| PRIMUS TELECOMMUNICATIONS GROUP INC ITEM 1A RISK FACTORS A wide range of factors could materially affect our performance |
| In addition to factors affecting specific business operations and the financial results of those operations identified elsewhere in this report, the following factors, among others, could adversely affect our operations: The unqualified opinion with a matter of emphasis regarding our ability to continue as a going concern from our independent registered public accounting firm in connection with the filing of our Form 10-K for the year ended December 31, 2005, could adversely affect our operations by potentially increasing our immediate need for additional capital and disrupting supplier relationships |
| Our independent registered public accounting firm has included in their report concerning our consolidated financial statements for 2005 an explanatory paragraph that our recurring losses from operations, the maturity of dlra23dtta6 million of the 2000 Convertible Subordinated Debentures due February 15, 2007, negative working capital, 23 ______________________________________________________________________ [44]Table of Contents and stockholders’ deficit raise substantial doubt about our ability to continue as a going concern |
| This opinion may adversely affect our ability to manage our accounts payable and potentially cause some suppliers to deal with us on a cash-on-delivery or prepaid basis only or to terminate the supplier relationship |
| If this were to occur, this would adversely affect our operations by increasing our immediate need for additional capital |
| If competitive pressures continue or intensify and/or the success of our new initiatives is not adequate in amount or timing to offset the decline in results from our core businesses, we may not be able to service our debt or other obligations |
| We believe that our existing cash and cash equivalents, future sales of equity, internally generated funds from operating activities, continued cost reduction efforts, our ability to moderate capital expenditures, combined with existing and potential debt financing alternatives and potential proceeds from opportunistic asset sales and interest savings from balance sheet deleveraging should be sufficient to fund our debt service requirements and other fixed obligations (such as capital leases, vendor financing and other long-term obligations), resolution of vendor disputes, and other cash needs for our operations through at least 2006 |
| However, there are substantial risks, uncertainties and changes that could cause actual results to differ from our current belief, particularly as aggressive pricing and bundling strategies by certain incumbent carriers and ILECs have intensified competitive pressures in the markets where we operate, and/or if we have insufficient financial resources to market our services |
| The aggregate anticipated margin contribution from our new initiatives may not be adequate in amount or timing to offset the declines in margin from our core business |
| In addition, regulatory decisions could have a material adverse impact on our operations and outlook |
| See also information regarding our 2000 Convertible Subordinated Debentures due February 15, 2007 and other information under “Item 7—MD&A—Liquidity and Capital Resources–Short- and Long-Term Liquidity Considerations and Risks” and in these Risk Factors |
| If adverse events referenced therein were to occur, we may not be able to service our debt or other obligations and could, among other things, be required to seek protection under the bankruptcy laws of the United States or other similar laws in other countries |
| Our high level of debt may adversely affect our financial and operating flexibility |
| We currently have substantial indebtedness and anticipate that we and our subsidiaries may incur additional indebtedness in the future |
| The level and/or terms of our indebtedness (1) could make it difficult for us to make required payments of principal and interest on our outstanding debt; (2) could limit our ability to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements or other purposes; (3) requires that a substantial portion of our cash flow, if any, be dedicated to the payment of principal and interest on outstanding indebtedness and other obligations and, accordingly, such cash flow will not be available for use in our business; (4) could limit our flexibility in planning for, or reacting to, changes in our business; (5) results in our being more highly leveraged than many of our competitors, which places us at a competitive disadvantage; (6) will make us more vulnerable in the event of a downturn in our business; and (7) could limit our ability to sell assets partially or fund our operations due to covenant restrictions |
| If we are delisted from the Nasdaq National Market and/or Nasdaq Capital Market, it could result in a more limited public market for our common stock |
| On June 17, 2005, we received a notice of potential delisting of our common stock from Nasdaq National Market due to the fact that our common stock had not met the minimum prescribed trading prices for continued listing on the Nasdaq National Market |
| On December 13, 2005, we received a Staff Determination Letter from the Nasdaq National Market that our common stock was subject to delisting from the Nasdaq National Market for failing to meet the minimum bid requirement |
| On December 20, 2005, the Company requested a hearing that was held on January 12, 2006 before the Nasdaq Listings Qualification Panel (the “Panel”) |
| The delisting of our common stock was stayed pending the outcome of the hearing |
| On February 14, 2006, the Company received the Panel’s determination to continue the listing of the Company’s common stock on the Nasdaq National Market conditioned upon the following exception: on or before March 10, 2006, the Company must have evidenced a 24 ______________________________________________________________________ [45]Table of Contents closing bid price of at least dlra1dtta00 per share for a minimum of ten consecutive trading days |
