| METRO ONE TELECOMMUNICATIONS INC other factors include those discussed under Item 1A Risk Factors |
| Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof |
| We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events |
| BUSINESS We are a provider of Enhanced Directory Assistance® and other information services through operators and electronically |
| We contract primarily with wireless carriers, Voice over Internet Protocol (“VoIP”) providers, cable companies, Competitive Local Exchange Carriers (“CLEC”) and prepaid carriers to provide our services to their subscribers |
| Our proprietary Enhanced Directory Assistance platform provides comprehensive directory assistance listings and other informational content and services |
| Other non-directory assistance services and content include access to personal contacts and calendars, reservation services, movie listings and a variety of other unique services |
| Our special return-to-operator features, StarBack® and AutoBack®, make the telephone easier to use and are offered exclusively by Metro One |
| All of our services are currently provided by operators located only in the United States or electronically |
| Many of our features or aspects thereof are the subject of patents or pending patent applications |
| Revenues are derived principally through fees charged to telecommunications carriers and other customers |
| In addition to voice-based services, we also provide Enhanced Directory Assistance services in electronic format |
| These services are provided to customers who electronically issue directory assistance queries and use the returned information to complete and correct their own data records |
| We currently provide electronic directory assistance services in a number of delivery formats to meet customer needs including automated file processing and real-time individual look ups |
| We contract with a broad range of companies that require electronic directory assistance including companies in the service, marketing, and financial sectors |
| Our Data Services business represents an emerging business based on infrastructure originally developed to support our voice-based call center business |
| We have been in business since 1989, when we began developing and testing provision of information services over the telephone |
| In 1991, we entered into our first contract with a wireless carrier to provide our services to that carrier’s subscribers on a charge-per-call basis |
| Our customers include several wireless and other telecommunications carriers such as XO Communications, SunCom and Cablevision |
| We have expanded our customer base to include enterprise data services, specialized operator services, such as with Motorola’s VIAMOTO application, and information services to corporations with offices in the United States and Canada |
| We have also expanded into the landline telecommunications market and provide our services to regional CLECs |
| Competition in the telecommunications industry, and in the directory assistance market in which we participate, has been intense |
| Carriers are looking to lower their costs of providing directory assistance and other services through, among other ways, outsourcing to low cost domestic or overseas operators and utilizing automation to reduce costs |
| In response to these and other issues, in May 2003, we launched Infone, a service that provided enhanced directory and personal assistant services directly to consumers |
| The initial launch of Infone was accompanied by a significant nationwide marketing and promotion campaign |
| Revenues from Infone were not significant in relation to total revenues since its inception |
| Because of our inability to attract a significant number of subscribers to this service, it was discontinued in December 2005 |
| 3 ______________________________________________________________________ In the recent past, several of our largest customers have transferred their calls away from us for a variety of reasons, primarily in order to obtain lower prices and/or as a result of consolidation in the wireless industry |
| As a result of the loss of these customers and the associated revenues and operating losses, since the second quarter of 2005 we have taken significant actions to restructure our operations to lower our cost structure |
| In addition, we have refocused our efforts on the wholesale directory assistance and data services markets to pursue additional revenue sources in the voice-based and electronic delivery-based directory assistance and information services markets |
| Telecommunications Industry The US telecommunications industry has generally been characterized by strong growth and increased competition due to new technologies, a more favorable regulatory environment and, for carriers, an increasingly sophisticated and demanding subscriber |
| Telecommunications carriers face increasing competitive pressures to differentiate their products and establish brand loyalty |
| Costs to acquire new subscribers can be significant, therefore carriers are emphasizing pricing and plan elements to attract and retain customers |
| In addition, carriers are increasingly offering local, long distance, wireless, cable and Internet services bundled into one package in order to appeal to a wider market |
| Competitive pressures are particularly acute for wireless and newer landline carriers, such as CLECs |
| The industry has also experienced a considerable amount of consolidation and investment in new technologies as well as increasing competitive pressure from alternative providers, including cable companies, VoIP providers, Mobile Virtual Network Operators (“MVNO”) and others |
| Wireless Telecommunications |
| The US wireless telecommunications market has experienced dramatic growth over the last decade |
| This growth has been due largely to technological advances that give callers affordable, high-quality mobile services |
| According to industry analysts, the number of wireless subscribers in the United States will reach more than 200 million by the end of 2006 |
| A relatively small number of carriers dominate the wireless telecommunications market |
| In terms of estimated number of subscribers, the largest US wireless carriers include Cingular Wireless, Verizon Wireless, Sprint Nextel and T-Mobile |
| Competition in the industry has been intense with several carriers typically competing for wireless subscribers in most major US markets |
| With slowing subscriber growth and downward pressure on average revenue per user (“ARPU”), carriers are seeking to differentiate themselves from their competitors |
| While pricing pressures are fierce, carriers also focus on value-added services and features as a means of differentiating themselves |
| As subscriber and ARPU growth slow, there has been significant recent consolidation in the industry as evidenced by the 2005 merger of Nextel Communications and Sprint PCS and the 2004 combination of Cingular Wireless and AT&T Wireless |
| Landline Telecommunications |
| The US landline telecommunications market is significantly larger than the US wireless market |
