Back to GetFilings.com
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended September 30, 1999.
OR
[ ] Transition Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File No.: 1-5270
SOFTNET SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-1817252
-------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
650 Townsend Street, Suite 225, San Francisco California 94103
-------------------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 365-2500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
--------------------- ---------------------------
Common Stock, par NASDAQ National Market
value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at November 30, 1999 was approximately $544.9 million.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 30, 1999
- -------------------------------------- -----------------------------------
Common stock, $.01 per share par value 18,755,105
Documents Incorporated by Reference:
Proxy Statement for registrant's 2000 Annual Meeting of Shareholders (Part III)
PART I
Item 1. Business
This Annual Report of Form 10-K contains forward-looking statements concerning
the Company's anticipated future operating results, future revenues and
earnings, adequacy of future cash flow, or expected Y2K readiness. (These
forward-looking statements include, but are not limited to, statements
containing the words "expect", "believe", "will", "may", "should", "project",
"estimate" and like expressions, and the negative thereof.) These statements are
subject to risks and uncertainties that could cause actual results to differ
materially from the statements, including the risks attendant to a growing
business in a new industry as well as those risks described under the caption
"Factors Affecting the Company's Operating Results".
During fiscal 1999, SoftNet Systems, Inc. and its Subsidiaries (the "Company")
completed its plans to refocus its entire strategy and resources on providing
broadband Internet services. This refocus was achieved in two parts: first, by
the disposition during the year of the Company's two non-Internet related
businesses: Kansas Communications, Inc. ("KCI") which was divested in February
1999 and Micrographic Technology Corporation ("MTC") which was divested in
September, 1999; and second, the acquisition in February, 1999 of Intelligent
Communications, Inc. ("Intellicom"), a company that owns a proprietary two-way
satellite technology providing an alternative to terrestrial connectivity to
rural ISPs and other businesses. The Company believes that with the two
remaining businesses, Intellicom and ISP Channel Inc. ("ISP Channel"), the
latter a leading provider of high-speed Internet access over cable primarily to
exurban markets, it brings together a unique and cost-effective means of
providing high speed Internet access to a substantial potential customer base,
both domestic and international.
At the beginning of fiscal 1999, ISP Channel had systems deployed in 13 cable
headends that served an aggregate of approximately 800 cable modem customers.
These systems passed approximately 167,000 marketable homes, that is, homes that
could access ISP Channel high speed Internet service. At September 30, 1999, 62
systems were deployed serving an aggregate of approximately 7,380 customers and
the deployed systems passed approximately 562,000 marketable homes. Similarly,
in February 1999, when the Company acquired Intellicom, Intellicom had deployed
approximately 60 very small aperture terminal ("VSAT") satellite systems; at
September 30, 1999, the number of VSAT systems deployed was 98, of which 24 were
used by ISP Channel as an alternative to terrestrial connectivity. As of
November 30, 1999, the ISP Channel had 69 systems deployed, approximately 9,140
cable modem customers.
In April 1999, the Company successfully completed a secondary offering of its
common stock, raising net proceeds of approximately $141.5 million which funds
have been, and will continue to be, used for the financing of the Company's
aggressive deployment of the services of both ISP Channel and Intellicom as well
as for possible acquisitions and expansion into related market opportunities. In
December 1999, the Company completed a private placement to Pacific Century
Cyberworks ("Pacific Century") of 5 million shares of the Company's common stock
for $129 million and, at the same time, Pacific Century agreed to form a joint
venture with the Company to provide certain services relating to cable-based
Internet access throughout up to 63 countries in Asia. As a result of the
Pacific Century placement, Pacific Century will have the right to nominate two
directors to the Company's board of directors.
On July 2, 1999, the Company entered into a letter agreement with Mediacom LLC,
one of the top-ten cable operators in the US, which was formalized in definitive
agreements dated November 4, 1999. Under the agreements, the Company will issue
to Mediacom an aggregate 3.5 million shares of common stock in exchange for
Mediacom entering into an affiliate agreement of up to 10 years, but with a 5
year minimum, with ISP Channel that provides for Mediacom delivering to ISP
Channel over one million homes passed, of which are 900,000 two-way upgraded
homes passed, on a minimum schedule of 150,000 homes every 6 months over the
first three years of the contract. In the event that Mediacom fails to deliver
the agreed number of homes within the contractual time period, a portion of the
stock issued to Mediacom will be returned to the Company. In the event that
Mediacom acquires or upgrades more than 900,000 two-way homes, then both parties
are obligated to extend the original agreement on similar terms for such
incremental homes subject to a cap on the total aggregate number of shares that
the Company is obligated to issue to Mediacom. In addition, Mediacom gained the
right to nominate one member to the Company's board of directors, who shall be
Rocco Commisso, Mediacom's chairman and chief executive officer.
The employees of the Company have increased from approximately 80 as of
September 30, 1998 to approximately 220 as of September 30, 1999. Senior
appointments made during the year included the appointment of a senior vice
president customer sales and service, a vice president human resources, a
general manager for Intellicom, a corporate controller and, in November 1999,
the appointment of a chief technology officer.
The Company's current principal executive office is located at 650 Townsend
Street, Suite 225, San Francisco, California 94103. As of November 30, 1999, the
Company had approximately 55 employees at its principal executive office.
ISP Channel
ISP Channel seeks to become the leading broadband services provider of
high-speed Internet access and other Internet-related services to homes and
businesses located primarily in the franchise areas of small to mid-sized cable
companies, a market segment which has seen dramatic consolidation during fiscal
year 1999. As of November 1, 1999, ISP Channel had contracts with cable
operators representing approximately 2.4 million homes passed. Of these homes,
approximately 63% are currently, or will shortly be, passed by two-way cable
systems. In addition, ISP Channel is targeting certain other markets including
multiple dwelling units, hotels, hospitals, schools and campuses, which may
significantly increase the size of the market for ISP Channel's services. The
ISP Channel service provides residential and business subscribers access to the
Internet over the existing cable television infrastructure at speeds up to 1.5
megabits per second ("Mbps"). This increased speed means that the required
download time for a 10 megabyte file can be less than one minute. Higher speed
and the "always on" feature of cable modem access differentiate this service
from traditional dial up Internet access and allow subscribers to more
conveniently enjoy sophisticated multimedia applications and programming. ISP
Channel also offers an intuitive user interface provided through a co-branding
agreement with Snap.com and local information, news and entertainment customized
for each community served through its own ISP Channel Neighborhood local portal.
Services
High-Speed Internet Access.
ISP Channel's service offerings utilize the cable television infrastructure and
ISP Channel's network and content technologies to provide a rapidly deployable,
relatively inexpensive method of access to the Internet for residential and
business customers at speeds up to 1.5 Mbps. The ISP Channel service enables
customers to experience graphically rich, interactive, and multimedia
applications thereby improving the Internet experience. As of November 30, 1999,
ISP Channel had contracts for its ISP Channel service with 43 cable operators,
including Mediacom LLC, Galaxy Telecom L.P., and Cable Communications Co-op of
Palo Alto, representing approximately 2.4 million homes passed. Sixty-nine of
these systems, representing over 610,000 marketable homes, have been equipped
and have begun offering ISP Channel's services. As of November 30, 1999, ISP
Channel had approximately 9,140 residential and business customers to its ISP
Channel service. ISP Channel also provides non-cable based dial-up and dedicated
Internet access to approximately 1,500 residential and business customers. For
areas where two-way cable is not yet available, ISP Channel deploys a telephone
return solution, which uses the cable infrastructure for high-speed downstream
transmission and telephone dial-up access for upstream transmission. To use the
ISP Channel via cable modem, residential and business customers need a personal
computer with at least a 66 MHz, 486 or equivalent microprocessor and 16
megabytes of main memory. When compatible set-top boxes become widely available,
ISP Channel plans to deliver its high-speed Internet access through televisions.
Residential. All ISP Channel customers are provided an e-mail address,
roaming services, access to unique newsgroups and chat services and
personal Web space as part of their monthly fee. Additionally, ISP Channel
provides a co-branded "cable affiliate/ISP Channel" default home page that
allows each customer to personalize his or her portal to the Internet.
Monthly service charges (excluding modem rental) currently range from
$29.95 to $49.00 for flat rate residential service, with one-time
installation charges of approximately $99. The retail price of cable modems
has declined significantly over the past year and now range from
approximately $150 to $250 each, which the Company typically rents for
$10-12 per month.
Business. ISP Channel's business solutions include Internet and intranet
services over existing cable infrastructure and traditional telephone data
lines when necessary. ISP Channel provides its cable affiliates the ability
to offer local telecommuters, small office/home office customers and
business customers a comprehensive selection of Internet and corporate
local area network access for employees in the office, and virtual private
network and remote local area network applications, which extend corporate
network access to remote employees and external organizations, including
business partners, suppliers and customers. ISP Channel's future business
services are expected to include on-line software distribution, secure
high-speed data storage facilities, international roaming services and
office-to-office IP telephony. Prices vary significantly depending on
functionality and speed.
On-line Services.
ISP Channel's content and programming services enhance the customer's on-line
experience by aggregating local and national content through agreements with
content providers such as Snap.com. ISP Channel's network architecture and local
cable headend caching and collaborative server functionality facilitate the
distribution of multimedia applications, including multi-player games, video
conferencing and multicast video applications, as well as local and national
advertising.
National Content Aggregation. ISP Channel has entered into an agreement
with Snap.com to provide co-branded ISP Channel/Snap content aggregation,
directory and search services. The co-branded content incorporates a custom
on-line presence for the cable affiliate, including on-line cable
schedules, pay-per-view and, in the future, bill payment options.
Personalization also allows a customer to use the co-branded ISP
Channel/Snap "push" technology to create a customized default page
incorporating the customer's interests, including local and national news,
weather, sports, stock portfolio, horoscope, local city information and
hundreds of other selections. In addition, the co-branded "cable
affiliate/ISP Channel/Snap" user interface provides a simplified, intuitive
navigation tool for the customer.
Local On-line Communities. ISP Channel develops and deploys local on-line
communities called ISP Channel Neighborhoods that target the interests of
local residents, including civic, commercial and education issues. The
on-line communities provide a graphical directory of local services,
including shops, restaurants and events currently not focused on by
national, regional or city-wide content aggregation services. Local on-line
community conferencing forums include an on-line PTA to foster better
communications between parents and teachers and an on-line town hall to
provide residents a more timely method to communicate with city officials.
