| FIBERNET TELECOM GROUP INC\ Item 1A RISK FACTORS Factors Affecting our Business Condition In addition to the other information and factors included in this report, the following factors should be considered in evaluating our business and future prospects: We are an early-stage company, and we expect to encounter risks and difficulties frequently experienced by early-stage companies in new and rapidly evolving markets |
| We did not begin to engage in our current business until 1999 and did not begin to offer our services until the first quarter of 2000 |
| Our limited operating history makes the evaluation of our future prospects very difficult |
| We will encounter risks and difficulties frequently experienced by early stage companies in new and rapidly evolving markets |
| As an early-stage organization, we are at a competitive disadvantage to larger, more established competitors |
| We anticipate that this competitive disadvantage may persist for the foreseeable future |
| If we do not successfully address these risks, our business may suffer |
| We have and may continue to experience operating losses, net losses and a cash flow deficit |
| We may not achieve or sustain operating income, net income or positive cash flow from operations in the future |
| Since our inception we have incurred operating losses and net losses both on an annual and quarterly basis |
| We expect to continue to incur operating losses and net losses in 2006, and we may not achieve profitability for the foreseeable future |
| You should also be aware that our financial and operational performance depends upon a number of factors, many of which are beyond our control |
| These factors include: • the economic and competitive conditions in the communications and networking industries; • any operating difficulties, increased operating costs or pricing pressures we may experience; • the passage of legislation or other regulatory developments that may adversely affect us; • changes in technologies creating alternative services to our services or making our services and networks obsolete; • any delays in implementing any strategic projects; and • our ability to operate our networks in a reliable and cost-effective manner |
| The sector in which we operate is highly competitive, and we may not be able to compete effectively |
| We face competition from many entities with significantly greater financial resources, well-established brand names and larger customer bases |
| The entities that compete with us include wireless service providers, local telephone companies, long distance companies, competitive access providers, competitive local exchange carriers and competitive colocation providers |
| The numerous companies that compete in our markets expose us to severe price competition for our services |
| We believe competition may intensify in the future |
| If additional competitors focus on our market, there may be intensified price competition which could have a material adverse effect on our business |
| Additionally, we may experience an increased number of service disconnections |
| 15 ______________________________________________________________________ [17]Table of Contents In the communications industry, continued pricing pressure from our competitors and an excess of network capacity continue to cause prices for our services to decline |
| In 2005, we continued to experience decreases in the prices of our services |
| We anticipate that prices for broadband network services, in general, and for our services, in particular, will continue to decline over the next several years due primarily to the following: • price competition as various service providers continue to sell services at greatly reduced process to absorb significant excess capacity in existing networks and continue to install additional networks that compete with our networks; • recent technological advances that permit substantial increases in the transmission capacity and more efficient utilization of both new and existing fiber; and • strategic alliances, consolidations or similar transactions that increase customers’ purchasing power |
| Many of our customers and vendors have experienced financial difficulties and have filed or may file for bankruptcy protection |
| Recent general economic weakness severely impacted the telecommunications industry |
| The expected demand for broadband connectivity was not been realized in many segments of the market |
| As a result, there was an industry-wide slowdown in capital spending and a large number of industry-related bankruptcy filings |
| Many of our customers and vendors experienced financial distress, and some of them filed for bankruptcy protection |
| We have contracts with communications providers that have filed for relief from creditors under the Bankruptcy Code, as well as contracts with other communications providers who may still yet file for bankruptcy protection |
| As a result, there is a significant doubt that some of our customers or vendors will perform their obligations under our contracts with them |
| In bankruptcy proceedings, the debtor, or trustee, as the case may be, has the right to, among other things, reject certain contracts |
| In the past, bankruptcy courts have determined that certain of our contracts with our customers constitute executory contracts, and the contracts were rejected |
| There can be no assurance that additional customers or vendors will not seek bankruptcy protection and that additional contracts will not be terminated |
| We may require additional capital to fund the further development of our networks and operation of our business, and an inability to obtain such capital could harm our business |
| Although we have substantially completed the build-out of our networks, we may selectively expand our networks in the future as market conditions and customer demand dictate |
| In addition, we may have to expand or adapt our networks to respond to the following: • an increasing number of customers; • demand for greater network capacity or colocation space; • the replacement of inadequate or malfunctioning network elements; • changes in our customers’ service requirements; and • technological advances |
| To do so, we may need to raise additional funds through public or private equity or debt financings |
| If we raise funds through the issuance of equity securities, the ownership percentage of our then-current stockholders will be diluted and the holders of new equity securities may have rights, preferences or privileges senior to those of the holders of our common stock |
