<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-29255
FASTNET CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-2767197
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3864 COURTNEY STREET
TWO COURTNEY PLACE, SUITE 130
BETHLEHEM, PA 18017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(610) 266-6700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's Common Stock outstanding as of May
12, 2000 was 14,988,947.
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FASTNET CORPORATION
FORM 10-Q
MARCH 31, 2000
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets-- December 31, 1999 and March 31, 2000
(unaudited) ...............................................................3
Consolidated Statements of Operations-- Three Months Ended
March 31, 1999 and March 31, 2000 (unaudited)..............................4
Consolidated Statements of Cash Flows-- Three months Ended
March 31, 1999 and March 31, 2000 (unaudited)..............................5
Notes to Consolidated Financial Statements....................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................13
Item 2. Changes in Securities and Use of Proceeds..............................14
Item 3. Defaults Upon Senior Securities........................................15
Item 4. Submission of Matters to a Vote of Security Holders....................15
Item 5. Other Information......................................................15
Item 6. Exhibits and Reports on Form 8-K.......................................21
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
FASTNET CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 March 31
1999 2000
------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 953,840 $ 6,118,416
Marketable securities............................................... -- 38,889,620
Accounts receivable, net of allowance of
$49,388 and $136,977.............................................. 1,791,422 1,774,008
Offering costs...................................................... 1,336,605 --
Other current assets................................................ 469,605 710,943
------------- -------------
Total current assets................................... 4,551,472 47,492,987
------------- -------------
PROPERTY AND EQUIPMENT, net............................................ 7,363,848 8,640,676
GOODWILL, net.......................................................... 2,115,558 1,910,350
CUSTOMER LIST, net..................................................... 1,722,222 1,555,555
OTHER ASSETS........................................................... 86,476 93,376
------------- -------------
$ 15,839,576 $ 59,692,944
============= =============
LIABILITIES AND SHAREHOLDERS EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................................... $ 12,985 $ 17,160
Current portion of capital lease obligations........................ 1,417,066 1,414,097
Accounts payable.................................................... 2,319,524 1,930,951
Accrued expenses.................................................... 1,708,896 713,984
Deferred revenues................................................... 2,331,258 2,578,602
------------- -------------
Total current liabilities.............................. 7,789,729 6,654,794
------------- -------------
LONG-TERM DEBT......................................................... 3,081,634 46,608
------------- -------------
CAPITAL LEASE OBLIGATIONS.............................................. 2,794,093 2,776,580
------------- -------------
OTHER LIABILITIES...................................................... 810,322 24,767
------------- -------------
COMMITMENTS AND CONTINGENCIES..........................................
SHAREHOLDERS' EQUITY:
Preferred stock (10,000,000 shares authorized, 808,629 shares
outstanding at December 31, 1999 and none outstanding at
March 31, 2000)................................................... 5,460,653 --
Common stock (50,000,000 shares authorized, 7,546,984 and
14,988,947 shares outstanding at December 31, 1999 and
March 31, 2000)................................................... 4,798,924 64,164,093
Deferred compensation............................................... (364,149) (1,220,083)
Accumulated deficit................................................. (7,531,630) (11,753,815)
Less- Treasury stock, at cost....................................... (1,000,000) (1,000,000)
------------- -------------
Total shareholders' equity ............................ 1,363,798 50,190,195
------------- -------------
$ 15,839,576 $ 59,692,944
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
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FASTNET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ended
(Unaudited)
---------------------------------
3/31/1999 3/31/2000
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<S> <C> <C>
REVENUES.................................................... $ 1,733,843 $ 3,030,310
OPERATING EXPENSES:
Cost of revenues......................................... 1,193,512 2,471,251
Selling, general and administrative...................... 751,329 3,706,513
Depreciation and amortization............................ 128,291 1,001,989
------------- -------------
2,073,132 7,179,753
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Operating loss........................................... (339,289) (4,149,443)
-------------- --------------
OTHER INCOME (EXPENSE):
Interest income.......................................... 3,270 318,787
Interest expense......................................... (57,309) (388,078)
Other.................................................... --- (3,451)
------------- --------------
(54,039) (72,742)
-------------- --------------
NET LOSS.................................................... $ (393,328) $ (4,222,185)
============= =============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE......................................... $ (0.06) $ (0.36)
============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING................................ 7,000,000 11,690,105
============= =============
</TABLE>
The accompanying notes are an integral part of these statements
4
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FASTNET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the three months ended
March 31, March 31,
1999 2000
--------- ---------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss................................................. $ (393,328) $ (4,222,185)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Depreciation and amortization........................ 128,291 1,001,989
Amortization of debt discount........................ -- 255,802
Amortization of deferred compensation................ -- 136,799
Changes in operating assets and liabilities-
Decrease (increase) in assets-
Accounts receivable.............................. 160,506 17,414
Other assets..................................... (31,963) (248,238)
Increase (decrease) in liabilities-
Accounts payable and accrued expenses............ 382,961 (346,880)
Deferred revenues................................ 302,899 247,344
Other liabilities................................ -- (484,452)
------------- --------------
Net cash provided by (used in) operating
activities................................ 549,366 (3,642,407)
------------- --------------
INVESTING ACTIVITIES:
Purchases of property and equipment...................... (422,534) (1,373,366)
Securities purchased..................................... -- (40,390,723)
Securities sold.......................................... -- 1,500,000
------------- -------------
Net cash used in investing activities....... (422,534) (40,264,089)
------------ -------------
FINANCING ACTIVITIES:
Proceeds from long-term debt............................. -- 1,027,994
Repayments of long-term debt............................. (1,769) (1,008,845)
Repayments of capital lease obligations.................. (6,993) (554,058)
Proceeds from issuance of common stock, net.............. -- 49,605,981
------------- -------------
Net cash provided by (used in) financing
activities................................. (8,762) 49,071,072
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 118,070 5,164,576
CASH AND CASH EQUIVALENTS, beginning of period.............. 256,782 953,840
------------- -------------
CASH AND CASH EQUIVALENTS, end of
period................................................... $ 374,852 $ 6,118,416
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
5
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FASTNET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
FASTNET Corporation and its subsidiaries (formerly You Tools Corporation)
("FASTNET" or the "Company"), a Pennsylvania corporation, has been providing
Internet access services to its customers since 1994. The Company is a growing
Internet services provider targeting small and medium sized enterprises in
selected high growth secondary markets in the mid-Atlantic area of the United
States. The Company complements its Internet access services by delivering a
wide range of enhanced products and services that are designed to meet the needs
of its target customer base.
The accompanying unaudited financial information as of March 31, 2000 and
for the three months ended March 31, 1999 and 2000 has been prepared in
accordance with generally accepted accounting principles for interim
financial information. In the opinion of management the accompanying
financial statements include all significant adjustments, consisting of only
normal and recurring adjustments, which are necessary for a fair
presentation of the financial position as of March 31, 2000, the results of
operations and cash flows the three months ended March 31, 1999 and 2000.
Operating results for the three months ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the full year.
The accompanying consolidated financial statements include the accounts of
FASTNET and subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. The preparation of
financial statements in conformity with generally accepted accounting
principles require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Interim Financial Information
While the Company believes that the disclosures presented are adequate
to make the information not misleading, these Consolidated Financial
Statements should be read in conjunction with the Consolidated Financial
Statements and the notes included in the Company's latest annual report on
Form 10-K.
Reclassifications
Certain reclassifications have been made to the prior year to conform with
the current year presentation.
(2) INITIAL PUBLIC OFFERING
On February 7, 2000, the Company completed its initial public offering of
4,000,000 shares of Common stock at a price of $12.00 per share. An
additional 600,000 shares of common stock were issued pursuant to the
exercise of the underwriters' over-allotment option. The Company received net
proceeds of approximately $49.6 million from the offering. Immediately prior
to the consummation of the offering, the convertible note converted into
2,033,334 shares of Common stock and 808,629 shares of Series A Convertible
Preferred stock converted into an equal amount of common stock.
(3) CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
FASTNET considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
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 March 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, net in the Consolidated Statements
of Operations. The cost of securities sold is based on the specific
identification method.
The Company's investments in debt and equity securities are diversified
among high-credit quality securities in accordance with the Company's
investment policy.
(4) PROPERTY AND EQUIPMENT:
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Property and equipment consist of the following:
12/31/99 3/31/2000
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Equipment........................................ $ 6,524,216 $ 7,666,889
Computer equipment............................... 1,217,455 1,364,264
Computer software................................ 713,480 868,254
Furniture and fixtures........................... 279,667 463,803
Leasehold improvements........................... 228,980 507,530
------------- -------------
8,963,798 10,870,740
Less- Accumulated depreciation and amortization.. (1,599,950) (2,230,064)
------------- -------------
$ 7,363,848 $ 8,640,676
============= =============
</TABLE>
6
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Depreciation and amortization expense for the three months ended March 31, 1999
and 2000 was $128,291 and $1,001,989, respectively. The net carrying value of
property and equipment under capital leases was $4,097,653 and $4,631,229 at
December 31, 1999 and March 31, 2000, respectively
(5) DEBT
On January 19, 2000, the Company sold a $1,000,000 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
pricing model and recorded as a debt discount which was amortized to interest
expense upon repayment of the note which occured with the proceeds from the
initial public offering.
Immediately prior to the consumation of the Company's initial public
offering, the $3.1 million Convertible Note converted into 2,033,334 shares
of common stock. In addition, with a portion of the proceeds from the
Company's initial public offering the Company repaid the $1.0 million January
19, 2000 note and a $500,000 obligation for financial advisory services
rendered during 1999.
7
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(6) COMMON STOCK OPTIONS
In March 1999, the Company approved the Equity Compensation Plan (the
"Plan"). The Plan provides for the issuance of up to 1,000,000 shares of
Common stock for incentive stock options ("ISOs"), nonqualified stock options
(NQSOs") 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 from the date of grant.
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 stock) on the date of grant. Compensation, if
any, is deferred and charged to expense over the respective vesting period.
8
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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
which 20,000 options vested immediately and the remaining 200,000 will vest
quarterly over a period of five years. The exercise price of these options is
$9.25 per share and the fair value of the Company's Common stock on the date
of grant was $12.44. As a result of these grants, the Company recorded
deferred compensation of $701,800. In addition to these grants, during
February 2000 the Company granted Common stock options to certain employees
at an exercise price of $9.25 when the fair value of the Common stock was
$14.69 which resulted in deferred compensation of $290,993. These options
generally vest over a five-year term.
(7) LEASE ARRANGEMENT
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 expire on August 28, 2000 and are used to
secure computer-related equipment under three-year capital leases. As of
March 31, 2000, the Company utilized $465,000 of the available credit.
(8) NEW ACCOUNTING PRONOUNCEMENTS
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 on existing accounting rules and
provides specific guidance on how those accounting rules should be applied.
SAB No. 101 is effective for fiscal years beginning after December 15, 1999.
Management believes its revenue recognition accounting policies are in
compliance with the provisions of SAB No. 101.
(9) NET LOSS PER COMMON SHARE
The Company has presented net loss per share pursuant to SFAS No. 128,
"Earnings per Share." Basic loss per share was computed by dividing net loss
by the weighted average number of shares of Common stock outstanding during
the period. Diluted loss per share is the same as net loss per Common share
since the impact on loss per share is antidilutive due to the Company's
losses.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
9
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THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH OUR FINANCIAL STATEMENTS AND THE RELATED NOTES TO THE FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THIS FORM 10-Q. THE FOLLOWING INCLUDES A NUMBER OF
FORWARD-LOOKING STATEMENTS THAT REFLECT OUR CURRENT VIEWS WITH RESPECT TO FUTURE
EVENTS AND FINANCIAL PERFORMANCE. WE USE WORDS SUCH AS ANTICIPATE, BELIEVES,
EXPECTS, FUTURE, AND INTENDS, AND SIMILAR EXPRESSIONS TO IDENTIFY
FORWARD-LOOKING STATEMENTS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE
FORWARD- LOOKING STATEMENTS, WHICH APPLY ONLY AS OF THE DATE OF THIS QUARTERLY
REPORT ON FORM 10-Q. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR OUR PREDICTIONS.
