| DELTATHREE INC ITEM 1A Risk Factors |
| Before you invest in our common stock, you should understand and carefully consider the risks below, as well as all of the other information contained in this annual report, including our financial statements and the related notes contained elsewhere in this report |
| Any of these risks could materially adversely affect our business, financial condition and results of operations and the trading price of our common stock, and you may lose all or part of your investment |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations |
| Risks Related to our Company We have a history of losses and we are uncertain as to our future profitability |
| We have incurred significant losses since inception, and we may continue to incur significant losses for the foreseeable future |
| As of December 31, 2005, our accumulated deficit was approximately dlra152 million |
| We generated positive cash flow from operations of approximately dlra0dtta2 million during 2005 and dlra0dtta5 million during 2004 |
| Our revenues may not grow or even continue at their current level |
| As a result, while we believe we have sufficient funds to meet our working capital requirements for at least the next fiscal year and although we attained profitability during the fourth quarter of 2005, we will need to increase our revenues and maintain our current cost structure to maintain profitability |
| If our revenues do not increase as much as we expect or if our expenses increase at a greater pace than revenues, we may not be able to maintain profitability |
| We cannot assure you that we will be able to sustain or increase profitability on a quarterly or annual basis in the future |
| Our business strategy is to expand our revenue sources to include the provision of VoIP telephony to several different customer groups |
| We can neither assure you that we will be able to accomplish this nor that this strategy will be profitable |
| Currently, our revenues are primarily generated by sales of VoIP telephony through our direct consumer offering, iConnectHere, and our reseller and service provider sales channels (including sales of our Outsourced Platform Solution) |
| VoIP telephony from these channels generated 96dtta1prca, 96dtta02prca, and 92dtta1prca of our total revenues in 2005, 2004, and 2003, respectively |
| In the future, we intend to generate increased revenues in VoIP telephony, from multiple sources and customer bases, many of which are unproven |
| We expect that our revenues for the foreseeable future will be dependent on, among other factors: o sales of VoIP telephony, including sales of our Outsourced Platform Solution; o acceptance and use of VoIP telephony; o expansion of service and product offerings; o traffic levels on our network; 16 o the effect of competition, regulatory environment, international long distance rates and access and transmission costs on our prices; and o continued improvement of our global network quality |
| We may not be able to sustain our current revenues or successfully generate additional revenues from the sale of VoIP telephony, including our Outsourced Platform Solution |
| We may need additional capital to finance our operations and grow our business |
| Due to the nature of our industry, our future capital needs are difficult to predict |
| Therefore, we may require additional capital to fund some or all of the following: o introduction and deployment of our new, or existing, products and services; o enhancement and expansion of our network; o unanticipated opportunities; o strategic alliances, and potential acquisitions; o changing business conditions; and o unanticipated competitive pressures |
| We intend to continue to expand our network and to introduce new products and services |
| These activities require significant marketing and promotional expenses that we often incur before we begin to receive the related revenue |
| While we believe we have sufficient funds to meet our working capital requirements for at least the next fiscal year, if our cash flow from operations is not sufficient to meet our capital expenditure and working capital requirements, we will need to raise additional capital |
| There can be no assurance that we will be able to raise such additional capital on favorable terms or at all |
| If we are unable to obtain additional capital, we may be required to reduce the scope of our business or our anticipated growth, which could have a material adverse effect on our business, financial condition, and results of operations |
| Decreasing telecommunications prices may cause us to lower our prices to remain competitive, which could prevent our future profitability |
| Decreasing telecommunications prices may diminish or eliminate the competitive pricing advantage of our services |
| International and domestic telecommunications prices have decreased significantly over the last few years in most of the markets in which we operate, and we anticipate that prices will continue to be reduced in all of the markets in which we do business or expect to do business |
| Users who select our services (or our resellers &apos or Outsourced Platform customers &apos services) to take advantage of the current pricing differential between traditional telecommunications prices and our (or our customers &apos ) prices may switch to traditional telecommunications carriers as such pricing differentials diminish or disappear, and we will be unable to use such pricing differentials to attract new customers in the future |
