| INPHONIC INC ITEM 1A RISK FACTORS There are a number of important factors that could cause our actual results to differ materially from those that are indicated by forward-looking statements |
| These factors include, without limitation, those listed below and elsewhere in this Annual Report on Form 10-K Risks Related to Our Business Our limited operating history makes it difficult for us to accurately forecast future revenue and appropriately plan our expenses |
| We commenced operations in 1999 and have a limited operating history |
| As a result, it is difficult for us to predict future revenue and operating expenses |
| Many of our expenses, such as compensation for employees and lease payments for facilities and equipment, are relatively fixed |
| We base these expense levels, in part, on our expectations of future revenue |
| A softening in demand for our product and service offerings, whether caused by changes in consumer spending, consumer preferences, weakness in the US or global economies or other factors, may result in decreased revenue, significant changes in our operating results from period to period and may cause our net losses to increase |
| For example, in the quarter ended December 31, 2005, our revenues were substantially lower than we had forecasted, resulting in substantially higher operating losses than had been expected |
| We have historically incurred significant losses and may not be profitable in the future |
| We have experienced significant net losses each year since our inception |
| For 2004 and 2005, we had net losses attributable to common stockholders of dlra32dtta3 million and dlra38dtta2 million, respectively |
| For the quarters ended December 31, 2004 and 2005 we had net losses attributable to common stockholders of dlra7dtta9 million and dlra24dtta6 million, respectively |
| As of December 31, 2005, we had an accumulated deficit of dlra164dtta7 million |
| We may continue to incur net losses, and we cannot assure you that we will be profitable in future periods |
| Our financial results may also be impacted by stock-based compensation charges and possible limitations on the amount of net operating loss carryforwards that we can utilize annually in the future to offset any taxable income |
| Our ability to achieve and sustain profitability will depend on our ability to generate and sustain substantially higher revenue while maintaining reasonable cost and expense levels |
| If we fail to generate sufficient revenue or achieve profitability, we will continue to incur significant losses |
| We may then be forced to reduce operating expenses by taking actions not contemplated in our business plan, such as discontinuing sales of certain of our wireless services and devices, curtailing our marketing efforts or reducing the size of our workforce |
| We expect our financial results to fluctuate, which may lead to volatility in our stock price |
| Our revenue and operating results may vary significantly from period to period due to a number of factors, including: • economic conditions specific to online commerce and the wireless communications industry; • the timing of introduction of popular devices by mobile phone manufacturers; • timing of bonuses paid to us by other wireless carriers; • seasonal fluctuations in both Internet usage and purchases of wireless services and devices; • our ability to attract visitors to our websites and our ability to convert those visitors into customers; • our ability to retain existing customers; • delays in market acceptance or adoption by consumers of our services, including our MVNE services; • delays in our development and offering of new wireless services and devices; 12 ______________________________________________________________________ [33]Table of Contents • changes in our use of sales and distribution channels; • our ability to source wireless devices at competitive prices; • our ability to manage our procurement and delivery operations; • the amount of our marketing and other advertising costs; • our or our competitors’ pricing and marketing strategies; • our competitors’ introduction of new or enhanced products and services; • the extent to which overall Internet use is affected by spyware, viruses, and “phishing,” spoofing and other spam emails directed at Internet users, viruses and “denial of service” attacks directed at Internet companies and service providers, and other events; and • the amount and timing of operating costs relating to expansion of our operations |
| If we are unable to maintain strong relationships with wireless carriers, our business would be adversely affected |
| We depend upon a small number of wireless carriers for a substantial portion of our revenue and the loss of any one of these relationships could cause our revenue to decline substantially |
| In addition, the increasing consolidation in the wireless industry, as evidenced by Cingular’s acquisition of AT&T Wireless and Sprint’s merger with Nextel, will cause the number of wireless carriers to continue to decline and result in further revenue and pricing pressure |
| For 2005, revenue from Cingular, T-Mobile and Sprint/Nextel each represented greater than 10prca at our total revenue and an aggregate of 67prca of our total revenue |
| For 2004 and 2005, revenue from our top four wireless carriers represented 81prca and 76prca of our total revenue, respectively |
| Our wireless carriers could terminate their agreements with us without penalty and with little notice |