OVERVIEW
FASTNET Corporation began providing Internet access services to its
customers in 1994. In 1998, we began to implement our current strategy of
providing Internet access and enhanced products and services to small and
medium sized enterprises in selected high growth markets beyond our original
markets in Bethlehem, Pennsylvania and the areas surrounding
Philadelphia, Pennsylvania. Currently, we have twelve Customer Network
Facilities (CNF's) in operation and nine more under construction. Our
operational CNF's currently provide service to selected secondary markets in
Pennsylvania, New Jersey, Maryland, New York, Delaware, Massachusetts, and
Connecticut.
As of March 31, 2000, we provided Internet access and enhanced services
to approximately 435 enterprise customers, approximately 17,500 Home and
Small Office (HASO) customers, and 5,800 customers using our dedicated,
shared and colocation web hosting products under our brand name 123HostMe.
On July 30, 1999 we acquired Internet Unlimited, Inc., a web hosting and
colocation company located in Bethlehem, Pennsylvania. As a result of this
acquisition, we increased the number of customers using our web hosting
services and supplemented our management and technical expertise.
On January 19, 2000, the Company sold a $1,000,000 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 proceeds of this note were used to satisfy working
capital requirements. This note was repaid upon consumation of the initial
public offering.
On February 7, 2000 the Company completed its initial public offering of
4,000,000 shares of Common stock at a price of $12.00 per share. On March 7,
2000 the Company 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.
The Company received aggregate net cash proceeds of approximately $49.6
million from the initial public offering and exercise of the over-allotment
option.
10
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OUR HISTORY OF OPERATING LOSSES
We have incurred operating losses in each year since our inception and
expect our losses to continue as we execute our business plan to build CNF's
in high growth secondary markets. Our operating losses were 8% of revenues
for the year ended December 31, 1997, 20% for the year ended December 31,
1998, and 63% for the year ended 1999. Our operating losses increased to 137%
of revenues in the first quarter of 2000 up from 20% of revenues in the first
quarter of 1999.
RESULTS OF OPERATIONS
REVENUES
We provide services to our customers which we classify in three general
types; Internet access and enhanced services, home and small office (HASO)
access, and Dialplex virtual private networking services (VPN). We target our
Internet access and enhanced services to small and medium sized enterprises
(SME) located within our service areas. FASTNET offers a broad range of
dedicated access solutions including T-1, T-3, frame relay, SMDS, and
enterprise class Digital Subscriber Lines (DSL) services. Our enhanced
services are complementary to dedicated access and include Total Managed
Backup, Total Managed Security, Unified Messaging, 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 an increased use 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 our expansion into new
markets and focus additional resources on marketing and promoting these
services.
Our HASO revenues consist of dial-up Internet access to both residential
and business customers, residential DSL Internet access, and Integrated
Services Digital Network (ISDN) Internet access. Our customers using HASO
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
continue to execute our business plan, we expect HASO revenues to decrease as
a percentage of total revenues.
We also provide our customers with Dialplex Virtual Private Networking
(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. One
customer, Microsoft's WebTV Networks accounted for over 25% of our total
revenues during the three months ended March 31, 2000.
COST OF REVENUES
Our cost of revenues primarily consist of our connectivity charges and
telecommunications charges. These are our costs of directly connecting to the
Internet backbone. We also classify engineering payroll and related expenses,
the cost of third party hardware and software we sell to our customers, and
rental expense on network equipment financed under operating leases as cost
of revenues.
11
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THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1999
REVENUES. Revenues increased by $1.3 million, or 75% to $3.0 million for the
three months ended March 31, 2000, compared to $1.7 million for the three
months ended March 31, 1999. This increase in revenues is primarily
attributable to an increase in the number of customers using our services.
Also contributing to this increase was the acquisition of Internet Unlimited
in July 1999 which accounted for $524,782 of revenues in the first quarter of
2000.
During the first quarter of 2000 and the first quarter of 1999 we derived a
significant portion of our revenues from Microsoft's WebTV Networks. In the
first quarter of 2000 we derived $748,000 or 25% of our revenues as compared
to $319,000 or 18% of our revenues for the first quarter of 1999. We expect
that revenues from Microsoft's WebTV Networks will remain in excess of 20% of
our revenues throughout calendar 2000.
COST OF REVENUES. Cost of revenues increased by $1.3 million, or 107%, to
$2.5 million for the first quarter of 2000 compared to $1.2 million for the
first quarter of 1999. Cost of revenues increased to 82% of revenues for the
first quarter of 2000 compared to 69% of revenues for the first quarter of
1999. This increase is primarily attributable to the increase in Internet
access and telecommunication charges as well as headcount costs relating to
additional engineering staff. We expect our costs to continue to grow as a
percentage of revenue as we continue to add network capacity ahead of new
customers.
SELLING, GENERAL, AND ADMINISTRATIVE. Selling and general and administrative
expenses increased by $3.0 million or 393% to $3.7 million in the first
quarter of 2000 compared to $751,000 for the first quarter 1999. This
increase is primarily attributable to an increase in selling, general and
administrative personnel from 37 in the first quarter of 1999 to 85 in the
first quarter of 2000. Another factor causing this increase was the
acquisition of Internet Unlimited which added personnel, rent expense and
other selling, general and administrative expenses. Included in this first
quarter 2000 selling, general, and administrative expenses were non-recurring
charges of $705,000 related to one-time compensation charges and imputed
interest associated with warrants attached to a January 2000 bridge financing.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$874,000, or 681% for the first quarter of 2000 compared to $128,000 for the
first quarter of 1999. This increase was primarily attributable to the
purchase of equipment necessary to support the expansion of our Bethlehem,
Pennsylvania Network Operations Center, as well as, the increased
depreciation for the equipment located in the 10 additional CNF's in
operation during the first quarter of 2000 compared to the first quarter of
1999. Also contributing to the increase was $371,000 of amortization expense
relating to the intangible assets recorded in the purchase accounting of
Internet Unlimited.
OTHER INCOME/EXPENSE. Interest income increased by $315,517 from $3,270 in
the first quarter of 1999 to $318,787 in the first quarter of 2000. This
increase is attributal to the investment of the proceeds from the initial
public offering. Interest expense increased by $330,769 from $57,309 in the
first quarter of 1999 to $388,078 in the first quarter of 2000. This increase
is primarily attributal to the non-recurring amortization of debt discount of
$255,802 relating to the value assigned to the warrant issued with the
January 19, 2000 bridge financing as well as increased interest expense on
capital lease obligations.
<TABLE>
<CAPTION>
CASH FLOW ANALYSIS
Three Months
Ended March 31,
1999 2000
---- ----
<S> <C> <C>
OTHER FINANCIAL DATA:
Cash flows provided by (used in) operating activities.. $549,366 $(3,642,407)
</TABLE>
12
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<TABLE>
<S> <C> <C>
Cash flows used in investing activities................ (422,534) (40,264,089)
Cash flows provided by (used in) financing activities.. (8,762) 49,071,072
Net increase in cash and cash equivalents.............. $118,070 $ 5,164,576
</TABLE>
Cash flows from operating activities decreased by $4,191,773 from cash
provided of $549,366 in the first quarter of 1999 to use of $3,642,407 in the
first quarter of 2000. This decrease is primarily the result of our net loss
by $3,828,857. The increase in the net loss is a result of the Company's
growth efforts and expansion into new markets as well as the addition of
infrastructure in existing markets and expanded capacity of the network
operations center. We expect to continue to incur losses until the regional
CNF's produce sufficient revenues to cover their operating costs and the
corporate overhead expenses.
Cash used in investing activities increased from $422,534 in the first
quarter of 1999 to $40,264,089 in the first quarter of 2000, a change of
$39,841,555. This increased cash outflow is primarily attributable to the
Companies investments in marketable securities and an increase in purchases
of property and equipment.
Cash flows from financing activities increased by $49,079,834 from cash
used of $8,762 during the first quarter of 1999 to $49,071,072 during the
first quarter of 2000. The increase in cash flow from financing activities is
a result of the proceeds from the Company's initial public offering,
partially offset by the repayments of capital lease obligations.
LIQUIDITY AND CAPITAL RESOURCES
Our business plan has required, and is expected to continue to
require, substantial capital to fund operation, capital expenditures,
expansion of sales and marketing capabilities, and acquisitions.
Prior to our initial public offering, we have 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 in the amount of approximately $3.1 million to
H&Q You Tools Investment Holding, L.P. 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 our common stock and released its security interest
immediately prior to our initial public offering. We used a portion of the
proceeds from this 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.
In June 1999, we entered into a master lease 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 $16.4 million available
under this facility.
In January 2000, we entered into a purchase 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 a portion of the proceeds from the initial public offering.
As of March 31, 2000, our cash and cash equivalents and marketable
securities were $45.0 million. We believe that our existing cash and cash
equivalents, marketable securities, and available financing under existing
equipment lease facilities will be sufficient to meet our working capital and
capital expenditure requirements for at least the next 12 months. However, we
may be required to seek additional sources of financing, in order to fund the
planned expansion of the Company. 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
us or our shareholders. If such sources of financing are insufficient or
unavailable, or if we experience shortfalls in anticipated revenue or
increases in anticipated expenses, we may need to slow down or stop the
expansion of our regional deployment, including our customer network
facilities and reduce our marketing and development efforts. Any of these
events could harm our business, financial condition or results of operations.
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk related to changes in interest rates. We
invest excess cash balances in cash equivalents and Marketable Securities. We
believe that the effect, if any, of reasonably possible near-term changes in
the interest rates on our financial position, results of operations, and cash
flows will not be material.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not involved currently in any legal proceedings that either
individually or taken as a whole, will have a material adverse effect on our
business, financial condition and results of operations.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) In the preceding three years, we have issued the following
securities that were not registered under the Securities Act:
Since our inception, we have issued to employees and H&Q You Tools
Investment Holding, L.P. an aggregate of 7,000,000 shares of common stock and
to employees and directors options to purchase 858,500 shares issued pursuant
to our Equity Compensation Plan. All of such sales were made under the
exemption from registration provided under Section 4(2) of the Securities Act.
On May 28, 1998, we sold 1,000,000 shares of common stock for $0.20 per
share and a warrant to purchase 1,000,000 shares of our common stock at a per
share exercise price of $1.50. This warrant is exercisable at any time on or
before May 30, 2005 to H&Q You Tools Investment Holding L.P. This sale was
made under the exemption from registration provided under Section 4(2) of the
Securities Act.
Pursuant to our Equity Compensation Plan, we have granted, as of March
31, 2000, options to purchase a total of 858,500 shares of common stock, of
which 450,000 are exercisable at a price of $1.50 per share; 115,000 are
exercisable at a price of $2.50 per share, 20,000 are exercisable at a price
of $7.13 per share, 273,500 are exercisable at a price of $9.25 per share. No
options have been exercised. In granting the options and selling the
underlying securities upon exercise of the options, we relied upon exemptions
from registration set forth in Rule 701 and Section 4(2) of the Securities
Act.
On July 30, 1999, we issued 546,984 shares of our common stock to the
shareholders of Internet Unlimited, Inc. in connection with our acquisition
of Internet Unlimited, Inc. These sales were made under the exemption from
registration provided under Section 4(2) of the Securities Act.
In August 1999, we sold 808,629 shares of Series A convertible preferred
stock to H&Q You Tools Investment Holding L.P., Naveen Jain, Everest Venture
Partners I, L.P., Entrepreneurial Investment Corporation, J.F. Shea Co. Inc.,
as nominee, Lucent Technologies, Inc, InterNetworking Systems, at a price of
$7.13 per share. All of these sales were made under the exemption from
registration provided under Section 4(2) of the Securities Act. All of these
shares of preferred stock were converted into 808,629 shares of our common
stock immediately prior to the consummation of our IPO.
During the first quarter of 2000, we signed two lease credit lines with
a vendor providing the Company with an aggregate credit line of $8.0 million.
The credit facility expires on August 28, 2000, and as of March 31, 2000 the
Company had borrowed $465,000 under the facility.
