 2,557,267
Other current assets ..................................................... 521,781 1,350,527
------------- -------------
Total current assets ........................................ 26,599,379 16,687,351
PROPERTY AND EQUIPMENT, net ................................................... 19,631,011 18,732,917
INTANGIBLES, net .............................................................. 2,350,274 2,686,793
OTHER ASSETS .................................................................. 396,710 369,081
------------- -------------
$ 48,977,374 $ 38,476,142
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ........................................ $ 17,541 $ 12,874
Current portion of capital lease obligations ............................. 4,681,781 5,330,122
Accounts payable ......................................................... 2,576,087 2,481,576
Accrued expenses ......................................................... 3,804,893 2,076,454
Deferred revenues ........................................................ 3,113,321 3,354,179
Accrued restructuring .................................................... 4,045,643 2,043,263
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Total current liabilities ................................... 18,239,266 15,298,468
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LONG-TERM DEBT ................................................................ 29,746 28,274
CAPITAL LEASE OBLIGATIONS ..................................................... 7,105,678 5,348,907
OTHER LIABILITIES ............................................................. 78,107 95,345
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SHAREHOLDERS' EQUITY:
Preferred stock (10,000,000 shares authorized, no shares
outstanding at December 31, 2000 and June 30, 2001) .................. -- --
Common stock (50,000,000 shares authorized, 15,990,947 and
17,990,947 shares outstanding at December 31, 2000 and June 30, 2001) 64,414,205 66,221,609
Deferred compensation .................................................... (797,354) (537,908)
Note receivable .......................................................... (437,500) (437,500)
Accumulated other comprehensive income ................................... 17,763 1,512
Accumulated deficit ...................................................... (38,672,537) (46,542,565)
Less - Treasury stock, at cost ........................................... (1,000,000) (1,000,000)
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Total shareholders' equity .................................. 23,524,577 17,705,148
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$ 48,977,374 $ 38,476,142
============= =============
The accompanying notes are an integral part of these consolidated statements.
3
FASTNET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 2001 2000 2001
------------- ------------- ------------- -------------
REVENUES .................................. $ 3,168,815 $ 4,043,289 $ 6,199,125 $ 7,703,600
OPERATING EXPENSES:
Cost of revenues ....................... 3,143,893 2,930,508 5,642,010 6,080,406
Selling, general and administrative .... 5,046,754 2,988,527 8,725,725 5,749,120
Depreciation and amortization .......... 1,113,252 1,957,641 2,115,241 3,719,592
------------- ------------- ------------- -------------
9,303,899 7,876,676 16,482,976 15,549,118
------------- ------------- ------------- -------------
Operating loss ......................... (6,135,084) (3,833,387) (10,283,851) (7,845,518)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income ........................ 695,955 171,656 1,014,753 478,625
Interest expense ....................... (135,036) (242,126) (523,115) (499,662)
Other .................................. (1,290) (867) (4,751) (3,473)
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559,629 (71,337) 486,887 (24,510)
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NET LOSS .................................. $ (5,575,455) $ (3,904,724) $ (9,796,964) $ (7,870,028)
============= ============= ============= =============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.37) $ (0.23) $ (0.73) $ (0.48)
============= ============= ============= =============
SHARES USED IN COMPUTING BASIC AND DILUTED
NET LOSS PER COMMON SHARE ................. 14,989,804 17,345,112 13,339,555 16,528,238
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated statements.
4
FASTNET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
2000 2001
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OPERATING ACTIVITIES:
Net loss ............................................................ $ (9,796,964) $ (7,870,028)
Adjustments to reconcile net loss to net cash
used in operating activities -
Depreciation and amortization ................................... 2,115,241 3,719,592
Amortization of debt discount ................................... 255,802 --
Amortization of deferred compensation ........................... 213,650 84,177
Changes in operating assets and liabilities -
Decrease (increase) in assets -
Accounts receivable .................................... (184,948) 95,289
Other assets ........................................... (680,585) (140,934)
Increase (decrease) in liabilities -
Accounts payable and accrued expenses .................. (161,036) (2,955,134)
Deferred revenues ...................................... 398,722 59,775
Accrued restructuring .................................. -- (2,002,380)
Other liabilities ...................................... (779,553) 16,238
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Net cash used in operating activities .............. (8,619,671) (8,993,405)
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INVESTING ACTIVITIES:
Purchases of property and equipment ................................. (3,717,428) (628,524)
Cash acquired in business acquisition ............................... -- 208,821
Sales (purchases) of marketable securities, net ..................... (35,695,013) 10,604,224
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Net cash provided by (used) in investing activities ...................... (39,412,441) 10,184,521
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FINANCING ACTIVITIES:
Proceeds from long-term debt ........................................ 1,027,994 --
Repayments of long-term debt ........................................ (1,017,991) (256,139)
Repayments of capital lease obligations ............................. (791,353) (1,042,389)
Proceeds from issuance of Common stock, net ......................... 49,646,878 --
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Net cash provided by (used in) financing activities 48,865,528 (1,298,528)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................... 833,416 (107,412)
CASH AND CASH EQUIVALENTS, beginning of period ........................... 953,840 5,051,901
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CASH AND CASH EQUIVALENTS, end of period ................................. $ 1,787,256 $ 4,944,489
============= =============
The accompanying notes are an integral part of these consolidated statements.
5
FASTNET CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
FASTNET Corporation and its subsidiaries ("FASTNET" or the "Company"),
a Pennsylvania corporation, has been providing Internet access services to its
customers since 1994. The Company is a growing business Internet communications,
web hosting and colocation provider targeting small and medium sized enterprises
in selected high growth secondary markets in the Northeastern area of the United
States. The Company complements its Internet access services by delivering a
wide range of enhanced products and services that are designed to meet the needs
of its target customer base.
QUARTERLY FINANCIAL INFORMATION AND RESULTS OF OPERATIONS
The accompanying unaudited financial information as of June 30, 2000
and 2001 and for the six months ended June 30, 2000 and 2001 has been prepared
in accordance with accounting principles generally accepted in the United
States. In the opinion of management, all significant adjustments, consisting of
only normal and recurring adjustments, have been included in the accompanying
unaudited financial statements. Operating results for the six months ended June
30, 2001 are not necessarily indicative of the results that may be expected for
the full year. While the Company believes that the disclosures presented are
adequate to make the information not misleading, these Consolidated Financial
Statements should be read in conjunction with the Consolidated Financial
Statements and the notes included in the Company's latest annual report on Form
10-K.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of FASTNET and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States require 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 period. Actual results could differ from those estimates.
LIQUIDITY AND GOING CONCERN
The Company's business plan has required substantial capital to fund
operations, capital expenditures, expansion of sales and marketing capabilities,
and acquisitions. The Company modified its business strategy in October 2000, to
allow it to maintain operations without any additional funding in the
foreseeable future. Simultaneous with the modification of its strategic plan,
the Company recorded a charge primarily related to network and telecommunication
optimization and cost reduction, facility exit costs, realigned marketing
strategy, and involuntary employee terminations. As a result of its modified
strategy, the Company has realized a reduction in its cash consumption both as a
percentage of revenues and in nominal dollars.
6
The Company has incurred losses since inception and expects to continue
to incur losses in 2001. As of June 30, 2001, the Company's accumulated deficit
was $46,542,565. As of June 30, 2001, cash and cash equivalents and marketable
securities were $12,779,557. The Company believes that its existing cash and
cash equivalents and marketable securities will be sufficient to meet its
working capital and capital expenditure requirements into 2002. However, the
Company may be required to seek additional sources of financing. If additional
funds are raised through the issuance of equity securities, existing
shareholders may experience significant dilution. Furthermore, additional
financing may not be available when needed or, if available, such financing may
not be on terms favorable to the Company. If such sources of financing are
insufficient or unavailable, or if the Company experiences shortfalls in
anticipated revenue or increases in anticipated expenses, the Company may need
to make further modifications to its strategic plan. These further modifications
could harm the Company's business, financial condition, or results of
operations.
The Company is subject to those risks associated with companies
operating in the telecommunication services industry. The Company's future
results of operations involve a number of risks and uncertainties. Factors that
could affect the Company's future operating results and cause actual results to
vary materially from expectations include, but are not limited to, dependence on
major customers, risks from competition, new products and technological change,
price and margin pressures and dependence on key personnel.