| Our agreements with these carriers are non-exclusive, and they have entered into similar agreements with our competitors, which may be on more favorable terms |
| Our revenue may decline if: • one or more of the wireless carriers terminates its agreement with us or we are unable to negotiate extensions of these agreements on acceptable terms; or • there is a downturn in the business of any of these wireless carriers; or • there is continued significant consolidation in the wireless services industry |
| In addition, if the wireless carriers were to discontinue allowing us to sell and activate wireless service plans on their networks and instead were to provide these activation services exclusively themselves, this would have a significant adverse effect on our revenue |
| Ongoing consolidation among wireless carriers could result in revenue and pricing pressure and adversely impact our results of operations |
| In recent years, there has been a trend in the wireless industry toward consolidation of wireless carriers |
| For example, Cingular Wireless recently acquired AT&T Wireless, and Sprint recently merged with Nextel |
| Ongoing consolidation among the wireless carriers would reduce the number of companies whose wireless services we offer, which could adversely affect our results of operations |
| We rely on the leading wireless carriers for a substantial portion of our revenue, and we expect this to continue for the foreseeable future |
| We may be subject to pricing pressures that may result from a further consolidation among wireless carriers, which could have an adverse effect on our operations |
| If consolidation continues, the commissions and bonuses paid to us by wireless carriers could decrease or the prices charged to us for the supply of wireless devices could increase, resulting in a decrease in our gross margin |
| 13 ______________________________________________________________________ [34]Table of Contents A failure to continue to improve our customer experience could adversely affect our operating results |
| We operate in a very competitive environment and we believe that maintaining high overall customer satisfaction is critical part of our ongoing efforts to promote the use of our own branded websites, as well as the private-labeled websites that we create and manage for our marketers, and to improve our operating results |
| In the past, including during 2005, we had certain problems with our customer support operations and in fulfillment of orders |
| If the efforts we have undertaken to improve our customer experience are unsuccessful, we could be subject to customer complaints, litigation, and investigations by state and federal regulatory authorities |
| If these issues are not resolved, our revenues and results of operations could be adversely affected |
| A decrease in the growth rate of our wireless service activations could adversely affect our operating results |
| A substantial portion of our revenue consists of commissions we earn from the wireless carriers for the activation of new customer accounts |
| We may also receive bonuses for meeting volume and other performance-based targets |
| If the growth rate in the number of new activations declines or the customer churn rates increase, we may not earn these additional bonuses and our revenue could decline in the future |
| We may require additional cash to upgrade and expand our operations, which may not be available on terms acceptable to us, or at all |
| Since our inception, our operating and investing activities have used more cash than they have generated |
| We expect our uses of cash over the next 12 months to include funding our operations, expanding our customer base, maintaining and enhancing our e-commerce platform and focusing on customer service |
| As of December 31, 2005, we had cash and cash equivalents of dlra70dtta8 million including borrowings under our line of credit of dlra15dtta0 million |
| While we believe that our current cash and cash equivalents, amounts available under our bank line of credit and trade credit available from wireless carriers and handset manufacturers will be sufficient to fund our working capital and capital expenditures through the foreseeable future, our revenue may not meet our expectations, we may be unable to control costs or we may incur additional expenses, including capital expenditures |
| In addition, we have not been in compliance with certain of our covenants under our line of credit for each of the quarters ended June 30, 2005, September 30, 2005 and December 31, 2005 |
| Although we received waivers from our lender of our non-compliance with each of these covenants, there is no assurance that we will be in compliance with our covenants in the future, and if not in compliance, that we will receive a waiver |
| To remain competitive, we must continue to use cash to enhance and improve the functionality and features of our e-commerce platform and the websites we create and manage |
| If competitors introduce new services embodying new technologies, or if new industry standards and practices emerge, we may have to spend resources on the purchase or development of new functionalities or technologies |
| If we incur additional expenses or experience a revenue shortfall, our current resources may not be sufficient |
| We may then find it necessary to obtain additional financing |
| In the event that additional financing is required, we may not be able to raise it on terms acceptable to us, if at all |