In January 2000, the Company issued 30,000 warrants to an investor
pursuant to the note and warrant purchase agreement. This warrant was
immediately exercisable at a price of $12.00 per share. This sale was made
under the exemption from registration provided under Section 4(2) of the
Securities Act.
No underwriters were involved in the foregoing sales of securities.
These sales were made in reliance upon an exemption from the registration
provisions of the Securities Act set forth in Section 4(2) thereof relative
to sales by an issuer not involving any public offering or the rules and
regulations thereunder, or in the case of options to purchase common stock
granted prior
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to October 21, 1999 and in the case of common stock purchased pursuant to the
Equity Compensation Plan, Rule 701 of the Securities Act. All of the
foregoing securities are deemed restricted securities for purposes of the
Securities Act.
(d) Use of Proceeds of the Initial Public Offering
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, 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. The proceeds received net of underwriting
discounts and commissions, and other transaction costs were approximately
$49,606,000.
From the effective date of the Registration Statement through the
quarter ended March 31, 2000, FASTNET incurred the following expenses in
connection with the initial public offering:
<TABLE>
<S> <C>
Underwriting discounts and commission......................$ 3,864,000
Other Expenses (estimated)................................. 1,730,000
-----------
Total Expenses.............................................$ 5,594,000
===========
Net offering proceeds to FASTNET...........................$49,606,000
-----------
</TABLE>
None of the expenses incurred by the Registrant in connection with the
initial public offering were paid, directly or indirectly, to directors,
officers, persons owning ten percent or more of the Company's equity
securities or affiliates of the Company.
From the effective date of the Registration Statement through the
quarter ended March 31, 2000, the Registrant has utilized the proceeds from
the initial public offering and underwriters' over-allotment as follows:
<TABLE>
<S> <C>
Repayment of notes payable......................................$1,004,000
Payment of other obligations.................................... 537,000
Capital Expenditures............................................ 1,373,000
Working Capital Requirements.................................... 1,685,000
----------
Total...........................................................$4,599,000
==========
</TABLE>
Unused proceeds of the initial public offering are currently invested in
debt and equity securities diversified among high-credit quality securities
in accordance with the Company's investment policy.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
FACTORS AFFECTING FUTURE OPERATING RESULTS
This quarterly report on Form-10-Q contains forward-looking statements
concerning the Registrant's future products, expenses, revenue, liquidity and
cash needs as well as the Registrant's plans and strategies. These
forward-looking statements are based on current expectations and the Registrant
assumes no obligation to update this information. Numerous factors could cause
actual results to differ significantly from the results described in these
forward-looking statements, including the following risk factors.
WE ONLY RECENTLY BEGAN TO IMPLEMENT OUR CURRENT BUSINESS STRATEGY. AS A RESULT,
YOU MAY NOT BE ABLE TO EVALUATE OUR BUSINESS PROSPECTS BASED ON OUR HISTORICAL
RESULTS.
In 1998, we began to implement our current business strategy of
targeting small and medium sized enterprises in high growth secondary markets
not only within the mid-Atlantic area of the United States, but also outside
of this area. Prior to 1998, we conducted business solely in the mid-Atlantic
area, particularly in Eastern Pennsylvania. Consequently, the evaluation of our
future business prospects is difficult because our historical results for
periods during which we were implementing our current business strategy are
limited.
WE HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES.
We have incurred net losses since our inception. For the years ended
December 31, 1996, 1997, 1998 and 1999, we had losses of $115,000, $322,000,
$1.3 million and $5.6 million, respectively. On a pro forma basis, assuming that
the acquisition of Internet Unlimited, Inc. was consummated on January 1, 1998,
we would have incurred net losses of approximately $2.6 million, or 42% of
revenues, for the year ended December 31, 1998 and approximately $6.5 million,
or 71% of revenues, for year ended December 31, 1999. Under our current business
strategy, we expect to continue to operate at a loss for the foreseeable future.
In order to achieve profitability, we must develop and market products
and services that gain broad commercial acceptance by small and medium sized
enterprises and residential customers in our target regions. 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.
Therefore, we cannot predict whether we will obtain or sustain positive
operating cash flow or generate net income in 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 three
months ended March 31, 2000, we had a net loss of $4.2 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:
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the timing of costs relating to the construction of our
customer network facilities;
the timing of the introduction of new products and services;
changes in pricing policies and product offerings by us or our
competitors; and
fluctuations in demand for Internet access and enhanced
products and services.
Therefore, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful and cannot be relied upon as
indicators of future performance. If our operating results in any future period
fall below the expectations of analysts and investors, the market
price of our common stock would likely decline.
THE MARKET PRICE AND TRADING VOLUME OF OUR COMMON STOCK ARE VOLATILE
The market price of our common stock has fluctuated significantly in
the past, and is likely to continue to be highly volatile. In addition, the
trading volume in our common stock has fluctuated, and significant price
variations can occur as a result. We cannot assure you that the market price of
our common stock will not fluctuate or continue to decline significantly in the
future. In addition, the U.S. equity markets have from time to time experienced
significant price and volume fluctuations that have particularly affected the
market prices for the stocks of 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.
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.
OUR EXPANSION EFFORTS MAY NOT BE SUCCESSFUL IN OUR NEW TARGET REGIONS BECAUSE
OUR BUSINESS GROWTH STRATEGY IS LARGELY UNTESTED.
Our growth strategy includes building customer network facilities in
high growth secondary markets where we do not currently operate. In each market,
we will target primarily small and medium sized enterprise customers. Since our
growth strategy is largely untested, we cannot give any assurances that we will
be able to successfully implement it in our target regions.
Our success will depend upon:
our ability to identify attractive target regions outside of
the mid-Atlantic area;
our ability to rapidly deploy additional customer network
facilities; and
our ability to replicate our sales and marketing efforts.
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, competitive factors or other events beyond our
control.
FOR THE YEAR ENDED DECEMBER 31, 1999, OUR LARGEST CUSTOMER ACCOUNTED FOR 21% OF
OUR TOTAL REVENUES. THE LOSS OF THIS CUSTOMER COULD HARM OUR RESULTS OF
OPERATIONS.
Although our primary business strategy is to target small and medium
sized enterprises, we currently derive, and expect in the future to derive, a
significant portion of our revenues from a small number of our business
customers that are not small and medium sized enterprises. For example, Lucent
Technologies, Inc. accounted for 7% of total revenues for the year ended
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<PAGE>
December 31, 1999 and 11% of total revenues for the fiscal year ended December
31, 1998 and Microsoft's WebTV Networks, Inc. accounted for 21% of total
revenues for the 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 strategy
of targeting small and medium sized enterprises, 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. The loss of
any of our significant customers or a significant decrease in revenues from
these customers could harm our results of operations.
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.
We rely upon our centralized sales force and regional marketing
managers to sell our products and services in our new regions. We serve our
existing customers through our sales, technical support and customer support
staff. 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.
IF WE ARE UNABLE TO RAPIDLY EXPAND INTO OUR TARGET REGIONS, WE MAY NEED TO
MODIFY OUR GROWTH AND OPERATING PLANS.
Our business strategy depends on our ability to rapidly expand into
new regions, which requires significant capital resources. As a result, we may
need significant additional funds to execute our growth strategy. If our
existing cash is not sufficient to meet our cash requirements, our need to fund
our ongoing operations could limit our ability to execute our business strategy.
Therefore, we will need to seek additional capital from public or private equity
or debt sources to fund our growth and operating strategies. We cannot be
certain that we will be able to raise additional capital in the future on terms
acceptable to us or at all. If alternative sources of financing are insufficient
or unavailable, we may be required to modify our growth and operating plans in
accordance with the extent of available financing.
In the past, we have been able to provide limited services to customers
90 days after the date construction begins for a new customer network facility.
There are many factors, however, which may affect our ability to expand rapidly
into target regions, including availability of equipment and telecommunications
services. Therefore, there can be no assurances that we will be able to expand
into our target regions in our anticipated time frame. If we are unable to
rapidly expand into our target regions, our business and results of operations
will be harmed.
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:
national Internet service providers and regional and local
Internet service providers, including providers of free
dial-up Internet access;
national and regional long distance and local
telecommunications carriers;
cable operators and their affiliates;
providers of web hosting, colocation and other Internet-based
business services;
computer hardware and other technology companies that bundle
Internet connections with their products; and
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.
17
<PAGE>
As a result of an increase in the number of competitors, and 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.
We believe that the following are the primary competitive factors in
our market:
pricing;
quality and breadth of products and services;
ease of use;
personal customer support and service; and
brand awareness.
Many of our competitors have significantly greater market presence,
brand-name recognition, and financial resources than we do. In addition, all of
the major long distance telephone companies, also known as interexchange
carriers, offer Internet access services. The recent reforms in the federal
regulation of the telecommunications industry have created greater opportunities
for local exchange carriers, including incumbent local exchange carriers and
competitive local exchange carriers, to enter the Internet access market. In
order to address the Internet access requirements of the current business
customers of long distance and local carriers, many carriers are integrating
horizontally through acquisitions of or joint ventures with Internet service
providers, or by wholesale purchase of Internet access from Internet service
providers. In addition, many of the major cable companies and other alternative
service providers, such as those companies utilizing wireless and satellite-
based service technologies, have announced their plans to offer Internet access
and related services. While few of these larger companies have focused on our
key customer base of small and medium sized enterprises in our target markets,
it is possible that they will do so in the future. 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:
lack of inexpensive, high-speed connection options;
a limited number of reliable local access points for business
users;
lack of affordable electronic commerce solutions;
limited internal resources and technical expertise;
inconsistent quality of service; and
difficulty in integrating hardware and software related to
Internet based business applications.
18
<PAGE>
In addition, we believe that many Internet users lack confidence in the
security of transmitting their data over the Internet, which has hindered
commercial use of the Internet. Technologies that adequately address these
security concerns may not be developed.
The adoption of the Internet for commerce and communication
applications, particularly by those enterprises that have historically relied
upon alternative means, generally requires the understanding and acceptance of a
new way of conducting business and exchanging information. In particular,
enterprises that have already invested substantial resources in other means of
conducting commerce and exchanging information may be reluctant or slow to adopt
a new strategy that may make their existing personnel and infrastructure
obsolete.
OUR SUCCESS DEPENDS ON THE CONTINUED DEVELOPMENT OF INTERNET INFRASTRUCTURE.
The recent growth in the use of the Internet has caused periods of
performance degradation, requiring the upgrade by providers and other
organizations with links to the Internet of routers and switches,
telecommunications links and other components forming the infrastructure of the
Internet. We believe that capacity constraints caused by rapid growth in the use
of the Internet may impede further development of the Internet to the extent
that users experience increased delays in transmission or reception of data or
transmission errors that may corrupt data. Any degradation in the performance of
the Internet as a whole could impair the quality of our products and services.
As a consequence, our future success will be dependent upon the reliability and
continued expansion of the Internet.
WE RELY ON A LIMITED NUMBER OF VENDORS AND SERVICE PROVIDERS, SOME OF WHICH ARE
OUR COMPETITORS. THIS MAY ADVERSELY AFFECT THE FUTURE TERMS OF OUR
RELATIONSHIPS.
We rely on other companies to supply key components of our network
infrastructure, which are available only from limited sources. For example, we
currently rely on routers, switches and remote access devices from Lucent
Technologies, Inc., Cisco Systems, Inc. and Nortel Networks Corporation. We
could be adversely affected if any of these products were no longer available on
commercially reasonable terms, or at all. From time to time, we experience
delays in the delivery and installation of these products and services, which
can lead to the loss of existing or potential customers. We do not know that we
will be able to obtain such products in the future cost-effectively and in a
timely manner. Moreover, we depend upon MCI WorldCom, Inc. and AT&T 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 DEPEND ON OUR EXECUTIVE OFFICERS TO EXECUTE OUR BUSINESS STRATEGY AND COULD
BE HARMED BY THE LOSS OF THEIR SERVICES.
Our success depends in part upon the continued service and performance
of:
David K. Van Allen, Chief Executive Officer;
Sonny C. Hunt, President;
Stanley F. Bielicki, Chief Financial Officer;
Phillip L. Weller, Chief Technology Officer;
Rafe Scheinblum, Executive Vice President Operations;
Mark A. Horinko, Vice President Engineering; and
Thomas J. Roberts, Vice President Sales.