COMPREHENSIVE INCOME
The Company follows Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires
companies to classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from in the shareholders' equity section of the balance sheet.
For the three and six months ended June 30, 2000 and 2001, comprehensive loss
was as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 2001 2000 2001
------------ ------------ ------------ ------------
Net loss $(5,575,455) $(3,904,724) $(9,796,964) $(7,870,028)
Unrealized gain (loss) on marketable securities (1,896) 5,734 (2,999) 16,251
------------ ------------ ------------ ------------
Comprehensive loss $(5,577,351) $(3,898,990) $(9,799,963) $(7,853,777)
============ ============ ============ ============
REVENUE RECOGNITION
Revenues include one-time and recurring charges to customers for
connectivity services.. One-time charges primarily relate to the initial
connection fees and are recognized as revenue over the life of the customer
contract. The Company recognizes recurring connectivity revenues over the period
the services are provided. The Company offers contracts for Internet solutions
that are generally paid for in advance by customers. Revenue recognition on
these advance payments is deferred at the time of billing and recognized as
revenue ratably over the service period.
Revenues are also derived from the resale of products, including
hardware and software, colocation and web hosting services. The Company sells
its colocation and web hosting and related services for contractual periods
ranging from one to twelve months. These contracts generally are cancelable by
either party without penalty. Revenues from these contracts are recognized
ratably over the contractual period as services are provided. Incremental fees
for excess bandwidth usage and data storage are billed and recognized as
revenues in the period in which customers utilize such services.
MAJOR CUSTOMERS
The Company derived revenues of approximately 24%, 13%, 25% and 14% for
the three months ended June 30, 2000 and 2001 and the six months ended June 30,
2000 and 2001 respectively, from the Company's largest customer, WebTV. FASTNET
expects to discontinue all services to WebTV by September 2001. As of June 30,
2001, the Company had outstanding accounts receivable from this customer of
$312,133. No other customer accounted for more than 10% of total revenues for
the periods presented.
7
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period to conform
to the current period presentation.
(2) INITIAL PUBLIC OFFERING
On February 7, 2000, the Company completed its initial public offering
of 4,000,000 shares of Common stock at a price of $12.00 per share. An
additional 600,000 shares of Common stock were issued pursuant to the exercise
of the underwriters' over-allotment option. The Company received net proceeds of
$49,605,981 from the initial public offering and the exercise of the
over-allotment option.
(3) ACQUISITION
On March 14, 2001, the Company acquired all the assets and
substantially all the liabilities of Cybertech Wireless, Inc., ("Cybertech") a
provider of fixed wireless Internet services headquartered in Rochester, NY, for
2,000,000 shares of common stock valued at $1,875,000. The results of operations
from the acquired business have been included in the consolidated financial
statements from the date of acquisition. The Company recorded the acquisition
using the purchase method of accounting pursuant to Accounting Principles Board
("APB") No. 16, "Accounting for Business Combinations." The excess of the
purchase price over the fair value of net assets acquired was preliminarily
determined to be $1,200,397. This entire amount was preliminarily allocated to
acquired technology and is being amortized on a straight-line basis over 3
years. Amortization expense for the six months ended June 30, 2001, was
$120,124. Pro forma information for Cybertech is not material, and therefore,
has not been presented..
The following table lists noncash assets that were acquired and
liabilities that were assumed as a result of the acquisition:
Noncash assets:
Accounts receivable ....... $ 82,402
Other current assets ...... 660,183
Property and equipment .... 1,395,137
Intangibles ............... 1,200,397
------------
$ 3,338,119
============
Assumed liabilities:
Accounts payable .......... $ 1,013,626
Accrued expenses .......... 226,231
Deferred revenues ......... 181,083
Debt ...................... 250,000
Other liabilities ......... 1,000
------------
1,671,940
------------
Net noncash assets acquired 1,666,179
Purchase price paid in stock ... (1,875,000)
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Cash acquired .................. $ (208,821)
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(4) CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
FASTNET considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
8
Management determines the appropriate classification of its investments
in debt and equity securities at the time of purchase and reevaluates such
determinations at each balance sheet date. As of June 30, 2001, all of the
Company's investments are classified as available for sale and are included in
marketable securities in the accompanying consolidated balance sheets.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and accretion
as well as interest are included in interest income. Realized gains and losses
are included in other income in the accompanying consolidated statements of
operations. The cost of securities sold is based on the specific identification
method.
The Company's investments in debt and equity securities are diversified
among high-credit quality securities in accordance with the Company's investment
policy.
(5) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31, 2000 JUNE 30, 2001
----------------- -------------
Equipment ................... $ 17,811,184 $ 19,068,204
Computer equipment .......... 1,815,519 2,100,725
Computer software ........... 1,584,685 1,700,023
Furniture and fixtures ...... 609,661 645,453
Leasehold improvements ...... 2,961,217 3,225,481
------------- -------------
24,782,266 26,739,886
Less-Accumulated depreciation
and amortization .......... (5,151,255) (8,006,969)
------------- -------------
$ 19,631,011 $ 18,732,917
============= =============
Depreciation and amortization expense for the three months ended June
30, 2000 and 2001 and the six months ended June 30, 2000 and 2001 was $741,375,
$1,483,926, $1,371,489 and $2,855,714, respectively. The net carrying value of
property and equipment under capital leases was $11,604,918 and $8,366,990 at
December 31, 2000 and June 30, 2001, respectively.
(6) INTANGIBLE ASSETS
Intangible assets represent the purchase price of an acquired business
over the fair value of the net tangible assets at the date of acquisition.
Goodwill and intangible assets are being amortized on the straight-line basis
over 3 years. The carrying value of goodwill and other intangibles are evaluated
periodically based on fair values or undiscounted operating cash flow whenever
significant events or changes occur which might impair recovery of recorded
costs. The Company believes that no impairment of goodwill or other intangible
exists at June 30, 2001. Amortization of goodwill and other intangible assets
was approximately $371,877, $473,715, $743,752 and $863,878 for the three months
ended June 30, 2000 and 2001 and the six months ended June 30, 2000 and 2001,
and is included in depreciation and amortization expense (See Note 9).
(7) RESTRUCTURING CHARGE
On October 10, 2000, the Company announced a restructuring to its
business operations and this restructuring plan provided for the suspension of
selling and marketing efforts in 12 of the 20 markets that were operational as
of September 30, 2000 (the "Restructuring Plan.") Selling and marketing efforts
will be focused on markets located in Pennsylvania and New Jersey. The
Restructuring Plan includes redesigning the network architecture intended to
achieve an overall reduction in telecommunication expenses. In conjunction with
the Restructuring Plan, the Company terminated 44 employees.
9
The Company has ceased all sales and marketing activities in the 12
closed markets and is negotiating the exit of the facilities, where practicable.
Telecommunication exit and termination costs relate to contractual obligations
the Company is unable to cancel for network and related costs in the markets
being closed. These costs consist of both Internet backbone connectivity cost,
as well as network and access costs.. Leasehold termination payments includes
carrying costs and rent expense for leased facilities located in non-operational
markets. The Company is actively pursuing both sublease opportunities as well as
full lease terminations.
During the fourth quarter of 2000, the Company recorded a charge for
$5,159,503. Of this restructuring charge, $2,043,263 has not been paid as of
June 30, 2001 and is, accordingly, classified as accrued restructuring. The
Company anticipates that the total amount accrued will be paid in 2001. The
restructuring charges were determined based on formal plans approved by the
Company's management and Board of Directors using the information available at
the time. Management of the Company believes this provision will be adequate to
cover any future costs incurred relating to the restructuring. In addition, the
Company recorded a $3,233,753 asset impairment charge as a result of the
Restructuring Plan in December 2000.
The activity in the restructuring charge accrual during the six months
ended June 30, 2001 is summarized in the table below:
ACCRUED CASH PAYMENTS ACCRUED
RESTRUCTURING DURING THE RESTRUCTURING
CHARGE SIX MONTHS CHARGE
AS OF ENDED AS OF
DECEMBER 31, JUNE 30, JUNE 30,
2000 2001 2001
----------- ----------- -----------
Telecommunications exit and termination fees $2,552,472 $1,133,481 $1,418,991
Leasehold termination costs ................ 708,818 355,565 353,253
Sales and marketing contract terminations .. 522,520 391,362 131,158
Facility exit costs ........................ 261,833 121,972 139,861
----------- ----------- -----------
$4,045,643 $2,002,380 $2,043,263
=========== =========== ===========
(8) LEASE ARRANGEMENT
During the first quarter of 2000, the Company received a credit line of
$3,000,000 from a vendor to purchase equipment. In April 2000, the same vendor
added a second credit facility of $5,000,000 to the original credit facility.
