Document/Exhibit Description Pages Size
1: S-1 Registration Statement (General Form) 170 940K
2: EX-2.1 Plan of Acquisition, Reorganization, Arrangement, 58 300K
Liquidation or Succession
3: EX-2.2 Plan of Acquisition, Reorganization, Arrangement, 83 370K
Liquidation or Succession
4: EX-2.3 Plan of Acquisition, Reorganization, Arrangement, 80 377K
Liquidation or Succession
5: EX-3.1 Articles of Incorporation/Organization or By-Laws 21 95K
6: EX-3.2 Articles of Incorporation/Organization or By-Laws 17 75K
7: EX-3.3 Articles of Incorporation/Organization or By-Laws 14 70K
8: EX-4.5 Instrument Defining the Rights of Security Holders 12 56K
9: EX-4.6 Instrument Defining the Rights of Security Holders 9 48K
10: EX-4.7 Instrument Defining the Rights of Security Holders 10 51K
11: EX-4.8 Instrument Defining the Rights of Security Holders 14 58K
12: EX-4.9 Instrument Defining the Rights of Security Holders 10 56K
13: EX-4.10 Instrument Defining the Rights of Security Holders 12 63K
14: EX-4.12 Instrument Defining the Rights of Security Holders 19 74K
15: EX-4.13 Instrument Defining the Rights of Security Holders 11 59K
16: EX-4.14 Instrument Defining the Rights of Security Holders 6 24K
17: EX-10.1 Material Contract 37 176K
18: EX-10.3 Material Contract 12 69K
19: EX-10.4 Material Contract 12 67K
20: EX-10.5 Material Contract 12 69K
21: EX-10.6 Material Contract 12 69K
22: EX-10.7 Material Contract 12 71K
23: EX-10.8 Material Contract 12 70K
24: EX-10.9 Material Contract 14 71K
25: EX-10.10 Material Contract 8 41K
26: EX-10.11 Material Contract 7 37K
27: EX-23.1 Consent of Experts or Counsel 1 10K
28: EX-23.2 Consent of Experts or Counsel 1 10K
29: EX-23.3 Consent of Experts or Counsel 1 10K
30: EX-23.4 Consent of Experts or Counsel 1 10K
31: EX-23.6 Consent of Experts or Counsel 1 10K
32: EX-23.7 Consent of Experts or Counsel 1 10K
33: EX-23.8 Consent of Experts or Counsel 1 10K
34: EX-23.9 Consent of Experts or Counsel 1 10K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1999
REGISTRATION NUMBER 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
OMNILYNX COMMUNICATIONS CORPORATION
(Exact Name of Registrant as Specified in Charter)
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DELAWARE 4813 76-0530551
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
1770 MOTOR PARKWAY, SUITE 300
HAUPPAUGE, NEW YORK 11788
(516) 582-2222
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------------
JOSEPH A. GREGORI
CHIEF EXECUTIVE OFFICER
OMNILYNX COMMUNICATIONS CORPORATION
1770 MOTOR PARKWAY, SUITE 300
HAUPPAUGE, NEW YORK 11788
(516) 582-2222
(Name, address, including zip code, and telephone number, including area code,
of registrant's agent for service)
------------------------------
COPIES TO:
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ROBERT G. REEDY MICHAEL L. FALTISCHEK
PORTER & HEDGES, L.L.P. PAUL RUBELL
700 LOUISIANA RUSKIN, MOSCOU, EVANS & FALTISCHEK, P.C.
HOUSTON, TEXAS 77002-2764 170 OLD COUNTRY ROAD
(713) 226-0674 MINEOLA, NEW YORK 11501
(516) 663-6600
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / __________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED SHARE PRICE REGISTRATION FEE
Common Stock, par value $.0001 per share.... (1) (1) $ 20,240,000 $5,627
TOTAL....................................... -- -- $ 20,240,000 $5,627
(1) In accordance with Rule 457(o) under the Securities Act, the number of
shares being registered and the proposed maximum offering price per share
are not included in this table.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES EXCHANGE COMMISSION, ACTING PURSUANT TO
SAID SECTION 8(A), MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED , 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
1,600,000 SHARES
[LOGO]
OMNILYNX COMMUNICATIONS CORPORATION
COMMON STOCK
This is OmniLynx Communications Corporation's initial public offering of
common stock. OmniLynx has recently acquired one company in the
telecommunications industry. We will also acquire two additional companies in
the same industry simultaneously with and as a condition of the closing of this
offering. OmniLynx has not conducted any operations to date except in connection
with this offering and the acquisitions of these companies.
We expect that the initial public offering price will be between $9.00 and
$11.00 per share. Prior to the offering, no public market for our common stock
existed. After the offering, we expect that the common stock will trade on the
American Stock Exchange under the symbol " ."
INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN "RISK
FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
---------------------
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PER SHARE TOTAL
Public Offering Price................................................... $ $
Underwriting Discount................................................... $ $
Proceeds, before expenses, to OmniLynx Communications Corporation....... $ $
The underwriters may also purchase up to an additional 240,000 shares at the
public offering price, less the underwriting discount, within 45 days from the
date of this prospectus to cover over-allotments.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
WESTPORT RESOURCES INVESTMENT SERVICES, INC.
WEATHERLY SECURITIES CORPORATION
, 1999
[NATIONAL COVERAGE GRAPHIC]
HEADER: NATIONAL COVERAGE.
DESCRIPTION: Graphic illustration of the United States territory marked with
symbols identifying the cities in which our services are available and the
cities in which our services are planned to be made available. The name of the
city is identified beside each symbol.
CAPTION: When complete, our networks in these regions will enable us to provide
service to commercial buildings, multiple dwelling units and residential
consumers throughout our targeted regions.