| Such competition or continued price decreases may require us to lower our prices to remain competitive, may result in reduced revenue, a loss or decrease of customers and may prevent our future profitability |
| We have a limited operating history upon which you can evaluate us |
| Although we commenced our operations in 1996, in 2000 we began to transform our business from a provider of wholesale minutes to carriers to our current role as a provider of VoIP solutions |
| We, therefore, have only a limited operating history upon which you can evaluate our current business and prospects |
| You should consider our prospects in light of the risks, expenses and difficulties we may encounter as an early stage company in the new and rapidly evolving market for VoIP telephony |
| These risks include our ability: o to increase acceptance of our VoIP telephony products and services (including our Outsourced Platform Solution); o to compete effectively; and o to develop new products and keep pace with developing technology |
| 17 In addition, because we expect an increasing percentage of our revenues to be derived from our VoIP telephony products and services (including our Outsourced Platform Solution), our past operating results may not be indicative of our future results |
| The success of our VoIP telephony products and services is dependent on the growth and public acceptance of VoIP telephony |
| The success of our VoIP telephony products and services is dependent upon future demand for VoIP telephony systems and services |
| In order for the VoIP telephony market to continue to grow, several things need to occur |
| Telephone and cable service providers must continue to invest in the deployment of high speed broadband networks to residential and business customers |
| VoIP networks must improve quality of service for real-time communications, managing effects such as packet jitter, packet loss, and unreliable bandwidth, so that toll-quality service can be provided |
| VoIP telephony equipment and services must achieve a similar level of reliability that users of the public switched telephone network have come to expect from their telephone service |
| VoIP telephony service providers must offer cost and feature benefits to their customers that are sufficient to cause the customers to switch away from traditional telephony service providers |
| Service providers and resellers must be willing to use outsourced solutions providers for VoIP telephony |
| Furthermore, end users in markets serviced by recently deregulated telecommunications providers are not familiar with obtaining services from competitors of these providers and may be reluctant to use new providers, such as us |
| We will need to devote substantial resources to educate customers and end users about the benefits of VoIP telephony solutions in general and our services in particular |
| If any or all of these factors fail to occur, our business may decline |
| Our future success depends on the growth in the use of the internet as a means of communications |
| If the market for VoIP telephony, in general, and our services in particular, does not grow at the rate we anticipate or at all, we will not be able to increase our number of users or generate revenues we anticipate |
| To be successful, VoIP telephony requires validation as an effective, quality means of communication and as a viable alternative to traditional telephone service |
| Demand and market acceptance for recently introduced services are subject to a high level of uncertainty |
| The Internet may not prove to be a viable alternative to traditional telephone service for reasons including: o inconsistent quality or speed of service, including power outages; o traffic congestion on the Internet; o potentially inadequate development of the necessary infrastructure; o lack of acceptable security technologies; o lack of timely development and commercialization of performance improvements; and o unavailability of cost-effective, high-speed access to the Internet |
| If Internet usage grows, the Internet infrastructure may not be able to support the demands placed on it by such growth, or its performance or reliability may decline |
| In addition, Web sites may from time to time experience interruptions in their service as a result of power outages and other delays occurring throughout the Internet network infrastructure |
| If these outages or delays occur frequently, customers &apos use of the Internet and our products and services as a means of communications could decline or may not grow as we anticipate |
| Intense competition could reduce our market share and decrease our revenue |
| The market for VoIP telephony is extremely competitive |
| Our competitors include both start-up IP telephony service providers and established traditional communications providers |
| Many of our existing competitors and potential competitors have broader portfolios of services, greater financial, management and operational resources, greater brand-name recognition, larger subscriber bases and more experience than we have |
| In addition, many of our IP telephony competitors use the Internet instead of a private network to transmit traffic |
| Operating and capital costs of these providers may be less than ours, potentially giving them a competitive advantage over us in terms of pricing |
| 18 We also compete in the growing market of discount telecommunications services including calling cards, prepaid cards, call-back services, dial-around or 10-10 calling and collect calling services |