| If additional funds are raised through another bank credit facility or the 16 ______________________________________________________________________ [18]Table of Contents issuance of debt securities, the holders of such indebtedness would have rights senior to the rights of the holders of our common stock, and the terms of this indebtedness could impose restrictions on our ability to incur additional indebtedness and on our operations, which could impede the successful execution of our business plan |
| If our actual results vary from the anticipated results of our operating plan, we may not be able to fund operating and investing activities with internally generated cash flows, and we may require external sources of capital |
| From time to time, we may consider private or public sales of additional equity or debt securities and other financings, depending upon market conditions, in order to finance the continued operations of our business or for other strategic purposes |
| There can be no assurance that we will be able to successfully consummate any such financing on acceptable terms, or at all |
| Our inability to obtain additional financing, as needed, could have a material adverse effect on our business |
| We do not have any off-balance sheet financing arrangements, nor do we anticipate entering into any |
| We must maintain our existing agreements for space in major carrier hotels or our business will be harmed |
| Our business depends upon our ability to lease space in carrier hotels to establish carrier hotel facilities where we can locate our networking equipment and interconnect with our customers |
| At a minimum, to provide our services in a particular metropolitan area, we must obtain space in the major carrier hotels in that area |
| In addition, we need adequate space at our carrier hotel facilities in order to continue offering colocation services |
| There may be significant competition for space in major carrier hotels |
| Our inability to obtain additional space, or our inability to renew existing leases, would negatively impact our operations and have a material adverse effect on our business |
| We may not be able to increase the number of our significant customers and the volume of traffic on our networks and our business may suffer |
| Our revenues continue to be negatively impacted by the general economic environment and by the difficulties that are affecting our industry |
| We have experienced significant disconnections of services by our customers and decreases in the prices of our services |
| To do so, we must obtain long-term commitments from new large-volume customers, as well as expand our relationships with current customers |
| This need is more critical as a wholesale carrier because our potential customers are a limited number of service providers |
| Therefore, it is essential for us to succeed at establishing and expanding customer relationships; otherwise our business will suffer |
| If we cannot maintain the scalability, reliability and speed of our network, potential customers will not use our services |
| Because of the limited deployment of our services, our ability to manage a substantial amount of traffic on our networks while maintaining superior service is unknown at this time |
| There is no assurance that our network will be able to maintain current levels of service as the number of our customers and amount of traffic grow |
| Our failure to maintain such levels of service would significantly reduce customer demand for our services and have a material adverse effect on our business |
| Service interruptions on our networks could expose us to liability or cause us to lose customers |
| Our operations depend on our ability to prevent or mitigate any damages from power losses, network failures, transmission cable cuts or natural disasters |
| The failure of any equipment or facility on our networks could result in the interruption of service until we make the necessary repairs or install replacement equipment |
| If service is not restored in a timely manner, agreements with our customers may obligate us to provide credits or other remedies to them, which would reduce our revenues or increase our expenses, and we may be exposed to 17 ______________________________________________________________________ [19]Table of Contents litigation from our customers |
| Service disruptions could also damage our reputation with customers, causing us to lose existing customers or to have difficulty attracting new ones |
| Many of our customers’ communications needs are extremely time sensitive, and delays in signal delivery may cause significant losses to a customer using our networks |
| Our networks may also contain undetected design faults and software “bugs” that, despite our testing, may be discovered only after our networks have been completed and are in use |
| The occurrence of a natural disaster or act of terrorism in close proximity to our facilities would substantially harm our business |
| The substantial majority of our facilities are located within the New York metropolitan area, with the remainder located in Los Angeles |
| In particular, our facilities located at 60 Hudson Street and 111 Eighth Avenue in New York City are critical to our business |
| Given the concentration of our facilities, the loss of one of our facilities through the occurrence of a natural disaster, fire or flood, or an act of terrorism would have a material adverse effect on our business, results of operations and financial condition |
| We may not carry sufficient insurance to compensate us for losses caused by such an occurrence, and we may not be able to operate our business after the loss of one of our facilities |
| Our failure to manage the growth of our operations could harm our business |
| We have rapidly and significantly expanded our operations |
| We anticipate that further expansion will be required to grow our customer base if we are to be successful in implementing our business strategy |
| Our future performance depends in part upon our ability to manage our growth effectively |
| We may not be able to implement management information and control systems in an efficient and timely manner, and our current or planned personnel, systems, procedures and controls may not be adequate to support our future operations |
| If we are unable to manage our growth effectively, our business will suffer |
