| CNET NETWORKS INC Item 1A Risk Factors SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS This Annual Report on Form 10-K contains “forward- looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended |
| Forward-looking statements are any statements other than statements of historical fact |
| Examples of forward-looking statements include projections of earnings, revenues or other financial items, statements of the plans and objectives of management for future operations, and statements concerning proposed new products and services, and any statements of assumptions underlying any of the foregoing |
| In some cases, you can identify forward-looking statements by the use of words such as “may,” “will,” “expects,” “should,” “believes,” “plans,” “anticipates,” “estimates,” “predicts,” “potential,” or “continue,” and any other words of similar meaning |
| Any or all of our forward-looking statements in this report and in any other public statements we make may turn out to be wrong and our actual results to differ materially from forecasted or historical results |
| They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including those outlined below |
| Consequently, no forward-looking statement can be guaranteed |
| We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise |
| You are advised, however, to consult any further disclosures we make on related subjects in our reports to the Securities and Exchange Commission |
| Also note that we provide cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our businesses |
| These are factors that we think could cause our actual results to differ materially from expected and historical results |
| Other factors besides those listed here could also adversely affect us |
| This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995 |
| You should carefully consider the risks described below before making an investment decision regarding CNET Networks securities |
| Our business, financial condition or results of operations could be materially adversely affected by any of these risks |
| The trading price of our common stock could decline due to any of these risks |
| The risks described below are not the only ones we face |
| Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations |
| Our revenues might not grow in 2006, and they might decrease |
| Several factors, many of which are outside of our control, contribute to our revenue growth |
| Some scenarios that might impede our revenue growth in the future are listed below |
| • our failure to maintain existing marketing customers and to attract new marketing customers due to competition from other media outlets, dissatisfaction with our services, reduced advertising budgets; • our loss of advertising and other marketing opportunities to competitors, especially as other media companies increase their online presence in areas where we focus; 8 ______________________________________________________________________ [32]Table of Contents • our inability to attract advertisers for our newer websites; • our inability to respond to ad-blocking technology might decrease the effectiveness of online advertising; • a loss of revenues from our publishing operations, as more advertising dollars shift from publishing to the Internet; • weakness in corporate and consumer spending may lead to a decline in advertising , which is the primary source of our revenues; • a decline in general economic conditions, which could occur as a result of currency fluctuations, rising interest rates, or other factors; • disruption of our operations due to technical difficulties, system downtime, Internet brownouts or denial of service or other similar attacks; and • disruption to our operations, employees, partners, customers and facilities caused by natural disasters, international or domestic terrorist attacks or armed conflict |
| We may not be able to achieve our targeted incremental profit margins and accordingly we may fail to make expected improvements in our overall profit margins |
| • We have identified incremental profit margins as a useful performance measure |
| Incremental profit margin is the percent of each dollar of new revenue that we earn in 2006 as compared to 2005 that flows to operating income before depreciation, amortization and stock-based compensation expense |
| We may fail to achieve our incremental profit margin targets |
| Some of the factors that could cause us not to achieve these targets include: • greater than expected expenses due to a decision to invest in new products, services or websites; • acquisitions of businesses that cannot immediately achieve these profit margins; • greater than expected compensation expenses due to competition for qualified employees; • a failure to achieve projected revenue growth, as described in the first risk factor above; or • a failure to manage the costs associated with innovation and growth |
| We have generated significant losses in the past and cannot assure you that we will report positive net income in the future |
| If our revenues do not increase, we may not be able to adjust spending in a timely manner to maintain positive net income |
| We have generated an operating loss in eight of the past ten years and have generated a net loss in seven of the past ten years |
| Although we generated positive net income in 2005, our ability to generate positive net income in 2006 may be negatively impacted by: • the implementation of Financial Accounting Standards Board Statement 123R, “Share-Based Payments”, which will require us to begin recognizing expenses for stock options for periods beginning after January 1, 2006; • an inability to decrease expenses in a timely manner to offset any revenue shortfalls or expenses associated with cost-reduction measures, such as severance, lease termination payments, contract termination costs or impairment charges; • payments associated with contingent liabilities, such as litigation or our guarantee of the New York lease of Ziff-Davis, Inc, as described in more detail in a subsequent risk factor; or • any unusual transactions such as impairments or losses on investments |
| 9 ______________________________________________________________________ [33]Table of Contents Competition is intense and we might not compete successfully |
| The media industry is intensely competitive and rapidly evolving |
| We compete for advertisers, users and business partners with numerous companies throughout the world that offer information and content in our primary areas of focus |
| • Traditional offline media |
| We have always competed for consumers and advertisers in our areas of focus with the traditional offline media, such as television, radio, cable and print |