| In addition, some Internet service providers have begun to aggressively enhance their real time interactive communications, focusing on instant messaging, PC-to-PC and PC-to-phone, and/or broadband phone services |
| In addition, traditional carriers, cable companies and satellite television providers are bundling services and products that we do not offer together with internet telephony services |
| These services could include wireless communications, voice and data services, Internet access, and cable television |
| Although this provides us with the opportunity to offer these companies our products and services as a way for them to offer internet telephony services, these companies can also introduce these services on their own and may be able to bundle the services at a single attractive price |
| This could make it more difficult for us to compete against them with direct to consumer offerings of our own |
| If we are unable to provide competitive service offerings, we may lose existing customers and be unable to attract additional customers |
| In addition, many of our competitors, especially traditional carriers, enjoy economies of scale that result in a lower cost structure for transmission and related costs, which cause significant pricing pressures within the industry |
| To remain competitive, we must continue to invest significant resources in research and development, sales and marketing, and customer support |
| We may not have sufficient resources to make these investments or to make the technical advances necessary to be competitive which in turn will cause our business to suffer |
| Potential fluctuations in our quarterly financial results may make it difficult for investors to predict our future performance |
| Our quarterly operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control |
| The factors generally within our control include: o the rate at which we are able to attract users to purchase our VoIP telephony products and services, including our Outsourced Platform Solution; o the amount and timing of expenses to enhance marketing and promotion efforts and to expand our infrastructure; and o the timing of announcements or introductions of new or enhanced services by us |
| The factors outside our control include: o the timing of announcements or introductions of new or enhanced services by our competitors; o technical difficulties or network interruptions in the Internet or our privately-managed network; and o general economic and competitive conditions specific to our industry |
| The foregoing factors also may create other risks affecting our long-term success, as discussed in the other risk factors |
| We believe that quarter-to-quarter comparisons of our historical operating results may not be a good indication of our future performance, nor would our operating results for any particular quarter be indicative of our future operating results |
| Our success depends on our ability to handle a large number of simultaneous calls, which our network may not be able to accommodate |
| We expect the volume of simultaneous calls to increase significantly as we expand our operations |
| Our network hardware and software may not be able to accommodate this additional volume |
| If we fail to maintain an appropriate level of operating performance, or if our service is disrupted, our reputation could be hurt, we could lose customers and our business, financial condition and results of operations could be materially and adversely affected |
| 19 Because we are unable to predict definitively the volume of usage and our capacity needs, we may be forced to enter into disadvantageous contracts that would reduce our operating margins |
| We may have to enter into additional long-term agreements for leased communications transmission capacity |
| To the extent that we overestimate our call volume, we may be obligated to pay for more transmission capacity than we actually use, resulting in costs without corresponding revenue |
| Conversely, if we underestimate our capacity needs, we may be required to obtain additional transmission capacity through more expensive means or such capacity may not be available |
| As a result, our margins could be reduced and our business, financial condition and results of operations could be materially and adversely affected |
| We face a risk of failure of computer and communications systems used in our business |
| Our business depends on the efficient and uninterrupted operation of our computer and communications systems as well as those that connect to our network |
| We maintain communications systems in facilities in New York, Los Angeles, Chicago, Atlanta, London, Amsterdam, Hong Kong and Jerusalem |
| Although we have designed our network to reduce the possibility of disruptions or other outages, our systems and those that connect to our network are subject to damage or interruption from natural disasters, power loss, communications failure, hardware or software malfunction, network failures, physical or electronic break-ins, sabotage, computer viruses, intentional acts of terrorism or vandalism and other events that may be or may not be beyond our control |
| Any system interruptions that cause our services to be unavailable, including significant or lengthy telephone network failures or difficulties for users in communicating through our network or portal, could damage our reputation and result in a loss of users |
