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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000
[ ] 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 0-28579
eVENTURES GROUP, INC.
(Exact name of Registrant as Specified in Its Charter)
DELAWARE 75-2233445
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
300 CRESCENT COURT, SUITE 800
DALLAS, TEXAS 75201
(Address of Principal Executive Offices)
214-777-4100
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.00002 PER SHARE
(Title of Class)
Indicate by a check mark whether the registrant: (1) has file 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 a 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. [ ]
Aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of September 15, 2000 was $227,683,796.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by a 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 [ ] No [ ]
As of September 15, 2000, there were 51,989,745 shares of our common
stock, par value $0.00002 outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PART III -- Incorporated by reference to our proxy statement to be
mailed or sent to securities holders on or about October 10,
2000
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TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. Business...................................................................................1
ITEM 2. Properties................................................................................25
ITEM 3. Legal Proceedings.........................................................................26
ITEM 4. Submission of Matters to a Vote of Security Holders.......................................26
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.....................26
ITEM 6. Selected Financial Data...................................................................27
ITEM 7. Management's Discussion And Analysis Of Financial Condition And Results Of
Operations................................................................................28
ITEM 7A. Quantitative And Qualitative Disclosures About Market Risk................................34
ITEM 8. Financial Statements And Supplementary Data...............................................35
ITEM 9. Changes In And Disagreements With Accountants On Accounting And Financial
Disclosure................................................................................35
PART III
ITEM 10. Directors and Executive Officers of the Registrant........................................35
ITEM 11. Executive Compensation....................................................................35
ITEM 12. Security Ownership of Certain Beneficial Owners and Management............................35
ITEM 13. Certain Relationships and Related Transactions............................................35
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................35
SIGNATURES......................................................................................................42
EXHIBIT INDEX...................................................................................................44
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PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
FORWARD-LOOKING STATEMENTS
"Forward-looking" statements have been included throughout this
document. These statements describe our attempt to predict future events. The
words "believe," "anticipate," "expect," and similar expressions are used to
identify "forward-looking" statements. The important factors listed in the
section entitled "Risk Factors", as well as any cautionary language in this
annual report, provide examples of risks, uncertainties and events that may
cause our actual results to differ materially from the expectations described in
these "forward-looking" statements. You should be aware that the occurrence of
the events described in these risk factors and elsewhere in this annual report
could have an adverse effect on our business, results of operations or financial
condition.
You should be aware that these "forward-looking" statements are subject
to a number of risks, assumptions, and uncertainties, such as:
o risks associated with our capital requirements, including the
need to provide working capital for operations and to fund
planned capital expenditures;
o risks associated with increasing competition in the
communications industry, including industry over-capacity and
declining prices; and
o changes in laws and regulations that govern the communications
industry.
This list is only an example of some of the risks that may affect the
forward-looking statements. If any of these risks or uncertainties materialize
(or if they fail to materialize), or if the underlying assumptions are
incorrect, then actual results may differ materially from those projected in the
forward-looking statements. We undertake no obligation to revise these
statements to reflect future events or circumstances.
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PART I
ITEM 1. BUSINESS
BUSINESS OVERVIEW
We are a global broadband network services provider. We offer a variety
of communications services over an expanding, facilities-based network. Our
network currently reaches 31 domestic and nine international cities in North
America, Central America, Europe, Asia, the Middle East and Mexico. During the
twelve months ended June 30, 2000, we transmitted approximately 500 million
minutes of packet-based voice traffic on our network and maintained
relationships with approximately 300 service providers.
ORGANIZATION AND HISTORY
We were originally incorporated in Delaware in 1987 as "Adina, Inc." We
allowed our corporate existence to lapse in February 1996 and were subsequently
reinstated as "eVentures Group, Inc." in August 1999. In the fall of 1999, we
completed a series of transactions following which we became a holding company
with two wholly-owned operating subsidiaries, e.Volve Technology Group, Inc.
("e.Volve") and AxisTel Communications, Inc. ("AxisTel"), and a strategic
investment in PhoneFree.com, Inc. ("PhoneFree"). We have since acquired Internet
Global Services, Inc. ("iGlobal") and have made additional strategic
investments, including investments in ORB, Inc., Fonbox Inc., LC39 Venture Group
LLC and Spydre Labs, LLC.
Through August 2000, our strategy, which we referred to as building a
Communications Econet, was to build a family of interdependent companies by
operating, developing and investing in communications-related businesses and
support services that leverage the power of the Internet. At the center of our
strategy were investments in our wholly-owned subsidiaries, AxisTel, e.Volve and
iGlobal, which focus on the deployment and operation of private, managed global
communications networks. Since the initial deployment of those networks, we have
utilized our networks primarily to provide communications services to
Communications Service Providers, such as Qwest Communications, AT&T and RSL
Communications.
We are now in the process of combining and expanding the AxisTel,
e.Volve and iGlobal networks to deploy a range of broadband network services
that we can offer to our customers. As we expand our network, we anticipate
increasing our product and service offerings and our customer base. By
consolidating our network businesses, we intend to establish a single entity
that is well positioned to capitalize on the growth in the market for global
broadband network services. We have begun to take steps to implement our plan,
including:
o developing a combined organizational structure;
o integrating our networks and completing a network rollout
plan;
o expanding our core network products and services;
o attracting new customers; and
o forging strategic relationships with key vendors and
suppliers.
In addition to consolidating our networks, we will continue to seek
strategic investments which compliment our core network businesses and offer
opportunities to expand the product and service offerings and customer base.
MARKET OPPORTUNITY
We believe that the global market for broadband network services,
including transport, Internet access and value added communications services,
will grow significantly due to a number of factors, including:
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The Growing Importance of the Internet
The Internet has experienced tremendous growth in the past decade and
has emerged as the central global medium for communications and commerce. The
growth in data that is transmitted over the Internet is driven by a number of
factors, including the rapidly increasing number of network-enabled and
Internet-based applications, the growing number of users linked to the Internet
through personal computers, advances in network-enabled devices, servers and
routers, and the increasing availability of broadband connections.
The explosive growth of the Internet and the increasing demand for data
services are expected to continue. According to International Data Corporation
("IDC"), the number of Internet users worldwide will increase from approximately
142 million at the end of 1998 to approximately 502 million by the end of 2003,
representing a compound annual growth rate of approximately 29%. In addition,
according to IDC, the number of web pages is expected to grow from approximately
1.7 billion in 1999 to approximately 13.1 billion in 2003, representing a
compound annual growth rate of approximately 67%. This growth is expected to
lead to a substantial increase in the demand for broadband network services.
Convergence of Global Telecommunications and Data Services
The global telecommunications industry has grown at a rapid rate over
the last decade, driven by domestic and international deregulation,
technological development, network deployment and the globalization of business.
The number of Communications Service Providers has also been increasing as a
result of competition fostered by domestic and international deregulation. These
factors have contributed to a substantial decrease in the cost of communications
services delivered over the traditional circuit switched network. This decrease
in price, however, has been more than offset by an increase in total revenue
driven by the growth in demand that low prices and new services have created.
In addition, over the last decade, the volume of traffic on data
networks has grown at an unprecedented rate. According to TeleGeography, in
1998, data surpassed voice as the dominant traffic for the U.S. long distance
market. This growth has been driven by several factors, including technological
innovation, high penetration of personal computers and, in particular, by the
rapid expansion of the Internet as a global medium for business activity. The
increase in data traffic has necessitated additional data network capacity,
quality and services.
We believe that the combination of increasing demand on the traditional
telephone network and the proliferation of data networks, with their enhanced
functionality and efficiency, is driving the convergence of voice and data
networks, including the Internet. We expect this convergence to accelerate as
enterprises and network infrastructure providers attach increasing value to data
networks and as the functionality of computers and computing devices, such as
personal digital assistants, is enhanced by voice capability.
Legacy Approach of Traditional Communications Service Providers
The majority of the traditional, incumbent Communications Service
Providers have taken steps over the past several years to position themselves as
vertically integrated providers. This was done to create low cost, high quality
differentiated services. While leveraging the natural barrier to entry of
network ownership to protect the distribution channel, capture valuable customer
relationships and determine service offerings has been the legacy strategy, new
entrants to the broadband network services industry are migrating toward a
horizontally segmented market. In this approach, new entrants are disaggregating
historical service offerings and turning their focus to core competencies and
recognition of the importance of network intelligence, data and switching
capabilities needed to best serve the end user. By focusing on core
competencies, capital and human resources are conserved and new entrants are
able to offer best of breed solutions in a time and cost effective manner. New
entrants are able to focus on a specific portion of the traditional telecom
value chain to establish expertise and gain market share quickly. In addition,
new entrants will be positioned to outperform the traditional incumbents as a
result of having no installed base to protect and having the ability to engage
in a cannibalization of the communications service industry.
In addition, the traditional, incumbent Communications Service Provider
responded to demand for new network capabilities by building out physically
separate networks to incorporate new technologies. As a result,
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these Communications Service Providers have invested billions of dollars in
stand-alone networks that are designed to provide vertically integrated services
and do not possess interoperability with converged network architectures. This
creates a significant cost advantage to new entrants operating converged
networks.
The mass of regulation which continues to weigh on the traditional
Communications Service Providers may be the most significant legacy encumbrance.
Access charges, tariffs and billing standards only make sense in a circuit
switched context and a transition to an Internet Protocol environment will
render these regulations irrelevant and create a competitive advantage for new
entrants. Protected, high margin revenue sources will decline for the
traditional provider.
OUR SOLUTION
Deploying a Converged Network. We are taking advantage of underlying
changes in the communications industry and the increasing demand for broadband
network services through the development of a converged network that allows us
to offer a variety of broadband transport, Internet access and value added
services. By integrating the networks that have been deployed by e.Volve,
AxisTel and iGlobal, and by expanding that combined network, we intend to
provide a range of broadband network services and bundled value added services
to our customers. Our broadband network service solutions will enable our
customers to outsource their communications infrastructure needs to a single
provider.
Focusing on Significant Users of Bandwidth. We intend to continue to
target customers that we believe will have increasing needs for bandwidth,
including Internet, Application and Communications Service Providers. This
target market is a large and growing market with many potential customers.
