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EXHIBIT 99.1
RISK FACTORS
From time to time, US Xchange, L.L.C. may make written or oral
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Written forward-looking statements may appear in
documents we file with the Securities and Exchange Commission, in press releases
and in reports to our securityholders. The Private Securities Litigation Reform
Act of 1995 contains a safe harbor for forward-looking statements on which we
rely in making these disclosures. You can identify forward-looking statements
through our use of words such as "believe," "anticipate," "plan," "expect,"
"may," "will," "intend," "estimate" (and the negatives of these words) and
similar expressions. Certain of our forward-looking statements may also discuss
items such as:
- our current development plans and business strategies;
- anticipated revenues and demand in our markets;
- the growth of our operations and the markets for our
services and products;
- our anticipated capital expenditures;
- possible changes in regulatory requirements;
- our competition and competitive challenges; and
- changes in technology.
In this exhibit we identify some important risk factors that could cause our
actual results to differ materially from those contemplated by any of our
forward-looking statements. All of our forward-looking statements are qualified
by reference to the following risk factors.
WE HAVE A LIMITED HISTORY OF OPERATIONS AND EXPECT TO CONTINUE TO INCUR
SIGNIFICANT LOSSES, NEGATIVE CASH FLOW FROM OPERATIONS AND NEGATIVE EBITDA AS WE
EXPAND OUR OPERATIONS
We commenced commercial operations in July 1997. As a result of our limited
operating history, you have limited operating and financial data about us upon
which you can evaluate our performance and an investment in US Xchange. Our
business plan requires that we make significant capital expenditures and incur
significant operating expenses as we enter and establish our facilities-based
services in each of our markets. To date, we have generated only limited
revenues from our operations and we have incurred significant operating losses,
negative EBITDA and negative cash flows from operating and investing activities.
We expect to continue to incur negative cash flows and negative EBITDA in each
of our markets for approximately 24 to 36 months after we commence
facilities-based switched operations in each such market. As a result, we expect
to experience increasing consolidated losses as we expand our operations, build
our networks and switching facilities, and develop our customer base. None of
our markets currently generates positive operating cash flow or EBITDA. We
cannot assure you that we will sufficiently increase our revenues, achieve or
sustain positive EBITDA or profitability or generate sufficient operating cash
flow to meet our working capital and debt service requirements.
WE NEED SUBSTANTIAL CAPITAL TO DEVELOP AND EXPAND OUR BUSINESS
We need significant capital to continue to develop and expand our networks,
services and customer base, and to continue to fund our expected losses. As of
December 31, 1999, we estimate that our future capital requirements for our
current networks will aggregate approximately $73.4 million. Our estimated
capital requirements include capital expenditures, working capital, debt service
and operating losses that we will need to incur to install, deploy and operate
the networks and switching systems in our current markets and to
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construct or acquire long-haul fiber routes to interconnect such networks. At
December 31, 1999, we had unrestricted cash totaling approximately $189,000 and
we had available borrowings of $35.5 million under our subordinated secured line
of credit from our Co-Chairman and co-founder. We expect that these capital
resources, together with cash expected to be generated from future revenues,
interim debt financing of up to $25 million provided by Choice One under the
merger agreement and sales of our dark fiber along our local and long haul fiber
networks will be sufficient to fully fund the development of our current
markets. However, the actual amount of our capital requirements may vary
significantly from our estimates based upon a number of factors, including,
among other things:
- the timing and success of our current development plans;
- shortfalls in our revenue and cost projections;
- demand for our services;
- regulatory, technological and competitive developments;
- any decision to expand our operations into additional
commercial regions or markets; and
- any acquisitions or joint ventures that we decide to
undertake.
WE ARE HIGHLY LEVERAGED AND MAY INCUR SUBSTANTIAL ADDITIONAL INDEBTEDNESS
As of December 31, 1999, we had total indebtedness of $267.3 million, and
$60.0 million of contributed equity. The terms of our senior secured credit
facility and of our 15% Senior Notes limit, but do not prohibit, us from
incurring additional indebtedness. In particular, we and our subsidiaries may,
subject to certain restrictions, incur an unlimited amount of indebtedness
(including secured indebtedness) to finance the cost of equipment, inventory and
network assets, including the cost to design, develop, acquire, construct,
install, improve, transport and integrate any of those items.
