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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: December 31, 2000
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 0-29255
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FASTNET Corporation
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2767197
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Two Courtney Place, Suite 130, 18017
3864 Courtney Street, Bethlehem, PA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (610) 266-6700
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Securities registered pursuant to Section 12(b) of the Act: None
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Title of Each Class Name of Each Exchange
None on Which Registered
Securities registered pursuant to Section 12(g) of the Act: ________
Common Stock, no par value
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the closing price of the Common Stock on March 29,
2001 as reported on the Nasdaq National Market, was approximately $8.4 million.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded from this
computation in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 29, 2001, the Registrant had outstanding 17,990,947 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-K
Report, which Proxy Statement is to be filed within 120 days after the end
of the Registrant's fiscal year ended December 31, 2000.
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Index FASTNET Corporation
Page
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Part I.
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 18
Item 3. Legal Proceedings.............................................. 19
Item 4. Submission of Matters to a Vote of
Security Holders............................................ 19
Part II.
Item 5. Market for the Registrant's Securities and
Related Stockholder Matters................................. 19
Item 6. Selected Financial Data........................................ 21
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 22
Item 7a. Qualitative and Quantitative Disclosure about Market Risk...... 29
Item 8. Financial Statements and Supplementary Data.................... 29
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................... 29
Part III.
Item 10. Directors and Executive Officers of the Registrant............. 30
Item 11. Executive Compensation......................................... 30
Item 12. Security Ownership of Certain Beneficial Owners
and Management.............................................. 30
Item 13. Certain Relationships and Related Transactions................. 30
Part IV.
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K......................................... 31
Exhibit Index
Signatures
PART I.
FORWARD LOOKING STATEMENTS
From time to time, FASTNET may report, through its press releases and/or
Securities and Exchange Commission filings, certain matters that would be
characterized as forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act") that are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected. Certain of these risks and uncertainties are beyond
management's control. The forward-looking statements in this report include
statements relating to our ability to: have additional market opportunities to
sell fixed broadband wireless Internet access services; expand into our idled
market-based facilities in New York State as a result of the acquisition of the
assets of Cybertech Wireless, Inc.; use our consultative field selling approach
in our eight markets to allow us to capitalize on our competitive advantages and
strong brand; expand into nearby markets through acquisitions; use our technical
expertise in deploying and tailoring fixed broadband wireless access; add to and
modify existing product and service offerings to our existing customers;
increase our gross margin due to a reduction in expenses; fund operations
through 2001 and into the future without raising additional cash; cause access
and enhance revenues to increase as a percentage of our total revenues; expand
our customer base; generate future revenue primarily from our dedicated Internet
access and web hosting product lines; utilize Cybertech's network deployment
knowledge to build out wireless networks in selected existing FASTNET markets;
and execute our business plan and decrease SOHO revenues as a percentage of
total revenues. Readers are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties,
and that actual results may differ materially from those in the forward-looking
statements as a result of various factors. The information contained in this
report identifies certain important factors that could cause such differences,
beginning on page 12 below and elsewhere in this report.
ITEM 1. BUSINESS.
OVERVIEW
We have been providing Internet access services to our customers since our
incorporation in 1994. We initially attracted many of our customers by providing
them Internet access. We differentiate ourselves from our competition by
providing prospective customers with a consultative problem solving approach to
harnessing the power of the Internet for their specific needs. We further
differentiate ourselves by combining world-class customer support with technical
expertise. We are a full service provider supplementing our dedicated Internet
access services by offering enhanced products and services that are designed to
meet the expanding needs of our customers and increase our revenue per customer.
The services we provide include:
o Internet access services;
o Total Managed Security;
o Colocation;
o Web hosting services;
o Web design and development;
o Professional network and software design services; and
o Virtual private networks.
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We classify our revenue into three major categories: revenues from the sale
of enterprise level Internet access and enhanced products and services, revenues
from the sale of Internet access to small office and home office ("SOHO")
customers, and revenues from the sales of Internet access to customers that use
our Dialplex Virtual Private Network (VPN or wholesale Internet access
services). Our Internet access and enhanced products and services revenue is
made up of revenue from high speed Internet access, web hosting services, web
design services, colocation services, and professional and consulting services.
SOHO revenue is generated from customers that are connected to FASTNET's network
using dialup modems, digital ISDN circuits or residential speed DSL. Our
Dialplex service revenue is generated from customers using our network to
provide connectivity and Internet access to their subscribers.
RESTRUCTURING
On October 10, 2000, we announced a change to our strategic business plan
that was developed by management and approved by the Board of Directors. We
modified our plan in an attempt to continue operations without the need for
additional funding.
The strategy of the restructuring plan included: continuing to grow revenue
through concentrating sales and marketing efforts in fewer markets, revising the
current telemarketing sales approach to a consultative, customer centric
approach, modifying network architecture to produce improved gross margins,
while still maintaining a high level of reliability, and reducing our head count
and associated SG&A expenses to reduce cash consumption.
We took the following actions as part of our new plan: planned build out of
new markets was stopped, revised the current sales approach to be consultative
with a customer centric focus, suspended field sales efforts in all but eight
markets located in Pennsylvania and New Jersey, redesigned our network in an
effort to improve gross margins, while still maintaining a high level of
reliability, and terminated 44 employees.
RECENT DEVELOPMENTS
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 small office/home office access with
headquarters in Rochester, New York. Cybertech has deployed a wireless network
in Rochester, Albany, Syracuse and Buffalo New York. 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 network
deployment knowledge to build out wireless networks in selected existing FASTNET
markets.
OUR MARKET OPPORTUNITY
OVERVIEW. The Internet has become an important global medium enabling
millions of people to obtain and share information and conduct business
electronically. Its expanded use has made the Internet a critical tool for
information and communications for many users. Internet access and enhanced
Internet services, including data center servers and electronic commerce
services, represent two of the fastest growing segments of the
telecommunications services market. The availability of Internet access,
advancements in technologies required to navigate the Internet, and the
proliferation of content and applications available over the Internet have
attracted a rapidly growing number of Internet users.
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OUR TARGET MARKET. We are targeting small and medium sized enterprises
(SMEs) located in secondary markets. We also target other enterprises that can
benefit from access to the Internet, such as hospitals, educational
institutions, and state and local agencies. The SMEs we target usually have one
or more of these attributes in common: they have 100 or more employees; they
have $5 million or more in sales; they are located in secondary markets usually
less than 20 miles outside of major metropolitan areas; and usually they need at
least some level of technical assistance in developing a plan on how best to
gain access to the Internet cost effectively. While our target customers usually
have one or more of these attributes, we have attracted and seek to continue to
attract a number of larger customers that exceed both employee and/or sales
volume parameters of small and medium sized enterprises. In the past, we believe
that we have attracted these customers because of our strong technical
capabilities in solving Internet access problems and our ability to install
enhanced services. We believe that we will continue to attract these customers
in the future. We expect to have additional market opportunities in New York
State as result of the acquisition Cybertech Wireless, Inc. These opportunities
include continuing to sell fixed broadband wireless access services in the
markets previously served by Cybertech, as well as, selling FASTNET's access
services, enhanced products and services, and colocation services in markets
being served by Cybertech and expanding our combined footprint by utilizing
FASTNET's previously idled market-based facilities in Albany, Rochester and
Syracuse, New York.
Small and medium sized enterprises often concentrate in secondary markets
to avoid the higher costs associated with locating in a metropolitan area. We
define a secondary market as typically smaller than the 100 most populated U.S.
metropolitan markets. However, national ISPs have historically placed their
largest points of presence, only in or around densely populated major cities.
Customers that are located within a few miles from these points of presence
often receive cost savings on their access pricing. However we believe customers
located in secondary markets that are up to 20 miles away from these points of
presence are underserved by the national ISPs or have been charged higher prices
for Internet access services. In addition, national ISPs typically lack the
local presence to provide rapid customer support. On the other hand regional or
local ISPs in these secondary markets often lack the requisite scale and
resources to provide a full range of services at acceptable quality and price
levels.
OTHER MARKET OPPORTUNITIES. While we do not actively target SOHO customers
with our sales and advertising programs, we have and expect to continue to have
a significant number of SOHO customers. We had approximately 19,400 of these
customers at December 31, 2000. We will continue to service this segment of the
access market because it complements the utilization of our network during off
peak hours when our network has excess capacity because of lower utilization by
our business customers.
Sales of our Dialplex service also provide us with another revenue
opportunity. Users of this service connect their customers to the Internet using
FASTNET's network infrastructure. Examples of users of this service are WebTV
Network Inc., governmental agencies, both state and local, and other ISPs.
OUR SOLUTION
We believe that we offer our customers a comprehensive solution to their
Internet access and enhanced products and services needs. Key aspects of our
solution include:
TECHNOLOGY PLATFORM. Our network architecture is designed to provide our
customers with reliable redundant connections to the Internet. We monitor our
network from our network operations center around the clock which allows our
staff to be immediately alerted and responsive to problems if they arise.
Control of our network infrastructure from a central location also allows us to
improve the quality of service by minimizing network downtime. We have
structured our network so that we can deliver competitively priced Internet
access to our customers located in the secondary markets.
INTERNET ACCESS. We believe that we must be "access independent" in
connecting customers to FASTNET's network. Accordingly, we offer our customers a
wide range of conventional last mile solutions including telecommunications
circuits and fixed broadband wireless services at varying speeds to permit them
to tailor a cost effective solution to their Internet access needs.
COMPREHENSIVE SUITE OF SERVICES. We seek to provide small and medium sized
enterprises with a complete solution for their Internet service needs. Our
comprehensive suite of services enables our customers to easily and more
cost-effectively address their Internet needs without developing solutions
internally or assembling services from multiple vendors, including resellers,
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other ISPs and information technology service providers. We offer our services
in customized bundles through a single network connection and provide our
customers with technical support and management expertise.
HIGH QUALITY CUSTOMER SUPPORT AND SERVICE. We focus on providing our
customers with high quality support and service in order to maintain customer
loyalty and maximize retention. Our market-focused sales approach coupled with
our tailored solutions to the technical aspects of Internet access enables us to
provide the personalized service and attention that small and medium sized
enterprises often require. In addition, we believe that customer satisfaction is
critical to our success in selling our enhanced products and services. We
provide around-the-clock customer support, real-time monitoring, trouble ticket
escalation and high quality customer service.
PLUG AND PLAY EASE OF INSTALLATION. In order to simplify what is sometimes
a technically challenging installation, we have designed and continue to enhance
our products and services to provide our customers with plug and play
installation. We ship pre-configured equipment to our customers that, in most
cases, is ready for installation. During the sales process we use a Customer
Configuration Questionnaire (CCQ) to thoroughly profile the needs of the
prospective customer, thereby enabling us to configure a solution for the
customer before we begin the installation or conversion. In the event that a
customer requires assistance, the customer can contact our provisioning
engineers, where the customer is guided through the installation process.
COST SAVINGS TO OUR CUSTOMERS. We believe our Internet solutions are more
cost-effective for our customers than developing their own in-house Internet
solutions. In order to match the level of performance and reliability that we
provide to our customers, many customers would need to make significant
expenditures for equipment, personnel and dedicated bandwidth.
OUR BUSINESS STRATEGY
Our strategy is to be an Internet solutions provider that customers rely on
for their data and Internet needs. We concentrate our consultative field selling
approach in markets in Pennsylvania, New Jersey and New York where we believe we
can capitalize on our competitive advantages and our strong brand. As we prove
our business strategy in these markets, we will look to expand into other nearby
markets, through carefully chosen acquisitions.
o UTILIZE TECHNICAL EXPERTISE. Deciding on the proper method to access the
Internet still remains a technical exercise that often exceeds the in-house
expertise of small and medium sized enterprises. We believe that our
in-house technical expertise and ability to guide customers through what
can be a complex process are valued by prospective customers and
differentiates us from our competition. We are initially concentrating on
markets that are within driving distance from our headquarters so that we
can leverage the support of our Bethlehem technical team. In addition, we
expect that as our relationship with our access customers strengthens over
time, we will be able to further leverage the customer's reliance and trust
in our technical team to help them install and support a full array of our
value added solutions.
o EXPANDING EXISTING CUSTOMER RELATIONSHIPS TO MARKET ENHANCED PRODUCTS AND
SERVICES. We offer a portfolio of enhanced products and services to meet
the expanding needs and complexity of our customers' Internet operations.
As our customers begin to rely more heavily on the Internet to conduct
their business and back office operations, we believe they will require
higher levels of security, assistance in back-up and recovery, and a
program to aid with disaster recovery. These are all potential higher
margin revenue opportunities for FASTNET because our goal is to build a
strong consultative long-term relationship with our customers.
o RELIABLE AND REDUNDANT NETWORK. We have designed our network architecture
to provide our customers the reliability they require to conduct their
business. We provide this reliability using redundant connections to
Internet backbone providers. Our market-based facilities are monitored 24
by 7 from our central network operations center in Bethlehem, Pennsylvania.
In addition, we offer a strong Service Level Agreement (SLA) because we use
tier one Internet backbone providers and leading network equipment
providers. We are designated a Cisco Powered Network.
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o CONSULTATIVE CUSTOMER RELATIONS. Small and medium sized enterprises usually
do not have the resources either in capital or personnel necessary to cost
effectively evaluate, design and implement solutions to fully utilize the
power of the Internet for their business. We have trained our sales
professionals to use a consultative selling approach. We do not offer just
one solution that must work for every customer, but rather our sales
professionals and sales engineers interact with prospective customers until
we uncover those factors that are necessary for us to tailor a
cost-effective solution. A solution that we believe fits the customer's
current needs and provides a platform from which they can scale their
Internet access in bandwidth and add enhanced products and services as
their business grows.