These credit facilities were used to secure computer-related equipment under
three-year capital leases.
In June 1999, the Company entered into a $20,000,000 master equipment
lease agreement with an equipment vendor. Leases under the agreement are payable
in three monthly installments of 0.83% of the value of the equipment leased and
33 monthly installments of 0.0345% of the value of the equipment leased. Capital
lease obligations related to the credit facilities as of June 30, 2001 totaled
$4.1 million. In August 2001, the Company signed a Settlement and Release
10
Agreement to settle the capital lease obligations. Pursuant to the agreement,
the Company made a $2,000,000 cash payment in August 2001 to the vendor in
exchange for full satisfaction of all of the Company's obligations related to
this arrangement. Additionally, the Company received title to the equipment
subject to this lease. An extraordinary gain on early extinguishment of debt
will be recorded in the third quarter of 2001 of the excess capital lease
obligation over the one-time cash payment
(9) RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other
Intangible Assets." SFAS No. 141 requires business combinations initiated after
June 30, 2001 to be accounted for using the purchase method of accounting, and
broadens the criteria for recording intangible assets separate from goodwill.
Recorded goodwill and intangibles will be evaluated against this new criteria
and may result in certain intangibles being subsumed into goodwill, or
alternatively, amounts initially recorded as goodwill may be separately
identified and recognized apart from goodwill. SFAS No. 142 requires the use of
a nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. The provisions of each statement which apply to goodwill
and intangible assets acquired prior to June 30, 2001 will be adopted by the
Company on January 1, 2002. We expect the adoption of these accounting standards
will result in certain of our intangibles being subsumed into goodwill and will
have the impact of reducing our amortization of goodwill and intangibles
commencing January 1, 2002; however, impairment reviews may result in future
periodic write-downs.
(10) NET LOSS PER COMMON SHARE
The Company has presented net loss per share pursuant to SFAS No. 128,
"Earnings per Share." Basic net loss per Common share was computed by dividing
net loss by the weighted average number of shares of Common stock outstanding
during the period. Diluted net loss per Common share reflects the potential
dilution from the exercise or conversion of securities into Common stock, such
as stock options. Outstanding Common stock options and warrants are excluded
from the diluted net loss per Common share calculations as the impact on the net
loss per Common share using the treasury stock method is antidilutive due to the
Company's losses.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH OUR
FINANCIAL STATEMENTS AND THE RELATED NOTES TO THE FINANCIAL STATEMENTS APPEARING
ELSEWHERE IN THIS FORM 10-Q. THE FOLLOWING INCLUDES A NUMBER OF FORWARD-LOOKING
STATEMENTS THAT REFLECT OUR CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND
FINANCIAL PERFORMANCE. WE USE WORDS SUCH AS ANTICIPATES, BELIEVES, EXPECTS,
FUTURE, AND INTENDS, AND SIMILAR EXPRESSIONS TO IDENTIFY FORWARD-LOOKING
STATEMENTS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD- LOOKING
STATEMENTS, WHICH APPLY ONLY AS OF THE DATE OF THIS QUARTERLY REPORT ON FORM
10-Q. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR
OUR PREDICTIONS, INCLUDING, WITHOUT LIMITATION, THOSE FACTORS SET FORTH IN ITEM
5 PART II. THE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A NUMBER OF RISKS AND
UNCERTAINTIES INCLUDING, BUT NOT LIMITED TO, OUR ABILITY TO: OFFER OUR CUSTOMERS
IN THE NEW YORK REGION THE FULL SUITE OF PRODUCTS AND SERVICES THAT WE OFFER OUR
OTHER CUSTOMERS; INCREASE OUR ACCESS AND ENHANCED REVENUES AS A PERCENTAGE OF
OUR TOTAL REVENUES; UTILIZE CYBERTECHS' EMPLOYEE NETWORK KNOWLEDGE TO BUILD OUT
WIRELESS NETWORKS IN SELECTED EXISTING FASTNET MARKETS; EXPAND OUR CUSTOMER
BASE; MIGRATE CUSTOMERS FROM OUR COMPETITORS IF THE INDUSTRY CONTINUES TO
CONSOLIDATE; GROW OUR REVENUES BY CAPTURING MARKET SHARE FROM OTHER PROVIDER AND
THROUGH SALES OF ALTERNATIVE SERVICE OFFERINGS; REDUCE OUR COST OF REVENUES AND
CASH CONSUMPTION RATE; MAINTAIN OPERATIONS WITHOUT ANY ADDITIONAL FUNDING INTO
2002. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. THE INFORMATION CONTAINED HEREIN IS CURRENT ONLY AS
OF THE DATE OF THIS FILING AND WE UNDERTAKE NO OBLIGATION TO UPDATE THE
INFORMATION IN THIS FORM 10-Q IN THE FUTURE.
OVERVIEW
We are an Internet solutions provider offering broadband data
communication services and enhanced products and services to businesses in
selected high growth second tier markets in the Northeastern United States. Our
services include high-speed data and Internet services, data center services,
including managed and unmanaged web hosting and colocation services, small
office home office (SOHO) Internet access, wholesale ISP services, and various
professional services including web design and development. We focus our sales
and marketing efforts on businesses in the markets we serve using the value
proposition of leveraging our technical expertise with world-class customer
care. We approach our customers from an access independent position, providing
connectivity over a variety of available technologies. These include classic
Telco provided point-to-point, frame relay, ISDN, SMDS, ATM, and DSL. We also
offer FASTNET controlled last mile Internet access utilizing wireless transport.
On February 7, 2000, we completed an initial public offering of
4,000,000 shares of Common stock at a price of $12.00 per share. On March 7,
2000, we sold 600,000 shares of Common stock at a price of $12.00 per share
pursuant to the exercise of the underwriter's over-allotment option. We received
aggregate net cash proceeds of $49,605,981 from the initial public offering and
exercise of the over-allotment option.
On March 14, 2001, we acquired all the assets and substantially all the
liabilities of Cybertech Wireless, Inc. ("Cybertech"), a provider of wireless
high speed Internet access, web hosting and SOHO access located in New York
State. Cybertech has deployed wireless networks in Rochester, Syracuse, Albany
and Buffalo. Once the integration is complete, we believe we will be able to
offer our customers in the New York region the full suite of products and
services offered to customers in our Pennsylvania and New Jersey markets. We
will also utilize Cybertech's employee network deployment knowledge to build
out wireless networks in selected existing FASTNET markets.
As of June 30, 2001, we provided Internet access and enhanced services
to approximately 1,033 enterprise customers, 20,501 SOHO customers, and 8,085
customers using our web hosting and colocation services.
12
RECENT DEVELOPMENTS
In August 2001, the Company signed a Settlement and Release Agreement
to settle certain capital lease obligations. Pursuant to the agreement, the
Company made a $2,000,000 cash payment in August 2001 to the lender in exchange
for full satisfaction of all of the Company's obligations related to this
arrangement. Additionally, the Company received title to the equipment subject
to this lease. An extraordinary gain on early extinguishments of debt will be
recorded in the third quarter of 2001 of the excess capital lease obligation
over the one-time cash payment.
OUR HISTORY OF OPERATING LOSSES
We have incurred operating losses in each year since our inception and
expect our losses to continue through December 31, 2001 as we seek to execute
our revised business plan. Our net losses were $1,274,290, $5,601,071 and
$31,140,920 for the years ended December 31, 1998, 1999, 2000 respectively, and
$7,870,028 for the six months ended June 30, 2001.
MODIFICATION OF OUR STRATEGIC PLAN
On October 10, 2000, we modified our strategic plan. This modified plan
called for the suspension of selling and marketing efforts in 12 of the 20
markets that were operational as of September 30, 2000.