Our relatively high level of indebtedness could have important consequences
to our future prospects. For example, it could:
- limit our ability to obtain any necessary financing in the
future for working capital, capital expenditures, debt
service requirements or other purposes;
- require that we dedicate a substantial portion of our cash
flow from operations, if any, to paying principal of and
interest on our indebtedness;
- limit our flexibility in planning for, or reacting to
changes in, our business;
- make us more highly leveraged than some of our competitors,
which may place us at a competitive disadvantage; and
- increase our vulnerability in the event of a downturn in our
business.
We cannot assure you that our consolidated operating cash flows and capital
resources will be sufficient to pay our indebtedness. In fact, we may need to
refinance a substantial portion of our debt because of a deficiency. We cannot
assure you that we will be able to refinance any of our debt on commercially
reasonable terms or at all. Our ability to meet our debt service requirements
and to refinance any debt will depend upon, among other things, our future
performance, which, in turn, will depend upon prevailing economic conditions and
financial, business, regulatory and other factors, many of which are beyond our
control. Further, we cannot assure you that we will have sufficient funds
available at the time of certain change of control events to make any required
debt repayments, including required repurchases of our 15% Senior Notes and our
senior secured credit facility.
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DEBT RESTRICTIONS LIMIT OUR FINANCIAL AND OPERATIONAL FLEXIBILITY
The terms of our senior secured credit facility and of our 15% Senior Notes
impose certain financial and operating restrictions on us and our restricted
subsidiaries. These restrictions limit, among other things, our ability to:
- incur additional indebtedness;
- create liens;
- engage in sale-leaseback transactions;
- sell assets;
- effect consolidations or mergers;
- make investments and certain other restricted payments;
- pay dividends and make distributions in respect of membership
interests;
- redeem membership interests;
- issue or sell membership interests of our restricted subsidiaries; and
- enter into transactions with any of our members or affiliates.
While these limitations are subject to a number of important qualifications
and exceptions, if we were to fail to comply with these restrictions and, in
some cases, were to fail to cure our noncompliance, we would be in default under
the terms of our senior secured credit facility and of our 15% Senior Notes. In
addition, the terms of any additional debt or equity financings that we might
obtain could further restrict our financial and operational flexibility.
As of and for the quarter and year ended December 31, 1999 and the quarter
ended March 31, 2000, we did not comply with certain financial performance
covenants under our senior secured credit facility. However, on May 15, 2000,
we announced that US Xchange, Inc., the newly formed parent of US Xchange,
L.L.C. and a corporation wholly owned by our sole member, signed a definitive
merger agreement with Choice One Communications, Inc. ("Choice One"), a
publicly held integrated communications provider that offers local exchange and
long distance telecommunications services, high-speed data, Internet and DSL
solutions, and web design and hosting primarily to small and medium-sized
businesses in second and third tier markets in the Northeast United States.
Under the terms of the agreement, Choice One will pay approximately $311
million in net cash and issue approximately 7,000,000 shares of its common
stock to Mr. VanderPol, the sole stockholder of our parent. The merger is
subject to certain conditions, including Hart-Scott-Rodino clearance and other
regulatory approvals. In addition, all of the holders of our outstanding 15%
Senior Notes have executed and delivered to Choice One a letter agreement
pursuant to which they have agreed that the surviving corporation upon
completion of the merger may redeem the 15% Senior Notes on the merger closing
date at a redemption price equal to 109% of their principal amount plus accrued
interest, if any, to the closing date. The bond holders also have agreed to an
amendment to the Indenture, to take effect on the redemption date, providing
for the deletion of certain covenants and other provisions of the Indenture.
In connection with the merger, GE Capital has agreed to forbear from
exercising its right and remedies relating to our non-compliance with financial
performance covenants until the earlier of (i) July 31, 2000 or (ii) the
occurrence of any of the following events:
- the occurrence of an event of default, or the occurrence of an event
or the happening of a condition which with the passing of time or the
giving of notice or both would constitute an event of default, under
the loan agreement, other than the events of default for the periods
ending December 31, 1999 and March 31, 2000;
- certain events of bankruptcy;
- termination of the merger.
