10K released today:
OBTV Orbittravel Com Corp (OTHER OTC) 6/21/2004 6:41:41 PM ET
Realtime Quote $0.02 + $0.00 (+10.00%) Refresh Quote
Latest Headline for Orbittravel Com Corp
10KSB: DIVOT GOLF CORP
6/21/2004 11:49:31 AM
(EDGAR Online via COMTEX) -- ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
*** You should read the following discussion and analysis in conjunction with the consolidated financial statements for 2002 and 2003 included in this Annual Report on Form 10-KSB.
Overview and Background.
On December 5, 2002, through Itrex International Corporation, the Company
executed agreements for the acquisition of all of the stock of Snap-It
Technologies, a California company ("Snap-It")
On December 5, 2002, through its affiliate (and subsequently, its wholly-owned subsidiary, Itrex International Corporation,) the Company executed agreements for the acquisition of Snap-It Technologies, a California company which developed, manufactured and distributed digital photograph kiosks. However, following the completion of its due diligence, based upon its determination that Snap-It Technologies had not developed its product distribution sufficiently to warrant the Company's acquisition and proposed investment, the Company elected to rescind the proposed acquisition.
On March 28, 2003, through its affiliate (and subsequently, its wholly-owned subsidiary, Itrex International Corporation), the Company executed a definitive acquisition agreement to acquire Malibu Beach Beverage Company, Inc. ("MBB Co."). MBB Co. had been in business since 1998 as a specialty beverage manufacturer of natural juice blends and teas. MBB Co. represented that it had product distribution in 30 states across North America.
On November 26, 2003, Malibu Beach Beverage Group, LLC ("MBB Group") purchased certain intellectual property rights from Amy L. Goldman, the duly appointed, qualified and acting Chapter 7 Trustee of the bankruptcy estate of MBB, Inc. in that certain Chapter 7 bankruptcy case pending in the United States Bankruptcy Court for the Central District of California, San Fernando Valley Division, In re: Malibu Beach Beverage Co., Inc., Debtor, Case No.: SV 01- 17743-AG, including the right to use the trade name of "Malibu Beach Beverage Company," among other assets (the "Rights"), for a purchase price of $20,000. MBB Group is a Delaware limited liability company in which Joseph R. Cellura, the Company's
Chairman, Chief Executive Officer and majority shareholder, owns a 25% interest.
On or about March 14th, 2004, Malibu Beach Beverage Group, LLC, a Delaware LLC ("MBBG") entered into a tripartite licensing agreement with the Company and Itrex (the "Tripartite Agreement"). Under the terms and conditions of the Tripartite Agreement, the Company agreed to loan MBBG the sum of $290,000 for working capital, and Itrex, the Company's wholly-owned subsidiary, agreed to accept from MBBG a total of 80 % of the royalties derived from the sale of alcoholic beverages and mixers (the "Products"). Pursuant to a separate promissory note, MBBG agreed to repay to Itrex the sum of $100,000, plus interest, in consideration for a $100,000 loan from Itrex to MBBG made on or about March 29th, 2004. Pursuant to the terms of the Tripartite Agreement, MBBG agreed to perform the research, development, administration, marketing, and distribution of the Products. The Company's Chairman and CEO, Joseph Cellura, holds a 25% membership interest in MBBG, entitling him to receive 25% of any and all MBBG distributions to its members (if any).
SMARTVoice was incorporated on December 18th, 2003 while on going negotiations where being conducted to acquire the rights to assets and intellectual property of another company. SMARTVoice formally became a wholly-owned subsidiary of the Company on May 25th, 2004. Prior to that date, it was an affiliate of the Company, and between December 16th 2003 and May 30th 2004, the Company caused certain of its convertible debenture holders to invest approximately $394,940 into SMARTVoice for use as working capital for both itself and those of the Company on or about May 25th, 2004, SMARTVoice Telecommunications Incorporated, a Georgia Corporation ("SMARTVoice Ga.") affiliated with SMARTVoice sold all of its right, title and interest in all intellectual property of the Voice over Internet Protocol ("VoIP") division of SMARTVoice Ga., including but not limited to any and all copyrights and applications therefore, patents and applications therefore, trademarks and applications therefore, licensing, technology, proprietary information, software, formulas, and any other claimed proprietary information, and any other tangible and intangible intellectual property of the VoIP division of SMARTVoice Georgia. On January 1, 2004 SMARTVoice executed Executive employment agreements with Charles P. Shuster, as Chairman and CEO of SMARTVoice and Frederick Alger as Chief Financial Officer of SMARTVoice. Additionally the SMARTVoice Board of Directors met on January 6, 2004 and authorized the offer of Executive employment agreement to Robert Barkley for the position of Senior Vice President of Business Development. The compensation has been deferred for all executive employment agreements of SMARTVoice. The Company has formed a compensation committee to review the terms of the Executive employment agreements. The Company intends to have SMARTVoice succeed to the business plan of SMARTVoice Ga. as set forth herein.
SMARTVoice will seek to develop and market telecommunication technology for IP telephony and applications. IP Telephony is the technology of using the Internet to transport voice conversations.
SMARTVoice intends to be an IP Telephony service provider with two product lines: (1) internet protocol telephone devices and communication services, and (2) hosted services which implement the functionality of a private branch exchange, or PBX, over data networks. Its first product line will include analog
telephone adaptors and communication software and services that work over broadband networks. SMARTVoice expects to sell internet protocol telephony software and services that will enable its customers to provision and use voice communication services with IP telephones and other end-point devices. SMARTVoice has established its website at " www.smartvoice-ip.com
The Company intends currently to focus its efforts and business strategy on seeking financing for its core business, internet-based technologies, as well as product development and the distribution of related consumer products throughout North America in 2004 and 2005.
M, D & A
FORWARD-LOOKING STATEMENTS
This Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, including our statements regarding factors that could impact our gross margins; our cost estimates under contracts accounted for using the percentage of completion method; efforts to raise additional financing; commitment of resources, and reduction in operating costs including the possible sale or cessation of certain business segments and the possible further reduction of personnel and suspension of salary increases and capital expenditures. You should not place undue reliance on these forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including our good faith assumptions being incorrect, our business expenses being greater than anticipated due to competitive factors or unanticipated development or sales costs; revenues not resulting in the manner anticipated due to a continued slow down in technology spending, particularly in the telecommunications market; our failure to generate investor interest or to sell certain of our assets or business segments. The forward-looking statements may also be impacted by the additional risks faced by us as described in this Report, including those set forth under the section entitled Factors that May Affect Future Results. All forward-looking statements included in this Report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements.
Since February 2000 the company had begun a new product development program in certain segments of the travel industry as a content provider in kids travel, entertainment travel, technology information and financial information products & services for the internet, broadband, third generation wireless and PDA applications. Through 2000, as a content provider and distribution vehicle, along with our Global Distribution System, management considered the company to be in a unique position to deliver its new products and services to market. As significant changes in the dot com market have evolved, beginning in late 2000 through the present, we have been negatively impacted and have had to reestablish our focus to capitalize and deploy our financial products, Brokerage Bar and X-change software, as our primary product focus. We will attempt to spin off Orbittravelkids.com as a separate public entity which will contain certain
joint content distribution partners. To date, we have been unsuccessful in our attempts to secure certain seized assets we will begin the process of a spin off or sale of Travelfile in the wholly owned subsidiary Orbittravel.com Inc.
Between January of 2001 and December of 2003, the company was unable to operate due to legal proceedings and the corresponding impact on the ability of the company to secure adequate financing to fund operations.
Risk Factors.
Investing in the Company's securities involves a high degree of risk. An investor should carefully consider the following factors and other information in this Annual Report on Form 10-KSB, including the Company's consolidated financial statements and related notes, before making a decision to invest in the Company's securities. Additional risks and uncertainties, including those generally affecting the market in which the Company operates or that the Company currently deems immaterial, may also impair the Company's current or future business. The Company has a history of losses and therefore cannot assure investors that it will be profitable.
The Company has not filed various reports required under the Securities Act of 1933 and the Securities Exchange Act of 1934, including, but not limited to, Forms 10-Q and 10KSB for the period 2002 to 2004. Although the Company intends to file such late reports in the near future, it cannot assure when such reports will be filed.
