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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-32941
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MPOWER HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-2232143
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
175 SULLY'S TRAIL, SUITE 300, PITTSFORD, NY 14534
(Address of principal executive offices) (Zip Code)
(585) 218-6550
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE PER COMMON SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of June 30, 2003, the aggregate market value of common stock held by
non-affiliates of the registrant, based on the last sale price of such stock in
the NASD Over the Counter Bulletin Board on June 30, 2003, was approximately
$68.6 million.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
As of March 15, 2004, the registrant had 78,332,022 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable
Exhibit Index is located on page 56.
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PART I
ITEM 1. BUSINESS
THE COMPANY
We were one of the first competitive local exchange carriers founded
after the inception of the Telecommunications Act of 1996, which opened up the
local telephone market to competition. Today, we offer local and long distance
voice services as well as high-speed Internet access by way of a variety of
broadband product and service offerings. Our services are offered primarily to
small and medium-sized business customers and residential customers (primarily
in the Las Vegas market) through our wholly-owned subsidiary, Mpower
Communications Corp. ("Communications") in Los Angeles, California, San Diego,
California, Northern California (the San Francisco Bay area and Sacramento), Las
Vegas, Nevada and Chicago, Illinois. As of March 2004, we have approximately
51,000 business customers and approximately 21,000 residential customers. We
also bill a number of major local and long distance carriers for the costs of
originating and terminating traffic on our network for our local service
customers. We do not have any unbundled network element platform ("UNE-P")
revenues. During 2003, we acquired approximately 87% of our new sales through
our direct sales force and supporting staff, with the remainder acquired through
agent relationships and outbound telemarketing.
As used in this report, the terms "we," "us," "our," "our company" and
"Mpower" means Mpower Holding Corporation and its subsidiaries.
FINANCIAL HISTORY
In May 1998, we completed our initial public offering of common stock,
raising net proceeds of $63.0 million. From May 1999 to March 2000, we raised
over $900 million of additional funds through debt and equity issuances to
pursue an aggressive business plan to rapidly expand our business using Class 5
circuit switching technology (the same as used by Verizon, SBC, and other major
telecommunication companies) in each of our markets and began deploying digital
loop carriers in each collocation site. This business plan required significant
up-front capital expenditures in each market as well as lower recurring margins
in its early phase. In mid-2000, the capital markets became virtually
inaccessible to early stage communications ventures. Consequently, in September
2000, we commenced what became a 36-month process to restructure our business,
both operationally and financially.
- - From September 2000 through May 2001, we significantly scaled back our
operations, canceling more than 500 existing collocations, and
canceling plans to enter the Northeast and Northwest Regions
(representing more than 350 collocations).
- - From February 2002 through July 2002, we undertook a comprehensive
recapitalization through a Chapter 11 bankruptcy plan that eliminated
$593.9 million in carrying value of long-term debt and preferred stock
(as well as $65.3 million of associated annual interest and dividend
costs) in exchange for cash and 98.5% of our common stock.
- - From November 2002 to January 2003, we eliminated the remaining $51.3
million of carrying value of our long-term debt for cash payments,
which released all of our network equipment from any remaining security
interests, giving us the ability to pursue alternative financing and
strategic transactions.
- - In January 2003, we announced we had reached an agreement with RFC
Capital Corporation, a wholly-owned subsidiary of Textron Financial
Corporation, for a three-year funding facility of up to $7.5 million,
secured only by certain of our receivables.
- - In January 2003, we announced a series of strategic transactions to
further strengthen us financially and focus our operations on our
California, Nevada and Illinois markets. The sale of our customers and
assets in Florida, Georgia, Ohio, Michigan and Texas to other service
providers (the "Asset Sales") has now brought more geographic
concentration to our business. The Asset Sales for customers and assets
in Ohio, Michigan and Texas were completed in March 2003. The Asset
Sales for our customers and business in Georgia and Florida were
completed in April 2003. The Asset Sales are expected to generate net
proceeds to us of approximately $19.0 million, of which $18.1 million
of net proceeds have been received in 2003.
- - In September 2003, we raised net proceeds of approximately $16.0
million through a private placement of shares of our common stock and
warrants to purchase additional shares of common stock.
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EMERGENCE FROM CHAPTER 11 PROCEEDINGS
On July 30, 2002, we and our subsidiary, Communications, formally
emerged from Chapter 11 as our recapitalization plan (the "Plan") became
effective. See Note 2 in the Notes to the consolidated financial statements for
a summary of the material features of the Plan.
As of July 30, 2002, we implemented fresh-start accounting under the
provisions of Statement of Position ("SOP") 90-7 "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code." Under SOP 90-7, our
reorganized fair value was allocated to our assets and liabilities, our
accumulated deficit was eliminated, and our new equity was issued according to
the Plan as if we were a new reporting entity. In conformity with fresh-start
accounting principles, Predecessor Mpower Holding recorded a $244.7 million
reorganization charge to adjust the historical carrying value of our assets and
liabilities to fair market value reflecting the allocation of our $87.3 million
estimated reorganized equity value as of July 30, 2002. We also recorded a
$315.3 million gain on the cancellation of debt on July 30, 2002 pursuant to the
Plan. As a result, our net operating loss carryforwards, which were subject to
annual use limitations before the reorganization, have been significantly
reduced.
As a result of our reorganization, the financial statements published
by us for the periods following the effectiveness of the Plan will not be
comparable to those published before the effectiveness of the Plan.
RESHAPING MPOWER
Our scaling back of operations from September 2000 through May 2001,
canceling more than 500 existing collocations and canceling plans to enter the
Northeast and Northwest regions followed by emergence from Chapter 11 and the
recapitalization of our balance sheet were significant steps in a sequential
process to reshape our company. Through the pre-negotiated Chapter 11
proceeding, we eliminated $593.9 million in carrying value of long-term debt
settled and preferred stock in exchange for $19.0 million in cash and 98.5% of
the common stock of our reorganized company. This process reduced our debt and
preferred stock by approximately 92%. In November 2002, we repurchased $49.2
million in carrying value of our 2004 Notes for $14.2 million in cash. In
January 2003, we repurchased the remaining $2.1 million in carrying value of our
2004 Notes for $2.2 million in cash. This transaction removed all liens on our
network equipment.
With our long-term debt eliminated, the second step in the process of
reshaping our company was to significantly bring down our cash burn rate. We
first began to see cash conservation as a priority in September 2000 when we
pulled back on our network expansion plans. Since that time, we have continued
to scale back our market footprint and have made significant operational
improvements which resulted in efficiencies including reduced headcount and
lower selling, general and administrative expenses ("SG&A") and capital
expenditures. In January 2003, we announced the sale of our customers and assets
in Florida, Georgia, Ohio, Michigan and Texas. The Asset Sales of Ohio, Michigan
and Texas were completed in March 2003. The remaining Asset Sales were completed
in April 2003. The Asset Sales accomplished three things: significantly reduced
our cash burn, brought us additional cash through the sale of the markets, and
resulted in geographic concentration for the rest of our business.
The final step in reshaping our company is to accelerate our growth in
the markets within which we currently operate. We intend to accomplish this
through organic growth, the increased investment in our sales force which we
expect to result in the acceleration in the growth of our customer base, as well
as growth through strategic transactions. In terms of strategic transactions, we
will continue to explore opportunities to increase our customer base through
merger and/or acquisition transactions that we would expect to be accretive to
shareholder value.
COMPANY OVERVIEW
Mpower Communications Corp. is a facilities-based communications
provider offering an integrated bundle of broadband data and voice communication
services to business customers. We provide a full range of telephone, high-speed
data, Internet access, and Web hosting solutions in Las Vegas, Nevada, Chicago,
Illinois and throughout California.
As a facilities-based provider, we own and control a substantial amount
of our network infrastructure and bring the power of that directly to our
customers. Our regional footprint provides us concentrated service coverage and
experience in the markets we serve.
We acquire new customers primarily through our dedicated account managers who
personally work with customers to find the best solution for their unique
communications needs. We also maintain relationships with agents and have a
telemarketing sales organization. We intend to aggressively grow our sales agent
channel. We plan to continue to evolve our product and service offerings in
order to maximize the value perceived by our customers while delivering such
products and services as cost-effectively as possible.
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We maintain a Web site with the address www.mpowercom.com. We have not
incorporated by reference into this report on Form 10-K the information on our
Web site and you should not consider it to be a part of this document. Our Web
site address is included in this document for reference only. We make available
free of charge (other than an investor's own Internet access charges) through
our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, and amendments to these reports, through a link to
the EDGAR database, as soon as reasonably practicable after we electronically
file such material with, or furnish such material to, the Securities and
Exchange Commission.
MARKET OPPORTUNITY
We believe we have a significant market opportunity as a result of the
following factors:
IMPACT OF THE TELECOMMUNICATIONS ACT OF 1996
The Telecommunications Act of 1996 allows CLECs to use the existing
infrastructure established by incumbent carriers, as opposed to building a
competing infrastructure at significant cost. The Telecommunications Act
requires all incumbent carriers to allow CLECs to collocate their equipment in
the incumbent carrier's central offices. This enables us to access customers
through existing telephone line connections. The Telecommunications Act created
an incentive for incumbent carriers that were formerly part of the Bell system
to cooperate with CLECs by precluding each of these incumbent carriers from
providing long distance service in its region until regulators determine there
is a significant level of competition in the incumbent carriers' local market.
See "Government Regulations."
NEEDS OF SMALL AND MEDIUM-SIZED BUSINESSES FOR INTEGRATED COMMUNICATIONS
SOLUTIONS
Small and medium-sized businesses are our primary customer target.
Small and medium-sized businesses are subject to the cost and complexity of
using multiple service providers: local dial-tone providers, long distance
carriers, Internet service providers and equipment integrators. We believe these
businesses can benefit significantly from an integrated cost-effective
communications solution delivered by a single provider.
GROWING MARKET DEMAND FOR HIGH-SPEED DATA SERVICES
The rise of the Internet as a commercial medium as well as a necessary
business tool has driven the demand for high-speed data services. Businesses are
increasingly establishing Web sites and corporate intranets and extranets to
expand their customer reach and improve their communications efficiency. To
remain competitive, small and medium-sized businesses increasingly need
high-speed data and Internet connections to access critical business information
and communicate more effectively with employees, customers, vendors and business
partners.
SHRINKING COMPETITIVE LANDSCAPE
The shake out in the telecommunications industry in recent years has
significantly reduced the number of competitors in the marketplace. Many
companies in the competitive communications industry have succumbed to heavy
debt loads and burdensome interest payments without the revenue streams to
compensate, and therefore have not been able to sustain their business model. As
a result, fewer competitors are vying for the same customers.
