| MPOWER HOLDING CORP Item 1A Risk Factors Before you invest in shares of our securities, you should be aware of various risks, including the risks described below |
| Our business, financial condition or results of operations could be materially adversely affected by any of these risks |
| The risks and uncertainties described below or elsewhere in this report are not the only ones facing us |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business and operations |
| If any of the matters included in the following risks were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected |
| In such case, you could lose all or part of your investment |
| We have incurred net losses in each year of our existence |
| We may not be able to generate sufficient cash flow to cover our operating commitments |
| We generated positive cash flows from continuing operations for the year ended December 31, 2005 and we expect the same in 2006 |
| We have contractual commitments for approximately dlra22dtta1 million of payments during 2006 and plan to make capital expenditures during the year |
| In addition, we have announced our intention to repurchase up to dlra10dtta0 million of our common stock |
| If the revenues generated from our operations are not sufficient to cover these commitments and other operating expenses, we will need to rely on our cash balances, credit facility, or other financing |
| Under any of these circumstances, our financial condition will be weakened |
| 19 _________________________________________________________________ Market conditions and our past performance resulted in our bankruptcy reorganization in 2002 |
| We filed for bankruptcy protection in April 2002 and completed our bankruptcy reorganization in July 2002 |
| Although we eliminated substantially all of our substantial debt burden in the reorganization and have improved our operating performance, we still face many of the same business challenges that existed prior to the bankruptcy and that resulted in the failure of a number of companies in our industry |
| In particular, we still have to compete with well-entrenched telephone companies such as Verizon and SBC (now called AT&T), and we must still look to these aggressive competitors to supply us with access to their facilities in order for us to serve our own customers |
| Our failure to achieve or sustain market acceptance at desired pricing levels could impair our ability to achieve profitability or positive cash flow |
| Prices for data communication services have fallen historically, a trend that may continue |
| Accordingly, we cannot predict to what extent we may need to reduce our prices to remain competitive or whether we will be able to sustain future pricing levels as our competitors introduce competing services or similar services at lower prices |
| Our ability to meet price competition may depend on our ability to operate at costs equal to or lower than our competitors or potential competitors |
| There is a risk that competitors may undercut our rates, increase their services or take other actions that could be detrimental to us |
| Lower prices will negatively affect our ability to achieve and sustain profitability |
| Changes in laws or regulations could restrict the way we operate our business and negatively affect our costs and competitive position |
| A significant number of the services we offer are regulated at the federal, state and/or local levels |
| If these laws and regulations change or if the administrative implementation of laws develops in an adverse manner, there could be an adverse impact on our costs and competitive position |
| In addition, we may expend significant financial and managerial resources to participate in administrative proceedings at either the federal or state level, without achieving a favorable result |
| We believe incumbent carriers and others may work aggressively to modify or restrict the operation of many provisions of the Telecommunications Act |
| We expect ILECs and others to continue to pursue litigation in courts, institute administrative proceedings with the FCC and other state regulatory agencies and lobby the United States Congress, all in an effort to affect laws and regulations in a manner favorable to them and against the interest of competitive carriers |
| Adverse regulatory developments could negatively affect our operating expenses and our ability to offer services sought by our existing and prospective customers |
| The prices we charge for our services and pay for the use of services of ILECs and other competitive carriers may be negatively affected in regulatory proceedings, which could result in decreased revenues, increased costs and loss of business |
| If we were required to decrease the prices we charge for our services or to pay higher prices for services we purchase from ILECs and other competitive carriers, it would have an adverse effect on our ability to achieve profitability and offer competitively priced services |
| We must file tariffs with state and federal regulators, which indicate the prices we charge for our services |
| In addition, we purchase some tariffed services from ILECs and/or competitive carriers |
| The rates we pay for other services we purchase from ILECs and other competitive carriers are set by negotiations between the parties |
| All of the tariffed prices may be challenged in regulatory proceedings by customers, including ILECs, competitive carriers and long distance carriers who purchase these services |
| Negotiated rates are also subject to regulatory review |
| During the pendency of the negotiations, or if the parties cannot agree, the local carrier must charge the long distance carrier the appropriate benchmark rate established by regulation |
| This could have an adverse impact on our expected revenues and operating results |