SALES AND MARKETING
We currently focus our field sales and marketing efforts in eight markets
located in Pennsylvania and New Jersey. We are using a consultative, customer
centric selling approach. Our sales representatives provide a local presence in
each market that can easily and quickly be supported, in person, from our
centrally based sales and technical support team. Our focus is on developing and
building long-term relationships with our customers that usually begins with
selling them Internet access and expands by selling them enhanced products and
services as their use of the Internet grows. We target our marketing and
advertising campaigns to a discrete list of businesses that we consider to be
our target customers in each of our markets. Our marketing campaigns are
comprised of direct mail, targeted print media, and in-market community based
activities. We also leverage both resellers and referral partners as additional
sales channels.
PRODUCTS AND SERVICES
We offer comprehensive Internet solutions to our customers, which include
dedicated and dial-up Internet access and enhanced Internet products and
services. Our dedicated Internet access offering is available at speeds that
range from 56 kilobits per second (Kbps) to 155 megabits per second (Mbps).
Dedicated Internet access can be delivered through standard telephony circuits,
such as T-1 through OC-3 digital circuits, digital subscriber line technology,
also known as DSL, or fixed broadband wireless connections with scalable service
from 256 Kbps to 155 Mbps. We offer our customers DSL service through an
agreement with Covad Communications Company, which enables us to sell Covad's
DSL service. Our dedicated Internet access provides our customers with always-on
connectivity to the Internet as well as access to our enhanced Internet products
and services.
In addition to Internet access, we offer a suite of enhanced Internet
products and services to our customers. As the needs of our customers evolve, we
will add to and modify existing product and service offerings to meet their
needs. Our current enhanced services include:
o COLOCATION SERVICES. We have recently codified our Managed and
Un-managed Colocation offerings to our customers concurrent with the
opening of our new 7,500 square foot Class "A" Internet Data Center in
Bethlehem, Pennsylvania. Our new data center allows us to offer
single-server colocation to customers just starting out in the
e-commerce arena, half cabinets, full cabinets and custom-designed
private caged colocation suites, to enable a full array of hosting
environments for any sized business. Adjunct offerings of managed
services include, backup and recovery, systems monitoring, hardware
and software provisioning, event tracking, notification and
resolution, and a full suite of design, consultation and development
services. The high reliability of our environmental, power and
Internet connectivity systems in-place at this data center offer our
customers a perfect environment to off load the risk, and much of the
expense, that our customers would incur by locating their servers
elsewhere. We also offer in market colocation services for
customers who wish to have local access to their equipment
o TOTAL MANAGED SECURITY SERVICES. We address our customers' concerns
about the security of data transmitted over the Internet by offering
various levels of protection through our Total Managed Security
services. These services provide security to a company's network,
including local area networks and wide area networks, from
unauthorized access by external sources. In addition, as part of our
services, our network operations center personnel provide 24
hours-a-day, seven days-a-week monitoring and threat response. We
incorporate third-party products into our security solution and we
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continually evaluate third-party products to meet the future needs of
our customers. These products include web content filtering, mail
filtering and detailed log file generation. In December 2000, we
renewed our Managed Security Services Agreement with WatchGuard
Technologies Inc. to provide security services and products for an
additional one-year term.
o WEB HOSTING SERVICES. We provide a wide range of content hosting
services, including shared and dedicated hosting on our servers for
customers web sites as well as colocation hosting of customer supplied
servers in our facilities. Entry-level shared server web hosting
provides our customers with a managed and pre-configured system at a
reasonable cost. The customer simply adds its content through an
interface such as FTP (file transfer protocol) or, in a growing number
of cases, through Microsoft's FrontPage extensions.
o WEB SERVICES. The growth of the Internet has made a strong web
presence increasingly important for small and medium sized
enterprises. We provide our customers with web site design and
development services. We provide our customers with database
management and customize solutions for our customers that help them
utilize the Internet as a vehicle to conduct business. Our web
services include e-commerce services and other sophisticated
development projects related to the operation of an e-commerce enabled
web site. Our web services work in conjunction with our web hosting
services to provide our customers with a comprehensive web presence.
o VIRTUAL PRIVATE NETWORK SERVICES. When an enterprise customer wants to
enable remote or off-site access to its computer network, the customer
commonly uses a form of a virtual private network connection. A
virtual private network provides a convenient and secure computer
connection from a remote location back to the company's main computer
network. We provide customers with our VPN product, which enables them
to control many aspects of their configuration, such as user profile
changes and security functions, through a private web-based interface.
o DIALPLEX/WHOLESALE ISP SERVICES. This service allows users to connect
their customers to the backbone of the world-wide Internet by
seamlessly first accessing FASTNET's infrastructure as a gateway to
the Internet. It provides users with a cost effective means of growing
their customer base while limiting the capital investment required to
service existing and new customers. It also allows them to provide
their customers with the reliability and redundancy of service enjoyed
by FASTNET's direct and SOHO access customers.
We have agreements with our customers for our services that are typically
for a one-year term that after expiration will automatically convert to a
monthly term until the agreement is either terminated upon 30 days notice or
renewed for a new one-year term. We bill our customers on a monthly basis and in
some circumstances we offer discounts for prepayment. We offer each of our
services individually or as part of a bundled solution. Our customers receive
additional discounts from us if they purchase more than one service.
NETWORK ARCHITECTURE AND INFRASTRUCTURE
Our network architecture is designed to provide our customers with
reliable, high speed Internet access as well as our comprehensive suite of
enhanced products and services. Key components of our network are:
MARKET INFRASTRUCTURE. We provide our dedicated access customers with
constant Internet access through a data circuit that is connected continuously
to the Internet. Dedicated access customers in each market connect to one of our
facilities using high-speed data circuits provided by an incumbent local
exchange carrier or competitive local exchange carrier. An incumbent local
exchange carrier is generally the original telephone company, which services the
customer's area. A competitive local exchange carrier is generally a company
that is trying to compete with an incumbent local exchange carrier. Our dial-up
customers connect to our network using either 56K modem or digital ISDN
circuits. We subscribe on a monthly basis for services provided by a number of
local exchange carriers, including AT&T Corporation, through its subsidiary
Teleport Communications Group, and Verizon. We also have agreements with local
exchange carriers, including Adelphia Communications, including the following:
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o Ameritech. We entered into a 60-month agreement with Ameritech on
August 28, 2000 to provide telecommunication circuits. Under the terms
of the contract, FASTNET has an annual service obligation of $262,000.
o NEXTLINK PENNSYLVANIA, INC. We entered into agreements with NEXTLINK
in June, October and December 1999, each for a term of three years.
NEXTLINK provides us with point-to-point DSC service. Under the terms
of these agreements, we have agreed to purchase a minimum annual
amount of services from NEXTLINK, resulting in minimum payment to
NEXTLINK of approximately $327,000 per year.
We have agreements with a number of national Internet backbone providers,
including the following companies:
o MCI WORLDCOM INC. We entered into an agreement with MCI on March 8,
2001 for the use of various connectivity technologies from MCI. These
include fixed pricing for transit and transport services utilizing
point to point circuits, frame relay, ATM and SMDS. The agreement has
a four year term and includes an annual volume commitment (AVC). The
first year AVC is $2.4 million and increases to $3.0 million for the
second third and fourth years. The agreement contains a business down
turn provision that allows for a maximum reduction of 30% provided the
reduction in usage is related to a down turn in business rather than a
shift in providers.
o SPRINT COMMUNICATIONS COMPANY, L.P. We entered into an agreement with
Sprint on June 8, 1999 for a term of three years. Sprint provides us
with dedicated Internet access service. Under the terms of this
agreement, we have agreed to purchase a minimum annual amount of
services from Sprint, resulting in minimum payments to Sprint of
approximately $1.4 million per year.
These services provide redundancy and high reliability in the event that
any of our backbone providers should experience network difficulties. We are
billed by all of our backbone providers monthly and are generally charged
according to the number of services that we choose to subscribe to in addition
to initial installation fees. Since we maintain a carrier-independent design, we
have the flexibility to select the most reliable and lowest cost provider in
each region.
NETWORK OPERATIONS CENTER. Each of our market-based facilities is connected
to our network operations center. The network operations center monitors the
operation of each device connected to our network and provides rapid
notification of any faults or failures. This monitoring process is designed to
ensure that we are in position to react quickly to restore operations in the
event of technical problems. In addition, the connection between the network
operations center and the market-based facilities provides an additional level
of redundancy for customer traffic if needed.
DATA CENTER. In December 2000, FASTNET opened a 7,500 square foot Class-A
data center in Bethlehem, PA. The Data center can support 300 full cabinets and
is directly integrated into FASTNET's network, thereby providing managed and
unmanaged colocation customers optimal bandwidth availability for maximum
performance and scalability. The center offers multiple levels of security, has
a fully-redundant environmental system, FM-200 fire suppression systems, backed
up by a dry-pipe sprinkler system, and a back-up continuous duty diesel
generator.
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EQUIPMENT. We purchase our equipment from a number of vendors to take
advantage of beneficial pricing and improvements in technology and performance.
We currently use routers from Cisco Systems, Inc., such as the 7500 series, that
are equipped with redundant components including route switching processors and
power supplies for added reliability. We sell both Cisco Systems, Inc. and
Nortel Networks Corporation routers to our customers for use as customer premise
equipment. We entered into Master Lease Agreements with Cisco Systems on
February 17, 2000 and April 20, 2000. Under the terms of these agreements, we
have agreed to lease equipment from Cisco Systems, resulting in minimum payments
to Cisco Systems of approximately $2,853,305 per year. Our dial-up Internet
access, as well as our virtual private network services for 56K analog and 128K
ISDN, use Lucent Technologies (Ascend) TNT remote access servers. On September
18, 1998 and June 29, 1999 we entered into Master Lease Agreements for equipment
leasing with Lucent Technologies (Ascend), each having three year terms. Under
the terms of one of these agreements, we have agreed to lease equipment from
Lucent, resulting in minimum payments to Lucent of approximately $2,841,710 per
year. Under the terms of the second agreement, we have a credit line to finance
the leasing of additional equipment. We have the option to purchase the
equipment subject to these leases at the end of the lease term and, in some
cases, renew the term of the lease for an additional rental period. Our networks
also utilize and rely on switches, hubs and other connection devices, which we
purchase from a number of different manufacturers. Our enhanced products and
services are supported by Sun Microsystems, Inc., UNIX-based and Microsoft
Windows NT-based servers located at our market based facilities.
CUSTOMERS
Our customer base consists primarily of small and medium sized enterprises
and SOHO customers located in secondary markets. As of December 31, 2000, we
provided Internet access and enhanced services to approximately 860 enterprise
customers, and approximately 19,400 SOHO customers. We also provided web hosting
services to approximately 7,800 customers throughout the world. While we have
not concentrated our sales and marketing efforts on Fortune 500 companies, we
provide our Internet solutions to a number of large enterprises. Lucent
Technologies, Inc. accounted for 7% of total revenues for the year ended
December 31, 1999 and 11% of total revenues for the year ended December 31, 1998
and Microsoft's WebTV Networks, Inc. accounted for 9%, 21% and 20% of total
revenues for the years ended December 31, 1998, 1999 and 2000, respectively. We
expect that a significant portion of our revenues will continue to be derived
from a limited number of customers, which may vary from year to year.
CUSTOMER AND TECHNICAL SUPPORT
We believe superior customer and technical support is critical to our
ability to retain existing customers and attract new customers. Our customers
depend on the speed and reliability of our network and our ability to keep them
connected to the Internet at all times. The knowledge and service orientation of
our local customers and technical support personnel are key elements in our
ability to assist our customers in quickly resolving their problems.
To address individual customer problems, we provide customer technical
support 24 hours a day, seven days a week. Our customers also have the ability
to reach our customer support representatives by e-mail or schedule a telephone
appointment at a time that is convenient to them. In addition, our customer care
representatives are available to respond to individual customer needs and
provide direct customer support.
COMPETITION
The Internet services market is extremely competitive and highly
fragmented. We face competition from numerous types of ISPs, including national
ISPs, and anticipate that competition will only intensify in the future as the
ISP industry goes through consolidation and attrition. We believe that the
primary competitive factors in the Internet services market include:
o pricing;
o quality and breadth of products and services;
o ease of use;
o personal customer support and service;
o brand awareness; and
o financial stability.
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We believe that we have competed favorably based on these factors,
particularly due to our:
o market focused operating strategy;
o superior customer support and service; and
o high reliability.
Our current competitors include many large companies that have
substantially greater market presence, brand-name recognition and financial
resources. Some of our local or regional competitors may also enjoy greater
recognition within a particular community. We currently compete, or expect to
compete, with the following types of companies:
o national ISPs, such as PSINet, Inc. and Concentric Network
Corporation;
o providers of web hosting, colocation and other Internet-based business
services, such as Verio, Inc.;
o numerous regional and local Internet service providers, some of which
have significant market share in their particular market area;
o established on-line service providers, such as America Online, Inc.;
o computer hardware and other technology companies that provide Internet
connectivity with their own or other products, including the
International Business Machines Corporation and Microsoft Corporation;
o national long distance carriers such as AT&T Corporation, MCI
WorldCom, Inc., Qwest Communications International Inc. and Sprint
Communications Company, L.P.;
o regional Bell operating companies and local telephone companies;
o providers of free Internet service, including NetZero, Inc. and
MicroWorkz Computer Corporation;
o cable operators or their affiliates, including At Home Corporation and
Time Warner Entertainment Company, L.P.;
o terrestrial wireless and satellite Internet service providers; and
o nonprofit or educational ISPs.
Many of the major cable companies and some other Internet access providers
have begun to offer or are exploring the possibility of offering Internet
connectivity through the use of cable modems. Cable companies, however, are
faced with large-scale upgrades of their existing plant, equipment and
infrastructure in order to support connections to the Internet backbone via
high-speed cable access devices. We believe that there is a trend toward
horizontal integration through acquisitions or joint ventures between cable
companies and telecommunications carriers. Other alternative service companies
have also announced plans to enter the Internet connectivity market with various
wireless terrestrial and satellite-based service technologies. In addition,
several competitive local exchange carriers and other Internet access providers
have launched national or regional digital subscriber line programs providing
high speed Internet access using the existing copper wire telephone
infrastructure. Several of these competitive local exchange carriers have
announced strategic alliances with local, regional and national service
providers to provide broadband Internet access. These developments could
substantially increase competition in the ISP market.