| Like the wireless market, the landline market is dominated by a relatively small number of major carriers |
| Carriers providing local service include the regional Bell operating companies, such as SBC Communications, independent telephone companies, such as ALLTEL Communications, and CLECs, such as Cox Communications or Integra Telecom |
| In addition, cable companies are offering packaged services including local and long distance telephone services |
| Local and long distance carriers competing in each other’s markets, as well as against newer and smaller independent carriers, have added to competition in the landline market |
| With deregulation, the entry of new landline competitors and the increasing affordability of wireless services, subscribers who were historically bound to local carriers as a matter of geography are now increasingly able to choose their carriers |
| This includes the opportunity to select a CLEC These companies compete with incumbent local carriers to provide a variety of services, including local, long distance and Internet and other data services |
| As a result, the landline telecommunications market is rapidly becoming subscriber-based and carriers must find ways to differentiate their services to attract and retain subscribers |
| In addition, to maintain operational focus, CLECs often outsource non-core operations, including directory assistance services |
| While many incumbent carriers provide directory assistance services on an outsourced basis, the competitive local exchange carriers may prefer to outsource their directory assistance needs to independent companies rather than use the services of their competitors |
| Directory Assistance Market Call volumes generated by the wireless directory assistance market in the United States are estimated to grow significantly to over 3dtta6 billion calls by the end of 2006, according to some industry sources, among which individual estimates vary |
| Wireless subscribers tend to be heavy users of directory assistance services |
| Growth in the wireless directory assistance market is driven by factors such as growth in the wireless subscriber base, rising wireless penetration, increasing subscriber mobility and the offering of quality directory assistance services by wireless carriers |
| 4 ______________________________________________________________________ The landline directory assistance market today is larger than the wireless directory assistance market |
| According to industry sources, landline directory assistance is projected to reach four billion calls by the end of 2006 |
| Growth in the landline directory services market is driven by a number of factors, including the growing information needs of subscribers and the offering by landline carriers of call completion services |
| However, the Pelorus Group projects that by the end of 2006, wireless directory assistance revenues will have surpassed that of landline directory assistance, amounting to nearly 57prca of total directory assistance revenues |
| In addition, enhanced services are expected to account for nearly 37prca of all directory assistance calls by the end of 2006 |
| Unlike other aspects of telecommunications services, directory assistance has seen a period of rising retail prices in the last several years |
| For example, in June 2001 the range of retail prices charged for a directory assistance call among the major wireless carriers was dlra0dtta75 to dlra1dtta29, with a majority of large carriers at dlra0dtta99 per call |
| In January 2006, this same range was dlra1dtta25 to dlra1dtta50 |
| During this same timeframe, prices for many other telecommunications services have trended downward |
| Recent growth in calls made to providers of directory assistance offering their services without charge to consumers is anticipated to be a disruptor to telecommunications carrier-provided 411 services |
| The nature and extent of disruption of the directory assistance market because of these no-charge directory assistance services is, as yet, unclear |
| Such providers typically generate revenue via advertising to consumers while outsourcing the calls to third party directory assistance service providers such as Metro One |
| Customers Our principal business currently involves providing Enhanced Directory Assistance and information services primarily to wireless carriers, VoIP providers, cable companies, CLECs, prepaid carriers, and other providers, including those offering their services at no charge to end users, in all or a portion of their service areas |
| Our major carrier customers include XO Communications, SunCom and Cablevision |
| In addition, we provide our services to certain CLECs in the landline telecommunications market |
| Customers that accounted for more than 10prca of our revenues during the periods indicated are as follows: Years ended December 31, Customer 2005 2004 2003 AT&T Wireless Services — 28 % 44 % Nextel Communications 76 % 56 35 Sprint PCS — — 13 In October 2005, Nextel notified us that it would be terminating the Services Agreement between us, effective January 9, 2006 |
| We continued to handle Nextel calls through a negotiated transition period which was substantially completed by March 31, 2006 |
| Our contract with AT&T Wireless expired on December 1, 2003, and we were unable to reach an economic arrangement acceptable to both parties, thus, our negotiations did not result in a new contract to replace the then existing one |
| We agreed to continue to provide service to AT&T Wireless customers through a transition period beginning in March 2004 |
| The transition was substantially completed by July 31, 2004 |
| Our contract with Sprint PCS expired in December 2002 |
| We agreed to an arrangement with Sprint PCS, pursuant to which we continued to handle its subscribers’ calls through a transition period that began in March 2003 and was substantially completed by June 30, 2003 |
| We offer our services to a carrier’s subscribers under a brand name selected by the carrier |
| The carrier establishes its own fee structure with its subscribers |
| Subscribers typically pay the carrier’s fees ranging from dlra1dtta25 to dlra1dtta50 plus airtime charges for our services |
| We charge carriers directly and, at present, bear no subscriber collection risk |
| We charge our customers on a per call basis |
| Competitive pressures have caused our average revenue per call to decrease in the recent past |
| We currently provide our services to several carrier customers |
| The terms of these contracts are generally similar, with variations in the geographic market to be served, the services and features we are to provide the carriers’ subscribers and the term |
| 5 ______________________________________________________________________ We have expanded our customer base to include data services, specialized operator services, such as with Motorola’s VIAMOTO application, and directory assistance services to corporations with offices in the United States and Canada |
| Call Centers and Network We operate call centers located in the United States |
| Our call centers are located in or near major metropolitan areas |
