| As of December 31, 2005, we had an accumulated deficit of dlra528dtta2 million |
| We expect to incur net losses for the next several years as our business matures |
| Our ability to generate profits and positive cash flow from operating activities will depend in large part on our ability to increase our revenues to offset the costs of operating our network and providing services |
| If we cannot achieve operating profitability or positive cash flow from operating activities, our business, financial condition and operating results will be adversely affected |
| Failure to obtain additional funding may limit our ability to complete our existing networks or to expand our business |
| As of December 31, 2005, we had a working capital deficit of dlra14dtta2 million and dlra528dtta2 million of accumulated deficit |
| We currently expect to spend approximately dlra2dtta5 million during 2006 to expand and upgrade our networks in the markets where we currently provide service, including our network in Pinellas County, Florida |
| Planned capital expenditures in 2006 and thereafter to complete the buildout of our network in Pinellas County, Florida will have to be funded by cash flow from operations in that market or from additional equity financings |
| We may not be able to raise proceeds sufficient to complete our buildout or upgrade in Pinellas County |
| If we fail to obtain sufficient financing, we may be required to discontinue our buildout of Pinellas County, which could have a material adverse effect on our business |
| See Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” |
| Our substantial indebtedness may adversely affect our cash flows, future financing and flexibility |
| As of December 31, 2005, we had approximately dlra273 million of outstanding indebtedness, including accrued interest, and our stockholders’ equity was dlra33dtta5 million |
| We pay interest in cash on our credit facilities |
| We may need to incur additional indebtedness in the future |
| Our level of indebtedness could adversely affect our business in a number of ways, including: • we may have to dedicate a significant amount of our available funding and cash flow from operating activities to the payment of interest and the repayment of principal on outstanding indebtedness; • depending on the levels of our outstanding debt and the terms of our debt agreements, we may have trouble obtaining future financing for working capital, capital expenditures, general corporate and other purposes; • high levels of indebtedness may limit our flexibility in planning for or reacting to changes in our business; and • increases in our outstanding indebtedness and leverage will make us more vulnerable to adverse changes in general economic and industry conditions, as well as to competitive pressure |
| We may not be able to make future principal and interest payments on our debt |
| Our earnings were not sufficient to cover our fixed charges in each year of the seven-year period ended December 31, 2005 |
| We currently generate sufficient cash flow from operating activities to service our debt |
| However, our ability to make future principal and interest payments on our debt depends upon our future 29 ______________________________________________________________________ [55]Table of Contents performance, which is subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control |
| If we cannot grow and generate sufficient cash flow from operating activities to service our debt payments, we may be required, among other things to: • seek additional financing in the debt or equity markets; • refinance or restructure all or a portion of our debt; • sell selected assets; or • reduce or delay planned capital expenditures |
| These measures may not be sufficient to enable us to service our debt |
| In addition, any such financing, refinancing or sale of assets may not be available on commercially reasonable terms, or at all |
| Restrictions on our business imposed by our debt agreements could limit our growth or activities |
| Our credit facilities place operating and financial restrictions on us and our subsidiaries |
| These restrictions affect, and any restrictions created by future financings, will affect our and our subsidiaries’ ability to, among other things: • incur additional debt; • create or incur liens on our assets; • make certain investments; • use the proceeds from the sale of assets; • pay cash dividends on or redeem or repurchase our capital stock; • utilize excess liquidity except for debt reduction; • engage in potential mergers and acquisitions, sale/leaseback transactions or other fundamental changes in the nature of our business; and • make capital expenditures |
| In addition, our credit facilities require us to maintain specified financial ratios, such as debt to EBITDA (earnings before income, taxes, depreciation and amortization) and EBITDA to cash interest |
| These limitations may affect our ability to finance our future operations or to engage in other business activities that may be in our interest |
| If we violate any of these restrictions or any restrictions created by future financings, we could be in default under our agreements and be required to repay our debt immediately rather than at scheduled maturity |
| The demand for our bundled broadband communications services may be lower than we expect |
| The demand for video, voice and data services, either alone or as part of a bundle, cannot readily be determined |
| Our business could be adversely affected if demand for bundled broadband communications services is materially lower than we expect |
| If the markets for the services we offer, including voice and data services, fail to develop, grow more slowly than anticipated or become saturated with competitors, our ability to generate revenue will suffer |
| Competition from other providers of video services could adversely affect our results of operations |
| To be successful, we will need to retain our existing video customers and attract video customers away from our competitors |
| Some of our competitors have advantages over us, such as long-standing customer relationships, larger networks, and greater experience, resources, marketing capabilities and name recognition |
| In addition, a continuing trend toward business combinations and alliances in the cable television area and in the telecommunications industry as a whole may create significant new competitors for us |
| In providing video 30 ______________________________________________________________________ [56]Table of Contents service, we currently compete with Bright House, Charter, Comcast, Mediacom and Time Warner |
| We also compete with satellite television providers, including DirecTV and Echostar |
| Legislation now allows satellite television providers to offer local broadcast television stations |
| The providers of video services in our markets have, from time to time, adopted promotional discounts |
| We expect these promotional discounts in our markets to continue into the foreseeable future and additional promotional discounts may be adopted |