We currently expect to complete this merger by July 31, 2000. Pursuant to
the merger agreement, we will receive sufficient cash consideration to pay the
obligations under the senior secured credit facility and the 15% Senior Notes
in full. However, we can give no assurance that any of the events listed above
will occur, that we will complete the merger by July 31, 2000 or that GE
Capital will again agree to forbear from exercising its rights under the loan
agreement. If GE Capital exercises its remedies under the loan agreement, we
may be required to repay all or any portion of the outstanding borrowings under
the facility. If this occurs prior to the completion of the merger and we
cannot otherwise satisfy our payment obligations under the senior secured
credit facility, our business would be materially adversely affected and we
would also be in default of the indenture governing the 15% Senior Notes.
In addition, under the indenture governing our 15% Senior Notes, we are
also required to file certain reports with the Securities and Exchange
Commission and to deliver these reports to the trustee and the holders of the
15% Senior Notes. We have not timely delivered our Annual Report on Form 10-K
for the year ended December 31, 1999 or our Quarterly Report on Form 10-Q for
the quarter ended March 31, 2000 and, accordingly, have failed to comply with
our reporting obligations under the indenture. However, in connection with the
merger, all the holders of the 15% Senior Notes have agreed that the 15%
Senior Notes may be redeemed on the merger closing date. If the merger were not
to be completed the trustee or holders of 25% of the outstanding principal of
the 15% Senior Notes could declare the outstanding principal and accrued and
unpaid interest to be immediately due and payable. We cannot give any assurance
that we would have sufficient cash resources or be able to obtain any
additional financing to meet these payment obligations.
OUR HOLDING COMPANY STRUCTURE MAY LIMIT OUR ABILITY TO MAKE DEBT PAYMENTS
US Xchange is a holding company, and our principal assets consist of our
equity interests in our subsidiaries. We rely upon payments from our
subsidiaries to generate the funds necessary to meet our obligations, including
our payment obligations under our 15% Senior Notes, our senior secured credit
facility, our substantial secured line of credit and our existing bank credit
facility. Our subsidiaries, however, are legally distinct from us and have no
obligation, contingent or otherwise, to pay amounts due or make funds available
for payment under our parent company indebtedness. Our subsidiaries have not
guaranteed any of our indebtedness. Moreover, the borrower under our senior
secured credit facility is a wholly-owned subsidiary of US Xchange and US
Xchange is a guarantor of such indebtedness. The ability of our subsidiaries to
make payments to us will be subject to, among other things, the availability of
funds and the terms of the indebtedness of our parent company subsidiaries. The
indenture governing our 15% Senior Notes and our senior credit facility, permit
our subsidiaries to incur substantial amounts of indebtedness. Claims of our
subsidiaries' creditors, including trade creditors, will generally have priority
as to the assets of the subsidiaries over the claims of the holders of
indebtedness of US Xchange. Accordingly, our parent company indebtedness,
including our 15% Senior Notes and senior credit facility, are effectively
subordinated to the liabilities (including trade payables) of our subsidiaries.
As of December 31, 1999, our subsidiaries have approximately $58.1 million of
liabilities (excluding intercompany payables).
WE FACE SIGNIFICANT COMPETITION
The telecommunications industry is highly competitive, and one of the
primary purposes of the Telecommunications Act of 1996 is to foster additional
competition. We expect to experience declining prices and increasing price
competition. We cannot assure you that we will be able to achieve or maintain
adequate market share or margins, or compete effectively, in any of our markets.
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In each of our markets, we compete principally with the incumbent local
exchange carrier serving such market, either Ameritech or GTE. We expect to face
significant competitive product and pricing pressure from these companies
because the incumbent has
- long-standing relationships with its customers,
- financial, technical, marketing, personnel and other resources,
including brand name recognition, substantially greater than ours,
- the potential to fund competitive services with cash flows from a
variety of businesses, and
- a nearly monopolistic market share.