| The Panel also noted that the Company meets the listing standards for inclusion in the Nasdaq Capital Market, and that a transfer to that market would provide the Company with an additional 180 days (from December 13, 2005) to comply with the minimum bid price rule |
| In order to meet the minimum bid price rule, we may take certain steps to increase the minimum bid of our common stock, including, subject to appropriate authorizations and approvals, effecting a reverse split of our common stock |
| On February 7, 2006, the Company applied for listing on the Nasdaq Capital Market to be effective March 14, 2006 |
| Effective March 14, 2006, the Company’s common stock trades on the Nasdaq Capital Market |
| If we do not meet the minimum bid price rule by June 12, 2006, however, our common stock would be delisted from trading on the Nasdaq Capital Market and could trade on the OTC Bulletin Board |
| The OTC Bulletin Board is a substantially less liquid market than the Nasdaq National Market or Capital Market |
| As a result, if our common stock is delisted from the Nasdaq markets or if we effect a reverse split of our common stock, our stockholders may have greater difficulty disposing of their shares in acceptable amounts and at acceptable prices and we may have greater difficulty issuing equity securities or securities convertible into common stock in such circumstances |
| If delisted, we cannot assure you when, if ever, our common stock would once again be eligible for listing on either the Nasdaq National Market or Capital Market |
| Given our limited experience in delivering our new product initiatives and in providing bundled local, wireless, broadband, DSL, Internet, data and VOIP services, we may not be able to operate successfully or expand these parts of our business |
| During 2004, we accelerated initiatives to provide wireless, broadband, VOIP and local wireline services in certain markets where we operate |
| During the third quarter of 2004 we accelerated initiatives to become an integrated wireline, wireless and broadband service provider in order to counter competitive pricing pressures initiated by large incumbent providers in certain of the principal markets where we operate and to stem the loss of certain of our wireline and dial-up ISP customers to our competitors’ bundled wireless, wireline and broadband service offerings |
| Our experience in providing these new products in certain markets and in providing these bundled service offerings is limited |
| Our primary competitors include incumbent telecommunications providers, cable companies and other ISPs that have a significant national or international presence |
| Many of these operators have substantially greater resources, capital and operational experience than we do |
| We also expect that we will experience increased competition from traditional telecommunications carriers and cable companies and other new entrants that expand into the market for broadband, VOIP, Internet services and traditional voice services, and regulatory developments may impair our ability to compete |
| Therefore, future operations involving these individual or bundled services may not succeed in this new competitive environment, and we may not be able to expand successfully; may experience margin pressure; may face quarterly revenue and operating results variability; and have heightened difficulty in establishing future revenues or results |
| As a result, there can be no assurance that we will reverse recent revenue declines or maintain or increase revenues or be able to generate income from operations or net income in the future or on any predictable or timely basis |
| We may be exposed to significant liability resulting from our noncompliance with FCC directives regarding enhanced 911 (E911) services |
| In June 2005, the FCC adopted new rules requiring VOIP providers interconnected to the public switched telephone network (PSTN) to provide E911 service in a manner similar to traditional wireline carriers by November 2005 |
| LINGO, our subsidiary which sells VOIP services, was unable to meet this deadline for all of its customers |
| As of February 28, 2006, approximately 35prca of our LINGO customers were without E911 service |
| We have sought a waiver from the FCC asking for an additional nine months to complete deploying our E911 service, but the FCC has not yet addressed our waiver petition |
| We also are participating in a legal challenge to these rules pending before the US Court of Appeals for the District of Columbia Circuit |
| LINGO’s current services are more limited than the 911 services offered by traditional wireline telephone companies |
| These limitations may cause significant delays, or even failures, in callers’ receipt of the emergency assistance they need |
| We have notified our customers of the differences between our Emergency Calling Service 25 ______________________________________________________________________ [46]Table of Contents and E911 services and those available through traditional telephony providers and have received affirmative acknowledgement from substantially all of our customers |
| Nevertheless, injured customers may attempt to hold us responsible for any loss, damage, personal injury or death suffered as a result of our failure to comply with the FCC mandated E911 service |
| Our resulting liability could be significant, although the likelihood is remote |
| In addition, if and to the extent that we are determined to be out of compliance with the FCC order regarding E911 services we may be subject to fines or penalties or injunctions prohibiting LINGO from providing service in some markets |
| We are substantially smaller than our major competitors, whose marketing and pricing decisions, and relative size advantage, could adversely affect our ability to attract and retain customers and are likely to continue to cause significant pricing pressures that could adversely affect our net revenues, results of operations and financial condition |