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We currently do not have employment agreements with any of our named
executive officers. The loss of the services of one or more of our executive
officers could impair our ability to expand our operations and provide a high
level of service to our customers.
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 is 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:
downtime due to malfunction or failure of hardware or software;
overload conditions;
power loss or telecommunications failures;
human error;
natural disasters; and
sabotage or other intentional acts of vandalism.
Any of these occurrences could result in interruptions in the services
we provide to our customers and require us to spend substantial amounts of money
repairing and replacing equipment. In addition, we have finite capacity to
provide service to our customers under our current infrastructure. Because
utilization of our network is constantly changing depending upon customer use at
any given time, we maintain a level of capacity that we believe to be adequate
to support our current customer base. If we obtain additional customers in the
future, we will need to increase our capacity to maintain the quality of service
that we currently provide our customers. If customer usage exceeds our capacity
and we are unable to increase our capacity in a timely manner, our customers may
experience interruptions in or decreases in quality of the services we provide.
As a result, we may lose current customers or incur significant liability to our
customers for any damages they suffer due to any system downtime as well as the
possible loss of customers.
OUR NETWORK MAY EXPERIENCE SECURITY BREACHES WHICH COULD DISRUPT OUR SERVICES.
Our network infrastructure may be vulnerable to computer viruses,
break-ins and similar disruptive problems caused by our customers or other
Internet users. Computer viruses, break-ins or other problems caused by third
parties could lead to interruptions, delays or cessation in service to our
customers. There currently is no existing technology that provides absolute
security, and the cost of minimizing these security breaches could be
prohibitively expensive. We may face liability to customers for such security
breaches. Furthermore, such incidents could deter potential customers and
adversely affect existing customer relationships.
WE 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
20
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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 may 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.
We face risks due to possible changes in the way our competitors are regulated
which could have an adverse effect on our business. For example, the Federal
Communications Commission is considering 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. Such favorable
regulatory measures could enhance the viability of our competitors in the
Internet access marketplace. In addition, changes in the regulatory environment
may provide competing Internet service providers the right of access to the
cable systems of local franchised cable operators. The adoption of open access
to cable systems by Internet service providers could harm our business.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See attached exhibit index.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FASTNET CORPORATION.
Date: May 15, 2000 /S/ DAVID K. VAN ALLEN
----------------------
David K. Van Allen
Chief Executive Officer
Date: May 15, 2000 /S/ STANLEY F. BIELICKI
-----------------------
Stanley F. Bielicki,
Chief Financial Officer (Principal
Financial and Accounting Officer)
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.2 Third Amended and Restated Bylaws.
27.1 Financial Data Schedule (for SEC use only).
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Exhibit 3.2
THIRD AMENDED AND RESTATED BYLAWS OF
FASTNET CORPORATION
ARTICLE I
Offices and Fiscal Year
Section 1.01 REGISTERED OFFICE. The registered office of the
corporation in Pennsylvania shall be at Two Courtney Place, Suite 130, 3864
Courtney Street, Bethlehem, Pennsylvania, until otherwise established by an
amendment of the articles or by the Board of Directors and a record of the
change is filed with the Department of State in the manner provided by law.
Section 1.02 OTHER OFFICES. The corporation may also have offices at
such other places within or without Pennsylvania as the Board of Directors may
from time to time appoint or the business of the corporation may require.
Section 1.03 FISCAL YEAR. The fiscal year of the corporation shall
begin on the lst day of January in each year.
ARTICLE II
Notice - Waivers - Meetings Generally
Section 2.01 MANNER OF GIVING NOTICE.
(a) GENERAL RULE. Whenever written notice is required to be given to
any person under the provisions of the Pennsylvania Business Corporation Law
("Business Corporation Law") or by the articles or these bylaws, it may be given
to the person either personally or by sending a copy thereof by first class mail
or express mail, postage pre-paid, or by telegram (with messenger service
specified), telex, or facsimile transmission, to the address (or to the fax
number) of the person appearing on the books of the corporation or, in the case
of directors, supplied by the director to the corporation for the purpose of
notice. If the notice is sent by mail, telegraph or courier service, it shall be
deemed to have been given to the person entitled thereto when deposited in the
United States mail or with a telegraph office or courier service for delivery to
that person or, in the case of fax, when received. A notice of the meeting shall
specify the place, day and hour of the meeting, and any other information
required by any other provision of the Business Corporation Law, the articles or
these bylaws.
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(b) ADJOURNED SHAREHOLDER MEETING. When a meeting of shareholders is
adjourned it shall not be necessary to give any notice of the adjourned meeting
or of the business to be transacted at an adjourned meeting, other than by
announcement at the meeting at which the adjournment is taken, unless the Board
fixes a new record date for the adjourned meeting or the Business Corporation
Law requires notice of the business to be transacted and that notice has not
previously been given.
Section 2.02 NOTICE OF MEETINGS OF BOARD OF DIRECTORS. Notice of a
regular meeting of the Board of Directors need not be given. Notice of every
special meeting of the Board of Directors shall be given to each director by
telephone or in writing at least 24 hours (in the case of notice by telephone,
telex or fax) or 48 hours (in the case of notice by telegraph, courier service
or express mail) or five (5) days (in the case of notice of first class mail)
before the time at which the meeting is be held. Every such notice shall state
the time and place of the meeting. Neither the business to be transacted at, nor
the purpose of, any regular or special meeting of the Board may be specified in
the notice of the meeting.
Section 2.03 NOTICE OF MEETINGS OF SHAREHOLDERS.
(a) GENERAL RULE. Written notice of every meeting of the shareholders
shall be given by, or at the direction of, the secretary to each shareholder of
record entitled to vote at the meeting at least:
(i) ten (10) days prior to the day named for a meeting called to
consider a fundamental change under 15 PA.CS, Chapter 19; or
(ii) five (5) days prior to the day named for the meeting in any
other case.
If the secretary neglects or refuses to give notice of a meeting, the person or
persons calling the meeting may do so. By decision of the Board, persons other
than the secretary may be authorized to give notice of shareholder meetings.
(b) CONTENTS. In the case of a special meeting of shareholders the
notice shall specify the general nature of the business to be transacted.
(c) NOTICE OF ACTION BY SHAREHOLDERS. In the case of a meeting of
shareholders that has as one of its purposes action on the bylaws, a written
notice shall be given to each shareholder that the purpose, or one of the
purposes of the meeting is to consider the adoption, amendment or repeal of the
bylaws. There shall be included in, or enclosed with, the notice, a copy of the
proposed amendment, or summary of the changes to be affected thereby.
2.04 WAIVER OF NOTICE.
(a) WRITTEN WAIVER. Whenever any written notice is required to be given
under the provisions of the Business Corporation Law the articles of these
bylaws, where waiver thereof in
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writing, signed by the person or persons entitled to the notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
the notice. Neither the business to be transacted at, nor the purpose of, a
meeting need be specified in the waiver of notice of the meeting.
(b) WAIVER BY ATTENDANCE. Attendance of a person at any meeting shall
constitute a waiver of notice of the meeting except where a person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting was not lawfully called
or convened.
2.05 MODIFICATION OF PROPOSAL CONTAINED IN NOTICE. Whenever the
language of a proposed resolution is included in the written notice of a meeting
required to be given under the provisions of the Business Corporation Law or the
articles or these bylaws, a waiver thereof in writing, signed by the person or
persons entitled to the notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of the notice. Neither the
business to be transacted at, nor the purpose of, a meeting may be specified
in the waiver of notice of meeting.
2.06 EXCEPTION TO REQUIREMENT OF NOTICE.
(a) General rule. Whenever any notice or communication is required to
be given to any person under the provisions of the Business Corporation Law or
by the articles or these bylaws or by the terms of any agreement or other
instrument or as a condition precedent to taking any corporate action and
communication with that person is then lawful, the giving of the notice or
communication to that person shall not be required.
(b) SHAREHOLDERS WITHOUT FORWARDING ADDRESSES. Notice or other
communication shall not be sent to any shareholder with whom the corporation has
been unable to communicate for more than 24 consecutive months because
communications to the shareholder are returned unclaimed or the shareholder has
otherwise failed to provide the corporation with a current address. Whenever the
shareholder provides the corporation with a current address, the corporation
shall commence sending notices and other communications to the shareholder in
the same manner as to the other shareholders.
2.07 USE OF CONFERENCE, TELEPHONE AND SIMILAR EQUIPMENT. One or more
persons may participate in the meeting of the Board of Directors or the
shareholders of the corporation by means of conference, telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Participation in the meeting pursuant to this
section shall constitute presence in person at the meeting.
ARTICLE III
Shareholders
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Section 3.01 PLACE OF MEETING. Meetings of Shareholders shall be held
at such places, within or without the Commonwealth of Pennsylvania, as may be
fixed from time to time by the Board of Directors. If no such place is fixed by
the Board of Directors, meetings of the shareholders shall be held at the
principal executive offices of the Corporation.
Section 3.02 SPECIAL MEETINGS. Subject to the rights of the holders of
any class or series of Preferred Stock, special meetings of the shareholders may
be called only by either (i) the Board of Directors of the Corporation, (ii) the
Chairman of the Board or by the Board of Directors, if there be one, (iii) the
Chief Executive Officer of the Corporation, or (iv) the President of the
Corporation. Upon the written request of any person who has called a special
meeting, under these Bylaws or applicable law, which request specifies the
general nature of the business to be transacted at such meeting, it shall be the
duty of the Secretary to fix the time and place of such meeting, which shall be
held not less than five nor more than 60 days after the receipt of such request,
and to give due notice thereof as required by Section 2.03 hereof. If the
Secretary neglects or refuses to fix the time and place of such meeting, the
person or persons calling the meeting may do so.
Section 3.03 ANNUAL MEETING OF SHAREHOLDERS.
(a) TIME. A meeting of the shareholders of the Corporation shall be
held in each calendar year, at such time and on such date as the Board of
Directors may determine, and if such day is a legal holiday, then such meeting
shall be held on the next business day. If the annual meeting is not called and
held within six months after the designated time, any shareholder may call the
meeting at any time thereafter.
(b) ELECTION OF DIRECTORS. At such annual meeting, there shall be held
an election of Directors.
(c) NOMINATION AND ADVANCE NOTICE PROCEDURES.
(1) NOMINATION PROCEDURES. Only persons who are nominated
in accordance with the following procedures shall be eligible for election
as directors of the corporation, except as may be otherwise provided in the
designations of classes or series of preferred stock of the Corporation (the
"Preferred Stock") adopted in accordance with the Business Corporation Law and
the Articles of Incorporation of the Corporation (the "Articles"). Nominations
for the election of directors must be (a) made by or at the direction of the
Board of Directors (or any duly authorized committee thereof) or (b) made by any
shareholder of the Corporation (i) who is a shareholder of record on the date of
the giving of the notice provided for in this Section 3.03 and on the record
date for the determination of shareholders entitled to vote at such meeting and
(ii) who complies with the notice procedures set forth in this Section 3.03.