| The prices charged by incumbent carriers for unbundled network elements, collocations and other services upon which we rely are subject to periodic review by state regulatory agencies |
| Change in these prices may adversely affect our business |
| For more details about our regulatory situation, please see “Business - Government Regulations |
| ” Our changes in sales channel strategy and ability to attract and retain sales personnel and independent agents and vendors may adversely affect our operating results |
| The changes in our sales strategy will impact the number of account managers we have, and the amounts we will invest in new sales recruits for training and professional development |
| Our strategy to increase the quality and number of independent agents and vendors is expected to have challenges related to recruiting and retaining effective partners for us in these sales channels |
| We will also be investing in operating support system enhancements to make our product offerings more attractive to these alternative sales channels |
| Delays in the effectiveness of any of these strategy changes will adversely affect our operating results |
| 20 _________________________________________________________________ Our services may not achieve sufficient market acceptance to allow us to become profitable |
| To be successful, we must develop and market services that are widely accepted by businesses at profitable prices |
| Our success will depend upon the willingness of our target customers to accept us as an alternative provider of local, long distance, high-speed data and Internet services |
| Although always in the process of evaluating and rolling out additional products and services, we might not be able to provide the range of communication services our target business customers need or desire |
| A failure to develop acceptable product and service offerings will adversely affect our ability to attract or retain customers, which will adversely affect our revenues and ability to achieve profitability |
| If we are not able to compete successfully in the highly competitive telecommunications industry with competitors that have greater resources than we do, our revenues and operating results will be negatively affected |
| Our success depends upon our ability to compete with other telecommunications providers in each of our markets, many of which have substantially greater financial, marketing and other resources than we have |
| In addition, competitive alternatives may result in substantial customer turnover in the future |
| A growing trend towards consolidation of communications companies and the formation of strategic alliances within the communications industry, as well as the development of new technologies, could give rise to significant new competitors |
| If we cannot compete successfully, our revenues and operating results will suffer |
| If we are not able to obtain additional funds if and when needed, our ability to grow our business and our competitive position in our markets will be jeopardized |
| If we cannot generate or otherwise obtain sufficient funds, if needed, we may not be able to grow our business or devote the funds to marketing, new technologies and working capital necessary to compete effectively in the communications industry |
| We expect to fund any and all capital requirements through existing resources, internally generated funds and debt or equity financing, if needed |
| We may not be able to raise sufficient debt or equity financing, if and when needed, on acceptable terms or at all |
| This could result in stagnant or declining revenues and hence, additional losses |
| Fluctuating operating results may negatively affect our stock price |
| Our annual and quarterly operating results may fluctuate as a result of numerous factors, many of which are outside of our control |
| These factors include: • delays in the generation of revenue because certain network elements have lead times that are controlled by incumbent carriers and other third parties • the ability to develop and commercialize new services by us or our competitors • the ability to deploy on a timely basis our services to adequately satisfy customer demand • our ability to successfully operate and maintain our networks • the rate at which customers subscribe to our services • decreases in the prices for our services due to competition, volume-based pricing and other factors • the development and operation of our billing and collection systems and other operational systems and processes • the rendering of accurate and verifiable bills from the ILECs from whom we lease transport and resolution of billing disputes • the incorporation of enhancements, upgrades and new software and hardware products into our network and operational processes that may cause unanticipated disruptions • the interpretation and enforcement of regulatory developments and court rulings concerning the 1996 Telecommunications Act, interconnection agreements and the antitrust laws If our operating results fluctuate so as to cause us to miss earnings expectations, our stock price may be adversely affected |
| 21 _________________________________________________________________ The unplanned loss of senior members of our management team may adversely affect our operating results |
| The unplanned loss of senior management personnel could impair our ability to carry out our business plan |
| We believe our future success will depend in large part on our ability to attract and retain highly skilled and qualified personnel |
| If one or more senior members of our management team unexpectedly leaves us, it may be difficult to find suitable replacements |
| This loss of senior management personnel may adversely affect our operating results as we incur costs to replace the departed personnel and potentially lose opportunities in the transition of important job functions |
| We do not maintain key man insurance on any of our officers |