Moreover, the growth and success of the underlying businesses within the
targeted customer segments further drives demand for bandwidth and other network
services. We also believe that we will have the opportunity to leverage our
customer relationships to extend additional value added services as those
services become available. By targeting this group of customers, we believe that
we have the opportunity to maximize our growth potential.
Flexible Solution. We operate a converged packet-based network capable
of offering a range of broadband network solutions including transport, Internet
access and value-added services. As we expand our network footprint, we plan to
broaden our network service offerings to our customers. Our network
architecture, network intelligence and interconnections with other carriers will
provide us flexibility in managing traffic, scaling the network and deploying
additional service offerings.
Our network is engineered using Internet Protocol and Asynchronous
Transfer Mode technologies, which enable us to offer multiple voice and data
solutions on the same network. Internet Protocol technology refers to software
that keeps track of the Internet's addresses for different nodes, routes
outgoing messages and recognizes incoming messages. Internet Protocol technology
allows packets to traverse multiple networks on the way to their final
destination. Asynchronous Transfer Mode is a high speed transmission technology
that allows for fixed-site packets to be transported along a pre-determined
route along a single network or between interconnected networks.
OUR STRATEGY
Our objective is to become a leading global provider of broadband
network services by designing, deploying and operating a facilities-based
converged network. The principal elements of our strategy include:
Expanding the Reach and Capacity of Our Network. We plan to expand our
network's geographic footprint by aggressively adding Points of Presence both
domestically and internationally. Points of Presence are physical locations
where our network interconnects with our customers or another network. In
addition, we plan to add network capacity by leasing and/or purchasing
significant fiber optic route miles. As a part of our network expansion we are
deploying state-of-the-art equipment from vendors such as Cisco Systems and
Lucent Technologies to maximize the capacity, flexibility and functionality of
our fiber network.
Controlling Our Network Facilities. As we expand both domestically and
internationally, we intend to control the operation and expansion of our network
facilities by:
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o Purchasing our own equipment, either directly or through
capital leases;
o Installing our equipment in locations that we lease from
landlords; and
o Interconnecting our facilities over fiber optic cables that we
lease or own through Indefeasible Rights of Use.
We believe that our network deployment strategy provides us with
greater flexibility and control over the performance and reliability of our
network and enables us to increase our capacity more quickly to meet increasing
customer demand.
Expanding Our Sales Force and Focusing Our Sales Efforts on Internet,
Application and Communications Service Providers. We intend to target customers
with significant bandwidth demands such as Internet, Application and
Communications Service Providers. Providing services to this target market
positions us to benefit from the rapid growth and expansion of the demand for
broadband network services. We intend to develop and expand our direct sales
force, both domestically and internationally, focusing our efforts on markets
with the highest concentration of potential customers.
Pursuing Strategic Acquisitions, Investments and Alliances. We intend
to pursue selective acquisitions and investments that will allow us to quickly
and cost-effectively extend our geographic presence, customer base and product
and service offerings. Additionally, we intend to make strategic investments in
or enter into joint ventures or alliances with complementary businesses to
broaden our market presence or expand our strengths in key products and
services. We believe that successfully pursuing these strategic transactions or
alliances will enable us to expand our geographic reach and to broaden our
services to our customers.
Using Our Internet Protocol and Networking Experience. We intend to use
our experience in Internet Protocol and networking in the deployment of
innovative Internet infrastructure and value added services. Since our
inception, we have made strategic investments in several networking, Internet
telephony and Voice Over Internet Protocol or VOIP service companies. As a
result, we have acquired significant experience in these areas. We intend to
leverage our experiences and relationships to provide leading-edge product and
service offerings for our customers more quickly than if we attempted to develop
products or services internally.
OUR NETWORK
We offer our customers broadband network services over a global,
facilities-based converged network. Our network transmits packetized information
using the operating standards established for Internet Protocol and Asynchronous
Transfer Mode technologies, which facilitate high-speed, large-scale
communications.
Our network transmits voice, data, Internet and fax traffic within the
United States and to certain countries around the world. Our customers can
interconnect with this network through dedicated circuits from their facilities
to one of our Points of Presence. Alternatively, our customers may elect to
collocate and install equipment directly at our facilities in Jersey City,
Dallas, Kansas City, Mexico City or Miami to eliminate the cost of back-hauling
traffic from their facilities to one of our Points of Presence.
We either lease or own our network capacity under short-term leases and
Indefeasible Rights of Use. The majority of our current network traffic is
currently transmitted over leased fiber capacity. We intend to continue to build
our network through both leasing or buying fiber infrastructure from various
bandwidth providers. We will continue to utilize multiple fiber providers to
ensure higher reliability, quicker deployment of new technology and faster
provisioning.
We currently incorporate network equipment in both the deployment of
our network as well as the integration of customer's equipment onto the network.
We purchase or lease our network equipment from a variety of vendors, including
Cisco Systems, Lucent Technologies, Siemens, Sun, Hewlett Packard, Network
Equipment Technologies, Micro Muse, Dell, NetSpeak, Ericsson Hewlett Packard
Technologies and Alcatel.
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Today, our network consists of digital switching, routing and signal
management equipment and digital fiber optic cable lines, integrated and
deployed by AxisTel, e.Volve and iGlobal. The networks are interconnected
through common Points of Presence in Miami, Dallas, Jersey City and Kansas City.
Our current network configuration reaches 31 domestic and nine
international cities in North America, Central America, Europe, Asia, the Middle
East and Mexico. During the twelve months ended June 30, 2000, we transmitted in
excess of 500 million minutes over our network. We own or lease significant
bandwidth at various capacities up to OC-12, which is capable of transmitting
data at speeds of up to 622 megabits per second and plan to upgrade most of our
network backbone to OC-48, which is capable of trasmitting data at speeds of up
to 2.5 gigabits per second, or greater capacity. Four core locations will serve
as primary gateways for continental markets worldwide - London for the European
market, Los Angeles for the Asian market, Miami for the Latin American market
and Jersey City for the domestic and international market.
As of June 30, 2000, we had network facilities and Points of Presence
in the following locations:
Country City
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United States......... Jersey City and Newark, New Jersey; Buffalo and New York City, New
York; Philadelphia, Pennsylvania; Alpharetta and Atlanta, Georgia;
Boston and Cambridge, Massachusetts; Miami, Florida; Austin, Dallas,
Denton, El Paso, Fort Worth, Houston, Lubbock, Midland and San Antonio,
Texas; Denver, Colorado; Detroit, Michigan; Las Vegas, Nevada;
Overland Park, Kansas (Kansas City); Milwaukee, Wisconsin; San
Francisco, California; Washington D.C.; Minneapolis, Minnesota;
Oklahoma City, Oklahoma; Los Angeles, California; Chicago, Illinois;
Cleveland and Columbus, Ohio; Seattle, Washington
Jamaica............... Montego Bay
Mexico................ Mexico City
India................. New Dehli
United Kingdom........ London
At many of our Points of Presence, we use our equipment to translate
voice to data for transmission and retrieval over our network, and provide
private line, Asynchronous Transfer Mode and frame relay data services. Our
Points of Presence include Gateways and Network Access Points which are
connections to the public switched telephone network, and Internet access points
as well as interconnection facilities to large Communications Service Providers.
These Points of Presence facilitate the movement of traffic between our network
and those other transmission facilities.
During the next 24 months, we plan to expand our network aggressively
to include more than 30 Gateway locations and 175 Network Access Points reaching
more than 100 locations around the world. This network expansion will allow us
to provide a full suite of facilities-based broadband network services to our
customers.
Our network consists of the following elements:
o Gateways. Each of the Gateway locations will provide robust
connectivity to the network. Our Gateways will have fiber
connections at speeds ranging from OC-3 to OC-48 or higher.
Gateways will be equipped with state-of-the-art routing and
switching equipment and will utilize Asynchronous Transfer
Mode and Internet Protocol technologies. Our Gateways are
designed to deliver all of our broadband network services.
o Network Access Points. Network Access Points will principally
be located in second and third tier cities. Network Access
Points will have connectivity speeds ranging from T-1 to OC-3,
and will contain equipment designed primarily to support our
value added services. As a Network Access Point gains
significant customer traffic it can be converted into a
Gateway with the deployment of additional optical equipment
and the leasing of additional capacity. The network's
architecture effectively supports Gateway conversion. Network
Access Points will utilize Internet Protocol routers and other
similar equipment as appropriate to support the volume of
traffic.
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o Peering. Our network also connects with Internet exchange
points to provide access to and from the Internet. We have
direct and indirect peering arrangements with Internet
backbone providers in order to support Internet Protocol
services to and from the Internet. These arrangements allow us
to access the Internet directly, minimizing the amount of time
our customers communications traffic has to travel over the
Internet.
o Network Operations Center. To service our network effectively,
we have established network operations centers ("NOC") which
monitor and manage our network from central locations, 7 days
a week, 24 hours a day. Our primary NOC is located in Jersey
City with a secondary NOC in Dallas, Texas. These facilities
allow us to monitor all aspects of our network, including the
routers, databases, switches, leased lines, Internet
connections, gatekeepers and gateways, to ensure equipment
functionally and efficiency. Our NOCs utilize a combination of
leading edge monitoring technologies. By utilizing
technologically-advanced, real-time management and monitoring
systems, we seek to reduce system downtime and ensure that our
customers will not experience any noticeable interruption in
their service.
Our network is engineered to provide the following advantages:
o Scalability. The software and hardware that we use in our
network is scalable, allowing for new Points of Presence to be
easily integrated into our network with minimal incremental
investment.
o Flexibility. Leasing and purchasing our network capacity
provides us with greater flexibility and control over the
performance and reliability of our network. This enables us to
increase our capacity and to more quickly to meet customer
demand.
o Manageability. We directly control the quality of our services
over our network from one central location.
o Global Reach. Our network allows users to gain access to our
services from any country where we have a Point of Presence.