THE MPOWER SOLUTION
In today's competitive business landscape, businesses must utilize
every advantage to gain additional market share. We believe companies that most
efficiently meet customer needs will have the upper hand in gaining new
business. Advances in telecommunications and technology are vital resources in
this environment. We believe stakeholders will tend to choose communications
providers that have a proven track record of successfully providing solutions
that help overcome business challenges, maintain a solid balance sheet, are
"easy to do business with" and offer a competitive advantage.
We believe we are such a service provider. The product and service
offerings we deliver are designed to assist businesses in enhancing the
efficiency and effectiveness of an organization, while decreasing expenses in
both hard and soft dollars. We seek to understand business challenges and build
the appropriate solutions. We believe we have both the agility and capability to
tailor our services in the most meaningful configuration for our customers.
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FACILITIES-BASED NETWORK
We were one of the first competitive communications carriers to
implement a facilities-based network strategy. As a result, we own the network
switches that control how voice and data communications originate and terminate,
and we lease the telephone lines or transport systems over which the voice and
data traffic are transmitted. We install much of our network equipment at
collocation sites of the incumbent carriers from whom we lease standard
telephone lines. As we have already invested in and built our network, we
believe our strategy has allowed us to establish and sustain service in our
markets at a comparatively low cost while maintaining control of the access to
our customers.
Our network consists of 294 incumbent carrier central office
collocation sites, of which 280 are SDSL capable and 214 are T1 capable. This
means that of our 294 total collocation sites, we can provide our customers SDSL
services in 280 or 95% of the 294 collocation service areas and we can provide
T1 services in 214 or 73% of the 294 collocation service areas. In April 2004,
we will begin selling T1 services to customers using facilities that do not
directly connect to our collocation sites. We refer to this as "off network."
Having off network facilities increases our number of potential customers. We
have established working relationships with Verizon, Sprint, and Southwestern
Bell Corporation (including its operating subsidiaries PacBell and Ameritech,
collectively referred to as "SBC"). As of March 2004, we have over 258,000
billable lines in service.
INTELLIGENT NETWORK DESIGN
Traditional service providers deliver narrowband voice and data
services over a circuit-switched network. When these services are bundled they
are delivered over "separate" voice and data networks. We fully assimilate the
mature, proven components of traditional Time Division Multiplexing ("TDM")
technology with cost efficiencies of packet-switched data networks. Our Internet
Protocol ("IP")-enabled system integrates voice and data services into a single
platform, resulting in our ability to provide voice and data services to our
customers at a lower operating cost.
BUSINESS STRATEGIES
Targeting Small and Medium-Sized Businesses. We believe the small and
medium-sized business customer base generates an estimated 55% of all local
telephone service revenues. We target suburban areas of the metropolitan areas
we serve because these areas have high concentrations of small and medium-sized
businesses. By providing a package of voice and data services and focusing on
small and medium-sized business sales, we believe we will gain a competitive
advantage over the incumbent carrier, our primary competitor for these
customers.
Direct Sales Force. In order to better align the needs of our customers
with the skills of our direct sales force, we have established two distinct
sales forces to create a strategy that allows us to benefit from the unique
talents in our sales organization.
Major Markets: This sales channel focuses on multi-location, higher
revenue prospects. It sells all of our product and service offerings with a
focus on primary rate interfaces ("PRIs"), trunks, data T1 services and long
distance.
Mid Markets: This sales channel focuses on simpler sales environments
with a shorter sales cycle. It sells all of our product and service offerings
with a focus on plain old telephone service ("POTS"), DSL, and our integrated T1
services.
When fully staffed, we expect to have approximately 40 quota carrying
account managers serving our major markets customers and prospects. We expect to
have approximately 80 quota carrying account managers serving our mid markets
customers and prospects. The number of sales people allocated to these channels
could change based on business results of each channel.
Product and Service Offerings. We focus on offering bundled
communications packages to our small and medium-sized business customers. These
services include integrated T1 services, trunks and PRIs, as well as traditional
voice and data services (see Product & Service Offerings below).
Increase Market Share and Profitable Revenue. We plan to continue to
aggressively sell into our existing network footprint and target customers
within that footprint with the product and service offerings that we believe
will generate the highest margin revenue. We expect that the vast majority of
these services will be delivered to our customers under term contracts. We
believe that this strategy will further increase the quality of our revenue
streams. We expect that the majority of network expansion will be centered
around augmentation of our existing network to further enhance our product and
service offerings and service delivery capabilities.
Control Customer Relationship. By connecting the standard telephone
line originating at our customer's site to our central office collocation, we
effectively place the customer on our network. This connection serves as the
platform for delivering our current and
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future communications services to our customers. Any future changes our
customers want to make to their services, including purchasing more services
from us, are under our direct control. The one exception is for repairs, which
are infrequent but may require the participation of the incumbent carrier's
network maintenance staff.
Capital Efficient Network. We were one of the first competitive local
exchange carriers to implement a facilities-based network strategy of purchasing
and installing switches, collocating in the central offices of the incumbent
carrier and leasing local telephone lines, referred to as a "smart build"
strategy. This network footprint is complete and operational. We have installed
SDSL technology across our existing network, and have T1 technology in the
majority of our network collocations.
Optimize Current Network Infrastructure. The footprint of our
facilities-based network is completely built out and operational. All of our
traffic and revenue is on-switch, allowing us better control over our costs. Our
strategy going forward is to maximize the investment in this infrastructure and
increase market share in the areas we serve. Our ability to provide certain of
our T1 service offerings off network is a part of our overall strategy to
increase our market share while containing costs.
Dynamic Allocation of Bandwidth: As part of our product and service
offerings for businesses, our voice and data integrated solutions product, as
described below, is uniquely designed to give customers the ability to use
dynamically allocated bandwidth coupled with combining our customer's data and
voice needs on one medium. This simply means that data bandwidth fluctuates
(increases or decreases) based on phone usage. Customers serviced by many of our
competitors will typically be required to designate certain amounts of bandwidth
for data traffic and certain amounts for voice traffic. Our integrated T1
service provides the ability for our customers to use the entire circuit for
data transfers while still being able to place and receive phone calls all on
one circuit.
National Network Operations Center and Traffic Monitoring: Our national
operations center ("NOC") provides a high standard of network availability at
99.998% at December 31, 2003, coupled with reliability. Our NOC utilizes Fault,
Configuration, Accounting, Performance and Security ("FCAPS") management to
manage our network footprint.
Operations Support System. We have a comprehensive operations support
system to manage our business. Our system provides integrated features
addressing customer care, billing and collections, general ledger, payroll,
fixed asset tracking, and personnel management. Our systems have the ability to
adapt to multiple incumbent carrier provisioning systems, which can improve our
operating efficiencies and effectiveness. For our customers, we recently
launched NetBill - a simple and secure way to view and pay bills online and
manage their telecommunications accounts.
Timely and Accurate Provisioning for Customers. We believe one of the
keys to our success is effectively managing the provisioning process for new
customers. We have a standardized service delivery process and consolidated
service delivery centers, which significantly reduce our provisioning intervals
and improve our provisioning quality metrics. In addition, through electronic
order interfaces with all of the incumbent carriers, we have been able to
substantially reduce the time, number of steps and duplication of work typically
involved in the provisioning process. For customers, our implementation team
ensures that services are typically installed in a smooth and timely fashion.
This team manages the migration of existing services from data and information
gathering through installation and service activation.
Quality Customer Care. We have a professionally trained workforce that
seeks to generate customer satisfaction. We operate one main call center that
handles general billing, customer care and related issues for all of our
customers. Through low employee attrition, we believe our call center has been
able to develop a professional "teamwork" approach to assisting with any
customer issues.
We believe our call center performs at a high level of proficiency,
while continually meeting service level targets for our customers. Our call
center is focused on first call resolution, which involves both an enhanced
automated call distribution system that directs callers into the customer
service center based on the type of question they have, and specially trained
agents with the tools to resolve customer issues. Our service representatives
use our operations support system to gain immediate access to our customers'
data, enabling quick responses to customer requests and needs at any time. This
system also allows us to present our customers with one fully integrated monthly
billing statement for all communication services. We believe that providing
quality customer service is essential to offering a superior product and service
offering to our customers and creating customer loyalty.
Our quality customer "experience" is evidenced by our over 90% customer
satisfaction rating received from new customers we polled 45 days after they
join Mpower. This rating is a 13 month average through March 1, 2004.
One measure of customer satisfaction is "churn." Churn is defined as
the percentage of lines that are disconnected in any given period of time. Our
average monthly churn for business lines during the fourth quarter of 2003 was
approximately 1.8% and has been steadily decreasing over the prior several
quarters.
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SALES APPROACH
We provide personal relationships for businesses that are designed to
save our customers time, energy and money. The Mpower team consists of the
following functions, whose responsibilities are as indicted below:
- - DEDICATED ACCOUNT MANAGERS: Understand our customers' businesses and
determine the best communications solution to meet their needs. Our
organization structure has two distinct sales channels to separately
pursue "major markets" and "mid markets" customers.
- - SALES ENGINEERS: Provide technical expertise, solution design and
interface with IT partners and vendors.
- - FIELD MARKETING: Provide focused materials and qualified leads for key
vertical markets such as real estate, automotive, financial and retail
food.
- - PROVISIONING REPRESENTATIVES: Communicate with customers to ensure high
quality conversions.
- - FIELD TECHNICIANS: Provide smooth installations and timely field
repair.
- - CUSTOMER CARE ASSOCIATES: Committed to exceeding customer expectations.
- - CUSTOMER ACCOUNT MANAGERS: Located in each market to provide
local-level support.
We take a "feet-on-the-street" approach to both sales and marketing. As
of March 2004, we employed approximately 104 quota-carrying sales personnel and
an additional approximately 71 sales support personnel. During 2003,
approximately 87% of our new sales were acquired through our direct sales force
and supporting staff. Our account managers personally meet with customers to
determine the best communications solution for them. As a result of this design,
much of our business comes through referrals and networking. We have a highly
focused relationship-building approach which seeks to generate well-managed,
profitable growth through increased market share with minimal customer turnover.
Our two sales organization channels (Major Markets and Mid Markets) are divided
into teams within markets. Our direct sales efforts are complemented by our
telemarketing and agent channels.
Our sales representatives are supported by sales coordinators, customer
account managers and service delivery personnel. These support personnel
function as the liaison between the small business customer and our operational
personnel to effect a coordinated transfer of service from the incumbent
carrier's network to our network. Field technicians are responsible for the
installation of customer premise equipment, if required.
PRODUCT & SERVICE OFFERINGS
As an integrated service provider, we offer a variety of voice and data
services that come as a bundled solution, or can be conveniently packaged or
purchased as stand-alone products.
DATA AND INTERNET SERVICES
Our IP network is designed to provide data solutions that meet the
needs of today's growing businesses. We believe that our IP network is secure,
reliable and advanced. We deliver data in three ways:
- - Over an economic variable speed loop with Modem (SDSL),
- - Over a dedicated circuit (typically a T1, which we call
"MpowerConnect"), and
- - Integrated with Voice (typically over a T1, which we call
"MpowerOffice").