| If our equipment does not perform as we expect, it could delay our introduction of new services resulting in the loss of existing or prospective customers |
| In implementing our strategy, we may use new or existing technologies to offer additional services |
| We also plan to use equipment manufactured by multiple vendors to offer our current services and future services in each of our markets |
| If we cannot successfully install and integrate the technology and equipment necessary to deliver our current services and any future services within the time frame and with the cost effectiveness we currently contemplate, we could be forced to delay or abandon the introduction of new services |
| This could adversely affect our ability to attract and retain customers, resulting in a reduction of expected revenues |
| The failure of our operations support system to perform as we expect could impair our ability to retain customers and obtain new customers or could result in increased capital expenditures |
| Our operations support system is an important factor in our success and we continue to invest funds in maintaining and improving it |
| If our operations support system fails or is unable to perform, we could suffer customer dissatisfaction, loss of business or the inability to add customers on a timely basis, any of which would adversely affect our business, financial condition and results of operations |
| Furthermore, problems may arise with higher processing volumes or with additional automation features, which could potentially result in system breakdowns and delays and additional, unanticipated expense to remedy the defect or to replace the defective system with an alternative system |
| Our failure to manage growth could result in increased costs |
| We may be unable to manage our growth effectively |
| This could result in increased costs and delay our introduction of additional services resulting in a reduction of expected revenues |
| The development of our business will depend on, among other things, our ability to achieve the following goals in a timely manner, at reasonable costs and on satisfactory terms and conditions: • purchase, install and operate equipment • negotiate suitable interconnection agreements with, and arrangements for installing our equipment at the central offices of, ILECs on satisfactory terms and conditions • hire and retain qualified personnel • lease suitable access to transport networks • obtain required government authorizations |
| Any significant growth will place a strain on our operational, human and financial resources and will also increase our operating complexity as well as the level of responsibility for both existing and new management personnel |
| Our ability to manage our growth effectively will depend on the continued development of plans, systems and controls for our operational, financial and management needs and on our ability to expand, train and manage our employee base |
| 22 _________________________________________________________________ If we are unable to negotiate and enforce favorable interconnection agreements, we may incur higher costs that would impair our ability to operate profitably in our existing markets |
| We are in the process of amending our interconnection agreements to conform to the Triennial Review Order and Triennial Review Remand Order (“TRO/TRRO”) |
| Relatively few of our circuits are affected by the TRO/TRRO As a result, the TRO/TRRO amendments being negotiated/arbitrated at present will not have a significant impact on us |
| However, it is not possible to predict how the TRO/TRRO will affect our future long-term rates |
| Delays by the ILECs in connecting our customers to our network could result in customer dissatisfaction and loss of business |
| We rely on the timeliness of ILECs and other competitive carriers in processing our orders for customers switching to our service and in maintaining the customers’ standard telephone lines to assure uninterrupted service |
| Therefore, the ILECs might not be able to provide and maintain leased standard telephone lines in a prompt and efficient manner as the number of standard telephone lines requested by competitive carriers increases |
| This may result in customer dissatisfaction and the loss of new business |
| Our reliance on a limited number of equipment suppliers could result in additional expenses and loss of revenues |
| We currently rely and expect to continue to rely on a limited number of third party suppliers to manufacture the equipment we require |
| In recent years, at least one supplier went out of business, and there is the risk that others could do so in the future |
| If one or more additional suppliers go out of business, or if our competitors enter into exclusive or restrictive arrangements with our suppliers it may materially and adversely affect the availability and pricing of the equipment we purchase |
| Our reliance on third-party suppliers involves a number of additional risks, including the absence of guaranteed supply and reduced control over delivery schedules, quality assurance, production yields and costs |
| Our suppliers may not be able to meet our needs in a satisfactory and timely manner in the future and we may not be able to obtain alternative suppliers when and if needed |
| It could take a significant period of time to establish relationships with alternative suppliers for critical technologies and to introduce substitute technologies into our network |
| In addition, if we change suppliers, we may need to replace all or a portion of the equipment deployed within our network at significant expense in terms of equipment costs and loss of revenues in the interim |
| If we are not able to obtain or implement new technologies, we may lose business and limit our ability to attract new customers |
| We may be unable to obtain access to new technology on acceptable terms or at all |
| We may be unable to adapt to new technologies and offer services in a competitive manner |