Simultaneous with the modification of our strategic plan, we recorded a
restructuring charge of $5,159,503 primarily related to network and
telecommunication optimization and cost reduction, facility exit costs,
realigned marketing strategy, and involuntary employee terminations
The activity in the restructuring charge accrual during the six months
ended June 30, 2001 is summarized in the table below:
ACCRUED CASH PAYMENTS ACCRUED
RESTRUCTURING DURING THE RESTRUCTURING
CHARGE SIX MONTHS CHARGE
AS OF ENDED AS OF
DECEMBER 31, JUNE 30, JUNE 30,
2000 2001 2001
----------- ----------- -----------
Telecommunications exit and termination fees $2,552,472 $1,133,481 $1,418,991
Leasehold termination costs ................ 708,818 355,565 353,253
Sales and marketing contract terminations .. 522,520 391,362 131,158
Facility exit costs ........................ 261,833 121,972 139,861
----------- ----------- -----------
$4,045,643 $2,002,380 $2,043,263
=========== =========== ===========
RESULTS OF OPERATIONS
REVENUES
We provide services to our customers, which we classify in three
general types: Internet access and enhanced services, SOHO Internet access, and
Dialplex virtual private network (VPN) services. We target our Internet access
and enhanced services to businesses located within our active markets. FASTNET
offers a broad range of dedicated access solutions including T-1, T-3, Frame
Relay, SMDS, enterprise class Digital Subscriber Line (DSL) services and fixed
broadband wireless. Our enhanced services are complementary to dedicated
Internet access and include Total Managed Security and the sale of third party
hardware and software. We also classify our dedicated and shared web hosting and
colocation services as part of our enhanced services. Our business plan focuses
on the core service offering of Internet access coupled with add on sales of
enhanced products and services as our customers' Internet needs expand. Access
and enhanced revenues are recognized as services are provided. We expect our
access and enhanced revenues to increase as a percentage of our total revenues
as we continue to focus additional resources on marketing and promoting these
services.
The market for data and related services is becoming increasingly
competitive. We seek to continue to expand our customer base by both increasing
market penetration in our existing markets and by increasing average revenue per
customer by selling additional enhanced products and services. We have had a
historically low churn rate with our dedicated Internet customers. We believe as
the industry consolidates that we will have opportunities to migrate customers
from our competitors as their customers become dissatisfied with the level of
13
service provided by the consolidated organizations. In addition, the recent
economic challenges have caused other providers to either cease operations or
terminate certain product offerings. We seek to grow our revenues by capturing
market share from other providers.
Our SOHO revenues consist of dial-up Internet access to both
residential and small office business customers, SOHO DSL Internet access, and
Integrated Services Digital Network (ISDN) Internet access. Customers using our
SOHO services generally sign service contracts for one to two years. We
typically bill these services in advance of providing services. As a result,
revenues are deferred until such time as services are rendered. In the future as
we execute our business plan, we expect SOHO revenues to decrease as a
percentage of total revenues. We have reduced selling and marketing efforts
targeted to this customer base in response to increased competition from both
free Internet service providers and other providers.
We also offer our customers virtual private network (VPN) solutions.
VPN's allow business customers secure, remote access to their internal networks
through a connection to FASTNET's network. The cost of these services varies
with the scope of the services provided.
COST OF REVENUES
Our cost of revenues primarily consists of our Internet connectivity
charges and network charges. These are our costs of directly connecting to
multiple Internet backbone providers and maintaining our network. Cost of
revenues also includes engineering payroll, creative and programming staff
payrolls for web design and development and, the cost of third party hardware
and software that we sell to our customers, facility rental expense for in
market network infrastructure, and rental expense on network equipment financed
under operating leases.
THE THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2000
REVENUES. Revenues increased by $874,000, or 28%, to $4.0 million for
the three months ended June 30, 2001 from $3.2 million for the three months
ended June 30, 2000. This increase in revenues is primarily a result of an
increase in the number of business customers using our dedicated Internet access
and enhanced products and services. Our dedicated Internet access customer base
grew by 89% from 547 as of June 30, 2000, to 1,033 as of June 30, 2001.
Additionally, revenues increased due to the acquisition of Cybertech in March
2001. Our revenue growth from our business and enterprise customers for the
three months ended June 30, 2001 was partially offset by the following factors.
We lost 33 directly connected business customers using our DSL services due to
the business failure of NorthPoint Communications, Inc. We anticipate that
revenues generated from DSL services will continue to decline as a percentage of
our dedicated access revenues as uncertainty about other national DSL providers
grows following recent announcements. We expect, however, that part of this
decline will be offset by sales of alternative service offerings that we
provide. We experienced a decline in revenues from Microsoft's WebTV Networks,
our largest customer and largest user of our wholesale dial-up service. The
revenues from this customer declined by $263,000 or 34% from $774,000 for the
three months ended June 30, 2000 to $511,000 for the three months ended June 30,
2001. FASTNET expects to discontinue all services to WebTV by September 2001.
Our decision to discontinue service is based on our commitment to improve gross
margins as well as to remain focused on our core markets.
COST OF REVENUES. Cost of revenues decreased by $213,000, or 7%, from
$3.1 million for the three months ended June 30, 2000 to $2.9 million for the
three months ended June 30, 2001. Gross margin increased from 1% for the three
months ended June 30, 2000 to 28% for the three months ended June 30, 2001. The
decrease in cost of revenues and the improvement in gross margin was primarily
due to the reduction in the size and improvement in the efficiency of our
network along with reduced pricing on network elements. Offsetting the decrease
in cost of revenues was the additional cost of revenues associated with the
acquisition of Cybertech. Additionally, the Company reflected credits resulting
from telecommunication providers billing errors of $253,000 during the three
months ended June 30, 2001. If these credits had not been included, gross
margins would have been 21%.
SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general and
administrative expenses decreased by $2.1 million, or 41%, from $5.1 million for
the three months ended June 30, 2000 to $3.0 million for the three months ended
June 30, 2001. Selling, general and administrative personnel decreased by 37
employees from 123 employees at June 30, 2000 to 86 employees at June 30, 2001.
The June 30, 2001 employee count includes those employees that were retained as
part of the Cybertech acquisition. Advertising and promotional expenses
decreased by $756,000 from $880,000 for the three months ended June 30, 2000 to
$124,000 for the three months ended June 30, 2001. This decrease resulted from
the elimination or reduction of advertising expenses in markets where the
Company discontinued its direct field sales efforts. The remaining decline in
selling, general, and administrative expenses relates to the Company's continued
general cost containment efforts as well as internal systems optimizations
during the three months ended June 30 2001.
14
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
by $844,000, or 76%, from $1.1 million for the three months ended June 30, 2000
to $2.0 million for the three months ended June 30, 2001. This increase is due
to additional depreciation relating to networking equipment acquired during 2000
and the six months ended June 30, 2001 and the depreciation on the assets
acquired from the Cybertech transaction. In addition, there was an increase in
amortization related to the Cybertech transaction. Amortization expense related
to Cybertech was $103,000 for the three months ended June 30, 2001.
OTHER INCOME/EXPENSE. Interest income decreased by $524,000 from
$696,000 for the three months ended June 30, 2000 to $172,000 for the three
months ended June 30, 2001. This decrease in interest income resulted from the
increased use of our marketable securities to fund operations coupled with a
decrease in the related investment returns. Interest expense increased by
$107,000 from $135,000 for the three months ended June 30, 2000 to $242,000 for
the three months ended June 30, 2001. The increase in interest expense is
primarily the result of equipment that we financed to expand our network
infrastructure. We expect interest income to decrease as we use our cash and
marketable securities to fund operations. Interest expense is expected to
decrease as a result of the early extinguishments of $4.1 million of capital
lease obligations in August 2001.
THE SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2000
REVENUES. Revenues increased by $1.5 million, or 24%, to $7.7 million
for the six months ended June 30, 2001 from $6.2 million for the six months
ended June 30, 2000. This increase in revenues is primarily a result of an
increase in the number of business customers using our dedicated Internet access
and enhanced products and services. Our dedicated Internet access customer base
grew by 89% from 547 as of June 30, 2000 to 1,033 as of June 30, 2001.