| For instance, mainstream business publications, such as The New York Times, The Wall Street Journal, Fortune, Forbes, and Business Week and other publications devoted to certain content areas such as games or technology, offer content that competes with ours |
| Increasingly, these traditional offline media companies are developing broader reach by creating alternative channels of distribution for their content by building more robust Internet sites, acquiring online companies, and partnering with other media outlets |
| As the traditional offline media continues to introduce more multi-media offerings into the market, we will continue to compete with them for consumers and advertisers in the areas where we focus |
| Large general purpose portals, such as AOL, MSN and Yahoo! |
| are also competitors, especially as these properties expand their content offerings in our areas of expertise |
| We also compete with niche sites focused on the same vertical markets on which we focus |
| For example, our gaming properties compete with other gaming sites such as IGN Entertainment, and our business technology properties compete with smaller, niche sites such as TechTarget |
| In addition, many traditional media companies are increasing their online offerings |
| Search engines such as Google and Yahoo! |
| complete with us by attracting users looking for goods, services and content similar to those offered on our websites |
| They also complete with us by attracting marketing dollars from companies trying to reach those users |
| • Online comparison shopping services |
| Specialized online comparison shopping services such as Shopping |
| com and the online shopping services operated by large general purpose portals have sought to expand the reviews and information offerings on their sites |
| They compete with us for users and the companies trying to reach those users |
| • Online retail and auction companies |
| These companies, such as Amazon |
| They compete with us for users and the companies trying to reach those users |
| We may have difficulties with our acquisitions, investments and new product developments |
| We intend to pursue new business opportunities and ventures, including acquisitions, in a broad range of areas |
| Any decision by us to pursue a significant business expansion or a new business opportunity would be accompanied by risks, including, among others: • investment of a substantial amount of capital, which could have a material adverse effect on our financial condition and our ability to implement our existing business strategy; • issuance of additional equity interests, which would be dilutive to current stockholders; • additional burdens on our management personnel and financial and operational systems; • difficulty assimilating the operations, technology and personnel of the new business; • potential disruption of our ongoing business; • possible inability to retain key technical and managerial personnel; • additional expenses associated with amortization of purchased intangible assets; • additional operating losses and expenses associated with the activities and expansion of acquired businesses; 10 ______________________________________________________________________ [34]Table of Contents • possible impairment of relationships with existing employees and advertising customers; • potential undisclosed liabilities associated with new or acquired businesses; and • for foreign acquisitions and investments, additional risks related to the integration of operations across different cultures and languages, currency risks, and the particular economic, political, and regulatory risks association with specific countries |
| Acceptance of our brands, content and services may not continue |
| Our future success depends upon the strength of our brands and our ability to deliver original and compelling content and services that attract and retain users |
| We will endeavor to continue building existing brands such as CNETcom and GameSpot, and introducing new brands, that resonate with their audiences, but we may not be successful |
| The specialized nature of certain of our sites may limit those sites’ potential user base |
| Our content and services might not be attractive to a sufficient number of users to generate revenues consistent with our estimates |
| In addition, we might not develop new content or services in a timely or cost-effective manner |
| If we are not successful in growing our user base, then our ability to attract the advertisers who seek to market to the demographic represented by our user base may be affected which would in turn impact our revenue |
| Our ability to successfully develop and produce content and services is subject to numerous uncertainties, including the ability to: • anticipate and successfully respond to rapidly changing consumer tastes and preferences; • fund new program development; • attract and retain qualified editors, producers, writers, and technical personnel; and • successfully expand our content offerings into new platform and delivery mechanisms |
| Some of our sites may have limited user bases which will affect our ability to attract advertisers |
| We believe that our success depends on our ability to continue to grow our user base and increase user interaction with our sites |
| We may not innovate at a successful pace |
| Our industry is rapidly adopting new technologies and standards to create and satisfy consumer demand |
| It is critical that we continue to innovate, anticipate and adapt to these changes to ensure that our content-delivery platforms, services and products remain interesting to our users, advertisers and partners |
| In addition, we may discover that we must make significant expenditures to achieve this goal |
| If we fail to accomplish these goals, we may lose users and the advertisers that seek to reach those users |
| We depend in part on third parties for traffic who may sever their relationships with us or fail to perform |
| We depend in part on third parties for Internet traffic to our websites and changes to their operations or our failure to develop and maintain relationships with them could result in decreased traffic |
| Any reduction in users of our websites could negatively impact our ability to earn revenue |
| A significant portion of our users visit our websites by conducting a search on a search engine, such as Google, MSN or Yahoo! |
| Changes in the methodologies used by these search engines to display results could result in our websites receiving less favorable placements, which could reduce the number or users who link to our sites from these search engines |
| In addition, we rely on the cooperation of owners and operators of other Internet sites with whom we have syndication and other arrangements to generate traffic for our Internet sites |