| Substantially all of the VoIP telephony calls made by our iConnectHere customers, and a large percentage of our services provider and reseller customers are connected through local telephone companies and, at least in part, through leased facilities that may become unavailable |
| We are not a local telephone company or a local exchange carrier |
| Our network covers only portions of the United States |
| Accordingly, we must route parts of some domestic and all international calls made by our ICH customers, and a large percentage of our service provider and reseller customers, over leased transmission facilities |
| In addition, because our network does not extend to homes or businesses, we must generally route calls through a local telephone company to reach our network and, ultimately, to reach their final destinations |
| In many of the foreign jurisdictions in which we conduct or plan to conduct business, the primary provider of significant in-country transmission facilities is the national telephone company, which may be the only provider in that country |
| Accordingly, we may have to lease transmission capacity at artificially high rates from such a monopolistic provider, and consequently, we may not be able to generate a profit on those calls |
| In addition, national telephone companies may not be required by law to lease necessary transmission lines to us or, if applicable law requires national telephone companies to lease transmission facilities to us, we may encounter delays in negotiating leases and interconnection agreements and commencing operations |
| Additionally, disputes may result with respect to pricing, billing or other terms of these agreements, and these disputes could affect our ability to continue to operate in these countries, which may materially and adversely affect our business, financial condition and results of operations |
| Our computer systems and operations may be vulnerable to security breaches |
| We believe that the secure transmission of confidential information over the Internet, such as credit card numbers, is essential in maintaining user confidence in our services |
| Although we have developed systems and processes that are designed to protect consumer information and prevent fraudulent credit card transactions and other security breaches, our computer infrastructure is potentially vulnerable to physical or electronic computer viruses, break-ins and similar disruptive problems and security breaches that could cause interruptions, delays or loss of services to our users |
| We rely on licensed encryption and authentication technology to effect secure transmission of confidential information, including credit card numbers |
| It is possible that advances in computer capabilities or new technologies could result in a compromise or breach of the technology we use to protect user transaction data |
| A party that is able to circumvent our security systems could misappropriate proprietary information or cause interruptions in our operations |
| Security breaches also could damage our reputation and expose us to a risk of loss, litigation and possible liability |
| Although we have experienced no security breaches to date of which we are aware, we cannot guarantee you that our security measures will prevent security breaches |
| Operating internationally exposes us to additional and unpredictable risks |
| We intend to continue to enter additional foreign markets and expand our existing operations outside the United States |
| We cannot assure you that we will be successful in expanding into additional international markets |
| In addition to the uncertainty regarding our ability to generate revenue from foreign operations and expand our international presence, there are certain risks inherent in doing business on an international basis, including: 20 o political and economic instability; o legal uncertainty regarding liability, regulations, tariffs and other trade barriers; o fluctuations in exchange rates; o potentially adverse tax consequences; o action by foreign governments or foreign telecommunications companies to limit access to our services; o potentially weaker protection of intellectual property rights; and o uncertain market acceptance and difficulties in marketing efforts due to language and cultural differences |
| While in 2005 we experienced losses from fraud of less than 1prca of our revenues, callers have obtained our services without rendering payment by unlawfully using our access numbers and personal identification numbers |
| While we have continued to implement anti-fraud measures in order to control losses relating to these practices, and these measures have proven to be effective today, these measures may not in the future be sufficient to effectively limit all of our exposure in the future from fraud and future losses could rise significantly above current levels |
| We need to retain key personnel to support our products and ongoing operations |
| The development and marketing of our VoIP products and services will continue to place a significant strain on our limited personnel, management, and other resources |
| Our future success depends upon the continued services of our executive officers and other key employees who have critical industry experience and relationships that we rely on to implement our business plan |
| Except for Mr |
| Shimmy Zimels, our Chief Executive Officer, none of our officers or key employees is bound by employment agreements for any specific term |
| The loss of the services of any of these officers or key employees could delay the development and introduction of, and negatively impact our ability to sell, our products which could adversely affect our financial results and impair our growth |