| We may need to offer additional promotional discounts to be competitive, which could have an adverse impact on our revenues |
| In addition, incumbent local phone companies may market video services in their service areas to provide a bundle of services |
| BellSouth Corporation, or BellSouth, has entered into a strategic marketing alliance with DirecTV to jointly market voice and video services |
| As telephone service providers offer video services in our markets, it could increase our competition for our video and voice services and for our bundled services |
| Competition from other providers of voice services could adversely affect our results of operations |
| In providing local and long-distance telephone services, we compete with the incumbent local phone company in each of our markets |
| We are not the first provider of telephone services in most of our markets and we therefore must attract customers away from other telephone companies |
| BellSouth and Verizon are the primary incumbent local exchange carriers in our targeted region |
| They offer both local and long-distance services in our markets and are particularly strong competitors |
| In the future, we may face other competitors, such as cable television service operators who have announced their intention to offer telephone services with Internet-based telephony |
| If cable operators offer voice services in our markets, it could increase competition for our bundled services |
| The past several years have seen the emergence in our markets of carriers relying on the so-called unbundled network element platform obtained from incumbent local exchange carriers under Section 251(c)(3) of the Communications Act of 1934 and the FCC’s implementing regulations |
| Some of these carriers have been successful in capturing market share in a relatively short period of time |
| In the FCC’s Triennial Review Order, the framework was established whereby the obligations of incumbent local exchange carriers to continue to make available the unbundled network element platform may be eliminated in the future subject to certain conditions being satisfied and certified by state public service commissions |
| It is difficult at this time to determine the extent to which competition from unbundled network element platform providers in our markets may intensify or diminish and it is impossible to predict, in the event that the unbundled network element platform is no longer available in certain markets in the future, whether and which unbundled network element platform-based carriers will successfully transition to other means of serving their local exchange customers |
| Competition from other providers of data services could adversely affect our results of operations |
| Providing data services is a rapidly growing business and competition is increasing in each of our markets |
| Some of our competitors have advantages over us, such as greater experience, resources, marketing capabilities and name recognition |
| In providing data services, we compete with: • traditional dial-up Internet service providers; • incumbent local exchange carriers that provide dial-up and digital subscriber line (DSL) services; • providers of satellite-based Internet access services; • competitive local exchange carriers; and • cable television companies |
| In addition, some providers of data services have reduced prices and engaged in aggressive promotional activities |
| We expect these price reductions and promotional activities to continue into the foreseeable future and additional price reductions may be adopted |
| We may need to lower our prices for data services to remain competitive |
| 31 ______________________________________________________________________ [57]Table of Contents Our programming costs are increasing, which could reduce our gross profit |
| Programming has been our largest single operating expense and we expect this to continue |
| In recent years, the cable industry has experienced rapid increases in the cost of programming, particularly sports programming |
| Our relatively small base of subscribers limits our ability to negotiate lower programming costs |
| We expect these increases to continue, and we may not be able to pass our programming cost increases on to our customers |
| In addition, as we increase the channel capacity of our systems and add programming to our expanded basic and digital programming tiers, we may face additional market constraints on our ability to pass programming costs on to our customers |
| Any inability to pass programming cost increases on to our customers would have an adverse impact on our gross profit |
| Programming exclusivity in favor of our competitors could adversely affect the demand for our video services |
| We obtain our programming by entering into contracts or arrangements with programming suppliers |
| A programming supplier could enter into an exclusive arrangement with one of our video competitors that could create a competitive advantage for that competitor by restricting our access to this programming |
| If our ability to offer popular programming on our cable television systems is restricted by exclusive arrangements between our competitors and programming suppliers, the demand for our video services may be adversely affected and our cost to obtain programming may increase |
| The rates we pay for pole attachments may increase significantly |
| The rates we must pay utility companies for space on their utility poles is the subject of frequent disputes |
| If the rates we pay for pole attachments were to increase significantly or unexpectedly, it would cause our network to be more expensive to operate |
| It could also place us in a competitive disadvantage to video and telecommunications service providers who do not require, or who are less dependent upon, pole attachments, such as satellite providers and wireless voice service providers |
| See “Legislation and Regulation—Federal Regulation—Regulation of Cable Services—Pole Attachments” for more information |
| Loss of interconnection arrangements could impair our telephone service |
| We rely on other companies to connect our local telephone customers with customers of other local telephone providers |
| We presently have access to BellSouth’s telephone network under a nine-state interconnection agreement, which expires in June 2007 |
| We have access to Verizon’s telephone network in Florida under an interconnection agreement covering Florida, which expired in August 2004 |
| In accordance with provisions of the agreement, it will remain in full force until cancelled by either party |
| We are currently in negotiations with Verizon to renew our interconnection agreement |
| If either interconnection agreement is not renewed or terminated, we will have to negotiate another interconnection agreement with the respective carrier |
| The renegotiated agreement could be on terms less favorable than our current terms |
| It is generally expected that the Telecommunications Act of 1996 will continue to undergo considerable interpretation and implementation, which could have a negative impact on our interconnection agreements with BellSouth and Verizon |