In each of our commercial regions, we also face significant competition
from other facilities-based competitive local telephone companies and long
distance carriers, which further increases the pricing pressures on our
business. After the investment and expense of establishing network and support
services in a given market, the marginal cost of carrying an additional call is
negligible. We believe that Tier III markets will support only a limited number
of competitors and that operations in Tier III markets with multiple competitive
providers are likely to be unprofitable for one or more of the competitive
providers.
Prices in both the long distance business and the data transmission
business have declined significantly in recent years and we expect them to
continue to decline. We face competition from large long distance carriers such
as AT&T Corp., MCI WorldCom, Inc. and Sprint Corporation, as well as smaller
carriers, who have begun to offer integrated local, long distance and data
telecommunications services. AT&T acquired Teleport Communications Group, Inc.,
a major competitive local exchange carrier, and Tele-Communications, Inc., a
major cable television company, and MCI WorldCom has recently acquired local
networks in approximately 100 cities and has agreed to acquire Sprint. These
combinations have enhanced the ability of these carriers to offer bundled local
and long distance telecommunications services. Regional Bell operating companies
are also making concerted efforts to gain regulatory permission to offer their
own bundled local and long distance telecommunications services.
As telecommunications technologies continue to change rapidly, we expect
increasing competition in our markets from other potential competitors who may
be considered less traditional providers of telecommunications services,
including:
- cable television companies;
- microwave, satellite and other wireless telecommunications providers;
- providers of internet telephony services;
- electric utilities; and
- resellers.
In particular, companies offering or preparing to offer internet-protocol-based
voice and data transmission services, such as Qwest Communications
International, Inc., Level 3 Communications, Inc., and Williams Communications
Group are building nationwide networks that can access each of our markets.
Electric utilities and cable companies are likely competitors given their
existing rights of way. Electric utilities using Digital Line Power technologies
can transmit internet and data services over their power lines at speeds faster
than those achievable by telephone companies on their digital subscriber or
integrated services digital network lines. Other new technologies such as DSL,
internet telephony, cable modem service and wireless networks utilizing local
multi-point distribution services and satellite transmission, which can be used
to provide high capacity wireless local loop, local area network, internet
access and interactive services, have also created significant new competitors
that may have a lower cost basis than ours. We believe that there may also be an
increasing level of agent and distributor resale initiatives in our markets,
which may add further to competitive pricing pressures.
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WE MAY BE UNABLE TO MANAGE OUR GROWTH SUCCESSFULLY
We must achieve substantial growth in order to meet our payment obligations
on our existing indebtedness. To grow our business we will need to control our
costs, maintain regulatory compliance, maintain effective quality controls,
develop and retain a sufficient customer base, and attract, assimilate and
retain qualified management, technical and sales personnel. See " -- We Depend
on Qualified Personnel" below. If we decide to grow by acquiring other companies
or entering into joint ventures with other businesses, we will need to
successfully identify, finance, complete and assimilate such acquisitions or
joint ventures. See " -- We Face Additional Risks If We Pursue Any Acquisitions
or Joint Ventures" below.
If we cannot successfully manage the continued development and expansion of
our operations, we may not be able to sufficiently expand our customer base and
service offerings. We cannot assure you that we will be able to successfully
maintain the needed systems, procedures and controls, or obtain, integrate and
utilize the operational, technical, financial and human resources necessary to
manage a developing and expanding business in an evolving, highly regulated and
increasingly competitive industry.
WE DEPEND ON QUALIFIED PERSONNEL
A small number of key executive officers, most notably Mr. Ronald H.
VanderPol, our Co-Chairman and co-founder, and Mr. Richard Postma, our
Co-Chairman, Chief Executive Officer and co-founder, manage our business. The
loss of services of one or more of these key executive officers, particularly
Mr. VanderPol or Mr. Postma, could materially harm our business and our
prospects. We believe that our success will depend in large part on our ability
to continue to develop a large and effective sales force and attract and retain
highly skilled and qualified management, technical and sales personnel. Only
three of our executive officers have employment agreements, and we do not
maintain key person life insurance for any of our executive officers, other than
Messrs. VanderPol and Postma. Although we have been successful to date in
attracting and retaining a sufficient number of qualified personnel, the
competition for qualified personnel in the telecommunications industry is
intense. For this reason, we cannot assure you that we will be able to continue
to attract and retain the qualified management, technical and sales personnel
necessary to achieve our business objectives.