PRODUCTS AND SERVICES
Our network infrastructure has been engineered to accommodate a wide
array of customers and their respective communications needs. Currently our
suite of products and services includes Broadband Services, Value Added Services
and Prepaid Services. Broadband Services consist of transport services such as
private line, Asynchronous Transfer Mode and frame relay; Internet access
services such as dedicated bandwidth, dial-up Internet access and DSL; and
collocation services. Value Added Services include software services that
leverage the packet-based infrastructure of our network to deliver advanced
communications services to end-users. Value Added Services consist of VPN, or
virtual private network services, VOIP, or Voice-over Internet Protocol, and
other packet-based voice services and Internet Services including unified
communications, virtual second line, ISV Mail and web hosting and development.
We also offer Prepaid Services through the sale of calling cards on a wholesale
and retail basis.
Our suite of products and services provides diversification to our
revenue streams, leverages the network efficiently and positions us in rapidly
growing segments of the communications industry. Each of the service offerings
is outlined below:
Broadband Services
We offer Broadband Services to Internet, Application and Communications
Service Providers and to enterprises that need to transmit large amounts of
data, voice or video quickly and efficiently.
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Transport. Our transport services are generally purchased by
Communications and Internet Service Providers requiring additional capacity. Our
transport services, which accounted for approximately 3.0% of our total revenues
in fiscal 2000 include:
o Private Line Service. Our private line service provides
dedicated point-to-point transport services through
non-switched, non-usage sensitive dedicated facilities. Our
private line service is supported over our dedicated SONET, or
Synchronous Optical Network facilities, which results in a
highly reliable network. SONET is a set of standards that are
designed to allow the simultaneous transmission of digital
signals at various speeds without the use of multiplexing.
These services are comprised of bandwidth delivered in units
of: (i) full or fractional T-1, which is capable of
transmitting data at speeds of up to 1.44 megabits per second;
(ii) DS-3, which is capable of transmitting data at speeds of
up to 45 megabits per second; (iii) OC-3, which is capable of
transmitting data at speeds of up to 155.520 megabits per
second; (iv) OC-12; and (v) OC-48/STM 16.
o Asynchronous Transfer Mode Service. Our Asynchronous Transfer
Mode service is primarily offered to Internet and
Communications Service Providers with high bandwidth
transmission requirements between one or multiple locations.
Our Asynchronous Transfer Mode transport services provide
logical permanent virtual connections, thereby supporting
applications that send information at a constant or variable
bit rate. We offer a wide range of these services on a
per-packet basis, and at guaranteed speeds, to enable our
customers to match their application needs to the desired
amount of bandwidth.
o Frame Relay. Our frame relay services allow for the transport
of packet-based data and compressed video and voice services
between networks with the use of a fixed, dedicated circuit.
Our frame relay services provide our customers with a
cost-effective means to interconnect geographically disparate
equipment. Frame relay services are generally sold based on a
minimum committed transmission speeds and allow customers to
burst transmission up to a maximum predetermined capacity. Our
network allows frame relay traffic to ride inside core
Asynchronous Transfer Mode packet transport.
Internet Access. We offer a variety of Internet access services to our
enterprise and service provider customers, including dedicated access, dial-up
and DSL. Our Internet access services, which accounted for approximately 1% of
our total revenues in fiscal 2000 include:
o Dedicated Access. Internet via high-speed private connections
at speeds ranging from full or fractional T-1 to OC-12. Our
network is engineered for business-critical operations.
Through our public and private peering relationships,
customers have dedicated access solutions.
o Digital Subscriber Line Access. Our DSL, or digital subscriber
line access service, enables high speed digital transmission
over telephone lines. Through our reseller agreements with
national and regional DSL providers such as Covad
Communications and IP Communications, we currently offer a
wide range of dedicated access speeds from 144 kilobits per
second to 1.5 megabits per second. We offer DSL services on a
wholesale basis primarily to our Internet Service Provider
customers at a fixed monthly fee per user. In addition, we
also offer our service provider customers certain
administrative services such as service establishment, network
connectivity, bulk billing and second tier technical support.
o Dial-up Access. Our dial-up access service enables users to
connect to the Internet using a local telephone number. Our
customers can connect to the Internet through our regional
facilities in Texas and Oklahoma and, through our virtual
Internet Service Provider reseller relationship with Cable &
Wireless, USA, to more than 325 local Internet access points
in the United States.
o Collocation Services. Our collocation services provide our
customers with a physical location to collocate communications
equipment at our Points of Presence. This service allows our
service provider customers to expand their market areas
without extensive recurring real estate charges, build-out
fees and overhead costs.
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Value Added Services
As service providers and enterprises continue to use the Internet as a
business-critical tool, we believe they will increasingly demand a wider range
of services to outsource management, ensure security, enhance productivity,
reduce costs and improve service reliability and scalability. Our value-added
services accounted for approximately 87% of our total revenues in fiscal 2000,
with substantially all of such revenues derived from the sale of VOIP services.
Today, we offer a range of value added services, including:
o Virtual Private Networks. With our VPN service, we enable an
enterprise and its employees, customers, suppliers and
business partners to securely send and receive information via
encrypted dial-up, dedicated or DSL connections. We offer our
customers variable amounts of capacity across their VPN.
o Voice-over-Internet Protocol. Through our suite of VOIP and
other packet-based voice services, we offer low-cost,
high-quality network transport to Internet and Communications
Service Providers providing VOIP services to their customers.
We complete calls to public switched telephone networks
worldwide. Customers can originate calls through their own
facilities using various signaling protocols. Customers can
interconnect at any of our Gateways, where a protocol
conversion device converts their traffic to a
voice-over-packet protocol. The calls are then delivered via
our network to the Gateway nearest to the destination of the
calls. Equipment at our Gateway converts the calls from the
packet format back to a circuit switched call, and terminates
the call onto the public switch telephone network through
local access providers. Utilizing our network reach and
ability to terminate a large portion of calls on-net, we also
offer a retail dial around long distance product to
residential consumers.
o Internet Services. Internet services include the following:
o Unified Communications. Unified communications
provides users with a software-based solution for
managing all of their voice, fax and data
communications through a single client interface.
o Virtual Second Line. The virtual second line product
is a software product that enables individuals
logged on to an Internet session to be notified of
an incoming call and to have the options of
forwarding, accepting or sending a message to the
calling party.
o ISV Mail. ISV Mail is an internally developed
proprietary streaming video e-mail product, which is
a full motion audio and video stream hosted at the
ISV Mail data center.
o Web Site Hosting and Development. We offer our
customers web site hosting and website design and
development services through an in-house creative
team.
Prepaid Services
A prepaid calling card is a defined-limit long distance service. A
consumer selects a spending limit and accesses the network through a toll free
number utilizing a personal identification number. The consumer is charged a
predetermined rate per minute on each call until the spending limit is reached.
We offer our prepaid services directly under the "AxisTel" brand name and on a
wholesale and private label basis in the United States. During fiscal 2000,
approximately 9% of our revenues came from prepaid services.
We are also currently developing a product known as Web2Dial which will
allow individuals and businesses to provision and effect long-distance phone
calls over a combination of our private network and the Internet. Web2Dial will
also provide a web-based interface for online re-provisioning of traditional
phone cards and will offer other consumer value added products and services.
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OUR CUSTOMERS
We primarily target service providers such as Internet, Application and
Communications Service Providers. As of June 30, 2000, we had approximately 300
service provider customers, including 30 Communications Service Providers, 250
Internet Service Providers and 20 Application Service Providers. We also had
approximately 500 enterprise customers, with over 150 of those consisting of
distributors of prepaid services. For fiscal 2000, approximately 68% of our
revenues came from Qwest. No other customer accounted for more than 5% of our
revenues during fiscal 2000.
We have entered into switched services and carrier service agreements
with Qwest for international terminating traffic. Under these agreements, we
provide switched interstate telecommunications services and international
outbound telecommunications services to Qwest. Our switched services agreement
does not obligate Qwest to use our services, but permits Qwest to use our
services upon Qwest's periodic acceptance of our rates. Qwest may choose not to
use our services for a variety of reasons. Our carrier service agreement for
international terminating traffic, which was entered into on September 17, 1998,
is for a one-year term with automatic successive renewals for one-year periods
until termination by either party.
SALES AND MARKETING
Our sales efforts target leading service providers both in the United
States and overseas. The sales effort will be focused primarily on bandwidth
intensive service providers such as Internet, Application and Communications
Service Providers through a direct sales effort. We will also provide broadband
network services to certain enterprise customers.
Through our existing relationships, we have significant long-standing
relationships in the telecommunications industry. Currently, we sell directly
to, and through, Communications Service Providers, corporations and
organizations.
In overseas markets, we plan to establish relationships with local
service providers that have the local market expertise to provide termination
services. The opportunity to terminate a substantial volume of traffic makes us
an attractive partner. We anticipate targeting overseas service provider
partners such as carriers, call back companies, cellular and paging companies
and Internet Service Providers as an initial source of business development.
Customer Service and Support
Customer service and ongoing support are critical to maintaining
existing customer relationships and developing relationships with new customers.
We are developing an organizational infrastructure to support the sales effort,
product installation and customization, technical support, customer training and
product maintenance necessary for long-term customer relationships. Our NOCs in
Jersey City and Dallas operate 24 hours a day, seven days a week.
Marketing & Branding
To date, we have spent very little on advertising and marketing.
Traditional voice services have been sold to Communications Service Providers by
way of established relationships. Prepaid services have been sold on a wholesale
basis through distributors. As we expand our service reach and product
offerings, corporate branding will be augmented with product branding.
As our network expands, we intend to market to potential service
providers. This marketing will comprise trade show participation and advertising
in publications, as well as targeted Internet channels and Internet-based
telecommunications exchanges.
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STRATEGIC INVESTMENTS
From time to time we may acquire or take strategic minority positions
in other Internet and communications companies. We do this because we can expand
our network, service and customer base and promote opportunities for synergistic
business between our core business and companies that we invest in. For example,
we have provided prepaid calling card services to PhoneFree. While none of these
services has generated significant revenue to us, we have been able to advance
the business development of those companies by playing a strategic role.