VOICE AND DATA INTEGRATED SOLUTIONS
Our IP network infrastructure enables integration of business voice and
data communications and e-commerce applications, while streamlining business
processes by way of the Internet. We package voice and data applications to
provide value-added solutions from one provider, one point of contact and one
invoice.
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The MpowerOffice service offering includes:
- - High speed Internet access: 768k, 1.1 Megabit ("Mb") or 1.5Mb
- - Voice lines: 4 - 24 lines
- - Choice of call control services: unlimited features or Centrex
- - Remote Internet access: 3 dialup accounts
- - IP applications: 20 email accounts, 70Mb web space and domain name
service ("DNS") (up to 4 domains)
The MpowerEnterprise service offering includes:
- - High speed Internet access: 1.544 Megabits per second ("Mbps")
- - Integrated services digital network ("ISDN") PRI: 23 channels
- - Choice of call control services: 40 direct inward dialing ("DIDs"),
CallerID, Automatic Channel Selection and Hunting
- - Long Distance: 1,000 free domestic minutes.
SDSL HIGH SPEED INTERNET
SDSL High-Speed Internet uploads and downloads files at equally fast
rates, providing Internet access at speeds equal to that of a T1--but at a
fraction of the cost. Our SDSL offers equal upstream and downstream speeds of up
to 1.5 Mbps. Unlike Asymmetrical Digital Subscriber Line ("ADSL"), which only
allows quick downloads, SDSL has the power to both receive and send large files
at high speeds. SDSL can move data 50 times faster than a dial-up modem and 10
times faster than ISDN. Our SDSL service offering includes:
- - Multiple convenient tiers of speed up to 1.544 Mbps
- - SDSL modem
- - Web hosting
- - Email addresses
- - Domain name hosting
- - Always-on, secure high-speed Internet connection
- - 24/7 repair support
- - Full domain name registration and email support.
MPOWERCONNECT
MpowerConnect is fast, reliable Internet access with up to a full
T1-worth of bandwidth. Use of a T1 bypasses distance limitations associated with
some technologies and offers many benefits in terms of service quality while
providing 1.544 Mbps of bandwidth. Our product and service offering includes
both integrated voice and data T1 packages, as well as a data-only T1 service.
Delivered through a combination of telephone and data network facilities,
MpowerConnect is designed to be predictable, stable, fully symmetric, and
feature speeds of up to 1.544 Mbps. Additional features, such as blocks of IP
addresses, custom email accounts, and Web Hosting, are also available.
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Standard packages are available at either 768 Kilobits ("Kbps") or
1.544 Mbps Internet access speeds, with a variety of feature package upgrades
and a la carte feature options including:
- - DNS of public IP services such as Web Hosting and email
- - Custom email addresses
- - 40, 70, or 100 Mb Web Hosting
- - Dial-up Internet account
- - Block of up to 4, 8, or 16 IP addresses.
Web hosting: Our customers can register a new domain name or transfer a
current domain name to our servers. Our servers will be the origination point
for our customer's company's online presence including their email services.
Additional options are available to build online storefronts with secure online
credit card transactions.
Email: We offer email services with many features and hosted in our
data centers. We offer Username@mpowermail.net email addresses and domained
email accounts are also available.
VOICE SERVICES
Our intelligent network has been designed to provide the platform to
provide the highest level of quality and reliability to deliver local and long
distance telephone services. We offer many combinations of voice services. A
full suite of features and calling plans are also available. Voice services
options include:
- - Mpower PRI: A solution for businesses with high call volumes, includes
local service, 40 direct-dial numbers, caller ID, flat rate local and
local-toll usage, low long distance rates, among other features.
- - Mpower Trunks: Cost-effective, digital voice communications with
applications for call centers, general office use, smaller offices and
sales offices.
- - Mpower Business Voice Services: A complete menu of custom calling
features, local number portability, 911, directory, long distance
information services, among other features.
- - Centrex: Standard features include unique phone numbers for each
employee, 3-way calling, last number redial with additional features
available.
- - Long Distance: Long distance service across the country and
internationally at competitive rates.
- - Calling Card: Customers can make calls from anywhere and take advantage
of our low rates.
- - Mpower Business Toll-Free Service: Toll-free phone numbers with no
setup fees, monthly fees or minimums. Service options available for
U.S., Canada and the Caribbean.
- - Voicemail: Retrieve messages from any touch-tone phone, post greeting
announcements and store messages for up to 30 days. Optional features
allow for expansion of voice mail capacity.
- - Local Operator Services support analog business lines, digital trunks
and ISDN PRI.
- - Long Distance Operator Services are provided for domestic (1+ and Toll
Free), international and calling card.
- - Features - Call control services: An extensive list of customer calling
and Centrex features in addition to voicemail and audio and web
conferencing.
MARKETS
As of March 2004, we operate in five markets in three states and have
294 incumbent carrier central office collocation sites and 74 offnet
collocations. The
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major markets in our footprint are: Los Angeles, California, San Diego,
California, Northern California (the San Francisco Bay area and Sacramento), Las
Vegas, Nevada and Chicago, Illinois. The table below shows the distribution of
our central office collocation sites within these markets.
NUMBER OF COLLOCATIONS
----------------------
MARKET ON-NET OFF-NET
- ------------------------ ------ -------
Los Angeles ............ 142 32
San Diego .............. 28 5
Northern California..... 40 10
Las Vegas .............. 18 ---
Chicago ................ 66 27
--- ---
Totals ................. 294 74
=== ===
We believe there is significant scaling potential within our existing
market footprint, given our past success in market penetration in our base of
original markets. In addition, our robust network backbone is scalable and can
provide reliability and service quality across our collocation footprint, while
affording us the benefit of spreading the fixed costs across our markets. Use of
off network facilities will also allow us to sell certain T1 services to
customers that are not within the geographic reach of our collocation sites.
NETWORK ARCHITECTURE AND TECHNOLOGY
NETWORK ARCHITECTURE
Our IP network uses an integrated IP-based architecture to deliver
converged voice and data over a single platform with seamless integration and
delivery.
Our integrated voice and data offerings are delivered over a single,
IP-based network with a single invoice as opposed to an alternative which
cobbles together products and services over multiple networks and manages
multiple business support systems.
Network Technology:
- Facilities-based network,
- Can support multiple "last mile loop" access method,
- Single, integrated voice and data network, and
- Network design benefits from favorable economics of Voice over
IP ("VoIP"), Internet and packet-based technologies.
We believe our network technology offers the following benefits to our
customers:
- Seamless installation, integration and lower costs
- Dynamic, efficient use of bandwidth - all applications using
the same facility
- Single bandwidth facility easier to manage as compared to
voice channels and bandwidth
- Today's data business applications utilize IP protocol
- One point of contact with one bill.
Traditional networks provide narrowband voice and data services over a
circuit-switched network. When these services are bundled, they are delivered
over "separate" voice and data networks. Our IP network infrastructure enables
integration of business communication and commerce applications, while
streamlining business processes by way of the Internet.
Our facilities-based, local telephone and data network consists of
seven switches and 368 network access points providing extensive service
coverage in Las Vegas, Nevada, Chicago, Illinois and throughout California. Our
network features:
- - Industry leading vendors at every layer of network architecture
- - Comprehensive collocation coverage in every market
- - Network architecture which fully supports integrated communications
services from POTS to Integrated Voice and Data over IP, and designed
to support future technologies
- - Our network reliability exceeded 99.998% at December 31, 2003.
We were one of the first competitive communications carriers to
implement a facilities-based network strategy. As a result, we own the network
switches that control how voice and data transmissions originate and terminate,
and we lease from the incumbent local carrier only the telephone lines over
which the voice and data traffic are transmitted. In addition, Federal
Communications Commission ("FCC") regulations currently require incumbent
carriers to lease telephone lines to us at just and reasonable rates. Because we
have already invested and built our network, we are able to serve our markets at
a comparatively low cost while
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maintaining control of the access to our customers. By comparison, many CLECs do
not control their own facilities and, therefore, are much more dependent upon
the local Bell companies and the federal and state regulatory environment in
order to ensure the viability of their business plans.
We have implemented a strategy enabling us to own the hardware that
routes voice calls and data traffic, which we refer to as "switches," while
leasing the telephone lines and cable over which the voice calls and data
traffic are actually transmitted, which we refer to as "transport." We use three
basic types of transport to transmit voice calls and data traffic. First, we
lease the standard telephone line from the incumbent carrier. This allows us to
move voice calls and data traffic from a customer's location to the nearest
central office owned by the incumbent carrier. Inside these central offices, we
have equipment that allows us to deliver the services we sell to our customers.
Second, we lease network capacity from other communications companies, which
connects the equipment we installed in the central office of the incumbent
carrier to our switches. Third, we lease additional network capacity from other
communications companies, which connect our switches to each other and allow us
to complete our customers' long distance calls to national and international
destinations in addition to providing our customers connectivity to the
Internet. We believe this network strategy provides us an efficient capital
deployment plan, which should allow us to achieve an attractive return on our
invested capital.
We believe that leasing the standard telephone line from the incumbent
carrier's central office to the end-user provides a cost-efficient solution for
gaining control of access to our customers. Leasing costs are not incurred until
we have acquired a customer and revenue can be generated. It is our experience
that the network required to connect our collocation equipment located at an
incumbent carrier's central office to our switching hardware and the network
required to connect our customers' voice calls and data traffic to the Internet
and other telephones is available at reasonable prices in all of our current
markets. Because the network connection required to transport voice calls and
data traffic has become a readily available service from numerous other
communications companies, we focused our efforts on owning and installing the
hardware that determines where to route voice calls and data traffic and on
selling and delivering our services to our customers.
We have seven operational voice switches. All of our current voice
switches are DMS-500 switches manufactured by Nortel Networks. These switches
offer a flexible and cost efficient way for us to provide local and long
distance services to our customers.
Once we install equipment in the collocation sites we lease from the
incumbent carrier, we initiate service to a customer by arranging for the
incumbent carrier to physically disconnect a standard telephone line from their
equipment and reconnect the same standard telephone line to our equipment. When
the standard telephone line has been connected to our equipment, we have direct
access to the customer and can deliver our voice and data services. Any future
changes the customer wishes to make, such as purchasing more services from us,
are under our direct control.
We have installed our equipment in 294 collocation sites as of March
2004, and serve another 74 adjacent collocations by way of off network
facilities for a total of 368 collocations in our five markets. We will begin to
sell into these off network areas commencing in April 2004. Our seven host
switching sites are connected to each other, which allows us to transmit data
traffic using asynchronous transfer mode ("ATM") technology. Asynchronous
transfer mode technology allows both voice calls and data traffic to be
transported in digital form over a single cable connection at high speeds and
reasonable costs. By deploying SDSL and T1 technology into our network, we are
now able to transport both voice calls and data traffic in digital form on a
single telephone line from a customer's location to one of our switches.