TABLE OF CONTENTS
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Prospectus Summary.................................................................... 3
Risk Factors.......................................................................... 8
The Company........................................................................... 20
Use of Proceeds....................................................................... 21
Dividend Policy....................................................................... 21
Capitalization........................................................................ 22
Dilution.............................................................................. 24
Selected Financial Data............................................................... 25
Management's Discussion and Analysis of Pro Forma Financial Condition and Results of
Operations.......................................................................... 28
Management's Discussion and Analysis Of Financial Condition and Results of Operations
Combined and Founding Companies..................................................... 34
Business.............................................................................. 44
Management............................................................................ 61
Certain Relationships and Related Transactions........................................ 68
Principal Stockholders................................................................ 73
Description of Capital Stock.......................................................... 76
Shares Eligible for Future Sale....................................................... 80
Underwriting.......................................................................... 83
Legal Matters......................................................................... 85
Experts............................................................................... 85
Where You Can Find More Information................................................... 86
Index to Financial Statements......................................................... F-1
------------------------
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about us, including, among other things:
- The successful implementation of our anticipated growth strategies;
- Our ability to integrate our founding companies and future acquisitions;
- Continual changes in the telecommunications industry and technology;
- The actions of our competitors;
- Market acceptance of our services;
- Economic and demographic trends affecting our business; and
- Future expenditures for capital projects.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur.
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
------------------------
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS AND MAY
NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ
THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL DATA AND RELATED NOTES, BEFORE
MAKING AN INVESTMENT DECISION. OMNILYNX COMMUNICATIONS CORPORATION HAS RECENTLY
ACQUIRED ONE COMPANY IN THE TELECOMMUNICATIONS INDUSTRY. WE WILL ALSO ACQUIRE
TWO ADDITIONAL COMPANIES IN THE SAME INDUSTRY SIMULTANEOUSLY WITH AND AS A
CONDITION OF THE CLOSING OF THIS OFFERING. THESE THREE COMPANIES ARE REFERRED TO
AS THE FOUNDING COMPANIES. EXCEPT AS OTHERWISE NOTED, THE INFORMATION IN THIS
PROSPECTUS (1) ASSUMES THAT OMNILYNX HAS ACQUIRED ALL OF THE FOUNDING COMPANIES,
(2) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED, (3)
ASSUMES AN INITIAL PUBLIC OFFERING PRICE OF $10.00 PER SHARE (THE MIDPOINT OF
THE RANGE OF ESTIMATED PUBLIC OFFERING PRICES SET FORTH ON THE COVER PAGE OF
THIS PROSPECTUS), AND (4) GIVES EFFECT TO A 1.922704 TO 1 REVERSE SPLIT OF
OMNILYNX'S COMMON STOCK IN JUNE 1999.
THE COMPANY
OmniLynx acquired ARC Networks, Inc. in June 1999. We will acquire
InfoHighway International, Inc. and AXCES, Inc. simultaneously with and as a
condition of the closing of this offering. Through these companies, we intend to
offer an extensive array of Internet and telecommunications services to
businesses and consumers. These services will initially include a combination of
high-speed Internet access and local and long distance telephone service. In the
future, we intend to offer cable television, video conferencing, secure online
shopping, online data backup, virtual private networks and other advanced data
services. We currently operate principally in New York, New Jersey, Florida,
Illinois, Texas and California.
The combination of these three companies creates an extensive product mix,
and produces efficiencies by combining sales and marketing efforts, back office
operations and customer service. Our complementary product lines will enable us
to become a full service telecommunications company. We will offer both bundled
services for customer convenience and a wide array of unbundled services for
specific applications. We intend to service both residential and commercial
end-users.
With our DirectConnect service, we presently provide or have agreed to
provide high-speed Internet service to 30 multi-story buildings. This service is
significantly faster than dial up modem connections, yet sells for less than the
cost of a dedicated high-speed connection. We also provide Internet and
telephone services to over 10,000 access lines, and serve more than 160,000
residential customers with long distance service. We believe significant
opportunities exist to expand revenues by cross selling various products to
current customers. In addition, we intend to continue to grow in all of our
markets through the acquisition of complementary technologies or companies. We
intend to use these acquisitions to increase our Internet service provider and
competitive local exchange carrier revenues in our target markets.
Each of the founding companies has at least five years of experience in its
respective industry and a seasoned management team. Mr. Joseph A. Gregori is our
Chief Executive Officer, and has over 13 years in the telecommunications
industry. Prior to becoming ARC's Executive Vice President in 1998, he served as
Chief Operating Officer of PriCellular Corporation, a publicly traded wireless
telephone provider, and President of Nationwide Cellular Service Inc. and its
successor company, MCI Wireless. Mr. Peter F. Parrinello, our Chairman of the
Board and President, has over 25 years of experience in the telecommunications
industry. Mr. Tony Howlett, our Chief Technology Officer, founded InfoHighway
and has served as Chief Executive Officer since 1994.
3
THE OFFERING
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Common stock offered by
OmniLynx................... 1,600,000 shares
Common stock outstanding
after this offering(1)..... 4,587,242 shares
Use of proceeds.............. We expect that the net proceeds from this offering (after
all costs and underwriting discounts and commissions, but
without exercise of the over-allotment option) will be
approximately $13.3 million. We intend to use these proceeds
for:
- repayment of certain indebtedness of OmniLynx and the
founding companies;
- capital expenditures for hardware to enable us to
serve additional buildings;
- general working capital purposes; and
- future acquisitions of telecommunications companies.
American Stock Exchange
Symbol.....................
------------------------
(1) The calculation of the number of shares of common stock outstanding after
the offering consists of:
- 1,600,000 shares to be sold in the public offering;
- 939,000 shares issued to the founders of OmniLynx and other investors; and
- 2,048,242 shares to be issued to the shareholders of the founding
companies.
The number of shares of common stock outstanding after the offering in the table
above does not include 3,585,459 shares which are issuable pursuant to
contingent common stock issue rights and various warrants, options, convertible
notes and convertible preferred stock. For a detailed description of these
additional shares, see "Capitalization."
------------------------
RISK FACTORS
Investing in the common stock involves risks which are described in "Risk
Factors" beginning on page 8 of this prospectus.
------------------------
"OmniLynx-TM-," "DirectConnect-TM-," "ARC Networks-TM-," "InfoHighway-TM-,"
"AXCES, Inc.-TM-" and the OmniLynx logo names and marks are our trademarks. This
prospectus contains our other product names, trade names and trademarks and
those of other organizations.