The Company has recently experienced operating and net losses. Currently the Company has a net operating loss carry forward. The Company lost approximately $6.240 million in 2002 and approximately $3.024 million in 2003. In the future, the Company may not be able to generate sufficient revenue from operations to pay all of its operating or other expenses. If the Company fails to generate sufficient cash from its operations to pay these expenses, its management will need to identify other sources of funds. The Company may not be able to borrow money or issue more shares of common stock to meet its cash needs. Even if the Company can complete such financing transactions, it may not be on terms favorable to the Company. If the Company cannot raise sufficient capital to fund operations, the Company may not be able to continue its business, and the value of its securities could decline or experience significant dilution, require a change in the capital structure of the Company, or even become worthless.
The Company's securities could experience wide fluctuations in trading price and volume, or its securities may not have a market that trades. Although the Company intends to list its securities for trading on NASDAQ's "Bulletin Board" exchange, there can be no assurance that it will meet the requirements of the Bulletin Board, or otherwise be able to trade on this exchange, which could adversely impact the liquidity of the Company's securities and its ability to raise capital.
The Company's charter documents contain anti-takeover provisions that could prevent or delay a change in control of the Company, or adversely affect the market price of its common stock.
The Company's by-laws and amended certificate of incorporation give the Company's Board of Directors the authority to issue up preferred stock and to determine the rights and preferences of the preferred stock without obtaining shareholder approval. The existence of this preferred stock could make it more difficult or discourage an attempt to obtain control of the Company by means of a tender offer, merger, proxy contest or otherwise. Furthermore, the preferred stock could be issued with other rights, including economic rights, senior to the Company's common stock, and, therefore, the issuance or conversion of the preferred stock could have an adverse effect upon the market price of the Company's common stock, change the capital structure of the Company, or even result in a change in control.
Some provisions of Delaware law could make it more difficult for a third party to acquire the Company or hinder a change in management, even if doing so would be beneficial to the Company's shareholders. In addition, the Company may in the future adopt other measures that may have the effect of delaying, deferring or preventing an unsolicited takeover, even if such a change in control was at a premium price or favored by a majority of unaffiliated shareholders. These measures may be adopted without any further vote or action by the Company's shareholders.
Future issuances and sales into the market of the Company's common stock will dilute its current stockholders and may depress the market price of the Company's common stock.
As of May 26, 2004, the Company had approximately 700,680,704 million shares of its common stock outstanding and 5 million of preferred.
All of the shares issued in exchange for the outstanding convertible notes are restricted but may be eligible for resale if the note holders comply with Rule 144 of the Securities Act. The Company believes that all or substantially all of the note holders of its convertible preferred stock and convertible debt securities have held such securities for in excess of one year. Therefore, upon issuance of the common stock, such note holders may be deemed to have complied with Rule 144(d) of the Securities Act, as their holding period for the common stock may tack with their holding period for the convertible securities, as permitted by Rule 144(d)(ii) of the Securities Act. Persons who have held such securities for more than two years will be eligible to resell their shares under Rule 144(k) of the Securities Act.
Since up to 35% of the Company's common stock is currently concentrated in the Company's executive officers and directors and an additional approximately 35% (collectively, approximately 70%) of the Company's voting common stock is held or controlled by parties in interest, these persons may be able to directly control the Company's future.
Because the Company's common stock is currently traded on the Over-the-Counter Pink Sheets, sales of its common stock may:
cause the market price of the common stock to decrease in value;
decrease the level of public interest in its common stock;
inhibit buying activity that might otherwise help support the market price of its common stock;
prevent possible upward price movements in its common stock; or
not trade in a public market.
The Company's employment contract with its executive officer could have the effect of precluding or otherwise delaying a change in control of the Company that could be beneficial to the Company's stockholders.
The employment contract with the Company's executive officer provides for the payment of significant severance payments in the event the executive officer is terminated.
For example, Mr. Cellura's employment agreement, which expires on June 24, 2010, would require the Company to pay him, upon termination, an aggregate severance amount of up to $2.15 million plus the remaining base salary amounts, and $3.5 million in convertible preferred promissory notes due to him under the employment agreement, if the Company terminates him without cause. Even if the Company were to be successful in terminating Mr. Cellura's employment with cause, the Company still would be required to pay him $900,000 in addition to the $3.5 million in convertible preferred promissory notes. This could have the effect of precluding or otherwise delaying a change of control of the Company that would otherwise be in the best interest of its stockholders. See Executive CompensationEmployment Contracts, infra.
Financing Activity.
During the period January 1, 2002 through May 31st, 2004, the Company issued, by itself, and through its affiliate (and subsequently wholly-owned subsidiaries) Itrex an aggregate of approximately $7,850,472 of unregistered convertible debentures to approximately 162 investors and service providers, convertible into the Company's common stock (the "Debentures"). Approximately $239,940.76 of the proceeds from the sale of the Debentures was used to fund the working capital of SMARTVoice, which subsequently became the Company's wholly-owned subsidiary.(See "Business of the Company", MD&A, and "Financial Information"). Approximately $753,330 of the proceeds from the sale of the Debentures was used to fund the working capital of the Company. (See Business of the Company", MD&A, and "Financial Information") Approximately $100,000 of the proceeds from the sale of the Debentures was used to secure a licensing related from Malibu Beach Beverage Group, LLC, an entity 25% beneficially owned by the Company's Chairman and Chief Executive Officer Joseph R.Cellura, and from whom Itrex subsequently obtained certain rights to receive revenue in the form of royalties (See Business of the Company", MD&A, and "Financial Information").
The Company intends to raise additional capital in the form of equity and debt to fund the acquisition and growth of its recent acquisitions, as described above, which could significantly change the capital structure and cause a change of control in the Company.
Results of Operations.
As described herein, the Company was inactive from an operational standpoint and therefore generated no revenue during the reporting period.
Comparison of 2002 to 2003.
Revenues.
The Company the company generated no revenue in 2002 and no revenue in 2003.
Operating Expenses. Operating expenses in 2002 and 2003 of $4.945 and $1.236 million respectively in general and administrative expenses. These expenses were incurred through issuances of debt for services provide to the company during the reporting period and general administrative expense.
Other Expenses. Other expenses in 2002 and 2003 consisted $1.294 and $1.788 million respectively. The primary other expense was related to interest payable on unsecured debt owed by the company.
Net Loss. The company and it's subsidiaries incurred a ($6.240) and ($3.024) million in losses in 2002 and 2003 respectively
Liquidity and Capital Resources.
Capitalization. The Company's charter authorizes the issuance of 2 billion shares of common stock and 10.0 million shares of preferred stock. As of May 31st, 2004, the Company had approximately 701 million shares of common stock outstanding and approximately 5 million in preferred stock.
Current and Future Liquidity Needs. The Company has not generated net cash from operations for any period since 1996. The Company has primarily financed its operations since 1996 through private sales of equity and debt securities. As of May 31, 2004, the Company has no principal source of cash or liquidity.
Plan of Operation
The company has developed wholly owned subsidiaries and plans to focus on business opportunities in separate and distinct markets. Itrex has secured licensing right to the brand of Malibu Beach Beverage which will develop and market mixers, alcoholic beverages and related items. Smartvoice has acquired assets and intellectual property to compete in the internet telephony market. While both opportunities are deemed to be substantial, the plan of operation was developed for Smartvoice first and is outlined as follows.
The Company currently has only one (1) operating business: SMARTVoice Telecommunications Inc. and its subsidiaries (collectively, the "Company" or "SMARTVoice Telecommunications", or "we") develop and market telecommunication technology for IP telephony and applications. We are an IP Telephony service provider company that has two product lines: i) internet protocol telephone devices; internet communication services; ii) and hosted services that implement the functionality of a private branch exchange, or PBX, over data networks.