| It is also possible that further amendments to the Communications Act of 1934 may be enacted which could have a negative impact on our interconnection agreements with BellSouth and Verizon |
| The contractual arrangements for interconnection and access to unbundled network elements with incumbent carriers generally contain provisions for incorporation of changes in governing law |
| Thus, future FCC, state public service commission and/or court decisions may negatively impact the rates, terms and conditions of the interconnection services we have obtained and may seek to obtain under these agreements, which could adversely affect our business, financial condition or results of operations |
| Our ability to compete successfully in the provision of services will depend on the nature and timing of any such legislative changes, regulations and interpretations and whether they are favorable to us or to our competitors |
| 32 ______________________________________________________________________ [58]Table of Contents We could be hurt by future interpretation or implementation of regulations |
| The current communications and cable legislation is complex and in many areas sets forth policy objectives to be implemented by regulation at the federal, state, and local levels |
| It is generally expected that the Communications Act of 1934, as amended, the Telecommunications Act of 1996 and implementing regulations and decisions, as well as applicable state laws and regulations, will continue to undergo considerable interpretation and implementation |
| Regulations that enhance the ability of certain classes of our competitors, or interpretation of existing regulations to the same effect, would adversely affect our competitive position |
| It is also possible that further amendments to the Communications Act of 1934 and state statutes to which we or our competitors are subject may be enacted |
| Our ability to compete successfully will depend on the nature and timing of any such legislative changes, regulations, and interpretations and whether they are favorable to us or to our competitors |
| See “Legislation and Regulation” for more information |
| We operate our network under franchises that are subject to non-renewal or termination |
| Our network generally operates pursuant to franchises, permits or licenses typically granted by a municipality or other state or local government controlling the public rights-of-way |
| Often, franchises are terminable if the franchisee fails to comply with material terms of the franchise order or the local franchise authority’s regulations |
| Although none of our existing franchise or license agreements have been terminated, and we have received no threat of such a termination, one or more local authorities may attempt to take such action |
| We may not prevail in any judicial or regulatory proceeding to resolve such a dispute |
| Further, franchises generally have fixed terms and must be renewed periodically |
| Local franchising authorities may resist granting a renewal if they consider either past performance or the prospective operating proposal to be inadequate |
| In a number of jurisdictions, local authorities have attempted to impose rights-of-way fees on providers that have been challenged as violating federal law |
| A number of FCC and judicial decisions have addressed the issues posed by the imposition of rights-of-way fees on competitive local exchange carriers and on video distributors |
| We may become subject to future obligations to pay local rights-of-way fees which are excessive or discriminatory |
| The local franchising authorities can grant franchises to competitors who may build networks in our market areas |
| Local franchise authorities have the ability to impose regulatory constraints or requirements on our business, including those that could materially increase our expenses |
| In the past, local franchise authorities have imposed regulatory constraints, by local ordinance or as part of the process of granting or renewing a franchise, on the construction of our network |
| They have also imposed requirements on the level of customer service we provide, as well as other requirements |
| The local franchise authorities in our markets may also impose regulatory constraints or requirements, which could increase our expenses in operating our business |
| We may not be able to obtain telephone numbers for new voice customers in a timely manner |
| In providing voice services, we rely on access to numbering resources in order to provide our customers with telephone numbers |
| A shortage of or a delay in obtaining new numbers from numbering administrators, as has sometimes been the case for local exchange carriers in the recent past, could adversely affect our ability to expand into new markets or enlarge our market share in existing markets |
| Substantially all of our voice traffic passes through one of our two switches located in West Point, Georgia and nearby Huguley, Alabama, and these switches may fail to operate |
| Substantially all of our voice traffic passes through one of our two switches located in West Point, Georgia and nearby Huguley, Alabama |
| If one or both of our switches were to fail to operate, a portion or all of our customers would not be able to access our voice services, which likely would damage our relationship with our customers and could adversely affect our business |
| 33 ______________________________________________________________________ [59]Table of Contents We may encounter difficulties in implementing and developing new technologies |
| We have invested in advanced technology platforms that support advanced communications services and multiple emerging interactive services, such as video-on-demand, subscriber video-on-demand, digital video recording, interactive television, IP Centrex services and passive optical network services |
| We have also invested in our new enterprise management system |
| However, existing and future technological implementations and developments may allow new competitors to emerge, reduce our network’s competitiveness or require expensive and time-consuming upgrades or additional equipment, which may also require the write-down of existing equipment |
| In addition, we may be required to select in advance one technology over another and may not choose the technology that is the most economic, efficient or attractive to customers |
| We may also encounter difficulties in implementing new technologies, products and services and may encounter disruptions in service as a result |
| To expand into additional cities we will have to obtain pole attachment agreements, construction permits, telephone numbers, franchises and other regulatory approvals |
| Delays in entering into pole attachment agreements, receiving the necessary construction permits and conducting the construction itself have adversely affected our schedule in the past and could do so again in the future |
| Difficulty in obtaining numbering resources may also adversely affect our ability to expand into new markets |
| Further, as we recently experienced in Louisville, we may face legal or similar resistance |