| We currently do not maintain key person life insurance policies on any of our employees |
| Our ability to provide our service is dependent upon third-party facilities and equipment, the failure of which could cause delays or interruptions of our service, damage our reputation, cause us to lose customers and limit our growth |
| Our success depends on our ability to provide quality and reliable service, which is in part dependent upon the proper functioning of facilities and equipment owned and operated by third parties and is, therefore, beyond our control |
| Unlike traditional wireline telephone service or wireless service, our service requires our customers to have an operative broadband Internet connection and an electrical power supply, which are provided by the customerapstas Internet service provider and electric utility company, respectively, and not by us |
| The quality of some broadband Internet connections may be too poor for customers to use our services properly |
| In addition, if there is any interruption to a customerapstas broadband Internet service or electrical power supply, that customer will be unable to make or receive calls, including emergency calls, using our service |
| We also outsource several of our network functions to third-party providers |
| For example, we outsource the maintenance of our regional data connection points, which are the facilities at which our network interconnects with the public switched telephone network |
| If our third-party service providers fail to maintain these facilities properly, or fail to respond quickly to problems, our customers may experience service interruptions |
| Our customers have experienced such interruptions in the past and will experience interruptions in the future |
| In addition, our new E-911 service is currently dependent upon a third-party provider |
| Interruptions in service from this vendor could cause failures in our customers &apos access to E-911 services |
| Interruptions in our service caused by third-party facilities have in the past caused and may in the future cause us to lose customers, or cause us to offer substantial customer credits, which could adversely affect our revenue and profitability |
| If interruptions adversely affect the perceived reliability of our service, we may have difficulty attracting new customers and our brand, reputation and growth will be negatively impacted |
| 21 Third parties might infringe upon our proprietary technology |
| We cannot assure you that the steps we have taken to protect our intellectual property rights will prevent misappropriation of our proprietary technology |
| To protect our rights to our intellectual property, we rely on a combination of trademark and patent law, trade secret protection, confidentiality agreements and other contractual arrangements with our employees, affiliates, strategic partners and others |
| We may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights |
| Effective copyright and trade secret protection may not be available in every country in which we offer or intend to offer our services |
| Failure to adequately protect our intellectual property could materially harm our brand, devalue our proprietary content and affect our ability to compete effectively |
| Further, defending our intellectual property rights could result in significant financial expenses and managerial resources |
| Our services may infringe on the intellectual property rights of others |
| Third parties may assert claims that we have violated a patent or infringed a copyright, trademark or other proprietary right belonging to them |
| In these license agreements, the licensors have agreed to indemnify us with respect to any claim by a third party that the licensed software infringes any patent or other proprietary right so long as we have not made changes to the licensed software |
| We cannot assure you that these provisions will be adequate to protect us from infringement claims |
| Any infringement claims, even if not meritorious, could result in substantial monetary liability or may materially disrupt the conduct of our business |
| Risks Related to our Industry Government regulation and legal uncertainties relating to IP telephony could harm our business |
| Historically, voice communications services have been provided by regulated telecommunications common carriers |
| We offer voice communications to the public for international and domestic calls using IP telephony, and we do not operate as a licensed telecommunications common carrier in any jurisdiction |
| Based on specific regulatory classifications and recent regulatory decisions, we believe we should not be regulated as a telecommunications common carrier regulation in any of our markets |
| However, the growth of IP telephony has led to close examination of its regulatory treatment in many jurisdictions making the legal status of our services uncertain and subject to change as a result of future regulatory action, judicial decisions or legislation in any of the jurisdictions in which we operate |
| Established regulated telecommunications carriers have sought and may continue to seek regulatory actions to restrict the ability of companies such as ours to provide services or to increase the cost of providing such services |
| In addition, our services may be subject to regulation if regulators distinguish phone-to-phone telephony service using IP technologies over privately-managed networks such as our services from integrated PC-to-PC and PC-originated voice services over the Internet |