Video Conferencing and Collaborative Computing. Each of ISP Channel's local
cable affiliate collaborative servers facilitates high-speed desktop video
conferencing (15-30 frames per second) and collaborative computing not
feasible using traditional Internet dial-up access methods. The local
collaborative server allows users to work on documents over the network
while engaged in voice and videoconferences. ISP Channel provides an
intuitive user interface that is integrated into the browser to facilitate
"single-click" conferencing to individuals or groups.
Web Hosting Services. ISP Channel provides a full complement of Web hosting
and server co-location. ISP Channel's Virtual Merchant hosting service
allows businesses to create an on-line storefront using available software
and receive orders over the Internet in a matter of hours. Cost-effective
Web hosting packages target small business and are deployed in 24 to 48
hours. Commercial extranet applications allow a business to let their
customers or vendors access their local area networks using cable modems or
dial-up facilities. Monthly charges for Web hosting and co-location range
from $25 to $1,500 per month depending on bandwidth usage, number of
inquiries (or "hits") per month and scripting and database requirements.
Local and National Advertising. Through its cable affiliates, ISP Channel
plans to offer the ability to bundle local Internet banner and multimedia
advertising with the existing cable video advertising sales efforts.
Through ISP Channel's network architecture, local and national advertising
content will be stored in the Network Operations Center ("NOC") and
replicated at the local cable affiliate headend to enhance performance. ISP
Channel's network architecture utilizes multicast routing to enable the
efficient distribution of Internet-based advertising and video and audio
content services from content providers and the NOC to many ISP Channel
customers simultaneously.
Development of New Services. As the Internet continues to evolve and
encompass additional applications, ISP Channel plans to develop new
products and services targeted to this marketplace for the future. Such
products and services may include set-top box applications, Internet-based
telephony services (sometimes called IP telephony), enhancements to the ISP
Channel portal and improved on-line communities.
Network Architecture
ISP Channel's scalable, distributed network architecture links the
high-bandwidth capacity of the local cable infrastructure with leased nationwide
Internet backbone facilities from major telecommunications carriers, including
MCI, MFS and Sprint. ISP Channel has designed its network to move content closer
to the customer (thereby increasing speed of access) and provide end-to-end
network management. ISP Channel's backbone vendors provide it with scalable
Internet backbone capacity, and thereby enable ISP Channel to respond quickly to
increases in demand, avoiding the need to build and maintain a parallel Internet
network.
Network Operations Center. ISP Channel's NOC, which includes a network of
highly redundant servers, network management systems and broadband Internet
access facilities, manages core customer services, such as e-mail,
newsgroups, conferencing and chat facilities, and local content
replication. The NOC provides nationwide provisioning for all customer
services, whether the customer registers at the local cable affiliate's
business office, via a cable affiliate personalized toll-free telephone
number, or through an automated on-line provisioning system. ISP Channel is
continuing the process of building a new state-of-the-art facility to
support the activities of a growing number of cable affiliates and provide
the maximum service availability that consumers and commercial customers
demand. To date, ISP Channel has deployed one NOC in Mountain View,
California and plans to deploy regional data centers as justified by the
geographic concentration of cable affiliates in order to reduce operating
and capital expenditures and to provide a level of network redundancy.
Local Content Replication. ISP Channel's network architecture utilizes
content replication technologies to enhance the speed at which content is
delivered to customers and makes more efficient use of the cable
affiliates' local headend Internet connectivity by moving the requested
information closer to customers. By replicating frequently accessed content
in storage servers located in each cable affiliate's headend, ISP Channel
delivers large multimedia files, including graphically rich Web pages and
multimedia content, to numerous local cable modem customers without
frequent re-transmission over the Internet.
Total Network Management. ISP Channel utilizes a network of dedicated
servers to monitor connectivity and performance from the NOC to each
on-line cable affiliate headend and its respective cable modem customers.
In addition, ISP Channel's NOC currently monitors over 250 independent
routers and servers on the Internet, including major backbone providers,
major Internet service providers ("ISPs"), frequently accessed Web sites,
and major nationwide peering and routing facilities across the country. The
NOC allows ISP Channel to automatically reroute Internet traffic to
maintain customer cable modem performance despite regional Internet
congestion and backbone outages.
Redundant Leased Backbone Facilities. ISP Channel connects cable affiliate
headends to the Internet via facilities leased from MCI, MFS, Sprint and
others. By utilizing multiple providers, ISP Channel can assure maximum
network availability while enhancing the routing efficiency of cable modem
customers' Internet requests. National network agreements allow ISP Channel
to provide scalable local connections to its cable affiliates. ISP
Channel's network architecture facilitates high performance, rapid
cost-effective deployment independent of location and software scalability
for responsive additions to network capacities.
Cable Affiliate Headends. Affiliated cable system headends are connected to
the Internet and, in turn, the NOC through ISP Channel's leased backbone
facilities. Each Internet connection utilizes a high performance router
supporting speeds up to 45 Mbps, which can be upgraded to 155 Mbps as
required. Currently, ISP Channel is deploying headend equipment from Cisco,
3Com and Com21. In addition, ISP Channel purchases telephone access lines
to support local dial-up Internet access services or dial-up return for
one-way cable systems. ISP Channel actively monitors its dial-up facilities
and purchases additional lines as necessary to meet customer demand. ISP
Channel installs servers into the cable affiliate headend to support local
caching, collaborative and IP telephony functions. Local collaborative
servers facilitate desktop video conferencing and collaborative document
sharing. ISP Channel has been evaluating technology from several IP
telephony vendors and plans to deploy IP telephony servers to facilitate IP
telephony services through ISP Channel's network.
Cable Modems and Television Set-Top Boxes. Residential customers can
connect to the Internet over the local cable infrastructure using a cable
modem and, in the future will be able to connect via an integrated
television set-top box. In the case of cable modems, the coaxial cable is
connected to the cable modem and the cable modem is connected to an
Ethernet card installed in a customer's personal computer. Internal cable
modem personal computer cards do not require the Ethernet card
installation. In the case of television based high-speed Internet access,
the coaxial cable is attached directly to the set-top box. ISP Channel
currently provides a custom installation CD that allows a cable modem
customer to choose either Microsoft Internet Explorer or Netscape
Navigator, along with a selection of popular utility programs. ISP Channel
currently uses cable modems manufactured by 3Com, Com21 and General
Instruments.
Sales and Marketing
To Cable Operators.
ISP Channel markets its services through the establishment of exclusive
relationships with cable operators whose systems are primarily located in
secondary and tertiary markets and bedroom communities of major demographic
metropolitan areas. ISP Channel uses its sales force with offices in Chicago,
Illinois, Denver, Colorado and Los Angeles and Mountain View, California to
market the ISP Channel and other Internet services to cable operators and
businesses. This sales force targets the corporate offices of national and
regional multiple system operators. The sales force employs a team-selling
approach targeting key management, marketing and engineering personnel within
each cable system. ISP Channel typically participates in three national industry
trade shows, the Atlantic, NCTA and Western, in addition to numerous
state-sponsored local cable industry trade shows.
ISP Channel began offering telephone-based Internet services in June 1996 and
cable-based Internet services in the fourth quarter of fiscal 1997. As of
November 30, 1999, ISP Channel had contracts for its ISP Channel service with 43
cable operators, including Mediacom, Galaxy and Palo Alto Cable Co-op,
representing over 250 cable systems and approximately 2.4 million homes passed.
Sixty-nine of these systems, representing approximately 610,000 marketable
homes, have been equipped and have begun offering ISP Channel's services. As of
November 30, 1999, ISP Channel had approximately 9,140 residential and business
customers to its ISP Channel service. ISP Channel also provides non-cable based
dial-up and dedicated Internet access to approximately 1,500 residential and
business customers.
ISP Channel has a revenue sharing arrangement with its cable affiliates pursuant
to which a cable affiliate generally receives 25% of Internet services revenue
for the first 200 ISP Channel customers on a cable system and approximately 50%
of such revenues thereafter. In addition, ISP Channel has adopted an affiliate
incentive program whereby certain cable operators have been offered either cash
or shares of common stock as an incentive to sign an exclusive contract with ISP
Channel for the provision of Internet services to their cable systems and to
upgrade their cable network to two-way whereby it can then transmit data to and
from the end user. The number of shares of common stock that may be paid to any
individual cable affiliate will depend on a variety of factors, including the
number and size of the cable systems covered by a contract with a multiple
system cable operator, the number of homes passed and the number of cable
subscribers in a system, the services provided by ISP Channel and the length of
exclusivity of the contract. These incentive payments are expected to range
between $15.00 and $25.00 worth of stock per home passed, based on the fair
market value of the common stock at the time a letter of intent or definitive
agreement is entered into with a cable affiliate, depending upon the various
factors described above. ISP Channel may issue stock or pay cash incentives at
the time a contract is entered into, or it may place the stock or cash incentive
amounts in escrow to be disbursed as cable systems are deployed.
To Internet Customers.
Through Cable Affiliates. ISP Channel's agreements with its cable
affiliates provide ISP Channel a conduit to reach potential customers.
Cable affiliates provide ISP Channel with television advertising time and
the ability to include material describing ISP Channel's services in bills
mailed to cable subscribers. ISP Channel creates all of the content to be
included in such marketing efforts. ISP Channel produces a new marketing
campaign each quarter that includes 30 second television commercials, print
materials, radio spots and newspaper ads.
Direct to the Public. ISP Channel markets directly to homes and businesses
in its cable affiliates' franchise areas through telemarketing, direct
mail, door hangers, local event marketing, and Internet advertising
channels such as e-mail blasts and banner advertising. ISP Channel
telemarkets to existing cable subscribers using the cable affiliate's
current subscriber list. In addition, ISP Channel has entered into a
distribution agreement with Radio Shack whereby consumers will be able to
purchase ISP Channel service in Radio Shack stores. ISP Channel anticipates
implementing this agreement throughout calendar year 2000 in those areas
where ISP Channel service is available.
ISP Channel also e-mails a monthly newsletter to its Internet existing
customers that includes the latest Websites, useful software available to
enhance the Internet browsing experience, and news of upcoming Internet
events. ISP Channel also sends periodic notifications of service upgrades,
customer agreement updates and new product features.