As of September 15, 2000, we had made strategic investments in the
following companies:
PhoneFree
PhoneFree develops and markets VOIP telephony services and operates a
website at www.PhoneFree.com. The PhoneFree software, which can be downloaded
from the website, allows users to conduct "real-time" duplex voice conversations
from PC to PC and PC to phone. This software functions with normal multimedia PC
hardware over the Internet. PC to PC and domestic PC to Phone calls are free to
users with Internet connections, regardless of their duration and, in the case
of PC to PC calls, destination while International PC to phone service is
generally available for a flat monthly fee. PhoneFree derives revenues from the
sale of advertising on its website, e-commerce transactions and targeted
marketing campaigns. As of June 30, 2000, over 1.4 million people were using
PhoneFree software to make telephone calls over the Internet.
On March 3, 2000, we loaned $3.0 million to PhoneFree under a bridge
loan. On May 4th, 2000, we completed a $13.0 million investment in PhoneFree. We
purchased a total of 1,856,199 shares of newly-issued Series A Cumulative
Convertible Preferred Stock of PhoneFree in exchange for cash of $10.0 million
and the cancellation of the $3.0 million bridge loan. The PhoneFree preferred
stock that we purchased carries a 7% cumulative dividend, is convertible into
1,856,199 shares of PhoneFree common stock and votes with the PhoneFree common
stock on all matters. As part of our investment in PhoneFree, we also received a
four-year warrant to purchase 100,000 shares of PhoneFree common stock at $7.11
per share.
In connection with the bridge loan, we also received a four-year
warrant to purchase 240,000 shares of PhoneFree common stock at a price equal to
110% of the conversion price of the bridge loan. The warrant may not be called
by PhoneFree.
On September 1, 2000, PhoneFree acquired Callrewards. See "Callrewards"
below. After this transaction, assuming full conversion of our preferred stock
and including our two warrants, we own approximately 22% of the common stock of
PhoneFree.
Four of our directors are members of the ten-member board of directors
of PhoneFree, although we have a contractual right to appoint only two directors
to PhoneFree's board.
ORB
ORB is a leading business-to-business provider of next-generation, end
to end Internet advertising and marketing solutions. ORB's products and services
include campaign strategy, creative services, media services and software that
includes real-time analysis, predictive modeling, real time optimization, system
integration, ad serving and data base marketing. ORB was founded in 1995.
On May 26, 2000, we acquired approximately 24% of ORB. Our ownership
interest in ORB consists of 2,500,000 shares of ORB's newly issued Series A
Convertible Preferred Stock, representing approximately 6% of ORB, and 7,000,000
shares of ORB common stock, representing approximately 18% of ORB, that we
purchased from ORB's founders. The total purchase price was $8.0 million,
consisting of $4.5 million of cash and 284,167 shares of our common stock. We
also have an obligation, subject to certain conditions, to invest an additional
$2.5 million in ORB, representing approximately an additional 6% of ORB, on or
before October 7, 2000. It is likely that such conditions will be fulfilled.
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In connection with our investment in ORB, we received a five-year
option to purchase an additional 12% of ORB for $18 million in cash. Our
President was appointed to ORB's board of directors pursuant to an Investors
Rights Agreement among us, ORB and ORB's founding stockholders, and our Senior
Vice President - Investments was named a director and interim Chairman of ORB.
Fonbox
Fonbox is a development stage company which offers Internet-based
communications solutions for the Spanish-speaking and Portuguese-speaking market
in Latin America and elsewhere. Fonbox intends to offer cross-messaging, natural
language access and phone-based Internet access technologies through their
Lineabox (www.lineabox.com) unified messaging product. Fonbox intends to build a
network of Points of Presence in major Latin American markets and in certain
strategic U.S. markets. Fonbox currently offers its services in Miami, Sao
Paolo, Bogota, Mexico City and Buenos Aires. Our President is a member of the
board of directors of Fonbox. As of June 30, 2000 we own approximately 31% of
the voting equity interest of Fonbox.
Callrewards
On September 1, 2000, Callrewards completed a merger with PhoneFree.
Prior to the merger, we owned approximately 30% of the voting equity interests
in Callrewards. In the merger, we received approximately 104,000 shares of
PhoneFree common stock in exchange for 750,000 shares of Callrewards' Series A-1
Convertible Preferred Stock and promissory notes owed to us by Callrewards of
approximately $184,000. We received no other additional consideration in
connection with this transaction, and the merger was approved by the directors
of each of Callrewards and PhoneFree who were not affiliated with us.
Other Investments
Other investments include 10-K Wizard LLC, Launch Center 39 and Spydre
Labs.
COMPETITION
Competition in the Broadband Network Services Markets
The growth and potential size of the broadband services market has
attracted traditional telecommunications companies as well as new entrants of
various sizes. Current and prospective industry participants include
multinational alliances, foreign and domestic long distance and local
telecommunications providers, systems integrators, cable television and
satellite communications companies, wireless telecommunications providers and
national, local and regional Internet Service Providers. In addition, we expect
that the predicted growth of these markets will attract other established
companies and multinational alliances. Further, there are established and
start-up companies building global networks and beginning to offer similar
communications services as part of a comprehensive communications services
portfolio. Our established competitors include AT&T, British Telecommunications
PLC, Cable & Wireless, Equant N.V., France Telecom, Infonet, Sprint, WorldCom,
Inc. (UUNET Technologies) and others and new entrants such as Level (3),
Genuity, Global Crossing, Qwest, Universal Access, 360networks inc., Viatel,
Primus Communications, Carrier1, World Access, ibasis, ITXC, PSINet, Williams
Communications Group, Enron, Broadwing, Net2Phone, deltathree.com, dialpad, GRIC
and others.
We compete in highly fragmented markets. Most participants specialize
in specific segments of the market, such as transport, Internet access, and
value-added services, such as VOIP, prepaid services and Internet Services.
We believe that competition in the broadband transport, Internet access
and value added communications services markets is mainly a function of the
ability to offer a broad variety of innovative, quality services available on a
reliable network supported by an effective service organization. While we
believe that our network infrastructure, suite of services and expertise in
designing, developing and implementing broadband network solutions distinguish
us from our competitors, many of our existing and potential competitors have
greater financial and other resources, more customers, a larger installed
network infrastructure, greater economies of scale, greater
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market recognition, lower cost network structure and more established
relationships and alliances in the industry. As a result, these competitors may
be able to develop and expand their network infrastructure and service offerings
more quickly, adapt more swiftly to new or emerging technologies and changes in
customer demands, devote greater resources to the marketing and sale of their
offerings, pursue acquisition and other opportunities more readily and adopt
more aggressive pricing policies.
Competition in the Long Distance Telephony Market
The international communications industry is highly competitive and
significantly affected by regulatory changes, marketing and pricing decisions of
the larger industry participants, and the introduction of new services made
possible by technological advances. We believe that long distance service
providers compete on the basis of price, customer service, product quality, and
breadth of services offered. In each country of operations, we have a variety of
competitors. We believe that as the international communications markets
continue to deregulate, competition in these markets will increase, similar to
the competitive environment that has developed in the United States following
the AT&T divestiture in 1984. Prices of long-distance voice calls in the markets
in which we compete have declined historically and are likely to continue to
decrease. In addition, many of our competitors are significantly larger, have
substantially greater financial, technical, and market resources, and larger
networks.
Privatization and deregulation have had, and are expected to continue
to have, significant effects on competition in the industry. For example, as a
result of legislation enacted in the United States, regional Bell operating
companies will be allowed to enter the long distance market, AT&T, WorldCom and
other long distance carriers will be allowed to enter the local telephone
services market, and cable television companies and utilities will be allowed to
enter both the local and long distance telecommunications markets. In addition,
competition has begun to increase in the European Union communications markets
in connection with the deregulation of telecommunications industry in most EU
countries, which began in January 1998. This increase in competition could
adversely affect net revenue per minute and gross margin as a percentage of net
revenue.
As we expand our operations in markets outside the United States, we
will also encounter new competitors and competitive environments. Our foreign
competitors may enjoy a government-sponsored monopoly on telecommunications
services essential to our business, and will generally have a better
understanding of their local industry and longer working relationships with
local infrastructure providers.
GOVERNMENT REGULATION
As a global communications company, we are subject to varying degrees
of regulation in each of the jurisdictions in which we provide services. Local
laws and regulations, and the interpretation of such laws and regulations,
differ significantly among the jurisdictions in which we operate. There can be
no assurance that future regulatory, judicial and legislative changes will not
have a material adverse effect on us or that domestic and international
regulators or third parties will not raise material issues with regard to our
compliance or noncompliance with applicable regulations.
Domestic Telecommunications Service Regulation
With respect to our provision of domestic telecommunications services,
we are considered a nondominant domestic interstate and international carrier
subject to minimal regulation by the FCC. We are not required to obtain FCC
authority to expand our domestic interstate operations. We are required, and
currently hold, FCC authority under Section 214 of the Communications Act of
1934 to provide regulated international telecommunications services. In
conjunction with the provision of these services, we are required to file a
tariff or individual contracts with the FCC, as well as various other reports,
and pay various fees and assessments. Interstate common carriers must also offer
services on a nondiscriminatory basis at just and reasonable rates. As a
nondominant domestic interstate and international telecommunications service
provider, we are subject to the FCC's complaint jurisdiction. In particular, we
may be subject to complaint proceedings in conjunction with alleged
noncompliance. With respect to our provision of interstate and international
telecommunications services, there can be no assurance that the FCC, other
regulators, or third parties will not raise material issues with regard to our
compliance or noncompliance with applicable regulations, or that regulatory
activities will not have a material adverse effect on us.
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Our intrastate telecommunications operations are also subject to
various state laws and regulations, including, in most jurisdictions,
certification and tariff filing requirements. Some states also require the
filing of periodic reports, the payment of various fees and surcharges, and
compliance with service standards and consumer protection rules. States often
require pricing approval or notification for certain stock or asset transfers
or, in several states, for the issuance of securities, debt, or for name
changes. As part of our strategy, we are considering obtaining certificate and
tariff approvals to provide intrastate long distance services and competitive
local exchange services in a number of states. Certificates of authority can be
conditioned, modified, cancelled, terminated, or revoked by the state regulatory
authorities for failure to comply with state law or the rules, regulations, and
policies of the state regulatory authorities. Fines and other penalties also may
be imposed for such violations. State public service commissions also regulate
access charges and other pricing for telecommunications services within in each
state. The regional Bell operating companies and other local exchange carriers
have been seeking reduction of state regulatory requirements, including greater
pricing flexibility, which, if granted, could subject us to increased price
competition. We may also be required to contribute to universal service funds in
some states. With respect to our provision of intrastate telecommunications
services, there can be no assurance that state regulators or third parties will
not raise material issues with regard to our compliance or noncompliance with
applicable regulations, or that regulatory activities will not have a material
adverse effect on us.