Recently, several national access providers have begun offering dial-up
Internet access for free or at substantial discounts to prevailing rates, which
may result in significant pricing pressure for dial-up Internet access services.
We also believe that manufacturers of computer hardware and software products,
media and telecommunications companies and others will continue to enter the
Internet services market, which will intensify competition, especially for
dial-up access providers.
9
GOVERNMENT REGULATION
We provide Internet access, in part through transmissions over public
telephone lines. These transmissions are governed by regulations and policies
establishing charges, terms and conditions for communications. As an Internet
provider, we are not currently regulated directly by the Federal Communications
Commission or any other agency, other than regulations applicable to businesses
generally. We could, however, become subject to regulation by the Federal
Communications Commission and/or other regulatory agencies if we become
classified as a provider of basic telecommunications services. These regulations
could affect the charges that we pay to connect to the local telephone network
or for other purposes. For example, Internet access providers, unlike long
distance telephone companies, currently are not required to pay carrier access
charges. Access charges are assessed by local telephone companies on
long-distance companies for the use of the local telephone network when the
local telephone company originates and terminates long-distance calls, generally
on a per-minute basis. The payment of access charges has been a matter of
continuing dispute, with long-distance companies complaining that the charges
are substantially in excess of actual costs and local telephone companies
arguing that access charges are justified to subsidize lower local rates for end
users and other purposes. In May 1997, the Federal Communications Commission
reaffirmed its decision that Internet access providers should not be required to
pay access charges and subsequent statements issued by the Federal
Communications Commission have not altered this conclusion. A requirement by the
Federal Communications Commission that we pay access charges could have a
significant impact on our costs of providing service.
The Federal Communications Commission also has concluded that Internet
access providers should not be required to contribute to a new universal service
fund established to replace current local rate subsidies and to meet other
public policy objectives, such as providing access to enhanced communications
systems for schools, libraries and health care providers. As a result, unlike
other telecommunications providers, Internet access providers do not have to
contribute a percentage of their revenues to the federal universal service fund
and are not expected nor required to contribute to similar funds being
established at the state level. Both the access charge issue and the universal
service treatment of Internet access providers, however, are the subjects of
Federal Communications Commission proceedings and could change. Telephone
companies are actively seeking reconsideration or reversal of the relevant
Federal Communications Commission decisions and their arguments are gaining
support as Internet-based telephony begins to compete with conventional
telecommunications services. We cannot predict how these matters will be
resolved but we could be adversely affected if, in the future, Internet service
providers are required to pay access charges or contribute to universal service
support.
In addition, to the extent that an end user's call to an Internet access
provider is considered local rather than long distance, the local telephone
company that serves the Internet service provider may be entitled to reciprocal
compensation from the calling party's local telephone company. Reciprocal
compensation is a reimbursement mechanism between telephone companies whereby
the carrier that terminates a call is eligible for payment from the carrier
serving the calling party. This payment of reciprocal compensation reduces the
local telephone company's costs and ultimately reduces the internet service
provider's costs. However, the Federal Communications Commission recently
determined that most, but not all, traffic to an Internet access provider is
interstate rather than local in nature. This determination could potentially
eliminate the payment of reciprocal compensation to the local telephone
companies that serve us, which ultimately may affect our costs. There is a
pending proceeding at the Federal Communications Commission to determine
appropriate compensation mechanisms for such calls and the Federal
Communications Commission has ruled that state commissions, in the interim, may
determine under what circumstances reciprocal compensation should be paid. To
date, most states considering the issue have upheld reciprocal compensation for
calls placed to Internet service providers. If new compensation mechanisms
increase the costs to carriers that terminate calls to Internet service
providers or if states eliminate reciprocal compensation payments for calls to
Internet service providers, the affected carriers could increase the price of
service to Internet service providers to compensate themselves which could have
a material adverse effect on our business, financial condition and results of
operation.
The Federal Communications Commission is also continuing the pursuit of
measures that could stimulate the development of high-speed telecommunications
facilities and make it easier for operators of these facilities to obtain access
to customers by requiring incumbent telephone companies to provide access to
their rights-of-way and wiring located within multiple tenant environments
(MTEs). Last year the Federal Communications Commission issued an order
prohibiting telecommunications carriers from entering into contracts to service
commercial MTEs that restrict a property owner's ability to permit entry by
10
other service providers. The Federal Communications Commission is also
considering requiring owners of residential MTEs to provide competing service
providers nondiscriminatory access to their buildings. Such regulatory measures
could enhance the competitive viability of Internet service providers that are
affiliated with the providers of these high-speed facilities.
Finally, the issue of Internet service provider access to the
infrastructure deployed by cable television operators remains under
consideration. Several municipal franchising authorities have required
franchised cable companies to provide competing Internet service providers open
access to their cable infrastructure. Cable companies have appealed these
decisions and the courts have taken different regulatory approaches in deciding
whether to require open access. Although in recent months certain cable
operators have agreed to voluntarily provide access to competing service
providers, the Federal Communications Commission has initiated an inquiry into
whether open access should be mandated by regulatory fiat or whether the
Commission should continue to refrain from becoming involved in this issue. The
outcome of these efforts to compel open access and leased access will affect our
business, by either increasing or foreclosing Internet service provider access
rights to the cable television infrastructure.
The law relating to the liability of Internet service providers and online
service providers due to information 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, defamatory or otherwise illegal material, as
well as materials that infringe on intellectual property rights, that may
subject us to liability. Two federal laws mitigate these risks. In 1996,
Congress immunized Internet service providers and online service providers from
liability for defamation and similar claims arising from materials the Internet
service providers and online service providers did not create, but merely
distributed without knowing or having had reason to know of their defamatory
nature. Likewise, in 1998, Congress created a safe harbor from copyright
infringement liability for Internet service providers and online service
providers arising from materials placed on the Internet service provider's or
online service provider's network by third parties, so long as basic
requirements are satisfied.
Due to the increasing popularity and use of the Internet, it is possible
that additional laws and regulations may be adopted covering issues such as the
sale of alcohol and firearms, content, user privacy, pricing and trademark or
copyright infringement. Laws and regulations potentially affecting us have been
adopted, and may be adopted in the future, by federal and state governments, as
well as by foreign governments. We cannot predict the impact, if any, that
recent and future legislative or regulatory changes or developments may have on
our business, financial condition and results of operations. Changes in the
regulatory environment relating to the Internet access industry, including
regulatory changes that directly affect telecommunications costs or increase the
likelihood or scope of competition from regional telephone or other companies,
such as open access to cable infrastructure, could have a material adverse
effect on our business.
INTELLECTUAL PROPERTY
We have proprietary rights to trade secrets relating to technical and
business aspects of our operations. We have sought and will continue to seek
federal, state and local protection for these proprietary rights. We rely on a
combination of copyright, trademark and trade secret laws to protect our
proprietary rights, particularly those related to our names and logos. We
require each of our employees to enter into an inventions agreement, pursuant to
which each agrees that any intellectual property rights developed while in our
employment belong to us. We believe that we were the first to adopt the service
mark FASTNET and the associated logo in connection with Internet service
business, and have received federal registrations for them. In addition, we have
registrations pending for the following other names and marks: YOU'RE HUMAN, SO
ARE WE; 123HOSTME.COM; 123HOSTME! and HOST ME! We currently believe that these
names and marks are not material to our business.
In connection with the delivery of some of our services, we bundle third
party software in our products for customers using personal computers operating
on the Microsoft Windows or Macintosh platforms. While some of the applications
included in our start-up kit for access services subscribers are shareware that
we have obtained permission to distribute or that are otherwise in the public
domain and freely distributable, other applications included in the start-up kit
have been licensed where necessary. We currently intend to maintain or negotiate
renewals of all existing software licenses and authorization as necessary,
although we cannot be certain that such renewals will be available to us on
acceptable terms, if at all. We may also enter into additional licensing
agreements in the future for other applications.
11
EMPLOYEES
As of December 31, 2000, and as a result of our restructuring plan, we had
a total of 123 employees, including 121 full-time employees and 2 part-time
employees. Of these employees, 32 were in engineering, 71 were in general and
administrative positions, including executives, customer care, accounting and 20
were in sales and marketing.
We are not a party to any collective bargaining agreements covering any of
our employees, have never experienced any material labor disruption and are
unaware of any current efforts or plans to organize our employees. We consider
our relationships with our employees to be good.
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 acquisition of a 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
outstanding and 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, OUR LARGEST CUSTOMER ACCOUNTED
FOR 20% AND 21% OF OUR TOTAL REVENUES. THE LOSS OF THIS CUSTOMER COULD HARM OUR
RESULTS OF OPERATIONS.
Although our primary business strategy is to focus on selling Internet
access solutions and enhanced products and services to small and medium sized
businesses through a consultative approach, we currently derive, and may derive
12
in the future a significant portion of our revenue from a limited number of
customers that are not the focus of our business plan. For example, Lucent
Technologies, Inc. accounted for 7% of total revenues for the year ended
December 31, 1999, and 11% of total revenues for the fiscal year ended December
31, 1998 and Microsoft's WebTV Networks, Inc. accounted for 20% of revenues for
the fiscal year ended December 31, 2000, and 21% of total revenues for the
fiscal year ended December 31, 1999 and 9% of total revenues for the fiscal year
ended December 31, 1998. If we are unable to implement our revised business
strategy of capturing market share among small and medium sized business
customers by differentiating FASTNET from competitors through a consultative
problem solving sales approach, then, we will continue to be substantially
dependent upon revenues from our larger customers. We expect revenues from these
customers to vary from year to year. Our agreement with Microsoft's WebTV
Networks may be terminated upon 120 days notice and was renewed in September
2000, with a reduced rate per subscriber as part of the new agreement. The loss
of any of our significant customers or a significant decrease in revenues from
these customers could harm our results of operations.
WE HAVE A HISTORY OF LOSSES AND ARE UNABLE AT THIS TIME TO PREDICT WHEN WE WILL
BE ABLE TO TURN PROFITABLE.
We have incurred net losses since our inception. For the years ended
December 31, 1998, 1999, and 2000 we had losses of $1.3 million, $5.6 million
and $31.1 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 year ended December 31,
2000, we had a net loss of $31.1 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 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.
13
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 technology and telecommunications companies. These broad
market fluctuations may materially adversely affect the market price of our
Common stock in 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. We were notified on December 26, 2000 by Nasdaq that we
had not met the continued listing standards of Nasdaq with respect to minimum
public float and minimum bid price and that we had 90 days to cure our
noncompliance with these listing standards. On January 31, 2001 Nasdaq notified
us that we were again in compliance with the continued listing requirements of
the Nasdaq. We cannot provide assurances that we will be able to continue to
meet these continued listing requirements. If we are again unable to maintain
these standards, our Common stock could be delisted from the Nasdaq National
Market, where our Common stock currently trades. 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.
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.
14
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 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:
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
15
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.
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.
16
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 Sprint as our
primary 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;
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.
17
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 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.
ITEM 2. PROPERTIES.
Our corporate offices are located in Bethlehem, Pennsylvania where we lease
approximately 72,881 square feet of space for our Network Operations Center. Our
lease agreements for this space, which commenced on June 1, 1999 and September
1, 1999, respectively, have six-year terms. We also entered into a lease on
January 6, 2000 for 34,580 square feet of space for our principal executive
offices with a lease term of six years. We also lease space for our market based
infrastructure, ranging from 600 to 4,000 square feet, in Pennsylvania, New
Jersey, New York, Maryland, Michigan, Washington D.C., and Connecticut. We
believe that we will continue to be able to obtain suitable space on
commercially reasonable terms.
18
ITEM 3. LEGAL PROCEEDINGS.
We are not involved currently in any legal proceedings that either
individually or taken as a whole, will have a material adverse effect on our
business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a shareholder vote.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S SECURITIES AND RELATED SHAREHOLDER MATTERS.
Our Common stock has traded on the Nasdaq National Market (Nasdaq Symbol:
FSST) since the completion of our initial public offering ("IPO") on February 7,
2000. Prior to that date, there was no public market for our Common stock. The
following table sets forth the high and low prices for our Common stock for the
periods indicated as reported by the Nasdaq National Market:
Common Stock Price
2000
High Low
---------- ----------
First Quarter (from February 8, 2000) .... $ 22.03 $ 11.75
Second Quarter ........................... 12.13 3.56
Third Quarter ............................ 4.02 1.63
Fourth Quarter ........................... 2.50 0.28
On March 29, 2001, the closing price of our Common stock as reported on the
Nasdaq National Market was $0.97 per share. As of January 31, 2001, there were
approximately 5,052 shareholders of our Common stock.
We have never declared or paid any cash dividends on our Common stock and
do not expect to pay dividends in the foreseeable future. Our current policy is
to retain all of our earnings to finance future growth and working capital
needs.
Our initial public offering, or IPO, was effected through a Registration
Statement on Form S-1 (File No. 333-85465) that was declared effective by the
SEC on February 7, 2000 and pursuant to which we sold an aggregate of 4,000,000
shares of our Common stock at $12.00 per share. On March 7, 2000, the managing
underwriters of our IPO, ING Barings LLC, Wit SoundView Technology Group, Inc.,
FAC/Equities, a division of First Albany Corporation and DLJdirect, Inc.,
exercised the over-allotment option selling an additional 600,000 shares of our
Common stock. Total aggregate proceeds were $55.2 million. Proceeds net of
offering costs were $49.6 million.
From the effective date of the Registration Statement through December 31,
2000, we utilized the proceeds from the initial public offering and
underwriters' over-allotment as follows:
Repayment of debt .............................. $ 3,174,015
Payment of other obligations ................... 794,000
Capital Expenditures ........................... 9,327,182
Working Capital Requirements ................... 14,939,934
-------------
Total .......................................... $ 28,235,131
=============
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.