Customer Care and Billing
As part of ISP Channel's strategy to leverage local cable affiliates' brand
identities, ISP Channel is developing a comprehensive provisioning, billing and
customer care system that allows for its services to be individualized and
co-branded for each cable affiliate system. ISP Channel has entered into
contracts with PeopleSoft, Inc. (a financial system vendor), Clarify Inc. (a
customer contact system vendor) and Aspect Telecommunications (a call center
system vendor) to design and implement an integrated, flexible and scalable
solution. ISP Channel's Customer Care Center is designed to provide customer
service from a central care center located in Mountain View, California. The
Customer Care Center will provide individualized toll-free support for each
affiliated cable system for pre-sales information and through which customers
can coordinate all services including provisioning, billing and technical
support. Additionally, ISP Channel will provide cable affiliates with the
ability to access individualized Web-based reporting and call monitoring for all
customer care service including telemarketing, sales and technical support.
Provisioning. ISP Channel today provisions service by means of an
individualized toll-free number with personalized answering for each cable
affiliate system. ISP Channel is in the process of exploring an on-line
provisioning system that will enable a customer to purchase a cable modem
in a retail location or at the cable affiliate's business office and
register and provision the service on-line 24 hours per day. The on-line
services will include provisioning, Web-based or e-mail bill presentation
and Web-based service modification.
Billing. ISP Channel currently provides the ability for cable affiliates or
ISP Channel to be responsible for billing and collection. If any cable
affiliate elects to bill ISP Channel customers within its franchise area,
ISP Channel maintains a duplicate customer record in its system for
provisioning and reconciliation. If ISP Channel provides the billing and
collection services, ISP Channel provides bill delivery.
Technical Support. The Customer Care Center currently utilizes a
state-of-the-art automatic call distribution system to provide full-time
individualized technical support for each cable affiliate system. ISP
Channel is currently implementing a new Aspect automatic call distribution
system accompanied by Clarify's customer care software allowing a
customer's information and history to be presented to a technical support
representative in conjunction with each call. ISP Channel's "knowledge base
system" facilitates expedient trouble shooting and historical reporting on
an individualized cable system basis delivered to cable affiliates in
real-time through a Web-based interface or monthly via e-mail.
Vendor Relationships
In addition to the relationships that ISP Channel has with Snap.com, MCI, MFS
and Sprint, ISP Channel currently depends on a limited number of other suppliers
for certain key technologies used to provide Internet related services. In
particular, ISP Channel depends on 3Com Corporation, Com21, Inc. and General
Instruments for headend and cable modem technology and Cisco Systems, Inc. for
network routing and switching hardware.
Competition
ISP Channel faces competition in two broad areas. First, ISP Channel faces
competition for partnerships with cable operators from other cable modem-based
providers of Internet access services. Second, ISP Channel faces competition for
customers from other of providers of Internet services.
Cable Modem Service Providers
Even if a consumer believes that cable-based Internet access is the best method
of accessing the Internet, the consumer may not be able to obtain this service
from ISP Channel unless the consumer lives in an area serviced by a cable
operator that has partnered with ISP Channel. Thus, our primary competitors are
companies which seek to partner with cable operators and offer to equip these
cable systems with Internet access capability or to manage the cable operator's
Internet services. In addition, to the extent that cable operators decide not to
choose a partner but rather to develop and offer their own Internet service
themselves it would reduce the number of cable partners available to ISP Channel
and increase competition for the remaining cable operators.
Competitive cable modem service providers such as At Home Corporation, Road
Runner and High Speed Access Corporation (and their respective cable partners)
are deploying high speed Internet access services over cable networks. Where
deployed, these networks provide similar services to those offered by ISP
Channel. These Internet access providers and their cable operator affiliates
have substantially greater financial and operational resources than ISP Channel
and may accordingly be able to deploy their service more rapidly and aggregate
content more effectively than ISP Channel. In addition, such competitive
providers enjoy an inherent advantage in marketing their services to their cable
operator affiliates by virtue of such affiliations.
Alternative Internet Service Providers
There are many competing technologies for delivering Internet access to homes
and businesses, which compete with ISP Channel. The number of such competing
technologies is growing, and ISP Channel expects that competition will intensify
in the future. ISP Channel's competitors comprise several categories of
providers of Internet services such as: incumbent local exchange carriers,
national long distance carriers (otherwise known as Interexchange Carriers),
Competitive Local Exchange Carriers, Internet Service Providers, On-line Service
Providers, Wireless and Satellite Data Service Providers and Digital Subscriber
Line focused Competitive Local Exchange Carriers.
Many of these competitors are offering (or may soon offer) technologies and
services that will directly compete with ISP Channel. Such technologies include
Integrated Services Digital Network ("ISDN"), Digital Subscriber Line ("DSL")
and wireless data. The bases of competition in ISP Channel's markets include
transmission speed, reliability of service, breadth of service availability,
price/performance, network security, ease of access and use, content bundling,
customer support, brand recognition, operating experience, and capital
availability. ISP Channel believes that it compares unfavorably with its more
established competitors with regard to, among other things, brand recognition,
operating experience and capital availability. Many of ISP Channel's competitors
and potential competitors have substantially greater resources than ISP Channel
and there can be no assurance that ISP Channel will be able to compete
effectively when challenged within its target markets.
The various competitor types are detailed below:
Incumbent Local Exchange Carriers ("ILECs"). All of the larger ILECs that
are present in ISP Channel's target markets are offering DSL-based data
services. As they move forward in implementing these services (and secure
any additional needed regulatory approvals), the Regional Bell Operating
Companies and other ILECs will represent strong competition in all of ISP
Channel's target service areas. The ILECs have an established brand name
and reputation for high quality in their service areas, possess sufficient
capital to deploy DSL equipment rapidly, have their own copper lines and
can bundle digital data services with their existing analog voice services
to achieve economies of scale in serving customers.
National Long Distance Carriers. National Long Distance Carriers, such as
AT&T, Sprint and MCIWorldCom have deployed large-scale Internet access
networks, sell connectivity to businesses and residential customers and
have high brand recognition. They also have interconnection agreements with
many of the ILECs, and those agreements include collocation spaces from
which they have begun to offer DSL services competitive with ISP Channel.
In addition, AT&T's acquisition of TeleCommunications Inc.(TCI), allows
AT&T to provide broadband Internet service using TCI's cable
infrastructure, making AT&T a national cable modem service provider that
poses a competitive threat to ISP Channel.
Competitive Local Exchange Carriers ("CLECs"). Fiber-based CLECs such as
Intermedia Communications Group, Inc. and ICG Communications, Inc. have
extensive fiber networks in many metropolitan areas primarily providing
high speed digital and voice circuits to large customers. Some fiber-based
CLECs have announced plans to offer DSL services that will compete with the
ISP Channel in many of those markets targeted by ISP Channel. These
companies could modify their current business focuses to include
residential and small business customers using cable-based access or DSL in
combination with their current fiber networks, but are currently focused on
the business market.
Internet Service Providers ("ISPs"). ISPs, such as the ISP division of GTE
Corporation, UUNET Technologies, Inc. (a subsidiary of MCIWorldCom),
Earthlink (merging with Mindspring), Concentric Network Corporation, Netcom
(a subsidiary of ICG Communications) and PSINet, Inc. provide Internet
access using the existing public switched telephone network at ISDN speeds
or below for residential customers but at a higher bit rate for business
customers. Several of these ISPs have begun offering DSL-based services in
select areas. As these ISPs expand their coverage and additional ISPs
become DSL service providers, this will pose a competitive threat to ISP
Channel.
On-line Service Providers. On-line Service Providers, such as America
Online ("AOL"), MSN (a subsidiary of Microsoft), and Prodigy, Inc., provide
proprietary on-line services and specialized content and applications as
well as Internet access. These services are designed for broad consumer
access over telecommunications-based transmission media, which enable the
provision of digital services to the significant number of consumers who
have personal computers with modems. In addition, they provide Internet
connectivity, ease of use and consistency of environment. Many of these
On-line Service Providers have developed their own access networks for
modem connections. AOL has already begun limited rollout of DSL access
through ILEC and CLEC partnerships. If the On-line Service Providers are
successful in extending their access networks to cable-based access or DSL,
they will become a greater competitive threat to ISP Channel.
Wireless and Satellite Data Service Providers. Wireless and Satellite Data
Service Providers are developing wireless and satellite-based Internet
connectivity. ISP Channel may face competition from terrestrial wireless
services, including, wireless cable systems operating on the two Gigahertz
("GHz") and 28 GHz bands as well as Multi-channel Multi-point Distribution
Service and Local Multipoint Distribution Service, and 18 GHz and 39 GHz
point-to-point microwave systems. For example, the Federal Communications
Commission ("FCC") is currently considering new rules to permit
Multi-channel Multi-point Distribution Service licensees to use their
systems to offer two-way services, including high-speed data, rather than
solely to provide one-way video and telephony services. The FCC also
recently awarded Local Multipoint Distribution Service licenses, which can
be used for high-speed data services as well. In addition, companies such
as Teligent, Inc., Advanced Radio Telecom Corp. and WinStar Communications,
Inc. hold point-to-point microwave licenses to provide fixed wireless
services such as voice, data and videoconferencing.
ISP Channel also may face competition from satellite-based systems.
Motorola Satellite Systems, Inc., Hughes Space and Communications Group (a
subsidiary of General Motors Corporation), Teledesic and others have filed
applications with the FCC for global satellite networks which can be used
to provide broadband voice and data services. Partnerships have formed to
offer satellite Internet connections. For example, AOL is available through
Direct PC and Echostar (DishNet) provides Web TV as a bundled piece with
their hardware but continues to use phone lines for the return path.
In addition, unlicensed devices are permitted to provide short-range,
high-speed wireless digital communications. These frequencies must be
shared with incumbent users without causing interference. Although the
allocation is designed to facilitate the creation of new wireless local
area networks, users of these frequencies could become competitors of the
ISP Channel.
Cable Overbuild. The Telecommunications Act of 1996 made it possible for
competing cable companies to offer service in the same service areas. In
order to do this, a prospective competitor must "overbuild" their cable
infrastructure throughout the incumbent operator's service area. If an
overbuild takes place in one of ISP Channel's service areas, this would
pose a competitive threat were the "overbuilder" to offer high speed
Internet access themselves or through a competitor to ISP Channel.
DSL Providers. Certain companies, such as Covad Communications Group,
NorthPoint Communications Group and Rhythms NetConnections have obtained
CLEC certification and are offering high speed data services using a
strategy of collocating in ILEC central offices. The 1996 Act specifically
grants any and all CLECs the right to negotiate interconnection agreements
with the ILEC providing for such collocation.