| Some regulators may decide to treat the former as regulated common carrier services and the latter as unregulated enhanced or information services |
| 22 Application of new regulatory restrictions or requirements to us could increase our costs of doing business and prevent us from delivering our services through our current arrangements |
| In such event, we would consider a variety of alternative arrangements for providing our services, including obtaining appropriate regulatory authorizations for our local network partners or ourselves, changing our service arrangements for a particular country or limiting our service offerings |
| Such regulations could limit our service offerings, raise our costs and restrict our pricing flexibility, and potentially limit our ability to compete effectively |
| Further, regulations and laws that affect the growth of the Internet could hinder our ability to provide our services over the Internet |
| Our international operations are also subject to regulatory risks, including the risk that regulations in some jurisdictions will prohibit us from providing our services cost-effectively or at all, which could limit our growth |
| Currently, there are several countries where regulations prohibit us from offering service |
| These regulations have had an immaterial impact on us in 2005 |
| We, however, cannot assure you that these conditions will not have a material effect on our revenues and growth in the future |
| In addition, because customers can use our services almost anywhere that a broadband Internet connection is available, including countries where providing VoIP services is illegal, the governments of those countries may attempt to assert jurisdiction over us, which could expose us to significant liability and regulation |
| For a more detailed discussion of the regulation of IP telephony, see "e Regulation "e |
| We may not be able to keep pace with rapid technological changes in the communications industry Our industry is subject to rapid technological change |
| We cannot predict the effect of technological changes on our business |
| In addition, widely accepted standards have not yet developed for the technologies we use |
| We expect that new services and technologies will emerge in the market in which we compete |
| These new services and technologies may be superior to the services and technologies that we use, or these new services may render our services and technologies obsolete |
| To be successful, we must adapt to our rapidly changing market by continually improving and expanding the scope of services we offer and by developing new services and technologies to meet customer needs |
| Our success will depend, in part, on our ability to license leading technologies and respond to technological advances and emerging industry standards on a cost-effective and timely basis |
| We will need to spend significant amounts of capital to enhance and expand our services to keep pace with changing technologies |
| The success of our business is affected by customers &apos unimpeded access to broadband service |
| Providers of broadband services may be able to block our services, which could adversely affect our revenue and growth |
| A portion of our customers must have broadband access to the Internet in order to use our service |
| Some providers of broadband access have taken measures that affect their customers &apos ability to use our service, such as degrading the quality of the data packets we transmit over their lines, giving those packets low priority, giving other packets higher priority than ours, blocking our packets entirely or attempting to charge their customers more for also using our services |
| It is not clear whether suppliers of broadband access services have a legal obligation to allow their customers to access and use our service without interference |
| As a result of recent decisions by the US Supreme Court and the FCC, providers of broadband services are subject to relatively light regulation by the FCC Consequently, federal and state regulators might not prohibit broadband providers from limiting their customers &apos access to VoIP or otherwise discriminating against VoIP providers |
| Interference with our service or higher charges for using our service could cause us to lose existing customers, impair our ability to attract new customers and harm our revenue and growth |
| If we fail to comply with new FCC regulations requiring us to provide E-911 emergency calling services, we may be subject to fines or penalties, which could include disconnection of our service for certain customers or prohibitions on marketing of our services and accepting new customers in certain areas |
| On June 3, 2005, the FCC released an order, which we refer to as the VoIP E-911 Order, that imposed an obligation on VoIP providers to offer enhanced emergency calling services, or E-911, to their VoIP customers by November 28, 2005 |
| Like other providers of nomadic VoIP services, we were unable to comply with all of the requirements of the VoIP E-911 Order by the deadline |
| Some of our customers currently receive E-911 service in conformity with the VoIP E-911 Order, but a number of our customers do not receive such service |
| While the FCC did not require VoIP providers to discontinue service to customers that could not receive E-911 service, we could be subject to enforcement action by the FCC if we continue to be unable to provide such service to a significant number of our customers |