| The market for our services is becoming increasingly competitive with the emergence of additional retail and online distributors of wireless services and devices, which could adversely affect our business |
| We face substantial competition in the wireless services industry |
| We expect competition to intensify as a result of the entrance of new competitors and the development of new technologies, products and services |
| We compete with wireless carriers’ retail stores and online websites, as well as other retail stores and online businesses that provide similar products and services in competition with us |
| All of our agreements with wireless carriers and wireless device suppliers are non-exclusive, and these parties may provide the same or similar services and devices to our competitors on terms more favorable than ours |
| Due to the low barriers to entry in this industry, with sufficient time and capital, it would be possible for additional competitors to replicate our services |
| 14 ______________________________________________________________________ [35]Table of Contents Many of our existing and potential competitors have substantially greater financial, technical and marketing resources than we do |
| Additionally, many of these companies have greater name recognition and more established relationships in many of our market segments |
| These competitors may be able to adopt more aggressive pricing policies and offer customers more attractive terms than we can |
| We may face increasing price pressure from the wireless carriers |
| In addition, current and potential competitors have established, or may establish, cooperative relationships among themselves or with third parties to compete more effectively |
| Increasing costs of online advertising and or misjudgments in making advance commitments to purchase online advertising could have an adverse affect on our financial results |
| Online advertising, the cost of which continues to increase, composes a significant portion of our marketing expenses |
| If the effectiveness of our online advertising does not keep pace with the increased costs, our financial results could be adversely affected |
| In addition, in order to secure more favorable terms or advertising placement, we sometimes make significant advanced financial commitments for advertising purchases based upon our anticipated needs |
| If our actual needs do not match such financial commitments, our results could be adversely affected |
| We depend on Internet search engines to attract a substantial portion of the customers who use our websites, and losing these customers would adversely affect our revenue and financial results |
| Many consumers access our services by clicking through on search results displayed by Internet search engines |
| Internet search engines typically provide two types of search results, algorithmic listings and purchased listings |
| Algorithmic listings cannot be purchased, and instead are determined and displayed solely by a set of formulas designed by the search engine |
| Purchased listings can be purchased by advertisers in order to attract users to their websites |
| We rely on both algorithmic and purchased listings to attract and direct consumers to our websites |
| Search engines revise their algorithms from time to time in an attempt to optimize their search results |
| If one or more search engines which we rely on for algorithmic listings modifies its algorithms, resulting in fewer consumers clicking through to our websites, we would need to increase our marketing expenditures or we would experience a reduction in our revenue, which would adversely affect our financial results |
| If one or more of the search engines which we rely on for purchased listings modifies or terminates its relationship with us, our expenses could rise and our financial results may suffer |
| Any unanticipated increase in our rate of deactivation of active accounts could result in a decrease in our revenue |
| Under our agreements with wireless carriers, commissions are not earned if the customer’s service is deactivated with the carrier before a pre-determined period of time, usually between 120 and 210 calendar days |
| We maintain a reserve to cover the commissions lost through deactivations based upon our historical experience |
| For example, our experience has been that customers who participate in a promotion that allows them to obtain a phone and activate an account with no up-front payment have a higher deactivation rate than customers who pay amounts in advance |
| If the rate of our deactivations increases in excess of our historical experience, we would have to increase our deactivation reserve, which, in turn, would cause our revenue to decline |
| Further, if our estimates vary materially for a future period or periods in relation to revenue and/or net income so that we conclude that our method of determining estimates is not sufficiently accurate, we may be required to change our method of accounting for these estimates |
| While a change in accounting for deactivations would have no impact on our cash flow, any such change may negatively impact our net income for particular periods and cause a decline in stock price |
| An increase in our deactivation rate could also cause carriers to modify the commission terms with us or even terminate our agreements |
| 15 ______________________________________________________________________ [36]Table of Contents If we do not continue to attract customers through our existing online marketing programs, our revenue may be affected adversely and our marketing expenses may increase |