4
SUMMARY PRO FORMA COMBINED FINANCIAL DATA INFORMATION
OmniLynx acquired ARC in June 1999. We will acquire InfoHighway and AXCES
simultaneously with and as a condition of the closing of this offering. For
financial statement presentation purposes, AXCES has been identified as the
accounting acquiror. The following table presents summary unaudited pro forma
combined financial information for OmniLynx, as adjusted for:
- the effects of the acquisition of the founding companies on a historical
basis;
- the effects of certain pro forma adjustments to the historical financial
statements;
- the consummation of the offering and our use of the estimated net
proceeds; and
- the reverse stock split.
The pro forma combined financial data does not purport to represent what our
results of operations or financial position actually would have been had these
events, in fact, occurred on the date or at the beginning of the period
indicated, nor are they intended to project our results of operations or
financial position for any future date or period. See "Selected Financial Data"
and the Unaudited Pro Forma Combined Financial Statements and the notes thereto
included elsewhere in this prospectus.
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PRO FORMA COMBINED
------------------------------------
THREE MONTHS
YEAR ENDED ENDED MARCH 31,
DECEMBER 31, 1998 1999
----------------- -----------------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA(1):
Revenues................................................................. $ 46,373 $ 9,947
Cost of services......................................................... 22,719 5,490
----------------- -----------------
Gross profit............................................................. 23,654 4,457
Selling, general and administrative expenses(2).......................... 21,536 4,578
Depreciation and amortization(3)......................................... 3,818 977
----------------- -----------------
Loss from operations..................................................... (1,700) (1,098)
Interest expense, net(4)................................................. (459) (72)
----------------- -----------------
Loss before income taxes................................................. (2,159) (1,170)
Provision (benefit) for income taxes(5).................................. 245 (172)
----------------- -----------------
Net loss before dividends on preferred stock............................. (2,404) (998)
Dividends on preferred stock............................................. 842 210
----------------- -----------------
Net loss applicable to common stockholders............................... $ (3,246) $ (1,208)
----------------- -----------------
----------------- -----------------
Net loss per share - basic and diluted................................... $ (0.71) $ (0.26)
----------------- -----------------
----------------- -----------------
Shares used in computing pro forma net loss per share(6)................. 4,587,242 4,587,242
----------------- -----------------
----------------- -----------------
OTHER DATA:
EBITDA(7)................................................................ $ 2,118 $ (121)
EBITDA margin(7)......................................................... 4.6% (1.2)%
Gross margin............................................................. 51.0% 44.8%
5
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AS OF MARCH 31, 1999
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PRO FORMA
COMBINED AS ADJUSTED(9)
----------------- -----------------
(IN THOUSANDS)
BALANCE SHEET DATA(8):
Working capital (deficit)................................................ $ (8,379) $ 6,114
Total assets............................................................. 41,210 47,680
Total debt, including current portion.................................... 9,398 2,575
Stockholders' equity..................................................... 21,787 35,080
------------------------
(1) The pro forma combined statement of operations data assume that the
acquisition of the founding companies and the offering were closed on
January 1, 1998.
(2) Reflects adjustments to salaries, bonuses and benefit amounts to reflect
those established in contractual agreements with key management personnel of
the founding companies.
(3) Reflects the amortization of excess purchase price relating to the
acquisitions which has been preliminarily allocated to an undifferentiated
pool of intangible assets to be amortized over an average period of 10 years
for pro forma purposes. Also reflects annual amortization of the customer
list acquired in connection with InfoHighway's acquisition of Eden Matrix,
an Austin, Texas-based Internet service provider operated by AMICI Online
Investments, L.L.C., in January 1999 over the estimated useful life of three
years and annual depreciation on property and equipment also acquired in the
acquisition of Eden Matrix over the estimated useful life of five years.
(4) Reflects the reduction in interest expense due to the planned repayment and
planned conversion of certain debt in connection with the acquisitions.
(5) Assumes all income is subject to a federal corporate tax rate of 34%.
(6) Includes (a) the 939,000 shares outstanding immediately prior to the
offering, (b) 2,048,242 shares to be issued to the owners of the founding
companies as consideration for the acquisitions, and (c) 1,600,000 shares to
be sold in the offering. Does not include contingent common stock or shares
issuable pursuant to warrants, options, convertible notes and convertible
preferred stock, since their effect would be antidilutive.
(7) EBITDA as used in this prospectus consists of earnings before interest,
income taxes, depreciation and amortization. Based on our experience in the
industry, we believe that EBITDA is an important tool for measuring the
performance of companies in the industry (including potential acquisition
targets) in several areas such as liquidity, operating performance and
leverage. In addition, lenders use EBITDA as a criterion in evaluating
companies in the industry. EBITDA is not a measure of financial performance
determined under generally accepted accounting principles, should not be
considered as an alternative to net income as a measure of performance or to
cash flows as a measure of liquidity, and is not necessarily comparable to
similarly titled measures of other companies. EBITDA margin is calculated by
dividing EBITDA into the total revenues generated during the indicated
period.
(8) The pro forma combined balance sheet data assume that the acquisitions of
the founding companies occurred on March 31, 1999.
(9) Adjusted for the sale of the 1,600,000 shares of common stock included in
the offering and the application of the net proceeds therefrom. See "Use of
Proceeds."
6
SUMMARY HISTORICAL FINANCIAL INFORMATION FOR THE FOUNDING COMPANIES
The following table presents certain summary historical statement of
operations data for each of the founding companies for the years ended December
31, 1996, 1997 and 1998, and the three months ended March 31, 1998 and 1999.
This information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Combined and Founding
Companies" and the financial statements and notes thereto included in this
prospectus.
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THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS) (UNAUDITED)
AXCES, INC.
Revenues................................................... $ 8,468 $ 19,474 $ 30,280 $ 10,387 $ 5,411
Gross profit............................................... 4,508 11,471 20,391 7,523 3,558
Operating income........................................... 773 2,426 2,253 3,916 993
EBITDA..................................................... 835 2,561 2,456 3,960 1,051
INFOHIGHWAY INTERNATIONAL, INC.
Revenues................................................... 426 915 1,385 302 535
Gross profit............................................... 208 267 389 76 199
Operating loss............................................. (483) (1,389) (1,211) (326) (267)
EBITDA..................................................... (431) (1,214) (950) (257) (136)
ARC NETWORKS, INC.