| Such enforcement actions could include monetary forfeitures, cease and desist orders, and other penalties |
| 23 On November 28, 2005, we filed a request for partial waiver and extension of time of the FCCapstas VoIP E-911 rules for those customers to whom we could not provide E-911 service |
| Our petition remains pending |
| We cannot predict whether the FCC will grant or deny our petition |
| See "e Regulation--VoIP E-911 Matters "e for further information on the FCCapstas E-911 requirements |
| The VoIP E-911 Order also required us to notify our customers of any differences between our emergency calling services and those available through wireline telephone providers and to obtain affirmative acknowledgment from each of our customers of those notifications |
| We notified our customers of the differences in our emergency calling service and have received affirmative acknowledgement from substantially all of our customers |
| We are not currently accepting customers in areas where we cannot provide E-911 service in conformity with the FCCapstas rules |
| Various fees and taxes will increase our costs and our customers &apos cost of using our services |
| There are numerous fees and taxes assessed on traditional telephone services that we believe have not been applicable to us and that we have not paid in the past |
| To the extent we increase the cost of services to our customers to recoup some of the costs of compliance, this will have the effect of decreasing any price advantage we may have |
| In addition, it is possible that we will be required to collect and remit sales taxes in several states where we have not done so in the past |
| We are in the process of discussing the applicability of sales and other taxes with numerous states and we may proactively enter into discussions with additional states as conditions warrant |
| In the states where we determine that we need to collect and remit sales taxes, we will comply with the administrative rules existing in that state |
| States have or may take the position that we should have collected sales taxes in the past |
| If so, they may seek to collect those past taxes from us and impose fines, penalties or interest charges on us |
| Our payment of these past taxes and related charges could have a material adverse effect on us |
| We may be required to contribute to the Universal Service Fund, increasing our cost of providing services |
| If we collect those contributions from our customers, the cost advantage we offer customers would be reduced |
| FCC regulations require providers of interstate telecommunications services, but not providers of information services, to contribute to the federal Universal Service Fund, or USF Currently, we are not subject to direct contribution to the USF, although we do contribute indirectly to the USF through our purchase of telecommunications services from our suppliers |
| The FCC is considering a number of proposals that could alter the way that the USF is assessed |
| For instance, the FCC is considering an assessment based on the use of telephone numbers, in which case we would be required to contribute directly to the Universal Service Fund |
| In addition, the FCC may increase the contribution obligations of our suppliers, which would result in an increase in the surcharges those suppliers charge to us |
| We intend to collect from our customers any additional USF contributions we are required, directly or indirectly, to make |
| Many of our competitors are required to contribute directly to the USF and already collect those USF contributions from their customers |
| Risks Related to our relationship with Atarey Atarey exercises significant control over all matters submitted to a stockholder vote |
| Atarey owns approximately 41prca of the voting power and economic interest in us, and is the largest shareholder of our stock |
| As long as Atarey continues to beneficially own such a significant percentage of our capital stock and there are no other major shareholders, Atarey will be able to exercise a significant influence over decisions affecting us, including: 24 o composition of our board of directors and, through it, our direction and policies, including the appointment and removal of officers; o mergers or other business combinations; o acquisitions or dispositions of assets by us; o future issuances of capital stock or other securities by us; o incurrence of debt by us; o amendments, waivers and modifications to any agreements between us and Atarey; o payment of dividends on our capital stock; and o approval of our business plans and general business development |
| In addition, two of our seven directors are officers and/or directors of Atarey, or otherwise affiliated with Atarey |
| As a result, the ability of any of our other stockholders to influence the management of our company is limited, which could have an adverse effect on the market price of our stock |
| A third party may be deterred from acquiring our company |
| Atareyapstas major ownership could delay, deter or prevent a third party from attempting to acquire control of us |
| This may have the effect of discouraging a third party from making a tender offer or otherwise attempting to obtain control of us, even though such a change in ownership would be economically beneficial to us and our stockholders |
| Risks Related to our Common Stock Volatility of our stock price could adversely affect our stockholders |