Our first product line includes analog telephone adaptors and communication software and services that work over broadband networks. SMARTVoice Telecommunications sells internet protocol telephony software and services that enable customers to provision and use voice communication services with IP telephones and other end-point devices. The service is marketed under the brand name SMARTVoice. The Company develops and markets hosted iPBX solutions that allow service providers to offer to small and medium-sized businesses over broadband networks the features and functions that are commonly found in a typical business phone system. A hosted iPBX solution is a software application that implements the functionality of a business phone system over the same data connection that a business uses for connection to the internet. The phone system software runs on servers that are located at a central data center so that the only phone system equipment that is required at the customer site is our IP Telephony gateways. The phone system can also be accessed and controlled from any web browser on the internet.
The IP Telephony Industry Overview
The IP Telephony industry has grown dramatically from the early days of calls made through personal computers. According to a research study from Insight Research [IP PBX and IP Centrex: Growth of VoIP in the Enterprise) VoIP-based services will grow from $13.0 billion in 2002 to nearly $197.0 billion in 2007, representing a significant opportunity for VoIP providers such as SMARTVoice Telecommunications.
IP Telephony is an alternative technology that can replace services provided by the traditional telephone network. IP Telephony technology translates voice into data packets, transmits the packets over data networks and reconverts them into voice at the destination. Unlike traditional telephone networks, IP Telephony does not use dedicated circuits for each telephone call; instead, the same IP Telephony network can be shared by multiple users for voice, data and video simultaneously. This type of data network is more efficient than a dedicated circuit network because the data network is not restricted by the one-call, one-line limitation of a traditional telephone network. This improved efficiency creates cost savings that can be passed on to the consumer in the form of lower rates or retained by the IP Telephony provider.
We believe the growth of IP Telephony has been and continues to be driven primarily by: increasing consumer demand for lower cost phone service; improved quality and reliability of IP; Telephony calls fueled by technological advances, increased network development and greater bandwidth capacity; continuing domestic and international deregulation, opening new market opportunities for IP Telephony services; new product innovations that allow IP Telephony providers to offer services not currently offered by traditional phone service companies; and growing demand for long distance communication services driven by the increased mobility of the global workforce.
As a result of these developments, the Company believes consumers, enterprises and telecommunications providers will continue to embrace offerings from IP Telephony providers, such as those offered by us. Consumers, particularly in
emerging markets, are increasingly using IP Telephony-enabled services, such as calling cards and Internet Protocol (IP) telephones, to realize significant cost savings on long distance calls. Enterprises are significantly reducing telephony expenses by using IP Telephony to link users within offices and around the world. IP Telephony enables telecommunications providers to reduce their network costs and to deliver new products and services that cannot be supported by traditional networks. According to the World Trade Organization [Cite Study], 69 governments around the world have committed to telecommunications deregulation, opening new markets and fostering competition with incumbent telecommunications providers. To remain competitive in this environment, both incumbent and newly licensed telecommunications providers are seeking to lower costs, improve functionality and introduce new services.
IP Telephony technology enables cable operators to provide a comprehensive residential telephony solution, which we believe has several key benefits relative to traditional circuit-switched networks, including:
Comparable reliability, enhanced services and functionality;
Simpler and faster deployment;
Lower initial deployment costs; and
Lower cost structure providing an ability to offer competitive pricing to customers.
Cable operators seeking to offer IP telephony by developing an in-house service must integrate several additional components with their existing systems, which require substantial capital expense. Cable operators developing an in-house service must also engage in hiring, retraining and process reengineering to support telephony services. Full service IP Telephony companies, such as SMARTVoice Telecommunications, can provide cable operators the ability to outsource their IP telephony services, thereby reducing cable operators' costs, time to market and risks associated with developing and maintaining an in-house IP telephony service.
SMARTVoice Products and Services
We offer a variety of IP Telephony-based telecommunications products and services to consumers, enterprises and telecommunications providers around the world, primarily through local resellers. Our centrally managed platform supports a significant amount of consumer and corporate hardware products and services that we believe enhance quality, lower costs and improve ease of use and management. The devices and calling cards we offer allow users to access our IP Telephony platform to make low cost calls to anywhere in the world. The following are the key products and services offered by SMARTVoice:
Enterprise Solutions. We provide a suite of IP Telephony products and services targeting small and medium-sized enterprises. Our SMARTVoice service allows business customers to utilize their existing broadband connections to place free calls among their corporate offices and their primary business contacts, such as customers and suppliers. Our SMARTVoice service also allows enterprises to
access our IP Telephony platform to make low cost IP Telephony calls to anywhere in the world.
Public Call Centers and Internet Cafes. We offer public call centers and Internet cafes the ability to sell IP Telephony services. Public call centers and Internet cafes are popular in emerging markets where telecommunications infrastructure is limited and consumers rarely have freely available access to a telephone or the Internet. Our product and service offerings to public call centers and Internet cafes include devices to support end users and a billing software platform that allows call centers and Internet cafes to create their own rate tables, bill in their local currencies and print out customized bills with their company's information.
Broadband Telephony. We sell devices that can be plugged into a high speed connection anywhere in the world and allows users to be reached at the telephone number assigned to such devices. The devices also allow users to access our IP Telephony platform to make high speed connections to anywhere in the world.
The Company has designed an outsourced IP Telephony service offering that enables cable operators to provide IP Telephony-based residential telephone services. We believe our offering provides comparable quality, features and functionality to that provided by traditional phone companies. Our platform utilizes a fully managed network and does not need to carry voice traffic over the public Internet, which may suffer from data loss and transmission delays, which we believe allows us and our customers to provide voice quality equivalent to that provided by traditional phone companies.
We believe our service offers cable operators the ability to provide cable telephony services to their customers faster and with less expense than if they were to develop their own cable telephony service. Our service offerings allow cable operators to bundle telephony services with their video and data offerings. The cable operator can use its own brand, deliver a single bill and provide direct customer support to its customers. We support the back office platform, switching and transport of voice traffic, ongoing operations and secondary technical support to deliver a managed IP Telephony service.
We work with cable operators to deploy an integrated, tested and operational telephony service, including customized operations support systems, network interfaces, and carrier interconnects, telecommunications methods and procedures and real-time service assurance, including 24 x 7 network operations center support. Our service offering includes:
Planning and Deployment Services
We customize our service offering to capitalize on cable operators' existing systems and processes. We work with cable operators' engineers to design an optimal IP Telephony framework that interfaces with the public switched telephone network, or PSTN. We project traffic volume and capacity requirements on the cable operators' facilities, the PSTN and IP networks to develop a system that can handle peak demands across each segment. We also develop and document business processes and provide training and support to cable operators during
the cable telephony service launch and on an ongoing basis.
Switching and Service Assurance Platform
The switching and service assurance platform provides the infrastructure required to support IP Telephony cable telephony and consists of the following elements:
Call Management Server Platform.
Our call management server platform provides the features and functions typically delivered by a hardware-based switch, known as a CLASS 5 switch, but at what we believe to be a significantly lower cost. The software-based solution allows us to process a call and deliver it through the most efficient, cost effective and high quality route, provide CLASS 5 feature support (for example, caller ID, call waiting, distinctive ring and three-way calling), interface to the PSTN for termination and origination and provide network generated announcements.
Call Detail Server. The call detail server is a real-time event messaging, collection, correlation and distribution database. The database stores the information generated by the call management server platform and the real-time assurance platform described below. The record keeping server can be accessed by cable operator operations personnel through a Web-based or software interface to analyze call information, which can then be employed to improve network functions and prevent possible future network problems. The record keeping server also stores all the usage information required for customer support, billing, and back office and management functions.
Quality of Service Platform. The quality of service platform continually monitors the call management server platform and originates and terminates test calls across each cable, PSTN and IP entry and exit point to sample call quality and network availability. This information is collected and programmed by the cable operator personnel to generate real-time alarms if actual performance metrics exceed predetermined thresholds. The result is that cable operators can monitor call traffic and diagnose and resolve network problems in real-time, often before the telephone user notices any problem.
Telecommunications Administration
We order, provision and administer circuits for each phone line, and we establish agreements with both local and long distance telecommunications providers to terminate calls. We also acquire and manage a database of telephone numbers to assign to users in every geographic region of our customers.