19
In the preceding three years, we have issued the following securities that
were not registered under the Securities Act:
In December 2000, we sold 1,000,000 shares of restricted Common stock to
the Chief Executive Officer of the Company in a private placement for $437,500.
This sale was made under the exemption from registration provided under Section
4(2) of the Securities Act.
On March 14, 2001, we issued 2,000,000 shares of our Common stock to
Cybertech Wireless, Inc., in connection with the purchase of all the assets and
substantially all the liabilities of Cybertech. This sale was made under the
exemption from registration provided under Section 4(2) of the Securities Act.
20
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes selected financial data for the five years
in the period ended December 31, 2000. Our historical data for the Company is
derived from, and is qualified by reference to, our Financial Statements which
are included elsewhere in this Annual Report on Form 10-K. These Financial
Statements have been audited by Arthur Andersen LLP, independent public
accountants, to the extent indicated in their reports. This data should be read
in conjunction with our Consolidated Financial Statements and related Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Annual Report on Form 10-K.
YEAR ENDED DECEMBER 31,
1996 1997 1998 1999 2000
------------- ------------- ------------- ------------- -------------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues .................................... 1,942,607 3,670,614 5,527,979 8,392,362 12,660,248
Operating expenses:
Cost of services ......................... 1,162,011 2,333,919 3,241,741 5,671,948 13,325,733
Selling, general and administrative ...... 793,336 1,445,224 3,067,740 6,362,729 17,946,471
Depreciation and amortization ............ 78,804 177,375 346,568 1,600,058 5,038,811
Restructuring charge .................... -- -- -- -- 5,159,503 (1)
Asset impairment ........................ -- -- -- -- 3,233,753 (2)
------------- ------------- ------------- ------------- -------------
Total operating expenses ............... 2,034,151 3,956,518 6,656,049 13,634,735 44,704,271
Operating loss .............................. (91,544) (285,904) (1,128,070) (5,242,373) (32,044,023)
Other income (expense), net ................. (23,680) (36,162) (146,220) (358,698) 903,103
------------- ------------- ------------- ------------- -------------
Net loss .................................... $ (115,224) $ (322,066) $ (1,274,290) $ (5,601,071) (31,140,920)
============= ============= ============= ============= =============
Basic and diluted net loss per
Common share ............................. $ (0.01) $ (0.03) $ (0.14) $ (0.77) $ (2.20)
============= ============= ============= ============= =============
Weighted average number of common
shares outstanding ....................... 11,575,000 11,575,000 8,880,833 7,229,284 14,177,302
============= ============= ============= ============= =============
December 31,
1996 1997 1998 1999 2000
------------- ------------- ------------- ------------- -------------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ................... $ 28,591 $ 88,981 $ 256,782 $ 953,840 $ 5,051,901
Marketable securities ....................... -- -- -- -- 18,455,543
Property and equipment, net ................. 459,565 1,047,402 1,741,635 7,363,848 19,631,011
Total assets ................................ 822,953 1,683,345 3,226,841 15,839,576 48,977,374
Working capital (deficit) ................... (552,418) (1,447,138) (4,356,637) (3,238,257) 8,360,113
Debt and capital lease obligations .......... 412,839 655,626 3,277,706 7,305,778 11,834,746
Shareholders' equity (deficit) .............. (210,203) (532,256) (2,564,068) 1,363,811 23,524,577
- ----------
(1) In October 2000, the Company recorded a non-recurring charge related
to exit and closing costs for certain markets.
(2) In connection with the restructuring, the Company recorded an asset
impairment charge to reduce the carrying value of certain assets to
fair market value.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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
included high-speed data and Internet services, data center services, including
web hosting and managed and unmanaged 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, 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 approximately $49.6 million 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 network deployment knowledge to build out wireless
networks in selected existing FASTNET markets.
As of December 31, 2000, we provided Internet access and enhanced services
to 860 enterprise customers, 19,400 SOHO customers, and 7,800 customers using
our web hosting, and colocation services.
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 and 2000, respectively.
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. Our selling and
marketing strategy is focused on markets located in Pennsylvania, New Jersey and
New York.
The Company has also changed its sales model to a consultative,
face-to-face approach rather than the centralized telemarketing approach. We
believe our increased focus on a smaller number of markets, in conjunction with
the consultative sales approach will enable us to engage more customers in our
target markets and retain customers for longer periods of time. We are also
building a customer-centric culture highlighted by superior customer care and
technical support departments. We expect this increased focus on customer care
will help us build and maintain long-term relationships with our customers. We
have modified our value proposition from being a low-cost provider to focusing
on building a reputation of being an authority on Internet-enabled solutions
with exceptional customer care.
Our modified plan includes redesigning our network architecture and an
overall reduction in telecommunication expenses. We will eliminate the outbound
bandwidth in the 12 markets where field sales efforts were suspended. The
market-based infrastructure in the eight operational markets is being
reconfigured to reduce costs while still achieving reliability and redundancy of
22
the network by maintaining multiple connections to the worldwide Internet
backbone providers. We believe these changes will have a favorable impact on our
gross margins that will be evident in 2001.
As part of the restructuring plan, on October 10, 2000, we terminated 44
employees throughout all departments of the Company. This payroll and related
expense reduction will result in reduced selling, general, and administrative
expense, thereby, reducing our cash burn-rate.
In addition to these cost containment actions, we have reduced the planned
capital expenditures for 2001. As a result of our modified strategic plan, we
believe that the cash and investments we have available will be sufficient to
fund operations through 2001 without requiring us to raise any additional cash.
Simultaneous with the modification of our strategic plan, we recorded a
restructuring charge of $5.2 million primarily related to network and
telecommunication optimization and cost reduction, facility exit costs,
realigned marketing strategy, and involuntary employee terminations (see Note
6 in Notes to Consolidated Financial Statements).
The activity in the restructuring charge accrual during 2000 is summarized
in the table below:
ACCRUED
CASH RESTRUCTURING
RESTRUCTURING PAYMENTS AS OF
CHARGE DURING 2000 DECEMBER 31, 2000
------------ ------------ ------------
Telecommunications exit and termination fees .. $ 2,821,352 $ (268,880) $ 2,552,472
Leasehold termination costs ................... 869,585 (160,767) 708,818
Termination payments to employees ............. 345,144 (345,144) --
Sales and marketing contract terminations ..... 827,427 (304,907) 522,520
Facility exit costs ........................... 295,995 (34,162) 261,833
------------ ------------ ------------
$ 5,159,503 $(1,113,860) $ 4,045,643
============ ============ ============
During the fourth quarter of 2000, based upon a review of the Company's
long-lived assets, the Company recorded a non-cash charge of $3.2 million
primarily related to the write-down of a portion of the asset values of the
components of several of the Company's customer network facilities. The Company
idled operations in these facilities upon adoption of the Company's revised
business plan. An impairment was recognized as the future undiscounted cash
flows of each facility were estimated to be insufficient to recover their
related carrying values. As such, the carrying values of these assets were
written down to the Company's estimates of their fair value.
23
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
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 backbones 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.
24
The following table sets forth statement of operations data as a percentage
of revenues for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------
1998 1999 2000
------- ------- -------
Revenues ................................... 100.0% 100.0% 100.0 %
Operating expenses:
Cost of services ...................... 58.6 67.6 105.2
Selling, general and administrative ... 55.5 75.8 141.8
Depreciation and amortization ......... 6.3 19.1 39.8
Restructuring charge .................. -- -- 40.8
Asset impairment ...................... -- -- 25.5
------- ------- -------
120.4 162.5 353.1
------- ------- -------
Operating loss .................... (20.4) (62.5) (253.1)
Other expense income (expense), net ........ (2.7) (4.3) 7.1
------- ------- -------
Net loss ................................... (23.1)% (66.8)% (246.0)%
======= ======= =======
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
REVENUES. Revenues increased by $4.3 million or 51% to $12.7 million for
the year ended December 31, 2000, compared to $8.4 million for the year ended
December 31, 1999. This increase in revenues is primarily a result of an
increase in business customers using our dedicated Internet access and web
hosting services. Our dedicated Internet access customer base grew by 181% from
300 as of December 31, 1999 to 860 as of December 31, 2000. Our web hosting
customer base grew by 77% from 4,400 as of December 31, 1999 to 7,800 as of
December 31, 2000. Partially offsetting this increase in customers was a
decrease in the average revenue per customer during 2000 as compared to 1999.
This was the result of the addition of Enterprise DSL customers into our
dedicated Internet access customer base. We expect future revenue growth to be
primarily generated from our dedicated Internet access and web hosting product
lines.
For the year ended December 31, 2000, we derived $2.6 million or 20% of our
revenues from Microsoft's WebTV Networks Inc., as compared to $1.7 million or
21% of our revenues for the year ended December 31, 1999. During 2000, we began
offering our Dialplex network coverage in additional markets that resulted in
increased revenue from WebTV. However, in September 2000, we reduced the price
we charge WebTV for our wholesale Dialplex services. We seek to use this price
reduction to continue encouraging WebTV to increase the volume of business it
purchases from us.
COST OF REVENUES. Cost of revenues increased by $7.7 million, or 135%, to
$13.3 million for the year ended December 31, 2000 as compared to $5.7 million
for the year ended December 31, 1999. This increase is primarily attributable to
the increases in our network coverage areas, as well as increases in the
capacity of our network including capacity we suspended in October of 2000.
During 2000, we added additional connectivity at our network operations center.
25
Gross margin decreased from 32% for the year ended December 31, 1999 to (5)% for
the year ended December 31, 2000. This decrease in gross margin was a result of
installation of telecommunication circuits in new markets before we generated
any revenues in those new markets and an increase in engineering personnel.
During the fourth quarter of 2000, we reduced network costs by re-designing the
network to take advantage of cost saving opportunities while providing greater
capacity than was previously available.
SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by $11.6 million or 182% from $6.4 million for the year ended
December 31, 1999 to $17.9 million for the year ended December 31, 2000. This
increase is primarily attributable to an increase in selling, general and
administrative personnel from 72 at December 31, 1999 to a high of 134 at
September 30, 2000. As a result of the restructuring, selling, general and
administrative personnel decreased to 91 at December 31, 2000. Also contributing
to this increase was marketing and advertising expense incurred to gain brand
awareness in 20 markets. During the fourth quarter of 2000, we changed our
marketing approach to targeted direct advertising in an effort to reduce
expenses. In addition, the reduction in operational markets from 20 as of
September 30, 2000 to eight at December 31, 2000 should result in lower selling,
general, and administrative expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$3.4 million or 215% from $1.6 million for the year ended December 31, 1999 to
$5.0 million for the year ended December 31, 2000. This increase is comprised of
depreciation on the 20 market based network facilities and networking equipment
located in those facilities. Also contributing to the increase was $1.5 million
of amortization expense for the year ended December 31, 2000 that related to the
intangible assets recorded in the purchase accounting of Internet Unlimited as
compared to the $625,000 of amortization expense recorded during the last six
months of 1999.
OTHER INCOME/EXPENSE. Interest income increased by $2.0 million from
$52,000 for the year ended December 31, 1999 to $2.1 million for the year ended
December 31, 2000. This increase in interest income was generated from the
investment of the proceeds from our initial public offering on February 7, 2000.
Interest expense increased by $744,000 from $406,000 for year ended December 31,
1999 to $1.1 million for the year ended December 31, 2000, as we financed
equipment needed for our market expansion under capital lease arrangements. We
expect interest income to decrease as we use our cash to fund our operating
losses and interest expense to increase as we continue to service our capital
lease obligations.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
REVENUES. Total revenues increased by $2.9 million, or 52%, to $8.4 million
for the year ended December 31, 1999, compared to $5.5 million for the year
ended December 31, 1998. On a pro forma basis, assuming our acquisition of
Internet Unlimited, Inc. occurred prior to January 1, 1999, total revenues would
have been $9.1 million for the year ended December 31, 1999.
Service revenues increased by $3.3 million, or 68%, to $8.2 million for the
year ended December 31, 1999, compared to $4.9 million for the year ended
December 31, 1998. This increase in revenues is primarily attributable to an
increase in the number of customers using our dedicated Internet access services
and a 211% increase in virtual private network revenues from $679,000 for the
period ended December 31, 1998 to $2.1 million for the period ended December 31,
1999. This increase in virtual private networking revenues is primarily
attributable to the increase in revenues from one customer, Microsoft's WebTV
Networks. Our enhanced products and service revenues increased by 152% for the
period ended December 31, 1999 over the same period in 1998 in part due to our
acquisition of Internet Unlimited, Inc. Our dial-up customer base continued to
grow over the comparable period, resulting in an increase in dial-up revenues of
95% for the period ended December 31, 1999 over the same twelve month period in
1998.
Hardware and software revenues which represents our resale of third party
hardware and software to our customers decreased by $441,000 or 68% to $212,000
for the year ended December 31, 1999, compared to $653,000 for the year ended
December 31, 1998. In the year ended December 31, 1998, we sold a significant
amount of third party hardware and software as part of an installation for one
of our major customers. These customers historically have required less hardware
because of the scale of their Internet needs and their inclination to use their
existing equipment when available.
26
During these periods, we derived a significant portion of our revenues from
Microsoft's WebTV Networks and the State of Delaware. Microsoft's WebTV Networks
represented 21% of total revenues for the year ended December 31, 1999. The
State of Delaware represented 11% of total revenues for the year ended December
31, 1998.
COST OF REVENUES. Cost of revenues increased by $2.4 million, or 75%, to
$5.7 million for the year ended December 31, 1999, compared to $3.2 million for
the year ended December 31, 1998. As a percentage of revenues, cost of revenue
increased to 68% for the year ended December 31, 1999 from 59% for the year
ended December 31, 1998. On a pro forma basis, assuming our acquisition of
Internet Unlimited, Inc. occurred prior to January 1, 1999, cost of revenues
would have been $5.8 million for the year ended December 31, 1999.