| We obtain a large portion of our customers through incentive-based online marketing programs |
| We engage third parties to acquire customers through different marketing initiatives, including the use of websites that we create and manage under our marketers’ brands |
| We also use online advertising and other forms of direct marketing |
| Our marketers may not continue to participate in our marketing programs if the programs do not provide sufficient value, our competitors offer better terms, the third parties elect to provide these products and services directly or the market for incentive-based advertising decreases |
| If our marketers do not market our services to their customers, our revenues will not grow as anticipated and our marketing expenses may increase |
| Announcements and delays relating to the release of new wireless devices could adversely affect our revenues |
| From time to time, the wireless industry is significantly affected by the introduction of new wireless devices that quickly capture a large share of the market |
| Announcements of new devices can result in customers deferring purchase decisions until such devices are available |
| For example, in the quarter ended December 31, 2005, our results were adversely affected by the delay in the availability of a new wireless device |
| Likewise, our ability to have access to a sufficient supply of such devices when available is important in order for us to meet customer demand |
| If customers delay purchases due to the announcement of new products or if we do not have access to a sufficient supply of new products to meet demand, it could have an adverse affect in our revenues and results of operations |
| An interruption in the supply of wireless devices could hinder our ability to fulfill customer orders and cause a decline in our revenues |
| We rely on wireless carriers and wireless device suppliers in fulfilling customer orders for wireless devices |
| These suppliers may experience difficulty in providing us sufficient wireless devices to meet our needs or they may terminate or fail to renew contracts for supplying us these devices on terms we find acceptable |
| Our agreements with these suppliers are non-exclusive, and these suppliers have entered into similar agreements with our competitors, which may be on more favorable terms |
| From time to time, we may experience delays in receiving shipments of wireless devices from one or more of the wireless device suppliers, thereby preventing us from offering a wireless device until the shipment is received |
| Any significant interruption in the supply of any of these devices could hinder our ability to fulfill customer orders and result in the loss of customers, causing a decline in our revenues |
| If our distribution operations are interrupted for any significant period of time, our business and results of operations would be substantially harmed |
| Our success depends on our ability to successfully receive and fulfill orders and to promptly deliver our products to our customers |
| Our packaging, labeling and product return processes are performed both internally through our own distribution operations and to a lesser extent, by a third party |
| Our distribution operations are located in a single facility that is susceptible to damage or interruption from human error, fire, flood, power loss, telecommunications failure, theft, terrorist attacks and similar events |
| In 2003, we experienced a one-day interruption in our distribution operations due to Hurricane Isabel |
| Any future interruptions in our distribution center operations for a significant period of time could damage our reputation and substantially harm our business and results of operations |
| Interruptions or delays in service from third parties could impair our service offerings |
| We rely on third parties for both our primary network operations hosting center and our back-up facility |
| Any disruption of our access to Internet service could result in delays in our ability to receive information or transact business |
| We also rely on third-party software, suppliers and wireless carriers to process applications for 16 ______________________________________________________________________ [37]Table of Contents credit approval and to bill our customers |
| If we are unable to process credit applications in a timely manner or if our billing software fails and we are unable to bill customers on a timely basis, our business will be affected adversely |
| While we do have backup systems for certain aspects of our operations, our systems are not fully redundant and our disaster recovery planning may not be sufficient for all eventualities |
| From time to time we have experienced interruptions in these or other third-party services and if such a disruption were to occur in the future or their performance were to deteriorate, it could impair the quality of our services |
| If our arrangement with any of these third parties was terminated or if a third party ceased operations, discontinued business or altered the terms on which it does business with us, we might not be able to find an alternative provider on a timely basis or on reasonable terms, which would adversely affect our operating results |
| We have grown rapidly, and we must manage additional growth and the demands on our resources and personnel in order to be successful |
| We began operations in October 1999 and have grown rapidly since that time |
| Our growth has resulted, and any future growth will result, in increased responsibility for our management and increased demands on our resources |