Regulation of Internet Telephony
United States Government Regulation of the Internet and Internet
Telephony. We believe that under United States law the Internet-related services
that we provide constitute information services, rather than telecommunications
services. As such, our services are not currently regulated by the FCC or state
agencies responsible for regulating telecommunications carriers (although
aspects of our operations may be subject to state or federal regulation such as
regulations governing universal service funding, confidentiality of
communications, copyright, and excise taxes). However, several efforts have been
made to enact federal legislation that would either regulate or exempt from
regulation services provided over the Internet. Therefore, we cannot be sure
that Internet-related services such as ours will not be regulated in the future.
Increased regulation of the Internet may slow its growth by negatively impacting
the cost of doing business over the Internet. This would materially adversely
affect our business, financial condition and results of operations.
We also cannot be sure that Internet Protocol telephony will continue
to be lightly regulated by the FCC and state regulatory agencies. Although the
FCC has determined that, at present, information service providers, including
Internet Protocol telephony providers, are not telecommunications carriers, we
cannot be certain that this position will continue. On April 10, 1998, the FCC
issued its report to Congress concerning the implementation of the universal
service provisions of the Telecommunications Act of 1996. In the report, the FCC
indicated that it would examine the question of whether certain forms of
phone-to-phone Internet Protocol telephony are information services or
telecommunications services. The FCC noted that it did not have, as of the date
of the report, an adequate record on which to make a definitive pronouncement,
but that certain forms of phone-to-phone Internet Protocol telephony appear to
have the same functionality as non-Internet telecommunications services and lack
the characteristics that would render them information services. If the FCC were
to determine that certain information services, like those we provide, are
subject to FCC regulation as telecommunications services, the FCC may require
providers of Internet Protocol telephony services to make universal service
contributions, pay access charges or be subject to traditional common carrier
regulation. It is also possible that Internet based PC-to-phone and
phone-to-phone services may be regulated by the FCC differently in the future.
In addition, the FCC sets the access charges on traditional telephony traffic
and if it reduces these access charges, the cost of traditional long distance
telephone calls will probably be lowered, thereby decreasing our competitive
pricing advantage.
Changes in the legal and regulatory environment relating to the
Internet connectivity market, including regulatory changes which affect
telecommunications costs or that may increase the likelihood of competition from
the regional Bell operating companies or other telecommunications companies,
could increase our costs of providing service. For example, the FCC recently has
determined that subscriber calls to Internet Service Providers should be
classified for jurisdictional purposes as interstate calls. This determination
could affect a telephone carrier's costs for provision of service to these
providers by eliminating the payment of reciprocal compensation to carriers
terminating calls to these providers. The FCC has pending a proceeding to
encourage the development of cost-based compensation mechanisms for the
termination of calls to Internet Service Providers. Meanwhile, state agencies
will determine whether carriers receive reciprocal compensation for these calls.
If new compensation mechanisms
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increase the costs to carriers of terminating calls to Internet Service
Providers or if states eliminate reciprocal compensation payments, the affected
carriers could increase the price of service to Internet Service Providers to
compensate, which could raise the cost of Internet access to consumers.
Incumbent operators have commenced efforts to collect access charges
from Internet Protocol telephony providers. In September 1998, two regional Bell
operating companies advised Internet Protocol telephony providers that they
would impose access charges on such traffic. On April 5, 1999, Qwest (formerly
US West) filed a petition with the FCC asking the FCC to find that Internet
Protocol telephony services are telecommunications services, not enhanced or
information services, and therefore should be subject to access charge and
universal service obligations. To date, the FCC has not issued a public notice
requesting comment on the petition. If the FCC does ultimately determine that
Internet Protocol telephony is subject to the FCC's access charge and universal
service regimes, such a ruling would likely substantially increase the costs of
providing Internet Protocol telephony in the United States.
The FCC is in the process of collecting additional information
regarding Internet Protocol telephony services. On September 29, 1999, the FCC
released a notice of inquiry seeking information as to whether Internet Protocol
telephony services should be made accessible to the disabled under Section 255
of the Communications Act, which applies to "telecommunications services."
Numerous parties filed comments in this proceeding opposing the classification
of Internet Protocol telephony as a telecommunications service. To date, the FCC
has not issued a decision in this docket. In addition, on October 22, 1999, the
FCC released a notice of proposed rulemaking to collect information on the
status of local telephone service competition and the deployment of advanced
telecommunications capability. The FCC recognized that, while it does not
regulate Internet services, Internet Protocol telephony may become an important
substitute for circuit-switched telephony and should be included in evaluating
local competition. Also, the FCC asked whether it should undertake a more
specific determination of the extent to which the Internet is being used to
provide telephony services. This proceeding is also pending.
If the FCC determines that Internet Protocol telephony is subject to
regulation as a telecommunications service, it may subject providers of Internet
Protocol telephony services to traditional common carrier regulation and require
them to make universal service fund contributions and pay access charges to
terminate long distance traffic. In addition, it is possible that Internet
Protocol telephony providers may become subject to the Communications Assistance
for Law Enforcement Act, which requires telecommunications common carriers to
modify their networks to allow law enforcement authorities to perform electronic
surveillance. It is also possible that the FCC will adopt a regulatory framework
for Internet Protocol telephony providers different than that applied to
traditional common carriers. Moreover, Congressional dissatisfaction with the
FCC's conclusions regarding Internet Protocol telephony could result in
legislation requiring the FCC to impose greater or lesser regulation. Any change
in the existing regulation of Internet Protocol telephony by the FCC or Congress
could result in a material adverse effect on our business, financial condition,
operation results and future prospects.
In addition to the FCC and Congress, state regulatory authorities and
legislators may assert jurisdiction over the provision of intrastate Internet
telephony or information services. Some states already have initiated
proceedings to examine the regulation of such services. Additional regulation of
Internet telephony by the states could preclude us from intrastate markets or
make entrance more difficult. There can be no assurance that future state
regulatory and legislative changes will not have a material adverse affect on
our provision of intrastate Internet telephone or information services.
International Government Regulation of the Internet and Internet
Telephony. In connection with providing services to our customers the regulatory
treatment of Internet Protocol telephony and other communications services in
countries in Europe, Asia, Latin America, and the Middle East vary widely and is
subject to constant change. Some countries currently impose little or no
regulation on Internet Protocol telephony, as in the United States. Conversely,
other countries that prohibit or limit competition for traditional voice
telephony services generally do not permit Internet Protocol telephony or
strictly limit the terms under which it may be provided. Still other countries
regulate Internet Protocol telephony like traditional voice telephony services
or determine on a case-by-case basis whether to regulate Internet Protocol
telephony as a voice service or as another telecommunications service. For
example, iBasis, one of our competitors, has disclosed that the Israeli Minister
of Communications issued a letter requesting that iBasis cease and desist
terminating international calls over the Internet in Israel. Finally, in many
countries, Internet Protocol telephony has not been addressed by legislation or
the regulatory authorities. The varying and constantly changing regulation of
Internet Protocol telephony in the countries in which
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we currently provide or may provide services may materially adversely affect our
business, financial condition and results of operations.
With respect to the European Union, we believe that our Internet
Protocol telephony services fall outside the classification of regulated voice
telephony services. The European Union regulatory regime distinguishes between
voice telephony services and other telecommunications services. European
Commission Directive 96/19/EC requires that services other than voice telephony
be subjected to no more than a general authorization or declaration procedures.
For purposes of this Directive, "voice telephony" is defined as the commercial
provision for the public of the direct transport and switching of speech in real
time between public switch network termination points, enabling any user
connected to such a network termination point to communicate with another
termination point. On January 10, 1998, the European Commission issued a
Communication addressing whether Internet Protocol telephony was "voice
telephony" and thus subject to regulation as voice telephony by the Member
States. Consistent with its earlier directives, the European Commission stated
that Internet Protocol telephony could properly be considered voice telephony
only if all elements of its "voice telephony" definition were met, and the
European Commission concluded in this Communication that no form of Internet
Protocol telephony currently met the definition of "voice telephony" subject to
Member States' regulation. The Commission noted, however, that its conclusion
that Internet Protocol telephony cannot be considered voice telephony may not
apply to particular forms of service where, for example, an Internet Protocol
telephony service is marketed as an alternative form of voice telephony service,
users can dial out to any telephone number, and the provider guarantees the
quality of the Internet Protocol telephony service by bandwidth reservation and
claims that the quality of the service is the same as traditional voice
telephony service. Accordingly, the European Commission concluded that it would
continue to review its conclusion that Internet Protocol telephony is not "voice
telephony" in light of technological and market developments. The European
Commission recently launched a consultation, the "2000 Internet Protocol
Telephony Consultation," which is still pending, to determine whether Internet
Protocol telephony should now be regulated as voice telephony, given recent
developments.
We provide our services in other countries in which the regulatory
status of Internet Protocol telephony is unclear or in the process of
development, and in countries in which regulatory processes are not as
transparent as in the United States. Changes in the regulatory regimes of these
countries that have the effect of limiting or prohibiting Internet Protocol
telephony, or that impose new or additional regulatory requirements on providers
of such services, may result in our being unable to provide service to one or
more of the countries in which we currently operate. That result could
materially adversely affect our business, financial condition and results of
operations.
In addition, as we expand into foreign countries, such countries may
require that we qualify to do business in that particular country, that we are
otherwise subject to regulation or that we are prohibited from conducting our
business in that particular country. Our failure to qualify as a foreign
corporation in a jurisdiction in which we are required to do so, or to comply
with foreign laws and regulations, would materially adversely affect our
business, financial condition and results of operations, including by subjecting
us to taxes and penalties and/or by precluding us from, or limiting us in, the
enforcement of contracts in such jurisdictions. Likewise, our customers may be
or become subject to requirements to qualify to do business in a particular
foreign country, to otherwise comply with regulations, or to cease from
conducting business in that particular country. We cannot be certain that our
customers are currently in compliance with regulatory or other legal
requirements in their respective countries, that they will be able to comply
with existing or future requirements, and/or that they will continue in
compliance with any requirements. The failure of our customers to comply with
these requirements could materially adversely affect our business, financial
conditions and results of operations.