CariAccess Test and Agreement
During the past six months, we successfully executed a pilot test of our telephony offering with CariAccess, an Internet Service Provider in Barbados which led to the signing of an agreement under which we will provide CariAccess with our IP Telephony services. We believe CariAccess passes, or could
potentially serve a total of approximately 60,000 homes and municipalities principally located in the Eastern Caribbean. The pilot test demonstrated the viability of our IP telephony service and platform in an actual market setting. Under the terms of the agreement, CariAccess will maintain ownership of the customer, and first level customer and technical support, while we will support the back office platform, switching and transport of voice traffic, ongoing operations and secondary technical support to deliver a fully managed IP Telephony service. We will track and monitor voice quality and network performance metrics from start to finish and will provide CariAccess with a view into telephone calls routed over its network.
CariAccess will purchase the IP Telephony Gateways from us and an on-going monthly maintenance fee for each IP telephony subscriber line ordered by it. Under the agreement, CariAccess participates in a revenue sharing program based on long distance minutes terminated.
Our Competitive Advantages
We believe we have several core competitive advantages that will allow us to maintain and expand our position as a provider of IP Telephony services.
Leadership and Experience in IP Telephony.
Our management team has over 50 years of collective experience in designing and operating carrier class networks. We believe we have gained experience in our test market trials where we believe we have a record of quickly deploying and successfully managing our IP Telephony services around the world, across a variety of networks and technologies.
Platform to Deliver Centrally Managed, High Quality and Low
Cost Voice Services. We provide our services through our centrally managed platform, which aggregates, provisions, rates, routes, monitors and bills phone calls in real-time. We believe our platform allows us to offer a comprehensive array of services meeting the varied needs of consumer, enterprise, cable and carrier customers. Through our platform, we track and manage calls to optimize voice quality. We believe our centrally managed platform allows us to increase the number of end users of our services, without significant additional capital expenses generally associated with network build-outs.
Our Strategy
Our strategy is to become the leading provider of IP Telephony products and services in the markets we serve. The following are key elements of our strategy:
Capitalize on the Growth of IP Telephony Services. We believe SMARTVoice is positioned to take advantage of the expected growth of the IP Telephony services and cable telephony markets. According to a research study from Insight Research, [IP PBX and IP Centrex: Growth of VoIP in the Enterprise], IP Telephony-based services will grow from $13 billion in 2002 to nearly $197
billion in 2007, which we believe represents a significant opportunity for us. In-Stat/MDR In-Stat and Micro Design Resources, a marketing analysis company) (Packet Telephony) projects that the number of cable telephony subscribers worldwide will grow from 8.6 million at the end of 2002 to over 22 million by 2006.
Target Small to Mid-sized Cable Operators in the U.S. and International Cable Operators. SMARTVoice targets small to mid-sized cable operators in the U.S. and operators of all sizes in Europe and Latin America, who we believe may be more likely to buy our services than to build their own IP telephony service. These cable operators may not have the significant technical and financial resources required to develop an internal IP telephony solution, such as the personnel to support network operations, engineering, support and project management. We believe our service and our expertise in IP Telephony reduces cable operators' costs, time to market and risks associated with developing and maintaining an in-house IP telephony service. Offer Flexible Deployment and Economic Alternatives.
SMARTVoice offers cable operators a choice of strategic deployment and economic alternatives for our cable telephony offering. Depending on the particular market and financial position of each operator, we tailor our offer to fit within the business objectives and the available resources of each cable telephony opportunity. We believe we can develop and integrate specific features and applications into our service, such as voice-mail, voice-activated dialing and Internet-based account management, which the operator can then offer to its subscribers to meet the operator's strategic objectives. For resource and capital constrained operators, we believe we offer an alternative that requires a lower amount of human resources and financial investment by the operator.
Focus SMARTVoice on High Margin Opportunities in Emerging Markets. SMARTVoice targets international markets undergoing telecommunications deregulation, which we believe will provide high margin opportunities. We intend to continue to enhance our global distribution chain by securing new resellers with strong local sales and marketing channels. Our plan is to develop and integrate new services into our existing managed platform.
Sales and Marketing
SMARTVoice Service
SMARTVoice sells and markets our services through three levels, each designed to focus on a specific market: (1) a direct channel; (2) a reseller channel; and (3) a third party wholesale channel.
Using our platform, we believe resellers can quickly and easily sell our products in their own countries. We enable our resellers to generate calling card accounts, create rate tables to support different markets, provide customized billing in multiple currencies and languages and offer customer support tools. SMARTVoice targets small to mid-sized cable operators in the U.S. and operators of all sizes in Europe and Latin America, who we believe may not have the significant technical and financial resources required to develop and
maintain an internal cable telephony service. Our offering can be deployed over all or part of a cable operator's two-way digital cable systems. Our sales process combines business case development with a proposed technical architectural design. The timing of this process is variable and driven principally by the cable operator's own strategic priorities. We offer cable operators a range of strategic deployment and economic alternatives. We expect our cable telephony agreements to have terms of approximately seven years. Our two basic deployment options are described below, although our agreements could include aspects of each of these options:
Hosted Service. In a hosted service arrangement, the operator outsources the planning, development and aspects of the ongoing operation of cable telephony. The cable operator collects revenue from its customers and pays us a fee on a per subscriber basis for providing our integrated services as well as ongoing maintenance and support fees. In addition, the cable operator reimburses us for our telecommunications costs plus a margin. These costs include the set up and ongoing management of local and long distance interconnection and termination, the costs of any dedicated circuits and the recurring cost of maintaining phone numbers and other support services, such as 911 and operator assisted calling. Our fees on a particular contract will depend on a number of variables, including the size of the cable operator's telephony footprint, its ability to sell cable telephony services to its customers, the complexity of the deployment and the amount of local versus long distance termination.
In a hosted service arrangement, the cable operator is responsible for sales and marketing, customer activation, customer support, billing and collection, plant engineering and service technicians and any regulatory costs associated with offering cable telephony. The cable operator is also responsible for the capital expense associated with the cost of new service installation, the cost of equipment deployed at the subscriber's premises and the upgrade to its existing cable modem termination server. We bear the capital and operating expenses for the planning, design, procurement, deployment and operation of the IP Telephony infrastructure. Our capital expenses include the hardware and software costs of integrating our services and systems with the operator's systems.
Franchise Service. In the franchise service arrangement, SMARTVoice initially acquires the exclusive rights to offer IP telephony services in the cable operator's territory, subject to the cable operator's right to buy back the IP telephony rights and subscribers at pre-negotiated periods and valuations. Under this arrangement, SMARTVoice manages the offering in the franchise area. In a franchise services arrangement, cable operators collect the revenues from IP telephony subscribers and pass them through to us. We pay the cable operators an up front franchise fee based on the number of two-way homes passed, a monthly royalty fee based on a percentage of revenues and the costs associated with the deployment of IP telephony. We may continue to offer services to the cable operator if the operator elects to exercise its buy-back option.
Our planned costs include direct operational expenses such as customer activation, customer service, billing and collection, plant engineering and service technicians and any other legal and regulatory expenses associated with
offering IP telephony. We also intend to bear the cost for the set up and ongoing management of local and long distance termination and any other telecommunications administration activities required to interconnect seamlessly with the public switched network.
Telecommunications Services Agreement with Signal Communications Inc.
On May 5, 2003, we entered into a binding agreement with Signal Communications for the provision of telecommunications services to SMARTVoice. The agreement contemplates that Signal, directly or through its subsidiaries, will provide us with local and inter-exchange network access, termination, origination and other related services, drawing on its resources as a local, long distance and international telecommunications provider. We believe that this agreement will enable us to improve the time-to-market, stability, scalability and security of our IP telephony services and will allow us to more quickly attract and add customers.
Signal will provide us with these services at its incremental cost for providing the services plus a fixed monthly charge. We believe the pricing we will receive from Signal will be more favorable than what we would be able to receive from third parties.
Although we intend to use Signal Communications as our primary provider for telecommunications services related to offering IP telephony, we have sole discretion to use other telecommunications services providers. We may choose to use other providers in cases where they offer more competitive rates, in situations where Signal Communications is not able to deliver the services we require or for other reasons as we deem strategically.