| The long distance telecommunications, Internet, broadband, DSL, data and wireless industry is significantly influenced by the marketing and pricing decisions of the larger long distance industry, Internet access, broadband, DSL and wireless business participants |
| Prices in the long distance industry have continued to decline in recent years, and as competition continues to increase within each of our service segments and each of our product lines, we believe that prices are likely to continue to decrease |
| Our competitors in our core markets include, among others: Sprint, the regional bell operating companies (RBOCs) and the major wireless carriers in the United States; Telstra, SingTel Optus and Telecom New Zealand in Australia; Telus, BCE, Allstream (formerly AT&T Canada) and the major wireless and cable companies in Canada; and BT, Cable & Wireless United Kingdom, Colt Telecom, Energis and the major wireless carriers in the United Kingdom |
| Customers frequently change long distance, wireless and broadband providers, and ISPs in response to the offering of lower rates or promotional incentives, increasingly as a result of bundling of various services by competitors |
| Moreover, competitors’ VOIP and broadband product rollouts have added further customer choice and pricing pressure |
| As a result, generally, customers can switch carriers and service offerings at any time |
| Competition in all of our markets is likely to remain intense, or even increase in intensity and, as deregulatory influences are experienced in markets outside the United States, competition in non-United States markets is becoming similar to the intense competition in the United States |
| Many of our competitors are significantly larger than we are and have substantially greater financial, technical and marketing resources, larger networks, a broader portfolio of service offerings, greater control over network and transmission lines, stronger name recognition and customer loyalty, long-standing relationships with our target customers, and lower debt leverage ratios |
| As a result, our ability to attract and retain customers may be adversely affected |
| Many of our competitors enjoy economies of scale that result in low cost structures for transmission and related costs that could cause significant pricing pressures within the industry |
| Several long distance carriers in the United States, Canada and Australia and the major wireless carriers and cable companies, have introduced pricing and product bundling strategies that provide for fixed, low rates for calls |
| This strategy of our competitors could have a material adverse effect on our net revenue per minute, results of operations and financial condition if our pricing, set to remain competitive, is not offset by similar declines in our costs |
| Many companies emerging out of bankruptcy might benefit from a lower cost structure and might apply pricing pressure within the industry to gain market share |
| We compete on the basis of price, particularly with respect to our sales to other carriers, and also on the basis of customer service and our ability to provide a variety of telecommunications products and services |
| If such price pressures and bundling strategies intensify, we may not be able to compete successfully in the future, may face quarterly revenue and operating results variability, and may have heightened difficulty in estimating future revenues or results |
| Our repositioning in the market place places a significant strain on our resources, and if not managed effectively, could result in operational inefficiencies and other difficulties |
| Our repositioning in the market place may place a significant strain on our management, operational and financial resources, and increase demand on our systems and controls |
| To manage this change effectively, we must continue to implement and improve our operational and financial systems and controls, invest in critical 26 ______________________________________________________________________ [47]Table of Contents network infrastructure to maintain or improve our service quality levels, purchase and utilize other transmission facilities, and expand, train and manage our employee base |
| If we inaccurately forecast the movement of traffic onto our network, we could have insufficient or excessive transmission facilities and disproportionate fixed expenses |
| As we proceed with our development, operational difficulties could arise from additional demand placed on customer provisioning and support, billing and management information systems, product delivery and fulfillment, on our support, sales and marketing and administrative resources and on our network infrastructure |
| For instance, we may encounter delays or cost-overruns or suffer other adverse consequences in implementing new systems when required |
| In addition, our operating and financial control systems and infrastructure could be inadequate to ensure timely and accurate financial reporting |
| We have experienced significant historical, and may experience significant future, operating losses and net losses which may hinder our ability to meet our debt service or working capital requirements |
| As of December 31, 2005, we had an accumulated deficit of $(850dtta0) million |
| During the year ended December 31, 2003, we recognized net income of dlra54dtta8 million, of which dlra39dtta4 million is the positive impact of foreign currency transaction gains |
| We cannot assure you that we will recognize net income, or reverse net revenue declines in future periods |
| If we cannot generate net income or operating profitability, we may not be able to meet our debt service or working capital requirements |
| Integration of acquisitions ultimately may not provide the benefits originally anticipated by management and may distract the attention of our personnel from the operation of our business |