| If these events occur, we may lose customers to competitors offering more advanced services and our ability to attract new customers would be hindered |
| This will adversely affect our revenues and operating results |
| Rapid and significant changes in technology are expected in the communications industry |
| We cannot predict the effect of technological changes on our business |
| Our future success will depend, in part, on our ability to anticipate and adapt to technological changes, evolving industry standards and changing needs of our current and prospective customers |
| A system failure or breach of network security could cause delays or interruptions of service to our customers and result in customer dissatisfaction and loss of business |
| Interruptions in service, capacity limitations or security breaches could have a negative effect on customer acceptance and, therefore, on our ability to retain existing customers and attract new customers |
| Our networks may be affected by physical damage, power loss, capacity limitations, software defects, breaches of security by computer viruses, break-ins or otherwise and other factors which may cause interruptions in service or reduced capacity for our customers |
| The loss of existing or prospective customers would have a negative effect on our business, financial condition and results of operations |
| If we are unable to effectively deliver our services to a substantial number of customers, we may not achieve our revenue goals |
| Our network may not be able to connect and manage a substantial number of customers at high transmission speeds |
| If we cannot achieve and maintain digital transmission speeds that are otherwise available in a particular market, we may lose customers to competitors with higher transmission speeds and we may not be able to attract new customers |
| While digital transmission speeds of up to 1dtta5 Mbps are possible on portions of our network, that speed may not be available over a majority of our network |
| Actual transmission speeds on our network will depend on a variety of factors many of which are beyond our control, including the distance an end user is located from a central office, the quality of the telephone lines, the presence of interfering transmissions on nearby lines and other factors |
| The loss of existing or prospective customers would have a negative effect on our business, financial condition and results of operations |
| 23 _________________________________________________________________ We may lose customers or potential customers because the telephone lines we require may be unavailable or in poor condition |
| Our ability to provide some of our services to potential customers depends on the quality, physical condition, availability and maintenance of telephone lines within the control of the ILECs |
| In addition, the ILECs may not maintain the telephone lines in a condition that will allow us to implement certain services effectively or may claim they are not of sufficient quality to allow us to fully implement or operate certain services |
| Under these circumstances, we will likely suffer customer dissatisfaction and the loss of existing and prospective customers |
| Interference or claims of interference could result in customer dissatisfaction and loss of customers |
| Interference, or claims of interference by the ILECs, if widespread, could adversely affect our speed of deployment, reputation, brand image, service quality and customer satisfaction and retention |
| Technologies deployed on copper telephone lines, such as DSL, have the potential to interfere with other technologies on the copper telephone lines |
| Interference could degrade the performance of our services or make us unable to provide service on selected lines and the customers served by those lines |
| Although we believe our DSL technologies, like other technologies, do not interfere with existing voice services, ILECs may claim the potential for interference permits them to restrict or delay our deployment of DSL services |
| We may be unable to successfully resolve interference issues with ILECs on a timely basis |
| These problems will likely result in customer dissatisfaction and the loss of existing and prospective customers |
| Our future revenues and success will depend on continued growth in the demand for Internet access and high-speed data services |
| Demand for Internet services is still uncertain and depends on a number of factors, including the growth in consumer and business use of new interactive technologies, the development of technologies that facilitate interactive communication between organizations and targeted audiences, security concerns and increases in data transport capacity |
| If the markets for the services we offer, including Internet access and high-speed data services, fail to develop, grow more slowly than anticipated or become saturated with competitors, we may not be able to achieve our projected revenues |
| In addition, the market for high-speed data transmission is still evolving |
| Various providers of high-speed digital services are testing products from various suppliers for various applications, and no industry standard has been broadly adopted |
| Critical issues, including security, reliability, ease of use and cost and quality of various service options, remain unresolved and may impact the growth of these services |
| The desirability and marketability of our Internet service and our revenues may be adversely affected if we are not able to maintain reciprocal relationships with other Internet service providers |
| The Internet is comprised of many Internet service providers and underlying transport providers who operate their own networks and interconnect with other Internet service providers at various points |
| As we continue the operation of Internet services, connections to the Internet will be provided through wholesale carriers |