WE DEPEND ON THE RELIABILITY OF SOPHISTICATED INFORMATION AND PROCESSING SYSTEMS
Sophisticated back office information and processing systems are vital to
our growth and our ability to monitor costs, bill customers, provision customer
orders and achieve operating efficiencies. Our operations support systems, which
we have either acquired from or developed with third-party vendors, are
scaleable, may be employed either centrally or in more than one location, and
automate many of the functions which previously required multiple manual entries
of customer information to accomplish order management, provisioning, switch
administration and billing. We have completed the integration of our
provisioning, order entry and billing systems. However, we cannot assure you
that these systems will produce the anticipated operational solutions or that
these systems will perform as expected. As we expand our customer base, deploy
our networks and provide our own switch-based services, we will continue to face
several risks with respect to our systems, including:
- these systems might fail to perform as expected;
- these systems might fail to interface with the legacy systems of other
carriers; and
- we could fail to adequately identify all of our information and
processing needs or to upgrade our systems as necessary.
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In addition, our right to use certain of these systems is dependent upon license
agreements with third party vendors, certain of which they may cancel. We cannot
assure you that a third-party vendor will not cancel (or fail to renew) these
agreements.
OUR ABILITY TO IMPLEMENT OUR BUSINESS STRATEGY IS SUBJECT TO NUMEROUS RISKS
US Xchange is a recent entrant into the competitive local telephone
industry. There are numerous operating complexities associated with providing
facilities-based local exchange services. We will be required to develop and
enhance services, products and systems and will need to implement effective
marketing initiatives to sell these services and products. We will also need to
maintain the equipment to provide such services and products.
Our services may not be profitable due to, among other factors, lack of
customer demand, inability to secure and maintain access to the incumbent local
telephone companies' facilities on acceptable terms, competition and pricing
pressure from the incumbent local telephone companies and other competitive
providers, and cost overruns in connection with network build-outs. We expect to
face significant competitive product and pricing pressure in each of our
markets. We cannot assure you that our networks will generate sufficient
revenues, achieve or sustain positive EBITDA or profitability, or generate
sufficient operating cash flow to meet our working capital and debt service
requirements.
Our business is highly dependent on our ability to interconnect with and
obtain unbundled network elements from the incumbent local telephone companies
in our markets. In each of our markets, we rely on incumbent local telephone
companies to permit us to collocate our equipment in the incumbent local
telephone company's central offices as a means of connecting to our customers.
Under the 1996 Act, the incumbent local telephone companies are required to
permit us to effect such collocations and interconnections and to purchase only
the origination and termination services and network elements that we need.
While we believe that this regulatory requirement allows us to avoid certain
operating expenses, we cannot assure you that the incumbent local telephone
companies will effect such collocations and interconnections and such unbundling
of network elements in a timely manner or at rates, and on terms and conditions,
that will permit us to profitably offer switched services.
To the extent we interconnect with and use an incumbent local telephone
company's network to service our customers, we will be dependent upon the
technology and capabilities of the incumbent. We will also be required to
interface with the incumbent's legacy systems in order to properly provision and
service our customers. Many competitive local telephone companies, including US
Xchange, have experienced difficulties in working with the incumbent local
telephone companies with respect to provisioning, interconnection, collocation
and implementation of the systems used by competitive carriers to order and
receive unbundled network elements and wholesale services from the incumbent
local telephone companies. Coordination with incumbent local telephone companies
to gain access to network elements, complete the necessary operations support
system interfaces and secure reasonable and affordable collocation is necessary
for us to provide integrated local services to customers on a timely and
competitive basis. If we experience difficulties in obtaining high quality,
reliable and reasonably priced services from the incumbent local telephone
companies, the attractiveness of our services to our customers could be
impaired. The FCC has created a task force that is examining the problems that
have slowed the development of local telephone competition. On March 18, 1999,
the FCC issued an order permitting "cageless" and shared collocation of the
equipment of competitive providers, rather than the more costly collocation
methods previously required by the incumbent carriers, and requiring the
incumbent carriers to follow certain procedures before denying collocation. We
cannot predict the other changes, if any, that the FCC might adopt after the
task force has completed its examination.