| Our business strategy is based on the assumption that we will continue to retain qualified personnel who can expand our customer base and continue to develop and deliver innovative customer-driven solutions |
| We must continue to enhance and expand our business processes, information systems and operations to accommodate this growth |
| To manage future growth, we will need to: • implement additional management information systems; • retain qualified personnel to manage our operating, administrative, financial and accounting systems; • maintain and expand our wireless service and device activation capacity; • continue to train, motivate, manage and retain our existing employees and attract and integrate new employees; • expand our sales force to sell our new and existing offerings; and • maintain close coordination among our executive, information technology, accounting and finance, sales and operations organizations |
| If we are unable to manage future expansion, our ability to provide a high quality customer experience could be harmed, which would damage our reputation and substantially harm our business and results of operations |
| If we do not adequately protect our intellectual property, others could copy aspects of our services and operational technology, which could force us to become involved in expensive and time-consuming litigation |
| Our ability to compete and continue to provide technological innovation is substantially dependent upon our technology |
| We rely on a combination of intellectual property laws and confidentiality agreements to protect our technology |
| We generally enter into confidentiality and nondisclosure agreements with our employees, consultants and prospective and existing marketers |
| In addition, we seek to control access to our proprietary information |
| Despite our efforts to protect our intellectual property, unauthorized parties may attempt to copy or otherwise obtain and use our services or technology |
| Although we are not aware of any unauthorized use of our intellectual property to date, effectively policing against the unauthorized use of our technology is time-consuming and costly, and we cannot assure you that the steps taken by us will prevent misappropriation of our technology |
| Our failure to adequately protect our intellectual property rights could harm our business by making it easier for others to duplicate our services |
| 17 ______________________________________________________________________ [38]Table of Contents If we are unable to maintain the integration of our services with the wireless carriers’ existing credit and activation systems, we will be unable to process orders in a timely manner and our business may suffer |
| To activate wireless services for customers, we rely on access to the wireless carriers’ proprietary credit and activation systems through direct data, online and telephone interfaces |
| If, as a result of technology enhancements or upgrades of these systems by the wireless carriers, we are unable to integrate our services with these systems, we could be required to redesign or upgrade our information systems or software which could be costly and negatively affect our operating results |
| If we are unable to gain access to these systems, we would be unable to process orders, the wireless carriers could terminate their underlying agreements with us, and our business may suffer |
| Our failure to protect our customers’ confidential information and our network against security breaches could damage our reputation and substantially harm our business and results of operations |
| A significant barrier to online commerce is concern regarding the secure transmission of confidential information over public networks |
| Currently, a majority of our wireless service activations and device sales are billed to our customers’ credit card accounts directly |
| We rely on encryption and authentication technology licensed from third parties to securely transmit confidential information, including credit card numbers |
| Advances in computing capabilities, new discoveries in the field of cryptography or other developments may result in a compromise or breach of the technology used by us to protect customer transaction data |
| Although we are not aware of any security breaches, any compromise of our security could damage our reputation and expose us to a risk of loss or litigation and possible liability which would substantially harm our business and results of operations |
| Although we carry general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to cover all costs incurred in defense of potential claims or to indemnify us for all liability that may be imposed |
| In addition, anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations |
| We may need to expend significant resources to protect against security breaches or to address problems caused by breaches |
| If the technology we use infringes upon the proprietary rights of others, we may be forced to seek expensive licenses, reengineer our services, engage in expensive and time-consuming litigation or stop selling our services |
| If we were to discover that our services violated or potentially violated the proprietary rights of others, we might not be able to obtain licenses to continue offering those services without substantial reengineering |
| Any reengineering effort may not be successful, nor can we be certain that any licenses would be available on commercially reasonable terms |
