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Exhibit 99.1
RISK FACTORS
WE HAD APPROXIMATELY $3.6 BILLION OF INDEBTEDNESS AS OF JUNE 30, 2000, WHICH
COULD RESTRICT OUR OPERATIONS AND MAKE US SUSCEPTIBLE TO ECONOMIC DOWNTURNS
At June 30, 2000, our total indebtedness was $3.6 billion. Our annual interest
expense increased from $63.9 million in 1998 to $193.1 million in 1999. We
estimate that our annual interest expense for the year 2000 will be
approximately $325.1 million, assuming that we do not incur any additional
indebtedness or refinance existing indebtedness.
If we are unable to generate sufficient cash from operations to service our
indebtedness, we will be adversely affected. We historically have been unable to
generate sufficient cash flow from operations to meet our operating needs and
have relied upon financings to fund our operations. We cannot assure you that
our business will generate cash flow from operations, or that future financings
will be available, sufficient to fund our operations or satisfy our debt service
or working capital requirements. Our leverage could adversely affect our ability
to obtain additional financing for working capital, acquisitions or for other
purposes. It could make us more susceptible to economic downturns, contractions
in the general market availability of equity or debt financing and competitive
pressures. Our leverage could also affect our liquidity as a substantial portion
of available cash from operations must be applied to debt service requirements.
In the event of a cash shortfall, we could be forced to reduce expenditures or
forego potential acquisitions and other elements of our business plan to meet
such requirements.
WE MAY CONTINUE TO INCUR SUBSTANTIAL LOSSES
Although revenue has increased each year from $84.4 million in 1996 to $554.7
million in 1999, we had net losses of $55.1 million, $46.0 million, $264.9
million and $433.9 million, and had negative EBITDA of $28.0 million, $21.2
million, $42.1 million and $24.2 million, for each of the years ended December
31, 1996, 1997 and 1998 and 1999, respectively. We may continue to have losses
and negative EBITDA as we continue to integrate acquired companies and expand
our global network operations.
Factors that cause our operating results to fluctuate include:
- general economic conditions and specific economic conditions in the
Internet access industry;
- user demand for Internet services and our other service offerings;
- timing and amount of capital expenditures, other costs and expenses of
expanding our network;
- pricing changes, new product and new service introductions by us and our
competitors;
- the mix of services sold and the mix of channels through which those
services are sold;
- our ability to hire, retain and motivate highly skilled employees in a
highly competitive market;
- delays in obtaining sufficient supplies or inability to obtain sufficient
equipment from limited sources and telecom facilities; and
- potential adverse legislative and regulatory developments.
As a strategic response to a changing competitive environment, we may elect from
time to time to make pricing, service or marketing decisions that could have a
material adverse effect on our
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business, results of operations and cash flow. As a result of these factors, we
may continue to generate net losses and negative EBITDA.
THE TERMS OF OUR FINANCING ARRANGEMENTS MAY RESTRICT OUR OPERATIONS
Our equipment lease financing arrangements are secured by some of our assets.
These financing arrangements require that we satisfy many financial covenants.
Our ability to satisfy these financial covenants may be affected by events
beyond our control. As a result, we cannot assure you that we will be able to
continue to satisfy these covenants. Some of our financing arrangements also
currently prohibit us from paying dividends and repurchasing our capital stock
without consent. Our failure to comply with covenants and restrictions could
lead to a default under the terms of these agreements. In the event of a default
under these financing arrangements, our lenders would be entitled to accelerate
the outstanding indebtedness and foreclose upon any assets securing that
indebtedness. Lenders would also be entitled to be repaid from the proceeds of
the liquidation of those assets before the assets would be available for
distribution to the holders of our unsecured indebtedness.