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WE FACE RISKS RELATED TO THE LONG DISTANCE BUSINESS
We offer long distance services to our customers as part of our "one-stop
shopping" offering of bundled telecommunications services. The long distance
business is extremely competitive, and prices have declined substantially in
recent years and are expected to continue to decline. In addition, the long
distance industry has a high average churn rate, as customers frequently change
long distance providers in response to the offering of lower rates or
promotional incentives by competitors. We provide our own facilities-based long
distance services and we also purchase wholesale long distance services from
other carriers for resale to our customers. Our agreements with these other
carriers typically provide for the resale of long distance services on a
per-minute basis and contain minimum volume commitments. When we negotiate these
agreements, we must estimate future supply and demand for transmission capacity
as well as the calling patterns and traffic levels of our future customers. If
we fail to meet minimum volume commitments, we may have to pay underutilization
charges, and if we underestimate our need for transmission capacity, we may have
to obtain capacity through more expensive means.
PROVIDING SERVICES TO OUR RESIDENTIAL CUSTOMERS INVOLVES RISKS
In each of our markets we target creditworthy residential customers who we
believe are likely to have needs for multiple services through various affinity
group and other cost-effective marketing programs. Our success in providing
services to residential customers will depend, among other things, upon our
ability to:
- cost-effectively market our services to residential customers;
- maintain competitive prices and attractive service packages and thus
minimize the churn rate of our residential customers;
- provide high quality customer care services without incurring
significant additional costs;
- accurately evaluate the creditworthiness of prospective residential
customers;
- collect amounts owed by such customers in a timely, cost-effective
manner; and
- limit the amount of uncollectible bad debt from such customers.
We cannot assure you that we will be able to achieve acceptable profit margins
on our residential business.
WE FACE RISKS RELATED TO DATA TRANSMISSION BUSINESS
As part of our complete range of telecommunications services offerings, we
offer data transmission services in markets where our networks and switches have
become commercially operational. We target these services at large and
medium-sized businesses with substantial data communications requirements. The
success of our data transmission business will depend upon, among other things,
our ability to hire, train and retain qualified personnel, the effectiveness of
our sales personnel in the promotion and sale of our data transmission services,
the acceptance of such services by potential customers, our ability to control
our costs, and our ability to further enhance our services in response to future
technological changes. We cannot assure you that we will be able to profitably
provide our data transmission services.
WE WILL NEED TO ADAPT TO RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology. We rely primarily on third parties for the development of and
access to new technologies. We believe our future success will depend, in part,
on our ability to anticipate or adapt to technological developments and to
offer, on a timely basis and at competitive prices, services that meet customer
demands for lower costs and better-integrated voice and data services. We cannot
assure you that we will obtain access to new technologies on a timely basis or
on satisfactory terms. We believe that, for the foreseeable future,
technological changes will
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neither materially affect the continued use of fiber optic cable and
circuit-switched transmission, nor materially hinder us from acquiring necessary
technologies. However, we cannot predict the effect of technological changes on
our operations. Other providers are building fiber optic communications networks
that are based on packet-switched technologies and are designed to be cheaper
and faster than networks using circuit switching technologies such as our
networks. These packet-switched networks are designed with capabilities to
transmit voice, data, fax and video communications simultaneously over the same
lines. Additionally, local multi-point wireless service has bandwidth
characteristics that are well suited for simultaneous voice, data and video
transmission, and digital subscriber line technology can increase the carrying
capacity of the incumbent local telephone companies' copper wire networks. These
new technologies could provide competitive alternatives to the fiber optic
circuit-switched transmission technologies that we are deploying. The success of
any of these new technologies and our failure to adapt to them could materially
harm our business.
WE NEED TO COMPLY WITH SIGNIFICANT GOVERNMENT REGULATION
Our networks and the provision of our telecommunications services are
subject to significant regulation at the federal, state and local levels. Delays
in receiving required regulatory approvals, or new adverse regulations or
regulatory or judicial requirements, may have a material adverse effect upon our
business.