SDSL TECHNOLOGY
Using SDSL technology, we can increase the amount of information we
carry on a standard telephone line, which we refer to as bandwidth, to up to 1.5
Mbps. This bandwidth is the equivalent of 24 regular voice telephone lines. Our
SDSL equipment is programmed to allocate the available bandwidth. For example,
voice calls are carried at 64 Kbps; if a customer has eight phone lines and all
are in use at the same time, then 512 Kbps (eight phone lines multiplied by 64
Kbps each) of the total 1.5 Mbps are allocated for the voice calls. The
remaining bandwidth, up to 1024 Kbps, is available to carry the data traffic.
We believe the SDSL technology significantly reduces our customers'
potential for service outages when the incumbent carrier moves the standard
telephone line from their equipment to ours. Additionally, we believe this
technology reduces our costs since we lease a reduced number of standard
telephone lines per customer from the incumbent carrier. For example, if a
customer today has eight voice lines, we must order from and provision through
the incumbent carrier eight individual standard telephone lines. If the same
customer were to buy our service offering and we deliver the service using SDSL
technology, we only order and provision one standard telephone line from the
incumbent carrier and are still able to provide eight voice lines to the
customer.
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T1 TECHNOLOGY
With 4-wire T1 technology we reduce the impact of distance limitations
and service quality sometimes associated with SDSL. A T1 will consistently offer
1.544 million Mbps data speed. With this technology, we now have an alternative
to SDSL when network restrictions will not permit SDSL usage. Our T1 product and
service offerings provide customers a choice between integrated service,
data-only service and trunks. All use the same underlying transport and
equipment technology.
"Integrated" service refers to the combination of both traditional
voice services such as local and long distance service, and high speed Internet
connectivity. It refers to a service that offers both voice and data across a
single cable. Hardware specifically designed to manage these various types of
traffic is needed at both the customer premise and within our network. This
service allocates unused bandwidth from telephone lines not in use to the usable
data bandwidth. For example: A customer purchases a package of 8 voice lines and
1 Mbps of data bandwidth. When the customer is not using any of the voice lines,
the customer will receive the full 1.544 Mbps for data. However, if the customer
is using all of the voice lines, only 1 Mbps will be available for data.
The "data-only" T1 service provides a more robust and higher bandwidth
data offering that routes Internet traffic directly to the Internet backbone.
Customers receiving this service will not receive any voice lines, but likewise
there will be no voice lines to limit bandwidth. Even though no voice lines come
with the package, the same customer premise device is used in order to maintain
a consistency of equipment in our network.
The "trunk" service provides up to 24 channels over a single T1 for
carrying voice or data traffic to and from the customers Private Branch Exchange
("PBX") or Key System. With our trunk service, the customer provides the
equipment at their premise. Our T1 trunk services offer various features with
five different pathing options including DID (Direct Inward Dialing).
CUSTOMER PREMISE EQUIPMENT ("CPE")
We use two basic types of equipment at the customer premise. One is
called a "modem" and the other an Integrated Access Device ("IAD"). A modem is
used for an SDSL data-only connection. Here, no voice ports are needed and
therefore the modem is adequate to support the SDSL connection. The modem
communicates with our collocation by way of a DSL link and the customer's
network by way of an Ethernet link. The IAD is used for SDSL integrated access,
T1 integrated access and T1 Data Only. Within our network on the Wide Area
Network ("WAN"), the IAD has a built-in modem which communicates with the SDSL
and/or T1 link. From the customers' perspective, the IAD appears as regular
phone service for the voice channels, and an Ethernet port for data traffic. An
IAD is also used for the Data-Only T1 service to reduce the number of devices
used at the customer premise.
INTERCONNECTION AGREEMENTS AND COMPETITIVE CARRIER CERTIFICATIONS
In the ordinary course of business, we have negotiated interconnection
agreements with SBC Corp. (with its California and Illinois subsidiaries),
Sprint Nevada and Verizon California. We will be negotiating new agreements as
these current agreements expire during 2004. These agreements specify the terms
and conditions under which we lease unbundled network elements ("UNEs")
including type of UNE, price, delivery schedule, and maintenance and service
levels. The term of these agreements is generally two years. The agreements
provide for continued enforceability while the parties negotiate and, if
necessary, arbitrate the terms and conditions of a new agreement.
We possess certificates of public convenience and necessity in each of
our markets. This certifies that we are approved to provide telephone service as
both a local telephone company and long distance carrier in all of our existing
markets.
GOVERNMENT REGULATIONS
OVERVIEW
Our services are regulated at the federal, state and local levels. The
FCC exercises jurisdiction over all facilities of, and services offered by,
communications common carriers like us, when those facilities are used in
connection with interstate or international communications. State regulatory
commissions have some jurisdiction over most of the same facilities and services
when they are used in connection with communications within the state. In recent
years, there has been a dramatic change in the regulation of telephone services
at both federal and state levels as both legislative and regulatory bodies seek
to enhance competition in both the local exchange and interexchange service
markets. These efforts are ongoing and many of the legislative measures and
regulations adopted are subject to judicial review. We cannot predict the impact
on us of the results of these ongoing legislative and regulatory efforts or the
outcome of any judicial review.
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FEDERAL REGULATION
The FCC regulates interstate and international communications services,
including access to local telephone facilities to place and receive interstate
and international calls. We provide these services as a common carrier. The FCC
imposes more regulation on common carriers that have some degree of market
power, such as incumbent local exchange carriers. The FCC imposes less
regulation on common carriers without market power, including competitive
carriers like us. The FCC grants automatic authority to carriers to provide
interstate long distance service, but requires common carriers to receive an
authorization to construct and operate communications facilities, and to provide
or resell communications services, between the United States and international
points.
The FCC has required competitive carriers like us to cancel their
tariffs for domestic interstate and international long distance services, which
were schedules listing the rates, terms and conditions of all these services
offered. Even without tariff filing, however, carriers offering interstate and
international services must charge just and reasonable rates and must not
discriminate among customers for like services. The FCC may adjudicate
complaints against carriers alleging violations of these requirements.
Our charges for interstate access services, which includes the use of
our local facilities by other carriers to originate and terminate interstate
calls, remain governed by tariffs. In April 2001, the FCC adopted new rules that
limit our rates for these services. Under these rules, which took effect on June
20, 2001, competitive carriers were required to reduce their switched access
charges to rates no higher than 2.5 cents per minute. After one year (effective
June 2002), the rate ceiling was reduced to 1.8 cents and after two years
(effective June 2003) to 1.2 cents per minute. After three years (effective June
2004), all competitive carriers will be required to charge rates no higher than
the incumbent telephone company, currently in the range of 0.7 to 1.0 cents per
minute.
The FCC imposes numerous other regulations on carriers subject to its
jurisdiction, some of the most important of which are discussed below. The FCC
also hears complaints against carriers filed by customers or other carriers and
levies various charges and fees.
Except for certain restrictions placed on the Bell operating companies,
the Telecommunications Act permits virtually any entity, including cable
television companies and electric and gas utilities, to enter any communications
market. The Telecommunications Act takes precedence over inconsistent state
regulation. However, entities that enter communications markets must follow
state regulations relating to safety, quality, consumer protection and other
matters. Implementation of the Telecommunications Act continues to be affected
by numerous federal and state policy rulemaking proceedings and review by
courts. We are uncertain as to how our business may be affected by these
proceedings.
The Telecommunications Act is intended to promote competition. The
Telecommunications Act opens the local services market to competition by
requiring incumbent carriers to permit interconnection to their networks and by
establishing incumbent carrier and competitive carrier obligations with respect
to:
Reciprocal Compensation. All incumbent carriers and
competitive carriers are currently required to complete local calls
originated by each other under reciprocal arrangements at prices based
on tariffs or negotiated prices.
Resale. All incumbent carriers and competitive carriers are
required to permit resale of their communications services without
unreasonable restrictions or conditions. In addition, incumbent
carriers are required to offer wholesale versions of all retail
services to other common carriers for resale at discounted rates, based
on the costs avoided by the incumbent carrier by offering these
services on a wholesale basis.
Interconnection. All incumbent carriers and competitive
carriers are required to permit their competitors to interconnect with
their facilities. All incumbent carriers are required to permit
interconnection at any feasible point within their networks, on
nondiscriminatory terms, at prices based on cost, which may include a
reasonable profit. At the option of the carrier requesting
interconnection, collocation of the requesting carrier's equipment in
the incumbent carriers' premises must be offered.
Unbundled Access. All incumbent carriers are required to
provide access to specified individual components of their networks,
which are sometimes referred to as UNEs, on nondiscriminatory terms and
at prices based on cost, which may include a reasonable profit.
Number Portability. All incumbent carriers and competitive
carriers are required to permit users of communications services to
retain their existing telephone numbers without impairing quality,
reliability or convenience when switching from one common carrier to
another.
Dialing Parity. All incumbent carriers and competitive
carriers are required to provide "1+" equal access dialing to competing
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providers of long distance service, and to provide nondiscriminatory
access to telephone numbers, operator services, directory assistance
and directory listing, with no unreasonable dialing delays.
Access to Rights-of-Way. All incumbent carriers and
competitive carriers are required to permit competing carriers access
to their poles, ducts, conduits and rights-of-way at regulated prices.
Incumbent carriers are required to negotiate in good faith with
carriers requesting any or all of the above arrangements. If the negotiating
carriers cannot reach agreement within a predetermined amount of time, either
carrier may request arbitration of the disputed issues by the state regulatory
commission.
Our business relies to a considerable degree on the use of incumbent
carrier network elements, which we access through collocation arrangements in
incumbent carrier offices. The terms and conditions, including prices, of these
network elements and collocation elements are largely dictated by regulatory
decisions, and changes in the availability or pricing of these facilities can
have significant effects on our business plan and operating results.
The requirement that incumbent carriers unbundle their network elements
has been implemented through rules adopted by the FCC. In January 1999, the
United States Supreme Court confirmed the FCC's broad authority to issue these
rules, but vacated a particular rule that defined the network elements the
incumbent carriers must offer. In a November 1999 order, the FCC reaffirmed that
incumbent carriers must provide unbundled access to a minimum of six network
elements including local loop and transport facilities (the elements in primary
use by us). In December 2001, the FCC initiated a review of the network element
unbundling rules, and requested comments on whether to expand, reduce or change
the list of required elements.
