Prospectus Summary (Part 3)--RISK FACTORS
You should consider carefully the following risks, together with all other
information included in this prospectus before you decide to buy our common
stock. Please keep these risks in mind when reading this prospectus, including
any forward-looking statements appearing in this prospectus. If any of the
following risks actually occurs, our business, financial condition or results
of operations would likely suffer materially. As a result, the trading price of
our common stock may decline, and you could lose all or part of the money you
paid to buy our common stock.
Risks relating to our business
Our extremely limited operating history makes it difficult to evaluate our
business and prospects
We commenced operations in March 1998 and only recently began to market and
sell our services. We began offering commercial service in Stamford,
Connecticut in May 1998. Several members of our senior management team an
other employees have only recently joined us and therefore have worked together
for only a short period of time. Accordingly, you have limited information
about our company with which to evaluate our business, strategies and
performance and an investment in our common stock.
Because the high-speed data communications industry is new and rapidly
evolving, we cannot predict its future growth or ultimate size
The high-speed data communications industry is in the early stages of
development and is subject to rapid and significant technological change. Since
this industry is new and because the technologies available for high-speed data
communications services are rapidly evolving, we cannot accurately predict the
rate at which the market for our services will grow, if at all, or whether
emerging technologies will render our services less competitive or obsolete. If
the market for our services fails to develop or grows more slowly than
anticipated, our business, prospects, financial condition and results of
operations could be materially adversely affected. Many providers of high-speed
data communication services are testing products from numerous suppliers for
various applications, and these suppliers have not broadly adopted an industry
standard. In addition, certain industry groups are in the process of trying to
establish standards which could limit the types of technologies we could use.
Certain critical issues concerning commercial use of DSL technology for
Internet access, including security, reliability, ease and cost of access and
quality of service, remain unresolved and may impact the growth of these
services.
We have incurred losses and have experienced negative operating cash flow to
date and expect our losses and negative operating cash flow to continue and to
increase
We have incurred significant losses and experienced negative operating cash
flow for each month since our formation. We expect to continue to incur
significant losses and negative operating cash flow for the foreseeable future.
If our revenue does not grow as expected or capital and operating expenditures
exceed our plans, our business, prospects, financial condition and results of
operations will be materially adversely affected. As of June 30, 1999, we had
an accumulated deficit of approximately $11,689,000. We cannot be certain if or
when we will be profitable or if or when we will generate positive operating
cash flow. We expect our operating expenses to increase significantly as we
expand our business. In addition, we expect to make significant additional
capital
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expenditures during the remainder of 1999 and in subsequent years. We also
expect to substantially increase our operating expenditures, particularly
network and operations and sales and marketing expenditures, as we implement
our business plan. However, our revenue may not increase despite this
increased spending.
Our business model is unproven, and may not be successful
We do not know whether our business model and strategy will be successful.
If the assumptions underlying our business model are not valid or we are unable
to implement our business plan, achieve the predicted level of market
penetration or obtain the desired level of pricing of our services for
sustained periods, our business, prospects, financial condition and results of
operations could be materially adversely affected. We have adopted a different
strategy than other DSL providers. We focus on selling directly to small and
medium sized businesses in second and third tier cities. In contrast, other DSL
providers sell services primarily to Internet service providers and others who,
in turn, resell these services to end users through their sales forces. I
addition, many other DSL providers are currently focused primarily on offering
their services in large metropolitan areas. Certain of our target markets are
within the larger metropolitan areas where other DSL providers are focused on
providing service. Our unproven business model makes it difficult to predict
the extent to which our services will achieve market acceptance. To be
successful, we must deploy our network in a significant number of our selected
markets and convince our target customers to utilize our service. As of June
30, 1999, we provided service or had installed equipment in only 24 cities. It
is possible that we may never be able to deploy our network as planned, achieve
significant market acceptance, favorable operating results or profitability.