| Since trading commenced in November 1999, the market price of our common stock has been highly volatile and may continue to be volatile and could be subject to wide fluctuations in response to factors such as: o variations in our actual or anticipated quarterly operating results or those of our competitors; o announcements by us or our competitors of technological innovations; o introduction of new products or services by us or our competitors; o changes in financial estimates by securities analysts; o conditions or trends in the Internet industry; o changes in the market valuations of other Internet companies; o announcements by us or our competitors of significant acquisitions; o our entry into strategic partnerships or joint ventures; and o sales of our common stock by Atarey |
| All of these factors are, in whole or part, beyond our control and may materially adversely affect the market price of our common stock regardless of our performance |
| Investors may not be able to resell their shares of our common stock following periods of volatility because of the marketapstas adverse reaction to such volatility |
| In addition, the stock market in general, and the market for telecommunications, Internet-related and technology companies in particular, has been dramatically decreased and is extremely depressed |
| We cannot assure you that our common stock will trade at the same levels of other telecommunications or Internet stocks or that telecommunications or Internet stocks in general will sustain their current market prices |
| The liquidity of our common stock could be adversely affected by changes in our Nasdaq listing |
| 25 Our common stock is currently listed on the Nasdaq Capital Market |
| The listing of our common stock was transferred from the Nasdaq National Market to the Nasdaq Capital Market effective on September 17, 2002 |
| We currently meet all criteria for continued inclusion in the Nasdaq Capital Market |
| However, based on the volatile nature of our stock price, we can make no assurances that we will continue to do so |
| Failure to meet these criteria could result in our delisting from the Nasdaq Capital Market |
| If our shares were to be delisted from the Nasdaq Capital Market, our shares would continue to trade, if at all, on the OTC Bulletin Board, upon application by the requisite market makers |
| This would adversely impact our stock price, as well as the liquidity of the market for our shares which, as a result, would adversely affect the ability of our stockholders to purchase and sell their shares in an orderly manner, or at all |
| Furthermore, a delisting of our shares could damage our general business reputation and impair our ability to raise additional funds |
| Any of the foregoing events could have a material adverse effect on our business, financial condition and operating results |
| We do not intend to pay dividends |
| We have never declared or paid any cash dividends on our common stock |
| We intend to retain any future earnings to finance our operations and to expand our business and, therefore, do not expect to pay any cash dividends in the foreseeable future |
| Risks Related to our Israel-based Office We may be negatively impacted by changes in political, military and/or economic conditions |
| Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel |
| A peace agreement between Israel and Egypt was signed in 1979 and a peace agreement between Israel and Jordan was signed in 1994 |
| However, as of the date hereof Israel has not entered into any peace agreement with Syria or Lebanon |
| Despite peace related developments, certain countries, companies and organizations continue to participate in a boycott of Israeli firms |
| We do not believe that the boycott has had a material adverse effect on us, but there can be no assurance that restrictive laws, policies or practices directed towards Israel or Israeli-based businesses will not have an adverse impact on our business or financial condition in the future |
| Israelapstas economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early- to mid-l980s, low foreign exchange reserves, fluctuations in world commodity prices and military conflicts |
| The Israeli Government has, for these and other reasons, intervened in the economy by utilizing, among other means, fiscal and monetary policies, import duties, foreign currency restrictions and control of wages, prices and exchange rates |
| The Israeli Government has periodically changed its policies in all these areas |
| Although we derive most of our revenues outside of Israel, a substantial portion of our expenses are incurred in Israel and are affected by economic conditions in the country |
| All of these factors are, in whole or part, beyond our control and may materially adversely affect on our business, financial condition and operating results, or market price of our common stock regardless of our performance |
| We may be negatively impacted by employees being called for army service Generally, all male adult citizens and permanent residents of Israel under the age of 41 are, unless exempt, obligated to perform up to 36 days of military reserve duty annually |
| Additionally, all such residents are subject to being called to active duty at any time under emergency circumstances |
| While we have operated effectively under these requirements since we began operations, no assessment can be made as to the full impact of such requirements on our workforce or business if conditions should change, and no prediction can be made as to the effect on us of any expansion of such obligations |