| We believe that the US-based, local nature of our call centers and operators permits us to offer more accurate and valuable services than would be available through call centers located outside the United States |
| We typically operate our call centers 24 hours a day, seven days a week, 365 days a year |
| We have adjusted, and expect to further adjust, our call center personnel, the number of call centers we operate, and network capacities in order to address changes in volume demands caused by the termination of carrier contracts |
| During the year ended December 31, 2005, we reduced our headcount by approximately 800 employees and closed and consolidated the operations of 12 call centers |
| Subsequent to December 31, 2005, we have reduced our headcount further by approximately 1cmam350 employees and consolidated the operations of 13 more call centers into our remaining six call centers |
| Capacity needs can vary significantly as a result of changes in volume from existing customers or the addition of new customers, changes in usage within existing markets served, changes in our carrier customers and/or the number of calls they route to us or alternative strategies to attract additional calls |
| We continue to pursue additional significant business, and our call center system and network are readily scalable to accommodate such opportunities |
| Our systems, covering all of our call centers, are monitored and supported on a 24-hour per day basis from our network operations center located at our corporate headquarters |
| Our systems are redundant in order to avoid downtime from natural disasters or other adverse events |
| These arrangements allow us to meet or exceed strict service level standards |
| We believe quality and reliability are important considerations in a customer’s decision to use our services |
| To ensure high quality and consistency, we emphasize training, monitoring and customer support |
| We maintain a national training force with training personnel in each call center |
| Our operators undergo extensive training and testing on search techniques, etiquette and local information, including landmarks, major thoroughfares and geography |
| We continually monitor, test and evaluate call center performance |
| Call center personnel throughout the Company are incentivized based on measured quality performance |
| We also monitor our call centers for compliance with contract performance standards and report this information to the carriers on a regular basis |
| We have deployed VoIP capability to route voice traffic over a data network |
| VoIP not only provides excellent quality of service but substantially reduces transport cost from the traditional call routing over the Public Service Telephone Network |
| Dynamic call routing and VoIP technologies provide us with the ability to quickly route calls from call center to call center, both improving our cost structure and efficiency, and protecting our service levels |
| Our digital telecommunications network allows us the flexibility to serve customers who continue to use Multi Frequency Voice Circuits and those who have chosen to employ System Signaling 7 (“SS7”) in their operations |
| SS7 supports a vast range of services accessible from a variety of user terminals, including basic phones and more complex multimedia devices |
| Originally developed for Intelligent Networks simply to connect calls using out-of-band signals, SS7 is now driving major Advanced Intelligent Network network-based application services such as remote voicemail retrieval, calling-card services and 1-800 access |
| Our Services and Features We use a customized array of hardware and software, along with proprietary database search engines, to provide our Enhanced Directory Assistance |
| We receive incoming calls by means of assigned telephone numbers, which, in almost all cases are “411,” “555-1212,” “00” or 800 numbers |
| Our operators answer incoming calls and identify the service using the customer’s brand name |
| Upon receiving information requests from callers, operators search applicable databases using our proprietary search tools |
| The operator then connects the caller to the called party or supplies the caller with the requested information |
| We offer a variety of information services such as: • Directory listings information, which may be retrieved by methods that include reverse and category searches; • Movie, local event, and venue information; • TeleConcierge® services, including hotel and restaurant information and reservations; • Turn-by-turn driving instructions; and 6 ______________________________________________________________________ • Weather conditions and roadside assistance |
| Our Enhanced Directory Assistance services also incorporate connectivity features that make the telephone more useful and easier to use |
| These connectivity features include the following: • Call completion – allows a caller to be directly connected to the number requested without the need to redial; • StarBack® – allows the caller to return to a live operator simply by pressing a key, such as the star [*] key, or by otherwise issuing a command at any time during a call; • AutoBack® – automatically returns the caller to a live operator or provides other options upon a busy signal, “ring-no-answer” or other common situations without pressing a single key; • NumberBack® – sends the caller the called number simply by pressing the number [#] key; and • QuickSend® – a short messaging service allowing our operators to send customized alphanumeric messages on behalf of a caller |
| Database Systems and Content We believe the quality of our services is directly related to the scope, quantity and quality of the information content in our database systems |
| The majority of the information that we acquire, develop, and maintain is telephone listings data |
| To ensure high quality and accuracy, we obtain this data from multiple sources, including certain of the regional Bell operating companies, independent telephone companies and other commercial sources |
| This data is enhanced by our direct data collection efforts and a principal database of local information is developed for each call center or region |
| Our proprietary operator interface software allows operators to efficiently and simultaneously search and reverse-search multiple databases |
| Our search engine has been optimized for directory assistance services and large national databases, providing sub-second search times even in complex searches |
| We use proprietary database management systems to maintain and update our directory listings |
| We continually acquire additional content from a variety of sources or acquire access to content that will, in many cases, build on these listings data to make them more useful |
| Marketing and Sales We market to telecommunications carriers, businesses, governmental units, and other enterprises |
| The marketing process involves a considerable amount of time and attention by our senior management |
| Call center managers also play a key role in maintaining and developing wholesale customer relationships |
| We occasionally assist our carrier customers in the promotion of our services |
| We intend to continue to participate in marketing services in conjunction with carrier programs |
| We communicate on a regular basis with our existing carrier customers through our quality assurance and customer service programs |
| We have developed proprietary programs that allow us and our customers to monitor the quality of our performance and the volume and duration of directory assistance and information requests on a real-time basis |
| These programs also give us an opportunity to learn more about our carriers’ evolving needs |
| Management’s plans include aggressively pursuing new business opportunities in both the voice and data services sectors of our business in the near term |
| As part of our strategy, we expect to attract and hire additional sales personnel to pursue such opportunities |
| Technology Our ability to provide Enhanced Directory Assistance is dependent to a great extent on our proprietary technology |
| Our proprietary software applications enhance our call handling and delivery capabilities and provide the basis for our connectivity features |
| We have developed search engines to quickly access information from our databases |
| We continue to upgrade our operator interface software, database management systems and search engines to increase the efficiency and broaden the search capability of our operators |
| Our call processing systems incorporate programmable switching equipment, host computers, voice response units, and database servers |
| Our technology is powered by customized software |
| We are also monitoring technological advances in the methods of delivery of information and data and are working to ensure that our systems are compatible with, and we can take advantage of, such developments |
| 7 ______________________________________________________________________ Intellectual Property We rely on a combination of trademark, patent and trade secrets laws and confidentiality procedures to protect our intellectual property rights |
| We have 38 US patents issued and one foreign patent issued, including several relating to our StarBack technology, our information services platform and others associated with applications for call handling and delivery of information and other services |
| We have approximately 100 applications pending for additional US and foreign patents |
| We also have US and foreign registered trademarks for, among others, “Metro One,” “StarBack,” “AutoBack” and numerous other applications pending for US trademark registrations |
| Competition The directory assistance and information services markets are characterized by rapidly changing market forces, technological advancements and increasing competition from large carrier-affiliated companies and other independent companies |
| Our principal competitors include regional Bell operating companies and other independent providers |
| Telephone carriers, both landline and wireless, provide directory assistance both in and outside their own operating regions |
| Although we believe that none of these competitors offers a form of directory assistance that incorporates all features of our service products, they may have substantially greater financial, technical and marketing resources than we do and may be able to offer features similar to ours |
| We also face competition from independent companies seeking to offer forms of directory assistance and other information services |
| Included among these are firms that offer full or partial automation (with little or no involvement by a live operator), firms offering low cost directory assistance provided by overseas operators and firms offering information, directories and/or search engines via Internet-enabled devices |
| We believe the principal competitive factors in the directory assistance market are price, quality, technological innovation, experience and responsiveness to customers |
| Historically, we have sought to distinguish ourselves from our competitors based on the quality of our services, the development of useful features, the breadth of the content provided and our extensive national network of call centers |
| In recent years, wireless carriers appear to have become more focused on reducing costs, even if such reduction results in diminished services and quality |
| In addition, other sources of directory assistance, such as automation and those provided by offshore call centers and the Internet, provide low cost forms of competitive services |
| In response, we have reduced our call center network and other costs of service delivery in order to compete effectively |
| Government Regulation While in the past, our principal business as a wholesale supplier of enhanced directory assistance and information services for telecommunications common carriers has not been directly regulated, the offering of those services to the public by our customers is regulated by various federal and state regulatory authorities |
| The Federal Communications Commission (“FCC”) has jurisdiction over all US telecommunications common carriers to the extent they provide interstate or international communications services, including, in our case, the use of our local networks to originate or terminate such services |
| We maintain carrier certification with the various state utility commissions, including all fifty states and the District of Columbia |
| Many states require certification before a company can provide intrastate communications services |
| We are certified as an interexchange carrier in all jurisdictions where required, and as a local exchange carrier where required |
| Most states require us to file tariffs or price lists setting forth the terms, conditions and prices for services that are classified as intrastate |
| We have filed such tariffs or price lists where required |
| Certain of our services are subject to local, state and federal taxes and regulatory fees, including the Federal excise tax, FCC Universal Service and regulatory fees and numerous public utility commission regulatory fees |
| We have procedures in place to ensure that we properly collect taxes and fees from our customers and remit such taxes and fees to the appropriate entity pursuant to applicable laws and/or regulations |
| Other aspects of our services may be subject to state or federal regulation, such as regulations relating to the confidentiality of data and communications, copyright issues, and taxation of services |
| We cannot predict the actions that federal, state, and local regulators may take or what impact such actions would have on our business |
| Employees As of December 31, 2005, we had approximately 2cmam000 employees, approximately 18prca of whom were employed on a part-time basis |
| As of March 31, 2006, we had approximately 650 employees |
| Most of our employees are operators, and the number of full-time and part-time operators varies from time to time reflecting fluctuations in the volume of calls |
| None of 8 ______________________________________________________________________ our employees are subject to a collective bargaining agreement |
| We consider relations with our employees to be satisfactory |