In August 2003, the FCC released its Triennial Review Order in
connection with the FCC's review of UNEs. The incumbent carriers are required to
sell to competitive carriers such as us at forward-looking or Total Element Long
Run Incremental Cost ("TELRIC") rates, which reflect efficient costs plus a
reasonable profit. Competitive carriers such as us may depend upon the ability
to obtain access to these UNEs in order to provision services to their
customers. The FCC ordered that it would de-regulate access to the incumbent
carriers' fiber/broadband network but would continue to require that incumbents
provide access to their copper network and to digital signal level 1 ("DS-1")
and digital signal level 3 ("DS-3") loops and transport. We primarily buy access
to the incumbents' copper network and to DS-1s/T-1s. Although the FCC found that
competitive carriers are impaired without access to UNE loops and transport, the
FCC provided state commissions with an analytical framework to determine
impairment on a local basis.
On March 2, 2004, the U.S. Court of Appeals for the District of
Columbia Circuit issued its opinion in United States Telecom Associations v.
FCC, No. 00-1012 ("USTA Decision") affirming the de-regulation of access to the
incumbent carriers' broadband networks and vacating the FCC rules delegating
authority to the states. The USTA Decision is stayed until May 1, 2004. The FCC
has sought a stay and review by the U.S. Supreme Court. If the USTA Decision
does go into effect, our ability to obtain access to certain UNEs may become
more costly. Regardless of the outcome, we expect to be able to continue to
purchase some network elements from competitive carriers at market rates (e.g.,
such as transport which is used to connect parts of our network). At present, it
is not possible to predict how future rates will compare to the current TELRIC
rates but it is possible that further changes to the rules could adversely
affect our cost of doing business by increasing the cost of purchasing or
leasing network facilities.
The FCC's Triennial Review Order and the District of Columbia Circuit
Court's appellate review of the Triennial Review Order have little negative
impact upon us. The appellate decision affected the availability of certain UNEs
(e.g. switching) upon which we do not rely. Since our traffic runs on switches
and wire center equipment we own, we do not rely on ILEC switching to provide
service to our customers. Nevertheless, the de-regulation of access to the
incumbent carriers' broadband networks and vacation of the FCC rules delegating
authority to the states may have a significant impact on telecommunications
competition in the future. It is not possible to predict the extent of its
impact on us.
Also, in February 2002, the FCC requested comments on a number of
issues relating to regulation of broadband Internet access services offered over
telephone company facilities, including whether the incumbent carriers should
continue to be required to offer the elements of these services on an unbundled
basis. Any change in the existing rules that would reduce the obligation of
incumbent carriers to offer network elements to us on an unbundled basis could
adversely affect our business plan.
In May 2002, the prices that incumbent carriers may charge for access
to these network elements was determined by the Supreme Court, which affirmed
that incumbent carriers are required to price these network elements based on
the efficient replacement cost of existing technology, as the FCC methodology
now requires, rather than on their historical costs. The Court also determined
that the FCC may require incumbent carriers to combine certain previously
uncombined elements at the request of a competitive carrier.
In November 2001, the FCC initiated two rulemaking proceedings to
establish a core set of national performance measurements
15
and standards for evaluating an incumbent carrier's performance in provisioning
wholesale facilities and services to competitors. It sought comment on a set of
specific performance measurements and on related issues of implementation,
reporting requirements, and enforcement mechanisms. We cannot predict the
ultimate outcome of these proceedings and it is not clear when, or if, the FCC
will complete this proceeding.
In December 2001, the FCC initiated a review of the current regulatory
requirements for incumbent carriers' broadband telecommunications services.
Incumbent carriers are generally treated as dominant carriers, and hence are
subject to certain regulatory requirements, such as tariff filings and pricing
requirements. In this proceeding, the FCC seeks to determine what regulatory
safeguards and carrier obligations, if any, should apply when a carrier that is
dominant in the provision of traditional local exchange and exchange access
services provides broadband service. A decision by the FCC to exempt the
incumbent carriers' broadband services from traditional regulation could have a
significant adverse competitive impact. However, it is not clear when, or if,
the FCC will complete this proceeding.
The Telecommunications Act also contains special provisions that
replace prior antitrust restrictions that prohibited the regional Bell operating
companies from providing long distance services and engaging in communications
equipment manufacturing. Before the passage of the Telecommunications Act, the
regional Bell operating companies were restricted to providing services within a
distinct geographical area known as a local access and transport area ("LATA").
The Telecommunications Act permits the regional Bell operating companies to
provide interLATA long distance service immediately in areas outside of their
market regions and within their market regions once they have satisfied several
procedural and substantive requirements, including:
- a showing that the regional Bell operating company is subject
to meaningful local competition in the area in which it seeks
to offer long distance service; and
- a determination by the FCC that the regional Bell operating
company's entry into long distance markets is in the public
interest.
Verizon and SBC have obtained authority to provide interLATA long
distance services in substantially all of their operating areas and are
authorized to compete throughout their operating areas with packages of bundled
services, or "one stop shopping." With the completion of this process,
incentives for incumbent carriers to improve service to competitive carriers
like us in order to obtain interLATA long distance authority will be virtually
eliminated while at the same time, the regional Bell operating companies will be
in a position to become more efficient and attractive competitors.
After the passage of the Telecommunications Act of 1996, the FCC
adopted its current pricing rules based on TELRIC of a UNE. In September 2003,
the FCC initiated a review of these rules applicable to the pricing of UNEs. The
FCC review will determine whether the rules foster competition and investment.
We cannot predict the outcome of this review.
In several orders adopted in recent years, the FCC has made major
changes in the structure of the access charges incumbent carriers impose for the
use of their facilities to originate or complete interstate and international
calls. Under the FCC's plan, per-minute access charges have been significantly
reduced, and replaced in part with higher monthly fees to end-users and in part
with a new interstate universal service support system. Under this plan, the
largest incumbent carriers are required to reduce their average access charge to
$0.0055 per minute over a period of time, and some of these carriers have
already reduced their charges to the target level.
In August 1999, the FCC adopted an order providing additional pricing
flexibility to incumbent carriers subject to price cap regulation in their
provision of interstate access services, particularly special access and
dedicated transport. The FCC eliminated rate scrutiny for "new services" and
permitted incumbent carriers to establish additional geographic zones within a
market that would have separate rates. Additional and more substantial pricing
flexibility will be given to incumbent carriers as specified levels of
competition in a market are reached through the collocation of competitive
carriers and their use of competitive transport. This flexibility includes,
among other items, customer specific pricing, volume and term discounts for some
services and streamlined tariffing.
In May 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy program. This order established new
subsidies for telecommunications and information services provided to qualifying
schools, libraries and rural health providers. The FCC also expanded federal
subsidies for local dial-tone services provided to low-income consumers.
Providers of interstate telecommunications service, including us, must
contribute to these subsidies. Subsequently, the FCC created additional
subsidies that primarily benefit incumbent telephone companies. On a quarterly
basis, the FCC announces the contribution factor proposed for the next quarter.
For the first quarter of the year 2004, the contribution factor is $0.087 of a
provider's interstate and international revenue for the third quarter of 2003.
We intend to recover our share of these costs through charges assessed directly
to our customers and participation in federally subsidized programs. The FCC is
considering proposals to change the way contributions are assessed, but we
cannot predict when or whether the FCC will act on these proposals.
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STATE REGULATION
To provide services within a state, we generally must obtain a
certificate of public convenience and necessity from the state regulatory agency
and comply with state requirements for telecommunications utilities, including
state tariffing requirements. We have satisfied state requirements to provide
local and intrastate long distance services in the states in which we currently
operate.
State regulatory agencies have jurisdiction over our intrastate
services, including our rates. State agencies require us to file periodic
reports, pay various fees and assessments and comply with rules governing
quality of service, consumer protection and similar issues. These agencies may
also have to approve the transfer of assets or customers located in the state, a
change of control of our company or our issuance of securities or assumption of
debt. The specific requirements vary from state to state. State regulatory
agencies also must approve our interconnection agreements with incumbent
carriers. Price cap or rate of return regulation for competitive carriers does
not apply in any of our current markets. However, we cannot assure you that the
imposition of new regulatory burdens in a particular state will not affect the
profitability of our services in that state.
The FCC Triennial Review Order provides for state regulatory agencies
to determine whether competitive carriers would be impaired if certain unbundled
network elements - switching, transport, local loops - should be removed from
the list of UNEs that incumbent carriers must provide. Since we utilize our own
switches, if one or more state commissions find that CLEC's are not impaired
without the switching UNE, such a finding would not adversely impact us. The
Triennial Review Order concluded that competitive carriers would be impaired
without loops and transport UNEs. Regulatory dockets have been initiated in all
states in the last quarter of 2003 to determine the impairment/nonimpairment
issue on a local basis. A finding of non-impairment by state regulatory agencies
with respect to loops and transport UNEs could have a significant adverse
negative impact on our business. However, the District of Columbia Court of
Appeals decision vacated the FCC rules delegating authority to the states to
determine the impairment/nonimpairment issue. The decision is stayed until May
1, 2004. The FCC is seeking a further stay and review by the U.S. Supreme Court.
The final outcome of the appellate process is unknown at this time but it is
possible that further changes to the rules could adversely affect our cost of
doing business by increasing the cost of purchasing or leasing network
facilities from the incumbent carriers.
LOCAL REGULATION
Our networks must comply with numerous local regulations such as
building codes, municipal franchise requirements and licensing. These
regulations vary on a city by city and county by county basis. In some of the
areas where we provide service, we may have to comply with municipal franchise
requirements and may be required to pay license or franchise fees based on a
percentage of gross revenue or other factors. Municipalities that do not
currently impose fees may seek to impose fees in the future. We cannot assure
you that fees will remain at their current levels following the expiration of
existing franchises.
COMPETITION
The communications industry is highly competitive. We believe the
principal competitive factors affecting our business will be:
- pricing levels and policies
- transmission speed
- customer service
- breadth of service availability
- network security
- ease of access and use
- bundled service offerings
- brand recognition
- operating experience
17
- capital availability
- exclusive contracts
- accurate billing
- variety of services.
To maintain our competitive posture, we believe we must be in a
position to reduce our prices to meet any reductions in rates by our
competitors. Any reductions could adversely affect us. Many of our current and
potential competitors have financial, personnel and other resources, including
brand name recognition, substantially greater than ours, as well as other
competitive advantages over us. In addition, competitive alternatives may result
in substantial customer turnover in the future. Many providers of communications
and networking services experience high rates of customer turnover.
A continuing trend toward consolidation of communications companies and
the formation of strategic alliances within the communications industry, as well
as the development of new technologies, could give rise to significant new
competitors which could put us at a competitive disadvantage.
LOCAL DIAL-TONE SERVICES
Incumbent Carriers
In each of the markets we target, we will compete principally with the
incumbent carrier serving that area. We have not achieved and do not expect to
achieve a significant market share for any of our services. The incumbent
carriers have long-standing relationships with their customers, have financial,
technical and marketing resources substantially greater than ours and have the
potential to subsidize competitive services with revenues from a variety of
businesses.