| Although we have not been named a party in any litigation concerning the infringement of another party’s rights, a claim of infringement against us, with or without merit, could be time consuming and expensive to litigate or settle, and could divert management’s attention from executing our business plan |
| An adverse determination against us could prevent us from offering our services |
| From time to time, we receive notices from others claiming we have infringed upon their intellectual property rights |
| Responding to these claims may require us to seek expensive licenses, reengineer our services, engage in expensive and time-consuming litigation or stop selling our services |
| If we are unable to attract and retain management and key personnel, we may not be able to implement our business plan |
| We believe that the successful implementation of our business plan will depend on our management team, particularly the chairman of our board of directors and our chief executive officer, David A Steinberg |
| Losing the services of one or more members of our management team could adversely affect our business and our expansion efforts, and possibly prevent us from further improving our information management, financial and operational systems and controls |
| As we continue to grow, we may need to hire and retain qualified sales, marketing, administrative, operating and technical personnel with knowledge of the wireless services industry 18 ______________________________________________________________________ [39]Table of Contents and online marketing, and to train and manage new personnel |
| We may not be able to identify and hire qualified personnel due to competition for such personnel |
| The failure to hire and retain these personnel would have an adverse effect on our business |
| Our failure to identify and integrate successfully any businesses or technologies that we acquire may increase our costs and reduce our revenue |
| As part of our business strategy, we continue to seek to expand our service offerings through investments in, or acquisitions of, other businesses or technologies that we believe are complementary to our business |
| Although we regularly engage in discussions relating to potential acquisitions, we may not be able to identify, negotiate or finance any future acquisitions |
| If we do identify acquisitions, it may be necessary for us to raise additional funds to finance those acquisitions |
| Additional funds may not be available on terms that are favorable to us, or at all |
| If we issue our stock as consideration, our stockholders would experience dilution of their percentage ownership in our stock |
| Upon completion of any acquisitions, we may be unsuccessful in integrating and operating such acquired businesses profitably or otherwise implementing our strategy successfully |
| If we are unable to integrate any newly-acquired entities or technologies effectively, our business and results of operations could suffer |
| The time and expense associated with finding suitable and compatible businesses, technologies or services could also disrupt our ongoing business and divert our management’s attention |
| In addition, we may be required to reduce the carrying amount on our balance sheet of any acquired intangible assets; this reduction would adversely affect our financial results in the period in which it occurs |
| Vendors in India support our call center activities |
| Any difficulties experienced with these services could result in additional expense or loss of customers and revenue |
| We have outsourcing agreements with vendors in India to provide additional call center support |
| If these vendors are unable to perform satisfactory customer service, we could lose customers and would have to pursue alternative strategies to provide these services, which could result in delays, interruptions, additional expense and loss of customers |
| A variety of proposed federal and state legislation, if enacted, could restrict or discourage US companies from outsourcing their services to companies outside the US This legislation, if enacted, may impact our ability to use internationally outsourced services to support our call center activities |
| Risks Related to Our Industry If the online market for wireless services and devices does not gain widespread acceptance, our business would suffer |
| Our success will depend in part on our ability to attract consumers who have historically purchased wireless services and devices through traditional retail stores |
| Furthermore, we may have to incur significantly higher and more sustained advertising and promotional expenditures or price our products more competitively than we currently anticipate in order to attract additional online consumers and sell wireless services and devices to more customers |
| Specific factors that could deter consumers from purchasing wireless services and devices from us include: • concerns about buying wireless devices without a face-to-face interaction with sales personnel and the ability to physically handle and examine the devices; • pricing that does not meet their expectations; • concerns about the security of online transactions and the privacy of personal information; • delivery time associated with Internet orders; • delayed shipments or shipments of incorrect or damaged products; • inconvenience associated with returning or exchanging purchased items; 19 ______________________________________________________________________ [40]Table of Contents • inability to maintain good standing with business rating services; • failure to provide a positive customer experience for consumers; and • possible disruptions, computer viruses or other damage to the Internet servers or to the consumers’ computers |