Regulation of the Internet
Congress has recently adopted legislation that regulates certain
aspects of the Internet, including online content, user privacy, taxation,
access charges, liability for third-party activities and jurisdiction. In
addition, a number of initiatives pending in Congress and state legislatures
would prohibit or restrict advertising or sale of certain products and services
on the Internet, which may have the effect of raising the cost of doing business
on the Internet generally. The European Union has also enacted several
directives relating to the Internet, one of which addresses online commerce. In
addition, federal, state, local and foreign governmental organizations are
considering other legislative and regulatory proposals that would regulate the
Internet. Increased regulation of the Internet may
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hinder its growth, which may in turn negatively impact the cost of doing
business via the Internet or otherwise materially adversely affect our business,
results of operations and financial condition.
The Federal Trade Commission has adopted regulations regarding the
collection and use of personal identifying information obtained from minors when
accessing websites, and may adopt additional online privacy regulations. These
regulations may include requirements that companies establish certain procedures
to disclose and notify users of privacy and security policies, obtain consent
from users for certain collection and use of information and to provide users
with the ability to access, correct and delete personal information stored by
the company. These regulations may also include enforcement and redress
provisions. There can be no assurance that we will adopt policies that conform
with any regulations adopted by the Federal Trade Commission. Moreover, even in
the absence of those regulations, the Federal Trade Commission has begun
investigations into the privacy practices of companies that collect information
on the Internet. One investigation resulted in a consent decree pursuant to
which an Internet company agreed to establish programs to implement the
principles noted above. We may become subject to a similar investigation, or the
Federal Trade Commission's regulatory and enforcement efforts may adversely
affect our ability to collect demographic and personal information from users,
which could have an adverse effect on our ability to provide highly targeted
opportunities for advertisers and electronic commerce marketers. Any of these
developments would materially adversely affect our business, results of
operations and financial condition.
The European Union has adopted a directive that imposes restrictions on
the collection and use of personal data. Under the directive, citizens of the
European Union are guaranteed rights to access their data, rights to know where
the data originated, rights to have inaccurate data rectified, rights to
recourse in the event of unlawful processing and rights to withhold permission
to use their data for direct marketing. The directive could, among other things,
affect United States companies that collect information over the Internet from
individuals in European Union member countries, and may impose restrictions that
are more stringent than current Internet privacy standards in the United States.
In particular, companies with offices located in European Union countries will
not be allowed to send personal information to countries that do not maintain
adequate standards of privacy. The directive does not, however, define what
standards of privacy are adequate. As a result, the directive may adversely
affect the activities of entities such as us that engage in data collection from
users in European Union member countries.
INTELLECTUAL PROPERTY
We regard our copyrights, service marks, trademarks, trade dress, trade
secrets and similar intellectual property as critical to our success, and we
rely on trademark and copyright law, trade secret protection and confidentiality
and/or license agreements with our employees, customers, partners and others to
protect our proprietary rights. We pursue the registration of our trademarks and
service marks in the United States and have applied for the registration of
certain of our trademarks and service marks. AxisTel has applied for
registration of the names "AxisTel", "Global Telephony Xchange Service" and
"Web2Dial", but has not completed the registration process.
We currently use the trade name "Telares" to market certain of our
value added services. We filed a trademark application with the United States
Patent and Trademark office (the "PTO") for the "Telares" name on August 1999.
Subsequently, in February of 2000, we received notice from the PTO that Callnet
Communications, Inc. had filed an application for the trademark "Telara" for a
similar use to that of "Telares". In August, 2000, the PTO issued a notice that
it was publishing the "Telara" trademark. Although there can be no assurance, we
believe that the "Telares" mark takes precedence, and we are currently deciding
whether to challenge publication of the "Telara" trademark.
We are currently planning on filing a patent application for our
multimedia technology under the name "ISV Mail".
We have never filed any application to protect the name "eVentures" and
do not currently have any patents or other material intellectual property.
Additionally, the name "eVentures" is generic in nature and we may not be able
to protect it. We do not own the domain name eVentures.com, which is being used
by a business that is soliciting business plans, capital and advisors for
start-up companies. We have notified such company of the potential confusion and
we intend to attempt to fully enforce whatever rights we may have to protect our
name.
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EMPLOYEES
As of June 30, 2000, we had approximately 130 employees. We also employ
a limited number of independent contractors and temporary employees on a
periodic basis. Our employees are not represented by a labor union and we
consider our labor relations to be good.
RISK FACTORS
You should consider carefully risks associated with our forward-looking
statements, as well as the following investment considerations.
RISK FACTORS RELATING TO OUR COMPANY
WE HAVE A HISTORY OF OPERATING LOSSES AND ANTICIPATE THESE LOSSES FOR
AT LEAST THE NEXT SEVERAL YEARS.
We have incurred operating losses of $28.8 million and $3.3 million for
the fiscal years ended June 30, 2000 and 1999, respectively. Our revenues may
not continue to grow or even sustain current levels. We plan to continue to make
significant investments to expand our capacity and network infrastructure,
develop brand recognition, broaden the range of our service offerings and expand
our sales, marketing, technical and customer support personnel. Our capital
expenditures program, as currently contemplated, will require approximately $105
million during the five-year period ending June 30, 2005, the majority of which
will be for the expansion of our network infrastructure. A substantial portion
of these expenditures will be made before any significant revenue related to
these expenditures may be realized.
In addition, our operating expenses are based largely on anticipated
revenue trends and a significant portion of our expenses, such as personnel, the
leased portion of our network and our real estate facilities and depreciation of
our network infrastructure, is fixed. If our revenues fall below our
expectations, we would probably not be able to reduce our fixed or variable
expenses in sufficient time to respond to the shortfall. If we fail to achieve
significant increases in our revenues as a result of our investments, the size
of our operating losses may be larger than expected. We may never achieve
profitability or positive cash flows from operations in any period, and we may
not be able to sustain or increase profitability or positive cash flows on a
quarterly or annual basis.
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH TO BASE AN INVESTMENT
DECISION.
We have only a limited operating history upon which you can evaluate
our business and prospects. We commenced commercial operations in June of 1998
and have only recently begun to combine our network operations. In addition,
because we expect an increasing percentage of our revenues to be derived from
our broadband network services, our past operating results may not be indicative
of our future results.
You should consider our prospects in light of the risks, expenses and
difficulties we may encounter as an early stage company in the new and rapidly
evolving market for broadband network services. These risks include our ability:
o to increase our mix of revenues to include more high margin
broadband transport, Internet access and value-added services;
o to increase gross profits to cover the increased expenditures
we have planned;
o to compete effectively; and
o to offer new products and services and keep pace with
developing technology.
WE MAY HAVE INSUFFICIENT FUNDING TO IMPLEMENT OUR STRATEGY.
Unless we are able to generate sufficient cash from operations or raise
capital from outside investors, we will not have sufficient funds to implement
our strategy. We estimate that we will require approximately $170.0
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million during the next 24 months to fund capital expenditures, operating losses
and working capital. Even if we do generate cash from operations and/or raise
additional capital, we may not have enough money to continue operations,
primarily because, due to our limited operating history and the nature of the
communications industry, our future operating performance and capital needs are
difficult to predict.
We cannot assure our investors that adequate levels of additional
financing will be available at all or on acceptable terms. Any additional
financing could involve the issuance of securities with rights superior to those
of our common stockholders. The issuance of additional securities could also
result in significant dilution to our existing stockholders.
OUR SUCCESS DEPENDS ON OUR IMPLEMENTATION OF AN UNPROVEN BUSINESS
MODEL.
Our business strategy is to increase our revenues and profitability by
offering broadband transport, Internet access and value added services. We can
neither assure you that we will be able to do this or that this strategy will be
profitable. Currently our revenues are primarily generated from private line and
VOIP services for Qwest and other Communications Service Providers and the sale
of prepaid calling cards on a direct and wholesale basis. The provision of
carrier transport services and broadband and value-added services have not been
profitable to date.
In the future, we intend to generate increased revenues from multiple
sources, many of which are unproven, including the commercial sale of enhanced
Internet Protocol communications services. To date, we have recorded no revenue
from advertising. We expect that our revenues for the foreseeable future will be
dependent on, among other factors:
o sale of broadband transport, Internet access and value-added
services;
o acceptance and use of broadband Internet access;
o continued rapid growth of the demand for connectivity and
bandwidth;
o implementation of new service offerings;
o the effect of competition, regulatory environment,
international long distance rates and access and transmission
costs on our prices;
o continued expansion of our global network; and
o sale of Internet advertising.
We may not be able to sustain our current revenues or successfully
generate additional revenues from the sale of our services in the future.
WE DEPEND ON SALES TO QWEST.
We currently depend on sales to Qwest for a substantial majority of our
revenues. Qwest accounted for 68% and 65% of our revenues for the fiscal years
ended June 30, 2000 and June 30, 1999, respectively. Qwest is not contractually
required to purchase services from us. Qwest resells a significant portion of
the carrier transmission services it purchases from us to third parties.
Although we could market our services directly to these third parties if Qwest
ceased purchasing services from us, we cannot assure you that we would succeed
in attracting these customers or that these customers would purchase our
services in the same volume or on the same terms as from Qwest.
OUR SUCCESS DEPENDS ON OUR MANAGEMENT OF GROWTH AND OUR INTEGRATION OF
EXISTING BUSINESSES.
We are a new company formed by the combination of three separate and
distinct businesses with separate and distinct management teams: AxisTel,
e.Volve and iGlobal. We are faced with significant integration issues with
respect to these businesses and their management teams. We may not be successful
in integrating these
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management teams, and we may not be able to hire and retain the quality of
personnel we need to sustain our business. To the extent that we continue to
grow internally or through strategic alliances, we will be faced with many
risks, including risks associated with the establishment of new operations,
Websites and personnel; the diversion of resources from our existing businesses;
integration with our existing networks and services; and our management's
ability to manage increased traffic on our networks.