Incumbent carriers also have long-standing relationships with
regulatory authorities at the federal and state levels. While regulatory
initiatives which allow competitive carriers to interconnect with incumbent
carrier facilities provide increased business opportunities for us,
interconnection opportunities have been and likely will continue to be
accompanied by increased pricing flexibility for, and relaxation of regulatory
oversight of, the incumbent carriers. If the incumbent carriers are allowed by
regulators to offer discounts to large customers through contract tariffs,
engage in aggressive volume and term discount pricing practices for their
customers, and/or seek to charge competitors excessive fees for interconnection
to their networks, our operating margins could be materially adversely affected.
Future regulatory decisions that give the incumbent carriers increased pricing
flexibility or other regulatory relief could have a material adverse effect on
us.
Competitive Carriers/Long Distance Carriers/Other Market Entrants
We face, and expect to continue to face, competition from long distance
carriers, including AT&T, MCI, and Sprint, seeking to enter, reenter or expand
entry into the local exchange market. We also compete with other competitive
carriers, resellers of local dial-tone services, cable television companies,
electric utilities, microwave carriers and wireless telephone system operators.
The Telecommunications Act includes provisions that impose regulatory
requirements on all incumbent carriers and competitive carriers but grants the
FCC expanded authority to reduce the level of regulation applicable to these
common carriers. The manner in which these provisions of the Telecommunications
Act are implemented and enforced could have a material adverse effect on our
ability to successfully compete against incumbent carriers and other
communications service providers.
The Telecommunications Act radically altered the market opportunity for
competitive carriers. Many existing competitive carriers that entered the market
before 1996 had to build a fiber infrastructure before offering services. With
the Telecommunications Act requiring unbundling of the incumbent carrier
networks, competitive carriers are now able to enter the market more rapidly by
installing switches and leasing standard telephone lines and cable or by means
of a type of resale known as an UNE-P.
A number of competitive carriers have entered or announced their
intention to enter one or more of our markets. We believe that not all
competitive carriers, however, are pursuing the same target customers we pursue.
We intend to keep our prices at competitive levels while seeking to provide, in
our opinion, a higher level of service and responsiveness to our customers.
Innovative packaging and pricing of basic telephone services are expected to
provide competitive differentiation for us in each of our markets.
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LONG DISTANCE SERVICES
The long distance services industry is very competitive and many long
distance providers experience a high average turnover rate as customers
frequently change long distance providers in response to offerings of lower
rates or promotional incentives by competitors. Prices in the long distance
market have declined significantly in recent years. We expect to face increasing
competition from companies offering long distance data and voice services over
the Internet. Companies offering these services over the Internet could enjoy a
significant cost advantage because they do not currently pay common carrier
access charges or universal service fees.
DATA AND INTERNET SERVICES
We expect the level of competition with respect to data and Internet
services to intensify in the future. We expect significant competition from:
- Incumbent Carriers. Incumbent carriers sell commercial DSL
services. Some incumbent carriers have announced they intend
to aggressively market these services to their residential
customers at attractive prices. In addition, most incumbent
carriers are combining their DSL service with their own
Internet service provider businesses. The incumbent carriers
have an established brand name in their service areas, possess
sufficient capital to deploy DSL services rapidly and are in a
position to offer service from central offices where we may be
unable to secure collocation space.
- Traditional Long Distance Carriers. Many of the leading
traditional long distance carriers, including AT&T, MCI and
Sprint, have expanded their capabilities to support
high-speed, end-to-end networking services. These carriers
have extensive fiber networks in many metropolitan areas that
primarily provide high-speed data and voice services to large
companies. They could deploy DSL services in combination with
their current fiber networks. They also have interconnection
agreements with many incumbent carriers and have secured
collocation space from which they could begin to offer
competitive DSL services.
- Newer Long Distance Carriers. Numerous long distance carriers
are managing high-speed networks nationwide, with direct sales
forces, and are partnering with Internet service providers to
offer services directly to business customers. They could
extend their existing networks either alone or in partnership
with others.
- Cable Modem Service Providers. Cable television operators such
as Cox Communications are offering, or are preparing to offer,
high-speed Internet access over cable networks to consumers
and businesses. These networks provide high-speed data
services similar to our services, and in some cases at higher
speeds. These companies use a variety of new and emerging
technologies, including point-to-point and point-to-multipoint
wireless services, satellite-based networking and high-speed
wireless digital communications.
- Internet Service Providers. Internet service providers offer
Internet portal services which compete with our service. We
offer basic web hosting and e-mail services and anticipate
offering an enhanced set of Internet product and service
offerings in the future. The competitive Internet service
providers generally provide more features and functions than
our current Internet portal.
PERSONNEL
As of March 2004, we had approximately 730 employees, a 54% decrease
from the approximate 1,560 employees at December 31, 2002. None of our employees
are represented by a collective bargaining agreement.
RISK FACTORS
Before you invest in shares of our securities, you should be aware of
various risks, including the risks described below. Our business, financial
condition or results of operations could be materially adversely affected by any
of these risks. The risks and uncertainties described below or elsewhere in this
report are not the only ones facing us. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also adversely
affect our business and operations. If any of the matters included in the
following risks were to occur, our business, financial condition, results of
operations, cash flows or prospects could be materially adversely affected. In
such case, you could lose all or part of your investment.
OUR LOSSES AND NEGATIVE CASH FLOWS WILL CONTINUE IF WE ARE UNABLE TO REVERSE OUR
HISTORY OF LOSSES.
We have incurred substantial net losses and negative cash flow in each
year of our existence. We will need to improve our
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operating results to achieve and sustain profitability and to generate
sufficient positive cash flow from operations to meet our planned capital
expenditures, working capital and any future debt service requirements. We have
contractual commitments for approximately $25.1 million of payments during 2004
and plan to make approximately $11.0 million of capital expenditures during the
year. If the revenues generated from our operations are not sufficient to cover
these commitments and other operating expenses, we will need to rely on our cash
balances, credit facility or other financing. Under any of these circumstances,
our financial condition will be weakened.
MARKET CONDITIONS AND OUR PAST PERFORMANCE RESULTED IN OUR BANKRUPTCY
REORGANIZATION IN 2002.
We filed for bankruptcy protection in April 2002 and completed our
bankruptcy reorganization in July 2002. Although we eliminated substantially all
of our substantial debt burden in the reorganization, are now long-term debt
free and have improved our operating performance, we still face many of the same
hurdles that existed prior to the bankruptcy and that resulted in the failure of
a number of companies in our industry. In particular, we still have to compete
with well-entrenched, monopolistic telephone companies such as Verizon and SBC,
and we must still look to these aggressive competitors to supply us with access
to their facilities in order for us to serve our own customers.
THE REORGANIZATION OF OUR SALES FORCE MAY ADVERSELY AFFECT OUR OPERATING
RESULTS.
The reorganization of our sales force has created a sales channel that
focuses on large customers. These customers have more complex decision processes
and more cautious approaches towards decision-making, resulting in a longer
sales cycle for us. As a result of this reorganization of our sales force, there
may be periods of time when the sales force is not at its optimal headcount,
which may result in fewer sales and adversely affect our operating results. In
addition, until a greater number of our sales personnel have been fully trained,
there may be a delay in our achieving the desired effectiveness from our sales
force, again adversely affecting our operating results.
IF WE ARE NOT ABLE TO OBTAIN ADDITIONAL FUNDS WHEN NEEDED, OUR ABILITY TO GROW
OUR BUSINESS AND OUR COMPETITIVE POSITION IN OUR MARKETS WILL BE JEOPARDIZED.
If we cannot generate or otherwise obtain sufficient funds, if needed,
we may not be able to grow our business or devote the funds to marketing, new
technologies and working capital necessary to compete effectively in the
communications industry. We expect to fund any capital requirements through
existing resources, internally generated funds and debt or equity financing, if
needed. We may not be able to raise sufficient debt or equity financing, if and
when needed, on acceptable terms or at all. This could result in stagnant or
declining revenues and hence, additional losses.
FLUCTUATING OPERATING RESULTS MAY NEGATIVELY AFFECT OUR STOCK PRICE.
Our annual and quarterly operating results may fluctuate as a result of
numerous factors, many of which are outside of our control. These factors
include:
- delays in the generation of revenue because certain network
elements have lead times that are controlled by incumbent
carriers and other third parties
- the ability to develop and commercialize new services by us or
our competitors
- the ability to deploy on a timely basis our services to
adequately satisfy customer demand
- our ability to successfully operate and maintain our networks
- the rate at which customers subscribe to our services
- decreases in the prices for our services due to competition,
volume-based pricing and other factors
- the development and operation of our billing and collection
systems and other operational systems and processes
- the rendering of accurate and verifiable bills from the
incumbent local exchange carriers ("ILECs") from whom we lease
transport and resolution of billing disputes
- the incorporation of enhancements, upgrades and new software
and hardware products into our network and operational
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processes that may cause unanticipated disruptions
- the interpretation and enforcement of regulatory developments
and court rulings concerning the 1996 Telecommunications Act,
interconnection agreements and the antitrust laws.
If our operating results fluctuate so as to cause us to miss earnings
expectations, our stock price may be adversely affected.
THE LOSS OF SENIOR MEMBERS OF OUR MANAGEMENT TEAM MAY ADVERSELY AFFECT OUR
OPERATING RESULTS.
Our business is managed by a small number of senior management
personnel, the loss of some of whom could impair our ability to carry out our
business plan. We believe our future success will depend in large part on our
ability to attract and retain highly skilled and qualified personnel. If one or
more senior members of our management team leaves us, it may be difficult to
find suitable replacements. The loss of senior management personnel may
adversely affect our operating results as we incur costs to replace the departed
personnel and potentially lose opportunities in the transition of important job
functions. We do not maintain key man insurance on any of our officers.
IF OUR EQUIPMENT DOES NOT PERFORM AS WE EXPECT, IT COULD DELAY OUR INTRODUCTION
OF NEW SERVICES RESULTING IN THE LOSS OF EXISTING OR PROSPECTIVE CUSTOMERS.
In implementing our strategy, we may use new or existing technologies
to offer additional services. We also plan to use equipment manufactured by
multiple vendors to offer our current services and future services in each of
our markets. If we cannot successfully install and integrate the technology and
equipment necessary to deliver our current services and any future services
within the time frame and with the cost effectiveness we currently contemplate,
we could be forced to delay or abandon the introduction of new services. This
could adversely affect our ability to attract and retain customers, resulting in
a reduction of expected revenues.
THE FAILURE OF OUR OPERATIONS SUPPORT SYSTEM TO PERFORM AS WE EXPECT COULD
IMPAIR OUR ABILITY TO RETAIN CUSTOMERS AND OBTAIN NEW CUSTOMERS OR COULD RESULT
IN INCREASED CAPITAL EXPENDITURES.