In addition to any other applicable
requirements, for a nomination to be made by a shareholder, such shareholder
must have given timely notice thereof in proper written form to the Secretary of
the Corporation. To be timely, a shareholder's notice to the Secretary must be
delivered to or mailed and received at the principal executive offices of the
Corporation (a) in the
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case of an annual meeting, not less than ninety (90) days prior to the
anniversary date of the immediately preceding annual meeting of shareholders;
provided, however, that in the event that the annual meeting is called for a
date that is not within thirty (30) days before or after such anniversary date,
notice by the shareholder in order to be timely must be so received not later
than the close of business on the tenth (10th) day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure of the date of the annual meeting was made, whichever first occurs;
and (b) in the case of a special meeting of shareholders called for the purpose
of electing directors, not later than the close of business on the tenth (10th)
day following the day on which notice of the date of the special meeting was
mailed or public disclosure of the date of the special meeting was made,
whichever first occurs. Public disclosure shall include, but not be limited to,
information contained in a document publicly filed by the Corporation with the
Securities and Exchange Commission under Section 13, 14 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
To be in proper written form, a shareholder's notice to the
Secretary must set forth:
(A) as to each person whom the shareholder proposes to nominate for
election as a director (i) the name, age, business address and residence
of the person, (ii) the principal occupation or employment of the
person, (iii) the class or series and number of shares of capital stock
of the Corporation which are owned beneficially or of record by the
person, and (iv) any other information relating to the person that would
be required to be disclosed in a proxy statement or other filings
required to be made in connection with solicitations of proxies for
election of directors pursuant to Section 14 of the Exchange Act,
and the rules and regulations promulgated thereunder; and
(B) As to the shareholder giving the notice (i) the name and
record address of such shareholder, (ii) the class or series and number
of shares of capital stock of the Corporation which are owned
beneficially or of record by such shareholder, (iii) a description of
all arrangements or understandings between such shareholder and each
proposed nominee and any other person or persons (including their
names) pursuant to which the nomination(s) are to be made by such
shareholder, (iv) a representation that such shareholder, or an
authorized representative of that shareholder, intends to appear in
person or by proxy at the meeting to nominate the persons named in its
notice and (v) any other information relating to such shareholder that
would be required to be disclosed in a proxy statement or other filings
required to be made in connection with solicitations of proxies for
election of directors pursuant to Section 14 of the exchange Act and
the rules and regulations promulgated thereunder; and if such
shareholder of record is not the beneficial owner of the shares of
capital stock of the Corporation, the notice to the Secretary must also
include the name and address of the beneficial owner and the
information referred to in the immediately preceding clauses (iii) and
(v), substituting the beneficial owner for such shareholder.
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No person shall be eligible for election as a director of the
corporation unless nominated in accordance with the procedures set forth in
this Section 3.03. If the Chairman of the meeting determines that a
nomination was not made in accordance with the foregoing procedures, the
Chairman shall declare to the meeting that the nomination was defective and
such defective nomination shall be disregarded.
(2) ADVANCE NOTICE OF SHAREHOLDER BUSINESS. To be
properly brought before an annual meeting, any business must be (a) specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the Board of Directors, (b) otherwise properly brought before
the meeting by or at the direction of the Board of Directors, or (c)
otherwise properly brought before the meeting by a shareholder (i) who is a
shareholder of record on the date of the giving of notice provided for in
this Section 3.03 and on the record date for the determination of
shareholders entitled to vote at such annual meeting and (ii) who complies
with the notice procedures set forth in this Section 3.03. For such
nominations or other business to be considered properly brought before the
meeting by a shareholder such shareholder must, in addition to any other
applicable requirements, have given timely notice and in proper form of such
intent to bring such business before such meeting. To be timely, such
shareholder's notice must be delivered to or mailed and received by the
Secretary of the Corporation at the principal executive offices of the
Corporation not less than one hundred and twenty (120) days prior to the date
of the Corporation's proxy statement released to shareholders in connection
with the previous year's annual meeting; provided, however, that in the event
the Corporation did not hold an annual meeting the previous year, or if the
date of the current year's annual meeting has been changed by more than 30
days from the date of the previous year's meeting, then notice by the
shareholder to be timely must be so received within a reasonable time before
the Corporation begins to print and mail its proxy materials. To be in proper
form, a shareholder's notice to the Secretary shall set forth (i) the name
and record address of the shareholder who intends to propose the business and
the class or series and number of shares of capital stock of the Corporation
which are owned beneficially or of record by such shareholder, (ii) a
representation that the shareholder has been a holder of record of stock of
the Corporation entitled to vote at such meeting for at least one year and
that the shareholder intends to contrive to hold the securities through the
date of the meeting of shareholders, and intends to appear in person or by
proxy at the meeting to introduce the business specified in the notice, (iii)
a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting,
and (iv) any material interest of the shareholder in such business; provided
that, if such shareholder of record is not the beneficial owner of the shares
of capital stock of the Corporation, the notice to the Secretary must also
include the name and address of the beneficial owner and the information
referred to in the immediately preceding clauses (iii) and (v), substituting
the beneficial owner for such shareholder. To the extent that any provision
of Rule 14a-8 of the Exchange Act, or any successor provision thereto, is
applicable, such provision shall supercede and take precedence over this
Section 3.03(d).
No business shall be conducted at the annual meeting of shareholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section; provided, however, that, once business has
been properly brought before the annual
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meeting in accordance with such procedures, nothing in this Section shall be
deemed to preclude discussion by any shareholder of any such business. The
Chairman of the meeting may refuse to acknowledge the proposal of any business
not made in compliance with foregoing procedure.
(d) EXCEPTIONS. Provisions of this Section 3.03 do not apply to any
shares of Preferred Stock of the Corporation if otherwise provided in
designations of classes or series of such Preferred Stock.
Section 3.04 QUORUM AND ADJOURNMENT.
(a) GENERAL RULE. A meeting of shareholders of the corporation duly
called shall not be organized for the transaction of business unless a quorum is
present. The presence of shareholders entitled to cast at least a majority of
the votes that all shareholders are entitled to cast on a particular matter to
be acted upon at the meeting shall constitute a quorum for the purposes of
consideration and action on the matter. Shares of the corporation owned,
directly or indirectly, by it and controlled, directly or indirectly, by the
Board of Directors of this corporation, as such, shall not be counted in
determining the total number of outstanding shares for quorum purposes at any
given time.
(b) WITHDRAWAL OF A QUORUM. The shareholders present at a duly
organized meeting can continue to do business until adjournment notwithstanding
the withdrawal of enough shareholders to leave less than a quorum.
(c) ADJOURNMENT FOR LACK OF A QUORUM. If a meeting cannot be organized
because a quorum has not attended, those present may, except as provided in the
Business Corporation Law, adjourn the meeting to such time and place as they may
determine.
(d) ADJOURNMENTS GENERALLY. Any meeting at which directors are to be
elected shall be adjourned only from day to day, or for such longer periods not
exceeding 15 days each as the shareholders present and entitled to vote shall
direct, until the directors have been elected. Any other regular or special
meeting may be adjourned for such period as the shareholders present and
entitled to vote shall direct.
(e) ELECTING DIRECTORS AT ADJOURNED MEETING. Those shareholders
entitled to vote who attend a meeting called for the election of directors that
has been previously adjourned for lack of a quorum, although less than a quorum
as fixed in this section, shall nevertheless constitute a quorum for the purpose
of electing directors.
(f) OTHER ACTION IN ABSENCE OF A QUORUM. Those shareholders entitled to
vote who attend a meeting of shareholders that has been previously adjourned for
one or more periods aggregating at least 15 days because of an absence of a
quorum, although less than a quorum as fixed in this section, shall nevertheless
constitute a quorum for the purpose of acting upon any matter set forth in the
notice of the meeting if the notice states that those shareholders who attend
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the adjourned meeting shall nevertheless constitute a quorum for the purpose of
acting upon the matter.
(g) PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Unless
determined to the contrary by the Board of Directors in advance of a particular
meeting with respect to that meeting, any person who is otherwise entitled to
participate in any meeting of the shareholders may attend, be counted for the
purposes of determining a quorum and exercise all rights and privileges to which
such person might be entitled were such person personally in attendance,
including the right to vote, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, if such communications equipment is present in the
meeting room.
Section 3.05 ACTION BY SHAREHOLDERS. Except as otherwise provided in
the Business Corporation Law or the articles or these bylaws, whenever any
corporate action is to be taken by vote of the shareholders of the corporation,
it shall be authorized upon receiving the affirmative vote of a majority of the
votes cast by all shareholders entitled to vote thereon and, if any shareholders
are entitled to vote thereon as a class, upon receiving the affirmative vote of
the majority of the votes cast by the shareholders entitled to vote as a class.
Any action required or permitted to be taken at a meeting of the shareholders or
of a class of shareholders of a business corporation may not be taken without a
meeting, such that actions taken pursuant to a consent or consents thereto by
the shareholders is not permitted.
Section 3.06 ORGANIZATION OF MEETING. At every meeting of the
shareholders, the chairman of the board, if there be one, or in the case of a
vacancy in office or absence of the chairman of the board, one of the following
officers present in the order stated: the vice-chairman of the board, if there
be one, the president, the vice-presidents in their order of ranks and
seniority, or a person chosen by a majority vote of the shareholders present,
shall act as chairman of the meeting. The secretary or, in the absence of the
secretary, an assistant secretary, or in the absence of the secretary and
assistant secretary, a person appointed by the chairman of the meeting shall act
as secretary. The chairman of the meeting shall have the right and authority to
prescribe such rules, regulations and procedures and to do all such acts as, in
the judgment of such chairman, are appropriate for conduct of the meeting. To
the extent not prohibited by law, such rules, regulations or procedures may
include, without limitation, establishment of (i) an agenda or order of business
for the meeting and the method by which business may be proposed, (ii) rules and
procedures for maintaining order at the meeting and the safety of those present,
(iii) limitations on attendance at or participation in the meeting to
shareholders of record of the corporation, their duly authorized proxies or such
other persons as the chairman of the meeting shall determine, (iv) restrictions
on entry to the meeting after the time fixed for the commencement thereof and
(v) limitations on the time allotted to questions or comments by participants.
Any proposed business contained in the notice of a regular meeting is deemed to
be on the agenda and no further motions or other actions shall be required to
bring such proposed business up for consideration. Following completion of the
business of the meeting as determined by the chairman of the meeting, the
chairman of the meeting shall have the exclusive authority to adjourn the
meeting.
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Section 3.07 VOTING RIGHTS OF SHAREHOLDERS. Unless otherwise provided
in the articles, every shareholder of the corporation shall be entitled to one
vote for every share standing in the name of the shareholder in the books of the
corporation. Shareholders whose shares are in a Voting Trust shall not vote but
their shares shall be voted as called for in the Voting Trust. Except as
otherwise specifically provided by law, all matters coming before the meeting
shall be determined by a vote of shares. Such vote shall be taken by voice
unless a shareholder demands, before the vote begins, that it be taken by
ballot.
Section 3.08. VOTING LIST AND PROXIES.
(a) VOTING LIST. The officer or agent having charge of the
transfer books for shares of the Corporation shall make a complete list of
the shareholders entitled to vote at any meeting of shareholders, arranged in
alphabetical order, with the address of and the number of shares held by
each. The list shall be produced and kept open at the time and place of the
meeting and shall be subject to the inspection of any shareholder during the
whole time of the meeting for the purposes thereof except that, if the
Corporation has 5,000 or more shareholders, in lieu of the making of a list
the Corporation may make the information therein available at the meeting by
any other means.
(b) PROXIES. At all meetings of shareholders, shareholders entitled
to vote may attend and vote either in person or by proxy. Every proxy shall
be executed in writing by the shareholder or by such shareholder's duly
authorized attorney-in-fact and filed with the Secretary of the Corporation.
A telegram, telex, cablegram, datagram or similar transmission from a
shareholder or attorney-in-fact, or a photographic, facsimile or similar
reproduction of a writing executed by a shareholder or attorney-in-fact (or
other transmission as permitted by law, including, without limitation, by
internet, interactive voice response system or other electronic means) shall
be treated as properly executed for the purposes of this Section; provided
that such transmission sets forth a confidential and unique identification
number or other mark furnished by the Corporation to the shareholder for the
purposes of a particular meeting or transaction or is otherwise submitted
with information from which it can be determined that the transmission was
authorized by the shareholder. A proxy, unless coupled with an interest (as
defined in Section 1759(c) of the Business Corporation Law), shall be
revocable at will, notwithstanding any other agreement or any provision in
the proxy to the contrary, but the revocation of a proxy shall not be
effective until written notice thereof has been given to the Secretary of the
Corporation. An unrevoked proxy shall not be valid after three years from the
date of its execution unless a longer time is expressly provided therein. A
proxy shall not be revoked by the death or incapacity of the maker unless,
before the vote is counted or the authority is exercised, written notice of
the death or incapacity is given to the Secretary of the Corporation.
(c) JUDGES OF ELECTION. In advance of any meeting of shareholders of
the corporation, the Board of Directors may appoint judges of election, who
need not be shareholders, to act at the meeting or any adjournment thereof.