WE PARTIALLY DEPEND ON THE CASH FLOWS OF OUR SUBSIDIARIES IN ORDER TO SATISFY
OUR DEBT OBLIGATIONS
Our operating cash flow and consequently our ability to service our debt is
partially dependent upon the ability of our subsidiaries to distribute their
earnings to us in the form of dividends. We also depend on loans, advances or
other payments of funds to us by our subsidiaries. If for some reason these
funds were restricted, we would be adversely affected. Our subsidiaries are
separate legal entities and have no obligation, contingent or otherwise, to pay
any amount due pursuant to our financing commitments or to make any funds
available for that purpose. Our subsidiaries' ability to make payments may be
subject to the availability of sufficient surplus funds, the terms of such
subsidiaries' financings, applicable law and other factors. Our subsidiaries'
creditors generally will have priority to the assets of those subsidiaries over
the claims, if any, that we may have against those assets and claims that
holders of our indebtedness may indirectly have.
THE GROWTH OF OUR eCOMMERCE AND WEB HOSTING BUSINESS IS SUBJECT TO A NUMBER OF
RISKS AND UNCERTAINTIES
To successfully implement our business plan, we must continue to grow our
Internet and eCommerce hosting business. In order to do so, we will need to
locate and build Internet and eCommerce hosting centers. We cannot assure you
that we can locate suitable sites to build these centers along a fiber path on a
cost-effective basis. If we locate suitable sites, we will be subject to
construction risks, such as cost overruns and delays, and possible difficulty in
obtaining the hardware and telecommunications connectivity necessary to make the
Internet and eCommerce hosting centers operational. Also, once completed we
could experience difficulties in filling these centers to break even profit
capacity. Given the growing competition in our industry, speed to market is a
critical issue. To the extent we experience difficulties, delays and unexpected
costs, we may be adversely affected.
OUR GROWTH AND EXPANSION MAY STRAIN OUR ABILITY TO MANAGE OUR OPERATIONS AND OUR
FINANCIAL RESOURCES
Our rapid growth has placed a strain on our administrative, operational and
financial resources and has increased demands on our systems and controls. We
have more than 900 points of presence (POPs) and we plan to continue to expand
the capacity of existing POPs as customer-
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driven demand dictates. In addition, we have completed a number of acquisitions
of companies and telecommunications bandwidth. The process of consolidating the
businesses and implementing the strategic integration of acquired businesses
with our existing business may take a significant amount of time. It may also
place additional strain on our resources and could subject us to additional
expenses. We cannot assure you that our existing operating and financial control
systems and infrastructure will be adequate to maintain and effectively monitor
our growth. Our continued growth and personnel turnover may also increase our
need for qualified personnel. The competition for qualified personnel in our
businesses is intense and we cannot assure you that we will be successful in
attracting, integrating and retaining qualified personnel.
During the thirty months ended June 30, 2000 we acquired over 76 internet
service providers and other businesses, including Transaction Network Services,
Inc. (now PSINet Transaction Solutions) and Metamor Worldwide, Inc. (now PSINet
Consulting Solutions). In order to successfully integrate these businesses into
our own existing business, we need to expand and refine our management,
personnel, accounting, information systems and other resources.
If we do not effectively expand our capabilities and deploy our resources to
meet these needs, our business may be disrupted and adversely affected. Other
risks include:
- Possible inability of management to incorporate into our existing service
offerings new licensed or acquired technology and rights and new products
and services such as information technology consulting services and
eBusiness consulting services; and
- Possible impairment of relationships with employees, customers and
suppliers as a result of changes in management.
We cannot assure you that we will be successful in overcoming these risks or
other problems encountered in connection with acquisitions, strategic alliances
or investments we make in other companies. Although we have assembled teams to
help us integrate the businesses that we acquire, we cannot assure you that our
integration process will be successfully accomplished. We may take charges or
make adjustments to the depreciable lives of our assets as we integrate acquired
companies and also seek to reduce our cost structure. Our inability to improve
the operating performance of businesses we acquire or to integrate successfully
the operations of those companies could have a material adverse effect on us. In
addition, should we proceed with acquisitions in which the consideration
consists of cash, a substantial portion of our available cash may be used for
those purposes.
The purchase price of many of the businesses that might become attractive
acquisition candidates for us likely will significantly exceed the fair values
of the net assets of the acquired businesses. As a result, material goodwill and
other intangible assets would be required to be recorded which would result in
significant amortization charges in future periods.