| We strive to increase the volume of voice and data traffic that we carry over our existing global network in order to reduce transmission costs and other operating costs as a percentage of net revenue, improve margins, improve service quality and enhance our ability to introduce new products and services |
| We may pursue acquisitions in the future to further our strategic objectives |
| Acquisitions of businesses and customer lists, a key element of our historical growth strategy, involve operational risks, including the possibility that an acquisition does not ultimately provide the benefits originally anticipated by management |
| Moreover, there can be no assurance that we will be successful in identifying attractive acquisition candidates, completing and financing additional acquisitions on favorable terms, or integrating the acquired business or assets into our own |
| There may be difficulty in migrating the customer base and in integrating the service offerings, distribution channels and networks gained through acquisitions with our own |
| Successful integration of operations and technologies requires the dedication of management and other personnel, which may distract their attention from the day-to-day business, the development or acquisition of new technologies, and the pursuit of other business acquisition opportunities, and there can be no assurance that successful integration will occur in light of these factors |
| We experience intense domestic and international competition which may adversely affect our results of operations and financial condition |
| The local and long distance telecommunications, data, broadband, Internet, VOIP and wireless industries are intensely competitive with relatively limited barriers to entry in the more deregulated countries in which we operate and with numerous entities competing for the same customers |
| Recent and pending deregulation in various countries may encourage new entrants to compete, including ISPs, wireless companies, cable television companies, who would offer voice, broadband, Internet access and television, and electric power utilities who would offer voice and broadband Internet access |
| For example, the United States and many other countries have committed to open their telecommunications markets to competition pursuant to an agreement under the World Trade Organization which began on January 1, 1998 |
| Further, in the United States, as certain conditions have been met under the Telecommunications Act of 1996, the RBOCs have been allowed to enter the long distance market, and other long distance carriers have been allowed to enter the local telephone services market (although 27 ______________________________________________________________________ [48]Table of Contents recent judicial and regulatory developments have diminished the attractiveness of this opportunity), and many entities, including cable television companies and utilities, have been allowed to enter both the local service and long distance telecommunications markets |
| Moreover, the rapid enhancement of VOIP technology may result in increasing levels of traditional domestic and international voice long distance traffic being transmitted over the Internet, as opposed to traditional telecommunication networks such as ours |
| Currently, there are significant capital investment savings and cost savings associated with carrying voice traffic employing VOIP technology, as compared to carrying calls over traditional networks |
| Thus, there exists the possibility that the price of traditional long distance voice services will decrease in order to be competitive with VOIP Additionally, competition is expected to be intense to switch customers to VOIP product offerings, as is evidenced by numerous recent market announcements in the United States and internationally from industry leaders and competitive carriers concerning significant VOIP initiatives |
| Our ability effectively to retain our existing customer base and generate new customers, either through our network or our own VOIP offerings, may be adversely affected by accelerated competition arising as a result of VOIP initiatives, as well as regulatory developments that may impede our ability to compete, such as restrictions on access to broadband networks owned and operated by others and the requirements to provide E911 services |
| As competition intensifies as a result of deregulatory, market or technological developments, our results of operations and financial condition could be adversely affected |
| If the fair value of our long-lived assets is determined to be less than its carrying value, any resulting impairment charge could have a material adverse impact on our results of operations and financial condition |
| We assess the recoverability of our long-lived assets to be held and used whenever events or changes in circumstances indicate that their carrying amount may not be recoverable |
| Our judgments regarding the existence of impairment indicators are based on expected operational performance, market conditions, legal factors and future plans |
| If we conclude that a triggering event for impairment has occurred, we will compare the carrying value of the assets with the undiscounted cash flows expected to be derived from the usage of the asset |
| If there is a shortfall and the fair value of the asset is less than its carrying value, we will record an impairment charge for the excess carrying value over fair value |
| We estimate fair value using a discounted cash flow model |
| Any resulting impairment charge could have a material adverse impact on our financial condition and results of operations |
| A deterioration in our relationships with facilities-based carriers could have a material adverse effect upon our business |
| We primarily connect our customers’ telephone calls and data/Internet needs through transmission lines that we lease under a variety of arrangements with other facilities-based long distance carriers |