Revenues................................................... 5,583 9,648 13,931 3,462 4,001
Gross profit............................................... 509 753 2,280 433 700
Operating loss............................................. (947) (2,378) (1,592) (245) (365)
EBITDA..................................................... (929) (1,942) (1,185) (90) (269)
7
RISK FACTORS
You should carefully consider the following factors as well as the other
information contained in this prospectus. This prospectus contains certain
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
including the risk factors set forth below and elsewhere in this prospectus.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED COMBINED
OPERATING HISTORY.
OmniLynx was incorporated in December 1996 and acquired ARC in June 1999. We
will acquire InfoHighway and AXCES simultaneously with and as a condition of the
closing of the offering. The pro forma combined financial results presented in
this prospectus are not necessarily indicative of actual results which might
have occurred if our operations and management teams had been combined during
the periods presented, nor are they representative of future results that will
be reported on a consolidated basis. Our prospects must be considered in light
of the risks, expenses and difficulties frequently encountered by companies in
an early stage of development, particularly those in new and rapidly evolving
markets. To address these risks, we must, among other things, rapidly expand the
geographic coverage of our services; attract and retain customers within our
existing and in new regions; increase awareness of our services; respond to
competitive developments; continue to attract, retain and motivate qualified
persons; continue to upgrade our technologies; commercialize our network
services incorporating such technologies; integrate the founding companies' back
office operations and deliver the bundled telecommunications product and
effectively manage our expanding operations. We may not be successful in
addressing such risks, and any failure on our part to do so could have a
material adverse effect on our business, prospects, operating results and
financial condition.
THERE ARE RISKS ASSOCIATED WITH THE INTEGRATION OF THE FOUNDING COMPANIES WHICH
COULD ADVERSELY AFFECT OUR BUSINESS.
The acquisition of the founding companies involves a number of risks,
including:
- the assimilation of new operations and personnel;
- integration of each founding company's respective equipment, service
offerings, networks and technologies, financial and information systems
and brand names;
- coordination of geographically separated facilities and work forces;
- coordination of their respective sales, marketing and service development
efforts; and
- maintenance of standards, controls, procedures and policies.
The process of integrating the operations of the founding companies,
including their personnel, could cause interruption of, or loss in momentum of
our business and operations activities, including those of the businesses
acquired. Further, employees of the founding companies who may be key to the
integration effort or our ongoing operations may choose not to continue to work
for us following the closing of the acquisitions.
We will incur certain expenses in connection with the integration of the
founding companies, which are not expected to be significant. However, the
actual amount of these expenses could be higher than anticipated. Factors that
could increase such costs include any unexpected employee turnover, unforeseen
delays in addressing duplicate facilities once the acquisitions have been
completed and the associated costs of hiring temporary employees, and any
additional fees and charges to obtain consents, regulatory approvals or permits.
We may not achieve the benefits and strategic objectives sought through the
acquisitions. Costs associated with the acquisitions, or liabilities and
expenses associated with the operations of the founding companies, that exceed
our expectations, could have a material adverse effect on our business,
prospects, operating results and financial condition. See "Management's
8
Discussion and Analysis of Pro Forma Financial Condition and Results of
Operations--Pro Forma Liquidity and Capital Resources."
WE HAVE AND MAY CONTINUE TO EXPERIENCE NET OPERATING LOSSES IN THE IMMEDIATE
FUTURE.
Two of the three founding companies have incurred substantial historical net
operating losses and experienced negative cash flow during recent periods. As of
March 31, 1999, we had a historical combined deficit of approximately $4.2
million. The independent auditors' reports of ARC and InfoHighway contained
explanatory paragraphs describing the uncertainty as to the ability of each of
those companies to continue as a going concern. We currently intend to increase
our capital expenditures and operating expenses significantly in order to:
- integrate the founding companies;
- expand our networks to support additional expected end-users in existing
and future markets; and
- market and provide our services to a growing number of potential
end-users.
In addition, we intend to record intangible assets of $27.6 million
associated with the acquisitions. Such amounts will result in an annual
amortization charge of approximately $2.7 million for each of the next 10 years.
If the 10-day average closing price of the common stock exceeds $16.00 and
$21.00 per share, we will be required to record significant additional
intangible assets related to the contingent common stock issue rights based upon
the market value of the common stock at that time. As a result, our net income
and earnings per share will be adversely affected each of those years. See
"Management's Discussion and Analysis of Pro Forma Financial Condition and
Results of Operations-- Operations."
DUE TO VARIOUS MARKET AND ECONOMIC FACTORS, OUR FUTURE QUARTERLY OPERATING
RESULTS MAY VARY SIGNIFICANTLY. THIS MAY ADVERSELY IMPACT OUR STOCK PRICE.
Our annual and quarterly operating results may fluctuate significantly in
the future as a result of numerous factors. Factors that may affect our
operating results include:
- our ability to complete the integration of the founding companies and
achieve the expected operating efficiencies;
- our ability to successfully provide a bundled telecommunication package of
services;
- the rate at which customers subscribe to our services;
- the prices the customers pay for such services;
- customer turnover; and
- the timing and ability of incumbent local exchange carriers to provide and
construct the required central office collocation facilities should we
deploy telephone switches.
Our operating results are sensitive to the rates that we charge our end user
customers for our services and the volume commitments of those customers and the
rates we pay the underlying carriers who supply telecommunications services
directly to us. We believe our financial performance depends to a great extent
upon retaining customers and on levels of subscriber turnover, which can vary
due to a variety of factors, including price, customer service, relocation of
end-user customers and employee turnover within these customers. Additionally,
we have a limited number of long-term contracts with our customers, and we may
experience substantial customer turnover because customers may easily
9
discontinue the use of our services and switch to an alternative service
provider. Furthermore, our operating results may fluctuate depending on, among
other things:
- the success of our relationships with Bell Atlantic, MCI WorldCom,
Frontier Communications, Inc., ATT/Teleport and other potential third
parties who deliver carrier services to us;
- our ability to deploy our services on a timely basis to adequately satisfy
subscriber demand;
- our ability to maintain targeted subscriber levels; and
- the mix of line orders between consumer end-users and business end-users
(which typically have higher revenues and margins).