Our operations support system is expected to be an important factor in
our success. If our operations support system fails or is unable to perform, we
could suffer customer dissatisfaction, loss of business or the inability to add
customers on a timely basis, any of which would adversely affect our business,
financial condition and results of operations. Furthermore, problems may arise
with higher processing volumes or with additional automation features, which
could potentially result in system breakdowns and delays and additional,
unanticipated expense to remedy the defect or to replace the defective system
with an alternative system.
OUR FAILURE TO MANAGE GROWTH COULD RESULT IN INCREASED COSTS.
We may be unable to manage our growth effectively. This could result in
increased costs and delay our introduction of additional services resulting in a
reduction of expected revenues. The development of our business will depend on,
among other things, our ability to achieve the following goals in a timely
manner, at reasonable costs and on satisfactory terms and conditions:
- purchase, install and operate equipment
- negotiate suitable interconnection agreements with, and
arrangements for installing our equipment at the central
offices of, ILECs on satisfactory terms and conditions
- hire and retain qualified personnel
- lease suitable access to transport networks
- obtain required government authorizations.
Any significant growth will place a strain on our operational, human
and financial resources and will also increase our operating complexity as well
as the level of responsibility for both existing and new management personnel.
Our ability to manage our growth effectively will depend on the continued
development of plans, systems and controls for our operational, financial and
management needs and on our ability to expand, train and manage our employee
base.
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OUR SERVICES MAY NOT ACHIEVE SUFFICIENT MARKET ACCEPTANCE TO ALLOW US TO BECOME
PROFITABLE.
To be successful, we must develop and market services that are widely
accepted by businesses at profitable prices. Our success will depend upon the
willingness of our target customers to accept us as an alternative provider of
local, long distance, high-speed data and Internet services. Although we are in
the process of rolling out additional products and services, we might not be
able to provide the range of communication services our target business
customers need or desire. A failure to develop acceptable product and service
offerings will adversely affect our revenues and ability to achieve
profitability.
OUR FAILURE TO ACHIEVE OR SUSTAIN MARKET ACCEPTANCE AT DESIRED PRICING LEVELS
COULD IMPAIR OUR ABILITY TO ACHIEVE PROFITABILITY OR POSITIVE CASH FLOW.
Prices for data communication services have fallen historically, a
trend which may continue. Accordingly, we cannot predict to what extent we may
need to reduce our prices to remain competitive or whether we will be able to
sustain future pricing levels as our competitors introduce competing services or
similar services at lower prices. Our ability to meet price competition may
depend on our ability to operate at costs equal to or lower than our competitors
or potential competitors. There is a risk that competitors, perceiving us to
lack capital resources, may undercut our rates, increase their services or take
other actions that could be detrimental to us. Lower prices will negatively
affect our ability to achieve and sustain profitability.
IF WE ARE UNABLE TO NEGOTIATE AND ENFORCE FAVORABLE INTERCONNECTION AGREEMENTS,
WE MAY INCUR HIGHER COSTS THAT WOULD IMPAIR OUR ABILITY TO OPERATE PROFITABLY IN
OUR EXISTING MARKETS.
We must renew interconnection agreements currently in place with SBC
Corp. (with its California and Illinois subsidiaries), Sprint Nevada and Verizon
California as these current agreements expire during 2004. Upon renewal of our
interconnection agreements with other companies, including ILECs, in the markets
in which we operate, the rates charged to us under the interconnection
agreements might be increased. The increased prices might impair our ability to
price our services in a way to attract a sufficient number of customers and to
achieve profitability. We may be able to contest price increases on regulatory
grounds, but we may not be successful with any challenges and we could incur
significant costs seeking the regulatory review.
DELAYS BY THE ILECS IN CONNECTING OUR CUSTOMERS TO OUR NETWORK COULD RESULT IN
CUSTOMER DISSATISFACTION AND LOSS OF BUSINESS.
We rely on the timeliness of ILECs and other competitive carriers in
processing our orders for customers switching to our service and in maintaining
the customers' standard telephone lines to assure uninterrupted service.
Therefore, the ILECs might not be able to provide and maintain leased standard
telephone lines in a prompt and efficient manner as the number of standard
telephone lines requested by competitive carriers increases. This may result in
customer dissatisfaction and the loss of new business
OUR RELIANCE ON A LIMITED NUMBER OF EQUIPMENT SUPPLIERS COULD RESULT IN
ADDITIONAL EXPENSES AND LOSS OF REVENUES.
We currently rely and expect to continue to rely on a limited number of
third party suppliers to manufacture the equipment we require. If our suppliers
enter into competition with us, or if our competitors enter into exclusive or
restrictive arrangements with our suppliers it may materially and adversely
affect the availability and pricing of the equipment we purchase. Our reliance
on third-party vendors involves a number of additional risks, including the
absence of guaranteed supply and reduced control over delivery schedules,
quality assurance, production yields and costs.
Our vendors may not be able to meet our needs in a satisfactory and
timely manner in the future and we may not be able to obtain alternative vendors
when and if needed. It could take a significant period of time to establish
relationships with alternative suppliers for critical technologies and to
introduce substitute technologies into our network. In addition, if we change
vendors, we may need to replace all or a portion of the equipment deployed
within our network at significant expense in terms of equipment costs and loss
of revenues in the interim.
IF WE ARE NOT ABLE TO COMPETE SUCCESSFULLY IN THE HIGHLY COMPETITIVE
TELECOMMUNICATIONS INDUSTRY WITH COMPETITORS THAT HAVE GREATER RESOURCES THAN WE
DO, OUR REVENUES AND OPERATING RESULTS WILL BE NEGATIVELY AFFECTED.
Our success depends upon our ability to compete with other
telecommunications providers in each of our markets, many of which have
substantially greater financial, marketing and other resources than we have. In
addition, competitive alternatives may result in substantial customer turnover
in the future. A growing trend towards consolidation of communications companies
and the formation of strategic alliances within the communications industry, as
well as the development of new technologies, could give rise to significant new
competitors. If we cannot compete successfully, our revenues and operating
results will suffer.
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IF WE ARE NOT ABLE TO OBTAIN OR IMPLEMENT NEW TECHNOLOGIES, WE MAY LOSE BUSINESS
AND LIMIT OUR ABILITY TO ATTRACT NEW CUSTOMERS.
We may be unable to obtain access to new technology on acceptable terms
or at all. We may be unable to adapt to new technologies and offer services in a
competitive manner. If these events occur, we may lose customers to competitors
offering more advanced services and our ability to attract new customers would
be hindered. This will adversely affect our revenues and operating results.
Rapid and significant changes in technology are expected in the communications
industry. We cannot predict the effect of technological changes on our business.
Our future success will depend, in part, on our ability to anticipate and adapt
to technological changes, evolving industry standards and changing needs of our
current and prospective customers.
A SYSTEM FAILURE OR BREACH OF NETWORK SECURITY COULD CAUSE DELAYS OR
INTERRUPTIONS OF SERVICE TO OUR CUSTOMERS AND RESULT IN CUSTOMER DISSATISFACTION
AND LOSS OF BUSINESS.
Interruptions in service, capacity limitations or security breaches
could have a negative effect on customer acceptance and, therefore, on our
ability to retain existing customers and attract new customers. The loss of
existing or prospective customers would have a negative effect on our business,
financial condition and results of operations. Our networks may be affected by
physical damage, power loss, capacity limitations, software defects, breaches of
security by computer viruses, break-ins or otherwise and other factors which may
cause interruptions in service or reduced capacity for our customers.
IF WE ARE UNABLE TO EFFECTIVELY DELIVER OUR SERVICES TO A SUBSTANTIAL NUMBER OF
CUSTOMERS, WE MAY NOT ACHIEVE OUR REVENUE GOALS.
Our network may not be able to connect and manage a substantial number
of customers at high transmission speeds. If we cannot achieve and maintain
digital transmission speeds that are otherwise available in a particular market,
we may lose customers to competitors with higher transmission speeds and we may
not be able to attract new customers. The loss of existing or prospective
customers would have a negative effect on our business, financial condition and
results of operations. While digital transmission speeds of up to 1.5 Mbps are
possible on portions of our network, that speed may not be available over a
majority of our network. Actual transmission speeds on our network will depend
on a variety of factors many of which are beyond our control, including the
distance an end user is located from a central office, the quality of the
telephone lines, the presence of interfering transmissions on nearby lines and
other factors.
WE MAY LOSE CUSTOMERS OR POTENTIAL CUSTOMERS BECAUSE THE TELEPHONE LINES WE
REQUIRE MAY BE UNAVAILABLE OR IN POOR CONDITION.
Our ability to provide some of our services to potential customers
depends on the quality, physical condition, availability and maintenance of
telephone lines within the control of the ILECs. If the telephone lines are not
adequate, we may not be able to provide certain services to many of our target
customers. In addition, the ILECs may not maintain the telephone lines in a
condition that will allow us to implement certain services effectively or may
claim they are not of sufficient quality to allow us to fully implement or
operate certain services. Under these circumstances, we will likely suffer
customer dissatisfaction and the loss of existing and prospective customers.
INTERFERENCE OR CLAIMS OF INTERFERENCE COULD RESULT IN CUSTOMER DISSATISFACTION
AND LOSS OF CUSTOMERS.
Interference, or claims of interference by the ILECs, if widespread,
could adversely affect our speed of deployment, reputation, brand image, service
quality and customer satisfaction and retention. Technologies deployed on copper
telephone lines, such as DSL, have the potential to interfere with other
technologies on the copper telephone lines. Interference could degrade the
performance of our services or make us unable to provide service on selected
lines and the customers served by those lines. Although we believe our DSL
technologies, like other technologies, do not interfere with existing voice
services, ILECs may claim the potential for interference permits them to
restrict or delay our deployment of DSL services. The procedures to resolve
interference issues between competitive carriers and ILECs are still being
developed. We may be unable to successfully resolve interference issues with
ILECs on a timely basis. These problems will likely result in customer
dissatisfaction and the loss of existing and prospective customers.
OUR FUTURE REVENUES AND SUCCESS WILL DEPEND ON GROWTH IN THE DEMAND FOR INTERNET
ACCESS AND HIGH-SPEED DATA SERVICES.
If the markets for the services we offer, including Internet access and
high-speed data services, fail to develop, grow more slowly than anticipated or
become saturated with competitors, we may not be able to achieve our projected
revenues. Demand for Internet services is still uncertain and depends on a
number of factors, including the growth in consumer and business use of new
interactive technologies, the development of technologies that facilitate
interactive communication between organizations and targeted audiences,
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security concerns and increases in data transport capacity.