Cost of service revenues increased by $2.9 million, or 113%, to $5.5
million for the year ended December 31, 1999, compared to $2.6 million for the
year ended December 31, 1998. As a percentage of services revenues, cost of
services were 53% in the year ended December 31, 1998 compared to 67% in the
year ended December 31, 1999. These increases were primarily attributable to the
increase in Internet access and telecommunications charges, increased rental
expense on leased equipment, and an increase in payroll and related expenses for
engineers associated with our increased revenues, in advance of generating
revenues in new regions.
Cost of hardware and software decreased by $485,000 or 72% to $184,000 for
the year ended December 31, 1999, compared to $669,000 for the year ended
December 31, 1998 as a result of the decrease in hardware and software revenues.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by $3.3 million, or 107%, to $6.4 million for the year ended
December 31, 1999 compared to $3.1 million for the year ended December 31, 1998.
As a percentage of revenues, selling, general and administrative expenses
increased to 76% for the year ended December 31, 1999 from 55% for the year
ended December 31, 1998. This increase is primarily attributable to the increase
in selling, general and administrative personnel from 31 at December 31, 1998 to
73 at December 31, 1999, and a 67% increase in advertising expense from $625,000
in the year ended December 31, 1998 to $1.0 million in the year ended December
31, 1999. As a result of the increase in personnel, all related general and
administrative expenses increased. $500,000 of the $3.3 million increase was for
financial advisory services. On a pro forma basis, assuming our acquisition of
Internet Unlimited, Inc. occurred prior to January 1, 1999, selling, general and
administrative expenses would have been $6.9 million for the year ended December
31, 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$1.3 million or 362%, to $1.6 million for the year ended December 31, 1999,
compared to $347,000 for the year ended December 31, 1998. This increase was
primarily attributable to the purchase of equipment necessary to support the
expansion of our network and to the amortization of the intangible assets
associated with our acquisition of Internet Unlimited, Inc. On a pro forma
basis, assuming our acquisition of Internet Unlimited, Inc. occurred prior to
January 1, 1999, depreciation and amortization, including the amortization of
intangible assets associated with the Internet Unlimited acquisition would have
been $2.5 million for the year ended December 31, 1999.
CASH FLOWS ANALYSIS
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1999 2000
------------- ------------- -------------
Other Financial Data:
Cash flows used in operating activities ....... $ (613,979) $ (467,622) $(15,637,784)
Cash flows used in investing activities ....... (899,996) (2,280,717) (27,764,962)
Cash flows provided by financing activities ... 1,681,776 3,445,397 47,500,807
------------- ------------- -------------
Net increase in cash and cash equivalents ..... $ 167,801 $ 697,058 $ 4,098,061
============= ============= =============
Cash flows used by operating activities increased by $15.2 million from
cash used of $468,000 in the year ended December 31, 1999 to $15.6 million cash
used in the year ended December 31, 2000. This increase in cash used in
operations is primarily the result of our net loss of $31.1 million. The
increase in net loss is primarily a result of an increase in personnel from 91
27
at December 31, 1999 to a high of 169 and declining as a result of the revised
business plan to 123 at December 31, 2000, as well as an increase in
telecommunication charges and an increase in selling, general and administrative
expenses to support the expansion of the Company during the first part of 2000.
Also contributing to the net loss for the year ended December 31, 2000, was the
restructuring charge of $5.2 million and non-cash asset impairment charge of
$3.2 million. We expect to continue to incur losses until the operating markets
provide sufficient gross margin to cover both market operating costs as well as
corporate infrastructure.
Cash used in investing activities increased from $2.3 million in the year
ended December 31, 1999 to $27.8 million in the year ended December 31, 2000, an
increase of $25.5 million. This increase in cash outflows is primarily
attributable to the Company's purchases of marketable securities and an increase
in purchases of property and equipment.
Cash flows from financing activities increased by $44.1 million from cash
inflows of $3.4 million during the year ended December 31, 1999 to $47.5 million
during the year ended December 31, 2000. The increase in cash flows from
financing activities is a result of the proceeds from the Company's initial
public offering and exercise of the underwriters' over allotment partially
offset by the repayments of capital lease and debt 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 (see "Recent Developments") 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. We
expect these actions will reduce our cash consumption rate in the future, but
may result in early termination payments for certain contractual obligations
that exist. As of December 31, 2000, we had $23.5 million in cash and
marketable securities. 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, $4,045,643 has not been paid as of
December 31, 2000 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.
Prior to our initial public offering, we satisfied our cash requirements
primarily through debt and equity financings.
In May 1998, we issued 1,000,000 shares of our Common stock, a convertible
promissory note of $3.1 million and a warrant to purchase 1,000,000 shares of
our Common stock at an exercise price of $1.50 per share to H&Q You Tools
Investment Holding, L.P. for an aggregate of approximately $3.3 million in cash.
In connection with this financing, we granted H&Q You Tools Investment Holding,
L.P. a security interest in substantially all of our assets. H&Q You Tools
Investment Holding, L.P. converted this note into 2,033,334 shares of Common
stock and released its security interest immediately prior to our initial public
offering. We used a portion of the proceeds from this May 1998 financing to
repurchase outstanding shares of our Common stock representing 50% of our then
outstanding shares of Common stock for $1.0 million.
In May 1999, we issued a $1.0 million convertible note to H&Q You Tools
Investment Holding, L.P. for $1.0 million in cash. The principal amount of this
note and accrued interest was converted into 142,431 shares of Series A
Convertible Preferred stock at $7.13 per share in August 1999. In July 1999, we
used a portion of the proceeds from this financing to acquire Internet
Unlimited, Inc. a provider of Web hosting and colocation services, for $400,000
in cash and 546,984 shares of Common stock.
In August 1999, we sold 666,198 shares of Series A Convertible Preferred
stock to purchasers including Lucent Technologies, Inc. at $7.13 per share. The
net proceeds from these sales of Series A Convertible Preferred stock were
approximately $4.5 million. All of the outstanding Preferred stock automatically
converted into Common stock immediately prior to the consummation of the initial
public offering.
28
In June 1999, we entered into an agreement with Ascend Credit Corporation
for a $20 million equipment lease facility. Under this arrangement, we lease
equipment necessary for the construction of our customer network facilities.
Currently, we have approximately $13.2 million available under this facility.
In January 2000, we entered into an agreement under which we issued a $1.0
million note to H&Q You Tools Investment Holding, L.P. The note bore interest at
a rate equal to 7% per annum and was fully repaid on March 2, 2000 with proceeds
from the initial public offering.
ITEM 7a. 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 December 31, 2000 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 December 31,
2000. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheets - December 31, 1999 and 2000
Consolidated Statements of Operations - For the years ended
December 31, 1998, 1999 and 2000
Consolidated Statements of Shareholders' Equity (Deficit) - For the
years ended December 31, 1998, 1999 and 2000
Consolidated Statements of Cash Flows - For the years ended
December 31, 1998, 1999 and 2000
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
The Consolidated Financial Statements and the Report of the Independent
Public Accountants appears in Part IV of this Annual Report on Form 10-K
beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
29
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this item is incorporated herein by reference from
our Proxy Statement to the 2001 annual meeting of shareholders to be filed
shortly hereafter.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this item is incorporated herein by reference from
our Proxy Statement to the 2001 annual meeting of shareholders to be filed
shortly hereafter.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this item is incorporated herein by reference from
our Proxy Statement to the 2001 annual meeting of shareholders to be filed
shortly hereafter.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this item is incorporated herein by reference from
our Proxy Statement to the 2001 annual meeting of shareholders to be filed
shortly hereafter.
30
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
List of documents filed as part of this report:
(a) 1. Consolidated Financial Statements and Financial Statement
Schedule beginning on page F-1 are filed as part of this
Annual Report on 10-K.
2. Financial statement schedule. None
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1* Amended and Restated Articles of Incorporation of the Registrant.
3.2 Third Amended and Restated Bylaws of the Registrant.
10.1+ Equity Compensation Plan of the Registrant.
10.2* Investor Rights Agreement between the Registrant and the investors
listed on Exhibit A thereto, dated August 3, 1999.
10.3* MCI WorldCom On-Net Voice Agreement between the Registrant and MCI
WorldCom, Inc., dated August 6, 1999.
10.4* Managed Security Services Provider Agreement by and between WatchGuard
Technologies, Inc. and the Registrant, dated October 30, 1998.
10.5* Colocation License by and between Switch and Data Facilities Site
Two, L.P. and the Registrant, dated January 1, 1999.
10.6* Commercial Lease Agreement by and between RB Associates and the
Registrant, dated July 22, 1998.
10.7* Master Lease Agreement between Sunrise Leasing Corporation (Cisco
Systems, Inc.) and the Registrant, dated October 23, 1997.
10.8* Letter of Agreement between the Registrant and Ascend Communications,
Inc./Ascend Credit Corporation, dated September 18, 1998.
10.9* Agreement between NEXTLINK Pennsylvania, Inc. and the Registrant,
dated June 25, 1999.
10.10* Service Agreement between Hyperion Communications of New Jersey, LLC
and the Registrant, dated May 12, 1999.
10.11* Master Lease Agreement between Ascend Credit Corporation and the
Registrant, dated June 29, 1999.
10.12@ Agreement between WebTV Networks, Inc. and the Registrant, dated
September 20, 2000.
10.13* Form of Agreement between Focal Communications Corporation and the
Registrant.
10.14* Common Stock Warrant Purchase Agreement by and among the Registrant
and H&Q You Tools Investment Holding, L.P., dated May 28, 1998.
10.15* Master Lease Agreement between Sunrise Leasing Corporation (Cisco
Systems, Inc.) and the Registrant, dated November 3, 1999.
10.16* Agreement between Hambrecht & Quist LLC and the Registrant, dated June
29, 1999 and an amendment dated December 7, 1999.
10.17* Agreement between Covad Communications Company and the Registrant,
dated December 3, 1999.
10.18* Agreement between UUNET Technologies, Inc. and the Registrant, dated
December 14, 1999.
10.19* Agreement between NEXTLINK Pennsylvania, Inc. and the Registrant,
dated December 7, 1999.
10.20* Agreement between NEXTLINK Pennsylvania, Inc. and the Registrant,
dated October 19, 1999.
10.21* Agreement between the ISK Magnetics, Inc. and the Registrant, dated
January 6, 2000.
10.22# Employment Agreement between the Registrant and Stephen A. Hurly,
dated December 15, 2000.
10.23# Promissory Note and Restricted Stock Agreement executed by Stephen A.
Hurly, dated as of December 15, 2000.
10.24@ Agreement between MCI Worldcom and the Registrant, dated March 8,
2001.
10.25 Sonet Network Confirmation of Service Order between Ameritech and the
Registrant, dated August 28, 2000.
10.26 Master Contractor agreement between Jerren Corporation and the
Registrant, dated March 1, 2000.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP (Independent Public Accountants).
24.1 Power of Attorney (Contained on the signature page of this annual
report on Form 10-K).
- ---------------
31
* Incorporated by reference from the Registration Statement on Forms S-1
of the Registrant (Registration No. 333-85465) filed with the
commission on August 18, 1999, as amended.
# Incorporated by reference from the Current Report on Form 8-K dated
December 15, 2001.
+ Incorporated by reference from the Registration Statement on Form S-8
of the Registrant (Registration No. 333-43088) filed with the
Commission on August 4, 2000.
@ We have requested confidential treatment of certain portions of this
exhibit pursuant to Rule 406 of the Securities Act of 1933. The entire
agreement will be filed separately with the Securities and Exchange
Commission.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated December 15, 2000.
32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To FASTNET Corporation:
We have audited the accompanying consolidated balance sheets of FASTNET
Corporation (a Pennsylvania corporation) and subsidiaries as of December 31,
1999 and 2000, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 2000. These financial statements and schedule referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FASTNET Corporation and
subsidiaries as of December 31, 1999 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
Financial Statements is presented for purposes of additional analysis and is not
a required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
March 14, 2001
F-1
FASTNET CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
1999 2000
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 953,840 $ 5,051,901
Marketable securities ............................................. -- 18,455,543
Accounts receivable, net of allowance of $49,388 and $776,977 ..... 1,791,422 2,570,154
Deferred offering costs ........................................... 1,336,605 --
Other current assets .............................................. 469,605 521,781
------------- -------------
Total current assets ......................................... 4,551,472 26,599,379
PROPERTY AND EQUIPMENT, net ........................................... 7,363,848 19,631,011
GOODWILL, net of accumulated amortization of $346,940 and $1,167,775 .. 2,115,558 1,294,723
CUSTOMER LIST, net of accumulated amortization of $277,778
and $944,449 ....................................................... 1,722,222 1,055,551
OTHER ASSETS .......................................................... 86,476 396,710
------------- -------------
$ 15,839,576 $ 48,977,374
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ................................. $ 12,985 $ 17,541
Current portion of capital lease obligations ...................... 1,417,066 4,681,781
Accounts payable .................................................. 2,319,524 2,576,087
Accrued expenses .................................................. 1,708,896 3,804,893
Deferred revenues ................................................. 2,331,258 3,113,321
Accrued restructuring ............................................. -- 4,045,643
------------- -------------
Total current liabilities .................................... 7,789,729 18,239,266
LONG-TERM DEBT ........................................................ 3,081,634 29,746
CAPITAL LEASE OBLIGATIONS ............................................. 2,794,093 7,105,678
OTHER LIABILITIES ..................................................... 810,309 78,107
COMMITMENTS AND CONTINGENCIES (NOTE 10)
SHAREHOLDERS' EQUITY
Preferred stock (Note 9) .......................................... 5,460,653 --
Common stock (Note 9) ............................................. 4,798,924 64,414,205
Deferred compensation ............................................. (364,149) (797,354)
Note receivable ................................................... -- (437,500)
Accumulated other comprehensive income ............................ -- 17,763
Accumulated deficit ............................................... (7,531,617) (38,672,537)
Less - Treasury stock, at cost .................................... (1,000,000) (1,000,000)
------------- -------------
Total shareholders' equity ................................... 1,363,811 23,524,577
------------- -------------
$ 15,839,576 $ 48,977,374
============= =============
F-2
The accompanying notes are an integral part of these statements.