Factors that may add to volatility in our annual or quarterly operating
results include, among others, the amount and timing of capital expenditures and
other costs relating to the expansion of our network, the introduction of new
services by us or our competitors, technical difficulties or network downtime,
general economic conditions and economic conditions specific to the
telecommunications industry. There may be delays in the commencement and
recognition of revenue because the installation of telecommunication lines to
implement certain services has lead times that are controlled by third parties.
In addition, we plan to increase operating expenses to fund operations, sales,
marketing, general and administrative activities and infrastructure, including
increased expenses associated with our relationships with Bell Atlantic, MCI
WorldCom, Frontier Communications, Inc., ATT/Teleport and other carriers. To the
extent that these expenses are not accompanied by increases in revenues, we
could experience a material adverse effect on our business, prospects, operating
results and financial condition. As a result of all of the foregoing factors, it
is likely that in some future quarter our operating results will be below the
expectations of securities analysts and investors. Such events would likely
materially adversely affect the price of our common stock. Fluctuations in
operating results may also result in volatility in the price of our common
stock.
OUR BUSINESS MODEL IS UNPROVEN AND WE MAY NOT BE SUCCESSFUL IN IMPLEMENTING OUR
BUSINESS STRATEGY. IN ADDITION, OUR PRODUCTS AND SERVICES MAY NOT ACHIEVE
SIGNIFICANT MARKET ACCEPTANCE.
We believe that we are one of the first competitive local exchange carriers
to provide high-speed digital communications services bundled with traditional
telephony services using emerging technology to commercial buildings and
multiple dwelling units. As such, our business strategy is unproven. To be
successful, we must, among other things, develop and market services that are
widely accepted by small to medium size businesses and consumers. Our
DirectConnect services have only been launched in the New York City, New York;
Houston, Dallas, Austin, Texas; Jacksonville, Florida; and Parsippany, New
Jersey metropolitan areas, and may not achieve broad commercial acceptance. The
prices we charge for certain services are in some cases higher than those
charged by our competitors for the same services. A sufficient number of
end-users may not be willing to pay the prices we charge for our services.
Additionally, prices for digital communications services have fallen
historically, and prices in the industry in general, and for the services we
offer, and plan to offer, are expected to continue to fall. We have provided,
and expect in the future to provide, price discounts to customers that commit to
multiple services. In addition, we may be required to reduce prices periodically
to respond to competition and to generate increased sales volume. Accordingly,
our business model may not be successful. The failure of our business model
would result in a material adverse effect on our business, prospects, operating
results and financial condition. See "Management's Discussion and Analysis of
Pro Forma Financial Condition and Results of Operations" and "Business--Business
Strategy."
10
OUR LENGTHY SALES CYCLE FOR COMMERCIAL BUILDINGS AND MULTIPLE DWELLING UNITS
REQUIRES US TO INCUR SIGNIFICANT EXPENSES IN ADVANCE OF THE RECEIPT OF REVENUES.
Our practice of marketing to commercial buildings either through real estate
management companies or landlords has taken significant effort to date and the
sales cycle is lengthy. Further, we have targeted new construction as one of our
principal markets. This market is subject to construction delays and other
conditions beyond our control. During this lengthy sales cycle, we incur
significant expenses in advance of the receipt of revenues. Therefore, any
long-term failure to roll out our services could have a material adverse effect
on our business, prospects, operating results and financial condition. See
"Business--Customers."
WE DEPEND UPON ENTERING INTO AGREEMENTS WITH THIRD-PARTIES IN ORDER TO HOUSE AND
OPERATE CERTAIN COMPONENTS OF OUR NETWORKS WHICH ARE SUBJECT TO VARIOUS
GOVERNMENTAL REGULATIONS.
We depend upon our ability to secure certain network elements from the
various incumbent and competitive local exchange carriers to deliver our
services to our customers. Additionally, as we deploy telephone switching
equipment, we are required to physically or virtually collocate our equipment in
the incumbent local exchange carriers' central offices. However, collocation
space may not be available in the central offices requested and we may
experience initial rejections of our applications to obtain collocation space
from the incumbent local exchange carriers. The rejection of our applications
for collocation space could result in delays in and increased expenses
associated with, the roll out of our services in our target markets, which could
result in a material adverse effect on our business, prospects, operating
results and financial condition.
In order to collocate our equipment in the incumbent local exchange
carriers' central offices we will be required to enter into and implement
interconnection agreements in each of our target markets with the appropriate
incumbent local exchange carriers. These interconnection agreements govern the
relationship between us and the incumbent local exchange carriers. Since
interconnection agreements are subject to interpretation by both parties,
differences in interpretation may arise that cannot be resolved on favorable
terms to us. Also, the interconnection agreements are subject to state
commission, FCC and judicial oversight. Future modification to the terms,
conditions or prices of our future interconnection agreements by these
governmental bodies, or disputes with incumbent local exchange carriers over the
terms of the interconnection agreements generally, may have a material adverse
effect on our business, prospects, operating results and financial condition.
See "Business--Telecommunications Services--Long Distance Services."
The 1996 Telecommunications Act requires incumbent local exchange carriers
to interconnect with other carriers and to provide competitive local exchange
carriers access to their unbundled network elements. The 1996 Telecommunications
Act generally requires that interconnection charges as well as charges for
unbundled network elements be cost-based and nondiscriminatory. Our nonrecurring
and recurring monthly charges for lines may vary greatly. These rates are
subject to the approval of the appropriate state regulatory commission. The
approval process typically involves a lengthy review of the incumbent local
exchange carrier-proposed rates in each state. The ultimate rates approved
typically depend greatly on the incumbent local exchange carrier's initial rate
proposals and such factors as the geographic deaveraging/averaging policy of the
state public utility commission. These proceedings are time-consuming and will
absorb scarce resources including legal personnel and cost experts as well as
participation by our management. Consequently, we are subject to the risk that
the non-recurring and recurring charges for lines and other unbundled network
elements will increase from time to time based on new rates proposed by the
incumbent local exchange carriers and approved by state regulatory commissions.