In addition, the market for high-speed data transmission is relatively
new and evolving. Various providers of high-speed digital services are testing
products from various suppliers for various applications, and no industry
standard has been broadly adopted. Critical issues concerning commercial use of
DSL for Internet and high-speed data access, including security, reliability,
ease of use and cost and quality of service, remain unresolved and may impact
the growth of these services.
THE DESIRABILITY AND MARKETABILITY OF OUR INTERNET SERVICE AND OUR REVENUES MAY
BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO MAINTAIN RECIPROCAL RELATIONSHIPS
WITH OTHER INTERNET SERVICE PROVIDERS.
The Internet is comprised of many Internet service providers and
underlying transport providers who operate their own networks and interconnect
with other Internet service providers at various points. As we continue the
operation of Internet services, connections to the Internet will be provided
through wholesale carriers. We anticipate as our volume increases, we will enter
into reciprocal agreements with other Internet service providers. Other national
Internet service providers may not maintain reciprocal relationships with us. If
we are unable to maintain these relationships, our Internet services may not be
attractive to our target customers, which would impair our ability to retain and
attract customers and negatively affect revenues. In addition, the requirements
associated with maintaining relationships with the major national Internet
service providers may change. We may not be able to expand or adapt our network
infrastructure to meet any new requirements on a timely basis, at a reasonable
cost, or at all.
WE MAY INCUR LIABILITIES AS A RESULT OF OUR INTERNET SERVICE OFFERINGS.
United States law relating to the liability of on-line service
providers and Internet service providers for information carried on,
disseminated through, or hosted on their systems is currently unsettled. If
liability is imposed on Internet service providers, we would likely implement
measures to seek to minimize our liability exposure. These measures could
require us to expend substantial resources or discontinue some of our product or
service offerings. In addition, increased attention to liability issues, as a
result of litigation, legislation or legislative proposals could adversely
affect the growth and use of Internet services. Under these circumstances, our
revenues and operating expenses may be negatively affected.
CHANGES IN LAWS OR REGULATIONS COULD RESTRICT THE WAY WE OPERATE OUR BUSINESS
AND NEGATIVELY AFFECT OUR COSTS AND COMPETITIVE POSITION.
A significant number of the services we offer are regulated at the
federal, state and/or local levels. If these laws and regulations change or if
the administrative implementation of laws develops in an adverse manner, there
could be an adverse impact on our costs and competitive position. In addition,
we may expend significant financial and managerial resources to participate in
administrative proceedings at either the federal or state level, without
achieving a favorable result. We believe incumbent carriers and others may work
aggressively to modify or restrict the operation of many provisions of the
Telecommunications Act. We expect ILECs and others to continue to pursue
litigation in courts, institute administrative proceedings with the FCC and
other state regulatory agencies and lobby the United States Congress, all in an
effort to affect laws and regulations in a manner favorable to them and against
the interest of competitive carriers. Adverse regulatory developments could
negatively affect our operating expenses and our ability to offer services
sought by our existing and prospective customers.
THE PRICES WE CHARGE FOR OUR SERVICES AND PAY FOR THE USE OF SERVICES OF ILECS
AND OTHER COMPETITIVE CARRIERS MAY BE NEGATIVELY AFFECTED IN REGULATORY
PROCEEDINGS, WHICH COULD RESULT IN DECREASED REVENUES, INCREASED COSTS AND LOSS
OF BUSINESS.
If we were required to decrease the prices we charge for our services
or to pay higher prices for services we purchase from ILECs and other
competitive carriers, it would have an adverse effect on our ability to achieve
profitability and offer competitively priced services. We must file tariffs with
state and federal regulators which indicate the prices we charge for our
services. In addition, we purchase some tariffed services from ILECs and/or
competitive carriers. The rates we pay for other services we purchase from ILECs
and other competitive carriers are set by negotiations between the parties. All
of the tariffed prices may be challenged in regulatory proceedings by customers,
including ILECs, competitive carriers and long distance carriers who purchase
these services. Negotiated rates are also subject to regulatory review. During
the pendency of the negotiations, or if the parties cannot agree, the local
carrier must charge the long distance carrier the appropriate benchmark rate
established by regulation. This could have an adverse impact on our expected
revenues and operating results. The prices charged by incumbent carriers for
unbundled network elements, collocations and other services upon which we rely
are subject to periodic review by state regulatory agencies. Change in these
prices may adversely affect our business. For more details about our regulatory
situation, please see "Government Regulations."
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RISK FACTORS RELATED TO OUR COMMON STOCK
THE LACK OF A TRADING MARKET FOR OUR COMMON STOCK COULD ADVERSELY AFFECT OUR
STOCK PRICE.
Our common stock is quoted on the National Association of Securities
Dealers ("NASD") Over-the-Counter Bulletin Board under the symbol "MPOW." As a
result, our stockholders may find it more difficult to buy or sell shares of, or
obtain accurate quotations as to the market value of, our common stock than if
our common stock were listed on a national exchange or quoted on NASDAQ. In
addition, our common stock may be substantially less attractive as collateral
for margin borrowings and loan purposes, for investment by financial
institutions under their internal policies or state legal investment laws, or as
consideration in future capital raising transactions. These factors may
adversely affect the demand for and price of our stock.
OUR STOCK PRICE HAS BEEN VOLATILE HISTORICALLY AND MAY CONTINUE TO BE VOLATILE.
THE PRICE OF OUR STOCK MAY FLUCTUATE SIGNIFICANTLY, WHICH MAY MAKE IT DIFFICULT
FOR HOLDERS TO SELL OUR SHARES OF STOCK WHEN DESIRED OR AT ATTRACTIVE PRICES.
The market price for our stock has been and may continue to be
volatile. We expect our stock price to be subject to fluctuations as a result of
a variety of factors, including factors beyond our control. These factors
include:
- actual or anticipated variations in our operating results or
our competitors' operating results
- announcements of new product and service offerings by us or
our competitors
- changes in the economic performance or market valuations of
communications carriers
- changes in recommendations or earnings estimates by securities
analysts
- announcements of new contracts or customers by us or our
competitors, and timing and announcement of acquisitions by us
or our competitors
- conditions and trends in the telecommunications industry
- adverse rulings in one or more of the regulatory proceedings
affecting us
- conditions in the local markets or regions in which we
operate.
Because of this volatility, we may fail to meet the expectations of our
stockholders or of securities analysts at some time in the future, and the
trading prices of our stock could decline as a result. In addition, the stock
market has experienced significant price and volume fluctuations that have
particularly affected the trading prices of equity securities of many
telecommunication companies, including ours. Our stock price has varied between
$0.16 and $1.81 within the last 12 months, based on end of day stock quotes.
These fluctuations have often been unrelated or disproportionate to the
operating performance of these companies. In addition, any negative change in
the public's perception of competitive local exchange carriers could depress our
stock price regardless of our operating results.
THE VALUE OF OUR COMMON STOCK MAY BE NEGATIVELY AFFECTED BY ADDITIONAL ISSUANCES
OF COMMON STOCK BY US AND GENERAL MARKET FACTORS.
Issues or sales of common stock by us will likely be dilutive to our
existing common stockholders. Future issuances or sales of common stock by us,
or the availability of such common stock for future issue or sale, could have a
negative impact on the price of our common stock prevailing from time to time.
Sales of substantial amounts of our common stock in the public or private
market, a perception in the market that such sales could occur, or the issuance
of securities exercisable or convertible into our common stock could also
adversely affect the prevailing price of our common stock.
THE ATTRACTIVENESS OF OUR STOCK TO POTENTIAL PURCHASERS AND OUR STOCK PRICE MAY
BE NEGATIVELY AFFECTED SINCE PROVISIONS OF OUR CERTIFICATE OF INCORPORATION,
BY-LAWS AND DELAWARE GENERAL CORPORATE LAW MAY HAVE ANTI-TAKEOVER EFFECTS.
Our certificate of incorporation and by-laws contain provisions which
may deter, discourage or make more difficult a takeover or change of control of
our company by another corporation. These anti-takeover provisions include:
- the authority of our board of directors to issue shares of
preferred stock without stockholder approval on such terms and
with such rights as our board of directors may determine, and
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- the requirement of a classified board of directors serving
staggered three-year terms.
We have also adopted a rights plan, which may make it more difficult to
effect a change in control of our company and replace incumbent management.
Potential purchasers seeking to obtain control of a company may not be
interested in purchasing our stock as a result of these matters. This may reduce
demand for our stock and thereby negatively affect our stock price.
THE ATTRACTIVENESS OF OUR STOCK TO POTENTIAL PURCHASERS AND OUR STOCK PRICE MAY
BE NEGATIVELY AFFECTED SINCE WE DO NOT PAY DIVIDENDS ON OUR COMMON STOCK.
We have never paid a cash dividend on our common stock and do not plan
to pay dividends on our common stock for the foreseeable future. Potential
purchasers of our stock seeking a regular return on their investment may not be
interested in purchasing our stock as a result. This may reduce demand for our
stock and thereby negatively affect our stock price.
ITEM 2. PROPERTY
We have leased office space in Pittsford, New York, a suburb of
Rochester, where we maintain our corporate headquarters. The lease expires in
March 2010, but provides we can terminate at any time after March 2005 without
cost or penalty.
We also lease space in Las Vegas, Nevada for our national customer
service operations, national network operating center and local sales personnel.
This lease expires in October 2004 and is expected to be renegotiated prior to
expiration.
ITEM 3. LEGAL PROCEEDINGS
We are party to numerous state and federal administrative proceedings.
In these proceedings, we are seeking to define and/or enforce incumbent carrier
performance requirements related to:
- the cost and provisioning of those network elements we lease;
- the establishment of customer care and provisioning;
- the allocation of subsidies; and
- collocation costs and procedures.
The outcome of these proceedings will establish the rates and
procedures by which we obtain and provide leased network elements and could have
a material effect on our operating costs.
We have intervened on behalf of the FCC in an appeal filed by AT&T
seeking to overturn the FCC's declaratory ruling in CCB/CPD No. 01-02, in which
the FCC concluded that a long distance carrier may not refuse a call from/to an
access line served by a competitive local carrier with presumptively reasonable
access rates. We have appealed the FCC's order in CC Docket No. 96-262, in which
the FCC, among other things, established benchmark rates for competitive local
carrier switched access charges. We cannot predict the outcome of these appeals.
In September 2000, a class action lawsuit was commenced against us,
alleging violations of the Securities Exchange Act of 1934 and rule 10b-5
thereunder (the "Exchange Act") and Section 11 of the Securities Act of 1933. In
February 2002, the United States District Court for the Western District of New
York entered its Decision and Order dismissing the class action lawsuit. That
Decision and Order had been appealed to the United States Court of Appeals for
the Second Circuit. An Order was entered on October 1, 2003, dismissing the suit
with prejudice. There are no further claims that can be asserted against us with
respect to the class action suit.
From time to time, we engage in other litigation and governmental
proceedings in the ordinary course of our business. We do not believe any other
pe