The Telecommunications Act of 1996 provides for a significant deregulation
of the domestic telecommunications industry. The 1996 Act remains subject to
judicial review and additional FCC rulemaking. As a result, it is difficult to
predict what effect the legislation will have on us and our operations. There
are currently many regulatory actions underway and being contemplated by federal
and state authorities, and there is significant pending litigation, regarding
interconnection, pricing and other issues that could result in significant
changes affecting our business. Some of the pending issues and possible
developments include:
- the ability of regional Bell operating companies to provide long
distance services within their own local service regions, which, if
permitted, would allow them to bundle local and long distance
services; this would eliminate a marketing advantage we currently have
over such companies;
- further rules governing the provision of unbundled network elements;
- price cap regulation reform;
- changes in tariff filing requirements;
- access charge reform;
- reciprocal compensation for calls to internet service providers;
- universal service reform; and
- additional developments regarding the obligations of incumbent
carriers to provide interconnection and collocation.
See "Business -- Regulation." We cannot assure you that these changes will not
have a material adverse effect upon our business.
State regulatory commissions exercise jurisdiction over us because we
provide intrastate telecommunications services. As such a provider, we must
obtain regulatory authorizations and file tariffs with state agencies in each of
the states in which we operate. Local authorities regulate our access to
municipal rights-of-way. Network buildouts are also subject to numerous local
regulations, such as building codes and licensing requirements. Such regulations
vary on a city-by-city and county-by-county basis. See "Business -- Regulation."
We cannot assure you that we will be able to maintain required
authorizations from the FCC and state and local authorities or that such
authorities will not take actions adverse to our interests. If we do not
maintain the necessary authorities and maintain the required tariffs and if we
do not meet other regulatory obligations, third
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parties and regulators could challenge our ability to operate. Any such
challenge could cause us to incur substantial legal and administrative expenses
and sanctions.
WE RELY PRIMARILY ON LUCENT FOR THE SUPPLY, INSTALLATION AND MONITORING OF
EQUIPMENT
We have contracted with Lucent to supply our host and remote switches and
transmission and related electronic equipment and to install and turn up our
network systems. We cannot assure you that Lucent will continue to meet our
equipment and service requirements on a timely basis. We believe that there are
alternative sources of supply and that our Lucent-based switching systems are
compatible with alternative suppliers' equipment and platforms. However, a
number of factors could disrupt our operations and materially harm our business,
including any:
- extended interruption in the supply of fiber optic cable, switches or
other network equipment;
- material increases in cable, switch or equipment prices;
- significant delay or interruption in the installation, turn-up,
monitoring and maintenance of our networks; or
- extended delay in transitioning the products or services of an
alternative supplier, if necessary.
WE FACE ADDITIONAL RISKS IF WE PURSUE ANY ACQUISITIONS OR JOINT VENTURES
As part of our business strategy, we might acquire other businesses that
complement our existing businesses. We are unable to predict whether or when any
prospective acquisitions will occur or the likelihood of financing or completing
any acquisition on favorable terms and conditions. We expect to face a number of
risks if we pursue any acquisition, including:
- difficulty in assimilating the acquired operations and personnel;
- the potential disruption of our ongoing business and diversion of
resources and management attention;
- management's inability to maintain uniform standards, controls,
procedures and policies;
- the risks of entering markets in which we have little or no direct
prior experience; and
- the potential impairment of relationships with employees, suppliers or
customers as a result of changes in management following any
acquisition.
Similarly, with respect to our recently announced agreement to merge with
Choice One, we can give no assurance that the merger will be completed or, if
completed, that the combined entity will not face any of the foregoing risks.
See "Debt Restrictions Limit Our Financial and Operational Flexibility."
We may also enter into joint venture transactions. These transactions
present many of the same risks involved in acquisitions. However, they also may
involve the risk that we will not have control over the joint venture and that a
joint venture partner may have economic, business or legal interests or
objectives that are inconsistent with ours. Joint venture partners may also be
unable to meet their economic or other obligations, thereby forcing us to
fulfill these obligations or abandon or curtail the venture.
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