| Many of these carriers are, or may become, our competitors |
| Our ability to maintain and expand our business depends on our ability to maintain favorable relationships with the facilities-based carriers from which we lease transmission lines |
| If our relationship with one or more of these carriers were to deteriorate or terminate, it could have a material adverse effect upon our cost structure, service quality, network diversity, results of operations and financial condition |
| Uncertainties and risks associated with international markets could adversely impact our international operations |
| We have significant international operations and, as of December 31, 2005, derive more than 80prca of our revenues by providing services outside of the United States |
| In international markets, we are smaller than the principal or incumbent telecommunications carrier that operates in each of the foreign jurisdictions where we operate |
| In these markets, incumbent carriers are likely to control access to, and pricing of, the local networks; enjoy better brand recognition and brand and customer loyalty; generally offer a wider range of product and services; and have significant operational economies of scale, including a larger backbone network and more correspondent agreements |
| Moreover, the incumbent carrier may take many months to allow competitors, including us, to interconnect to its switches within its territory, and we are dependent upon their cooperation in migrating customers onto our network |
| There can be no assurance that we will be able to obtain the permits and 28 ______________________________________________________________________ [49]Table of Contents operating licenses required for us to operate; obtain access to local transmission facilities on economically acceptable terms; or market services in international markets |
| In addition, operating in international markets generally involves additional risks, including unexpected changes in regulatory requirements, taxes, tariffs, customs, duties and other trade barriers, difficulties in staffing and managing foreign operations, problems in collecting accounts receivable, political risks, fluctuations in currency exchange rates, restrictions associated with the repatriation of funds, technology export and import restrictions, and seasonal reductions in business activity |
| Our ability to operate and grow our international operations successfully could be adversely impacted by these risks and uncertainties particularly in light of the fact that we derive such a large percentage of our revenues from outside of the United States |
| Because a significant portion of our business is conducted outside the United States, fluctuations in foreign currency exchange rates could adversely affect our results of operations |
| A significant portion of our net revenue is derived from sales and operations outside the United States |
| The reporting currency for our consolidated financial statements is the United States dollar (USD) |
| The local currency of each country is the functional currency for each of our respective entities operating in that country |
| In the future, we expect to continue to derive a significant portion of our net revenue and incur a significant portion of our operating costs outside the United States, and changes in exchange rates have had and may have a significant, and potentially adverse, effect on our results of operations |
| Our primary risk of loss regarding foreign currency exchange rate risk is caused by fluctuations in the following exchange rates: USD/AUD, USD/CAD, USD/GBP, and USD/EUR For the year ended December 31, 2005, our results were unfavorably impacted by a weakening of the USD compared to the AUD, the CAD and the GBP and our revenue results were favorably impacted by a strengthening of the USD compared to the EUR See “Quantitative and Qualitative Disclosures about Market Risk |
| ” Due to the large percentage of our operations conducted outside of the United States, strengthening or weakening of the USD relative to one or more of the foregoing currencies could have an adverse impact on future results of operations |
| We historically have not engaged in hedging transactions and do not currently contemplate engaging in hedging transactions to mitigate foreign exchange risks |
| In addition, the operations of affiliates and subsidiaries in foreign countries have been funded with investments and other advances denominated in foreign currencies |
| Historically, such investments and advances have been long-term in nature, and we accounted for any adjustments resulting from currency translation as a charge or credit to accumulated other comprehensive loss within the stockholders’ deficit section of our consolidated balance sheets |
| In 2002, agreements with certain subsidiaries were put in place for repayment of a portion of the investments and advances made to those subsidiaries |
| As we anticipate repayment in the foreseeable future of these amounts, we recognize the unrealized gains and losses in foreign currency transaction gain (loss) on the consolidated statements of operations, and depending upon changes in future currency rates, such gains or losses could have a significant, and potentially adverse, effect on our results of operations |
| The telecommunications industry is rapidly changing, and if we are not able to adjust our strategy and resources effectively in the future to meet changing market conditions, we may not be able to compete effectively |
| The telecommunications industry is changing rapidly due to deregulation, privatization, consolidation, technological improvements, availability of alternative services such as wireless, broadband, DSL, Internet, VOIP, and wireless DSL through use of the fixed wireless spectrum, and the globalization of the world’s economies |
| In addition, alternative services to traditional fixed wireline services, such as wireless, broadband, Internet and VOIP services, are a substantial competitive threat |