FASTNET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1999 2000
------------- ------------- -------------
REVENUES ...................................... $ 5,527,979 $ 8,392,362 $ 12,660,248
OPERATING EXPENSES:
Cost of revenues (excluding depreciation) ..... 3,241,741 5,671,948 13,325,733
Selling, general and administrative ........... 3,067,740 6,362,729 17,946,471
Depreciation and amortization ................. 346,568 1,600,058 5,038,811
Restructuring charge .......................... -- -- 5,159,503
Asset impairment .............................. -- -- 3,233,753
------------- ------------- -------------
6,656,049 13,634,735 44,704,271
------------- ------------- -------------
Operating loss ................................ (1,128,070) (5,242,373) (32,044,023)
OTHER INCOME (EXPENSE):
Interest income ............................... 15,256 51,642 2,098,575
Interest expense .............................. (166,831) (405,549) (1,149,968)
Other ......................................... 5,355 (4,791) (45,504)
------------- ------------- -------------
(146,220) (358,698) 903,103
------------- ------------- -------------
NET LOSS ...................................... $ (1,274,290) $ (5,601,071) $(31,140,920)
============= ============= =============
BASIC AND DILUTED NET LOSS PER COMMON SHARE ... $ (0.14) $ (0.77) $ (2.20)
============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING .............................. 8,880,833 7,229,284 14,177,302
============= ============= ============
F-3
The accompanying notes are an integral part of these statements.
FASTNET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK
----------------------------- ----------------------------- DEFERRED
SHARES AMOUNT SHARES AMOUNT COMPENSATION
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1997 ................ -- $ -- 11,575,220 $ 124,000 $ --
Purchase of treasury stock ................ -- -- (5,787,610) -- --
Sale of Common stock ...................... -- -- 1,000,000 200,000 --
Issuance of Common stock to
employees for compensation ............. -- -- 212,390 42,478 --
Net loss .................................. -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 ................ -- -- 7,000,000 366,478 --
Issuance of Common stock
options below fair value ............... -- -- -- 532,450 (532,450)
Amortization of deferred
compensation ........................... -- -- -- -- 168,301
Issuance of Common stock for
acquisition (see Note 3) ............... -- -- 546,984 3,899,996 --
Sale of Preferred stock, net
of transaction costs (see
Note 9) ................................ 666,198 4,445,108 -- -- --
Conversion of note payable ................ 142,431 1,015,545 -- -- --
Net loss .................................. -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1999 ................ 808,629 5,460,653 7,546,984 4,798,924 (364,149)
Conversion of Convertible note ............ -- 2,033,334 3,050,000 --
Conversion of Preferred stock
to Common stock ........................ (808,629) (5,460,653) 808,629 5,460,653 --
Issuance of common stock
in initial public
offering, net .......................... -- -- 4,600,000 49,643,878 --
Issuance of Common stock
options below fair value ............... -- -- -- 992,733 (992,733)
Amortization of deferred
compensation ........................... -- -- -- -- 331,243
Issuance of Common stock warrant
in connection with debt................. -- -- -- 255,802 --
Exercise of Common stock
options ............................... -- -- 2,000 3,000 --
Unrealized gain on marketable
securities ............................ -- -- -- -- --
Issuance of restricted common
stock ................................. -- -- 1,000,000 437,500 --
Reduction of deferred compensation
for terminated employees .............. -- -- -- (228,285) 228,285
Net loss .................................. -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 2000 ................ -- $ -- 15,990,947 $ 64,414,205 $ (797,354)
============= ============= ============= ============= =============
(continued)
F-4
ACCUMULATED
OTHER
NOTE COMPREHENSIVE ACCUMULATED TREASURY
RECEIVABLE INCOME DEFICIT STOCK TOTAL
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1997 ................ $ -- $ -- $ (656,256) $ -- $ (532,256)
Purchase of treasury stock ................ -- -- -- (1,000,000) (1,000,000)
Sale of Common stock ...................... -- -- -- -- 200,000
Issuance of Common stock to
employees for compensation ............. -- -- -- -- 42,478
Net loss .................................. -- -- (1,274,290) -- (1,274,290)
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 ................ -- -- (1,930,546) (1,000,000) (2,564,068)
Issuance of Common stock
options below fair value ............... -- -- -- -- --
Amortization of deferred
compensation ........................... -- -- -- -- 168,301
Issuance of Common stock for
acquisition (see Note 3) ............... -- -- -- -- 3,899,996
Sale of Preferred stock, net
of transaction costs (see
Note 9) ................................ -- -- -- -- 4,445,108
Conversion of note payable ................ -- -- -- -- 1,015,545
Net loss .................................. -- -- (5,601,071) -- (5,601,071)
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1999 ................ -- -- (7,531,617) (1,000,000) 1,363,811
Conversion of Convertible note ............ -- -- -- -- 3,050,000
Conversion of Preferred stock
to Common stock ........................ -- -- -- -- --
Issuance of common stock
in initial public
offering, net .......................... -- -- -- -- 49,643,878
Issuance of Common stock
options below fair value ............... -- -- -- -- --
Amortization of deferred
compensation ........................... -- -- -- -- 331,243
Issuance of Common stock warrant
in connection with debt ................ -- -- -- -- 255,802
Exercise of Common stock
options ............................... -- -- -- -- 3,000
Unrealized gain on marketable
securities ............................ -- 17,763 -- -- 17,763
Issuance of restricted common
stock ................................. (437,500) -- -- -- --
Reduction of deferred compensation
for terminated employees .............. -- -- -- -- --
Net loss .................................. -- -- (31,140,920) -- (31,140,920)
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 2000 ................ $ (437,500) $ 17,763 $(38,672,537) $ (1,000,000) $ 23,524,577
============= ============= ============= ============= =============
F-4 [Continued]
The accompanying notes are an integral part of these statements.
FASTNET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1998 1999 2000
-------------- -------------- --------------
OPERATING ACTIVITIES:
Net loss ................................................ $ (1,274,290) $ (5,601,071) $ (31,140,920)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ..................... 346,568 1,600,058 5,038,811
Non-cash portion of restructuring charge .......... -- -- 4,045,643
Charge for impairment of long-lived assets ........ -- -- 3,233,753
Stock-based compensation expense .................. 42,478 -- --
Amortization of deferred compensation ............. -- 168,301 331,243
Provision for doubtful accounts ................... 8,592 41,591 727,589
Amortization of debt discount ..................... -- -- 255,802
Changes in operating assets and liabilities:
Increase in assets:
Accounts receivable ......................... (437,453) (859,415) (1,506,321)
Other assets ................................ (252,601) (176,481) (362,410)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses ....... 689,616 2,310,112 3,371,897
Deferred revenues ........................... 263,111 1,238,961 782,063
Other liabilities ........................... -- 810,322 (414,934)
-------------- -------------- --------------
Net cash used in operating activities ... (613,979) (467,622) (15,637,784)
-------------- -------------- --------------
INVESTING ACTIVITIES:
Purchases of property and equipment ..................... (899,996) (1,880,518) (9,327,182)
Purchase of marketable securities, net .................. -- -- (18,437,780)
Cash paid for business acquisition ...................... -- (400,199) --
-------------- -------------- --------------
Net cash used in investing activities ... (899,996) (2,280,717) (27,764,962)
-------------- -------------- --------------
FINANCING ACTIVITIES:
Proceeds from debt ...................................... 3,344,000 1,000,000 1,027,944
Repayments of debt ...................................... (615,920) (166,034) (1,025,276)
Repayments of capital lease obligations ................. (28,815) (497,072) (2,148,739)
Net repayments of line of credit ........................ (217,489) -- --
Purchase of treasury stock .............................. (1,000,000) -- --
Proceeds from sale of Common stock, net ................. 200,000 -- 49,646,878
Proceeds from sale of Preferred stock, net .............. -- 4,445,108 --
Increase in deferred offering costs ..................... -- (1,336,605) --
-------------- -------------- --------------
Net cash provided by financing activities 1,681,776 3,445,397 47,500,807
-------------- -------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............... 167,801 697,058 4,098,061
CASH AND CASH EQUIVALENTS, beginning of year ............ 88,981 256,782 953,840
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of year .................. $ 256,782 $ 953,840 $ 5,051,901
============== ============== ==============
F-5
The accompanying notes are an integral part of these statements.
FASTNET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY:
BACKGROUND
FASTNET Corporation and its subsidiaries ("FASTNET" or the "Company"), has
been providing Internet access and enhanced products and services to its
customers since 1994. The Company is an Internet services provider to businesses
in selected high growth secondary markets. 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.
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
$49,643,878 from the initial public offering and the exercise of the
over-allotment option.
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 has 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. The Company expects these
actions will reduce its cash consumption rate in the future, but may result in
early termination payments for certain contractual obligations that exist.
The Company has incurred losses since inception and expects to continue to
incur losses in 2001. As of December 31, 2000, the Company's accumulated deficit
was $38,672,537. As of December 31, 2000, cash and cash equivalents and
marketable securities were $23,507,444. The Company believes that its existing
cash and cash equivalents, marketable securities, and available financing under
existing equipment lease facilities 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, our 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 idle additional
markets and make further reductions in head count. Any of these events could
harm our business, financial condition or results of operations.
The Company is subject to those risks associated with companies in the
early stages of development. 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, and dependence on
key personnel.
ACQUISITION OF CYBERTECH WIRELESS, INC.
On March 14, 2001, the Company acquired Cybertech Wireless, Inc.
("Cybertech"), a provider of wireless broadband Internet services based in
Rochester, New York. The Company has acquired all the assets and has assumed
substantially all of the liabilities of Cybertech for 2,000,000 shares of the
Company's Common stock valued at approximately $1,800,000. The acquisition
will be accounted for under the purchase method.
F-6
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
FASTNET and its wholly owned subsidiaries. All material intercompany balances
and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
FASTNET considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
MARKETABLE SECURITIES
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 December 31, 2000, 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. Unrealized gains and losses are reported as a separate
component of shareholders' equity. As of December 31, 2000, the Company had
$17,763 of unrealized gains.
The Company's investments in debt and equity securities are diversified
among high-credit quality securities in accordance with the Company's investment
policy.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are provided on the straight-line basis over the estimated useful lives of the
respective assets, which range from 3 to 7 years. Maintenance, repairs and minor
replacements are charged to expense as incurred.
Effective July 1, 1999, the Company changed its method of depreciation for
property and equipment from mid-year convention to mid-month convention. This
change was applied on a prospective basis (as a change in accounting estimate)
to assets acquired after that date. The Company changed its method of
depreciation based upon management's belief that the mid-month convention
provides a better matching of costs and revenues and the fact that the mid-month
convention is the predominant method in practice. The effect of the change on
the net loss for the year ended December 31, 1999, was to decrease net loss by
approximately $390,000 or $0.05 per share.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of financial instruments held by the Company, which
include cash equivalents, accounts receivable, other current assets, accounts
payable, accrued expenses and deferred revenues, are reflected in the
accompanying consolidated financial statements at fair value due to the
short-term nature of those instruments. The carrying amount of long-term debt
approximates its fair value.
F-7
IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for its long-lived assets in accordance with Statement
of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
The Company reviews its long-lived assets, including property and equipment,
goodwill and customer list, for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be fully
recoverable. To determine recoverability of its long-lived assets, the Company
evaluates the probability that future undiscounted net cash flows will be less
than the carrying amount of the assets. Impairment is measured at fair value.
In accordance with SFAS No. 121, during the fourth quarter of the year
ended December 31, 2000, based upon a review of the Company's long-lived assets,
the Company recorded a non-cash charge of $3,233,753 related to the write-down
of a portion of the asset values of the components of several of the Company's
customer network facilities. The Company ceased operations in these facilities
upon adoption of the Company's revised business plan, which was approved by the
Board of Directors in October 2000 (see Note 7). An impairment was recognized
as the future undiscounted cash flows of each facility were estimated to be
insufficient to recover their related carrying values. As such, the carrying
values of these assets were written down to the Company's estimates of their
fair value. Fair value was based on current appraisal values or other estimates
of fair value. Management of the Company believes this provision will be
adequate to cover any future losses incurred relating to these facilities.
However, actual losses could vary significantly from these estimates.
COMPREHENSIVE INCOME
The Company follows 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 year ended December 31, 2000, comprehensive income
was as follows:
Year ended
December 31, 2000
-----------------
Net loss .......................................... $(31,140,920)
Unrealized gain on marketable securities .......... 17,763
-------------
Comprehensive loss ................................ $(31,123,157)
=============
REVENUE RECOGNITION
Revenues include one-time and ongoing charges to customers for accessing
the Internet. 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 ongoing access revenue over the period the services are
provided. The Company offers contracts for Internet access that are generally
paid for in advance by customers. The Company has deferred revenue recognition
on these advance payments and recognizes this revenue ratably over the service
period.
Revenues are also derived from the resale of products, including hardware
and software, and web hosting services. The Company sells its 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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." The bulletin is based upon existing accounting rules and provides
specific guidance on how those accounting rules should be applied. SAB No. 101
was required to be adopted in the fourth quarter of 2000. The Company's
revenue recognition accounting policies are in compliance with the
requirements of SAB No. 101.
F-8
COST OF REVENUES
Cost of revenues include telecommunications charges and other charges
incurred in the delivery and support of services, including personnel costs in
the Company's operations support function, as well as equipment costs related to
hardware and software revenues. Depreciation and amortization on the property
and equipment used by the Company to deliver and support services are excluded
from the cost of revenues and are included as a separate line item on the
accompanying consolidated statements of operations. The telecommunications
component of cost of revenues was $2,091,772, $4,528,908 and $10,420,599 for the
years ended December 31, 1998, 1999 and 2000, respectively.