Our failure to achieve or sustain market acceptance at desired pricing levels
could impair our ability to achieve profitability or positive cash flow
Prices for digital communication services have fallen historically, a trend
we expect will continue. Accordingly, we cannot predict to what extent we may
need to reduce our prices to remain competitive or whether we will be able to
sustain future pricing levels as our competitors introduce competing services
or similar services at lower prices. Our failure to achieve or sustain market
acceptance at desired pricing levels could impair our ability to achieve
profitability or positive cash flow, which would have a material adverse effect
on our business, prospects, financial condition and results of operations.
If we fail to recruit qualified personnel in a timely manner and retain our
employees, we will not be able to execute our business plan
To meet our business plan, we need to hire a substantial number of qualified
personnel, particularly sales and marketing personnel. If we are unable to
recruit qualified personnel in a timely manner or to retain our employees, we
will not be able to execute our business plan. Our industry is characterized by
intense competition for, and aggressive recruiting of, skilled personnel, as
well as a high level of employee mobility. Many of our future employees must be
recruited to work locally in the new markets where we intend to establish a
presence. The combination of our local sales and marketing strategy and the
competitive nature of our industry may make it difficult to hire qualified
personnel on a timely basis and to retain our employees.
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Our management team has little experience working together, and the loss of
key personnel could adversely affect our business
We depend on a small number of executive officers and other members of
senior management to work effectively as a team, to execute our business
strategy and business plan, and to manage employees who will be located
throughout the United States. The loss of key managers or their failure to work
effectively as a team could have a material adverse effect on our business and
prospects. Our senior management has worked together for only a short period of
time and may not work well together as a management team. Competition for
qualified executives in the data communication services industry is intense and
there are a limited number of persons with comparable experience. We do not
have employment agreements with any of our executive officers, so any of these
individuals may terminate his employment at any time.
Our failure to establish the necessary infrastructure to support our business
and to manage our growth could strain our resources and adversely affect our
business and financial performance
Our business plan anticipates that we will service in a significant number
of new cities and add a significant number of new employees in geographically-
dispersed areas. This rapid growth will continue to place a significant strain
on our management, financial controls, operations, personnel and othe
resources. Our failure to manage our rapid growth could have a material adverse
effect on our ability to integrate expanding operations, the quality of our
services and our ability to recruit, manage and retain key personnel. If we do
not institute adequate financial and reporting systems, managerial controls,
and procedures to manage and operate from multiple geographically-dispersed
locations, our operations will be materially and adversely affected. We are
currently implementing an operations support system to help manage customer
service, bill customers, process customer orders and coordinate with vendors
and contractors. Implementation of this system, which we expect to be
substantially completed by the end of 1999, could be delayed or, when
implemented, could cause disruptions in service or billing. In addition, we are
currently implementing a new financial and reporting system which will interact
with our operations support system. To manage our growth effectively, we must
successfully implement these systems on a timely basis, and continually expand
and upgrade these systems as our operations expand.
Disappointing quarterly revenue or operating results could cause the price of
our common stock to fall
Our quarterly revenue and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter. If our quarterly revenue or
operating results fall below the expectations of investors or security
analysts, the price of our common stock could fall substantially. Our quarterly
revenue and operating results may fluctuate as a result of a variety of
factors, many of which are outside our control, including:
. amount and timing of expenditures relating to the rollout of our
infrastructure and services;
. ability to obtain and the timing of necessary regulatory approvals;
. rate at which we are able to attract customers within our target markets
and our ability to retain these customers at sufficient aggregate revenue
levels;
. ability to deploy our network on a timely basis;
. availability of financing to continue our expansion;
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. technical difficulties or network downtime;
. availability of space in traditional telephone companies' central offices
and timing of the installation of our equipment in those spaces; and
. introduction of new services or technologies by our competitors and
resulting pressures on the pricing of our service.
The failure of our customers to pay their bills on a timely basis could
adversely affect our cash flow
Our target customers consist of small and medium sized businesses. We
anticipate having to bill and collect numerous relatively small customer
accounts. We may experience difficulty in collecting amounts due on a timely
basis. Our failure to collect accounts receivable owed to us by our customers
on a timely basis could have a material adverse effect on our business,
financial condition and cash flow.