Our Infrastructure
Our Centrally Managed Platform
We intend to deploy a centrally managed platform consisting of reliable and flexible data management, monitoring, control and billing systems, which support all of our products and services. Key elements of this system include: customer provisioning, customer access, fraud control, network security, call routing, call monitoring, media processing and normalization, call reliability and detailed call records.
Our platform will monitor our process of digitizing and compressing voice into packets and transmitting these packets over data networks around the world. All call signaling is routed to a managed SoftSwitch, which is a software-based product that manages call admission, call control, call rating and event recording and routes calls to an appropriate endpoint. Unless the recipient is using internet telephony as an on-line device, the packets are sent to a gateway where they are reassembled and the call is transferred to the PSTN and directed to a regular telephone anywhere in the world. We have hubs in the U.S., and Hong Kong which terminate voice traffic within particular regions. Our billing and back office systems manage and enroll customers and bill calls as they originate and terminate on the system.
Network Operations Center
We will locate our Network Operations Center is located at our headquarters in Atlanta, Georgia. We use various tools to monitor and manage all elements of telephone calls in real-time. Additionally, our Network Operations Center provides technical support to troubleshoot equipment and network problems.
Customer and Technical Support
We provide customer service on various levels to different customers. We provide customer service and technical support directly to our resellers. The resellers provide their own support directly to their sub-resellers and end users. U.S. consumers who access our services directly through the web site receive customer service and technical support through multilingual telephone communication, web-based customer service as well as e- mail support. We utilize multiple call centers globally to provide better support to our worldwide customer base.
Key Suppliers
We believe Signal Communications will be a significant supplier of telecommunications services to our IP telephony business. For a more complete discussion of this agreement, see, supra, "Telecommunications Services Agreement with Signal Communications."
The services provided by our SMARTVoice business depend on a SoftSwitch product. We currently have one SoftSwitch vendor and one SoftSwitch in operation. We are currently testing SoftSwitch products from other vendors to determine whether they comply with our quality and service standards.
One vendor, other than our current vendor, has satisfied our testing standards. However, we have not agreed on terms of supply with that vendor.
We believe that we have adequate alternative arrangements to receive an alternative supply of SoftSwitches and service and support for our SoftSwitches if our existing supplier is unable to continue to supply or service or support SoftSwitches, including providing some of the service and support functions ourselves. However, we may not be able to obtain alternative service or supply on favorable terms, which may have a material adverse effect on our ability to provide cable telephony services.
Competition
SMARTVoice IP Telephony Services International Communication Services Internationally, the competitive marketplace varies from region to region. In markets where the telecommunications marketplace has been fully deregulated, the competition continues to increase. Even a newly deregulated market allows new entrants to establish a foothold and offer competitive services relatively easily. Our competitors include both government-owned and incumbent phone companies and emerging competitive carriers. As consumers and telecommunications providers have come to understand the benefits that may be realized from transmitting voice over the Internet, a substantial number of companies have
emerged to provide IP Telephony services. We believe the principal competitive factors in the market include: price, quality of service, distribution, customer service, reliability, network capacity, the availability of enhanced communications services and brand recognition.
Consumer Division
The long distance market in the United States is highly competitive. There are several much larger and numerous similar-sized and smaller competitors and we expect to face continuing competition based on price and service offerings from existing competitors. The principal competitive factors in the market include: price, quality of service, distribution, customer service, reliability, network capacity and the availability of enhanced communications services. Some of our competitors include, but are not limited to AT&T, MCI, Sprint, IDT and Regional Bell Operating Companies, all of whom offer services and products competitive with ours on the above factors, including offering their own pre-paid calling cards.
Some providers, such as 8x8, Vonage and DeltaThree Inc., offer similar phone services to ours. We and cable operators seeking to provide our telephony services directly to customers will face competition for subscribers for telephone services from incumbent local exchange carriers, such as Verizon, Qwest, SBC Communications and competitive local exchange carriers. We believe that competition for telephony services will be primarily on the basis of price, quality, customer service and the ability to offer a bundled service offering of voice, data and video. Some local exchange carriers, alone or together with partners such as satellite television providers, are or may become capable of providing bundled service offerings of voice, high speed internet and video similar to those which cable operators may provide.
Regulation
The use of the Internet and private IP networks to provide voice communications services is a relatively recent market development. Although the provision of such services is currently permitted by United States law and largely unregulated within the United States, several foreign governments have adopted laws and/or regulations that could restrict or prohibit the provision of voice communications services over the Internet or private IP networks. More aggressive regulation of the Internet in general, and Internet telephony providers and services specifically, may materially and adversely affect our business, financial condition, operating results and future prospects, particularly if increased numbers of governments impose regulations restricting the use and sale of IP telephony services in the United States.
In an April 10, 1998 Report to Congress, the Federal Communications Commission (FCC) declined to conclude that IP telephony services constitute telecommunications services and instead indicated that it would undertake a subsequent examination of the question whether certain forms of phone- to-phone Internet telephony are information services or telecommunications services. The
FCC indicated that, in the future, it would consider the extent to which phone-to-phone Internet telephony providers could be considered "telecommunications carriers" such that they could be subject to the regulations governing traditional telephone companies such as the imposition of access charges. The FCC stated that, although it did not have a sufficient record upon which to make a definitive ruling, the record suggested that, to the extent that certain forms of phone-to-phone IP telephony appear to possess the same characteristics as traditional telecommunications services and to the extent the providers of those services obtain the same circuit-switched access as obtained by interexchange carriers, the FCC may find it reasonable that they pay similar access charges. The FCC also recognized, however, that it would consider whether it should forbear from imposing any of the rules that would apply to phone-to-phone Internet telephony providers as "telecommunications carriers." To date, the FCC has not imposed regulatory surcharges or traditional common carrier regulation upon providers of Internet communications services.
Although the FCC treats providers of Internet telephony services no differently from providers of other information and enhanced services that are exempt from payment of interstate access charges, this decision may be reconsidered in the future. For instance, on April 19, 2001, in Docket No. CC 01-92, the FCC adopted a proposal to begin a fundamental examination of all forms of intercarrier compensation the payments among telecommunications carriers resulting from their interconnecting networks. The FCC could adopt an intercarrier compensation mechanism and other regulations that could result in an increase in the cost of the local transmission facilities necessary to complete our calls or a decrease in the costs of such facilities to traditional long distance telephone companies. An increase in our rates as a result of new FCC regulations could have a material adverse effect on our ability to compete with long distance carriers.
There are several proceedings pending before the FCC that may affect the regulatory status of Internet telephony. On October 18, 2002, AT&T filed a petition with the FCC seeking a declaratory ruling that would prevent incumbent local exchange carriers, or ILECs, from imposing traditional circuit-switched access charges on phone-to-phone IP services. On February 5, 2003, pulver.com filed a petition with the FCC seeking a declaratory ruling that its "Free World Dialup," which facilitates point-to-point broadband Internet protocol voice communications, is neither telecommunications nor a telecommunications service as these terms are defined in section 153 of the Telecommunications Act of 1996. More recently, Vonage filed a petition for declaratory ruling requesting that the FCC find an Order of the Minnesota Public Utilities Commission (MNPUC) requiring Vonage to comply with state laws governing providers of traditional telephone service to be preempted because Vonage's broadband Internet telephony service is an information service. These petitions and subsequent industry reactions may exert pressure on the FCC to render a decision regarding the regulation of phone-to-phone IP services. The FCC could determine, for instance, that certain types of Internet telephony should be regulated like basic interstate telecommunications services. Thus, Internet telephony would no longer be exempt from the access charge regime that permits local telephone companies to charge long distance carriers for the use of the local telephone networks to originate and terminate long-distance calls, generally on a per minute basis, which in turn could have a material adverse effect on the ability of SMARTVoice to become a viable company in the cable telephony market. The FCC could also
conclude that Internet telephony providers should contribute to the Universal Service Fund, which provides support to ensure universal access to telephone service. The imposition of interstate access charges or universal service contributions would substantially increase our costs of serving our customers in the U.S. The imposition of regulation and contribution requirements might also negatively affect the incentives for companies to continue to develop IP technologies to offer IP Telephony services. It is also possible that the FCC might adopt a regulatory framework that is unique to IP telephony providers or one where IP telephony providers are subject to reduced regulatory requirements. We cannot predict what regulations, if any the FCC will impose.
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, taxation of services, licensing, and 911 emergency access. For instance, in a Further Notice of Proposed Rulemaking released February 20, 2002, the FCC has undertaken an examination of whether emergency 911 requirements should be extended to packet-based networks and services. Although SMARTVoice's service does not currently offer 911 services, SMARTVoice is currently developing technologies that may be able to support emergency access and enhanced services. Similarly, changes in the legal and regulatory environment relating to the Internet connectivity market, including regulatory changes that affect telecommunications costs or that may increase the likelihood of competition from the regional Bell operating companies, or RBOCs, or other telecommunications companies, could increase our costs of providing service.
Moreover, state governments and their regulatory authorities may assert jurisdiction over the provision of intra-state IP communications services where they believe that their telecommunications regulations are broad enough to cover regulation of IP services. Various state regulatory authorities have initiated proceedings to examine the regulatory status of Internet telephony services. While a majority of state commissions have not imposed traditional telecommunications regulatory requirements on IP telephony at this time, some states have issued rulings that may be interpreted differently. For instance, a state court in Colorado has ruled that the use of the Internet to provide certain intrastate services does not exempt an entity from paying intrastate access charges. Prior to imposing any regulatory burdens on IP Telephony providers, however, the Colorado Public Utilities Commission has opened a docket to investigate whether it has jurisdiction to regulate IP Telephony services. The State Public Service Commission of New York (NYPSC) has ruled that another company's particular IP telephony services may be considered telecommunications services subject to access charges. The NYPSC has, however, declined to issue a broad regulatory policy related to IP Telephony services in general. On October 9, 2003, the NYPSC published a notice seeking comment regarding the regulatory classification of another provider's IP Telephony services offered over broadband connections.
On the other hand, following an investigative workshop held by the Florida Public Service Commission on IP Telephony, the Florida Legislature passed a bill that exempts IP Telephony from regulation, but some local exchange companies have attempted to interpret the new law as leaving open the issue of access charges. On October 16, 2003, a Federal court in Minnesota issued a permanent
injunction against the MNPUC preventing the MNPUC from imposing state regulations on another provider's IP Telephony services offered over broadband connections. We have received letters from California, Washington, Wisconsin and Florida directing us to register as a telecommunications provider. We have responded to these letters by asserting that we are an information service and not a telecommunications provider and, therefore, are not subject to regulation under their laws. There can be no assurance that the states will accept our position. If the states require us to register as a telecommunications provider, we may become subject to significant additional fees and charges.
Packet-Switched Voice over Cable. The regulatory status of cable IP Telephony could be affected by the FCC and court decisions in the proceedings discussed above. SMARTVoice's ability to provide cable telephony services to cable operators may also be influenced by federal and state regulations specific to Internet over cable (also known as cable modem services). The FCC has deemed cable modem services to be unregulated information services that do not contain a separate telecommunications component.
Additionally, the FCC has found that information services are interstate in nature thus falling out of the regulatory purview of the states. On October 6, 2003, the U.S. Court of Appeals for the Ninth Circuit issued its opinion in Brand X Internet Services v. FCC, reversing the FCC's prior ruling that cable modem services do not contain a separate telecommunications component and remanded the issue back to the FCC for further proceedings consistent with the court's decision. The court's decision was based on procedural grounds. While the FCC has indicated that it may appeal the ruling, there is no guarantee that the FCC would do so, or that it would win on the merits. Until the FCC acts on the Ninth Circuit ruling, the regulatory status of cable modem services remains unchanged. We cannot predict what future actions the FCC may take in response to the Ninth Circuit decision. Presently, the decision may add uncertainty to the regulatory treatment of cable facilities used to provide information services such as IP Telephony and as to whether states may attempt to impose any regulations on the telecommunications component of cable modem services.
The FCC is engaged in several other proceedings to examine the regulatory treatment of cable modem services and other broadband technologies such as DSL that may indirectly affect the market for our cable telephony's service. Although the FCC has maintained a pro-competitive regulatory policy for cable and broadband services, SMARTVoice cannot predict the impact that market forces and regulatory developments might have on its business and operations related to our cable telephony solution.
On the state and local levels, regulators may try to impose additional franchise fees and requirements on cable operators seeking to offer cable telephony within the state. While the federal laws limit the extent of state and local regulation over cable networks used to offer telecommunications services, states may nevertheless attempt regulation. The FCC is also examining the role, if any, of state and local governmental authorities in regulating cable modem and broadband services in general. Where state or local regulators impose additional
requirements on cable providers that offer voice or cable modem services, this may create disincentives to cable operators deploying these services and, in turn, materially decrease market demand for SMARTVoice's IP telephony solution.
As state governments, courts, and regulatory authorities continue to examine the regulatory status of Internet telephony services, they could render decisions or adopt regulations affecting providers of Internet telephony services or requiring such providers to pay intrastate access charges or to make contributions to universal service funding. Should the FCC determine to regulate IP services, states may, if not preempted by federal regulation, decide to follow the FCC's lead and impose additional obligations as well. We cannot predict the actions that federal, state, and local regulators may take or what impact such actions would have on our business.
International. The regulatory treatment of IP communications outside the United States varies significantly from country to country. SMARTVoice operates on a global scale. The regulations we are subject to in many jurisdictions change from time to time, they may be difficult to obtain or it may be difficult to obtain accurate legal translations where official legal translations are unavailable. Additionally, in our experience, the enforcement of these regulations does not always track the letter of the law. Accordingly, although we devote considerable resources to maintaining compliance with these regulations, we cannot be certain that we are in compliance with all of the relevant regulations at any given point in time.
While some countries prohibit IP telecommunications, others have determined that IP services offer a viable alternative to traditional telecommunications services. As the Internet telephony market has expanded, regulators have begun to reconsider whether to regulate Internet telephony services. Some countries currently impose little or no regulation on Internet telephony services. For instance, on January 5, 2001, in the European Union (EU), the European Commission (EC) released a decision concluding that IP Telephony, in general, continues to fall outside the definition of voice telephony, except where the services satisfy all of four specific conditions. To date, the EC has not ruled that any particular type of IP Telephony service (such as computer-to- computer or phone-to-phone) satisfies all of these exception conditions. As a result, the EC directed Member States to permit providers to offer IP Telephony under data transmission general authorizations and without requiring compliance with more burdensome individual licenses and regulations applicable to traditional voice telephony. While the EC monitors and supervises the Member States of the EU subject to the principle of supremacy of EU law, the primary responsibility for implementing the provisions of specific EU legislation lies with the regulatory authorities of the Member States.
Accordingly, although Member States are required to adhere to the EU laws, an individual country may decide that a particular IP Telephony service meets all of the conditions necessary to be regulated as traditional voice services. SMARTVoice cannot guarantee that Member States will refrain from imposing additional regulations on our specific IP Telephony services. Other countries, including those in which the governments prohibit or limit competition for
traditional voice telephony services, generally do not permit Internet telephony services or strictly limit the terms under which those services may be provided. Still other countries regulate Internet telephony services like traditional voice telephony services, requiring Internet telephony companies to make universal service contributions and pay other taxes.
While some countries subject IP telephony providers to reduced regulations, others have moved towards liberalization of the IP communications sector and have lifted bans on provision of IP telecommunications services. We cannot predict how a regulatory or policy change of a particular country might affect the provision of our services. We believe that while increased regulations and restrictions could materially threaten our ability to provide services, the lifting of regulations in a country generally will enable us to expand our services and presence in that country.
In cases where access to some of our services may be blocked by government-controlled telecommunications companies, we will try to negotiate agreements with those governments to provide our services. No assurances can be given, however, that we will be successful in such negotiations or that we will be able to provide alternative means of accessing our services that will not be blocked by foreign governments or government-controlled telecommunications companies. The varying and continually changing regulatory landscape of Internet telephony in the countries in which we currently provide or may provide services may adversely and materially affect our business, financial condition and results of operations. We believe that our experience negotiating this complicated and ever-changing regulatory environment gives us a competitive advantage over other, less experienced competitors attempting to access these international markets. In addition, as we expand into additional foreign countries, some countries may conclude that we are required to qualify to do business in their country, that we are otherwise subject to regulation, or that we are prohibited from conducting our business in such countries. Our failure to qualify as a foreign corporation in certain jurisdictions, or to comply with foreign laws and regulations, may materially and adversely affect our business.
Moreover, our resellers in various foreign countries may be or may become subject to various regulatory requirements. We cannot be certain that our partners are currently in compliance with every regulatory or other legal requirement in their respective countries that they will be able to comply with existing or future requirements. Failure of our resellers to comply with these requirements could materially and adversely affect our business, as we may not be able to find other resellers for our products and services in these areas.
Regulation of the Internet. In addition to regulations addressing Internet telephony, cable modem and broadband services, other regulatory issues relating to the Internet in general could affect our ability to provide our services. Congress has adopted legislation that regulates certain aspects of the Internet, including online content, user privacy, taxation, liability for third-party activities and jurisdiction. In addition, a number of initiatives pending in Congress and state legislatures would prohibit or restrict advertising or sale of certain products and services on the Internet, which may have the effect of raising the cost of doing business on the Internet generally. The European Union
has also enacted several directives relating to the Internet, one of which addresses online commerce. Recently, the European Union adopted a privacy directive that establishes certain requirements with respect to, among other things, the confidentiality, processing and retention of personally identifiable subscriber information and usage patterns. The potential effect, if any, of these data protection rules on the development of our business remains uncertain. Federal, state, local and foreign governmental organizations are considering other legislative and regulatory proposals that would regulate the Internet. We cannot predict whether new taxes will be imposed on our services both nationally and internationally, and depending on the type of taxes imposed, whether and how our services would be affected thereafter. Increased regulation of the Internet may decrease its growth and hinder technological development, which may negatively impact the cost of doing business via the Internet or otherwise materially adversely affect our business, financial condition and results of operations. We may not be able to obtain sufficient funds to grow our business. Due to the nature of our industry, our future capital needs are difficult to predict. Therefore, we may require additional capital to fund some or all of the following: deployment of our IP telephony service; unanticipated opportunities; strategic alliances; potential acquisitions; changing business conditions; and unanticipated competitive pressures.
We believe that, as the expected growth in our SMARTVoice subsidiary accelerates, or if we acquire the business or assets of another company, we may need to raise additional capital from equity or debt sources. There can be no assurance that we will be able to raise such capital on favorable terms or at all. If we are unable to obtain such additional capital, we may be required to reduce the scope of our anticipated expansion, which could have a material adverse effect on our business, financial condition, and results of operations. Pricing pressures and increasing use of IP Telephony technology may lessen our competitive pricing advantage.
Our success is based partly on our ability to provide discounted local and long distance telephone services by taking advantage of cost savings achieved by carrying voice traffic employing IP Telephony technology, as compared to carrying calls over traditional networks. In recent years, the price of telephone service has fallen. The price of telephone service may continue to fall for various reasons, including the adoption of IP Telephony technology by other communications carriers. Many carriers have adopted pricing plans such that the rates that they charge are not always substantially higher than the rates that we charge for similar service. In addition, other providers of long distance services are offering unlimited or nearly unlimited use of some of their services for an attractive monthly rate. The overall effect of these developments may be to reduce the price of local and long distance calls to a point where we no longer have a price advantage. We would then have to rely on factors other than price to differentiate our product and service offerings, which we may not be able to do. If we are not able to do so, our business, financial condition and results of operations may be materially and adversely affected.
We and our cable customers may not be able to compete with providers that can bundle telephony services with other offerings. Our competitors as well as the
competitors of our cable operator customers, such as local exchange carriers and satellite television providers, may be able to bundle services and products that we do not offer together with long distance or Internet telephony services. These services could include wireless communications, voice and data services, Internet access and cable television. This form of bundling would put us at a competitive disadvantage if these providers can combine a variety of service offerings at a single attractive price. In addition, some of the telecommunications and other companies that compete with us and our cable customers may be able to provide customers with lower communications costs or other incentives with their services, reducing the overall cost of their communications packages, and significantly increasing pricing pressures on our services, which could materially and adversely affect our business, financial condition and results of operations. While we are entering the cable telephony business, in part, to take advantage of possible bundled service offerings by our cable operator customers, we cannot assure you that we will compete successfully in this business.
Some local exchange carriers, alone or together with partners such as satellite television providers, are capable of providing a similar bundled service offering of voice, data and video. This service offering would directly compete with bundled services offerings by cable operators that purchase our cable services. If we or our cable operator customers are unable to successfully compete with these offerings, our business, financial condition and results of operations may be materially and adversely affected. Competition could reduce our market share and decrease our revenue. The market for telecommunications services is extremely competitive. Many companies offer products and services like ours, and many of these companies have a superior presence in the markets we serve. In addition, many of these companies are larger than we are and have substantially greater financial, distribution and marketing resources than we do. We may not be able to compete successfully with these companies. If we do not succeed in competing with these companies, we will lose customers and our revenue will be substantially reduced, and our business, financial condition and results of operations may be materially and adversely affected.
Our competitors include the following:
International Communications Services. Competitors include both government-owned phone companies as well as emerging competitive carriers.
Consumer Division. There are several large and numerous small competitors and we expect to face continuing competition based on price and service offerings from existing competitors. Competitors include AT&T, MCI, Sprint, and Regional Bell Operating Companies, all of whom offer their own service. Some providers, such as Go2Call and DeltaThree, Inc., offer similar PC-to-phone services.
Cable Telephony. Our ability to sell our IP telephony services may be further limited by the fact that cable operators may elect to develop and maintain their own IP telephony service instead of buying services from us. There are several companies who currently market IP telephony services directly to consumers and cable operators. These companies may be able to offer services similar to ours,
or features that we may be unable to provide, and they may offer services at prices lower than we intend to charge. Other companies aggregate a series of elements to deploy cable telephony systems that could be competitive to us.
We along with cable operators seeking to provide our telephony services directly to customers will face competition for subscribers for telephone service from incumbent local exchange carriers, such as Verizon, Qwest, SBC and competitive local exchange carriers for subscribers for telephone services. We expect that competition for telephone services will be primarily on the basis of price, quality, customer service and the ability to offer a bundled voice, video and data service offering. Some local exchange carriers, alone or together with partners such as satellite television providers, are or may become capable of providing bundled service offerings of voice, data and video similar to which cable operators who have upgraded their systems to two-way digital cable can provide. Our business may be affected by the proliferation and increased usage of cellular telephones.
A significant number of our customers use calling cards while traveling, both domestically and abroad. As more and more people obtain cellular telephones, and as cellular telephone users increase their usage, and begin to use their phones in broader geographic regions, including internationally, the need for these customers to purchase our calling cards may be reduced. We cannot predict how this development will impact our business, as our calling card rates and service could be attractive enough for cellular telephone users to continue to purchase our cards when traveling. If our calling card rates and service are not attractive enough to compete with cellular telephone usage, our business, financial condition and results of operations may be materially and adversely affected. We have and plan to increasingly depend on our international operations, which subject us to unpredictable regulatory, economic and political situations.
A significant component of our strategy is to continue to expand internationally. We cannot assure you that we will be successful in expanding into additional international markets. In addition to the uncertainty regarding our ability to generate revenue from foreign operations and expand our international presence, there are certain risks inherent in doing business on an international basis, including: changing regulatory requirements, which vary widely from country to country; action by foreign governments or foreign telecommunications companies to limit access to our services; increased bad debt and subscription fraud; legal uncertainty regarding liability, tariffs and other trade barriers; economic and political instability; and potentially adverse tax consequences.
If our customers do not perceive our services to be effective or of high quality, our brand and name recognition would suffer. We believe that establishing and maintaining brand and name recognition is critical for attracting and expanding our targeted client base. We also believe that the importance of reputation and name recognition will increase as competition in our market increases. Promotion and enhancement of our name will depend on the effectiveness of our marketing and advertising efforts and on our success in continuing to provide high quality and reliable products and services, neither of which can be assured. Our SMARTVoice business requires us to rely on third
party resellers to promote and market our products and services. These third parties may not provide the same level of effort as we do to protect the high quality reputation we believe our services and products maintain. If they do not, our reputation may be diminished in these markets which may have a material and adverse effect on our business, results of operations and financial condition.