In addition, an intangible asset that frequently arises in connection with the
acquisition of a technology company is "acquired in-process research and
development," which under present U.S. accounting standards must be expensed
immediately upon acquisition. Such expenses, in addition to the financial impact
of acquisitions, could have a material adverse effect on us and could cause
substantial fluctuations in our quarterly and yearly operating results.
Furthermore, in connection with acquisitions or strategic alliances, we could
incur substantial expenses including the expenses of integrating the business of
the acquired company or the strategic alliance with our existing business.
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Although we have been successful to date identifying acquisition candidates at
prices we consider to be reasonable, we cannot assure you that this will
continue. We expect that competition for appropriate acquisition candidates may
be significant. We may compete with other telecommunications companies with
similar acquisition strategies, many of which may be larger and have greater
resources than we have. Competition for Internet companies is based on a number
of factors including price, terms and conditions, size and access to capital,
ability to offer cash, stock or other forms of consideration and other matters.
We cannot assure you that we will be able to successfully identify and acquire
suitable companies on acceptable terms and conditions.
OUR SUCCESS DEPENDS ON PROVIDING INCREASING BANDWIDTH TO CARRY MORE INFORMATION
FASTER THAN OUR COMPETITORS, WHICH IS EXPENSIVE, REQUIRES US TO MAKE SIGNIFICANT
FUTURE COMMITMENTS AND DEPENDS ON TECHNOLOGY THAT CAN BECOME OBSOLETE QUICKLY
At June 30, 2000, we were obligated to make future cash payments totaling $347.8
million for acquisitions of global fiber-based and satellite telecommunications
bandwidth, including IRUs or other rights. In addition, if certain additional
fiber-based bandwidth is delivered as expected in 2001, we will have additional
payment obligations ranging from $120.0 to $180.0 million, depending on when the
bandwidth is delivered. We also expect that there will be additional costs, such
as connectivity and equipment charges to take full advantage of this acquired
bandwidth and IRUs. Some of this fiber-based and satellite telecommunications
bandwidth may require acquisition and installation of equipment necessary to
access and light the bandwidth in order to make it operational. In addition, we
anticipate making significant investments to acquire and build-out new Internet
and eCommerce hosting centers in key financial and business centers throughout
the world and to purchase other facilities. We have spent approximately $350
million during the six months ended June 30, 2000 and we expect to spend
approximately $800 million on the construction of hosting centers through 2001.
Additionally, in connection with our awards of external and local wireless
licenses in Hong Kong, we have committed to invest approximately $385.8 million
to build a next generation IP network in Hong Kong. If we do not provide
bandwidth in amounts sufficient to compete effectively or satisfy customer needs
our business will suffer.
OUR NETWORK IS SUSCEPTIBLE TO FAILURE, SHUTDOWN AND DISRUPTION
We have implemented many network security measures, such as limiting physical
and network access to our routers. Nonetheless, our network infrastructure is
potentially vulnerable to computer viruses, break-ins, denials of service and
similar disruptive problems that could lead to interruptions in service to our
customers. Third parties could also potentially jeopardize the security of
confidential information stored in the computer systems of our customers. Any
one of these disruptions could deter potential customers, result in loss of
customer confidence and adversely affect our existing customer relationships. We
also cannot assure you that we will not experience failures or shutdowns
relating to individual POPs or even catastrophic failure of the entire network,
whether because of an "act of God" or otherwise.
These disruptions may also result in claims against us or liability on our part.
Such claims, regardless of their ultimate outcome, could result in costly
litigation and could have an adverse effect on us or our reputation or on our
ability to attract and retain customers for our products.
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WE MAY BE LIABLE FOR INFORMATION DISTRIBUTED ON OUR NETWORK
The law relating to liability of ISPs for information disseminated through their
networks is not completely settled. A number of lawsuits have sought to impose
such liability for defamatory speech, infringement of copyrighted materials and
other claims. A U.S. Circuit Court of Appeals case held that an ISP was
protected by a provision of the federal Communications Decency Act from
liability for material posted on its system but this case may not be applicable
in other factual circumstances. Other courts have held that online service
providers and ISPs may, under some circumstances, be subject to damages for
copying or distributing copyrighted materials. However, in an effort to protect
certain qualified ISPs, the federal Digital Millennium Copyright Act provides
qualified ISPs with a "safe harbor" from liability for copyright infringement.