Our failure to develop and maintain good relationships with marketing partners
in a local service market could adversely affect our ability to obtain and
retain customers in that market
In addition to marketing through our direct sales force, we rely on
relationships with local marketing partners, such as integrators of computer
systems and networks and consultants. These partners recommend our services to
their clients, provide us with referrals and help us build a local presence in
each market. We may not be able to identify, and maintain good relationships
with, quality marketing partners or assure you that they will recommend our
services rather than our competitors' services to their customers. Our failure
to identify, and maintain good relationships with, quality marketing partners
could have a material adverse effect on our ability to obtain and retain
customers in a market and, as a result, our business would suffer.
Our success depends on negotiating and entering into interconnection
agreements with traditional telephone companies
We must enter into and renew interconnection agreements with traditional
telephone companies in each of our target markets in order to provide service
in that market. These agreements govern, among other things, the price and
other terms regarding our location of equipment in the telephone companies'
central offices and our lease of copper telephone lines that connect those
central offices to our customers. To date, we have entered into agreements with
Ameritech, Bell Atlantic, BellSouth, SBC (including SNET) and GTE, which govern
our relationships in 21 states. Delays in obtaining interconnection agreements
would delay our entrance into target markets and could have a material adverse
effect on our business and prospects. Our interconnection agreements have
limited terms of one to two years and we cannot assure you that new agreements
will be negotiated or that existing agreements will be extended on terms
favorable to us. Interconnection agreements are also subject to oversight by
the FCC, state telecommunication regulators and the courts. These governmental
authorities may modify the terms or prices of our interconnection agreements in
ways that could adversely affect our ability to deliver service and our
business and results of operations.
Under federal law, traditional telephone companies have an obligation to
negotiate with us in good faith to enter into interconnection agreements. If no
agreement can be reached, either side may petition the applicable state
telecommunications regulators to arbitrate remaining disagreements. These
arbitration proceedings can last for many months. Moreover, the state
regulators must approve
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any interconnection agreement resulting from negotiation or arbitration, and
any party may appeal an adverse decision by the state regulators to federal
district court. The potential cost in resources and delay from this process
would delay our entry into markets and could harm our ability to compete in
these markets, and we cannot assure you that a state regulatory authority would
resolve disputes in our favor. Moreover, the FCC rules governing pricing
standards for access to the networks of the traditional telephone companies are
currently being challenged in federal court. If the courts overturn the FCC's
pricing rules, the FCC may adopt a new pricing methodology that would require
us to pay a higher price to traditional telephone companies for access to
suitable facilities and lines. This could have a detrimental effect on our
business.
Many of the traditional local telephone companies, including those created
by AT&T's divestiture of its local telephone service business, are conducting
technical or market trials or have begun deploying DSL-based services. In
addition, these companies also currently offer high-speed data communications
services that use other technologies. Consequently, these companies have
certain incentives to delay:
.our entry into, and renewals of, interconnection agreements
.our access to their central offices to install our equipment and provide
our services,
.provisioning acceptable transmission facilities and copper telephone
lines, and
.our introduction and expansion of our services.
Any such delays would negatively impact our ability to implement our business
plan and harm our competitive position, business and prospects.
Failure to obtain space for our DSL equipment in the local telephone
companies' central offices in our target markets could adversely affect our
business
Our strategy requires us to obtain space for our DSL equipment in those
central offices of the traditional telephone companies that already serve a
large number of our target customers. Failure to obtain required space to
locate our equipment on a timely basis could have a material adverse effect on
our business. In addition to negotiating and entering into interconnection
agreements with traditional telephone companies, we must negotiate and enter
into collocation agreements for each central office in which we locate
equipment. We may not be able to secure collocation space in the central
offices of our choice on a timely basis. We expect that central office space
will become increasingly scarce as demand increases. In addition, the terms of
our collocation agreements are one to two years and are subject to certain
renegotiation, renewal and termination provisions.