Any of the foregoing matters could result in a material adverse effect on our
business, prospects, operating results and financial condition. See
"Business--Network Architecture and Technology," "--Government Regulation" and
"--Legal Proceedings."
11
THE QUALITY OF OUR SERVICES IS DEPENDENT UPON THE QUALITY OF THE WIRING AND
EQUIPMENT USED BY THE INCUMBENT LOCAL EXCHANGE CARRIERS.
Our strategy requires us to interconnect with and use an incumbent local
exchange carrier's copper telecommunications lines to service our customers. As
such, we are dependent upon the technology and capabilities of the incumbent
local exchange carriers to meet certain telecommunications needs of our
customers and maintain our service standards. We are highly dependent on the
quality and availability of the incumbent local exchange carriers' copper lines
and the incumbent local exchange carriers' maintenance of such lines. We may not
be able to obtain the copper lines and the services we require from the
incumbent local exchange carriers or obtain such lines at quality levels, rates,
terms and conditions satisfactory to us. The failure to obtain such services or
obtain such lines at satisfactory quality levels, rates, terms and conditions
would have a material adverse effect on our business, prospects, operating
results and financial condition.
THE TELECOMMUNICATIONS SERVICES INDUSTRY IS HIGHLY COMPETITIVE AND SUBJECT TO
RAPID TECHNOLOGICAL CHANGE.
The telecommunications services industry is highly competitive, rapidly
evolving and subject to constant technological change. Our future success will
depend, in part, on our ability to effectively use leading technologies, to
continue to develop our technical expertise, to enhance our current services, to
develop new products and services that meet changing customer needs, and to
influence and respond to emerging industry standards and other technological
changes. In addition, numerous companies offer Internet, local and long distance
telephone and other telecommunication services, and we expect competition to
increase in the future. We believe that existing competitors will likely
continue to expand their service offerings to appeal to our existing or
potential customers. Many of our existing competitors have greater financial,
personnel, brand and name recognition and other resources. Moreover, we expect
that new competitors will enter the telecommunications market, and that some of
these new competitors may offer similar services to those offered by us. In
addition, the regulatory environment in which we operate is undergoing
significant change. As this regulatory environment evolves, changes may occur
that could create greater or unique competitive advantages for our current or
potential competitors, or could make it easier for other new entrants to provide
services. See "Business-- Competition."
WE MAY REQUIRE SIGNIFICANT ADDITIONAL CAPITAL FOR FUTURE ACQUISITIONS.
We cannot predict with certainty what our capital needs will be to finance
future acquisitions. We currently intend to use our common stock to fund a
portion of the purchase price of future acquisitions. If our common stock does
not maintain an acceptable price in the public markets or if potential
acquisition candidates are unwilling to accept our common stock as part of the
consideration for the sale of their businesses, we may have to use more cash to
finance our acquisition program. If we do not have enough cash resources, our
ability to make acquisitions could be limited unless we are able to obtain
additional cash through future debt or equity financings. Incurring debt would
increase our leverage and make us more vulnerable to economic downturns and
limit our ability to compete.
We intend to enter into negotiations with commercial banks to provide us
with a credit facility to be used for acquisitions, working capital, capital
expenditures and other general corporate purposes. Any such credit facility or
other debt financing will require that we make certain financial covenants which
could limit our operational and financial flexibility. We may not be able to
obtain adequate financing for our acquisition program at all or on terms we deem
acceptable. As a result, we might be unable to successfully pursue our
acquisition strategy. See "Management's Discussion and Analysis of Pro Forma
Financial Condition and Results of Operations--Pro Forma Liquidity and Capital
Resources."
12
WE ARE DEPENDENT UPON THE CONTINUED GROWTH OF THE INTERNET AS A MEDIUM OF
COMMERCE AND COMMUNICATION.
Many of our current and future products and services are targeted toward
users of the Internet, which has experienced rapid growth. The market for
Internet access and related services is relatively new and characterized by
rapidly changing technology, evolving industry standards, changes in customer
needs and frequent new product and service introductions. Our future success
will depend, in part, on our ability to effectively use leading technologies, to
continue to develop our technical expertise, to enhance our current services, to
develop new products and services that meet changing customer needs, and to
influence and respond to emerging industry standards and other technological
changes on a timely and cost-effective basis. We may not be successful in
effectively using new technologies, developing new services or enhancing our
existing services on a timely basis and such new technologies or enhancements
may not achieve market acceptance. If the market for Internet access services
fails to develop, develops more slowly than expected, or becomes saturated with
competitors, or if the Internet access and services we offer are not broadly
accepted, our business, operating results and financial condition will be
materially adversely affected.
In addition, critical issues concerning the commercial use of the Internet
remain unresolved and may impact the growth of Internet use, especially in the
business market we have targeted. Despite growing interest in the many
commercial uses of the Internet, many businesses have been deterred from
purchasing Internet access services for a number of reasons, including, among
others, inconsistent quality of service, lack of availability of cost-effective,
high-speed options, a limited number of local access points for corporate users,
inability to integrate business applications on the Internet, the need to deal
with multiple and frequently incompatible vendors, inadequate protection of the
confidentiality of stored data and information moving across the Internet, and a
lack of tools to simplify Internet access and use. In particular, a perceived
lack of security of commercial data, such as credit card numbers, has
significantly impeded commercial exploitation of the Internet to date, and there
can be no assurance that encryption or other technologies will be developed that
satisfactorily address these security concerns. Capacity constraints caused by
growth in the use of the Internet may, unless resolved, impede further
development of the Internet to the extent that users experience delays,
transmission errors and other difficulties. Further, the adoption of the
Internet for commerce and communications, particularly by those individuals and
enterprises which have historically relied upon alternative means of commerce
and communication, generally requires the understanding and acceptance of a new
way of conducting business and exchanging information. The failure of the market
for business-related Internet solutions to continue to develop would adversely
impact our business, prospects, operating results and financial condition.
IF THE MARKET FOR OUR SERVICES DOES NOT CONTINUE TO GROW, OUR BUSINESS WILL BE
MATERIALLY ADVERSELY AFFECTED.