Additionally, revenues increased due to the acquisition of Cybertech in March
2001. Our revenue growth from our business and enterprise customers for the
first six months of 2001 was partially offset by the following factors. We lost
33 directly connected business customers using our DSL services due to the
business failure of Northpoint Communications, Inc. We anticipate that sales of
DSL services will continue to decline as a percentage of our dedicated access
revenues as uncertainty about other national DSL providers grows following
recent announcements. We expect, however, that part of this decline will be
offset by sales of alternative service offerings that we provide. We experienced
a decline in revenues from WebTV, our largest customer and user of our wholesale
dial-up service. The revenues from this customer declined by $450,000 from $1.5
million for the six months June 30, 2000, to $1.1 million for the six months
ended June 30, 2001. FASTNET expects to discontinue all services to WebTV by
September 2001. Our decision to discontinue service is based on our commitment
to improve gross margins as well as to remain focused on our core markets.
COST OF REVENUES. Cost of revenues increased by $438,000, or 8%, from
$5.6 million for the six months ended June 30, 2000 to $6.1 million for the six
months ended June 30, 2001. Gross margin improved by 191% from 9% for the six
months ended June 30, 2000 to 21% for the six months ended June 30, 2001. The
increase in cost of revenues is due to the time lag in the expected benefits
from the reduction in our network infrastructure and the additional
telecommunications services purchased to support the anticipated growth in the
wholesale dial-up subscribers that was not achieved. Also included in this
increase is the cost of revenues of Cybertech which were not included in our
operating results prior to March 15, 2001. The improvement in gross margin is
due to the reduction in the size and improvement in the efficiency of our
network along with reduced pricing on network elements. Offsetting the decrease
in cost of revenues was the additional cost of revenues associated with
acquisition of Cybertech. Additionally, the Company reflected credits resulting
from telecommunication providers billing errors of $253,000 during the six
months ended June 30, 2001. If these credits had not been included, gross
margins would have been 18%
SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general and
administrative expenses decreased by $3.0 million, or 34%, from $8.7 million for
the six months ended June 30, 2000 to $5.7 million for the six months ended June
30, 2001. The decrease is partially due to $705,000 of non-recurring charges
that were included in the six months ended June 30 2000 relating to non-cash
compensation charges. Selling, general and administrative personnel decreased by
37 employees from 123 employees at June 30, 2000 to 86 employees at June 30,
2001. The June 30, 2001 employee count includes those employees that were
retained as part of the Cybertech acquisition. Advertising and promotional
expenses decreased by $913,000 from $1.2 million for the six months ended June
30, 2000, to $263,000 for the six months ended June 30, 2001. This decrease
resulted from the elimination or reduction of these expenses in markets where we
had discontinued our direct field sales efforts. The remaining decline in
selling, general, and administrative expenses relates to general cost
containment efforts the company continued during the first six months of 2001.
15
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
by $1.6 million, or 76%, from $2.1 million for the six months ended June 30,
2000 to $3.7 million for the six months ended June 30, 2001. This increase is
comprised of additional depreciation related to networking equipment acquired
during 2000 and the six months ended June 30, 2001 and the depreciation on the
assets acquired from the Cybertech transaction. In addition, there was an
increase in amortization of $121,000 for the six months ended June 30, 2001
related to the Cybertech acquisition.
OTHER INCOME/EXPENSE. Interest income decreased by $536,000 from $1.0
million for the six months ended June 30, 2000 to $479,000 for the six months
ended June 30, 2001. This decrease in interest income resulted from the use of
marketable securities to fund operations coupled with a decrease in the related
investment returns. Interest expense decreased by $23,000 from $523,000 for the
six months ended June 30, 2000 to $500,000 for the six months ended June 30,
2001. The decrease in interest expense is primarily the result of a one-time
charge for the amortization of debt discount of $255,802 related to the warrant
issued in connection with the January 19, 2000 bridge financing recorded in the
first six months of 2000. We expect interest income to decrease as we use our
cash and marketable securities to fund operations. Interest expense is expected
to decrease as a result of the early extinguishments of $4.1 million of capital
lease obligations in August 2001.
CASH FLOWS ANALYSIS
SIX MONTHS ENDED
JUNE 30,
2000 2001
------------- -------------
Other Financial Data:
Cash flows used in operating activities ............. $ (8,620,000) $ (8,993,000)
Cash flows provided by (used in) investing activities (39,412,000) 10,185,000
Cash flows provided by (used in) financing activities 48,866,000 (1,299,000)
------------- -------------
Net increase (decrease) in cash and cash equivalents $ 834,000 $ (107,000)
============= =============
Cash flows from operating activities increased by $373,000 from cash
used of $8.6 million for the six month period ended June 30, 2000 to cash used
of $9.0 million for the six month period ended June 30, 2001. This increase in
cash used in operations is primarily the result of payments made to reduce our
accrued restructuring charge, partially offset by a reduction in net loss.
Cash flows from investing activities increased by $49.6 million from
cash used of $39.4 million for the six months ended June 30, 2000 to cash
provided of $10.2 million for the six months ended June 30, 2001. This increase
in cash flows is primarily attributable to the Company's sales rather than
purchases of marketable securities and a decrease in purchases of property and
equipment.
Cash flows from financing activities decreased by $50.2 million from
cash provided of $48.9 million for the six months ended June 30, 2000 to cash
used of $1.3 million during the six months ended June 30, 2001. The decrease in
cash flows from financing activities is primarily the result of the cash inflows
from the Company's Initial Public Offering and exercise of the underwriters'
over allotment partially offset by an increase in payment for capital lease
obligations.
LIQUIDITY AND CAPITAL RESOURCES
The business plan we executed at the time of our IPO required
substantial capital to fund operations, capital expenditures, expansion of sales
and marketing capabilities, and acquisitions. We modified our business strategy
in October 2000 to allow us to maintain operations without any additional
funding into 2002. Simultaneous with the modification of our strategic plan, we
recorded a non-recurring charge primarily related to network and
telecommunication optimization and cost reduction, facility exit costs,
realigned marketing strategy, and involuntary employee terminations. These
actions have, to date, resulted in a reduction of our cash consumption rate. As
of June 30, 2001, we had $12.8 million in cash and marketable securities. While
we may pursue additional sources of funding, we believe that the cash and
investments we have available will be sufficient to fund operations into 2002.
During the fourth quarter of 2000, the Company recorded a charge for
$5,159,503. Of this restructuring charge, $2,043,263 has not been paid as of
June 30, 2001 and is, accordingly, classified as accrued restructuring. The
Company anticipates that the entire amount accrued will be paid in 2001. The
restructuring charges were determined based on formal plans approved by the
Company's management and Board of Directors using the information available at
the time. Management of the Company believes this provision will be adequate to
cover any future costs incurred relating to the restructuring.
16
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAF No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other
Intangible Assets." SFAS No. 141 required business combinations initiated after
June 30, 2001 to be accounted for using the purchase method of accounting, and
broadens the criteria for recording intangible assets separate from goodwill.
Recorded goodwill and intangibles will be evaluated against this new criteria
and may result in certain intangibles being subsumed into goodwill, or
alternatively, amounts initially recorded as goodwill may be separately
identified and recognized apart from goodwill. SFAS No. 142 requires the use of
a nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. The provisions of each statement which apply to goodwill
and intangible assets acquired prior to June 30, 2001 will be adopted by the
Company on January 1, 2002. We expect the adoption of these accounting standards
will result in certain of our intangibles being subsumed into goodwill and will
have the impact of reducing our amortization of goodwill and intangibles
commencing January 1, 2002; however, impairment reviews may result in future
periodic write-downs.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK.
Our financial instruments primarily consist of debt. All of our debt
instruments bear interest at fixed rates. Therefore, a change in interest rates
would not affect the interest incurred or cash flows related to our debt. A
change in interest rates would, however, affect the fair value of the debt. The
following sensitivity analysis assumes an instantaneous 100 basis point move in
interest rates from levels at June 30, 2001 with all other factors held
constant. A 100 basis point increase or decrease in market interest rates would
result in a change in the value of our debt of less than $50,000 at June 30,
2001. Because our debt is neither publicly traded nor redeemable at our option,
it is unlikely that such a change would impact our financial statements or
results of operations.
All of our transactions are conducted using the United States dollar.