Our success depends on traditional telephone companies providing acceptable
transmission facilities and copper telephone lines
We interconnect with and use the networks of traditional telephone companies
to provide our services to our customers. We cannot assure you that these
networks will be able to meet the telecommunications needs of our customers or
maintain our service standards. We also depend on the traditional telephone
companies to provide and maintain their transmission facilities and the copper
telephone lines between our network and our customers' premises. Our dependence
on traditional telephone companies could cause delays in establishing our
network and providing our services. Any such delays could have a material
adverse effect on our business. We lease copper telephone lines running from
the central office of the traditional telephone companies to each customer's
location. In
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many cases, the copper telephone lines must be specially conditioned by the
telephone company to carry digital signals. We may not be able to lease a
sufficient number of acceptable telephone lines on acceptable terms, if at all.
Traditional telephone companies often rely on unionized labor and labor-related
issues have in the past, and may in the future, adversely affect the incumbent
carriers' provision of services.
Our success depends on contractors who install the equipment and wiring
necessary to utilize our service in the central offices of traditional
telephone companies and at our customers' premises
We primarily utilize contractors to install necessary equipment and wiring
in the central offices of traditional telephone companies and at our customers'
premises. These installations must be completed on a timely basis and in a
cost-efficient manner. Failure to retain experienced contractors to install the
equipment and wiring or failure to complete these installations on a timely,
cost-efficient basis could materially delay our growth or damage ou
reputation, our business and prospects and results of operations. If we are
unable to retain contractors to provide these services, we will have to
complete these installations ourselves, probably at a greater cost and with
delay. We may be required to utilize numerous contractors as we expand our
operations, which may divert management attention and result in delays in
installations, increased costs and lower quality.
Intense competition in the high-speed data communication services market may
negatively affect the number of our customers and the pricing of our services
The high-speed data communication services market is intensely competitive.
If we are unable to compete effectively, our business, prospects, financial
condition and results of operations would be adversely affected. We expect the
level of competition to intensify in the future, due, in part, to increasing
consolidation in our industry. Our competitors use various technologies for
local access connections, that include higher speed alternatives to traditional
dial-up modems, such as integrated services digital network, or ISDN, frame
relay, T1 and DSL services, and alternatives to traditional telecommunications
networks such as wireless, satellite-based and cable networks. We expect
significant competition from:
. Other providers of DSL-based services like us, including Covad, Network
Access Solutions, NorthPoint and Rhythms NetConnections;
. Internet service providers, such as America Online, Concentric Network
and Flashcom, which have begun to develop high-speed access capabilities
to leverage their existing products and services.
. Traditional local telephone companies, including the traditional
telephone companies created by AT&T's divestiture of its local telephone
service business, some of which have begun deploying DSL-based services
and which provide other high-speed data communications services;
. National long distance carriers, such as AT&T and MCI WorldCom, which are
beginning to offer competitive DSL-based services;
. Cable modem service providers, such as At Home, which are offering high-
speed Internet access over cable networks and have positioned themselves
to do the same for businesses;
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. Providers utilizing alternative technologies, such as wireless and
satellite-based data service providers.
Many of our current and potential competitors have longer operating
histories, greater brand name recognition, larger customer bases and
substantially greater financial, technical, marketing, management, service
support and other resources than we do. Therefore, they may be able to respond
more quickly than we can to new or changing opportunities, technologies,
standards or customer requirements. See "Business --Competition."