The market for high bandwidth Internet services for small and medium-sized
businesses is in the early stages of development. Since this market is new and
because current and future competitors are likely to introduce competing
services, it is difficult to predict the rate at which this market will grow, if
at all, or whether new or increased competition will result in market
saturation. Various providers of high-speed digital communications services are
testing products from various suppliers for various applications, and no
industry standard has been broadly adopted. Certain critical issues concerning
commercial use of the Internet and remote local area network access, including
security, reliability, ease and cost of access and quality of service, remain
unresolved and may impact the growth of such services. If the market for our
services, including Internet access, fails to develop, grows more slowly than
anticipated or becomes saturated with competitors, our business, prospects,
operating results and financial condition could be materially adversely
affected. See "Business--Market Opportunity."
13
ANY SYSTEM FAILURE, WHETHER FROM NATURAL DISASTER OR ANY OTHER CAUSE, COULD
CAUSE WIDESPREAD INTERRUPTIONS IN THE SERVICES WE PROVIDE.
Our operations are dependent upon our ability to support our highly complex
network infrastructure and avoid damage from fires, earthquakes, floods, power
losses, excessive sustained or peak user demand, telecommunications failures,
network software flaws, transmission cable cuts and similar events. The
occurrence of a natural disaster or other unanticipated problem at our network
operations center could cause interruptions in the services we provide.
Additionally, failure of an incumbent local exchange carrier or other service
provider, such as other competitive local exchange carrier service providers, to
provide communications capacity we require, as a result of a natural disaster,
operational disruption or any other reason, could cause interruptions in the
services we provide. Any damage or failure that causes interruptions in our
operations could have a material adverse effect on our business, prospects,
operating results and financial condition. See "Business--Network Architecture
and Technology."
HACKERS, COMPUTER VIRUSES AND OTHER DISRUPTIVE PROBLEMS COULD POSE SECURITY
RISKS AND CAUSE MATERIAL INTERRUPTIONS IN THE SERVICES WE PROVIDE.
Despite the implementation of security measures, our networks may be
vulnerable to unauthorized access, computer viruses and other disruptive
problems. Internet service providers and corporate networks have in the past
experienced, and are likely in the future to experience, interruptions in
service as a result of accidental or intentional actions of Internet users,
current and former employees and others. Unauthorized access could also
potentially jeopardize the security of confidential information stored in the
computer systems of our customers and such customers' end-users, which might
result in our liability to our customers and also might deter potential
customers. Although we have implemented security measures that are standard
within the telecommunications industry, and plan to deploy new company-developed
security measures, there can be no assurance that we will implement such
measures in a timely manner or to the degree that may be compatible with our
various customers' expectations, or that if and when implemented, such measures
will not be circumvented. Eliminating computer viruses and alleviating other
security problems may require interruptions, delays or cessation of service to
our customers and such customers' end-users, which could have a material adverse
effect on our business, prospects, operating results and financial condition.
See "Business--Network Architecture and Technology."
OUR RELIANCE ON THIRD-PARTY VENDORS INVOLVES A NUMBER OF RISKS, ANY OF WHICH
COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS.
We rely and will continue to rely on outside parties to manufacture our
network equipment, such as customer premise equipment modems, network routing
and switching hardware, network management software, systems management software
and database management software. We also rely on incumbent local exchange
carriers to bill and collect for certain of our long distance customers in the
Southwestern Bell and Ameritech regions. As we sign additional service
contracts, we believe there may need to be a significant increase in the amount
of manufacturing and other services supplied by third parties in order for us to
meet our contractual commitments. We have in the past experienced supply
problems with certain of our vendors and there can be no assurance that these
vendors will be able to meet our needs in a satisfactory and timely manner in
the future or that we will be able to obtain additional vendors when and if
needed. Although we have identified alternative suppliers for technologies that
we deem critical and we are not constrained to use the same customer premise
equipment vendor in multiple regions, it could take a significant period of time
to establish relationships with alternative suppliers for critical technologies
and substitute their technologies into our networks. Our reliance on third-party
vendors involves a number of additional risks, including the absence of
guaranteed capacity and reduced control over delivery schedules, quality
assurance, production yields and costs. The loss of any of our relationships
with these suppliers could have a material adverse effect on
14
our business, prospects, operating results and financial condition. See
"Business--Network Architecture and Technology."
OUR SUCCESS IS HEAVILY DEPENDENT UPON OUR RETENTION OF CERTAIN OF OUR KEY
OFFICERS AND THE HIRING OF ADDITIONAL PERSONNEL.
Our performance is dependent on the performance of our executive officers
and key employees. In particular, our senior management has significant
experience in the data communications, telecommunications and personal computer
industries, and the loss of any one of our executive officers could have a
material adverse effect on our ability to execute our business strategy
effectively. In addition, we will be dependent upon the regional general
managers for each new region we enter. Regional general managers will have
direct responsibility for sales, service and market development efforts in their
respective regions, and the loss of one could disrupt significantly the
operations in the region. Additionally, given our early stage of deployment, we
are dependent on our ability to retain and motivate high quality personnel,
especially our management. We do not have "key person" life insurance policies
on any of our employees. We currently have employment agreements with Joseph A.
Gregori, Peter Parrinello, Tony Howlett and Glenn Kramer. However, certain
others of our current key personnel may not continue to be employed by us, and
we may not be able to attract and retain technical, sales, marketing and
managerial personnel in the future. Our future success also depends on our
continuing ability to identify, hire, train and retain other highly qualified
technical, sales, marketing and managerial personnel in connection with our
expansion within our existing regions and the deployment and marketing of our
network into targeted regions. Competition for such qualified personnel is
intense, particularly in software development, network engineering and product
management. The inability to attract and retain our officers and key employees
and the necessary technical, sales, marketing and managerial personnel could
have a material adverse effect upon our business, prospects, operating results
and financial condition. See "Business--Employees" and "Management."
THE INCREASE OF CURRENT GOVERNMENTAL SURCHARGES AND FEES ON OUR GROSS REVENUES
WOULD ADVERSELY AFFECT OUR BUSINESS.