Therefore, we are not exposed to any significant market risk relating to
currency rates
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not involved currently in any legal proceedings that either
individually or taken as a whole, are likely to have a material adverse effect
on our business, financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) On March 14, 2001 we issued 2,000,000 share of our Common
stock to Cybertech Wireless Inc., in connection with our
purchase of the assets and substantially all of the
liabilities of Cybertech. This sale was made under the
exemption from registration provided under Section 4(2) of the
Securities Act.
(d) Use of Proceeds of the Initial Public Offering
Our initial public offering, or IPO, was completed in February 2000.
The proceeds received net of underwriting discounts and commissions, and other
transaction costs were approximately $49,606,000.
From the effective date of the Registration Statement through June 30,
2001, we utilized the proceeds from the initial public offering and
underwriters' over-allotment as follows:
17
Net IPO Proceeds ........................ $ 49,606,000
----------------
Repayment of debt ....................... 4,723,000
Payment of other obligations ............ 794,000
Capital Expenditures .................... 10,282,000
Working Capital Requirements ............ 23,605,000
Total remaining ......................... $ 10,202,000
================
Unused proceeds of the initial public offering are currently invested
in debt and equity securities diversified among high-credit quality securities
in accordance with our investment policy.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER
We held our Annual Meeting of Stockholders June 22, 2001. Following are
descriptions of the matters voted on and the results of such meeting:
Votes Votes Votes Broker
For Against Withheld Non-votes
--- ------- -------- ---------
1. Election of Directors:
Stephen A. Hurly 13,961,349 -- 210,745 --
Sonny C. Hunt 13,782,734 -- 389,360 --
Douglas L. Michels 13,958,224 -- 213,870 --
David J. Farber 13,863,349 -- 308,745 --
R. Barry Borden 13,858,314 -- 313,780 --
Alan S. Kessman 13,959,384 -- 212,710 --
David K. Van Allen 13,681,914 -- 490,180 --
2. Amendment of the Company's
Equity Compensation Plan to
increase the number of author-
ized shares of Common Stock
reserved for issuance from
3,000,000 to 4,000,000 10,793,795 309,659 30,950 --
3. Approval of the Company's 2001
Employee Stock Purchase Plan 10,982,784 121,455 30,135 --
4. Proposal to ratify the appointment
of Arthur Andersen, LLP as inde-
pendent auditors of the Company
for the year ending December 31,
2001 14,119,595 25,130 27,369 --
18
ITEM 5. OTHER INFORMATION
FACTORS AFFECTING FUTURE OPERATING RESULTS
WE ONLY BEGAN TO IMPLEMENT OUR REVISED STRATEGIC BUSINESS PLAN IN OCTOBER 2000.
AS A RESULT, YOU MAY NOT BE ABLE TO EVALUATE OUR BUSINESS PROSPECTS BASED ON OUR
HISTORICAL RESULTS.
In October 2000, we announced our revised business plan and strategy in
response to changes in market conditions, the low probability of obtaining
additional financing for the existing business plan, and competitive factors.
Consequently, the evaluation of our future business prospects is difficult
because our historical results for the time that we were implementing our
revised strategy is limited. Our success will depend upon:
o our ability to attract and sell additional products and
services to our target customers;
o our ability to enter into selected product or service
partnerships; and
o our ability to open new markets through acquisitions of
financially sound ISPs within these new markets.
Our ability to successfully implement our business strategy, and the
expected benefits to be obtained from our strategy, may be adversely affected by
a number of factors, such as unforeseen costs and expenses, technological
change, economic downturns, changes in capital markets, competitive factors or
other events beyond our control.
ON OCTOBER 10, 2000, WE INITIATED OUR REVISED STRATEGIC PLAN. IF WE ARE UNABLE
TO ACHIEVE THE EXPECTED COST SAVINGS AND REDUCTION IN CASH CONSUMPTION UNDER
THIS PLAN, WE MAY HAVE TO FURTHER MODIFY OUR BUSINESS PLAN AND OUR BUSINESS
COULD BE HARMED.
If we do not achieve the expected cost savings and reduction in cash
consumption under this plan, then we will need to seek additional capital from
public or private equity or debt sources to fund our business plan. Given the
existing capital market conditions, it may be difficult or impossible to raise
additional capital in the public market in the future. In addition, we cannot be
certain that we will be able to raise additional capital through debt or private
financing at all or on terms acceptable to us. Raising additional equity capital
and issuing shares of Common stock for acquisitions likely will dilute current
shareholders. If alternative sources of financing are insufficient or
unavailable, we may be required to further modify our growth and operating plans
in accordance with the extent of available financing.
IF WE ARE UNABLE TO INTEGRATE CYBERTECH WIRELESS INC. WITH FASTNET, WE MAY NOT
REALIZE OUR PLANNED COST SAVINGS.
We must be able to integrate the networks of FASTNET and Cybertech to
gain the efficiencies we hope to achieve. We also must be able to retain and
manage key personnel, integrate the back-office operations of Cybertech into the
back-office operations of FASTNET, and expand Cybertech's product portfolio to
include wireline connectivity services and enhanced products and services or we
may not be able to achieve the operating efficiencies we anticipate.
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999, AND THE SIX MONTHS ENDED JUNE
30, 2001 OUR LARGEST CUSTOMER ACCOUNTED FOR 20%, 21%, AND 14% OF OUR TOTAL
REVENUES. WE PLAN TO TERMINATE SERVICE TO THIS CUSTOMER BEGINNING SEPTEMBER
2001.
While the termination of our relationship with WebTV, effective
September 2001, will reduce our quarter over quarter revenue growth rate and may
contribute to a negative quarter over quarter growth rate for the third quarter
of 2001, we believe that we have proactively planned to eliminate the expenses
associated with this low margin revenue stream, thereby preventing any material
adverse effect on our gross margins. If we are unable to completely eliminate
all of the expense related to this revenue stream then our continued expected
improvements in gross margin, which is the focus of our revised business model,
could be adversely effected.
19
WE HAVE A HISTORY OF LOSSES AND ARE UNABLE AT THIS TIME TO PREDICT IF AND WHEN
WE WILL BE ABLE TO TURN PROFITABLE.
We have incurred net losses since our inception. For the years ended
December 31, 1998, 1999, 2000, and the six months ended June 30, 2001 we had
losses of $1.3 million, $5.6 million $31.1 million, and $7.9 million
respectively.
In order to achieve profitability, we must develop and market products
and services that gain broad commercial acceptance by our target customers in
our target markets. We cannot give any assurances that our products and services
will ever achieve broad commercial acceptance among our customers. Although our
revenues have increased each year since we began operations, we cannot give any
assurances that this growth in annual revenues will continue or lead to our
profitability in the future. Moreover, our revised business plan may not enable
us to reduce expenses or increase revenues sufficiently to permit us to turn
profitable. Therefore, we cannot predict with certainty whether we will be able
to obtain or sustain positive operating cash flow or that our revised business
plan will allow us to generate positive cash flow into the future.
IT IS UNLIKELY THAT INVESTORS WILL RECEIVE A RETURN ON OUR COMMON STOCK THROUGH
THE PAYMENT OF CASH DIVIDENDS.
We have never declared or paid cash dividends on our Common stock and
have no intention of doing so in the foreseeable future. We have had a history
of losses and expect to operate at a net loss for the next several years. These
net losses will reduce our stockholders' equity. For the six months ended June
30, 2001, we had a net loss of $7.9 million. We cannot predict what the value of
our assets or the amount of our liabilities will be in the future.
OUR OPERATING RESULTS FLUCTUATE DUE TO A VARIETY OF FACTORS AND ARE NOT A
MEANINGFUL INDICATOR OF FUTURE PERFORMANCE.
Our operating results have fluctuated in the past and may fluctuate
significantly in the future, depending upon a variety of factors, including:
o the timing of costs including those relating to construction
of infrastructure and acquisitions to enter a new market;
o the timing of the introduction of new products and services;
o changes in pricing policies and product offerings by us or our
competitors;
o fluctuations in demand for Internet access and enhanced
products and services; and
o potential customers perception of the financial soundness of
the Company.
Therefore, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful and cannot be relied upon as
indicators of future performance. If our operating results in any future period
fall below the expectations of analysts and investors, the market price of our
Common stock would likely decline.
THE MARKET PRICE AND TRADING VOLUME OF OUR COMMON STOCK ARE VOLATILE.