| We may be exposed to risks associated with credit card fraud and identity theft that could cause us to incur unexpected expenditures and loss of revenue |
| Under current credit card practices, a merchant is liable for fraudulent credit card transactions when, as is the case with the transactions we process, that merchant does not obtain a cardholder’s signature |
| Any failure to prevent fraudulent credit card transactions would adversely affect our business and our revenue |
| We do not currently carry insurance to protect us against this risk |
| We do not receive any revenue from fraudulently placed orders |
| We bear the risk of future losses as a result of orders placed with fraudulent credit card data or fraudulent identity information, even though the associated financial institution approved payment of the orders |
| Our net sales may be negatively affected if we are required to charge taxes on purchases |
| We are not required to collect or are not subject to sales or other taxes related to the products we sell, except for certain corporate level taxes and sales taxes with respect to purchases by customers located in a limited number of states |
| However, one or more states or foreign countries may seek to impose sales or other tax collection obligations on us in the future |
| A successful assertion by one or more states or foreign countries that we should be collecting sales or other taxes on the sale of our products could result in substantial tax liabilities for past sales, discourage customers from purchasing products from us, decrease our ability to compete with traditional retailers or otherwise substantially harm our business and results of operations |
| Currently, decisions of the US Supreme Court restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the Internet |
| However, a number of states, as well as the US Congress, have been considering various initiatives that could limit or supersede the Supreme Court’s position regarding sales and use taxes on Internet sales |
| If any of these initiatives addressed the Supreme Court’s constitutional concerns and resulted in a reversal of its current position, we could be required to collect sales and use taxes in additional states |
| The imposition by state and local governments of various taxes upon Internet commerce could create administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligations on all of our online competitors and decrease our future sales |
| Government regulation of the Internet and e-commerce is evolving and unfavorable changes could substantially harm our business and results of operations |
| We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and e-commerce |
| Existing and future laws and regulations may impede the growth of the Internet or other online services |
| These regulations and laws may cover taxation, restrictions on imports and exports, customs, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services, broadband residential Internet access and the characteristics and quality of products and services |
| It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the Internet and e-commerce |
| Laws or regulations may be enacted that prohibit use of mass emails or similar marketing activities |
| We may not be able to support the marketing of our products and services by mass email or other online means if such activities are adverse to our business |
| Even if no relevant law or regulation is enacted, we may discontinue use or support of these activities if we become concerned that customers deem them intrusive or they otherwise adversely affect our goodwill |
| Unfavorable resolution of these issues may substantially harm our business and results of operations |
| 20 ______________________________________________________________________ [41]Table of Contents The wireless services industry may experience a decline in new subscriber growth rate |
| The wireless services industry has faced an increasing number of challenges, including a slowdown in new subscriber growth |
| According to The Yankee Group, an independent research firm, the wireless subscriber market in the United States has grown an average of almost 18prca per year from 1998 through 2005 |
| The Yankee Group forecasts this growth rate will fall to an average of almost 5prca per year through 2009 |
| If the wireless services industry experiences a decline in subscribers, our business may suffer |
| We may be unable to effectively market our wireless services if wireless carriers do not deliver acceptable wireless networks and service plans, which would cause our revenues to decline |
| The success of our business depends on the capacity, affordability and reliability of wireless voice and data access provided by wireless carriers |
| Growth in demand for wireless voice and data services may be limited if wireless carriers fail to maintain sufficient capacity to meet demand for these services, delay the expansion of their wireless networks and services, fail to offer and maintain reliable wireless network services or fail to market their services effectively |
| We also depend on wireless carriers to provide credit verification and approval to activate wireless service for customers |
| If wireless carriers are unable to verify credit information in a timely manner, we may lose marketers and customers |
| Use of wireless devices may pose health risks or cause injuries, which could increase our exposure to litigation and result in increased operating expenses |
| Radio frequency emissions from wireless devices may be linked to various health concerns, including cancer, and may interfere with various electronic medical devices, including hearing aids and pacemakers |
| In addition, there have been recent reports that people have been injured by explosions of refurbished batteries in wireless devices |
| The actual or perceived risk of radio frequency emissions from wireless devices or the potential for battery explosions or other injuries could adversely affect our business through a decline in sales of wireless services and increased exposure to potential litigation |
| Other Risks Our executive officers and directors hold a substantial portion of our stock and may be able to exercise significant influence over matters requiring stockholder approval, which may limit your ability to influence corporate matters |
| Our executive officers and directors control a significant percentage of our common stock |
| Specifically, as of February 28, 2006 our executive officers and directors as a group controlled approximately 38prca of our common stock |
| As a result, if these officers and directors act together, they will be able to exercise significant control over all matters requiring stockholder approval, including the determination of the composition of the board of directors, and may be able to exercise significant influence on fundamental corporate transactions |
| These stockholders may have interests that are different from yours |
| Corporate action might be taken even if other stockholders oppose them |
| This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial |
| The market price of our common stock has been and will likely continue to be subject to fluctuation |
| We have a relatively short operating history and a rapidly evolving and unpredictable business model |
| The trading price of our common stock fluctuates significantly |
| Trading prices of our common stock may fluctuate in response to a number of events and factors, such as: • quarterly and seasonal variations in operating results; • changes in financial estimates and ratings by securities analysts; • announcements by us or our competitors of new product and service offerings, significant contracts, acquisitions or strategic relationships; 21 ______________________________________________________________________ [42]Table of Contents • publicity about our company, our products and services, our competitors or e-commerce in general; • additions or departures of key personnel; • any future sales of our common stock or other securities; and • stock market price and fluctuations in trading volume of publicly-traded companies in general and Internet-related companies and specialty retailers in particular |
| The trading prices of Internet-related companies and e-commerce companies have been especially volatile |
| In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities |
| We may be the target of similar litigation in the future |
| Securities litigation could result in significant costs and divert management’s attention and resources, which could substantially harm our business and results of operations |
| If securities or industry analysts do not continue to publish research or reports about our business, our stock price and trading volume could decline |
| The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business |
| If one or more of the analysts who covers us downgrades our stock, our stock price would likely decline |
| If one or more of these analysts ceases coverage of our company or fails to regularly publish reports on us, interest in the purchase of our stock could decrease, which could cause our stock price or trading volume to decline |
| Anti-takeover provisions and other restrictions in our certificate of incorporation, bylaws and applicable law might discourage, delay or prevent a change of control of our company or changes in our management that our stockholders might find desirable |
| Our certificate of incorporation and bylaws provide for, among other things: • a classified board of directors; • restrictions on the ability of our stockholders to call special meetings of stockholders; • restrictions on the ability of our stockholders to act by written consent; • restrictions on the ability of our stockholders to remove any director or the entire board of directors without cause; • restrictions on the ability of our stockholders to fill a vacancy on the board of directors; and • advance notice requirements for stockholder proposals |
| These provisions may have the effect of delaying or preventing an acquisition of us or changes in our management, even if stockholders of our company deem such changes to be advantageous |
| In addition, our board of directors is permitted to authorize the issuance of undesignated capital stock without any vote or further action by the stockholders |
| Because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits us from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner |
| These provisions and other provisions of the Delaware General Corporation Law applicable to us may restrain large stockholders, in particular those owning 15prca or more of our outstanding voting stock, from consummating a merger or business combination with us without the approval of the board of directors, even if doing so would benefit our stockholders |