| Our business will be harmed if our information support systems are not further developed |
| Sophisticated information processing systems, including provisioning, accounting and network management, are vital to our growth and our ability to achieve operating efficiencies |
| Our plans for the development and implementation of these systems rely largely upon acquiring products and services from third party vendors and integrating those products and services |
| We may be unable to implement these systems on a timely basis or at all, and these systems may not perform as expected |
| A failure of these systems could substantially impair our ability to provide services, send invoices and monitor our operations |
| We may also be unable to maintain and upgrade our operational support systems as necessary |
| We license key software from third parties |
| If we are unable to obtain such software on commercially acceptable terms, our business could be adversely affected |
| We rely on software licensed from third parties, including applications that are integrated with internally developed software and used in our services |
| Most notably, we license Preside and MetaSolv TBS These third-party technology licenses may not continue to be available to us on commercially reasonable terms, or at all, and we may not be able to obtain licenses for other existing or future technologies that we desire to integrate into our services |
| Although we believe that there are alternative suppliers for the software that we rely upon, it could take a significant period of time to establish relationships with alternative suppliers and integrate their software into our services |
| The loss of any of our relationships with these suppliers could have a material adverse affect on our business |
| We depend on our key personnel, and the loss of their services may adversely affect our business |
| We are highly dependent upon the efforts of our senior management team, none of whom currently has an employment agreement with us |
| The death or departure of any of our key personnel could have a material adverse effect on our business |
| 18 ______________________________________________________________________ [20]Table of Contents We may become the subject of litigation by our stockholders, which could adversely affect our business |
| In addition to claims that may arise in the normal course of our business and financing activities, certain of our stockholders may sue us in an attempt to recover their losses as a result of the decline in our stock price, which has been significant since 2000 |
| The resolution of such a claim would likely be costly and time-consuming |
| If any or all of such claims cannot be resolved through a negotiated settlement, we could become a party to the resulting litigation |
| Any litigation, even if we are successful, could result in substantial costs and diversion of resources and management attention |
| An adverse determination in any litigation could also subject us to significant liability, under the judgment of a court or by default |
| Alternative technologies pose competitive threats |
| In addition to fiber-optic technology, there are other technologies that provide more capacity and speed than traditional copper wire transmission technology, such as digital subscriber lines, or DSL, and wireless technologies, and can be used instead of our networks |
| Furthermore, these technologies may be improved and other new technologies may be developed that provide more capacity, reliability, scalability and speed than the fiber-optic technology we deploy |
| The development of new technologies or the significant penetration of alternative technologies into our target markets may reduce the demand for our services and consequently could have a material adverse effect on our business |
| We have outstanding debt that may limit our ability to borrow additional money, restrict the use of our cash flows and constrain our business strategy, and we may not be able to meet our debt obligations |
| As of March 24, 2006, we had total outstanding debt of dlra14dtta2 million and dlra4dtta8 million of outstanding letters of credit |
| In addition, we had dlra0dtta8 million of availability to issue letters of credit under the credit facility, subject to compliance with the terms of the credit agreement |
| As a result of this debt and debt that we may incur in the future, we will need to devote a portion of our available cash towards debt service payments |
| In addition, our ability to borrow additional money is restricted by our current debt arrangements |
| Furthermore, we have agreed to terms in the credit agreement (which governs our credit facility) that expose us to certain risks and limitations, including the following: • principal amortization payments are required to be made quarterly beginning on June 30, 2007 and extend through maturity in 2008; • we have made affirmative financial covenants that we will breach if our financial results do not meet our expectations; and • we have agreed to certain negative covenants that may cause us to make choices regarding the operation of our business that we would not otherwise make |
| You should be aware that our ability to repay or refinance our debt depends on our successful financial and operating performance and on our ability to implement our business strategy successfully |
| There can be no assurance that our future cash flows and capital resources will be sufficient to repay our existing indebtedness and any indebtedness we may incur in the future, or that we will be successful in obtaining alternative financing |
| Further, our borrowings under our credit facility are secured by substantially all of our assets, and our obligations under our facility are guaranteed by our subsidiaries |
| In the event that we are unable to repay our debts, we may be forced to reduce or delay the completion or expansion of our networks, sell some of our assets, obtain additional equity capital or refinance or restructure our debt |
| If we are unable to meet our debt service obligations or comply with our covenants, we would be in default under our existing debt agreements, which would accelerate the repayment of our indebtedness |
| Our failure to achieve certain financial results would also violate certain covenants, potentially accelerating the outstanding balance of our debt for immediate payment |