If judges of election are not so appointed, the presiding officer of the
meeting may, and on the request of any shareholder shall, appoint judges of
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election at the meeting. The number of judges shall be one or three. A person
who is a candidate for office to be filled at the meeting shall not act as a
judge. In case any person appointed as a judge fails to appear or fails or
refuses to act, the vacancy may be filled by appointment made by the Board of
Directors in advance of the convening of the meeting or at the meeting by the
presiding officer thereof. The judges of election shall determine the number
of shares outstanding and the voting power of each, the shares represented at
the meeting, the existence of a quorum, the authenticity, validity and
effective proxies, receive both votes or ballots, hear and determine all
challenges and questions in any way arising in connection with the right to
vote, count and tabulate all votes, determine the result and do such acts as
may be proper to conduct the election or vote with fairness to all
shareholders. The judges of election shall perform their duties impartially,
in good faith, to best of their ability, and as expeditiously as is
practical. If there are three judges of election, the decision, act or
certificate of a majority shall be effective in all respects as the decision,
act or certificate of all. On request of the presiding officer of the
meeting, or of any shareholder, the judges shall make a report in writing of
any challenge or question or matter determined by them, and execute a
certificate of any fact found by them. In the report of certificate made by
them shall be prima facie evidence of the facts stated therein.
Section 3.09. VOTING BY FIDUCIARIES AND PLEDGEES. Shares of the
corporation standing in the name of a trustee or other fiduciary and shares held
by an assignee for the benefit of creditors or by receiver may be voted by the
trustee, fiduciary, assignee or receiver. A shareholder whose shares are pledged
shall be entitled to vote the shares until the shares have been transferred into
the name of the pledgee, or a nominee of the pledgee, but nothing in this
section shall effect the validity of a proxy given to a pledgee or nominee.
Section 3.10. VOTING BY JOINT HOLDERS OR SHARES.
(a) GENERAL RULE. Where shares of the corporation are held jointly or
as tenants in common by two or more persons as fiduciaries or otherwise:
(1) If only one or more of such persons is present in person
or by proxy, all the shares standing in the names of such persons shall
be deemed to be represented for the purpose of determining a quorum and
the corporation shall accept as the vote of all the shares the vote
cast by joint owner or a majority of them; and
(2) If the persons are equally divided upon whether the shares
held by them shall be voted or upon the manner of voting the shares,
the voting of the shares shall be divided equally among the persons
without prejudice to the rights of the joint owners or the beneficial
owners thereof among themselves.
(b) EXCEPTION. If there has been filed with the secretary of the
corporation a copy, certified by an attorney-at-law to be correct, of the
relevant portions of the agreement under which the shares are held or the
instrument by which the trust or estate was created or of an order of court
appointing them or of an order of court directing the voting of the shares,
the person
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specified as having such voting power in the document latest in
date of operative effect so filed, and only those persons, shall be entitled
to vote the shares but only in accordance therewith.
Section 3.11. VOTING BY CORPORATIONS.
(a) VOTING BY CORPORATE SHAREHOLDERS. Any corporation that is a
shareholder of this corporation may vote by any of its officers or agents, or by
proxy upon by any officer or agent, unless some other person by resolution of
the Board of Directors of the other corporation or a provision of its articles
or bylaws, a copy of which resolution or provision certified to be correct by
one of its officers has been filed with the secretary of this corporation, is
appointed its general or special proxy in which case that person shall be
entitled to vote the shares.
(b) CONTROLLED SHARES. Shares of this corporation owned, directly or
indirectly, by it and controlled, directly or indirectly, by the Board of
Directors of this corporation, as such, shall not be voted at any meeting and
shall not be counted in determining the total number of outstanding shares for
voting purposes at any given time.
Section 3.12. DETERMINATION OF SHAREHOLDERS OF RECORD.
(a) FIXING RECORD DATE. The Board of Directors may fix a time prior to
the date of any meeting of shareholders as a record date for the determination
of the shareholders entitled to notice of, or to vote at, the meeting, which
time, except in the case of an adjourned meeting, shall be not more than sixty
days prior to the date of the meeting of shareholders. Only shareholders of
record on the date fixed shall be so entitled not withstanding any transfer of
shares on the books of the corporation after any record date fixed as provided
in this subsection. The Board of Directors may similarly fix a record date for
the determination of shareholders of record for any other purpose. When a
determination of shareholders of record has been made as provided in this
section for purposes of a meeting, the determination shall apply to any
adjournment thereof unless the Board fixes a new record date for the adjourned
meeting.
(b) DETERMINATION WHEN A RECORD DATE IS NOT FIXED. If a record date is
not fixed:
(1) The record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the close
of business on the next day proceeding the day in which notice is given
or, if notice is waived, at the close of business on the day
immediately preceding the day on which the meeting is held.
(2) The record date for determining shareholders entitled to:
(i) express consent or dissent to corporate action in
writing without a meeting, when prior action by the Board of
Directors is not necessary;
(ii) call a special meeting of the shareholders; or
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(iii) propose an amendment of the articles;
shall be the close of business on the day in which the first written
consent or dissent, request for a special meeting or petition proposing
an amendment of the articles is filed with the secretary of the
corporation.
(3) The record date for determining shareholders for any other
purpose shall be at the close of business on the day in which the Board
of Directors adopts the resolution relating thereto.
Section 3.13. MINORS OF SECURITY HOLDERS. The corporation may treat a
minor who holds shares or obligations of the corporation as having the capacity
to receive and to empower others to receive dividends, interest, principal, or
other payments or distributions, to vote or express consent or dissent, and to
make elections and exercise rights relating to such shares or obligations or, in
the case of payments or distributions on shares the corporate officer
responsible for maintaining the list of shareholders or the transfer agent of
the corporation or, in the case of payments or distributions on obligations, the
treasurer or agent has received written notice that the holder is a minor.
ARTICLE IV
Board of Directors
Section 4.01. POWERS; PERSONAL LIABILITY.
(a) GENERAL RULE. Unless otherwise provided by statute, all powers
vested by law in the corporation shall be exercised by or under the authority
of, and the business and affairs of the corporation shall be managed under the
direction of, the Board of Directors.
(b) PERSONAL LIABILITY OF DIRECTORS.
(1) A director shall not be personally liable, as such,
for monetary damages for any action taken unless:
(i) the director has breached or failed to perform
the duties of his or her office under 15 Pa.C.S. Subch. 17B;
and
(ii) the breach or failure to perform constitutes
self-dealing, willful misconduct or recklessness.
(2) Paragraph (1) shall not apply to:
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(i) the responsibility or liability of a director
pursuant to any criminal statute; or
(ii) the liability of a director for the payment of
taxes pursuant to Federal, State or local law.
(c) NOTATION OF DISSENT. A director who is present at a meeting of the
Board of Directors, or of a committee of the board, at which action on any
corporate matter is taken on which the director is generally competent to act,
shall be presumed to have assented to the action taken unless his or her dissent
is entered in the minutes of the meeting or unless the director files a written
dissent to the action with the secretary of the meeting before the adjournment
thereof or transmits the dissent in writing to the secretary of the corporation
immediately after the adjournment of the meeting. The right to dissent shall not
apply to a director who voted in favor of the action. Nothing in this section
shall bar a director from asserting that minutes of the meeting incorrectly
omitted his or her dissent if, promptly upon receipt of a copy of such minutes,
the director notifies the secretary, in writing, of the asserted omission or
inaccuracy.
Section 4.02. QUALIFICATIONS AND SELECTION OF DIRECTORS.
(a) QUALIFICATIONS. Each director of the corporation shall be a natural
person of full age who need not be a resident of Pennsylvania or a shareholder
of the corporation.
(b) ELECTION OF DIRECTORS. Except as otherwise provided in these
bylaws, directors of the corporation shall be elected by the
shareholders. In elections for directors, voting need not be by
ballot unless required by vote of the shareholders before the
voting for election of directors begins. The candidates receiving
the highest number of votes from each class or group of classes,
if any, entitled to elect directors separately up to the number
of directors to be elected by the class or group of classes shall
be elected. If at any meeting of shareholders, directors of more
than one class are to be elected, each class of directors shall
be elected in a separate election.
Section 4.03. NUMBER AND TERM OF OFFICE.
(a) NUMBER. The Board of Directors shall consist of such number of
directors as may be determined from time to time by resolution of the Board of
Directors.
(b) TERM OF OFFICE. Each director shall hold office until the
expiration of the term for which he or she was selected and until a successor
has been selected and qualified or until his or her earlier death, resignation
or removal. A decrease in the number of directors shall not have the effect of
shortening the term of any incumbent director.
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(c) RESIGNATION. Any director may resign at any time upon written
notice to the corporation. The resignation shall be effective upon receipt
thereof by the corporation or at such subsequent time as shall be specified in
the notice of resignation.
Section 4.04. VACANCIES.
(a) GENERAL RULE. Vacancies in the Board of Directors, including
vacancies resulting from an increase in the number of directors, may be filled
by a majority vote of the remaining members of the board though less than a
quorum, or by a sole remaining director, and each person so selected shall be a
director to serve for the balance of the unexpired term, and until a successor
has been selected and qualified or until his or her earlier death, resignation
or removal.
(b) ACTION BY RESIGNED DIRECTORS. When one or more directors resign
from the board effective at a future date, the directors then in office,
including those who have so resigned, shall have power by the applicable vote to
fill the vacancies, the vote thereon to take effect when the resignations become
effective.
Section 4.05. REMOVAL OF DIRECTORS.
(a) REMOVAL BY THE SHAREHOLDERS. The entire Board of Directors, or any
class of the board, or any individual director may be removed from office
without assigning any cause by the vote of shareholders, or of the holders of a
class or series of shares, entitled to elect directors, or the class of
directors. In case the board or a class of the board or any one or more
directors are so removed, new directors may be elected at the same meeting. The
Board of Directors may be removed at any time with or without cause by the
unanimous vote or consent of shareholders entitled to vote thereon.
(b) REMOVAL OF THE BOARD. The Board of Directors may declare vacant the
office of a director who has been judicially declared of unsound mind or who has
been convicted of an offense punishable by imprisonment for a term of more than
one year or if, within 60 days after notice of his or her selection, the
director does not accept the office either in writing or by attending a meeting
of the Board of Directors.
Section 4.06. PLACE OF MEETINGS. Meetings of the Board of Directors may
be held at such place within or without Pennsylvania as the Board of Directors
may from time to time appoint or as may be designated in the notice of the
meeting.
Section 4.07 ORGANIZATION OF MEETINGS. At every meeting of the Board of
Directors, the chairman of the board, if there be one, or, in the case of a
vacancy in the office or absence of the chairman of the board, one of the
following officers present in the order stated: the vice chairman of the board,
if there by one, the president, the vice presidents in their order of rank and
seniority, or a person chosen by majority vote of the directors present, shall
act as chairman of the meeting. The secretary or, in the absence of the
secretary, an assistant secretary, or, in the absence of the
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secretary and assistant secretaries, a person appointed by the chairman of
the meeting, shall act as secretary.
Section 4.08. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held at such time and place as shall be designated from time
to time by resolution of the Board of Directors.
Section 4.09. SPECIAL MEETINGS. Special meetings of the Board of
Directors shall be held whenever called by the chairman or by two or more of the
directors.
Section 4.10. QUORUM OF AND ACTION BY DIRECTORS.
(a) GENERAL RULE. A majority of the directors in office of the
corporation shall be necessary to constitute a quorum for the transaction of
business, and the acts of a majority of the directors present and voting at a
meeting at which a quorum is present shall be the acts of the Board of
Directors.
(b) ACTION BY WRITTEN CONSENT. Any action required or permitted to be
taken at a meeting of the directors may be taken without a meeting if, prior or
subsequent to the action, a consent or consents thereto by all of the directors
in office is filed with the secretary of the corporation.
Section 4.11. EXECUTIVE AND OTHER COMMITTEES.
(a) ESTABLISHMENT AND POWERS. The Board of Directors may, by resolution
adopted by a majority of the directors in office, establish one or more
committees to consist of one or more directors of the corporation. Any
committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all of the powers and authority of the Board of
Directors except that a committee shall not have any power or authority as to
the following:
(1) The submission to shareholders of any action requiring
approval of shareholders under the Business Corporation Law.
(2) The creation or filling of vacancies in the Board of
Directors.
(3) The adoption, amendment or repeal of these bylaws.
(4) The amendment or repeal of any resolution of the board
that by its terms is amendable or repealable only by the board.
(5) Action on matters committed by a resolution of the Board
of Directors to another committee of the board.
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(b) ALTERNATE COMMITTEE MEMBERS. The board may designate one or more
directors as alternate members of any committee who may replace any absent or
disqualified member to any meeting of the committee or for the purposes of any
written action by the committee. In the absence or disqualification of a member
and alternate member or members of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not
constituting a quorum, may unanimously appoint another director to act at the
meeting in the place of the absent or disqualified member.
(c) TERM. Each committee of the board shall serve at the pleasure of
the board.
(d) COMMITTEE PROCEDURES. The term "Board of Directors" or "board,"
when used in any provision of these bylaws relating to the organization or
procedures of or the manner of taking action by the Board of Directors, shall be
construed to include and refer to any executive or other committee of the board.
Section 4.12. COMPENSATION. The Board of Directors shall have the
authority to fix the compensation of directors for their services as directors
and a director may be a salaried officer of the corporation.
ARTICLE V
Officers
Section 5.01. OFFICERS GENERALLY.
(a) NUMBER, QUALIFICATIONS AND DESIGNATION. The officers of the
corporation shall be a president, a secretary, a treasurer, and such other
officers as may be elected in accordance with the provisions of Section 5.03.
Officers may but need not be directors or shareholders of the corporation. The
president and secretary shall be natural persons of full age. The treasurer may
be a corporation, but if a natural person shall be of full age. The Board of
Directors may elect from among the members of the board a chairman of the board
and a vice chairman of the board who shall be officers of the corporation. Any
number of offices may be held by the same person.
(b) RESIGNATIONS. Any officer may resign at any time upon written
notice to the corporation. The resignation shall be effective upon receipt
thereof by the corporation or at such subsequent time as may be specified in the
notice of resignation.
(c) BONDING. The corporation may secure the fidelity of any or all of
its officers by bond or otherwise.
Section 5.02. ELECTION AND TERM OF OFFICE. The officers of the
corporation, except those elected by delegated authority pursuant to Section
5.03, shall be elected annually by the Board Directors, and each such officer
shall hold office for a term of one year and until a successor has been selected
and qualified or until his or her earlier death, resignation or removal.
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Section 5.03. SUBORDINATE OFFICERS, COMMITTEES AND AGENTS. The Board of
Directors may from time to time elect such other officers and appoint such
committees, employees or other agents as the business of the corporation may
require, including one or more assistant secretaries, and one or more assistant
treasurers, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these bylaws or as the Board of
Directors may from time to time determine. The Board of Directors may delegate
to any officer or committee the power to elect subordinate officers and to
retain or appoint employees or other agents, or committees thereof and to
prescribe the authority and duties of such subordinate officers, committees,
employees or other agents.
Section 5.04. REMOVAL OF OFFICERS AND AGENTS. Any officer or agent of
the corporation may be removed by the Board of Directors with or without cause.
The removal shall be without prejudice to the contract rights, if any, of any
person so removed. Election or appointment of an officer or agent shall not of
itself create contract rights.
Section 5.05. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause, shall be filled by
the Board of Directors or by the officer or committee to which the power to fill
such office has been delegated pursuant to Section 5.03, as the case may be, and
if the office is one for which these bylaws prescribe a term, shall be filled
for the unexpired portion of the term.
Section 5.06. AUTHORITY.
(a) GENERAL RULE. All officers of the corporation, as between
themselves and the corporation, shall have such authority and perform such
duties in the management of the corporation as may be provided by or pursuant to
resolutions or orders of the board of directors or, in the absence of
controlling provisions in the resolutions or orders of the board of directors,
as may be determined by or pursuant to these bylaws.
(b) CHIEF EXECUTIVE OFFICER. The chief executive officer shall have and
perform such duties as are delegated by the Board of Directors.
Section 5.07. THE CHAIRMAN AND VICE CHAIRMAN OF THE BOARD. The chairman
of the board or in the absence of the chairman, the vice chairman of the board,
shall preside at all meetings of the shareholders and of the Board of Directors
and shall have and perform such other duties as are delegated by the Board of
Directors.
Section 5.08. THE PRESIDENT. The president shall have and perform such
duties as are delegated by the board of directors.
Section 5.09. THE SECRETARY. The secretary or an assistant secretary
shall attend all meetings of the shareholders and of the Board of Directors and
shall record all the votes of the shareholders and of the directors and the
minutes of the meetings of the shareholders and of the Board of Directors and of
committees of the board in a book or books to be kept for that purpose;
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shall see that notices are given and records and reports properly kept and
filed by the corporation as required by law; shall be the custodian of the
seal of the corporation and see that it is affixed to documents executed on
behalf of the corporation under its seal; and, in general, shall perform all
duties incident to the office of secretary, and such other duties as may from
time to time be assigned by the Board of Directors.
Section 5.10. THE TREASURER. The treasurer or an assistant treasurer
shall have or provide for the custody of the funds or other property of the
corporation; shall collect and receive or provide for the collection and receipt
of moneys earned by or in any manner due to or received by the corporation;
shall deposit all funds in his or her custody as treasurer in such banks or
other places of deposit as the Board of Directors may from time to time
designate; shall, whenever so required by the Board of Directors, render an
account showing all transactions as treasurer and the financial condition of the
corporation; and, in general, shall discharge such other duties as may from time
to time be assigned by the Board of Directors.
Section 5.11. SALARIES. The salaries of the officers elected by the
Board of Directors shall be fixed from time to time by the Board of Directors or
by such officer as may be designated by resolution of the board. The salaries or
other compensation of any other officers, employees and other agents shall be
fixed from time to time by the officer or committee to which the power to elect
such officers or to retain or appoint such employees or other agents has been
delegated pursuant to Section 5.03. No officer shall be prevented from receiving
such salary or other compensation by reason of the fact that the officer is also
a director of the corporation.
ARTICLE VI
Share Certificates, Transfer, Etc.
Section 6.01. SHARE CERTIFICATES. Certificates for shares of the
corporation shall be in such form as approved by the Board of Directors, and
shall state that the corporation is incorporated under the laws of Pennsylvania,
the name of the person to whom issued, and the number and class of shares and
the designation of the series (if any) that the certificate represents. The
share register of transfer books and blank share certificates shall be kept by
the secretary or by any transfer agent or registrar designated by the Board of
Directors for that purpose.
Section 6.02. ISSUANCE. The share certificates of the corporation shall
be numbered and registered in the share register or transfer books of the
corporation as they are issued. They shall be signed by the president or a vice
president and by the secretary or an assistant secretary or the treasurer or an
assistant treasurer; but where a certificate is signed by a transfer agent or a
registrar, the signature of any corporate officer upon the certificate may be a
facsimile, engraved or printed. In case any officer who has signed, or whose
facsimile signature has been placed upon, any share certificate shall have
ceased to be such officer because of death, resignation or otherwise, before the
certificate is issued, it may be issued with the same effect as if the officer
had not ceased to be such at the date of its issue. The provisions of this
Section 6.02 shall be
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subject to any inconsistent or contrary agreement at the time between the
corporation and any transfer agent or registrar.
Section 6.03. TRANSFER. Transfers of shares shall be made on the share
register or transfer books of the corporation upon surrender of the certificate
therefore, endorsed by the person named in the certificate or by an attorney
lawfully constituted in writing. No transfer shall be made inconsistent with any
shareholders agreement, the provisions of the securities laws and the provisions
of the Uniform Commercial Code, 13 Pa.C.S. Div. 8, or other provisions of law.
Section 6.04. RECORD HOLDER OF SHARES. The corporation shall be
entitled to treat the person in whose name any share or shares of the
corporation stand on the books of the corporation as the absolute owner thereof,
and shall not be bound to recognize any equitable or other claim to, or interest
in, such share or shares on the part of any other person.
Section 6.05. LOST, DESTROYED OR MUTILATED CERTIFICATES. The holder of
any shares of the corporation shall immediately notify the corporation of any
loss, destruction or mutilation of the certificate therefore, and the Board
of Directors may, in its discretion, cause a new certificate or certificates
to be issued to the holder, in case of mutilation of the certificate, upon
the surrender of the mutilated certificate or, in case of loss or destruction
of the certificate, upon satisfactory proof of the loss or destruction and,
if the Board of Directors shall so determine, the deposit of a bond in such
form and in such sum, and with such surety or sureties, as it may direct.
ARTICLE VII
Indemnification of Directors, Officers and other Authorized
Representatives
Section 7.01. SCOPE OF INDEMNIFICATION.
(a) GENERAL RULE. The corporation shall indemnify an indemnified
representative against any liability incurred in connection with any
proceeding in which the indemnified representative may be involved as a party
or otherwise by reason of the fact that such person is or was serving in an
indemnified capacity, including, without limitation, liabilities resulting
from any actual or alleged breach or neglect of duty, error, misstatement or
misleading statement, negligence, gross negligence or act giving rise to
strict or products liability, except:
(1) where the indemnification is expressly prohibited by
applicable law;
(2) where the conduct of the indemnified representative
has been finally determined pursuant to Section 7.06 or otherwise:
(i) to constitute willful misconduct or recklessness
within the meaning of 15 Pa.C.S. Section 1746(b) or any
superseding provision of law sufficient in the
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circumstances to bar indemnification against liabilities
arising from the conduct; or
(ii) to be based upon or attributable to the receipt
by the indemnified representative from the corporation of a
personal benefit to which the indemnified representative is
not legally entitled; or
(3) to the extent the indemnification has been finally
determined in a final adjudication pursuant to Section 7.06 to be
otherwise unlawful.
(b) PARTIAL PAYMENT. If an indemnified representative is entitled to
indemnification in respect of a portion, but not all, of any liabilities to
which such person may be subject, the corporation shall indemnify the
indemnified representative to the maximum extent for such portion of the
liabilities.
(c) PRESUMPTION. The termination of a proceeding by judgment, order,
settlement or conviction or upon a plea of nolo contenders or its equivalent
shall not of itself create a presumption that the indemnified representative is
not entitled to indemnification.
(d) DEFINITIONS. For purposes of this Article:
(1) "indemnified capacity" means any and all past, present and
future service by an indemnified representative in one or more
capacities as a director, officer, employee or agent of the
corporation, or, at the request of the corporation, as a director,
officer, employee, agent, fiduciary or trustee of another corporation,
partnership, joint venture, trust, employee benefit plan or other
entity or enterprise;
(2) "indemnified representative" means any and all directors
and officers of the corporation and any other person designated as an
indemnified representative by the Board of Directors of the corporation
(which may, but need not, include any person serving at the request of
the corporation, as a director, officer, employee, agent, fiduciary or
trustee of another corporation, partnership, joint venture, trust,
employee benefit plan or other entity or enterprise);
(3) "liability" means any damage, judgment, amount paid in
settlement, fine, penalty, punitive damages, excise tax assessed with
respect to an employee benefit plan, or cost or expense, of any nature
(including, without limitation, attorneys' fees and disbursements); and
(4) "proceeding" means any threatened, pending or completed
action, suit, appeal or other proceeding of any nature, whether civil,
criminal, administrative or investigative, whether formal or informal,
and whether brought by or in the right of the corporation, a class of
its security holders or otherwise.
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Section 7.02. PROCEEDINGS INITIATED BY INDEMNIFIED REPRESENTATIVES.
Notwithstanding any other provision of this Article, the corporation shall not
indemnify under this Article an indemnified representative for any liability
incurred in a proceeding initiated (which shall not be deemed to include
counterclaims or affirmative defenses) or participated in as an intervenor or
AMICUS CURIAE by the person seeking indemnification unless the initiation of or
participation in the proceeding is authorized, either before or after its
commencement, by the affirmative vote of a majority of the directors in office.
This section shall not apply to reimbursement of expenses incurred in
successfully prosecuting or defending an arbitration under Section 7.06 or
otherwise successfully prosecuting or defending the rights of an indemnified
representative granted by or pursuant to this Article.