We have taken steps to qualify for the "safe harbor" but we cannot assure you
that we will be found to have qualified, if challenged in court. In 1998, the
federal Child Online Protection Act was enacted requiring limitations on access
to pornography and other material deemed "harmful to minors." This legislation
has been attacked in court as a violation of the First Amendment. We are unable
to predict the outcome of this case at this time. The imposition upon ISPs or
Web server hosts of potential liability for materials carried on or disseminated
through their systems could require us to implement measures to reduce our
exposure to such liability. Such measures may require that we spend substantial
resources or discontinue some product or service offerings. Any of these actions
could have an adverse effect on our business, operating results and financial
condition.
The regulation and liability of ISPs regarding information disseminated through
their networks is also undergoing a process of development in other countries.
For example, a recent court decision in England held an ISP liable for certain
allegedly defamatory content carried through its network under factual
circumstances in which the ISP had failed to delete it when asked to do so by
the complainant. Decisions, laws, regulations and other activities regarding
regulation and content liability may significantly affect the development and
profitability of companies offering on-line and Internet access services,
including us.
One particular area of uncertainty in this regard results from the entry into
effect of European Union Directive 95/46/EC on the protection of individuals
with regard to the processing of personal data and on the free movement of such
data. The EU Directive imposes obligations in connection with the protection of
personal data collected or processed by third parties. Under some circumstances,
we may be regarded as subject to the EU Directive's requirements. The United
States and the European Union currently are negotiating the application of the
EU Directive to U.S. companies.
ASSERTING AND DEFENDING INTELLECTUAL PROPERTY RIGHTS MAY ADVERSELY IMPACT
RESULTS OF OPERATIONS REGARDLESS OF THE OUTCOME
Competitors increasingly assert intellectual property infringement claims
against each other. The success of our business depends on our ability to
successfully defend our intellectual property. These types of claims may have a
material adverse impact on us regardless of whether or not we are successful.
From time to time, we have received claims that we have infringed rights of
others. If a competitor were successful bringing a claim against us, our
business might suffer. We cannot assure you that we will be successful defending
or asserting our intellectual property rights.
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IN ORDER TO COMPETE EFFECTIVELY WE NEED TO CONTINUALLY DEVELOP NEW PRODUCTS AND
SERVICES THAT GAIN MARKET ACCEPTANCE AND KEEP THE CONFIDENCE OF OUR CUSTOMERS
We have introduced new enterprise service offerings, including value-added,
IP-based enterprise communication services and DSL-based Internet access
services. The failure of these services, particularly DSL-based services, to
gain market acceptance in a timely manner could have an adverse effect on us. To
the extent that new or enhanced services are introduced and are not reliable, or
there are quality or compatibility problems, it could negatively impact market
acceptance of such services and adversely affect our ability to attract or
retain customers and subscribers. Our services may contain undetected errors or
defects that could result in additional development or remediation costs and
loss of credibility with our customers and subscribers.
Additionally, if we are unable to meet customer demand for network capacity, our
network could become congested during peak periods. Congestion could adversely
affect the quality of service we are perceived to provide. Conversely, due to
the high fixed cost nature of our infrastructure, if our network is
under-utilized, it could adversely affect our ability to provide cost-efficient
services. Our failure to match network capacity to demand could have an adverse
effect on us.
IF WE DO NOT CONTINUE TO EXPAND INTERNATIONALLY, OUR BUSINESS MAY SUFFER
A key component of our business strategy is our continued expansion into
international markets. Revenue from our non-U.S. operations continues to
increase as a percentage of consolidated results, comprising 51% of revenue for
1999. By comparison, our non-U.S. operations comprised 40% of revenue for all of
1998. We may need to enter into joint ventures or other strategic relationships
with one or more third parties in order to conduct our foreign operations
successfully. To the extent that we cannot do so, our business may be adversely
affected. In addition, there are a number of risks involved with doing business
abroad including:
o unexpected changes in or delays resulting from foreign laws, regulatory
requirements, tariffs, customs, duties and other trade barriers;
o difficulties in staffing and managing foreign operations;
o longer payment cycles and problems in collecting accounts receivable;
o fluctuations in currency exchange rates and foreign exchange controls which
restrict or prohibit repatriation of funds;
o technology export and import restrictions;
o delays resulting from customs brokers or government agencies;
o seasonal reductions in business activity during the summer months in Europe
and other parts of the world; and
o potentially adverse tax consequences, which could adversely impact the
success of our international operations.