The reorganization has resulted in significant growth of our
operations. This growth has and will continue to place a significant strain on
our managerial, operational and financial resources. To manage this growth, we
will be required to implement and improve our operating and financial systems
and controls, expand, train and manage our employee base, develop, introduce and
market new products and services, secure space for new facilities and control
expenses. We will be dependent upon our management to assume and perform the
management functions formerly performed by management of each of our
subsidiaries. To the extent that our management is unable to assume or perform
these combined duties, our business, results of operations and financial
condition could be adversely affected. There can be no assurance that the
management, systems and controls currently in place or any steps taken to
improve such management, systems and controls will be adequate in the future. In
addition, the integration of our existing businesses and their operations will
require our management to make and implement a number of strategic and
operational decisions. The timing and manner of the implementation of these
decisions will materially impact our business operations.
DIFFICULTIES IN CONSTRUCTING OUR NETWORK COULD INCREASE ITS ESTIMATED
COST AND DELAY ITS SCHEDULED COMPLETION.
The expansion, operation and any upgrading of our network is a
significant undertaking. Administrative, technical, operational and other
problems that could arise may be more difficult to address and solve due to the
significant size and complexity of the planned network. We are also dependent on
timely performance by third-party suppliers and contractors. Many of these
factors and problems are beyond our control. As a result, the entire network may
not be completed as planned for the cost and in the time frame that we currently
estimate. We may be materially adversely affected as a result of any significant
increase in the estimated cost of the network or any significant delay in its
anticipated completion.
After its initial completion, future expansions and adaptations of our
network's electronic and software components may be necessary in order to
respond to:
o a growing number of customers;
o increased demands by our customers to transmit larger amounts
of data;
o changes in our customers' service requirements; and
o technological advances by our competitors.
Any expansion or adaptation of our network will require substantial
additional financial, operational and managerial resources. If we are unable to
expand or adapt our network to respond to these developments on a timely basis
and at a commercially reasonable cost, then our business could be materially
adversely affected.
OUR STRATEGY REQUIRES THE DEVELOPMENT OF EFFECTIVE OPERATIONS SUPPORT
SYSTEMS TO IMPLEMENT CUSTOMER ORDERS AND TO PROVIDE AND BILL FOR
SERVICES.
Our strategy depends on our ability to implement effective operations
support systems. This is a complicated undertaking requiring significant
resources, expertise and support from third-party vendors. Operations support
systems are needed for, among other things:
o implementing customer orders for service;
o monitoring network performance;
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o provisioning, installing and delivering these services; and
o monthly billing for these services.
Since our strategy provides for rapid growth in the number and volume
of products and services we offer, we need to develop these operations support
systems on a schedule sufficient to meet our proposed service rollout dates. In
addition, we will require these operations support systems to expand and adapt
with our rapid growth. The failure to develop effective operations support
systems could have a material adverse effect on our ability to implement our
strategy.
OUR BUSINESS MAY BE IMPEDED BY GOVERNMENTAL REGULATIONS.
As a provider of domestic and international communications services, we
are subject to varying degrees of regulation in each of the jurisdictions in
which we provide services. Local laws and regulations, and interpretation of
such laws and regulations, differ significantly between jurisdictions. There can
be no assurance that future regulatory, judicial, and legislative changes will
not have a material adverse effect on us, that domestic or international
regulators or third parties will not raise material issues with regard to our
compliance or noncompliance with applicable regulations, or that regulatory
activities will not have a material adverse effect on us.
The legal and regulatory environment that pertains to the Internet is
uncertain and is changing rapidly as the use of the Internet increases. For
example, in the United States, the FCC is considering whether to impose
surcharges or additional regulations upon certain providers of Internet Protocol
telephony.
In addition, regulatory treatment of Internet Protocol telephony
outside the United States varies from country to country. There can be no
assurance that there will not be interruptions in Internet Protocol telephony in
these and other foreign countries or that we will be able to return to the level
of service we had in each of these countries prior to any interruptions.
New regulations could increase our costs of doing business and prevent
us from delivering our products and services over the Internet, which could
adversely affect our customer base and our revenue. The growth of the Internet
may also be significantly slowed. In addition to new regulations being adopted,
existing laws may be applied to the Internet. See "Business -- Government
Regulation."
WE MUST RECRUIT AND RETAIN KEY MANAGEMENT AND TECHNICAL PERSONNEL TO BE
COMPETITIVE.
Our success depends to a significant extent on the continued
contributions, experience and knowledge of our senior management team and key
technical and marketing personnel. The loss of any of these key personnel could
have a material adverse affect on our ability to operate our business or
implement our strategy. To implement our strategy, we need to hire a significant
number of additional employees, including new senior sales and network operating
personnel who are familiar with the service needs of Communications, Internet
and Application Service Providers, Internet telephony and Internet Protocol and
Asynchronous Transfer Mode technology. Our success also depends upon our ability
to identify, attract, hire, train, retain and motivate highly skilled technical,
managerial, sales and marketing personnel. Competition for these types of
personnel in the communications industry is intense. No assurance can be given
that we will be able to successfully attract, assimilate or retain a sufficient
number of qualified personnel. If we cannot attract and retain these key
personnel, we may not be able to effectively operate or grow our business, which
could impair our ability to create value for our stockholders and other
investors.
IF WE DO NOT RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID
TECHNOLOGICAL CHANGES, OUR SERVICES MAY BECOME OBSOLETE AND WE WOULD
PROBABLY LOSE CUSTOMERS AND BE UNABLE TO ATTRACT NEW ONES.
The broadband network services industry is characterized by rapid
technological developments and frequent new product and service introductions
and enhancements. The introduction of new products or technologies could render
our network or service offerings obsolete, thereby requiring us to spend more
than we currently anticipate in future periods in order to remain competitive,
retain our existing customers and attract new ones. Similarly, technological
developments could reduce the cost or increase the supply of services similar to
those
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that we provide or plan to provide, which could result in lower than expected
revenues in future periods. We may not be able to:
o anticipate or adapt to these new products or technologies on a
timely and cost-effective basis;
o obtain the necessary funds to develop or acquire new
technologies or products needed to compete; or
o address the increasingly sophisticated and varied needs of our
current and prospective customers.
OUR ABILITY TO COMPETE COULD BE JEOPARDIZED IF OUR NETWORK AND SERVICES
DO NOT PROPERLY OPERATE WITH THE EXISTING OR FUTURE EQUIPMENT OF OUR
CUSTOMERS.
We believe that our ability to compete successfully is dependent upon
the continued compatibility of our network and service offerings with products,
services and architectures offered by others, particularly our service provider
customers. Although we often work with vendors in testing newly developed
products, these products may not be compatible with our infrastructure. In
addition, although we currently intend to support emerging standards, there can
be no assurance industry standards will be established or, if they become
established, that we will be able to conform to these new standards in a timely
fashion and maintain a competitive position in the market. Our competitive
position would be adversely affected if we fail to conform to the prevailing
standards, or if common standards fail to emerge.
WE MAY LOSE CUSTOMERS IF WE EXPERIENCE SYSTEM FAILURES THAT
SIGNIFICANTLY DISRUPT THE AVAILABILITY AND QUALITY OF THE SERVICES THAT
WE PROVIDE.
Our operations depend on our ability to avoid and mitigate any damages,
physical or otherwise, from natural disasters, power losses, capacity
limitations, physical or electronic breaches of security, software defects,
telecommunications failures and intentional acts of vandalism, including
computer viruses. The failure of any equipment or facility on our network could
result in interruptions in service or reduced capacity for our enterprise and
service provider customers until we make the necessary repairs or install
replacement equipment. In addition, our customers may experience interruptions
in service if carriers or other service providers fail to provide the
communications capacity that we have leased in order to provide service to our
customers. Further, a majority of our traffic is transmitted over capacity that
we lease from third parties. The failure of any one of these connections also
could result in reduced performance.
These interruptions in service or performance problems could undermine
confidence in our services and cause us to lose customers or make it more
difficult to attract new ones. In addition, because many of our services are
critical to the business of many of our customers, any significant interruption
in our service could result in lost profits or other loss to our customers.
Although we attempt to disclaim liability in our service agreements, a court
might not enforce a limitation on our liability, which could expose us to
financial loss.
OUR INDUSTRY IS HIGHLY COMPETITIVE WITH PARTICIPANTS THAT HAVE GREATER
RESOURCES AND EXISTING CUSTOMERS.
The broadband network services industry is highly competitive. Many of
our existing and potential competitors have financial, personnel, marketing and
other resources significantly greater than ours. Many of these competitors have
the added competitive advantage of an existing customer base. In addition,
significant new competitors could arise as a result of:
o increased consolidation and strategic alliances in the
industry resulting from recent Congressional and FCC actions;
o allowing foreign carriers to compete in the U.S. market;
o further technological advances; and
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o further deregulation and other regulatory initiatives.
OUR MEXICAN OPERATIONS EXPOSE US TO CURRENCY RISKS.
Because our agreements with our Mexican suppliers are denominated in
Mexican pesos, we may be exposed to fluctuations in the Mexican peso, as well as
to downturns in the Mexican economy, all of which may adversely affect our
profitability.
OUR STRATEGY CONTEMPLATES FUTURE INTERNATIONAL EXPANSION BUT THERE ARE
SIGNIFICANT OPERATIONAL AND FINANCIAL RISKS ASSOCIATED WITH
INTERNATIONAL OPERATIONS.
Although we have not derived significant revenues from our
international operations in the past, an important component of our strategy is
to expand significantly our presence in international markets. As we expand, we
will substantially increase our exposure to the risks inherent in international
operations, including, among others, the following:
o general economic, social and political conditions;
o unexpected changes in legal or regulatory requirements
resulting in unanticipated costs and delays;
o differences in technology standards;
o tariffs, export and exchange controls and other trade
barriers;
o fluctuations in foreign currency exchange rates;
o difficulty of enforcing agreements and collecting accounts
receivables;
o adverse tax consequences;
o change in United States laws and regulations relating to
foreign trade and investment; and
o inability to offer some services in some countries due to
regulatory and other barriers.
Further, to expand our international operations, we may enter into
joint ventures or outsourcing agreements with third parties, acquire rights to
high bandwidth transmission capability, acquire complementary businesses or
operations or establish and maintain new operations outside the United States.