Alternative Internet Service Delivery. The scope of the Internet is going
beyond the personal computer. Services such as WebTV (a subsidiary of
Microsoft), Palm.net from Palm Pilot, and Sprint PCS Wireless Web, offer
Internet access through television, Personal Digital Assistants and
cellular phones respectively. In addition, companies like Metricom offer
mobile Internet access service through portable, wireless modems. All of
these technologies will compete with ISP Channel in the future as
alternative forms of Internet access.
Federal Regulation
Internet Regulation
ISP Channel's Internet services are not currently subject to direct regulation
by the FCC or any other governmental agency. However, it is possible that new
laws and regulations may be adopted that would subject the provision of ISP
Channel's Internet services to government regulation. Certain other legislative
initiatives, including those involving taxation of Internet services and payment
of access charges by ISPs, are also possible. Any new laws regarding the
Internet, particularly those that impose regulatory or financial burdens, could
impact adversely ISP Channel's ability to provide various services and could
have a material adverse effect on the Company's results of operations and
financial condition. ISP Channel cannot predict the impact, if any, that any
future laws or regulatory changes may have on its business.
The introduction of, or changes to, regulations that directly or indirectly
affect the regulatory status of Internet services, affect telecommunications
costs (including the application of reciprocal compensation requirements, access
charges or universal service contribution obligations to Internet services), or
increase the competition from regional telecommunications companies or others,
could have a material adverse effect on the Company's results of operations and
financial condition. For instance, if the FCC determines, through any one of its
ongoing or future proceedings, that the Internet is subject to regulation, or
that cable facilities used to provide Internet access must be opened to
competitors, ISP Channel or its cable affiliates could be required to comply
with a number of FCC regulations, including but not limited to rules relating to
entry/exit, facility access by competitors, reporting, fee, and record-keeping
requirements, marketing restrictions, access charge obligations, and universal
service contribution obligations, which could adversely impact ISP Channel's
ability to provide various planned services and have a material adverse effect
on the Company's results of operations and financial condition. ISP Channel
cannot predict the impact, if any, that regulations or regulatory changes may
have on its business. A final determination by the FCC that providing Internet
transport or telephony services to customers over an IP-based network is subject
to regulation also could impact adversely ISP Channel's ability to provide
various planned services and could have a material adverse effect on the
Company's results of operations and financial condition.
One issue that could have a material effect on ISP Channel is the continued
classification by the FCC of Internet access services as an "information
service". In the FCC's April 10, 1998 Report to Congress (the "April Report"),
the FCC discussed whether ISPs should be classified as telecommunications
carriers, and, on that basis, be required to contribute to the USF. The April
Report concluded that Internet access service-which the FCC defined as an
offering combining computer processing, information storage, protocol
conversion, and routing transmissions-is an "information service" under the
Telecommunications Act of 1996 and thus not subject to regulation. In contrast,
the FCC found that the provision of transmission capabilities to ISPs and other
information services providers do constitute "telecommunications services" under
the Telecommunications Act of 1996. Consequently, parties providing those
telecommunications services are subject to current FCC regulation (and the
corresponding USF obligations).
Another significant regulatory issue concerns the obligation of ISPs to pay
access charges to ILECs. Unlike "basic services," "enhanced services," which are
generally analogous to "information services" and include Internet access
services, have been exempt from interstate access charges. In 1997, the FCC
declined to modify the exemption, and the FCC's position was affirmed by the
United States Court of Appeals for the Eighth Circuit. The FCC has determined
that dial-up calls to ISPs are interstate, not local, calls for regulatory
purposes. It is uncertain whether this decision will have an adverse affect on
the ISP exemption from access charges. ISP Channel cannot assure , however, that
the FCC or the courts will not revisit this issue in the future and decide to
eliminate the access charge exemption applicable to ISPs.
Another major regulatory issue concerns Internet-based telephony. In the April
Report, the FCC observed that Internet-based telephone service (which the FCC
called "IP telephony") appears to be a telecommunications service rather than an
unregulated information service. For example, in the April Report the FCC stated
its intention to consider regulating voice and fax telephony services provided
over the Internet as "telecommunications" even though Internet access itself
would not be regulated. The FCC is also considering whether such Internet-based
telephone services should be subject to the universal service contribution
obligations discussed above, or pay carrier access charges on the same basis as
traditional telecommunications companies. ISP Channel cannot predict how the FCC
will resolve this issue, or the effect that the FCC's resolution would have on
its business.
ISP Channel could also be affected in a material adverse way by federal and
state laws and regulations relating to the liability of on-line services
companies and Internet access providers for information carried on or
disseminated through their networks. Several private lawsuits seeking to impose
such liability upon on-line services companies and Internet access providers are
currently pending. In addition, legislation has been enacted and new legislation
has been proposed that imposes liability for the transmission of or prohibits
the transmission of certain types of information on the Internet, including
sexually explicit and gambling information. The United States Supreme Court has
already held unconstitutional certain sections of the Communications Decency Act
of 1996 that would have proposed to impose criminal penalties on persons
distributing "indecent" materials to minors over the Internet. Congress
subsequently enacted legislation that imposes both criminal and civil penalties
on persons who knowingly or intentionally make available materials through the
Internet that are "harmful" to minors. However, that new law generally excludes
from the definition of "person" ISPs that are not involved in the selection of
content disseminated through their networks. Congress also enacted legislation
recently that limits liability for on-line copyright infringement. That latter
law includes exemptions which enable ISPs to avoid copyright infringement if
they merely transmit material produced and requested by others. It is possible
that other laws and regulations could be enacted in the future that would place
copyright infringement liability more directly on ISPs.
The imposition of potential liability on ISP Channel and other Internet access
providers for information carried on or disseminated through their systems could
require ISP Channel to implement measures to reduce its exposure to such
liability, which may require ISP Channel to expend substantial resources or to
discontinue certain service or product offerings. The increased attention to
liability issues as a result of these lawsuits and legislative actions and
proposals could impact the growth of Internet use. While ISP Channel carries
professional liability insurance, it may not be adequate to compensate claimants
or may not cover ISP Channel in the event ISP Channel becomes liable for
information carried on or disseminated through its networks. Any costs not
covered by insurance incurred as a result of such liability or asserted
liability could have a material adverse effect on the Company's results of
operations and financial condition.
State Regulation
As use of the Internet has proliferated in the past several years, state
legislators and regulators have increasingly shown interest in regulating
various aspects of the Internet. Much of the legislation that has been proposed
to date may, if enacted, handicap further growth in the use of the Internet. It
is possible that the state legislatures and regulators will attempt to regulate
the Internet in the future, either by regulating transactions or by restricting
the content of the available information and services. Enactment of such
legislation or adoption of such regulations could have a material adverse impact
on ISP's business.
One area of potential state regulation concerns taxes. The United States
Congress enacted a three-year moratorium on new state and local taxes on the
Internet as well as taxes that discriminate against commerce through the
Internet. Congress also established an advisory commission to study and make
recommendations on the federal, state and local taxation of Internet-related
commerce. These recommendations are due to Congress by April 2000 and could
serve as the basis for additional legislation. Future laws or regulatory changes
that lead to state taxation of Internet transactions could have a material
adverse impact on ISP Channel's business.
Although customer-level use of the Internet to conduct commercial transactions
is still in its infancy, a growing number of corporate entities are engaging in
Internet transactions. It is not possible to predict how state law will evolve
to address new transactional circumstances created by Internet commerce, or
whether the evolution of such laws will have a material adverse impact on ISP
Channel's business.
State legislators and regulators have also sought to restrict the transmission
or limit access to certain materials on the Internet. For example, in the past
several years, various state legislators have sought to limit or prohibit: (1)
certain communications between adults and minors, (2) anonymous and pseudonymous
use of the Internet, (3) on-line gambling, and (4) the offering of securities on
the Internet. Enforcement of such limitations or prohibitions in some states
could affect transmission in other states. State laws and regulations that
restrict access to certain materials on the Web could inadvertently block access
to other permissible sites. ISP Channel cannot predict the impact, if any, that
any future laws or regulatory changes in this area may have on its business.
Some states have also sought to impose tort liability or criminal penalties on
various conduct involving the Internet, such as the use of "hate" speech,
invasion of privacy, and fraud. The adoption of such laws could adversely impact
the transmission of non-offensive material on the Internet and, to that extent,
possibly have a material adverse impact on ISP Channel's business.
ISP Channel anticipates that it may in the future seek to offer
telecommunications service as a CLEC. All states in which ISP Channel operates
require a certification or other authorization from the state regulatory
commission to offer intrastate telecommunications services. Many of the states
in which ISP Channel operates are in the process of addressing issues relating
to the regulation of CLECs. Some states may require authorization to provide
enhanced services.
The Telecommunications Act contains provisions that prohibit states and
localities from adopting or imposing any legal requirement that may prohibit, or
have the effect of prohibiting, the ability of any entity to provide any
interstate or intrastate telecommunications service. The FCC is required to
preempt any such state or local requirements to the extent necessary to enforce
the Telecommunications Act's open market entry requirements. States and
localities may, however, continue to regulate the provision of intrastate
telecommunications services and require carriers to obtain certificates or
licenses before providing service.
In states where ISP Channel operates, rulemaking proceedings, arbitration
proceedings and other state regulatory proceedings that may affect ISP Channel's
ability to compete with ILECs are now underway or may be instituted in the
future. These proceedings involve a variety of telecommunications issues,
including but not limited to: pricing and pricing methodologies of local
exchange and intrastate interexchange services; development and approval of
resale agreements between ILECs and CLECs and among CLECs; terms and conditions
governing the provision of telecommunications services; customer service and
unauthorized changes in customer-selected telephone service providers;
complaints regarding anticompetitive practices and transactions between
affiliated telecommunications companies; denial of entry into telecommunications
markets; discount levels for resale of local exchange and toll services;
treatment of and compensation for calls to Internet service providers; charges
for access to ILEC networks; cost sharing and implementation of interim and
permanent number portability; dialing parity; access to and responsibility for
universal service funding; and review and recommendation to the FCC concerning
Regional Bell Operating Company authorization to offer in-region long distance
service. To the extent ISP Channel decides in the future to install its own
transmission facilities, rulemaking proceedings, arbitration proceedings and
other state regulatory proceedings may also affect ISP Channel's ability to
compete with ILECs. These proceedings may involve issues including but not
limited to: collocation of ILEC and CLEC facilities; interconnection agreements
between ILECs and CLECs; and access to unbundled and combined network elements
of ILECs. In addition, states in which ISP Channel operates may consider
legislation that involves issues including but not limited to: any of the
aforementioned issues in rulemaking proceedings, arbitration proceedings and
other state regulatory proceedings; alternative forms of regulation; and
limitations on the provision of competitive telecommunications services.