Our IP telephony business will be providing services that have not yet gained widespread customer and market acceptance. If customers do not perceive cable telephony to be a reliable and high quality alternative to traditional phone service, our ability to earn revenues from our cable telephony business and our business, financial condition and results of operations may be materially and adversely affected. Any damage to or failure of our systems or operations could result in reductions in, or terminations of, our services. Our success depends on our ability to provide efficient and uninterrupted, high quality services. Our systems and operations are vulnerable to damage or interruption from natural disasters, power loss, telecommunication failures, physical or electronic break-ins, sabotage, computer viruses, and intentional acts of terrorism or vandalism and similar events that may be or may not be beyond our control.
Our systems and operations could also be interrupted by Internet service providers or government owned telecommunications companies that implement network changes or blocks, which may also be out of our control. The occurrence of any or all of these events could still hurt our reputation and cause us to lose customers, which may materially and adversely affect our business, financial condition and results of operations.
Substantially all of the IP telephony calls made by our customers are connected through local telephone companies and, at least in part, through leased networks that may become unavailable.
We are not a local telephone company or a local exchange carrier. Our network covers only portions of the United States. Accordingly, we must route parts of some domestic and all international calls made by our customers over leased transmission facilities. In addition, because our network does not extend to homes or businesses, we must generally route calls through a local telephone company to reach our network and, ultimately, to reach their final destinations.
In many of the foreign jurisdictions in which we conduct or plan to conduct business, the primary provider of significant in-country transmission facilities is the national telephone company, which may be the only provider in that country. Accordingly, we may have to lease transmission capacity at artificially high rates from such a monopolistic provider, and consequently, we may not be able to generate a profit on those calls.
In addition, national telephone companies may not be required by law to lease necessary transmission lines to us or, if applicable law requires national telephone companies to lease transmission facilities to us, we may encounter delays in negotiating leases and interconnection agreements and commencing operations. Additionally, disputes may result with respect to pricing, billing or other terms of these agreements, and these disputes could affect our ability to continue to operate in these countries, which may materially and adversely
affect our business, financial condition and results of operations.
Our ability to implement our IP telephony services will require the negotiation of interconnection agreements with established telephone companies and other new market entrants, which can take considerable time, effort and expense and which is subject to federal, state and local regulation. Interconnection agreements are agreements between local telecommunications services providers that set forth the terms and conditions governing how these providers will interconnect their networks and/or purchase or lease network facilities and services. We rely on the Internet and third-party communications infrastructure over which we have little control.
Our service could be disrupted, our reputation could be harmed and we could lose customers, if the quality and maintenance of the third-party communications infrastructure on which we rely suffers. This infrastructure, including the Internet and leased transmission facilities, is sometimes used to carry our voice traffic between our customers. We have no control over whether the infrastructure on which we rely will be adequately maintained by these third parties or whether these third parties are able to upgrade or improve their equipment and prevent it from becoming obsolete. If these third parties fail to maintain, upgrade or improve this equipment, our service quality may be harmed, we may lose customers and our business, financial condition and results of operations may be materially and adversely affected. We do not control the security of the Internet and our business could be materially harmed by unauthorized activity which results in congestion, failures or deficiencies in the infrastructure.
We depend on key vendors for hardware devices and SoftSwitches. We rely on one of our vendors, Signal Communications Ltd. to manufacture the hardware devices sold by our channel sales group. Signal Communications could stop providing us with these products with little or no prior notice. While we believe our relationship with Signal Communications is stable, we can provide no assurance that this relationship will continue to be good, or continue at all. While we believe we could replace Signal Communications if necessary, this could take a period of time during which our hardware sales could be materially and adversely affected, and this could impact our ability to service some of our customers for this period of time.
The services provided by our SMARTVoice business depend on a SoftSwitch product. We currently have one SoftSwitch vendor and one SoftSwitch in operation. We understand that our SoftSwitch vendor may be experiencing financial difficulties. We are currently testing SoftSwitch products from other vendors to determine whether they comply with our quality and service standards. One vendor, other than our current vendor, has satisfied our testing standards. However, we have not agreed on terms of supply with that vendor. If we are unable to obtain SoftSwitches our ability to deploy our IP telephony service may be significantly delayed.
Our success depends on our ability to handle a large number of simultaneous calls, which our systems may not be able to accommodate. We expect the volume of simultaneous calls to increase significantly as we expand our operations. Our network hardware and software may not be able to accommodate this additional
volume. If we fail to maintain an appropriate level of operating performance, or if our service is disrupted, our reputation could be hurt, we could lose customers and our business, financial condition and results of operations could be materially and adversely affected. Because we are unable to predict definitely the volume of usage and our capacity needs, we may be forced to enter into disadvantageous contracts that would reduce our operating margins.
We may have to enter into additional long-term agreements for leased communications transmission capacity. To the extent that we overestimate our call volume, we may be obligated to pay for more transmission capacity than we actually use, resulting in costs without corresponding revenue. Conversely, if we underestimate our capacity needs, we may be required to obtain additional transmission capacity through more expensive means or such capacity may not be available. As a result, our margins could be reduced and our business, financial condition and results of operations could be materially and adversely affected.
We may not be able to keep pace with rapid technological changes in the communications industry. Our industry is subject to rapid technological change. We cannot predict the effect of technological changes on our business. We expect that new services and technologies will emerge in the market in which we compete. These new services and technologies may be superior to the services and technologies that we use, or these new services may render our services and technologies obsolete.
To be successful, we must adapt to our rapidly changing market by continually improving and expanding the scope of services we offer and by developing new services and technologies to meet customer needs. Our success will depend, in part, on our ability to respond to technological advances and emerging industry standards on a cost effective and timely basis. If we are unable to do so, our business, financial condition and results of operations may be materially and adversely affected. Unauthorized use of our intellectual property by third parties may damage our brand.
We regard our patents, service marks, trademarks, trade secrets and other intellectual property as important to our success. We rely on trademark and copyright law, trade secret protection and confidentiality agreements with our employees, customers, partners and others to protect our intellectual property rights. Despite our precautions, it may be possible for third parties to obtain and use our intellectual property without authorization. Furthermore, the laws of some foreign countries may not protect intellectual property rights to the same extent as do the laws of the United States.
It may be difficult for us to enforce certain of our intellectual property rights against third parties who may have acquired intellectual property rights by filing unauthorized applications in foreign countries to register the trademarks that we use because of their familiarity with our worldwide operations. Since Internet related industries such as ours are exposed to the intellectual property laws of numerous foreign countries and trademark rights are territorial, there is uncertainty in the enforceability and scope of protection of our trademarks.
The unauthorized use of our intellectual property by third parties may damage our brand and may have a material adverse effect on our business, financial condition and results of operations. Defending against intellectual property infringement claims could be expensive and could disrupt our business.
We cannot be certain that our products and services do not or will not infringe upon valid patents, trademarks, copyrights or other intellectual property rights held or claimed by third parties. We may also be subject to other legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. We may incur substantial expenses in defending against those third-party infringement claims, regardless of their merit. Successful infringement claims against us may result in substantial monetary liability or may materially disrupt the conduct of our business.
Our risk management practices may not be sufficient to protect us from unauthorized transactions or thefts of services. As have many others in our industry whose customers use credit cards to purchase services, we have been the victim of consumer fraud and theft of service. From time to time, callers have obtained our services without rendering payment by unlawfully using our access numbers and personal identification numbers. We attempt to manage these theft and fraud risks through our internal controls and our monitoring and blocking systems. If these efforts are not successful, the theft of our services may cause our revenue to decline significantly and our business, financial condition and results of operations to be materially and adversely affected.
The Company intends to focus its business strategy on extensive product development and distribution throughout North America in 2004 and 2005.
Jun 21, 2004
UBBFriend: Email this page to someone!
Printer-friendly view of this topic