Asia-Pacific and Latin American countries in which we operate have experienced
economic difficulties and uncertainties during the past few years. Economic
difficulties and uncertainties in varying regions of the world could also
adversely affect us.
THE LOSS OF KEY MANAGEMENT PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON US
Our success is highly dependent upon the personal abilities of our senior
executive management, which includes our Chairman of the Board and Chief
Executive Officer and founder and our President and Chief Operating Officer. We
have employment agreements with these individuals
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and other senior executive officers. The loss of the services of one or more
of our senior executive officers could have a material adverse effect on us.
WE COULD BE ADVERSELY AFFECTED BY CHANGES IN SUPPLIERS OR DELAYS IN DELIVERY OF
THEIR PRODUCTS AND SERVICES
From time to time, we are dependent on third party suppliers for our leased-line
connections, or bandwidth and some hardware components. Some of these suppliers
are or may become competitors. To the extent these suppliers increase prices, we
may be adversely affected. Moreover, any failure or delay on the part of our
network providers to deliver bandwidth to us or to provide operations,
maintenance and other services with respect to such bandwidth in a timely or
adequate fashion could adversely affect us.
In the case of hardware suppliers, although we attempt to maintain a minimum of
two vendors for each required product, we are not always able to do so. Some
components that we use to provide networking services are currently supplied
only by one source. We have from time to time experienced delays in the receipt
of hardware components and telecommunications facilities, including delays in
delivery of Primary Rate Interface telecommunications facilities, which connect
our dial-up customers to our network. A failure by a supplier to deliver such
products and services on a timely basis, or the inability to develop alternative
sources for such products and services, could adversely affect our business.
Periodic legislative and regulatory actions may affect the prices that we are
charged by the regional bell operating companies and other bandwidth carriers,
which could adversely affect our business.
WE ARE SUBJECT TO FOREIGN CURRENCY AND EXCHANGE RISKS
During the year ended December 31, 1999, 51% of our revenue was derived from
operations outside the United States and 21% of our assets were located outside
the United States. We anticipate that a comparable percentage of our future
revenue and operating expenses will continue to be generated from operations
outside the United States, including investment in foreign companies.
Accordingly, we will be subject to significant foreign currency and exchange
risks. Our obligations and those of our customers in foreign currencies will be
subject to unpredictable and indeterminate fluctuations in the event that such
currencies change in value relative to U.S. dollars. Furthermore, we and our
customers may be subject to exchange control regulations which might restrict or
prohibit the conversion of such currencies into U.S. dollars. Although we have
not entered into hedging transactions to limit our foreign currency risks, as a
result of the increase in our foreign operations and our issuance of euro-
denominated indebtedness, we may implement such practices in the future. We
cannot assure you that we will be successful in these activities or that they
will not have an adverse effect on our financial condition.
WE ARE SUBJECT TO COMPETITIVE PRESSURES THAT MAY ADVERSELY IMPACT US
We face extremely competitive markets for our Internet connectivity and Web
hosting services, our information technology consulting services, our
eBusiness consulting services and our other product offerings. Our current
and prospective competitors include national, regional and local ISPs, long
distance and local exchange telecommunications companies, cable television
and direct broadcast satellite providers, wireless communications providers,
on-line service providers, information technology solutions providers and
eBusiness solutions providers. While we believe that our network,
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products and customer service distinguish us from our competitors, some of these
competitors have greater market presence, brand recognition, and financial,
technical and personnel resources.