| To avoid a default, we may need waivers from third parties, which might not be granted |
| 19 ______________________________________________________________________ [21]Table of Contents Legislation and government regulation could adversely affect us |
| We are subject to federal, state and local regulations that affect our services, competition, the taxation of our services and other aspects of our operations |
| The regulation of the communications industry is changing rapidly and varies from state to state |
| Changes in the regulatory environment could affect our operating results by increasing competition, decreasing revenue, increasing costs or impairing our ability to offer services |
| Certain communications services are subject to significant regulation at the federal and state level |
| The Federal Communications Commission, or FCC, regulates communications carriers providing intrastate, interstate and international common carrier services |
| State public utility commissions exercise jurisdiction over intrastate communications services |
| The FCC and state public utility commissions do not regulate most enhanced services, which involve more than the pure transmission of customer provided information |
| Our subsidiary, Local Fiber, LLC, is regulated as a common carrier by virtue of its provision of communications services directly to the public for a fee |
| As a common carrier, Local Fiber, LLC is subject to extensive federal, state and local communications regulation, which includes the payment of all applicable regulatory assessments |
| Many of our competitors and customers, especially ILECs, are subject to federal and state regulations |
| These regulations change from time to time in ways that are difficult for us to predict |
| Although we believe the services we provide today, other than those provided by Local Fiber, LLC, are not subject to regulation imposed on other telecommunications services by the FCC or the state public utility commissions, changes in regulation or new legislation may impose regulation on our non-regulated services |
| As an access provider, we may incur liability for information disseminated through our networks |
| The law relating to the liability of access providers and on-line services companies for information carried on or disseminated through their networks is unsettled |
| Federal and state statutes have been directed at imposing liability on Internet service providers for aspects of content carried on their networks |
| There may be new legislation and court decisions that may affect our services and expose us to potential liability |
| As the law in this area develops, the potential imposition of liability for information carried on and disseminated through our networks could require us to implement measures to reduce our exposure to such liability, which may require the expenditure of substantial resources or the discontinuation of certain products or services offerings |
| Any significant costs that we incur as a result of such measures or the imposition of liability could have a material adverse effect on our business, including our operating expenses and our liquidity |
| Our principal stockholders, directors and executive officers currently control a significant percentage of the voting rights of our stock, and this may limit your ability to affect the outcome of any stockholder vote or exercise any influence over our business |
| The concentration of ownership of our common stock may have the effect of delaying, deferring or preventing a change in control, merger, consolidation, or tender offer that could involve a premium over the price of our common stock |
| Currently, our executive officers, directors and greater-than-five-percent stockholders and their affiliates, in the aggregate, beneficially own approximately 38prca of our outstanding common stock |
| These stockholders, if they vote together, are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions and matters |
| Anti-takeover provisions could prevent or delay a change of control that stockholders may consider favorable |
| Provisions in our certificate of incorporation, our bylaws and Delaware law could delay or prevent a change of control or change in management that would provide stockholders with a premium to the market price of their common stock |
| The authorization of undesignated preferred stock, for example, gives our board the ability to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to 20 ______________________________________________________________________ [22]Table of Contents change control of the company |
| If a change of control or change in management is delayed or prevented, this premium may not be realized, or the market price of our common stock could decline |
| We have neither declared nor paid any dividends on our common stock and do not anticipate paying cash dividends in the future |
| We currently intend to retain any earnings to fund operations and future growth |
| Furthermore, our credit facility currently prohibits, and the terms of any future debt agreements or preferred stock will likely restrict, the payment of cash dividends on our common stock |
| Our stock price is likely to be highly volatile |
| The trading price of our common stock is highly volatile |
| Failure to meet market expectations because of quarterly fluctuations in our financial results could cause our stock price to decline |
| Moreover, factors that are not related to our operating performance could cause our stock price to decline |
| The stock market has periodically experienced significant price and volume fluctuations that have affected the market prices for securities of technology and communications companies |
| Consequently, you may experience a decrease in the market value of your common stock, regardless of our operating performance or prospects |
| We could issue a substantial number of additional shares of common stock, which could adversely affect the trading price of our common stock |
| We have approximately 1dtta5 million shares of common stock subject to issuance upon exercise of outstanding stock options and warrants |
| We cannot predict the effect, if any, that future sales of shares of common stock, or the availability of shares of common stock for future sale, will have on the market price of our common stock |
| Sales of substantial amounts of common stock (including shares issued upon the exercise of stock options or warrants), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock |