| INTERNAP NETWORK SERVICES CORP ITEM 1A RISK FACTORS You should carefully consider the risks described below |
| Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us |
| If any of the following risks occurs, our business, financial condition or results of operations could be materially and adversely affected |
| Risks Related to Our Business We have a history of losses and may not achieve or sustain profitability |
| We have incurred net losses in each quarterly and annual period since we began operations in May 1996 |
| We incurred net losses of dlra5dtta0 million, dlra18dtta1 million, and dlra34dtta6 million for the years ended December 31, 2005, 2004 and 2003, respectively |
| As of December 31, 2005, our accumulated deficit was dlra860dtta1 million |
| We cannot guarantee that we will become profitable |
| Even if we achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase profitability on a quarterly or annual basis, and our failure to do so would adversely affect our business, including our ability to raise additional funds |
| Our operations have historically been cash flow negative, and we have depended on equity and debt financings to meet our cash requirements, which may not be available to us in the future on favorable terms |
| We have experienced negative operating cash flow and have depended upon equity and debt financings, as well as borrowings under our credit facilities, to meet our cash requirements in most quarterly and annual periods since we began our operations in May 1996 |
| We expect to meet our cash requirements in 2006 through a combination of cash flows from operations, existing cash, cash equivalents and investments in marketable securities, borrowings under our credit facilities, and the proceeds from our March 2004 public offering |
| Our capital requirements depend on several factors, including the rate of market acceptance of our services, the ability to expand and retain our customer base, and other factors |
| If our cash requirements vary materially from those currently planned, if our cost reduction initiatives have unanticipated adverse effects on our business, or if we fail to generate sufficient cash flow from the sales of our services, we may require additional financing sooner than anticipated |
| We cannot assure you that we will be able to obtain additional financing on commercially favorable terms, or at all |
| Provisions in our credit facility limit our ability to incur additional indebtedness |
| While we believe that we currently have adequate internal control procedures in place, we are still exposed to potential risks from legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002 |
| In the course of our ongoing evaluation of our internal controls over financing reporting, we have identified areas requiring improvement and are in the process of designing enhanced processes and controls to address the issues identified during our evaluation |
| We cannot be certain that our efforts will be effective or sufficient for us, or our auditors, to issue unqualified reports in the future |
| It may be difficult to design and implement effective financial controls for combined operations and differences in existing controls of any acquired businesses may result in weaknesses that require remediation when the financial controls and reporting are combined |
| Our ability to manage our operations and growth will require us to improve our operational, financial and management controls, as well as our internal reporting systems and controls |
| We may not be able to implement improvements to our internal reporting systems and controls in an efficient and timely manner and may discover deficiencies in existing systems and controls |
| We may not be able to compete successfully against current and future competitors |
| The Internet connectivity and Internet Protocol services market is highly competitive, as evidenced by recent declines in pricing for Internet connectivity services |
| We expect competition from existing competitors to continue to intensify in the future, and we may not have the financial resources, technical expertise, sales and marketing abilities or support capabilities to compete successfully |
| Our competitors currently include: regional Bell operating companies that offer Internet access; global, national and regional Internet service providers; providers of specific applications or solutions such as content distribution, security or storage; software-based and other Internet infrastructure providers and manufacturers; and colocation and data center providers |
| In addition, Internet network service providers may make technological advancements, such as the introduction of improved routing protocols to enhance the quality of their services, which could negatively impact the demand for our products and services |
| In addition, we will face additional competition as we expand our managed services product offerings, including competition from technology and telecommunications companies |
| A number of telecommunications companies and Internet service providers have been offering or expanding their network services |
| Further, the ability of some of these potential competitors to bundle other services and products with their network services could place us at a competitive disadvantage |
| Various companies are also exploring the possibility of providing, or are currently providing, high-speed, intelligent data services that use connections to more than one network or use alternative delivery methods including the cable television infrastructure, direct broadcast satellites and wireless local loop |
| Many of our existing and future competitors may have greater market presence, engineering and marketing capabilities, and financial, technological and personnel resources than we do |
| As a result, our competitors may have significant advantages over us |
| Increased competition and technological advancements by our competitors could adversely affect our business, results of operations and financial condition |
| 6 _________________________________________________________________ Pricing pressure could decrease our revenue and threaten the attractiveness of our premium priced services |
| Pricing for Internet connectivity services has declined significantly in recent years and may decline in the future |
| An economic downturn could further contribute to this effect |
| We currently charge, and expect to continue to charge, higher prices for our high performance Internet connectivity services than prices charged by our competitors for their connectivity services |
| By bundling their services and reducing the overall cost of their solutions, certain of our competitors may be able to provide customers with reduced communications costs in connection with their Internet connectivity services or private network services, thereby significantly increasing the pressure on us to decrease our prices |
| Increased price competition and other related competitive pressures could erode our revenue and significant price deflation could affect our results of operations if we are unable to control our costs |
| Because we rely on Internet network service providers to deliver our services and have agreed with some of these providers to purchase minimum amounts of service at predetermined prices, our profitability could be adversely affected by competitive price reductions to our customers even with an increased number of customers |
| In addition, over the last several years, companies that require Internet connectivity have been evaluating and will continue to evaluate the cost of such services, particularly high performance connectivity services such as those we currently offer, in light of economic factors and technological advances |
| Consequently, existing and potential customers may be less willing to pay premium prices for high performance Internet connectivity services and may choose to purchase lower quality services at lower prices, which could adversely affect our business, results of operations and financial condition |
| We depend on a number of Internet network service providers to provide Internet connectivity to our network access points |
| If we are unable to obtain required connectivity services on a cost-effective basis or at all, or if such services are interrupted or terminated, our growth prospects and business, results of operations and financial conditions would be adversely affected |
| In order to be able to provide high performance connectivity services to our customers through our network access points, we purchase connections from several Internet network service providers |
| We cannot assure you that these Internet network service providers will continue to provide service to us on a cost-effective basis or on otherwise competitive terms, if at all, or that these providers will provide us with additional capacity to adequately meet customer demand |
| Consolidation among Internet network service providers limits the number of vendors from which we obtain service, possibly resulting in higher network costs to us |
| We may be unable to establish and maintain relationships with other Internet network service providers that may emerge or that are significant in geographic areas, such as Asia and Europe, in which we may locate our future network access points |
| Any of these situations could limit our growth prospects and adversely affect our business, results of operations and financial condition |
| We depend on third-party suppliers for key elements of our network infrastructure and to provide services |
| If we are unable to obtain products or services, such as network access loops or local loops, on favorable terms or at all, or in the event of a failure of these suppliers to deliver their products and services as agreed, our ability to provide our services on a competitive and timely basis would be impaired and our results of operations and financial conditions would be adversely affected |
| Any failure to obtain required products or services from third-party suppliers on a timely basis and at an acceptable cost would affect our ability to provide our services on a competitive and timely basis |
| In addition to depending on services from third party Internet network service we depend on other companies to supply various key elements of our infrastructure, including the network access loops between our network access points and our Internet network service providers and the local loops between our network access points and our customers &apos networks |
| Pricing for such network access loops and local loops has been rising significantly over time, and we generally bill these charges to our customers at low or no margin, while some of our competitors have their own network access loops and local loops and are therefore not subject to similar availability and pricing issues |
| In addition, we currently purchase routers and switches from a limited number of vendors |
| Furthermore, we do not carry significant inventories of the products we purchase, and we have no guaranteed supply arrangements with our vendors |
| A loss of a significant vendor could delay any build-out of our infrastructure and increase our costs |
| If our limited source of suppliers fails to provide products or services that comply with evolving Internet standards or that interoperate with other products or services we use in our network infrastructure, we may be unable to meet all or a portion of our customer service commitments, which could adversely affect our business, results of operations and financial condition |
| A failure in the redundancies in our network operations centers, network access points or computer systems would cause a significant disruption in our Internet connectivity services, and we may experience significant disruptions in our ability to service our customers |
| Our business depends on the efficient and uninterrupted operation of our network operations centers, our network access points and our computer and communications hardware systems and infrastructure |
| Interruptions could result from natural or human caused disasters, power loss, telecommunications failure and similar events |
| If we experience a problem at our network operations centers, including the failure of redundant systems, we may be unable to provide Internet connectivity services to our customers, provide customer service and support or monitor our network infrastructure or network access points, any of which would seriously harm our business and operating results |
| Also, because we provide continuous Internet availability under our service level agreements, we may 7 _________________________________________________________________ be required to issue a significant amount of customer credits as a result of such interruptions in service |
| These credits could negatively affect our results of operations |
| In addition, interruptions in service to our customers could harm our customer relations, expose us to potential lawsuits and require additional capital expenditures |
| A significant number of our network access points are located in facilities owned and operated by third parties |
| In many of those arrangements, we do not have property rights similar to those customarily possessed by a lessee or subtenant, but instead have lesser rights of occupancy |
| In certain situations, the financial condition of those parties providing occupancy to us could have an adverse impact on the continued occupancy arrangement or the level of service delivered to us under such arrangements |
| The increased use of high power density equipment may limit our ability to fully utilize our data centers |
| Customers are increasing their use of high-density equipment, such as blade servers, in our data centers, which has significantly increased the demand for power on a per cabinet basis |
| Because most of our centers were built several years ago, the current demand for electrical power may exceed our designed capacity in these facilities |
| As electrical power, not space, is typically the limiting factor in our data centers, our ability to fully utilize our data centers may be limited in these facilities |
| Our business could be harmed by prolonged electrical power outages or shortages, increased costs of energy or general availability of electrical resources |
| Our data centers and P-NAPs are susceptible to regional costs of power, electrical power shortages, planned or unplanned power outages or natural disasters, and limitations, especially internationally, on availability of adequate power resources |
| Power outages could harm our customers and our business |
| We attempt to limit exposure to system downtime by using backup generators and Uninterruptible Power Systems (UPS), however, we may not be able to limit our exposure entirely even with these protections in place, as has been the case with power outages we have experienced in the past and may experience in the future |
| In addition, the overall power shortage in California has increased the cost of energy, which we may not be able to pass on to our customers |
| In each of our markets, we rely on utility companies to provide a sufficient amount of power for current and future customers |
| At the same time, power and cooling requirements are growing on a per unit basis |
| We do not have long-term power agreements in all our markets for long-term guarantees of provisioned amounts |
| This means that we could face power limitations in our centers |
| This could have a negative impact on the effective available capacity of a given center and limit our ability to grow our business, which could have a negative impact on our financial performance, operating results and cash flows |
| Any failure of our physical infrastructure or services could lead to significant costs and disruptions that could reduce our revenue and harm our business reputation and financial results |
| We must protect our customers’ data center and P-NAP infrastructure and their equipment located in our data centers |
| The services we provide in each of our data centers are subject to failure resulting from numerous factors, including: · human error; · physical or electronic security breaches; · fire, earthquake, flood and other natural disasters; · water damage; · fiber cuts; · power loss; · sabotage and vandalism; and · failure of business partners who provide our resale products |
| Problems at one or more of the data centers operated by us or any of our colocation providers, whether or not within our control, could result in service interruptions or significant equipment damage |
| We have service level commitment obligations to certain of our customers, including our significant customers |
| As a result, service interruptions or significant equipment damage in our data centers 8 _________________________________________________________________ could result in difficulty maintaining service level commitments to these customers |
| If we incur significant financial commitments to our customers in connection with a loss of power, or our failure to meet other service level commitment obligations, our liability insurance and revenue reserves may not be adequate |
| In addition, any loss of services, equipment damage or inability to meet our service level commitment obligations could reduce the confidence of our customers and could consequently impair our ability to obtain and retain customers, which would adversely affect both our ability to generate revenues and our operating results |
| Furthermore, we are dependent upon Internet service providers and telecommunications carriers in the US, Europe and Asia Pacific, some of which have experienced significant system failures and electrical outages in the past |
| Users of our services may in the future experience difficulties due to system failures unrelated to our systems and services |
| If for any reason, these providers fail to provide the required services, our business, financial condition and results of operations could be materially adversely impacted |
| There is no known prevention or defense against denial of service attacks |
| During a prolonged denial of service attack, Internet service may not be available for several hours, thus negatively impacting hosted customers’ on-line business transactions |
| Affected customers might file claims against us under such circumstances |
| Our property and liability insurance may not be adequate to cover these customer claims |
| Our results of operations have fluctuated in the past and may continue to fluctuate, which could have a negative impact on the price of our common stock |
| We have experienced fluctuations in our results of operations on a quarterly and annual basis |
| The fluctuation in our operating results may cause the market price of our common stock to decline |
| We expect to experience significant fluctuations in our operating results in the foreseeable future due to a variety of factors, including: · competition and the introduction of new services by our competitors; · continued pricing pressures resulting from competitors &apos strategies or excess bandwidth supply; · fluctuations in the demand and sales cycle for our services; · fluctuations in the market for qualified sales and other personnel; · changes in the prices for Internet connectivity we pay to Internet network service providers; · the cost and availability of adequate public utilities, including power; · our ability to obtain local loop connections to our network access points at favorable prices; · integration of people, operations, products and technologies of acquired businesses; and · general economic conditions |
| In addition, fluctuations in our results of operations may arise from strategic decisions we have made or may make with respect to the timing and magnitude of capital expenditures such as those associated with the deployment of additional network access points and the terms of our network connectivity purchase agreements |
| These and other factors discussed in this annual report on Form 10-K could have a material adverse effect on our business, results of operations and financial condition |
| In addition, a relatively large portion of our expense is fixed in the short-term, particularly with respect to lease and personnel expense, depreciation and amortization, and interest expense |
| Therefore, our results of operations are particularly sensitive to fluctuations in revenue |
| Because our results of operations have fluctuated in the past and are expected to continue to fluctuate in the future, investors should not rely on the results of any particular period as an indication of future performance in our business operations |
| Fluctuations in our results of operations could have a negative impact on our ability to raise additional capital and execute our business plan |
| Our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors |
| If this occurs, we could experience an immediate and significant decline in the trading price of our stock |
| The terms of our existing credit facility impose restrictions upon us |
| The terms of our existing credit facility impose operating and financial restrictions on us and require us to meet certain financial tests |
| These restrictions may also have a negative impact on our business, financial condition and results of operations by significantly limiting or prohibiting us from engaging in certain transactions |
| The failure to comply with any of these covenants would cause a default under the credit facility |
| Any defaults, if not waived, could result in the lender ceasing to make loans or extending credit to us, accelerate or declare all or any obligations immediately due, or take possession of or liquidate collateral |
| If any of these occur, we may not be able to effectively manage our operations, repay our debt or borrow sufficient funds to refinance it on terms that are acceptable to us, which could adversely impact our business, results of operations and financial condition |
| 9 _________________________________________________________________ As of December 31, 2005, we were in compliance with all loan covenants |
| We were in violation of a previous loan covenant that required a minimum Cash EBITDA, as defined in the credit facility, for the three-month period ended September 30, 2005 by dlra1dtta3 million |
| The violation resulted primarily from our continued expansion of data centers that caused the minimum Cash EBITDA for the period to be less than the level required under the agreement |
| On November 3, 2005, we received a formal waiver of the covenant violation |
| The loan agreement was amended as of December 27, 2005 to eliminate the minimum Cash EBITDA requirement |
| In the event of overcapacity created in the Internet connectivity and IP services market, we may record additional significant restructuring charges and goodwill impairment |
| As a result of the overcapacity created in the Internet connectivity and IP services market during the past several years, we have undertaken significant operational restructurings and have taken restructuring charges and recorded total restructuring costs of less than dlra0dtta1 million for the year ended December 31, 2005 and dlra3dtta6 million and dlra1dtta1 million for the years ended December 31, 2004 and 2003, respectively |
| If the Internet connectivity and IP services market continues to experience overcapacity and uncertainty or declines in the future, we may incur additional restructuring charges or adjustments in the future |
| Such additional restructuring charges or adjustments could adversely affect our business, net profit and stockholders &apos equity |
| If we are unable to deploy new network access points or do not adequately control expense associated with the deployment of new network access points, our results of operations could be adversely affected |
| As part of our strategy, we intend to continue to expand our network access points, particularly into new geographic markets |
| We will face various risks associated with identifying, obtaining and integrating attractive network access point sites, negotiating leases for centers on competitive terms, cost estimation errors or overruns, delays in connecting with local exchanges, equipment and material delays or shortages, the inability to obtain necessary permits on a timely basis, if at all, and other factors, many of which are beyond our control and all of which could delay the deployment of a new network access point |
| We cannot assure you that we will be able to open and operate new network access points on a timely or profitable basis |
| Deployment of new network access points will increase operating expense, including expense associated with hiring, training, retaining and managing new employees, provisioning capacity from Internet network service providers, purchasing new equipment, implementing new systems, leasing additional real estate and incurring additional depreciation expense |
| If we are unable to control our costs as we expand in geographically dispersed locations, our results of operations could be adversely affected |
| We have acquired and may acquire other businesses, and these acquisitions involve numerous risks |
| We intend to pursue additional acquisitions of complementary businesses, products, services and technologies to expand our geographic footprint, enhance our existing services, expand our service offerings and enlarge our customer base |
| If we complete future acquisitions, we may be required to incur or assume additional debt and make capital expenditures and issue additional shares of our common stock or securities convertible into our common stock as consideration, which will dilute our existing stockholders &apos ownership interest and may adversely affect our results of operations |
| Our ability to grow through acquisitions involves a number of additional risks including the following: · the ability to identify and consummate complementary acquisition candidates; · the possibility that we may not be able to successfully integrate the operations, personnel, technologies, products and services of the acquired companies in a timely and efficient manner; · diversion of managementapstas attention from normal daily operations to negotiate acquisitions and integrate acquired businesses; · insufficient revenue to offset significant unforeseen costs and increased expense associated with the acquisitions; · challenges in completing projects associated with in-process research and development being conducted by the acquired businesses; · risks associated with our entrance into markets in which we have little or no prior experience and where competitors have a stronger market presence; · deferral of purchasing decisions by current and potential customers as they evaluate the likelihood of success of our acquisitions; · issuance by us of equity securities that would dilute ownership of our existing stockholders; · incurrence and/or assumption of significant debt, contingent liabilities and amortization expense; and 10 _________________________________________________________________ · loss of key employees of the acquired companies |
| Failure to effectively manage our growth through acquisitions could adversely affect our growth prospects, business, results of operations and financial condition |
| Because we have limited experience operating internationally, our international operations may not be successful |
| We have limited experience operating internationally |
| We currently have network access points in London, Hong Kong, Singapore and Sydney, Australia, participate in a joint venture with NTT-ME Corporation and another NTT affiliate that operates a network access point in Tokyo, Japan and maintain a marketing agreement with Telefonica USA, which provides us with further access in Europe and access to the Latin American market |
| As part of our strategy to expand our geographic markets, we may develop or acquire network access points or complementary businesses in additional international markets |
| The risks associated with expansion of our international business operations include: · challenges in establishing and maintaining relationships with foreign customers as well as foreign Internet network service providers and local vendors, including data center and local network operators; · challenges in staffing and managing network operations centers and network access points across disparate geographic areas; · limited protection for intellectual property rights in some countries; · challenges in reducing operating expense or other costs required by local laws; · exposure to fluctuations in foreign currency exchange rates; · costs of customizing network access points for foreign countries and customers; · protectionist laws and practices favoring local competition; · political and economic instability; and · compliance with governmental regulations |
| We may be unsuccessful in our efforts to address the risks associated with our international operations, which may limit our international sales growth and adversely affect our business and results of operations |
| Disputes with vendors regarding the delivery of services may materially impact our results of operations and cash flows |
| In delivering our services, we rely on a number of Internet network, telecommunication and other vendors |
| We work directly with these vendors to provision services such as establishing, modifying or discontinuing services for our customers |
| Because of the volume of activity, billing disputes inevitably arise |
| These disputes typically stem from disagreements concerning the starting and ending dates of service, quoted rates, usage and various other factors |
| Disputed costs, both in the vendors’ favor and our favor, are researched and discussed with vendors on an ongoing basis until ultimately resolved |
| We record the cost and a liability based on our estimate of the most likely outcome of the dispute |
| These estimates are periodically reviewed by management and modified in light of new information or developments, if any |
| Because estimates regarding disputed costs include assessments of uncertain outcomes, such estimates are inherently vulnerable to changes due to unforeseen circumstances that could materially and adversely affect our results of operations and cash flows |
| We depend upon our key employees and may be unable to attract or retain sufficient numbers of qualified personnel |
| Our future performance depends to a significant degree upon the continued contributions of our executive management team and other key employees |
| To the extent we are able to expand our operations and deploy additional network access points, we may need to increase our workforce |
| Accordingly, our future success depends on our ability to attract, hire, train and retain highly skilled management, technical, sales, marketing and customer support personnel |
| Competition for qualified employees is intense, and we compete for qualified employees with companies that may have greater financial resources than we have |
| Our employment agreements with our executive officers provide that either party may terminate their employment at any time |
| Consequently, we may not be successful in attracting, hiring, training and retaining the people we need, which would seriously impede our ability to implement our business strategy |
| If we fail to adequately protect our intellectual property, we may lose rights to some of our most valuable assets |
| We rely on a combination of copyright, patent, trademark, trade secret and other intellectual property law, nondisclosure agreements and other protective measures to protect our proprietary rights |
| We also utilize unpatented proprietary know-how and trade secrets and employ various methods to protect such intellectual property |
| Taken as a whole, we believe our intellectual property rights are 11 _________________________________________________________________ significant and that the loss of all or a substantial portion of such rights could have a material adverse effect on our results of operations |
| We cannot assure you that our intellectual property protection measures will be sufficient to prevent misappropriation of our technology |
| In addition, the laws of many foreign countries do not protect our intellectual properties to the same extent as the laws of the United States |
| From time to time, third parties have or may assert infringement claims against us or against our customers in connection with their use of our products or services |
| In addition, we may desire or be required to renew or to obtain licenses from others in order to further develop and market commercially viable products or services effectively |
| We cannot assure you that any necessary licenses will be available on reasonable terms |
| We may face litigation and liability due to claims of infringement of third-party intellectual property rights |
| The Internet services industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement |
| From time to time, third parties may assert patent, copyright, trademark, trade secret and other intellectual property rights to technologies that are important to our business |
| Any claims that our products or services infringe or may infringe proprietary rights of third-parties, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel or require us to enter into royalty or licensing agreements, any of which could significantly harm our operating results |
| In addition, our customer agreements generally provide for us to indemnify our customers for expense or liabilities resulting from claimed infringement of patents or copyrights of third parties, subject to certain limitations |
| If an infringement claim against us were to be successful, and we were not able to obtain a license to the relevant or a substitute technology on acceptable terms or redesign our products or services to avoid infringement, our ability to compete successfully in our competitive market would be materially impaired |
| Risks Related to Our Industry The future evolution of the high performance Internet connectivity market, and therefore the role of our products and services, cannot be predicted with certainty |
| We face the risk that the market for high performance Internet connectivity services might develop more slowly or differently than currently projected, or that our services may not achieve continued and/or widespread market acceptance |
| Furthermore, we may be unable to market and sell our services successfully and cost-effectively to a sufficiently large number of customers |
| We typically charge a premium for our services, which may affect market acceptance of our services or adversely impact the rate of market acceptance |
| We believe the danger of non-acceptance is particularly acute during economic slowdowns and when there is significant pricing pressure on Internet service providers |
| Finally, if the Internet becomes subject to a form of central management, or if Internet network service providers establish an economic settlement arrangement regarding the exchange of traffic between Internet networks, the demand for our Internet connectivity services could be adversely affected |
| If we are unable to respond effectively and on a timely basis to rapid technological change, we may lose or fail to establish a competitive advantage in our market |
| The Internet connectivity and IP services industry is characterized by rapidly changing technology, industry standards and customer needs, as well as by frequent new product and service introductions |
| New technologies and industry standards have the potential to replace or provide lower cost alternatives to our services |
| The adoption of such new technologies or industry standards could render our existing services obsolete and unmarketable |
| Our failure to anticipate the prevailing standard, to adapt our technology to any changes in the prevailing standard or the failure of a common standard to emerge could hurt our business |
| Our pursuit of necessary technological advances may require substantial time and expense, and we may be unable to successfully adapt our network and services to alternative access devices and technologies |
| Our network and software are vulnerable to security breaches and similar threats that could result in our liability for damages and harm our reputation |
| There have recently been a number of widespread and disabling attacks on public and private networks |
| The number and severity of these attacks may increase in the future as network assailants take advantage of outdated software, security breaches or incompatibility between or among networks |
| Computer viruses, intrusions and similar disruptive problems could result in our liability for damages under agreements with our customers, and our reputation could suffer, thereby deterring potential customers from working with us |
| Security problems or other attacks caused by third parties could lead to interruptions and delays or to the cessation of service to our customers |
| Furthermore, inappropriate use of the network by third-parties could also jeopardize the security of confidential information stored in our computer systems and in those of our customers and could expose us to liability under Internet “spam” regulations |
| In the past, third parties have occasionally circumvented some of these industry-standard measures |
| Therefore, we cannot assure you that the measures we implement will not be circumvented |
| Our efforts to eliminate computer viruses and alleviate other security problems may result in increased costs, interruptions, delays or cessation of service to our customers, which could hurt our business, results of operations and financial condition |
| Terrorist activity throughout the world and military action to counter terrorism could adversely impact our business |
| The continued threat of terrorist activity and other acts of war or hostility may have an adverse effect on business, financial and 12 _________________________________________________________________ general economic conditions internationally |
| Effects from any future terrorist activity, including cyber terrorism, may, in turn, increase our costs due to the need to provide enhanced security, which would adversely affect our business and results of operations |
| These circumstances may also damage or destroy the Internet infrastructure and may adversely affect our ability to attract and retain customers, our ability to raise capital and the operation and maintenance of our network access points |
| If governments modify or increase regulation of the Internet, the provision of our services could become more costly |
| International bodies and federal, state and local governments have adopted a number of laws and regulations that affect the Internet and are likely to continue to seek to implement additional laws and regulations |
| For example, a federal law regulating unsolicited commercial e-mail, or “spam,” was enacted in 2003 |
| In addition, federal and state agencies are actively considering regulation of various aspects of the Internet, including taxation of transactions, and imposing access fees for VoIP The Federal Communications Commission and state agencies are also reviewing the regulatory requirements, if any, that should be applicable to VoIP If we seek to offer voice over IP services, we could be required to obtain certain authorizations from regulatory agencies |
| We may not be able to obtain such authorizations in a timely manner, or at all, and conditions could be imposed upon such authorization that may not be favorable to us |
| The adoption of any future laws or regulations might decrease the growth of the Internet, decrease demand for our services, impose taxes or other costly technical requirements, regulate the Internet in some respects as has been done with traditional telecommunications services, or otherwise increase the cost of doing business on the Internet or in some other manner |
| Any of these actions could have a significantly harmful effect on our customers or us |
| Moreover, the nature of any new laws and regulations and the interpretation of applicability to the Internet of existing laws governing intellectual property ownership and infringement, copyright, trademark, trade secret, obscenity, libel, employment, personal privacy and other issues is uncertain and developing |
| We cannot predict the impact, if any, that future regulation or regulatory changes may have on our business |
| Congress has extended the Internet Tax Freedom Act, which placed a moratorium against certain state and local taxation of Internet access, until November 1, 2007 |
| Pursuant to this moratorium, most of our services are not subject to state and local taxation |
| Should the US Congress not further extend or pass a similar moratorium limiting the taxation of Internet access or related services, state and local governments may impose taxes on some or all of the services we currently provide after November 1, 2007 |
| We may not be able to pass these taxes along to our customers |
| This additional expense may have a negative impact on our business and the industry generally |
| Risks Related to Our Capital Stock Our common stockholders may experience significant dilution, which would depress the market price of our common stock |
| As of December 31, 2005, (1) options to purchase an aggregate of 35dtta6 million shares of our common stock at a weighted average exercise price of dlra1dtta35 were outstanding, and (2) warrants to purchase 15dtta0 million shares of our common stock at an exercise price of dlra0dtta95 per share were outstanding |
| The issuance of our common stock upon the exercise of options and warrants could depress the market price of the common stock by increasing the number of shares of common stock outstanding on an absolute basis or as a result of the timing of additional shares of common stock becoming available on the market |
| Our stock price may be volatile |
| The market for our equity securities has been extremely volatile |
| Our stock price could suffer in the future as a result of any failure to meet the expectations of public market analysts and investors about our results of operations from quarter to quarter |
| The following factors could cause the price of our common stock in the public market to fluctuate significantly: · actual or anticipated variations in our quarterly and annual results of operations; · changes in market valuations of companies in the Internet connectivity and services industry; · changes in expectations of future financial performance or changes in estimates of securities analysts; · fluctuations in stock market prices and volumes; · future issuances of common stock or other securities; · the addition or departure of key personnel; and · announcements by us or our competitors of acquisitions, investments or strategic alliances |