Section 7 .03. ADVANCING EXPENSES. The corporation shall pay the
expenses (including attorneys' fees and disbursements) incurred in good faith by
an indemnified representative in advance of the final disposition of a
proceeding described in Section 7.01 or the initiation of or participation in
which is authorized pursuant to Section 7.02 upon receipt of an undertaking by
or on behalf of the indemnified representative to repay the amount if it is
ultimately determined pursuant to Section 7.06 that such person is not entitled
to be indemnified by the corporation pursuant to this Article. The financial
ability of an indemnified representative to repay an advance shall not be a
perquisite to the making of the advance.
Section 7.04 SECURING OF INDEMNIFICATION OBLIGATIONS. To further
effect, satisfy or secure the indemnification obligations provided herein or
otherwise, the corporation may maintain insurance, obtain a letter of credit,
act as self-insurer, create a reserve, trust, escrow, cash collateral or other
fund or account, enter into indemnification agreements, pledge or grant a
security interest in any assets or properties of the corporation, or use any
other mechanism or arrangement whatsoever in such amounts, at such costs, and
upon such other terms and conditions as the Board of Directors shall deem
appropriate. Absent fraud, the determination of the Board of Directors with
respect to such amounts, costs, terms and conditions shall be conclusive against
all security holders, officers and directors and shall not be subject to
voidability.
Section 7.05. PAYMENT OF INDEMNIFICATION. An indemnified representative
shall be entitled to indemnification within 30 days after a written request for
indemnification has been delivered to the secretary of the corporation.
Section 7.06. ARBITRATION.
(a) GENERAL RULE. Any dispute related to the right to
indemnification, contribution or advancement of expenses as provided under
this Article, except with respect to indemnification for liabilities arising
under the Securities Act of 1933 that the corporation has undertaken to
submit to a court for adjudication, shall be decided only by arbitration in
the metropolitan area in which the principal executive offices of the
corporation are located at the time, in accordance with the commercial
arbitration rules then in effect of The American Arbitration Association,
before a panel of three arbitrators, one of whom shall be selected by the
corporation, the second
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of whom shall be selected by the indemnified representative and the third of
whom shall be selected by the other two arbitrators. In the absence of the
American Arbitration Association, or if for any reason arbitration under the
arbitration rules of the American Arbitration Association cannot be
initiated, or if one of the parties fails or refuses to select an arbitrator
or if the arbitrators selected by the corporation and the indemnified
representative cannot agree on the selection of the third arbitrator within
30 days after such time as the corporation and the indemnified representative
have each been notified of the selection of the other's arbitrator, the
necessary arbitrator or arbitrators shall be selected by the presiding judge
of the court of general jurisdiction in such metropolitan area.
(b) BURDEN OF PROOF. The party or parties challenging the right of an
indemnified representative to the benefits of this Article shall have the burden
of proof.
(c) EXPENSES. The corporation shall reimburse an indemnified
representative for the expenses (including attorneys' fees and disbursements)
incurred in successfully prosecuting or defending such arbitration.
(d) EFFECT. Any award entered by the arbitrators shall be final,
binding and nonappealable and judgment may be entered thereon by any party in
accordance with applicable law in any court of competent jurisdiction, except
that the corporation shall be entitled to interpose as a defense in any such
judicial enforcement proceeding any prior final judicial determination adverse
to the indemnified representative under Section 7.01(a)(2) in a proceeding not
directly involving indemnification under this Article. This arbitration
provision shall be specifically enforceable.
Section 7.07. CONTRIBUTION. If the indemnification provided for in this
Article or otherwise is unavailable for any reason in respect of any liability
or portion thereof, the corporation shall contribute to the liabilities to which
the indemnified representative may be subject in such proportion as is
appropriate to reflect the intent of this Article or otherwise.
Section 7.08. MANDATORY INDEMNIFICATION OF DIRECTORS, OFFICERS, ETC.
To the extent that a representative of the corporation has been successful on
the merits or otherwise in defense of any action or proceeding referred to in
15 Pa.C.S. (167)1741 or 1742 or in defense of any claim, issue or matter
therein, such person shall be indemnified against expenses (including
attorneys' fees and disbursements) actually and reasonably incurred by such
person in connection therewith.
Section 7.09. CONTRACT RIGHTS; AMENDMENT OR REPEAL. All rights under
this Article shall be deemed a contract between the corporation and the
indemnified representative pursuant to which the corporation and each
indemnified representative intend to be legally bound. A repeal, modification or
an amendment hereof shall be prospective only and shall not affect any rights or
obligations then existing.
Section 7.10. SCOPE OF ARTICLE. The rights granted by this Article
shall not be deemed exclusive of any other rights to which those seeking
indemnification, contribution or
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advancement of expenses may be entitled under any statute, agreement, vote of
shareholder or disinterested directors or otherwise both as to action in an
indemnified capacity and as to action in any other capacity. The
indemnification, contribution and advancement of expenses provided by, or
granted pursuant to, this Article shall continue as to a person who has
ceased to be an indemnified representative in respect of matters arising
prior to such time, and shall inure to the benefit of the heirs and personal
representatives of such a person.
Section 7.11. RELIANCE ON PROVISIONS. Each person who shall act as an
indemnified representative of the corporation shall be deemed to be doing so in
reliance upon the rights provided by this Article.
Section 7.12. INTERPRETATION. The provisions of this Article are
intended to constitute bylaws authorized by 15 Pa.C.S. Section1746.
ARTICLE VIII
Miscellaneous
Section 8.01. CORPORATE SEAL. The corporation shall have a corporate
seal containing the name of the corporation, the year of incorporation and such
other details as may be approved by the Board of Directors.
Section 8.02. CHECKS. All checks, notes, bills of exchange or other
orders in writing shall be signed by such person or persons as the Board of
Directors or any person authorized by resolution of the Board of Directors may
from time to time designate.
Section 8.03. CONTRACTS.
(a) GENERAL RULE. Except as otherwise provided in the Business
Corporation Law in the case of transactions that require action by the
shareholders, the Board of Directors may authorize any officer or agent to enter
into any contract or to execute or deliver any instrument on behalf of the
corporation, and such authority may be general or confined to specific
instances.
(b) STATUTORY FORM OF EXECUTION OF INSTRUMENTS. Any note, mortgage,
evidence of indebtedness, contract or other document, or any assignment or
endorsement thereof, executed or entered into between the corporation and any
other person, when signed by one or more officers or agents having actual or
apparent authority to sign it, or by the president or vice president and
secretary or assistant secretary or treasurer or assistant treasurer of the
corporation, shall be held to have been properly executed for and in behalf of
the corporation, without prejudice to the rights of the corporation against any
person who shall have executed the instrument in excess of his or her actual
authority.
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Section 8.04. INTERESTED DIRECTORS OR OFFICERS; QUORUM.
(a) GENERAL RULE. A contract or transaction between the corporation and
one or more of its directors or officers or between the corporation and another
corporation, partnership, joint venture, trust or other enterprise in which one
or more of its directors or officers are directors or officers or have a
financial or other interest, shall not be void or voidable solely for that
reason, or solely because the director or officer is present at or participates
in the meeting of the Board of Directors that authorizes the contract or
transaction, or solely because his, her or their votes are counted for that
purpose, if:
(1) the material facts as to the relationship or interest and
as to the contract or transaction are disclosed or are known to the
Board of Directors and the board authorizes the contract or transaction
by the affirmative votes of a majority of the disinterested directors
even though the disinterested directors are less than a quorum;
(2) the material facts as to his or her relationship or
interest and as to the contract or transaction are disclosed or are
known to the shareholders entitled to vote thereon and the contract or
transaction is specifically approved in good faith by vote of those
shareholders; or
(3) the contract or transaction is fair as to the corporation
as of the time it is authorized, approved or ratified by the Board of
Directors or the shareholders.
(b) QUORUM. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the board that authorizes a
contract or transaction specified in subsection (a).
Section 8.05. DEPOSIT. All funds of the corporation shall be deposited
from time to time to the credit of the corporation in such banks, trust
companies or other depositories as the Board of Directors may approve or
designate, and all such funds shall be withdrawn only upon checks signed by such
one or more officers or employees as the Board of Directors shall from time to
time determine.
Section 8.06. CORPORATE RECORDS.
(a) REQUIRED RECORDS. The corporation shall keep complete and accurate
books and records of account, minutes of the proceedings of the incorporators,
shareholders and directors and a share register giving the names and addresses
of all shareholders and the number and class of shares held by each. The share
register shall be kept at either the registered office of the corporation in
Pennsylvania or at its principal place of business wherever situated or at the
office of its registrar or transfer agent. Any books, minutes or other records
may be in written form or any other form capable of being converted into written
form within a reasonable time.
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(b) RIGHT OF INSPECTION. Every shareholder shall, upon written verified
demand stating the purpose thereof, have a right to examine, in person or by
agent or attorney, during the usual hours for business for any proper purpose,
the share register, books and records of account, and records of the proceedings
of the incorporators, shareholders and directors and to make copies or extracts
therefrom. A proper purpose shall mean a purpose reasonably related to the
interest of the person as a shareholder. In every instance where an attorney or
other agent is the person who seeks the right of inspection, the demand shall be
accompanied by a verified power of attorney or other writing that authorizes the
attorney or other agent to so act on behalf of the shareholder. The demand shall
be directed to the corporation at its registered office in Pennsylvania or at
its principal place of business wherever situated.
Section 8.07. FINANCIAL REPORTS. Unless otherwise decided by the
Directors, the corporation shall furnish to its shareholders annual financial
statements, including at least a balance sheet as of the end of each fiscal year
and a statement of income and expenses for the fiscal year. The financial
statements shall be prepared on the basis of generally accepted accounting
principles, if the corporation prepares financial statements for the fiscal year
on that basis for any purpose, and may be consolidated statements of the
corporation and one or more of its subsidiaries. The financial statements shall
be mailed by the corporation to each of its shareholders entitled thereto within
120 days after the close of each fiscal year and, after the mailing and upon
written request, shall be mailed by the corporation to any shareholder or
beneficial owner entitled thereto to whom a copy of the most recent annual
financial statements has not previously been mailed. Statements that are audited
or reviewed by a public accountant shall be accompanied by the report of the
accountant; in other cases, each copy shall be accompanied by a statement of the
person in charge of the financial records of the corporation:
(1) Stating his or her reasonable belief as to whether or not
the financial statements were prepared in accordance with generally
accepted accounting principles and, if not, describing the basis of
presentation.
(2) Describing any material respects in which the financial
statements were not prepared on a basis consistent with those prepared
for the previous year.
Section 8.08. AMENDMENT OF BYLAWS. These bylaws may be amended or
repealed, or new bylaws may be adopted, either (i) by vote of the shareholders
at any duly organized annual or special meeting of shareholders, or (ii) with
respect to those matters that are not by statute committed expressly to the
shareholders, and regardless of whether the shareholders have previously adopted
or approved the bylaw being amended or repealed, by vote of a majority of the
Board of Directors of the corporation in office at any regular or special
meeting of directors. Any change in these bylaws shall take effect when adopted
unless otherwise provided in the resolution effecting the change.
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 6,118,416
<SECURITIES> 38,889,620
<RECEIVABLES> 1,910,985
<ALLOWANCES> 136,977
<INVENTORY> 0
<CURRENT-ASSETS> 47,492,987
<PP&E> 10,870,740
<DEPRECIATION> 2,230,064
<TOTAL-ASSETS> 59,692,944
<CURRENT-LIABILITIES> 6,654,794
<BONDS> 0
0
0
<COMMON> 64,164,093
<OTHER-SE> (13,973,898)
<TOTAL-LIABILITY-AND-EQUITY> 59,692,944
<SALES> 51,448
<TOTAL-REVENUES> 3,030,310
<CGS> 2,471,251
<TOTAL-COSTS> 7,179,753
<OTHER-EXPENSES> (72,742)
<LOSS-PROVISION> 87,589
<INTEREST-EXPENSE> 388,078
<INCOME-PRETAX> (4,222,185)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,222,185)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,222,185)
<EPS-BASIC> 0.36
<EPS-DILUTED> 0.36
</TABLE>