The market price of our Common stock has fluctuated significantly in
the past, and is likely to continue to be highly volatile. In addition, the
trading volume in our Common stock has fluctuated, and significant price
variations can occur as a result. We cannot assure you that the market price of
our Common stock will not fluctuate or continue to decline significantly in the
future. In addition, the U.S. equity markets have from time to time experienced
significant price and volume fluctuations that have particularly affected the
market prices for the stocks of small capitalization, technology and
telecommunications companies. These broad market fluctuations may materially
adversely affect the market price of our Common stock in the future. Such
variations may be the result of changes in our business, operations or
prospects, announcements of technological innovations and new products by
competitors, new contractual relationships with strategic partners by us or our
competitors, proposed acquisitions by us or our competitors, financial results
that fail to meet public market analyst expectations, regulatory considerations
and domestic and international market and economic conditions.
WE MAY BE UNABLE TO MAINTAIN THE STANDARDS FOR LISTING ON THE NASDAQ NATIONAL
MARKET, WHICH COULD MAKE IT MORE DIFFICULT FOR INVESTORS TO DISPOSE OF OUR
COMMON STOCK AND COULD SUBJECT OUR COMMON STOCK TO THE "PENNY STOCK" RULES.
Our Common stock is listed on the Nasdaq National Market. Nasdaq
requires listed companies to maintain standards for continued listing, including
either a minimum bid price for shares of a company's stock or a minimum tangible
net worth. For example, Nasdaq requires listed companies to maintain a minimum
bid price of at least $1.00.. If a company's stock does not close with a minimum
bid price of at least a $1.00 for 30 consecutive trading days, then the
registrant will be out of compliance with one aspect of the Nasdaq continued
listing standard. In this event, the Nasdaq's rules allow the registrant 90 days
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in which to regain compliance with the Nasdaq's listing standard by having its
stock close with a minimum bid price of $1.00 or more for ten consecutive
trading days. If a registrant is unable to cure the non-compliance within 90
days, then the company will be subject to delisting, pending an opportunity to
appeal. Maintaining compliance with each aspect of the Nasdaq's listing
stanadars is an on-going process for each listed company. If we were to be
delisted from the Nasdaq National Market then trading in our stock would then be
conducted on the Nasdaq SmallCap Market unless we are unable to meet the
requirements for inclusion. If we were unable to meet the requirements for
inclusion in the SmallCap Market, our Common stock would be traded on an
electronic bulletin board established for securities that do not meet the Nasdaq
listing requirements or in quotations published by the National Quotation
Bureau, Inc. that are commonly referred to as the "pink sheets". As a result, it
could be more difficult to sell, or obtain an accurate quotation as to the price
of our Common stock and certain institutional investors might not be able to
hold our Common stock.
In addition, if our Common stock were delisted, it would be subject to
the so-called penny stock rules. The SEC has adopted regulations that define a
"penny stock" to be any equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules impose additional sales practice
requirements on broker-dealers subject to certain exceptions.
For transactions covered by the penny stock rules, a broker-dealer must
make a special suitability determination for the purchaser and must have
received the purchaser's written consent to the transaction prior to the sale.
The penny stock rules also require broker-dealers to deliver monthly statements
to penny stock investors disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks. Prior
to the transaction, a broker-dealer must provide a disclosure schedule relating
to the penny stock market. In addition, the broker-dealer must disclose the
following:
o commissions payable to the broker-dealer and the registered
representative; and
o current quotations for the security as mandated by the
applicable regulations.
If our Common stock were delisted and determined to be a "penny stock,"
a broker-dealer may find it to be more difficult to trade our Common stock, and
an investor may find it more difficult to acquire or dispose of our Common stock
in the secondary market.
FUTURE SALES OF OUR COMMON STOCK COULD REDUCE THE PRICE OF OUR STOCK AND OUR
ABILITY TO RAISE CASH IN FUTURE EQUITY OFFERINGS.
No prediction can be made as to the effect, if any, that future sales
of shares of Common stock or the availability for future sale of shares of
Common stock or securities convertible into or exercisable for our Common stock
will have on the market price of our Common stock. Sale, or the availability for
sale, of substantial amounts of Common stock by existing stockholders under Rule
144, through the exercise of registration rights or the issuance of shares of
Common stock upon the exercise of stock options or warrants, or the perception
that such sales or issuances could occur, could adversely affect prevailing
market prices for our Common stock and could materially impair our future
ability to raise capital through an offering of equity securities.
IN THE FUTURE, WE MAY BE UNABLE TO EXPAND OUR SALES, TECHNICAL SUPPORT AND
CUSTOMER SUPPORT INFRASTRUCTURE, WHICH MAY HINDER OUR ABILITY TO GROW AND MEET
CUSTOMER DEMANDS.
On October 10, 2000, we terminated 44 employees across all departments
of the Company. This involuntary termination may make it more difficult to
attract and retain employees. If, in the future, we are unable to expand our
sales force and our technical support and customer support staff, our business
would be harmed because this would limit our ability to obtain new customers,
sell products and services and provide existing customers with a high level of
technical support.
WE COULD FACE SIGNIFICANT AND INCREASING COMPETITION IN OUR INDUSTRY, WHICH
COULD CAUSE US TO LOWER PRICES RESULTING IN REDUCED REVENUES.
The growth of the Internet access and related services market and the
absence of substantial barriers to entry have attracted many start-ups as well
as existing businesses from the telecommunications, cable, and technology
industries. As a result, the market for Internet access and related services is
very competitive. We anticipate that competition will continue to intensify as
the use of the Internet grows. Current and prospective competitors include:
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o national Internet service providers and regional and local
Internet service providers, including providers of free
dial-up Internet access;
o national and regional long distance and local
telecommunications carriers;
o cable operators and their affiliates;
o providers of Web hosting, colocation and other Internet-based
business services;
o computer hardware and other technology companies that bundle
Internet connections with their products; and
o terrestrial wireless and satellite Internet service providers.
We believe that the number of competitors we face is significant and is
constantly changing. As a result, it is extremely difficult for us to accurately
identify and quantify our competitors. In addition, because of the constantly
evolving competitive environment, it is extremely difficult for us to determine
our relative competitive position at any given time.
As a result of vertical and horizontal integration in the industry, we
currently face and expect to continue to face significant pricing pressure and
other competition in the future. Advances in technology and changes in the
marketplace and the regulatory environment will continue, and we cannot predict
the effect that ongoing or future developments may have on us or the pricing of
our products and services.
Many of our competitors have significantly greater market presence,
brand-name recognition, and financial resources than we do. In addition, all of
the major long distance telephone companies, also known as interexchange
carriers, offer Internet access services. The recent reforms in the federal
regulation of the telecommunications industry have created greater opportunities
for local exchange carriers, including incumbent local exchange carriers and
competitive local exchange carriers, to enter the Internet access market. In
order to address the Internet access requirements of the current business
customers of long distance and local carriers, many carriers are integrating
horizontally through acquisitions of or joint ventures with Internet service
providers, or by wholesale purchase of Internet access from Internet service
providers. In addition, many of the major cable companies and other alternative
service providers, such as those companies utilizing wireless and satellite
based service technologies, have announced their plans to offer Internet access
and related services. Accordingly, we may experience increased competition from
traditional and emerging telecommunications providers. Many of these companies,
in addition to their substantially greater network coverage, market presence,
and financial, technical and personnel resources, also already provide
telecommunications and other services to many of our target customers.
Furthermore, they may have the ability to bundle Internet access with basic
local and long distance telecommunications services, which we do not currently
offer. This bundling of services may harm our ability to compete effectively
with them and may result in pricing pressure on us that would reduce our
earnings.
OUR GROWTH DEPENDS ON THE CONTINUED ACCEPTANCE BY SMALL AND MEDIUM SIZED
ENTERPRISES OF THE INTERNET FOR COMMERCE AND COMMUNICATION.
If the use of the Internet by small and medium sized enterprises for
commerce and communication does not continue to grow, our business and results
of operations will be harmed. Our products and services are designed primarily
for the rapidly growing number of business users of the Internet. Commercial use
of the Internet by small and medium sized enterprises is still in its early
stages. Despite growing interest in the commercial uses of the Internet, many
businesses have not purchased Internet access and related services for several
reasons, including:
o lack of inexpensive, high-speed connection options;
o a limited number of reliable local access points for business
users;
o lack of affordable electronic commerce solutions;
o limited internal resources and technical expertise;
o inconsistent quality of service; and
o difficulty in integrating hardware and software related to
Internet based business applications.