We may be heavily dependent on third parties to be successful in our
international operations. We may not be able to successfully sell our services
or adequately establish or maintain operations outside the United States.
WE EXPECT THAT THE RATES WE CHARGE FOR OUR SERVICES WILL DECLINE OVER
TIME, AND WE MAY NOT BE SUCCESSFUL IN REDUCING OUR OPERATING EXPENSES
OR INTRODUCING NEW SERVICES THAT WILL COMPENSATE FOR THESE LOST
REVENUES.
We expect to continue to experience decreasing prices for our services
as we and our competitors increase transmission capacity on existing and new
networks, as a result of our current agreements with customers, through
technological advances or otherwise, and as volume-based pricing becomes more
prevalent. For example, we have experienced significant and persistent downward
price pressure on the rates we charge for VOIP services to Mexico. Accordingly,
our historical revenues are not indicative of future revenues based on
comparable traffic volumes. If the prices for our services decrease for whatever
reason and we are unable to offer additional services from which we can derive
additional revenues or otherwise reduce our operating expenses, our operating
results will decline and our business and financial results will suffer.
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WE RELY ON LIMITED SOURCES FOR SUPPLYING CRITICAL COMPONENTS OF OUR
NETWORK INFRASTRUCTURE. IF WE ARE UNABLE TO OBTAIN SUFFICIENT
QUANTITIES OF CRITICAL EQUIPMENT FROM THESE SOURCES WHEN NEEDED, WE MAY
BE FORCED TO DELAY OUR DEVELOPMENT AND EXPANSION PLANS, WHICH WOULD
NEGATIVELY AFFECT OUR COMPETITIVE POSITION.
We depend on vendors to supply the critical components of our network
infrastructure as we expand our network both domestically and internationally.
If we are unable to obtain these critical components on a timely basis, we may
have to abandon or delay our expansion plans, which would adversely affect our
competitive position. Some of our networking equipment is available only from
one or a small number of sources. For instance, we rely on Cisco Systems for our
network routers and Lucent Technologies for our optical electronic equipment. We
typically purchase or lease all of our components under purchase orders placed
from time to time. We do not carry significant inventories of components and
have no guaranteed supply arrangements with vendors. Our vendors also sell
products to our competitors and we cannot assure you that they will not enter
into exclusive arrangements with our competitors.
WE NEED TO OBTAIN ADDITIONAL CAPACITY FOR OUR NETWORK FROM OTHER
PROVIDERS IN ORDER TO SERVE OUR CUSTOMERS AND KEEP OUR COSTS DOWN.
We lease telecommunications capacity and obtain Indefeasible Rights of
Use in fiber optic strands from both long distance and local telecommunications
carriers in order to extend the range of our network. Our inability to obtain
this additional capacity on acceptable terms, or at all, could adversely affect
our ability to quickly expand our network, attract new customers and serve our
existing customers or could increase our costs of doing so.
OUR NETWORK AND OPERATIONS MAY BE VULNERABLE TO SECURITY BREACHES.
Our network is potentially vulnerable to physical or electronic
computer viruses, break-ins and similar disruptive problems and security
breaches, which could cause interruptions, delays or loss of services to our
users. We believe that the secure transmission of confidential information over
the Internet, such as credit card numbers, is essential in maintaining user
confidence in our services. We rely on licensed encryption and authentication
technology to effect secure transmission of confidential information, including
credit card numbers. It is possible that advances in computer capabilities, new
technologies or other developments could result in a compromise or breach of the
technology we use to protect user transaction data. A party that is able to
circumvent our security systems could misappropriate proprietary information or
cause interruptions in our operations. Security breaches also could damage our
reputation and expose us to a risk of loss or litigation and possible liability.
As of this date, we have not experienced security breaches of which we are
aware. However, we cannot guarantee you that our security measures will prevent
security breaches in the future.
OUR NETWORK MAY NOT BE ABLE TO ACCOMMODATE OUR CAPACITY NEEDS.
We expect the volume of traffic we carry over our network to increase
significantly as we expand our operations and service offerings. Our network may
not be able to accommodate this additional volume. In order to ensure that we
are able to handle additional traffic, we may have to enter into long-term
agreements for leased capacity. To the extent that we overestimate our capacity
needs, we may be obligated to pay for more transmission capacity than we
actually use, resulting in costs without corresponding revenues. Conversely, if
we underestimate our capacity needs, we may be required to obtain additional
transmission capacity from more expensive sources. If we are unable to maintain
sufficient capacity to meet the needs of our users, our reputation could be
damaged and we could lose customers.
RISK FACTORS RELATED TO OUR COMMON STOCK
OUR COMMON STOCK HAS A LIMITED TRADING HISTORY AND AN ILLIQUID MARKET.
There has only been a limited public market for our common stock. We
cannot predict the extent to which an active trading market will develop or how
liquid that market might become.
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THE INFINITY ENTITIES OWN A MAJORITY OF OUR COMMON STOCK AND MAY HAVE
PLANS FOR THE COMPANY THAT MAY BE DIFFERENT FROM THOSE OF OTHER HOLDERS
OF OUR STOCK.
IEO Investments, Limited, Infinity Emerging Subsidiary Limited and
Infinity Investors, Limited (the "Infinity Entities") own a majority of our
shares of capital stock. The Infinity Entities, therefore, may exercise
significant control over our business, policies and affairs and, in general,
determine the outcome of any corporate transaction or other matters submitted to
the stockholders for approval, all in a manner that could conflict with the
interests of other shareholders.
SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE MAY DECREASE THE
PRICE OF OUR COMMON STOCK.
As of September 15, 2000, we had a total of 65,668,169 shares of common
stock eligible for future sale, consisting of:
o 50,159,135 shares of restricted common stock outstanding;
o 326,087 shares of common stock issuable upon conversion of our
Series B convertible preferred stock;
o 869,832 shares of common stock issuable upon conversion of our
Series C convertible preferred stock;
o 139,378 shares of common stock issuable upon the exercise of
warrants; and
o 14,173,737 shares of common stock issuable upon the exercise
of stock options.
We currently have 1,830,610 shares of freely tradable common stock. Of
the outstanding shares of common stock and shares issuable upon conversion of
our preferred stock and exercise of options and warrants, which are not freely
tradable, 43,627,253 shares of our common stock are subject to a lock-up
agreement under our registration rights agreement dated September 22, 1999. This
lock-up expires on September 23, 2001, but can be waived by the Infinity
Entities at any time. The resale restrictions governing the remaining 6,531,882
shares of common stock and shares of common stock issuable upon conversion of
our preferred stock or exercise of our warrants and stock options expire at
various times between November, 2000 and March 2002. If our shareholders sell
substantial amounts of their common stock in the public market, including shares
issued upon the conversion of convertible preferred stock or the exercise of
outstanding options, then the market price of our common stock could fall.
ANTI-TAKEOVER PROVISIONS COULD LIMIT OUR SHARE PRICE AND DELAY A CHANGE
OF MANAGEMENT.
Our certificate of incorporation and by-laws contain provisions that
could make it more difficult or even prevent a third party from acquiring our
company without the approval of our incumbent board of directors. These
provisions, among other things:
o divide our board of directors into three classes, with members
of each class to be elected in staggered three-year terms;
o limit the right of stockholders to call special meetings of
stockholders;
o limit the right of stockholders to present proposals or
nominate directors for election at annual meetings of
stockholders; and
o authorize our board of directors to issue preferred stock in
one or more series without any action on the part of
stockholders.
These provisions could limit the price that investors might be willing
to pay in the future for shares of our common stock and significantly impede the
ability of the holders of our common stock to change management. Provisions and
agreements that inhibit or discourage takeover attempts could reduce the market
value of our common stock.
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OUR STOCK PRICE IS HIGHLY VOLATILE.
The market price for our common stock has been highly volatile and is
likely to continue to be highly volatile. The trading prices of many technology
and Internet-related company stocks, including ours, have experienced
significant price and volume fluctuations in recent months. These fluctuations
often have been unrelated or disproportionate to the operating performance of
these companies. Any negative change in the public's perception of the prospects
of Internet or communications companies could depress our stock price regardless
of our results.
The market price of our common stock may fluctuate significantly in
response to a number of factors, some of which are beyond our control,
including:
o quarterly variations in operating results;
o changes in financial estimates by securities analysts;
o changes in market valuations of Internet-related companies;
o announcements by us or our competitors of new products and
services or of significant acquisitions, strategic
partnerships or joint ventures;
o any loss of a major customer;
o additions or departures of key personnel;
o future sales of common stock; and
o volume fluctuations, which are particularly common among
highly volatile securities of Internet-related companies.
In the past, companies in our industry have been the subject of class
action litigation by investors following periods of volatility in the price of
their publicly traded securities. We will incur substantial legal costs if the
market value of our common stock experiences adverse fluctuations and we become
the subject of similar litigation that may further affect the price of our
common stock.
AVAILABLE INFORMATION
We are subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended and in accordance therewith files
reports and other information with the Securities and Exchange Commission, as
amended. Such filings can be inspected and copied at the Public Reference
Section of the commission located at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, DC 20549 and at regional public reference facilities
maintained by the Commission located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at Seven World Trade Center,
Suite 1300, New York, New York 10048. Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission by calling
1-800-SEC-0330. Such material may also be accessed electronically by means of
the commission's home page on the Internet (http://www.sec.gov).
ITEM 2. PROPERTIES
Our corporate offices are located at 300 Crescent Court, Suite 800,
Dallas, Texas, occupying approximately 9,400 square feet. This lease expires on
July 31, 2004. We also maintain an office in New York located at 520 Madison
Avenue, New York, New York. This facility includes approximately 3,600 square
feet under a sub-lease from Freshfields LLP, which expires in May 2003.
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We also have offices at 12200 Stemmons Parkway, Suite 315, Dallas,
Texas, and at One Evertrust Plaza, Suite 800, in Jersey City, New Jersey. We
occupy approximately 12,500 square feet and approximately 15,500 square feet in
these locations, respectively. The leases expire in June 2004 and January 2009,
respectively.
The Company also maintains network facilities in Kansas City, Miami,
Dallas and Mexico City,