ADVERTISING
All advertising costs are expensed as incurred at the first time the
advertising is placed. Advertising expense for the years ended December 31,
1998, 1999 and 2000 was $625,264, $1,046,181, and $2,925,970, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities and are measured using enacted tax rates
that are expected to be in effect when the differences reverse.
At December 31, 2000, the Company had a net operating loss carry forward
for federal income tax purposes of approximately $32.8 million. The net
operating loss carryforward will begin to expire in 2010. The Company's
utilization of its loss carry forward could be limited pursuant to the Tax
Reform Act of 1986, due to cumulative changes in ownership in excess of 50%.
The Company has a net deferred tax asset primarily related to the net
operating loss carryforward and temporary differences between the financial
reporting and tax accounting treatment of certain expenses. Due to the Company's
history of operating losses, the realization of the deferred tax asset is
uncertain. Therefore, the Company has provided a full valuation allowance
against the net deferred tax asset as of December 31, 2000.
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.
MAJOR CUSTOMERS
The Company derived revenues of approximately 11%, 21% and 20% for the
years ended December 31, 1998, 1999 and 2000, respectively, from one customer.
As of December 31, 1999 and 2000, the Company had outstanding accounts
receivable from this customer of $425,581 and $325,900, respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash balances and trade receivables. The
Company invests its excess cash with federally insured banks. The Company does
not require collateral from its customers.
SUPPLEMENTAL CASH FLOW INFORMATION
For the years ended December 31, 1998, 1999, and 2000, the Company paid
interest of $171,101, $317,443, and $769,251, respectively. For the years ended
December 31, 1998, 1999 and 2000, the Company paid income taxes of $103,187,
$75, and $2,222, respectively. The amounts paid in 1998 were refunded to the
Company in 2000. The Company incurred capital lease obligations of $140,805,
$4,524,670 and $9,725,039 for the years ended December 31, 1998, 1999, and 2000,
respectively.
F-9
The following table lists noncash assets that were acquired and liabilities
that were assumed as a result of the acquisition discussed in Note 3 for the
year ended December 31, 1999:
Noncash assets:
Accounts receivable ................................... $ 95,075
Other current assets .................................. 19,277
Property and equipment ................................ 194,798
Goodwill .............................................. 2,462,498
Customer list ......................................... 2,000,000
Other assets .......................................... 10,422
-----------
$4,782,070
===========
Assumed liabilities:
Accounts payable ...................................... $ 6,008
Accrued expenses ...................................... 104,720
Deferred revenues ..................................... 207,133
Capital lease obligation .............................. 9,460
Debt .................................................. 154,554
-----------
481,875
-----------
Net noncash assets acquired ..................... 4,300,195
Purchase price paid in stock .......................... 3,899,996
-----------
Cash paid, net of cash acquired ....................... $ 400,199
===========
STOCK-SPLIT
On May 28, 1998, the Company effected a 24,115-for-1 split. All references
in the financial statements to the number of shares and to per share amounts
have been retroactively restated to reflect this change.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of Effective Date of FASB Statement No. 133-an amendment
of FASB Statement No. 133" which must be adopted by the Company on January 1,
2001, provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. As the Company does not
currently hold derivative instruments or engage in hedging activities, the
adoption of this pronouncement did not have any impact on the Company's
financial position or results of operation.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years financial
statements to conform to the current year presentation.
3. ACQUISITION:
On July 30, 1999, the Company acquired 100% of the capital stock of
Internet Unlimited, Inc., a provider of web hosting and colocation services, for
$400,000 in cash and 546,984 shares of Common stock with transaction costs of
$75,000. 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
liabilities was determined to be $4,462,498. Of this amount $2,462,498 was
allocated to goodwill and $2,000,000 was allocated to customer list. The
customer list and goodwill are being amortized on a straight-line basis over 3
F-10
years. Amortization expense for the years ended December 31, 1999 and 2000 was
$624,718 and $1,487,506, respectively. If the acquisition of Internet Unlimited
Inc. had occurred on January 1, 1998, the unaudited pro forma information, after
giving effect to the pro forma adjustments described below, would have been as
follows:
FOR THE YEAR ENDED DECEMBER 31,
1998 1999
------------ ------------
Unaudited pro forma revenues ...................... $ 6,125,184 $ 9,109,726
Unaudited pro forma operating loss ............. .. $(2,583,521) $(6,102,433)
Unaudited pro forma net loss ...................... $(2,748,038) $(6,483,523)
Unaudited pro forma basic and diluted net loss
per Common share ............................... $ (0.29) $ (0.86)
The unaudited pro forma information does not purport to be indicative of
the results that would have been attained if the operations had actually been
combined for the periods presented and is not necessarily indicative of the
operating results to be expected in the future. The pro forma adjustments
consist of the amortization of customer list and goodwill of $1,487,500
(including $624,718 recorded by the Company from the acquisition date through
December 1999) for the year ended December 31, 1999. Additionally, prior to the
acquisition, the Company derived revenues from Internet Unlimited, Inc. These
revenues and the corresponding costs of revenues recorded by Internet Unlimited,
Inc. have been eliminated from the above unaudited information.
4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES:
Cash and cash equivalents and marketable securities consisted of the
following:
December 31,
1999 2000
------------ ------------
Cash and cash equivalents ................ $ 953,840 $ 5,051,901
------------ ------------
Marketable securities (at market value)
Commercial paper .................... -- 7,950,262
Corporate notes ..................... -- 8,502,881
US government agency notes .......... -- 2,002,400
------------ ------------
$ -- $18,455,543
============ ============
The contractual maturities of the marketable securities at December 31,
2000 are all less than one year.
5. PROPERTY AND EQUIPMENT:
YEAR ENDED DECEMBER 31,
1999 2000
------------- -------------
Equipment ................................ $ 6,524,216 $ 17,811,184
Computer equipment ....................... 1,217,455 1,815,519
Computer software ........................ 713,480 1,584,685
Furniture and fixtures ................... 279,667 609,661
Leasehold improvements ................... 228,980 2,961,217
------------- -------------
8,963,798 24,782,266
Less - Accumulated depreciation
and amortization ...................... (1,599,950) (5,151,255)
------------- -------------
$ 7,363,848 $ 19,631,011
============= =============
Depreciation and amortization expense for the years ended December 31,
1998, 1999 and 2000, was $346,568, $980,267, and $3,551,305, respectively. The
net carrying value of property and equipment under capital leases was $4,097,653
and $11,604,918 at December 31, 1999 and 2000, respectively.
F-11
6. ACCRUED EXPENSES:
DECEMBER 31,
1999 2000
------------ ------------
Accrued telecommunication costs .. $ -- $ 1,160,870
Professional fees ................ 91,026 817,268
Accrued compensation ............. 163,168 330,336
Accrued offering costs ........... 1,300,000 --
Other ............................ 154,702 1,496,419
------------ ------------
$ 1,708,896 $ 3,804,893
============ ============
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 eight 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.
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 cost in the markets
being closed. These costs consist of both Internet backbone connectivity cost,
as well as network and access costs. These services are no longer required in
the closed markets. 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, $4,045,643 has not been paid as of
December 31, 2000 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 in
2000, the Company recorded a $3,233,753 asset impairment charge as a result of
the Restructuring Plan (see Note 2 " Impairment of Long-Lived Assets").
The activity in the restructuring charge accrual during 2000 is summarized
in the table below:
ACCRUED
CASH RESTRUCTURING
RESTRUCTURING PAYMENTS AS OF
CHARGE DURING 2000 DECEMBER 31, 2000
------------ ------------ ------------
Telecommunications exit and termination fees .. $ 2,821,352 $ (268,880) $ 2,552,472
Leasehold termination costs ................... 869,585 (160,767) 708,818
Termination payments to employees ............. 345,144 (345,144) --
Sales and marketing contract terminations ..... 827,427 (304,907) 522,520
Facility exit costs ........................... 295,995 (34,162) 261,833
------------ ------------ ------------
$ 5,159,503 $(1,113,860) $ 4,045,643
============ ============ ============
8. DEBT:
DECEMBER 31,
1999 2000
------------ ------------
Convertible notes payable ........... $ 3,050,000 $ --
Term notes .......................... 44,619 47,287
------------ ------------
3,094,619 47,287
Less - Current portion .............. (12,985) (13,474)
------------ ------------
$ 3,081,634 $ 33,813
============ ============
On October 25, 2000, the Company entered into an agreement with an investor
to provide the Company with financial advisory services. The agreement was
amended on February 12, 2001 and expires on June 30, 2001. In exchange for these
services, the Company issued a convertible note for $250,000. This note is due
on October 24, 2003 and is convertible into Common stock at $1.00 per share
above the closing price on the date of the agreement, which was $1.13 per share.
No interest or dividends are payable on this note. In connection with this note,
the Company paid a retainer of $50,000 and issued a warrant to purchase 120,000
shares of the Company's Common stock at an exercise price of $1.13 per share,
the fair market value of the Common stock on the date of grant. The warrant was
immediately exercisable, and expires in 10 years. As a result of the financial
advisory services rendered in 2000, the Company incurred approximately $250,000
that has been included in selling, general, and administrative expenses.
On January 19, 2000, the Company issued a $1,000,000 bridge financing note
to an investor with a warrant to purchase 30,000 shares of Common stock. The
note bore interest at 7% per annum and matured upon the completion of the
initial public offering. The warrant is exercisable at $12 per share and expires
on January 18, 2007. The warrant was valued at $255,802 using the Black Scholes
Option pricing model and was recorded as a debt discount. This debt discount was
amortized to interest expense over the term of the note. The note was repaid
with the proceeds from the Company's initial public offering (see Note 9).
F-12
On May 14, 1999, the Company issued a $1,000,000 convertible note to an
investor (the "May 14 Convertible Note"). The May 14 Convertible Note bore
interest at 7%, and both principal and accrued interest were convertible at the
option of the holder at any time prior to maturity at rates, subject to
adjustment, based on the future sales price of the Company's Common stock. In
August 1999, the May 14 Convertible Note, together with accrued and unpaid
interest totaling $1,015,545 was converted into 142,431 shares of Series A
Preferred stock (see Note 9). The shares of Series A Preferred stock converted
into Common stock upon the consummation of the Company's initial public offering
(see Note 9).
On May 28, 1998, the Company issued a $3,050,000 convertible note (the
"Convertible Note") and a warrant to purchase 1,000,000 shares of Common stock
at an exercise price of $1.50 per share to an investor. The investor also
purchased 1,000,000 shares of Common stock (see Note 9). The Black-Scholes
Option pricing model calculated a minimal value for the warrant; therefore, no
proceeds were assigned to the warrant. The Convertible Note bore interest at 7%
and was convertible into Common stock at the option of the investor at any time
prior to maturity at $1.50 per share subject to adjustment, as defined. The
Convertible Note was secured by substantially all of the assets of the Company.
The Convertible Note originally matured on November 30, 1999. On August 9, 1999,
the investor agreed to extend the maturity of the Convertible Note to January
31, 2001. The investor also agreed to convert the Convertible Note into
2,033,334 shares of Common stock immediately prior to the consummation of the
Company's initial public offering (see Note 9). The Convertible Note was
converted to 2,033,334 shares of Common stock upon the consummation of the
initial public offering (see Note 9).
Term notes
The Company has three outstanding term notes from a bank for equipment and
vehicles.
In 2000, the Company received a $27,994 term note from a bank, bearing
interest at 12.7%. The outstanding balance as of December 31, 2000 was $21,892.
Interest expense on this term note was $2,584 in 2000. Future maturities on this
term note as of December 31, 2000 are $4,067 in 2001, $4,583 in 2002 and $13,242
in 2003.
In 1998, the Company received a $44,000 term note from a bank, bearing
interest at 9%. The outstanding balance at December 31, 1999 and 2000 was
$34,710 and $21,025, respectively. Interest expense related to this term note
was $1,293 in 1998, $3,695 in 1999 and $2,670 in 2000. Future maturities on this
term note as of December 31, 2000 are $9,104 in 2001, $9,958 in 2002 and $1,963
in 2003.
In 1997, the Company received a $21,873 term note from a financing company,
bearing interest at 10.75%. The outstanding balance at December 31, 1999 and
2000 was $9,909 and $4,370, respectively. Interest expense on this term note was
$1,819 in 1998, $1,381 in 1999 and $790 in 2000. Future maturities on this term
note as of December 31, 2000 are $4,370 in 2001.
9. SHAREHOLDERS' EQUITY:
PREFERRED STOCK
The Company has 10,000,000 authorized shares of no par value Preferred
stock. The Company designated and issued 808,629 shares as Series A Convertible
Preferred stock ("Series A Preferred") in August 1999. The Series A Preferred
was convertible at any time into Common stock of the Company at a one-for-one
conversion ratio. The holders of the Series A Preferred had a liquidation
preference of $7.13 per share.
In August 1999, the Company sold 666,198 shares of Series A Preferred to
certain investors at $7.13 per share. In connection with the sale of Series A
Preferred, an advisory fee of $285,000 is due to the financial advisor, who is a
significant shareholder. The advisory fee is due in February 2001 and has been
included within accrued expenses as of December 31, 2000 and other long-term
liabilities as of December 31, 1999 in the accompanying consolidated balance
sheets. The net proceeds from the sale of the Series A Preferred were
$4,445,108. The Series A Preferred converted into Common Stock immediately prior
to the consummation of the Company's initial public offering.
F-13
COMMON STOCK
The Company has 50,000,000 authorized shares of no par value Common stock.
The Company had 7,546,984 shares outstanding as of December 31, 1999 and
15,990,947 shares outstanding as of December 31, 2000.
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 raising net
proceeds of $42,947,878. Additionally, on March 7, 2000, the underwriters
exercised their over-allotment option for the purchase of an additional 600,000
shares at a price of $12.00 per share. The Company received net cash proceeds of
$6,696,000 from the exercise of the underwriter's over-allotment option.
In May 1998, the Company purchased 5,787,610 shares of Common stock from
certain employee shareholders (the "Sellers") of the Company. Subsequently in
May 1998, the Company sold 1,000,000 shares to an investor. The Company recorded
the purchase from the Sellers as a purchase of treasury stock. Also, in May
1998, the investor purchased a $3,050,000 note from the Company and received a
warrant to purchase 1,000,000 shares of Common stock. Also in May 1998, the
Company issued 212,390 shares of Common stock to certain employees. In
connection with issuing these shares, the Company charged $42,478 to
compensation expense. This expense is included within selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
RESTRICTED COMMON STOCK
In December 2000, the Company sold 1,000,000 shares of Common stock to the
Chief Executive officer of the Company (the "Holder") for $437,500, which
represented the fair market value of the shares on the sale date, in exchange
for a note receivable (the "Note"). The Note bears interest at 6% per year. The
Note and accrued interest are due on December 1, 2005. The Note is secured by a
pledge of the Company's Common stock sold by the Company and held by the Holder
for $328,125 of the Note amount and the balance of $109,375 is secured by the
Holder's personal assets. The Note is reflected in shareholders' equity on the
consolidated balance sheets as a Note receivable on Common stock.
The shares issued to the Holder are restricted and vest as follows: 25%
vest upon the transaction date and the remaining shares vest pro rata as of the
last day of each calendar month over the 36-month period commencing on the date
of the Note. In the event the Holder's employment with the Company is terminated
for any reason, the Holder shall offer to sell all unvested shares to the
Company for the amount paid by the Holder for the shares plus accrued interest
(as defined) in the Note agreement. In the event of a change in control, as
defined, 50% of the holder's unvested shares shall become vested.
COMMON STOCK OPTIONS
In March 1999, the Company approved the 1999 Equity Compensation Plan (the
"1999" Plan). The 1999 Plan provides for the issuance of up to 1,000,000 shares
of Common stock for incentive stock options ("ISOs"), nonqualified stock options
("NQSO's") and restricted shares. ISOs are granted with exercise prices at or
above fair value as determined by the Board of Directors. NQSOs are granted with
exercise prices determined by the Board of Directors. Each option expires on
such date as the Board of Directors may determine, generally ten years. On June
23, 2000, the Company's shareholders approved an amendment to the 1999 Plan to
change the name of the 1999 Plan to the Equity Compensation Plan ("the Plan")
and increase the number of shares available for issuance under the Plan to
3,000,000 shares of Common stock.
The Company applies APB Opinion No.25, "Accounting for Stock Issued to
Employees," and the related interpretations in accounting for options issued to
employees under the Plan. Accordingly, compensation expense is recognized for
the intrinsic value (the difference between the exercise price and the fair
value of the Company's Common stock) on the date of grant. Compensation, if any,
is deferred and charged to expense over the respective vesting period. In May
and June 1999, the Company issued options to purchase 110,000 and 3,000 shares
of Common stock, respectively for $2.50 per share. At that time the fair value
of the Company's Common stock was deemed $7.13 per share. These options vest
over periods ranging from one to five years. In connection with these option
grants, the Company recorded deferred compensation of $532,450. The amortization
of deferred compensation was $168,301 and $113,898 for the years ended December
31, 1999 and 2000, respectively.
F-14
On February 28, 2000, certain members of the Company's Board of Directors
were granted a total of 220,000 options to purchase Common stock. Of these
options, 20,000 vested immediately and the remaining 200,000 will vest quarterly
over a period of five years. The exercise price of these options was $9.25 per
share and the fair value of the Company's Common stock on the date of grant was
$12.44 per share. Accordingly, the Company recorded deferred compensation of
$701,800. Additionally, during February 2000, the Company granted 53,491 options
to purchase Common stock to certain employees at an exercise price of $9.25 per
share and the fair value of the Common stock on the date of grant was $14.69 per
share. Accordingly, the Company recorded deferred compensation of $290,993.
These options generally vest over a five-year term. Compensation expense
recorded from the amortization of the deferred compensation was $217,345 for the
year ended December 31, 2000.
As a result of the termination of employees, $228,285 of the unamortized
balance of deferred compensation was reversed in the year ended December 31,
2000.
Under SFAS No. 123, "Accounting for Stock-Based Compensation," compensation
cost related to stock options granted to employees is computed based on the
value of the stock option at the date of grant using an option valuation
methodology, typically the Black-Scholes option pricing model. SFAS No. 123 can
be applied either by recording the fair value of the options or by continuing to
record the APB No. 25 value and disclosing the SFAS No. 123 impact on a pro
forma basis. The Company has elected the disclosure method of SFAS No. 123. Had
compensation cost of the Plan been determined based upon the fair value of the
options at the date of grant, as prescribed under SFAS No. 123, the Company's
net loss and net loss per Common share for the years ended December 31, 1999 and
2000 would have increased as follows:
FOR THE YEAR ENDED DECEMBER 31,
1999 2000
--------------- ---------------
Net loss - as reported ............ $ (5,601,071) $ (31,140,920)
Net loss - pro forma .............. $ (5,897,935) $ (32,232,934)
Basic and diluted net loss per
Common share - as reported .. $ (0.77) $ (2.20)
Basic and diluted net loss per
Common share- pro forma ..... $ (0.82) $ (2.27)
The weighted average fair value of options granted during 2000 and 1999 is
estimated at $2.68 and $2.11 per share, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
FOR THE YEAR ENDED DECEMBER 31,
1999 2000
---------- ----------
Expected life ....................... 6.0 years 6.0 years
Risk-free interest rate ............. 5.55% 6.48%
Volatility .......................... 70.0% 100.0%
Dividend rate ....................... 0% 0%
Information with respect to outstanding options under the Plan is as
follows:
AGGREGATE PRICE PER
SHARES PRICE SHARE
------------ ------------- -------------
Plan inception, March 1, 1999 ..... -- $ -- $ --
Granted ...................... 585,000 1,105,100 1.50-7.13
------------ ------------- -------------
Outstanding, December 31, 1999 .... 585,000 1,105,100 1.50-7.13
Granted .................... 1,397,750 4,204,208 0.56-13.58
Exercised .................. (2,000) (3,000) 1.50
Cancelled .................. (10,000) (23,000) 1.50-2.50
------------ ------------- -------------
Outstanding, December 31, 2000 .... 1,970,750 $ 5,283,308 $0.56-$13.58
============ ============= =============
F-15
As of December 31, 2000, there were 1,071,750 options available for grant
under the plan.
In January 2001, 118,000 of the 586,000 options, which were exercisable as of
December 31, 2000, were cancelled.
The following table summarizes information about stock options outstanding at
December 31, 2000:
Options Outstanding Options Exercisable
---------------------------------- --------------------------------
Weighted Weighted Weighted
average average average
Range of exercise Number remaining exercise Number exercise
prices outstanding life price exercisable price
- ------------------- --------------- -------------- --------------- ------------- --------------
$0.56 - $1.13 970,000 9.8 $ 0.98 -- --
$1.50 446,000 8.2 1.50 367,000 $ 1.50
$2.00 - $3.00 137,500 8.6 2.54 77,000 2.57
$4.09 - $4.81 112,500 9.3 4.70 24,500 4.65
$5.81 - $6.25 3,000 9.4 6.03 1,500 6.25
$7.13 20,000 8.6 7.13 17,500 7.13
$9.25 273,250 9.2 9.25 91,000 9.25
$9.88 - $13.58 8,500 9.3 4.82 8,000 4.82
--------------- -------------- --------------- ------------- --------------
1,970,750 9.24 $ 2.68 586,500 $ 3.30
=============== ============== =============== ============= ==============
WARRANTS
In May 1998, the Company issued a warrant to an investor to purchase
1,000,000 shares of Common stock at an exercise price of $1.50 per share. This
warrant is currently exercisable and expires in May 2005.
In January 2000, the Company issued a warrant to purchase 30,000 shares of
Common stock at an exercise price of $12.00 per share in conjunction with the
bridge financing (see Note 8). The warrant is currently exercisable and expires
in January 2007.
10. COMMITMENTS AND CONTINGENCIES:
LEASES
During the first quarter of 2000, the Company received a credit line of
$3.0 million from a vendor to purchase equipment. In April 2000, the same vendor
added a second credit facility of $5.0 million to the original credit facility.
These credit facilities are used to secure computer-related equipment under
three-year capital leases.
In June 1999, the Company entered into a $20 million 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. As of
December 31, 2000, the Company had $15.7 million available for the purchase of
additional equipment under the lease.
The Company leases office space, telecommunications services and equipment
under capital and operating leases expiring through 2010. Rent expense under the
operating leases was $542,447, $1,027,502 and $1,766,647 during the years ended
December 31, 1998, 1999 and 2000, respectively. The interest rates implicit in
the capital leases range from 10.5% to 22.2%. Future minimum lease payments as
of December 31, 2000, are as follows:
F-16
CAPITAL OPERATING
LEASES LEASES
------------- -------------
2001 ................................... $ 4,681,781 $ 1,716,459
2002 ................................... 4,477,402 1,353,386
2003 ................................... 2,440,351 1,350,561
2004 ................................... 187,925 1,373,464
2005 ................................... -- 1,134,930
Thereafter ............................. -- 1,628,294
------------- -------------
Total minimum lease payments ........... 11,787,459 $ 8,557,094
=============
Less - Current portion ................. (4,681,781)
-------------
$ 7,105,678
=============
LITIGATION
From time-to-time, the Company is involved in certain legal actions arising
in the ordinary course of business. In management's opinion, based on the advice
of counsel, the outcome of such actions is not expected to have a material
adverse effect on the Company's future financial position or results of
operations.
RELATED PARTY TRANSACTIONS
In June 1999, the Company entered into a financial arrangement, as amended,
with an advisor (the "Financial Advisor"), who is an affiliate of a significant
shareholder. This agreement provided for a payment of $320,000 due to the
Financial Advisor on February 1, 2001 related to the private placement of
securities, and a $500,000 payment due upon the earlier of the consummation of
an initial public offering or February 1, 2001. This $500,000 payment is related
to general strategic and advisory services rendered during the three months
ended September 30, 1999. The $500,000 was repaid in March 2000.
In January 2000, the Company received a $1,000,000 promissory note from the
Financial Advisor. This promissory note was repaid upon the consummation of the
initial public offering (see Notes 8 and 9).
11. RETIREMENT SAVINGS PLAN
In 1999, the Company established a defined contribution 401(k) retirement
savings plan, which covers substantially all employees. Employees become
eligible to participate in the plan upon completion of three months of
employment. Employees may elect to contribute up to 15% of their annual
compensation up to the maximum allowable under the Internal Revenue Code. The
Company matches $0.50 on every $1.00 up to the first 6% of the employee
contributions. The Company made $72,036 and $92,823 of contributions in 1999 and
2000, respectively.
12. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA (in thousands, except per share
data)
1999 2000
-------------------------------------------- --------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
quarter quarter quarter quarter quarter quarter quarter quarter
-------- -------- -------- -------- -------- -------- -------- --------
Revenues ................ $ 1,734 $ 1,818 $ 2,295 $ 2,546 $ 3,030 $ 3,169 $ 3,225 $ 3,236
Operating expenses ...... 2,073 2,491 4,186 4,886 7,180 9,305 11,465 16,754
Operating loss .......... (339) (673) (1,891) (2,340) (4,150) (6,136) (8,240) (13,518)
Other income (expense) .. (54) (56) (117) (131) (73) 560 354 62
Net loss ................ (393) (729) (2,008) (2,471) (4,223) (5,576) (7,886) (13,456)
Basic and diluted net loss
per Common share ..... (0.06) (0.10) (0.27) (0.33) (0.36) (0.37) (0.53) (0.90)
F-17
FASTNET CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2000
ADDITIONS
--------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS OTHER BALANCE AT
DESCRIPTION YEAR AND EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
------------ ------------ ------------ ------------ ------------
For the year ended December 31, 1998:
Allowance for doubtful accounts ... $ 14,442 $ 8,592 $ -- $ (5,847) $ 17,187
============ ============ ============ ============ ============
For the year ended December 31, 1999:
Allowance for doubtful accounts ... $ 17,187 $ 41,591 $ -- $ (9,390) $ 49,388
============ ============ ============ ============ ============
For the year ended December 31, 2000:
Allowance for doubtful accounts ... $ 49,388 $ 727,589 $ -- $ -- $ 776,977
============ ============ ============ ============ ============
Restructuring reserve ............. $ -- $ 5,159,503 $ -- $(1,113,860) $ 4,045,643
============ ============ ============ ============ ============
F-18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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: April 2, 2001 By: /s/Stephen A. Hurly
--------------------------------------------
Stephen A. Hurly
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
Date: April 2, 2001 By: /s/Stephen A. Hurly
--------------------------------------------
Stephen A. Hurly
Chief Executive Officer, President and Director
(Principal Executive Officer)
Date: April 2, 2001 By: /s/Stanley F. Bielicki
--------------------------------------------
Stanley F. Bielicki
Chief Financial Officer
(Principal Financial & Accounting Officer)
Date: April 2, 2001 By: /s/David K. Van Allen
--------------------------------------------
David K. Van Allen
Director
Date: April 2, 2001 By: /s/Sonny C. Hunt
--------------------------------------------
Sonny C. Hunt
Director
Date: April 2, 2001 By: /s/Douglas L. Michels
--------------------------------------------
Douglas L. Michels
Director
Date: April 2, 2001 By: /s/David J. Farber
--------------------------------------------
David J. Farber
Director
Date: April 2, 2001 By: /s/R. Barry Borden
--------------------------------------------
R. Barry Borden
Director
Date: April 2, 2001 By: /s/Alan S. Kessman
--------------------------------------------
Alan S. Kessman
Director