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In addition, we believe that many Internet users lack confidence in the
security of transmitting their data over the Internet, which has hindered
commercial use of the Internet. Technologies that adequately address these
security concerns may not be developed.
The adoption of the Internet for commerce and communication
applications, particularly by those enterprises that have historically relied
upon alternative means, generally requires the understanding and acceptance of a
new way of conducting business and exchanging information. In particular,
enterprises that have already invested substantial resources in other means of
conducting commerce and exchanging information may be reluctant or slow to adopt
a new strategy that may make their existing personnel and infrastructure
obsolete.
OUR SUCCESS DEPENDS ON THE CONTINUED DEVELOPMENT OF INTERNET INFRASTRUCTURE.
The recent growth in the use of the Internet has caused periods of
performance degradation, requiring the upgrade by providers and other
organizations with links to the Internet of routers and switches,
telecommunications links and other components forming the infrastructure of the
Internet. We believe that capacity constraints caused by rapid growth in the use
of the Internet may impede further development of the Internet to the extent
that users experience increased delays in transmission or reception of data or
transmission errors that may corrupt data. Any degradation in the performance of
the Internet as a whole could impair the quality of our products and services.
As a consequence, our future success will be dependent upon the reliability and
continued expansion of the Internet.
WE RELY ON A LIMITED NUMBER OF VENDORS AND SERVICE PROVIDERS, SOME OF WHICH ARE
OUR COMPETITORS. THIS MAY ADVERSELY AFFECT THE FUTURE TERMS OF OUR
RELATIONSHIPS.
We rely on other companies to supply key components of our network
infrastructure, which are available only from limited sources. For example, we
currently rely on routers, switches and remote access devices from Lucent
Technologies, Inc., Cisco Systems, Inc. and Nortel Networks Corporation. We
could be adversely affected if any of these products were no longer available on
commercially reasonable terms, or at all. From time to time, we experience
delays in the delivery and installation of these products and services, which
can lead to the loss of existing or potential customers. We do not know that we
will be able to obtain such products in the future cost-effectively and in a
timely manner. Moreover, we depend upon MCI WorldCom, Inc., and other
telecommunication companies as our backbone providers. These companies also sell
products and services that compete with ours. Our agreements with our primary
backbone providers are fixed price contracts with terms ranging from one to
three years. Our backbone providers operate national or international networks
that provide data and Internet connectivity and enable our customers to transmit
and receive data over the Internet. Our relationship with these backbone
providers could be adversely affected as a result of our direct competition with
them. Failure to renew these relationships when they expire or enter into new
relationships for such services on commercially reasonable terms or at all could
harm our business, financial condition and results of operations.
WE NEED TO RECRUIT AND RETAIN QUALIFIED PERSONNEL OR OUR BUSINESS COULD BE
HARMED.
Competition for highly qualified employees in the Internet service
industry is intense because there are a limited number of people with an
adequate knowledge of and significant experience in our industry. Our success
depends largely upon our ability to attract, train and retain highly skilled
management, technical, marketing and sales personnel and upon the continued
contributions of such people. Since it is difficult and time consuming to
identify and hire highly qualified employees, we cannot assure you of our
ability to do so. Our failure to attract additional highly qualified personnel
could impair our ability to grow our operations and services to our customers.
WE COULD EXPERIENCE SYSTEM FAILURES AND CAPACITY CONSTRAINTS, WHICH COULD RESULT
IN THE LOSS OF OUR CUSTOMERS OR LIABILITY TO OUR CUSTOMERS.
The continued operation of our network infrastructure depends upon our
ability to protect against:
o downtime due to malfunction or failure of hardware or
software;
o overload conditions;
o power loss or telecommunications failures;
o human error;
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o natural disasters; and
o sabotage or other intentional acts of vandalism.
Any of these occurrences could result in interruptions in the services
we provide to our customers and require us to spend substantial amounts of money
repairing and replacing equipment. In addition, we have finite capacity to
provide service to our customers under our current infrastructure. Because
utilization of our network is constantly changing depending upon customer use at
any given time, we maintain a level of capacity that we believe to be adequate
to support our current customer base. If we obtain additional customers in the
future, we will need to increase our capacity to maintain the quality of service
that we currently provide our customers. If customer usage exceeds our capacity
and we are unable to increase our capacity in a timely manner, our customers may
experience interruptions in or decreases in quality of the services we provide.
As a result, we may lose current customers or incur significant liability to our
customers for any damages they suffer due to any system downtime as well as the
possible loss of customers.
OUR NETWORK MAY EXPERIENCE SECURITY BREACHES, WHICH COULD DISRUPT OUR SERVICES.
Our network infrastructure may be vulnerable to computer viruses,
break-ins and similar disruptive problems caused by our customers or other
Internet users. Computer viruses, break-ins or other problems caused by third
parties could lead to interruptions, delays or cessation in service to our
customers. There currently is no existing technology that provides absolute
security, and the cost of minimizing these security breaches could be
prohibitively expensive. We may face liability to customers for such security
breaches. Furthermore, such incidents could deter potential customers and
adversely affect existing customer relationships.
WE COULD FACE POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH OUR
NETWORK.
It is possible that claims could be made against Internet service
providers in connection with the nature and content of the materials
disseminated through their networks. The law relating to the liability of
Internet service providers due to information carried or disseminated through
their networks is not completely settled. While the U.S. Supreme Court has held
that content transmitted over the Internet is entitled to the highest level of
protection under the U.S. Constitution, there are federal and state laws
regarding the distribution of obscene, indecent, or otherwise illegal material,
as well as material that violates intellectual property rights which may subject
us to liability. Several private lawsuits have been brought in the past and are
currently pending against other entities which seek to impose liability upon
Internet service providers as a result of the nature and content of materials
disseminated over the Internet. If any of these actions succeed, we might be
required to respond by investing substantial resources or discontinuing some of
our service or product offerings, which could harm our business.
NEW LAWS AND REGULATIONS GOVERNING OUR INDUSTRY COULD HARM OUR BUSINESS.
We are subject to a variety of risks that could materially affect our
business due to the rapidly changing legal and regulatory landscape governing
Internet access providers. For example, the Federal Communications Commission
currently exempts Internet access providers from having to pay per-minute access
charges that long-distance telecommunications providers pay local telephone
companies for the use of the local telephone network. In addition, Internet
access providers are currently exempt from having to pay a percentage of their
gross revenues as a contribution to the federal universal service fund. Should
the Federal Communications Commission eliminate these exemptions and impose such
charges on Internet access providers, this would increase our costs of providing
dial-up Internet access service and could have a material adverse effect on our
business, financial condition and results of operations.
We face risks due to possible changes in the way our suppliers are
regulated which could have an adverse effect on our business. For example, most
states require local exchange carriers to pay reciprocal compensation to
competing local exchange carriers for the transport and termination of Internet
traffic. However, in February 1999, the Federal Communications Commission
concluded that at least a substantial portion of dial-up Internet traffic is
jurisdictionally interstate, which could ultimately eliminate the reciprocal
compensation payment requirement for Internet traffic. Should this occur our
telephone carriers might no longer be entitled to receive payment from the
originating carrier to terminate traffic delivered to us. The Federal
Communications Commission has launched an inquiry to determine a mechanism for
covering the costs of terminating calls to Internet service providers, but in
the interim state commissions will determine whether carriers will receive
compensation for such calls. If the new compensation mechanism that may be
adopted by the Federal Communications Commission increases the costs to our
telephone carriers for terminating traffic to us, or if states eliminate
reciprocal compensation payments, our telephone carriers may increase the price
of service to us in order to recover such costs. This could have a material
adverse effect on our business, financial condition and results of operations.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) No reports were filed on Form 8-K during the three month period
ended June 30, 2001.
SIGNATURES
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.
FASTNET Corporation:
Date: August 14, 2001 /s/ Stephen A. Hurly
---------------------------
Stephen A. Hurly
Chief Executive Officer
Date: August 14, 2001 /s/ Stanley F. Bielicki
---------------------------
Stanley F. Bielicki
Chief Financial Officer
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