Local Regulation
Although local jurisdictions generally have not sought to regulate the Internet,
it is possible that such jurisdictions will seek to impose regulations in the
future. In particular, local jurisdictions may attempt to tax various aspects of
Internet access or services, such as transactions handled through the Internet
or customer access, as a way of generating municipal revenue. The imposition of
local taxes and other regulatory burdens by local jurisdictions could have a
material adverse impact on ISP Channel's business.
In the context of the acquisition of TCI by AT&T, several local jurisdictions
that approved the acquisition imposed open access conditions on such approval,
while other such local jurisdictions have rejected such conditions or have
reserved the right to impose such conditions in the future. In addition, a class
action lawsuit was filed against the major cable modem ISPs and their cable
company owners earlier this year seeking, among other things, to impose open
access on such cable companies. While ISP Channel was not named in the lawsuit,
the outcome could affect its business. ISP Channel cannot predict the outcome or
scope of the local approval process or the class action lawsuit. Nor can ISP
Channel predict the impact, if any, that future federal, state or local legal or
regulatory changes, including open access conditions, might have on its
business.
ISP Channel's networks may also be subject to numerous local regulations such as
building codes and licensing. Such regulations vary on a city by city and county
by county basis. To the extent ISP Channel decides in the future to install its
own transmission facilities, it will need to obtain rights-of-way over private
and publicly owned land. There can be no assurance that such rights-of-way will
be available to ISP Channel on economically reasonable or advantageous terms.
Foreign Regulation
ISP Channel has recently begun to expand operations in foreign countries that
may require ISP Channel to qualify to do business in such foreign countries.
Qualification to do business in a foreign jurisdiction could subject ISP Channel
to taxes, regulations, and other legal requirements which could have a material
adverse affect on the Company's results of operations and financial condition.
Conversely, ISP Channel's failure to qualify as a foreign corporation in a
jurisdiction where we are required to do so could subject ISP Channel to taxes,
interest and penalties and could impair ISP Channel's ability to enforce
contracts in such jurisdictions. It is also possible that the statutes and
regulations of any applicable foreign jurisdiction could allow claims to be made
against ISPs for defamation, negligence, copyright or trademark infringement, or
other theories based on the nature and content of the materials disseminated
through their networks. Any such legislation or regulation, or the application
of laws or regulations from jurisdictions whose laws do not currently apply to
ISP Channel's business, could have a material adverse affect on the Company's
results of operation and financial condition.
The foregoing discussion of regulatory factors does not describe all laws,
regulations, or restrictions that may apply to ISP Channel. Nor does it review
all laws or regulations under consideration by federal and state governmental
bodies that may affect ISP Channel's operations. It is possible that present and
future laws and regulations not discussed here could have a material adverse
effect on the Company's results of operations and financial condition.
Backlog
As of November 30, 1999, the ISP Channel had 43 signed contracts representing
over 250 cable systems and approximately 2.45 million homes passed. Sixty nine
of these systems, representing approximately 610,000 marketable homes passed,
have been equipped and have begun offering ISP Channel's services. The remainder
of these systems, representing approximately 1.84 million homes passed, are in
backlog pending upgrade by the cable operator to two-way capability or pending
other factors. As of November 30, 1999, ISP Channel had approximately 9,140
residential and business customers to its ISP Channel service, plus
approximately 1,060 customer orders in backlog.
Employees and Facilities
As of November 30, 1999 ISP Channel had approximately 179 employees.
ISP Channel has a network operations center and customer care center located
respectively at 510 and 520 Logue Avenue, Mountain View, California 94043. The
Company also maintains sales offices in Chicago, Illinois; Denver, Colorado; and
Los Angeles, California.
Legal Proceedings
ISP Channel has no material pending litigation.
Intellicom
Intellicom provides two-way satellite Internet access options utilizing VSAT
technology. Intellicom focuses its sales penetration efforts on rural markets,
particularly ISPs, educational institutions and small businesses. In addition to
providing Internet access options, Intellicom provides Internet-based
applications, consulting services and full Internet access (including direct
network connectivity). Intellicom's other products and services include Web
server hosting and integration services, client software development and
maintenance services, training and network integration and consulting services.
A major focus for Intellicom is its K.I.D.S. package, providing curriculum
content, Internet access and revenue opportunities for schools. Intellicom's
VSAT-based point of presence locations can be placed throughout North and South
America. Intellicom currently bases its service on Ku-band architecture but may,
in the future, provide its Internet services in the C-band satellite arena in
addition. Many international satellites utilize the C-band architecture and
Intellicom expects to retrofit its equipment for C-band coverage areas with
little difficulty.
Intellicom's mission is to become the leading provider of two-way
satellite-based network connectivity solutions for organizations requiring
access to the global Internet. To this end, Intellicom utilizes its unique
experience and expertise to provide an effective alternative for Internet
services and solutions to Internet customer networks. Intellicom has worked
toward achieving this position by focusing on building a high performance
network infrastructure, integrating and expanding its suite of value-added
products and services, investing in its network operations and technical support
infrastructure, expanding and tailoring its sales and marketing efforts to reach
its targeted customers more effectively, and leveraging relationships with
strategic partners.
Products and Services
Intellicom provides its customers with a comprehensive range of Internet access
options, applications and consulting services. Intellicom believes that, over
time, its strategic focus on business applications for the Internet and its
niche network connectivity options will play a larger role in differentiating
Intellicom from its competitors. Intellicom's options and services include a
stable, low-cost VSAT system on two-way satellite technology, providing
high-speed access to the Internet. Intellicom's branded offerings include the T1
Plus product line as a connectivity solution to the marketplace and its
proprietary EdgeConnector(TM) server which enhances the VSAT network's
efficiency . The comprehensive package of Internet applications is customized to
work within the VSAT network, specifically for the ISP industry. A key component
of its service offering is the ability to cache content at the EdgeConnector
server. Intellicom created this services within its network as an answer to
Internet backbone congestion. The objective is to move a substantial amount of
the Web, FTP, and NNTP traffic from the network backbone to the `network edge.'
The major benefit of such technology lies in its ability to cache a majority of
the web's most popular sites. In addition to caching, the EdgeConnector server
hosts a number of additional services, such as e-mail, Web hosting, proxy
service, shell accounts, Telnet, FTP, file sharing, dynamic addressing,
firewalling, address translation, and speed enhancement .
Additionally, Intellicom offers connectivity services based on a range of VSAT
service options ranging from 33 kilobits per second to 66 kilobits per second
dedicated uplinks with 2 megabit shared downlinks. The majority of Intellicom's
customers use Intellicom as their primary gateway to the Internet and rely on
Intellicom to connect, secure, and maintain their network integrity. Intellicom
designs and out-source manufactures VSAT equipment specifically for its
applications.
Intellicom makes a variety of other products and services available, including
Web server hosting and content development services, client software products,
training, end-user support and engineering support. All of these products and
services are integrated to provide customers with a total solution to their
Internet application and business needs. Intellicom enables Internet users to
purchase access, applications, products and services, including network
integration services, through a single source. Intellicom's Network Operations
Center continually monitors traffic across Intellicom's network.
Sales and Marketing
Intellicom's marketing focus, for the first six months after acquisition by the
Company, was primarily to serve the needs of the ISP Channel. Going forward,
Intellicom's focus is to build and leverage relationships with strategic
partners and distributors, which involves expanding market coverage by
partnering into new point of presence locations and building new relationships
with other Internet service providers, service companies, and niche access
providers.
Competition
The market for Internet access services is extremely competitive. Intellicom
believes that its ability to compete successfully depends upon a number of
factors, including: market presence; the capacity, reliability, and security of
its network infrastructure; the pricing policies of its competitors and
suppliers; the timing and release of new products and services by Intellicom and
its competitors; and industry and general economic trends.
The competitors of Intellicom are broken into three groups: (1)
vertically-integrated satellite service operators including Hughes and Intelsat;
(2) wholesale service providers including Tachyon, eSAT, and OptiStreams; (3)
retail service providers including DirecTV/PC, local cable providers, and
private network providers. Many of these competitors have greater market
presence, engineering and marketing capabilities, and financial, technological
and personnel resources than Intellicom.
While Intellicom believes that the price and performance characteristics of its
products and services are currently competitive, increased competition may
result in price reductions, reduced gross margin and loss of market share, any
of which could materially affect Intellicom's business, operating results and
financial condition. Many of Intellicom's current and potential competitors have
significantly greater financial, technical, marketing, and other resources than
Intellicom. As a result, they may be able to respond more quickly to new or
emerging technologies and changes to customer requirements, or to devote greater
resources to the development, promotion, sale, and support of their products
than Intellicom. The introduction of products embodying new technologies and the
emergence of new industry standards could render Intellicom's existing products
less marketable. In addition, current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. There can
be no assurance that Intellicom will be able to compete successfully against
current or future competitors or that the pressures faced by Intellicom will not
materially adversely affect its business, operating results, and financial
condition.
Intellicom does not believe that it competes directly with terrestrial
telecommunications service providers. Terrestrial providers are likely to expand
their availability of high-speed access services in cities, but are unlikely to
enter the rural markets because of cost, volume and required infrastructure
investments. Intellicom believes that new competitors include large satellite
operators that are integrating vertically by offering satellite transponder
leasing, Internet access, equipment and systems integration. As a result of
acquisitions, certain companies have obtained or expanded their Internet access
products and services which may permit them to devote greater resources to the
development of new competitive products and services and the marketing and
distribution of existing products and services. Also, the ability of some of
Intellicom's competitors to bundle satellite services with Internet access and
other products could place Intellicom at a competitive disadvantage.
Intellicom believes that the industry will see mergers and consolidation in the
near future, which could result in greater competition and increased pricing
pressures. Changing market conditions could adversely affect Intellicom's
business, financial condition, and results of operations. There can be no
assurance that Intellicom will have the financial resources, technical
expertise, or marketing and support capacity to continue to compete
successfully.
Employee and Facilities
As of September 30, 1999, Intellicom had 35 employees. None of Intellicom's
employees is currently subject to any collective bargaining agreement.
Intellicom operates from two principal locations. Intellicom leases
approximately 16,700 square feet of space for its office, warehouse and
operations center in Livermore, California and a 1,400 square foot Customer
Service Center in Chippewa Falls, Wisconsin. Intellicom handles client-side
technical support issues and order fulfillment through its Customer Service
Center in Chippewa Falls, Wisconsin.
Legal Proceedings
Intellicom has no material pending litigation.
Factors Affecting The Company's Operating Results
The risks and uncertainties described below are not the only ones that the
Company face. Additional risks and uncertainties not presently known to the
Company or that the Company currently deems immaterial may also impair the
Company's business operations. If any of the following risks actually occur, the
Company's business, financial condition or results of operations could be
materially adversely affected. In such case, the trading price of the Company's
common stock could decline, and you may lose all or part of your investment.
The Company Cannot Assure You That The Company Will Be Profitable Because The
Company Has Operated The Company's Internet Services Business Only For A Short
Period Of Time
The Company acquired ISP Channel in June 1996 and Intellicom on February 9,
1999. As such, the Company has very limited operating history and experience in
the Internet services business and the Company cannot assure you that the
Company's ability to develop or maintain strategies and business operations for
the Company's Internet services will achieve positive cash flow and
profitability. The successful expansion of both the ISP Channel and Intellicom
services will require strategies and business operations that differ from those
the Company has historically employed. To be successful, the Company must
develop and market products and services that are widely accepted by consumers
and businesses at prices that provide cash flow sufficient to meet the Company's
debt service, capital expenditures and working capital requirements.
The Company's ISP Channel Business May Fail If The Industry As A Whole Fails Or
The Company's Products And Services Do Not Gain Commercial Acceptance
It has become feasible to offer Internet services over existing cable lines and
equipment on a broad scale only recently. There is no proven commercial
acceptance of cable-based Internet services and none of the companies offering
such services are currently profitable. It is currently very difficult to
predict whether providing cable-modem Internet services will become a viable
industry.
The success of the ISP Channel service will depend upon the willingness of new
and existing cable subscribers to pay the monthly fees and installation costs
associated with the service and to purchase or lease the equipment necessary to
access the Internet. Accordingly, the Company cannot predict whether the
Company's pricing model will prove to be viable, whether demand for the
Company's services will materialize at the prices the Company expect to charge,
or whether current or future pricing levels will be sustainable. If the Company
does not achieve or sustain such pricing levels or if the Company's services do
not achieve or sustain broad market acceptance, then the Company's business,
financial condition, and prospects will be materially adversely affected.
The Company's Continued Negative Cash Flow And Net Losses May Depress Stock
Prices
The Company's continued negative cash flow and net losses may result in
depressed market prices for the Company's common stock. The Company cannot
assure you that the Company will ever achieve favorable operating results or
profitability. The Company has sustained substantial losses over the last five
fiscal years. For the year ended September 30, 1999, the Company had a net loss
of $50.5 million. As of September 30, 1999, the Company had an accumulated
deficit of $100.2 million. The Company expects to incur substantial additional
losses and experience substantial negative cash flows as the Company expands the
Company's Internet service offerings. The costs of expansion will include
expenses incurred in connection with:
o inducing cable affiliates to enter into exclusive multi-year contracts
with the Company;
o the amount and timing of capital expenditures and other costs related
to the Company's operations;
o research and development of new product and service offerings;
o the continued development of the Company's direct and indirect selling
and marketing efforts; and
o possible charges related to acquisitions, divestitures, business
alliances or changing technologies.
In addition, the Company's expense levels are based in part on expectations of
future revenues and, to a large extent, are fixed. The Company may be unable to
adjust spending quickly enough to compensate for any unexpected revenue
shortfall. The Company's revenues will be dependent upon the growth rates of ISP
Channel's subscribers and Intellicom's customers.
If The Company Does Not Achieve Cash Flows Sufficient To Support The Company's
Operations, The Company May Be Unable To Implement The Company's Business Plan
The development of the Company's business will require substantial capital
infusions as a result of:
o the Company's need to enhance and expand product and service offerings
to maintain the Company's competitive position and increase market
share; and
o the substantial investment in equipment and corporate resources
required by the continued national launching of the ISP Channel and
Intellicom services.
In addition, the Company anticipates that the majority of cable affiliates with
one-way cable systems will eventually upgrade their cable infrastructure to
two-way cable systems, at which time the Company will have to upgrade the
Company's equipment on any affected cable system to handle two-way
transmissions. The Company cannot accurately predict whether or when the Company
will ultimately achieve cash flow levels sufficient to support the Company's
operations, development of new products and services, and expansion of the
Company's Internet services. Unless the Company reaches such cash flow levels,
the Company may require additional financing to provide funding for operations.
If the Company is required to raise capital through a long-term debt financing,
the Company will be highly leveraged and such debt securities may have rights or
privileges senior to those of the Company's current stockholders. If the Company
is required to raise capital by issuing equity securities, the percentage
ownership of the Company's stockholders will be reduced, stockholders may
experience additional dilution and such securities may have rights, preferences
and privileges senior to those of the Company's common stock. In the event that
the Company cannot generate sufficient cash flow from operations, or is unable
to borrow or otherwise obtain additional funds on favorable terms to finance
operations when needed, the Company's business, financial condition, and
prospects would be materially adversely affected.
The Unpredictability Of The Company's Quarter-To-Quarter Results May Adversely
Affect The Trading Price Of The Company's Common Stock
The Company cannot predict with any significant degree of certainty the
Company's quarter-to-quarter operating results. As a result, the Company
believes that period-to-period comparisons of the Company's revenues and results
of operations are not necessarily meaningful and should not be relied upon as
indicators of future performance. It is likely that in one or more future
quarters the Company's results may fall below the expectations of analysts and
investors. In such event, the trading price of the Company's common stock would
likely decrease. Many of the factors that cause the Company's quarter-to-quarter
operating results to be unpredictable are largely beyond the Company's control.
These factors include, among others:
o the number of ISP Channel and Intellicom customers;
o the Company's ability and that of the Company's cable affiliates to
coordinate timely and effective marketing strategies, in particular,
the Company's strategy for marketing the ISP Channel service to
subscribers in such affiliates' local cable areas;
o the rate at which the Company's cable affiliates can complete the
installations required to initiate service for new subscribers;
o the amount and timing of capital expenditures and other costs relating
to the expansion and provision of ISP Channel and Intellicom services;
o competition in the Internet or cable industries; and
o changes in law and regulation.
Existing Contractual Obligations Allow For Additional Issuances Of Common Stock
Upon A Market Price Decline, Which Could Further Adversely Affect The Market
Price For The Company's Common Stock
As of November 30, 1999, the total number of shares of the Company's common
stock underlying all of the Company's convertible securities, including common
stock underlying unvested stock options and grants made under the Company's 1998
Stock Incentive Plan and 1999 Supplemental Stock Incentive Plan, and common
stock that the Company is obligated to issue to Mediacom, LLC pursuant to a
stock purchase agreement (and 500,000 shares of common stock that the Company
issued to Pacific Century on December 13, 1999) was approximately 12,405,000
shares. This would have been 39.8% of the Company's outstanding common stock as
of November 30, 1999, assuming such shares would have been issued as of such
date. The issuance of common stock as a result of these obligations could result
in immediate and substantial dilution to the holders of the Company's common
stock. To the extent any of these shares of common stock are issued, the market
price of the Company's common stock may decrease because of the additional
shares on the market.
The Company May Not Be Able To Successfully Implement The ISP Channel's Business
Plan If The Company's Cable Affiliates Are Adversely Impacted
The success of the Company's business depends upon the Company's relationship
with the Company's cable affiliates. Therefore, the Company's success and future
business growth will be substantially affected by economic and other factors
affecting the Company's cable affiliates.
The Company does not have direct contact with the Company's customers
Because customers to the ISP Channel service must subscribe through a cable
affiliate, in many cases the cable affiliate (and not the Company) will
substantially control the customer relationship with the end-user customers. For
example, under some of the Company's existing contracts, cable affiliates are
responsible for important functions, such as billing for and collecting ISP
Channel subscription fees and providing the labor and costs associated with
distribution of local marketing materials.
Failure or delay by cable operators to upgrade their systems may adversely
affect subscription levels
Certain ISP Channel services are dependent on the quality of the cable networks
of the Company's cable affiliates. Currently, some cable systems are capable of
providing only information from the Internet to the subscribers, and require a
telephone line to carry information from the subscriber back to the Internet.
These systems are called "one-way" cable systems. Several cable operators have
announced and begun making upgrades to their systems to increase the capacity of
their networks and to enable traffic both to and from the Internet over their
networks, so-called "two-way capability". However, cable system operators have
limited experience with implementing such upgrades. These investments have
placed a significant strain on the financial, managerial, operational and other
resources of cable system operators, many of which already maintain a
significant amount of debt.
Further, cable operators must periodically renew their franchises with city,
county or state governments. These governmental bodies may impose technical and
managerial conditions before granting a renewal, and these conditions may
adversely affect the cable operator's ability or willingness to implement such
upgrades.
In addition, many cable operators may emphasize increasing television
programming capacity to compete with other forms of entertainment delivery
systems, such as direct broadcast satellite, instead of upgrading their networks
for two-way Internet capability. Such upgrades have been, and the Company
expects will continue to be, subject to change, delay or cancellation. Cable
operators' failure to complete these upgrades in a timely and satisfactory
manner, or at all, would adversely affect the market for the Company's products
and services in any such operators' franchise area. In addition, cable operators
may roll-out Internet access systems that are incompatible with the Company's
high-speed Internet access services. Any of these actions could have a material
adverse effect on the Company's business, financial condition, and prospects.
If The Company Does Not Obtain Exclusive Access To Cable Customers, The Company
May Not Be Able To Sustain Any Meaningful Growth
The success of the ISP Channel service is dependent, in part, on the Company's
ability to gain exclusive access to cable consumers. The Company's ability to
gain exclusive access to cable customers depends upon the Company's ability to
develop exclusive relationships with cable operators that are dominant within
their geographic markets. The Company cannot assure you that affiliated cable
operators will not face competition in the future or that the Company will be
able to establish and maintain exclusive relationships with cable affiliates.