NEW REGULATIONS MAY ADVERSELY AFFECT US
Our activities subject us to varying degrees of federal, state and local
regulation. The FCC exercises jurisdiction over all facilities of, and services
offered by, telecommunications carriers to the extent that they involve the
provision, origination or termination of jurisdictionally interstate or
international communications. The state regulatory commissions retain
jurisdiction over the same facilities and services to the extent they involve
origination or termination of jurisdictionally intrastate communications.
Our Internet operations are not currently subject to direct regulation by the
FCC or any other governmental agency, other than regulations applicable to
businesses generally. However, the FCC has indicated that some services offered
over the Internet, such as phone-to-phone IP telephony, may be functionally
indistinguishable from traditional telecommunications service offerings and
their non-regulated status may have to be re-examined. We are unable to predict
what regulations may be adopted in the future, or to what extent existing laws
and regulations may be found applicable, or the impact that any new or existing
laws may have on our business. We cannot assure you that new laws or regulations
relating to Internet services will not have an adverse effect on us. Although
the FCC has decided not to allow local telephone companies to impose per-minute
access charges on Internet service providers, and that decision has been upheld
by the reviewing court, further regulatory and legislative consideration of this
issue is likely. In addition, some telephone companies are seeking relief
through state regulatory agencies. Such rules, if adopted, would affect our
costs of serving dial-up customers and could have an adverse effect on us.
IF WE BECOME SUBJECT TO PROVISIONS OF THE INVESTMENT COMPANY ACT OF 1940, OUR
BUSINESS OPERATIONS MAY BE RESTRICTED
We have significant amounts of cash invested in short-term investment grade and
government securities. The Investment Company Act of 1940 places restrictions on
the capital structure and business activities of companies registered under that
Act. We have active business operations in the Internet industry and do not
propose to engage in investment activities in a manner or to an extent which
would require us to register as an investment company under the Investment
Company Act of 1940. The Investment Company Act of 1940 permits a company to
avoid becoming subject to it for a period of up to one year despite the holding
of investment securities in excess of such amount if, among other things, its
board of directors has adopted a resolution which states that it is not the
company's intention to become an investment company. Our board of directors has
adopted such a resolution that would become effective in the event we are deemed
to fall within the definition of an investment company. If we were to be
determined to be an investment company, our business would be adversely
affected.
THE MARKET PRICE AND TRADING VOLUME OF OUR CAPITAL STOCK MAY BE HIGHLY VOLATILE
The market price and trading volume of our common stock and convertible
preferred stock have been and may continue to be highly volatile. Factors
such as variations in our revenue, earnings and cash flow and announcements
of new service offerings, technological innovations, strategic alliances or
acquisitions involving our competitors or price reductions by us, our
competitors or providers of alternative services could cause the market price
of our capital stock to fluctuate substantially. In addition, the stock
markets recently have experienced significant price and
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volume fluctuations that particularly have affected technology-based companies
and resulted in changes in the market prices of the stocks of many companies
that have not been directly related to the operating performance of those
companies. The broad market fluctuations have adversely affected and may
continue to adversely affect the market price of our capital stock. In addition,
fluctuating markets could adversely affect our ability to finance our
requirements for acquisitions and working capital.
WE DO NOT ANTICIPATE PAYING CASH DIVIDENDS ON OUR COMMON STOCK
We have never declared or paid any cash dividends on our common stock and do not
anticipate paying cash dividends on our common stock in the foreseeable future.
In addition, our debt securities contain limitations on our ability to declare
and pay cash dividends.
FORWARD LOOKING STATEMENTS
This Form 10-Q and our other filings with the Securities and Exchange
Commission contain forward-looking statements. Forward-looking statements can
be identified by the use of terminology such as "believes," "expects," "may,"
"will," "should," "anticipates" or similar words. These statements may
discuss our future expectations or contain projections of our results of
operations or financial condition or expected benefits to us resulting from
acquisitions, investments or transactions. Actual results may differ
materially from those expected. Factors that affect or may contribute to any
differences include those discussed above in this Exhibit 99.1 to the Form
10-Q, in the section of the Form 10-Q entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and in other
documents filed by us with the Securities and Exchange Commission.