| We invest significant resources in the recruitment, training and retention of qualified operators |
| Our organizational structure provides opportunities and encourages talented individuals to take on roles of increasing responsibility |
| We also invest considerable resources in personnel motivation, including providing incentive plans for our operators, management and corporate staff |
| com to access free-of-charge our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports, which we make available as soon as reasonably practicable after we electronically file such materials with or furnish such materials to the Securities and Exchange Commission |
| The information on our website should not be considered part of this filing |
| ITEM 1A RISK FACTORS The risks described below should be carefully considered |
| Additional issues 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 occur, our business, financial condition, results of operations or cash flows could be materially and adversely affected |
| We have a history of losses and negative cash flows on a quarterly and annual basis, and may experience greater losses from operations than we currently anticipate, which raises doubt about our ability to continue as a going concern |
| We have experienced net losses in each of the quarterly and annual periods since the first quarter of 2003 |
| In the year ended December 31, 2005, we incurred a loss of dlra39dtta8 million |
| At December 31, 2005, we had working capital of approximately dlra26dtta6 million |
| To achieve profitability, we will need to generate additional revenue and continue to decrease our expenditures |
| We can give no assurance that we will achieve sufficient revenue or reduce expenditures to be profitable on a quarterly or annual basis in the future |
| These factors, among others, raise doubt about our ability to continue as a going concern |
| Even if we do ultimately achieve profitability, we may not be able to sustain profitability on a quarterly or annual basis |
| We may need additional capital in the future, and it may not be available on acceptable terms, or at all |
| Our unrestricted cash balances at December 31, 2005 were approximately dlra17dtta8 million |
| These cash balances may not be sufficient to fund operating and other expenses for the next twelve months or until we reach profitability |
| We can give no assurance that our cost reduction initiatives will yield the results we anticipate or that we will generate sufficient cash flows from the sales of our services |
| As a result, we may need to secure additional financing to execute our business plan |
| We cannot be certain that additional financing will be available on terms favorable to us or at all |
| The terms of available financing may place limits on our financial and operating flexibility |
| If adequate financing is not available on acceptable terms, we may be forced to sell assets or further reduce expenditures, or both, and we may not be able to pursue all of our business objectives |
| An inability to secure additional funding could force us to liquidate our business or otherwise seriously harm our business, results of operations and financial condition |
| We have contracts with a limited number of carrier customers |
| If we fail to extend these contracts or sign new ones, or if these contracts are terminated prior to their expiration, our business could be adversely affected |
| A limited number of customers account for a large percentage of our continuing revenues |
| In 2005, Nextel Communications and ALLTEL Communications accounted for nearly 83prca of our revenues and both of these customers have transitioned their calls away from us as of the date of this filing |
| Some of our other contracts are non-exclusive, contain performance and other standards, and call volume may be transferred to alternative providers within the terms of the agreements |
| If we fail to extend or replace our contracts, or other contracts are terminated prior to their expiration, our business could be adversely affected |
| Although we seek to increase the number of our customers, opportunities are limited because a small number of companies dominate the telecommunications market |
| This limits the potential carrier customer base and our expansion opportunities through carrier relationships |
| 9 ______________________________________________________________________ We are restructuring our business to focus on providing directory assistance and information services on a wholesale basis |
| Even after giving effect to this restructuring, we may not have sufficient cash to execute on our current business plan |
| We have taken steps to restructure certain aspects of our business, including closing call centers, reducing our work force, discontinuing our Infone service, and renegotiating existing agreements with customers |
| However, restructuring (for example severing employees and terminating leases) takes resources and time to implement |
| There can be no assurance that we will be successful in renegotiating any agreements or otherwise implementing the restructuring |
| There can also be no assurance that following this restructuring we will have sufficient cash reserves to achieve profitability |
| Furthermore, our restructuring could have a material adverse impact on our ability to execute on our business plan |
| We need to expand call volume, increase our efficiencies and substantially lower the cost of delivery of our services in order to be successful |
| In order to successfully execute our business strategies, we need to increase the volume of calls we service |
| We intend to increase call volume by seeking additional customers, including landline carrier customers, as well as seeking additional business from our existing customers and by offering our services to other types of customers |
| We have limited experience in the landline market, which is dominated by the regional Bell operating companies |
| Because of increasing competitive pressures and declining per call pricing, we need to substantially reduce the cost of delivery of our directory assistance services in order to compete with automated services, offshore contractors, and other low-cost providers |
| If we are unable to expand our wireless business or attract significant landline business revenues on a cost effective basis or at all, or if we are unable to substantially reduce the cost of delivering our services, we may be unable to achieve and maintain profitability |
| We have a long sales cycle which may cause delays that adversely affect our revenue growth and operating results |
| A customer’s decision to contract for our directory assistance and information services involves a significant commitment of technical and other resources |
| As a result, we have a long sales cycle for both new contracts and contract extensions, particularly with large customers |
| The selling process involves demonstrating the value-added benefits of outsourcing directory assistance and using our services rather than those of our competitors |
| Additionally, the effectiveness of our marketing to other types of customers, including businesses, governmental units or callers attracted through other means or affiliations, is difficult to predict at any given point in time, given a wide variety of potential business circumstances |
| Any delays due to lengthy sales cycles could significantly affect our revenue growth and operating results |
| Our inability to achieve desired pricing levels could adversely affect our ability to return to profitability |
| We are subject to competitive pressures with respect to pricing that has affected our operations and profitability and could adversely affect our ability to return to profitability |
| Generally, our pricing levels have declined and, in the future, may continue to decline in response to competition in the industry |
| The prices that we charge our carrier customers are subject to the terms of our contracts |
| The changing telecommunications market, the relative leverage of the negotiating parties and the overall competitive landscape can significantly impact contract pricing negotiations |
| In addition, other sources of directory assistance, such as automation and those provided by offshore call centers and the Internet provide low cost forms of competitive services |
| We charge our carrier customers on a per call basis, with prices varying in some cases based on call volume |
| Our long-term strategy is based in part on reducing the price we charge our carrier customers |
| If we continue to reduce our prices without a corresponding increase in call volume, there could be an adverse impact on our ability to achieve and maintain profitability |
| We face substantial competition from a number of other companies |
| Many of our competitors in the directory assistance market, including the regional Bell operating companies, have far greater resources and better name recognition |
| The regional Bell operating companies also may have the advantage of being the local telephone carrier in their area of operation |
| Some of these companies are or may be developing their own versions of directory assistance services |
| We also face competition from a number of other independent directory assistance providers |
| Individual competitors may also seek to provide low cost domestic or offshore service or to provide automation of directory assistance services |
| If we are unable to compete successfully, it could have an adverse effect on our business, financial condition, results of operations or cash flows |
| Our ability to compete successfully depends, in part, on our ability to anticipate and appropriately respond to many factors, including pricing decisions by carriers, decisions by carriers to force consumers to accept lower-quality information services products, the introduction of new services and products by our competitors, changes in subscriber preferences, changes in economic conditions and discount pricing strategies by our competitors |
| The telecommunications market is subject to rapid change and uncertainty that may result in competitive situations which could unfavorably affect us |
| These changes and uncertainties are due to, among other factors, the following: • Mergers, acquisitions and alliances among carriers and among our competitors, which can result in fewer carriers in the marketplace, lost carrier customers, increased negotiating leverage for newly affiliated carriers and more effective competitors; • Changes in the regulatory environment, which may affect us directly, by affecting our ability to access and update listings data at a reasonable cost, or indirectly, by restricting our carrier customers’ ability to operate or provide a competitive service; • Increasing availability of alternative methods for delivery of directory assistance and other information services, including the Internet; • Evolving industry standards, including frequent technological changes and new product introductions; and • Changes in retail prices offered to consumers for our services or for services perceived to be substitutes for ours, in whole or in part |
| Our quarterly and annual operating results may vary significantly in part due to factors outside our control |
| In the future, as in the past, our quarterly and annual operating results may vary significantly as a result of a number of factors |
| We cannot control many of these factors, which include, among others: • Changes in the telecommunications market, including the addition or withdrawal of carriers from the market, changes in technology and increased competition from existing and new competitors; • The timing and expense of our call center network expansion or contraction, including changing staffing and infrastructure expenses related to anticipated call volume changes; • The addition or expiration of contracts with carrier customers; • Changes in our or our competitors’, customers’ or suppliers’ pricing policies; • Lengthy sales cycles for new and extended contracts; • The timing of the commencement of our services under new or existing contracts with our carrier customers, which depends in part on the customers’ ability to adapt their networks and billing systems to allow them to transfer calls to us; • Lack of market acceptance or delays or increased development costs related to the introduction of our services or features; and • General economic conditions |
| For these reasons, investors or other interested parties should not rely on period-to-period comparisons of our financial results as an indication of any future results |
| Our future operating results could fall below the expectations of securities industry analysts or investors |
| Any such shortfall could result in a decline in the market price of our common stock |
| Fluctuations in our operating results would likely increase the volatility of our common stock price |
| Our operating results are significantly affected by our ability to accurately estimate the amount and timing of call volume, which is often subject to factors outside of our control |
| Our operating results are significantly affected by costs incurred for expanding or contracting staffing and infrastructure |
| We incur significant staffing and general and administrative costs in contracting or expanding operations, as necessary, and in anticipation of additional or reduced call volume under our customer contracts |
| If such call volume does not depart or arrive as scheduled, in the amount anticipated, or at all, our operating results can be adversely affected |
| This could increase our operating expenses without a corresponding increase in revenues |
| Regulations affecting our customers and suppliers and future regulations to which we may be subject may adversely affect our business |
| While in the past, our principal business as a wholesale supplier of enhanced directory assistance and information services for telecommunications common carriers has not been directly regulated, the offering of those services to the public by our 11 ______________________________________________________________________ customers is regulated by various federal and state regulatory authorities |
| The Federal Communications Commission (“FCC”) has jurisdiction over all US telecommunications common carriers to the extent they provide interstate or international communications services, including, in our case, the use of our local networks to originate or terminate such services |
| The application of the FCC’s current and/or future policies could have a material adverse effect on our business, operating results and financial condition |
| Future acquisitions, joint ventures, or other efforts to pursue additional growth strategies may strain our operations |
| We intend to evaluate, and in the future may pursue, acquisition or business opportunities that are consistent with our business strategy |
| If we fail to adequately address financial and operational risks associated with such acquisitions or business opportunities, such activities may adversely affect our business |
| These risks can include, among other things: • Difficulties in assimilating the operations, technology, information systems and personnel of an acquired company, including the inability to maintain uniform standards, controls and policies, and the loss of key employees of the acquired company; • Diversion of management’s attention from other business concerns; • Impairment of relationships with licensors, customers and suppliers; • Difficulties in entering into markets in which we have no direct prior experience and potential marketing expenses related thereto; • Use of cash resources, potentially dilutive issuances of equity securities and incurrence of additional debt and contingent liabilities; and • Significant write-offs related to goodwill and amortization expenses related to other intangible assets |
| If we are unable to anticipate changes in technology and industry standards and to develop new services and features, we may not succeed |
| Our success depends, in part, on our ability to anticipate changes in technology and industry standards and to develop and introduce new services and features that are accepted by the marketplace and cost effective for us to provide as a part of our overall service offerings |
| The development of new services and features can be very expensive |
| Further, given rapid technological changes, frequent introduction of new products, services and features, and changing consumer demands that characterize our industry, it can be difficult to correctly anticipate future changes in technology and industry standards |
| If we fail to develop new services and features, encounter difficulties that delay the introduction of such services and features, or incorrectly anticipate future changes and develop services and features that are not accepted by the marketplace or are not cost effective for us to provide as a part of our overall service offerings, we may not succeed at our business |
| Alternative methods for delivery of directory assistance and information services could reduce the demand for our services |
| Our revenues continue to come primarily from providing Enhanced Directory Assistance and information services to telephone users |
| However, information can be transmitted in other ways, including more intelligent communications devices and other technologies and protocols, and over the Internet |
| For example, as the Internet continues to develop and 12 ______________________________________________________________________ becomes easier to use and access, technologies may be developed that decrease or eliminate the demand for telephone-based or voice-based directory or information services |
| Widespread acceptance of existing and developing technologies and protocols, such as voice recognition and wireless application protocol, could adversely affect our business |
| Our call volume could decline if telephone users change their usage habits and rely on the Internet or other alternatives as their primary source for information |
| Systems failures, delays and other problems could harm our reputation and business, cause us to lose customers and expose us to customer liability |
| Our success also depends on our ability to provide reliable services |
| Our operations could be interrupted by significant damage to or failure of our network, our connections to third parties, our computer hardware or software or our customers’ or suppliers’ computer hardware or software |
| Any such significant damage or failure could disrupt the operations of our network and the provision of our services and result in the loss of current and potential customers |
| In addition, if call volume increases, we may need to expand and/or upgrade our technology and network hardware and software in order to provide services |
| Capacity limits on our technology and network hardware and software may make it difficult for us to expand and upgrade our systems in a timely and economical manner |
| If we are unable to obtain or adequately update directory or information content at an economical cost, we may be unable to provide current levels of service or improve our service |
| Our operations depend on our access to the names, telephone numbers and other information that we supply directly to callers or we use in providing our services |
| The availability, cost, quality and usefulness of such data varies widely across geographic regions |
| If we are unable to obtain or update directory or information content at an economical cost, we may be unable to provide current levels of service, improve our Enhanced Directory Assistance service or provide new services and features |
| Ultimately, the satisfaction of callers and our carrier customers, and our ability to renew and extend our current customer contracts and enter into new customer contracts, depends on the quality of services we provide |
| The quality of our services is directly related to the quality of our listings data and other information content |
| As we rely on a limited number of suppliers, an abrupt loss of any key supplier could adversely affect our business operations or delay our development efforts |
| We rely on some key suppliers to provide us with programming and engineering services and to license us their technology |
| An abrupt loss of any current key supplier could cause a disruption in our operations or a delay in our development efforts and could adversely affect our business operations |
| If we are unable to continue to attract and retain qualified senior management, sales and technical personnel and call center operators, or our call center staff is unionized, our operations could be adversely affected |
| Our success depends to a significant extent on the efforts and abilities of our senior management, sales and technical personnel and call center operators |
| The loss of the services of our senior management and technical personnel could have a material adverse effect on our business and our ability to meet our strategic objectives |
| In addition, increasing our revenues is critical to our success |
| If we are unable to attract and retain qualified and productive sales personnel, we may not be able to increase our revenues which would have an adverse effect on our plans and our business |
| We also depend on the continued service of our call center operators, who we hire from the available labor pool |
| The ability to attract and retain qualified senior management, sales and technical personnel, operators and other skilled employees is extremely important to the operation of our business |
| If we are unable to attract and retain qualified individuals, or we are required to pay significantly higher wages and other benefits to such individuals, or if our call center staff is unionized, it could adversely affect our business operations |
| We find it more difficult to recruit and retain qualified individuals during periods of low unemployment and, therefore, may be subject to increasing pressure to offer higher wages and other benefits during such periods |
| In our call center hiring, we may also feel the effects of the telecommunications industry in general, which has widespread union membership among its operators and other workers |
| If we are unable to use and protect our intellectual property, we may be unable to provide some of our Enhanced Directory Assistance and information services or profitably operate our business |
| We regard aspects of our Enhanced Directory Assistance, and their features and processes, to be proprietary |
| If we are unable to use and protect our intellectual property, we may be unable to provide some of our Enhanced Directory Assistance and/or our personal assistant services or profitably operate our business |
| To a limited extent, we rely on a combination of trade secret, patent and other intellectual property law, nondisclosure agreements and other protective measures to protect our intellectual property |
| However, these measures may be difficult and costly to meaningfully enforce |
| In addition, attempts to enforce our intellectual property rights may bring into question the validity of these rights |
| Litigation with 13 ______________________________________________________________________ respect to patents or other intellectual property rights can result in substantial costs and diversion of management attention and other resources |
| Our common stock may be delisted from the Nasdaq Capital Market if we are unable to maintain compliance with Nasdaq Capital Market continued listing requirements |
| Our common stock listing was transferred from the Nasdaq National Market to the Nasdaq Capital Market (formerly the Nasdaq SmallCap Market) on February 22, 2006 |
| We elected to seek a transfer to the Nasdaq Capital Market because we had been unable to regain compliance with the dlra1dtta00 minimum bid price requirement for continued listing on the Nasdaq National Market |
| By transferring to the Nasdaq Capital Market, we were afforded an extended grace period and now have until July 17, 2006 in which to satisfy the dlra1dtta00 minimum bid price requirement |
| To regain compliance, the closing bid price of our common stock has to remain at dlra1dtta00 per share or more for a minimum of ten consecutive trading days |
| If we are unable to regain compliance by July 17, 2006, our common stock could be delisted from the Nasdaq Capital Market |
| Our board of directors is currently not comprised of a majority of independent directors as required by Marketplace Rule 4450(c)(1) and the audit committee of the board of directors is currently not comprised of three members as required by Marketplace Rule 4350(d)(2)(A) |
| On October 21, 2005, we received a Nasdaq Staff Deficiency Letter informing us that we no longer comply with Nasdaq’s independent director and audit committee requirements for continued listing |
| The letter stated that, consistent with Marketplace Rules 4350(c)(1) and 4350(d)(4), we had until the earlier of our next annual shareholders’ meeting or October 4, 2006, in order to regain compliance |
| The letter also stated that, in the event we do not regain compliance during this cure period, our common stock will be delisted |
| Our management and board of directors are considering the addition of independent directors but there can be no assurance these directors will be added prior to the end of the cure period |
| If our common stock were to be delisted from the Nasdaq Capital Market, we may seek quotation on a regional stock exchange, if available |
| Such listing could reduce the market liquidity for our common stock |
| If our common stock is not eligible for quotation on another market or exchange, trading of our common stock could be conducted in the over-the-counter market on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board |
| As a result, an investor would find it more difficult to dispose of, or obtain accurate quotations for the price of, our common stock |
| Our common stock price is volatile |
| The market price of our common stock has experienced volatility and is likely to continue to experience significant fluctuations in response to a number of factors |
| These factors include, among others, those that affect our quarterly and annual operating results and the following: • Announcements of extensions, expirations or changes in our contracts and the effects on our call centers and infrastructure of such activities; • Announcements relating to material events concerning our customers; • Actual or anticipated variations in our results of operations; • Changes in financial estimates by securities analysts; • Obsolescence of technologies that we or our customers use; • Introductions of new technologies, products or features; • New product initiatives and growth strategies; and • General market conditions |
| From January 1, 2005 through December 31, 2005, our common stock price fluctuated from a low of dlra0dtta36 per share to a high of dlra1dtta53 per share and has on several days fluctuated more than 10prca |
| These trading prices may change significantly and arbitrarily |
| In addition, broad market factors affecting telecommunications or technology stocks may adversely affect the market price of our common stock |
| General economic, political and market conditions, including interest rate changes and recession, may also adversely affect our stock price |
| 14 ______________________________________________________________________ Oregon law and provisions of our charter could make the acquisition of our Company more difficult |
| We are authorized to issue up to 10cmam000cmam000 shares of preferred stock, and our Board of Directors has the authority to fix the preferences, limitations and relative rights of those shares without any vote or action by the shareholders |
| The potential issuance of preferred stock may delay or prevent a change in control of our Company, may discourage bids for the common stock at a premium over the market price and may adversely affect the market price of, and the voting and other rights of the holders of, our common stock |
| In addition, provisions under Oregon law limit the ability of parties who acquire a significant amount of voting stock to exercise control over our Company |
| These provisions may have the effect of lengthening the time required for a person to acquire control of our Company through a proxy contest or the election of a majority of the Board of Directors and may deter efforts to obtain control of our Company |