| We anticipate as our volume increases, we will enter into reciprocal agreements with other Internet service providers |
| Other national Internet service providers may not maintain reciprocal relationships with us |
| If we are unable to maintain these relationships, our Internet services may not be attractive to our target customers, which would impair our ability to retain and attract customers and negatively affect revenues |
| In addition, the requirements associated with maintaining relationships with the major national Internet service providers may change |
| We may not be able to expand or adapt our network infrastructure to meet any new requirements on a timely basis, at a reasonable cost, or at all |
| 24 _________________________________________________________________ We may incur liabilities as a result of our Internet service offerings |
| United States law relating to the liability of on-line service providers and Internet service providers for information carried on, disseminated through, or hosted on their systems is currently unsettled |
| If liability is imposed on Internet service providers, we would likely implement measures to seek to minimize our liability exposure |
| These measures could require us to expend substantial resources or discontinue some of our product or service offerings |
| In addition, increased attention to liability issues, as a result of litigation, legislation or legislative proposals could adversely affect the growth and use of Internet services |
| Under these circumstances, our revenues and operating expenses may be negatively affected |
| RISK FACTORS RELATED TO OUR COMMON STOCK Our stock price has been volatile historically and may continue to be volatile |
| The price of our stock may fluctuate significantly, which may make it difficult for holders to sell our shares of stock when desired or at attractive prices |
| The market price for our stock has been and may continue to be volatile |
| We expect our stock price to be subject to fluctuations as a result of a variety of factors, including factors beyond our control |
| These factors include: • actual or anticipated variations in our operating results or our competitors’ operating results • announcements of new product and service offerings by us or our competitors • changes in the economic performance or market valuations of communications carriers • changes in recommendations or earnings estimates by securities analysts • announcements of new contracts or customers by us or our competitors, and timing and announcement of acquisitions by us or our competitors • conditions and trends in the telecommunications industry • adverse rulings in one or more of the regulatory proceedings affecting us • conditions in the local markets or regions in which we operate |
| Because of this volatility, we may fail to meet the expectations of our stockholders or of securities analysts at some time in the future, and the trading prices of our stock could decline as a result |
| In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the trading prices of equity securities of many telecommunication companies, including ours |
| These fluctuations have often been unrelated or disproportionate to our operating performance |
| In addition, any negative change in the public’s perception of competitive local exchange carriers could depress our stock price regardless of our operating results |
| The value of our common stock may be negatively affected by additional issuances of restricted or unrestricted common stock by us and general market factors |
| Future issuances or sales of our common stock by us will likely be dilutive to our existing common stockholders |
| Future issuances or sales of common stock by us, or the availability of such common stock for future issue or sale, could have a negative impact on the price of our common stock prevailing from time to time |
| Sales of substantial amounts of our common stock in the public or private market, a perception in the market that such sales could occur, or the issuance of securities exercisable or convertible into our common stock could also adversely affect the prevailing price of our common stock |
| 25 _________________________________________________________________ The attractiveness of our stock to potential purchasers and our stock price may be negatively affected by our rights plan and provisions of our certificate of incorporation, by-laws and Delaware General Corporate Law, which may have anti-takeover effects |
| Our certificate of incorporation and by-laws contain provisions which may deter, discourage or make more difficult a takeover or change of control of our company by another corporation |
| These anti-takeover provisions include: • the authority of our board of directors to issue shares of preferred stock without stockholder approval on such terms and with such rights as our board of directors may determine, and • the requirement of a classified board of directors serving staggered three-year terms |
| We have also adopted a rights plan, which may make it more difficult to effect a change in control of our company and replace incumbent management |
| Potential purchasers seeking to obtain control of a company may not be interested in purchasing our stock as a result of these matters |
| This may reduce demand for our stock and thereby negatively affect our stock price |
| The attractiveness of our stock to potential purchasers and our stock price may be negatively affected since we do not pay dividends on our common stock |
| We have never paid a cash dividend on our common stock and do not plan to pay dividends on our common stock for the foreseeable future |
| Potential purchasers of our stock seeking a regular return on their investment may not be interested in purchasing our stock as a result |
| This may reduce demand for our stock and thereby negatively affect our stock price |