| If we do not adjust our contemplated plan of development to meet changing market conditions and if we do not have adequate resources, we may not be able to compete effectively |
| The telecommunications industry is marked by the introduction of new product and service offerings and technological improvements |
| Achieving successful financial results will depend on our ability to anticipate, assess and adapt to rapid technological changes, and offer, on a timely and cost-effective basis, services including the bundling of multiple services, that meet evolving industry standards |
| If we do not anticipate, assess or adapt to such technological changes at a competitive price, maintain competitive services or obtain new technologies on a timely basis or on satisfactory terms, our financial results may be materially and adversely affected |
| 29 ______________________________________________________________________ [50]Table of Contents If we are not able to operate a cost-effective network, we may not be able to successfully grow our business |
| Our long-term success depends on our ability to design, implement, operate, manage and maintain a reliable and cost-effective network |
| In addition, we rely on third parties to enable us to expand and manage our global network and to provide local, broadband Internet and wireless services |
| If we fail to generate additional traffic on our network, if we experience technical or logistical impediments to our ability to develop necessary network (such as our DSL networks in Australia and Canada) or to migrate traffic and customers onto our network, or if we experience difficulties with our third-party providers, we may not achieve desired economies of scale or otherwise be successful in growing our business |
| If we are not able to use and protect our intellectual property domestically and internationally, it could have a material adverse effect on our business |
| Our ability to compete depends, in part, on our ability to use intellectual property in the United States and internationally |
| We rely on a combination of trade secrets, trademarks and licenses to protect our intellectual property |
| We are also subject to the risks of claims and litigation alleging infringement of the intellectual property rights of others |
| The telecommunications industry is subject to frequent litigation regarding patent and other intellectual property rights |
| We rely upon certain technology, including hardware and software, licensed from third parties |
| There can be no assurance that the technology licensed by us will continue to provide competitive features and functionality or that licenses for technology currently used by us or other technology that we may seek to license in the future will be available to us on commercially reasonable terms or at all |
| Although our existing intellectual property are on standard commercial terms made generally available by the companies providing the licenses and, individually, their costs and terms are not material to our business, the loss of, or our inability to maintain existing licenses, could result in shipment delays or reductions until equivalent technology or suitable alternative products could be developed, identified, licensed and integrated |
| Such delays or reductions in the aggregate could harm our business |
| The loss of our key personnel could have a material adverse effect on our business |
| The loss of the services of K Paul Singh, our Chairman and Chief Executive Officer, or the services of our other key personnel, or our inability to attract and retain additional key management, technical and sales personnel, could have a material adverse effect upon us |
| We are subject to potential adverse effects of regulation which may have a material adverse impact on our competitive position, growth and financial performance |
| Our operations are subject to constantly changing regulation |
| There can be no assurance that future regulatory changes will not have a material adverse effect on us, or that regulators or third parties will not raise material issues with regard to our compliance or noncompliance with applicable regulations, any of which could have a material adverse effect upon us |
| As a multinational telecommunications company, we are subject to varying degrees of regulation in each of the jurisdictions in which we provide our services |
| Local laws and regulations, and the interpretation of such laws and regulations, differ significantly among the jurisdictions in which we operate |
| Enforcement and interpretations of these laws and regulations can be unpredictable and are often subject to the informal views of government officials |
| Recent widespread regulatory changes in the United Kingdom and potential future regulatory, judicial, legislative and government policy changes in other jurisdictions where we operate could have a material adverse effect on us |
| Domestic or international regulators or third parties may raise material issues with regard to our compliance or noncompliance with applicable regulations, and therefore may have a material adverse impact on our competitive position, growth and financial performance |
| Regulatory considerations that affect or limit our business include (1) United States common carrier requirements not to discriminate unreasonably among customers and to charge just and reasonable rates; (2) general uncertainty regarding the future regulatory classification of and taxation of VOIP telephony, the need to provide emergency calling services in a manner required by the FCC that is not yet available commercially on 30 ______________________________________________________________________ [51]Table of Contents a nation-wide basis and the ability to access broadband networks owned and operated by others; if regulators decide that VOIP is a regulated telecommunications service, our VOIP services may be subject to burdensome regulatory requirements and fees, we may be obligated to pay carriers additional interconnection fees and operating costs may increase; (3) general changes in access charges, universal service and regulatory fee payments would affect our cost of providing long distance services; and (4) general changes in access charges and contribution payments could adversely affect our cost of providing long distance, wireless, broadband, VOIP, local and other services |