Currently, a number of the Company's contracts with cable operators do not
contain exclusivity provisions. Even if the Company is able to establish and
maintain exclusive relationships with cable operators, the Company cannot assure
the ability to do so on favorable terms or in sufficient quantities to be
profitable. In addition, the Company will be excluded from providing
Internet-over-cable in those areas served by cable operators with exclusive
arrangements with other Internet service providers. The Company's contracts with
cable affiliates typically range from three to seven years, and the Company
cannot assure you that such contracts will be renewed on satisfactory terms. If
the exclusive relationship between either the Company and the Company's cable
affiliates or between the Company's cable affiliates and their cable subscribers
is impaired, if the Company does not become affiliated with a sufficient number
of cable operators, or if the Company is not able to continue the Company's
relationship with a cable affiliate once the initial term of its contract has
expired, the Company's business, financial condition and prospects could be
materially adversely affected.
Failure To Increase Revenues From New Products And Services, Whether Due To Lack
Of Market Acceptance, Competition, Technological Change Or Otherwise, Would Have
A Material Adverse Effect On The Company's Business, Financial Condition And
Prospects
The Company expects to continue extensive research and development activities
and to evaluate new product and service opportunities. These activities will
require the Company's continued investment in research and development and sales
and marketing, which could adversely affect the Company's short-term results of
operations. The Company believes that future revenue growth and profitability
will depend in part on the Company's ability to develop and successfully market
new products and services. Failure to increase revenues from new products and
services, whether due to lack of market acceptance, competition, technological
change or otherwise, would have a material adverse effect on the Company's
business financial condition and prospects.
The Company's Purchase Of Intellicom Subjects The Company To Risks In A New
Market
The purchase of Intellicom involves other risks including potential negative
effects on the Company's reported results of operations from acquisition-related
charges and amortization of acquired technology and other intangible assets. As
a result of the Intellicom acquisition, the Company recorded approximately $16
million of intangible assets which will adversely affect the Company's earnings
and profitability for the foreseeable future. If the amount of such recorded
intangible assets is increased or if the Company has future losses and is unable
to demonstrate the Company's ability to recover the amount of intangible assets
recorded during such time periods, the period of amortization could be
shortened, which may further increase annual amortization charges. In such
event, the Company's business and financial condition could be materially and
adversely affected. In addition, the Intellicom acquisition was structured as a
purchase by the Company of all of the outstanding stock of Intellicom. As a
result, the Company could be adversely affected by direct and contingent
liabilities of Intellicom. It is possible that the Company is not aware of all
of the liabilities of Intellicom and that Intellicom has greater liabilities
than the Company expected.
In addition, the Company has very little experience in the markets and
technology in which Intellicom is focused. As such, the Company is faced with
risks that are new to the Company, including the following:
Dependence on VSAT market
One of the reasons the Company purchased Intellicom was to be able to
provide two-way satellite Internet access options to the Company's
customers using VSAT satellite technology. However, the market for VSAT
communications networks and services may not continue to grow or VSAT
technology may be replaced by an alternative technology. A significant
decline in this market or the replacement of the existing VSAT technology
by an alternative technology could adversely affect the Company's business,
financial condition and prospects.
Risk of damage, loss or malfunction of satellite
The loss, damage or destruction of any of the satellites used by
Intellicom, or a temporary or permanent malfunction of any of these
satellites, would likely result in interruption of Internet services the
Company provides over the satellites which could adversely affect the
Company's business, financial condition and prospects.
In addition, use of the satellites to provide Internet services requires a
direct line of sight between the satellite and the cable headend and is
subject to distance and rain attenuation. In certain markets which
experience heavy rainfall, transmission links must be engineered for
shorter distances and greater power to maintain transmission quality. Such
engineering changes may increase the cost of providing service. In
addition, such engineering changes may require FCC approval, and the
Company cannot assure you that the FCC would grant such approval.
Equipment failure and interruption of service
The Company's operations will require that the Company's network, including
the satellite connections, operate on a continuous basis. It is not unusual
for networks, including switching facilities and satellite connections, to
experience periodic service interruption and equipment failures. It is
therefore possible that the network facilities the Company uses may from
time to time experience interruptions or equipment failures, which would
negatively affect consumer confidence as well as the Company's business
operations and reputation.
Dependence on leases for satellites
Intellicom currently leases satellite space from GE Americom and Satmex. If
for any reason, the leases were to be terminated, the Company cannot assure
you that the Company could renegotiate new leases with GE Americom, Satmex
or another satellite provider on favorable terms, if at all. The Company
has not identified alternative providers and believe that any new leases
would probably be more costly to the Company. In any case, the Company
cannot assure you that an alternative provider of satellite services would
be available, or, if available, would be available on terms favorable to
the Company.
Competition
The market for Internet access services is extremely competitive.
Intellicom believes that its ability to compete successfully depends upon a
number of factors, including: market presence; the capacity, reliability,
and security of its network infrastructure; the pricing policies of its
competitors and suppliers; and the timing and release of new products and
services by Intellicom and its competitors. The Company cannot assure you
that Intellicom will be able to successfully compete with respect to these
factors.
Government regulation
The VSAT satellite industry is a highly regulated industry. In the United
States, operation and use of VSAT satellites requires licenses from the
FCC; and Satmex is licensed by the Mexican government. As a lessee of
satellite space, the Company could in the future be indirectly subject to
new laws, policies or regulations or changes in the interpretation or
application of existing laws, policies or regulations, that modify the
present regulatory environment.
While the Company believes that the Company's lessors will be able to
obtain all licenses and authorizations necessary to operate effectively,
the Company cannot assure you that the Company's lessors will be successful
in doing so. The Company's failure to indirectly obtain some or all
necessary licenses or approvals could have a material adverse effect on the
Company's business, financial condition and prospects.
If The Company Fails To Manage The Company's Expanding Business Effectively, The
Company's Business, Financial Condition And Prospects Could Be Adversely
Affected
To exploit fully the market for the Company's products and services, the Company
must rapidly execute the Company's sales strategy while managing anticipated
growth through the use of effective planning and operating procedures. To manage
the Company's anticipated growth, the Company must, among other things:
o continue to develop and improve the Company's operational, financial
and management information systems;
o hire and train additional qualified personnel;
o continue to expand and upgrade core technologies; and
o effectively manage multiple relationships with various customers,
suppliers and other third parties.
Consequently, such expansion could place a significant strain on the Company's
services and support operations, sales and administrative personnel and other
resources. The Company may, in the future, also experience difficulties meeting
demand for the Company's products and services. Additionally, if the Company is
unable to provide training and support for the Company's products, it will take
longer to install the Company's products and customer satisfaction may be lower.
The Company cannot assure that the Company's systems, procedures or controls
will be adequate to support the Company's operations or that management will be
able to exploit fully the market for the Company's products and services. The
Company's failure to manage growth effectively could have a material adverse
effect on the Company's business, financial condition and prospects.
The Company's Limited Experience With International Operations May Prevent The
Company From Growing The Company's Business Outside The United States
A key component of the Company's strategy is to expand into international
markets and offer broadband services in those markets. The Company has limited
experience in developing localized versions of the Company's products and
services and in developing relationships with international cable system
operators. The Company may not be successful in expanding the Company's product
and service offerings into foreign markets. In addition to the uncertainty
regarding the Company's ability to generate revenues from foreign operations and
expand the Company's international presence, the Company faces specific risks
related to providing broadband services in foreign jurisdictions, including:
o regulatory requirements, including the regulation of Internet access;
o legal uncertainty regarding liability for information retrieved and
replicated in foreign jurisdictions; and
o lack of a developed cable infrastructure in many international
markets.
If Cable Affiliates Are Unable To Renew Their Franchises Or The Company is
Unable To Affiliate With Replacement Operators, The Company's Business,
Financial Condition And Prospects Could Be Materially Adversely Affected
Cable television companies operate under non-exclusive franchises granted by
local or state authorities that are subject to renewal and renegotiation from
time to time. A franchise is generally granted for a fixed term ranging from
five to 15 years, but in many cases the franchise may be terminated if the
franchisee fails to comply with the material provisions of the franchise. The
Cable Television Consumer Protection and Competition Act of 1992 (the "Cable
Act") prohibits franchising authorities from granting exclusive cable television
franchises and from unreasonably refusing to award additional competitive
franchises. The Cable Act also permits municipal authorities to operate cable
television systems in their communities without franchises. The Company cannot
assure that cable television companies having contracts with the Company will
retain or renew their franchises. Non-renewal or termination of any such
franchises would result in the termination of the Company's contract with the
applicable cable operator. If an affiliated cable operator were to lose its
franchise, the Company would seek to affiliate with the successor to the
franchisee. The Company cannot, however, assure an affiliation with such
successor. In addition, affiliation with a successor could result in additional
costs to the Company. If the Company cannot affiliate with replacement cable
operators, the Company's business, financial condition and prospects could be
materially adversely affected.
The Company May Lose Cable Affiliates Through Their Acquisition Which Could Have
A Material Adverse Effect On The Company's Business, Financial Condition And
Prospects
Under many of the Company's contracts, if a cable affiliate is acquired and the
acquiring company chooses not to enter into a contract with the Company, the
Company may lose the Company's ability to offer Internet services in the area
served by such former cable affiliate entirely or on an exclusive basis. Such a
loss could have a material adverse effect on the Company's business, financial
condition and prospects.
The Company Depends On Third-Party Technology To Develop And Introduce
Technology The Company Uses And The Absence Of Or Any Significant Delay In The
Replacement Of Third-Party Technology Would Have A Material Adverse Effect On
The Company's Business, Financial Condition And Prospects.
The markets for the products and services the Company uses are characterized by
the following:
o intense competition;
o rapid technological advances;
o evolving industry standards;
o changes in subscriber requirements;
o frequent new product introductions and enhancements; and
o alternative service offerings.
Because of these factors, the Company has chosen to rely upon third parties to
develop and introduce technologies that enhance the Company's current product
and service offerings. If the Company's relationship with such third parties is
impaired or terminated, then the Company would have to find other developers on
a timely basis or develop the Company's own technology. The Company cannot
predict whether the Company will be able to obtain the third-party technology
necessary for continued development and introduction of new and enhanced
products and services or whether such technology will gain market acceptance. In
addition, the Company cannot predict whether the Company will obtain third-party
technology on commercially reasonable terms or replace third-party technology in
the event such technology becomes unavailable, obsolete or incompatible with
future versions of the Company's products or services. The absence of or any
significant delay in the replacement of third-party technology would have a
material adverse effect on the Company's business, financial condition and
prospects.