Telecommunications providers pay a variety of surcharges and fees related to
the provision of interstate and intrastate services. Interstate surcharges
include federal universal service fees, common carrier regulatory fees,
numbering administration and primary interexchange carrier charges. In addition,
state regulators impose similar surcharges and fees on intrastate services. The
division of our services between interstate services and intrastate services is
a matter of interpretation and may in the future be contested by the FCC or
relevant state commissions. A change in the characterization of the jurisdiction
of our services could cause an increase in our payment obligations. In addition,
pursuant to periodic revisions by state and federal regulators of the applicable
surcharges, we may be subject to increases in the surcharges and fees currently
paid.
OUR BUSINESS IS HIGHLY REGULATED AND MAY BE ADVERSELY AFFECTED BY FUTURE CHANGES
IN GOVERNMENTAL REGULATIONS RELATING TO OUR INDUSTRY.
Our services are subject to federal, state and local government regulation.
The 1996 Telecommunications Act, which became effective in February 1996,
introduced widespread changes in the regulation of the telecommunications
industry, including provisions to increase competition among all
telecommunications providers, including the local markets in which we operate.
The 1996 Telecommunications Act eliminates many of the pre-existing legal
barriers to competition in telecommunications service markets and establishes
basic criteria for relationships between telecommunications providers.
Among other things, the 1996 Telecommunications Act removes barriers to
entry in the local exchange telephone market by preempting state and local laws
that restrict competition and by providing competitors interconnection, access
to unbundled network elements and retail services at wholesale rates. The FCC's
primary rules interpreting the 1996 Act, which were issued on August 8, 1996,
have in
15
large part, been upheld by the United States Supreme Court except, as noted
earlier, with respect to the minimum list of unbundled network elements.
Additional judicial challenges to FCC rules or changes in these rules could have
a material adverse effect on our business, prospects, operating results and
financial condition.
The FCC has also simultaneously proposed additional rules requiring
incumbent local exchange carriers to provide forms of collocation and unbundled
loops to competitive local exchange carriers on more favorable terms than
previously prescribed by the FCC. The FCC has also proposed additional rules
under which incumbent local exchange carriers may offer advanced
telecommunications services. The FCC's rulings, proposals and actions thereunder
may be appealed or reconsidered, and it is uncertain whether the FCC will in
fact order more favorable collocation and loop availability for competitive
local exchange carriers.
No assurance can be given that changes to current regulations or the
adoption of new regulations by the FCC or state regulatory authorities or
legislative initiatives, such as changes to the 1996 Act, or court decisions
will not have a material adverse effect on our business, prospects, operating
results and financial condition. See "Business--Government Regulations" and
"--Legal Proceedings."
In addition, we are subject to government regulation in several respects
which could cause additional operating costs and which must be monitored for
compliance. In particular, federal and state law prohibits the practice known as
"slamming," whereby telephone companies switch a customer's local or long
distance carrier without the customer's permission. We have been involved in
several legal proceedings in various states in which we were alleged to have
been engaged in slamming. Some of those cases have been settled while others are
still pending. See "Business--Legal Proceedings." In response, we have adopted
safeguards, including new policies and procedures, to reduce significantly and
substantially the number of slamming complaints against us. There can be no
assurance that we will not be penalized again for possible slamming practices in
the future, despite our new safeguards, and that such penalty, whether in the
form of a fine or a suspension of our right to conduct business, will not have a
material adverse impact on our business, prospects, operating results and
financial condition. We must also comply with advertising and disclosure rules
relating to our sale of long distance telephone services to the public. Our
retail marketing program, which utilizes representatives to recruit retail
customers and additional representatives, is subject to state laws regulating
network marketing programs. We must be registered with the public utility
commissions of most states in order to provide telephone service in those
states. Some state commissions also must approve changes in ownership of AXCES
and ARC, as well as the issuance of the securities contemplated by this
offering. We are also subject to federal, state and local government regulations
relating to health, safety, employment, wages and working conditions. There can
be no assurance that we will receive all necessary government approvals or that
government regulations will not have a material adverse impact on our business,
prospects, operating results and financial condition.
WE MAY INCUR LIABILITY AS AN INTERNET SERVICE PROVIDER.
We are an Internet service provider. As a general matter, Internet service
providers are not subject to federal and state regulations. However, laws
governing use of the Internet, including taxation of transactions, privacy,
security, digital signatures, and encryption are continually under consideration
at the state and federal level. In particular, the law governing the liability
of online service providers and Internet access providers for participating in
the hosting or transmission of objectionable materials or information currently
remains unsettled. Under the terms of the 1996 Telecommunications Act, courts
can impose civil and criminal penalties for the use of interactive computer
services for the transmission of certain indecent or obscene communications. The
United States Supreme Court in 1997 held this provision unconstitutional as it
relates to indecent, but not obscene, communications. In October 1998, Congress
enacted the Child Online Protection Act, which requires that online material
that is "harmful" to minors be restricted. This law is currently being
challenged and on February 1, 1999 a U.S.
16
District Court judge issued a preliminary injunction against enforcement of
portions of that act. The U.S. Justice Department has filed an appeal of the
February 1999 ruling. Also, some states have adopted or may adopt in the future
similar requirements. The constitutionality of such state requirements remains
unsettled at this time. In addition, several private parties have filed lawsuits
seeking to hold Internet service providers accountable for information that they
transmit, such as libelous material and copyrighted material. We cannot predict
the outcome of this litigation or the potential for the imposition of liability
on Internet service providers for information that they host, distribute or
transport. These suits and other regulations could materially change the way
ISPs must conduct business and could impact our determination to expand or
continue this business. To the extent that we become parties to future
litigation or there are new regulations, such litigation or new regulations
could have a material adverse effect on our business, prospects, operating
results and financial condition.
OTHER COMPANIES HAVE NAMES SIMILAR TO OURS.
Even though we are using the mark "OmniLynx Communications" in the United
States, other companies in many different industries have preexisting rights to
the name "OmniLynx" within defined territories. One specific company may have
the right to use the name for telecommunications services within an established
area. If any of these other companies are successful with their claims to our
name, we may be required to either obtain a license from them for the use of the
name "OmniLynx," or be required to change our name within certain defined
territories. Either result would cause us to incur additional expenses. If we
are required to change our name, we may lose the goodwill associated with the
"OmniLynx" name in these markets. 