| Any adverse developments implicating the foregoing could materially adversely affect our business, financial condition, result of operations and prospects |
| Natural disasters may affect the markets in which we operate, our operations and our profitability |
| Many of the geographic areas where we conduct our business may be affected by natural disasters, including hurricanes and tropical storms |
| Hurricanes, tropical storms and other natural disasters could have a material adverse effect on the business by damaging the network facilities or curtailing voice or data traffic as a result of the effects of such events, such as destruction of homes and businesses |
| Terrorist attacks and other acts of violence or war may affect the markets in which we operate, our operations and our profitability |
| We are a United States-based corporation with significant international operations |
| Terrorist attacks, such as the attacks that occurred in New York City and Washington, DC on September 11, 2001, and subsequent worldwide terrorist actions, including apparent action against companies operating abroad, may negatively affect our operations |
| We cannot assure you that there will not be further terrorist attacks that affect our employees, network facilities or support systems, either in the United States or in any of the other countries in which we operate |
| Certain losses resulting from these types of events are uninsurable and others are not likely to be covered by our insurance |
| Terrorist attacks may directly impact our business operations through damage or harm to our employees, network facilities or support systems, increased security costs or the general curtailment of voice or data traffic |
| Any of these events could result in increased volatility in or damage to our business and the United States and worldwide financial markets and economies |
| A small group of our stockholders could exercise influence over our affairs |
| As of February 28, 2006, funds affiliated with American International Group, Incorporated (AIG Entities) beneficially owned 15prca of our outstanding common stock, which was acquired through the conversion of their Series C Preferred Stock |
| As a result of such share ownership, these holders can exercise influence over our affairs through the provisions of a certain Governance Agreement between such holders and us, dated November 4, 2003, that provide for their right to nominate a candidate for election by our stockholders to our board of directors and nominate one non-voting board observer, in each case subject to the maintenance of certain minimum ownership levels of our common stock and our board’s right to exercise its fiduciary duties |
| In addition, these holders’ significant ownership levels could have an influence on: amendments to our certificate of incorporation; other fundamental corporate transactions such as mergers and asset sales; and the general direction of our business and affairs |
| Also, the applicable triggering provisions of our rights agreement with StockTrans, Inc, as Rights Agent, dated December 23, 1998 (as amended, the “Rights Agreement”) contain exceptions with respect to the acquisition of beneficial ownership of our shares by such holders and the other former holders of Series C Preferred Stock |
| As a result, such holders could gain additional control over our affairs without triggering the provisions of the Rights Agreement |
| Finally, other stockholders that acquire a significant portion of our common stock, either in the market or in future issuances by us, could potentially exercise influence over our affairs |
| 31 ______________________________________________________________________ [52]Table of Contents Significant future sales of our common stock in the public market could adversely affect the market price of our common stock and could impair our ability to raise funds in additional stock offerings |
| Significant future sales of our common stock in the public market, including in particular the shares offered under the Common Stock Resale Registration Statement (defined below) and the Note Registration Statement (defined below) and shares issuable upon conversion of the 2009 Debentures, could lower our stock price and impair our ability to raise funds in new stock offerings |
| Of 22dtta6 million shares of our common stock originally issued upon conversion of our Series C Preferred stock (the “Series C Registered Securities”) in November 2003, which were registered for resale under an effective registration statement (the “Common Stock Resale Registration Statement”) under the Securities Act, 16dtta5 million shares were, as of February 23, 2006, held by a group of affiliated holders |
| These shares, in general, may be freely resold under the Securities Act pursuant to the Common Stock Resale Registration Statement |
| The holders of the 2010 Notes have a registration statement that has been declared effective under the Securities Act (the “Note Registration Statement”) covering these notes and the 14dtta2 million shares of common stock issuable upon conversion of these notes, and the 22dtta3 million shares of common stock issuable upon conversion of the outstanding 2009 Debentures will be unrestricted and freely transferable under the Securities Act |
| Sales of a substantial amount of this common stock in the public market, or the perception that these sales may occur, could create selling pressure on our common stock and adversely affect the market price of our common stock prevailing from time to time in the public market and could impair our ability to raise funds in additional stock offerings |