The Company Depends On Third-Party Suppliers For Certain Key Products And
Services And Any Inability To Obtain Sufficient Key Components Or To Develop
Alternative Sources For Such Components Could Result In Delays Or Reductions In
The Company's Product Shipments
The Company currently depends on a limited number of suppliers for certain key
products and services. In particular, the Company depends on General Instrument
Corporation, 3Com Corporation and Com21, Inc. for headend and cable modem
equipment, Cisco Systems, Inc. for specific network routing and switching
equipment, and, among others, MCIWorldCom, Inc. for national Internet backbone
services. Additionally, certain of the Company's cable modem and headend
equipment suppliers are in litigation over their patents. The Company could
experience disruptions in the delivery or increases in the prices of products
and services purchased from vendors as a result of this intellectual property
litigation. The Company cannot predict when delays in the delivery of key
components and other products may occur due to shortages resulting from the
limited number of suppliers, the financial or other difficulties of such
suppliers or the possible limited availability in the suppliers' underlying raw
materials. In addition, the Company may not have adequate remedies against such
third parties as a result of breaches of their agreements with the Company. The
inability to obtain sufficient key components or to develop alternative sources
for such components could result in delays or reductions in the Company's
product shipments. If that were to happen, it could have a material adverse
effect on the Company's customer relationships, business, financial condition,
and prospects.
If New Data Over Cable System Interface Specifications ("DOCSIS")-Compliant
Cable Modems Are Not Deployed Timely And Successfully, The Company's Subscriber
Growth Could Be Constrained
Each of the Company's subscribers currently obtains a cable modem from the
Company to access the ISP Channel. The North American cable industry has
recently adopted interface standards known as DOCSIS for hardware and software
to support the delivery of data services over the cable infrastructure utilizing
compatible cable modems. If the Company is not able to obtain a sufficient
quantity of DOCSIS-compliant modems, the Company's growth will be limited.
The Company also believes that in order to meet the Company's subscriber goals,
two-way cable modems must also become widely available in other channels, such
as through personal computer manufacturers and through retail outlets.
Currently, this widespread availability has not yet occurred. In addition, these
modems must be easy for consumers to install themselves, rather than requiring a
customer service representative to perform the installation. If two-way cable
modems do not become quickly available in outlets other than through cable
television companies, or if they cannot be installed easily by consumers, it
would be difficult for the Company to attract large numbers of additional
subscribers and the Company's business would be harmed.
The Company Depends On Third-Party Carriers To Maintain Their Cable Systems
Which Carry The Company's Data And Any Interruption Of The Company's Operations
Due To The Failure To Maintain Their Cable Systems Would Have A Material Adverse
Effect On The Company's Business, Financial Condition And Prospects
The Company's success will depend upon the capacity, reliability and security of
the network used to carry data between the Company's subscribers and the
Internet. A significant portion of such network is owned by third parties, and
accordingly the Company has no control over its quality and maintenance. The
Company relies on cable operators to maintain their cable systems. In addition,
the Company relies on other third parties to provide a connection from the cable
system to the Internet. Currently, the Company has transit agreements with
MCIWorldCom, Sprint, and others to support the exchange of traffic between the
Company's network operations center, cable system and the Internet. The failure
of any other link in the delivery chain resulting in an interruption of the
Company's operations would have a material adverse effect on the Company's
business, financial condition and prospects.
Any Increase In Competition Could Reduce The Company's Gross Margins, Require
Increased Spending By The Company On Research And Development And Sales And
Marketing, And Otherwise Materially Adversely Affect The Company's Business,
Financial Condition And Prospects
The markets for the Company's products and services are intensely competitive,
and the Company expects competition to increase in the future. Many of the
Company's competitors and potential competitors have substantially greater
financial, technical and marketing resources, larger subscriber bases, longer
operating histories, greater name recognition and more established relationships
with advertisers and content and application providers than the Company does.
Such competitors may be able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies and devote substantially more resources
to developing Internet services or online content than the Company can. The
Company's ability to compete may be further impeded if, as evidenced by the
acquisitions of TCI and MediaOne by AT&T, competitors utilizing different or the
same technologies seek to acquire or merge to enhance their competitive
strengths. The Company cannot predict whether the Company will be able to
compete successfully against current or future competitors or that competitive
pressures faced by the Company will not materially adversely affect the
Company's business, financial condition, prospects or ability to repay the
Company's debts. Any increase in competition could reduce the Company's gross
margins, require increased spending by the Company on research and development
and sales and marketing, and otherwise materially adversely affect the Company's
business, financial condition and prospects.
ISP Channel face competition from many sources, which include:
o other cable-based access providers;
o telephone-based access providers; and
o alternative technologies.
Cable-based access providers
In the cable-based segment of the Internet access industry, the Company competes
with other cable-based data services that are seeking to contract with cable
system operators. These competitors include:
o systems integrators such as Excite@Home, Roadrunner and High Speed
Access Corp.; and
o Internet service providers such as Earthlink Network, Inc. and
MindSpring Enterprises, Inc. (which two companies are in the process
of merging), and IDT Corporation.
Most cable system operators have begun to provide high-speed Internet access
services over their existing networks. The largest of these cable system
operators are Adelphia, CableVision, Charter, Comcast, Cox, MediaOne, TCI and
Time Warner. Comcast, Cox and TCI market through Excite@Home, while Time Warner
plans to market the RoadRunner service through Time Warner's own cable systems
as well as to other cable system operators nationwide. Adelphia provides high
speed Internet access through a wholly owned subsidiary called Powerlink. In
particular, Excite@Home has announced its intention to compete directly in the
small- to medium-sized cable system market, where High Speed Access Corp., an
affiliate of Charter, currently competes as well.
Telephone-based access providers
Some of the Company's most direct competitors in the access markets are
telephone-based access providers, including incumbent local exchange carriers,
national interexchange or long distance carriers, fiber-based competitive local
exchange carriers, ISPs, online service providers, wireless and satellite data
service providers, and local exchange carriers that use digital subscriber line
technologies. Some of these competitors are among the largest companies in the
country, including AT&T, MCIWorldCom, Sprint and Qwest. Other competitors
include BBN, Earthlink/Mindspring, Netcom, Concentric Network, and PSINet. The
result is a highly competitive and fragmented market.
Some of the Company's potential competitors are offering diversified packages of
telecommunications services to residential customers. If these companies also
offer Internet access service, then the Company would be at a competitive
disadvantage. Many of these companies are offering (or may soon offer)
technologies that will attempt to compete with some or all of the Company's
Internet data service offerings. The bases of competition in these markets
include:
o transmission speed;
o security of transmission;
o reliability of service;
o ease of access and use;
o ratio of price to performance;
o quality of presentation and content;
o timeliness of content;
o customer support;
o brand recognition; and
o operating experience and revenue sharing.
Alternative technologies
In addition, the market for high-speed data transmission services is
characterized by several competing technologies that offer alternatives to
cable-modem service and conventional dial-up access. Competitive technologies
include telecom-related wireline technologies, such as integrated services
digital network and digital subscriber line technologies, and wireless
technologies such as local multipoint distribution service, multichannel
multipoint distribution service and various types of satellite services. The
Company's prospects may be impaired by FCC rules and regulations, which are
designed, at least in part, to increase competition in video and related
services. The FCC has also created a General Wireless Communications Service in
which licensees are afforded broad latitude in defining the nature and service
area of the communications services they offer. The full impact of the General
Wireless Communications Service remains to be seen. Nevertheless, all of these
new technologies pose potential competition to the Company's business.
Significant market acceptance of alternative solutions for high-speed data
transmission could decrease the demand for the Company's services.
The Company cannot predict whether and to what extent technological developments
will have a material adverse effect on the Company's competitive position. The
rapid development of new competing technologies and standards increases the risk
that current or new competitors could develop products and services that would
reduce the competitiveness of the Company's products and services. If that were
to happen, it could have a material adverse effect on the Company's business,
financial condition and prospects.
A Perceived Or Actual Failure By The Company To Achieve Or Maintain High Speed
Data Transmission Could Significantly Reduce Consumer Demand For The Company's
Services And Have A Material Adverse Effect On The Company's Business, Financial
Condition And Prospects
Because the ISP Channel and Intellicom services have been operational for a
relatively short period of time, the Company's ability to connect and manage a
substantial number of online subscribers at high transmission speeds is unknown.
In addition, the Company face risks related to the Company's ability to scale up
to expected subscriber levels while maintaining superior performance. The actual
downstream data transmission speeds for each subscriber will be significantly
slower and will depend on a variety of factors, including:
o actual speed provisioned for the subscriber's modem;
o quality of the server used to deliver content;
o overall Internet traffic congestion;
o the number of active subscribers on a given channel at the same time;
o the capability of modems used; and
o the service quality of the cable networks of ISP Channel's cable
affiliates and the networks of Intellicom's customers.
As the number of subscribers increases, it may be necessary for the Company's
cable affiliates to add additional 6 MHz channels in order to maintain adequate
data transmission speeds from the Internet. These additions would render such
channels unavailable to such cable affiliates for video or other programming.
The Company cannot assure you that the Company's cable affiliates will provide
additional capacity for this purpose. On two-way cable systems, the transmission
data channel to the Internet (or return path) is located in a range not used for
broadcast by traditional cable networks and is more susceptible to interference
than the transmission data channel from the Internet, resulting in a slower peak
transmission speed to the Internet. In addition to the factors affecting data
transmission speeds from the Internet, the interference level in the cable
affiliates' data broadcast range to the Internet can materially affect actual
data transmission speeds to the Internet. The actual data delivery speeds
realized by subscribers will be significantly lower than peak data transmission
speeds and will vary depending on the subscriber's hardware, operating system
and software configurations. The Company cannot assure you that the Company will
be able achieve or maintain data transmission speeds high enough to attract and
retain the Company's planned numbers of subscribers, especially as the number of
subscribers to the Company's services grows. Consequently, a perceived or actual
failure by the Company to achieve or maintain high speed data transmission could
significantly reduce consumer demand for the Company's services and have a
material adverse effect on the Company's business, financial condition and
prospects.
Any Damage Or Failure That Causes Interruptions In The Company's Operations
Could Have A Material Adverse Effect On The Company's Business, Financial
Condition And Prospects
The Company's operations are dependent upon the Company's ability to support a
highly complex network and avoid damages from fires, earthquakes, floods, power
losses, telecommunications and satellite failures, network software flaws,
transmission cable cuts and similar events. The occurrence of any one of these
events could cause interruptions in the services the Company provides. In
addition, the failure of an incumbent local exchange carrier or other service
provider to provide the communications capacity the Company requires, as a
result of a natural disaster, operational disrupti