We may not be able to continue to grow our business if we do not obtain
significant additional funds on acceptable terms by 2001
The actual amount and timing of our future capital requirements will depend
on the demand for our services and regulatory, technological and competitive
developments which could differ materially from our estimates. We may not be
able to raise sufficient debt or equity capital on terms that we consider
acceptable, if at all. If we are unable to obtain adequate funds on acceptable
terms, our ability to deploy and operate our network, fund our expansion or
respond to competitive pressures would be significantly impaired
We may incur significant amounts of debt in the future to implement our
business plan and, if incurred, this indebtedness will create greater financial
and operating risk and limit our flexibility
We intend to seek additional debt financing in the future. We are not
generating sufficient revenue or operating cash flow to fund our operations or
to repay existing or expected debt. We may not be able to repay our current
debt or any future debt. In addition, the terms of any future debt would likely
contain additional restrictive covenants that would limit our ability to incur
additional indebtedness and place other operating restrictions on our business.
If we incur additional debt, we will be required to devote increased amounts of
our cash flow to service indebtedness. This could require us to modify, delay
or abandon the capital expenditures and other investments necessary to
implement our business plan.
We may be subject to risks associated with future acquisitions
We may acquire complementary businesses. At present, we have no agreements
or other arrangements with respect to any acquisition. An acquisition may not
produce the revenue, earnings or business synergies that we anticipate, and an
acquired business might not perform as we expect. If we pursue any acquisition,
our management could spend a significant amount of time and effort in
identifying and completing the acquisition and may be distracted from the
operation of our business. If we complete an acquisition, we would probably
have to devote a significant amount of management resources to integrating the
acquired business with our existing operations, and that integration may not be
successful.
Our services are subject to federal, state and local regulation and changes in
laws or regulations could adversely affect the way we operate our business
The facilities we use and the services we offer are subject to varying
degrees of regulation at the federal, state and/or local levels. Changes in
applicable laws or regulations could, among other things, increase our costs,
restrict our access to the central offices of the traditional telephone
companies, or restrict our ability to provide our services. For example, the
1996 Telecommunications Act, which, among other things, requires traditional
telephone companies to unbundle network
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elements and to allow competitors to locate their equipment in the telephone
companies' central offices, is the subject of ongoing administrative
proceedings at the federal and state levels, litigation in federal and state
courts, and legislation in federal and state legislatures. We cannot predict
the outcome of the various proceedings, litigation and legislation or whether
or to what extent these proceedings, litigation and legislation may adversely
affect our business and operations. In addition, decisions by the FCC and state
telecommunications regulators will determine some of the terms of our
relationships with traditional telecommunications carriers, including the terms
and prices of interconnection agreements, and access fees and surcharges on
gross revenue from interstate and intrastate services. State telecommunications
regulators determine whether and on what terms we will be authorized to operate
as a competitive local exchange carrier in their state. In addition, local
municipalities may require us to obtain various permits which could increase
the cost of services or delay development of our network. Future federal, state
and local regulations and legislation may be less favorable to us than current
regulations and legislation and may adversely affect our businesses and
operations. See "Business -- Governmental Regulation."
A recent U.S. Supreme Court decision has raised questions about our ability to
obtain interconnection facilities from the traditional telephone companie
which could hurt our business
A January 1999 decision by the U.S. Supreme Court could adversely affect our
business because it has raised questions about whether we will be able to
obtain certain interconnection facilities from the traditional telephone
companies that we need in order to provide our services. In that decision, the
Supreme Court invalidated an FCC rule which defines the particular parts of a
traditional telephone company's network that must be provided to competitors
like us, and it sent the matter back to the FCC with instructions to consider
further the question of which parts of a traditional telephone company's
network must be provided to competitors. The FCC recently initiated a
proceeding to develop a new standard for determining which portions of the
telephone companies' network elements must be made available to competitors
like us. The FCC has stated that it plans to issue a new decision on this
matter later this year. This new standard may change the parts of the telephone
companies' networks to which companies like ours have access. If this occurs,
our ability to implement our business plan will be adversely affected.
Uncertain tax and other surcharges on our services may increase our payment
obligations to federal and state governments
Telecommunications providers are subject to a variety of federal and state
surcharges and fees on their gross revenues from interstate and intrastate
services. These surcharges and fees may be increased and other surcharges and
fees not currently applicable to our services could be imposed on us. In either
case, the cost of our services would increase and that could have a material
adverse effect on our |