| Our ability to maintain these relationships will continue to be critical to the success of our Internet operations |
| If we are unable to develop and 11 ______________________________________________________________________ [35]Table of Contents maintain satisfactory relationships with such third parties on acceptable commercial terms, or if our competitors are better able to capitalize on these relationships, we could see a reduction in the numbers of users of our websites |
| Our revenues are derived in large part from the sale of advertising and we expect that this will continue to be the case for the foreseeable future |
| Most of our advertising contracts are short-term and are subject to termination by the customer at any time on thirty-days’ prior written notice |
| Advertisers who have longer-term contracts may fail to honor their existing contracts or fail to renew their contracts |
| If a significant number of advertisers or a few large advertisers decided not to continue advertising on our websites, we could experience a rapid decline in our revenues over a relatively short period of time |
| We depend on, and receive, a significant percentage of our revenue from a relatively small number of advertisers |
| A relatively small number of advertisers contribute a significant percentage of our revenue |
| These customers may not continue to use our services to the same extent, or at all, in the future |
| A significant reduction in advertising by one or more of our largest customers could have a material adverse effect on our financial performance and condition |
| A significant percentage of our revenues are derived from activity-based fees generated from our commerce Internet sites and we might not be able to attract qualified users for which merchants are willing to pay us activity-based fees |
| We earn fees when users visit the sites of our merchant partners to view products that are listed on our commerce sites |
| There are currently many other businesses that offer similar services, often at lower prices than the ones we charge |
| It is very easy for new businesses to begin operations in this space |
| In addition, users may prefer to contact merchants directly rather than return to our commerce sites to make future purchases |
| If we are unable to continue to attract users to our shopping services or to maintain the fees we charge merchants for sending users to their sites, then our business, operating results and financial condition may be adversely affected |
| Most of our agreements with merchants under which activity-based fees are earned are terminable by either party on ten to thirty days notice |
| In addition, the amount of activity based fees that we earn is highly dependent upon consumer purchasing activity and trends |
| Our advertising and other operating revenues may be subject to fluctuations, which could have a material adverse effect on our business, operating results and financial condition |
| We believe that advertising spending on the Internet, as in traditional media, fluctuates significantly with economic conditions |
| Because a majority of our revenues are derived from advertising, fluctuations in advertising spending generally, or with respect to Internet-based spending specifically, could adversely impact our revenue |
| In addition, marketing spending follows seasonal consumer behavior throughout the calendar year to reflect trends during the calendar year, with spending historically weighted towards the fourth quarter |
| Consistent with industry trends, our revenues in 2005 were weighted toward the end of the year, with 30prca of our revenues being earned in the fourth quarter |
| Our business may be affected by events that draw users away from our content |
| Our business may be impacted by any event that decreases the amount of the time that users spend on CNET properties |
| During these times, our traffic and revenues may decrease |
| Some of these factors include geopolitical events and natural disasters |
| 12 ______________________________________________________________________ [36]Table of Contents An inability to attract and retain key personnel could adversely affect our operations |
| Our success depends to a large extent on the continued services of our senior management team and qualified skilled employees |
| Our success also depends on our ability to identify, attract, develop, retain and motivate other highly skilled officers, key employees and personnel in a competitive job environment |
| We do not have employment agreements with any of our executive officers and do not maintain “key person” life insurance policies on any of our officers or other employees |
| As the overall industry for interactive content and Internet advertising grows, our employees are increasingly sought after by competitors |
| In order to remain competitive in the employment market, we may need to increase compensation to retain or attract qualified employees, which could have an adverse effect our financial condition or operating results |
| Our inability to attain shareholder approval of equity compensation plans may affect our ability to attract and retain key employees |
| We have limited protection of our intellectual property and could be subject to infringement claims that may result in costly litigation, the payment of damages or the need to revise the way we conduct our business |
| Our success and ability to compete are dependent in part on the strength of our proprietary rights, on the goodwill associated with our trademarks, trade names, service marks, and on our ability to use US and foreign laws to protect them |
| Our intellectual property includes our original content, our editorial features, logos, brands, domain names, the technology that we use to deliver our products and services, the various databases of information that we maintain and make available through our Internet sites or by license, and the appearance of our Internet sites |
| We claim common law protection on certain names and marks that we have used in connection with our business activities |
| While we have applied for and obtained registration of many of our marks in countries outside of the US where we do business, we have not been able to obtain registration of all of our key marks in such jurisdictions, in some cases due to opposition by people employing similar marks |
| In addition to US and foreign laws, we rely on confidentiality agreements with our employees and third parties, and protective contractual provisions to protect our intellectual property |
| Policing our intellectual property rights worldwide is a difficult task and we might not be able to identify infringing users |
| We cannot be certain that third party licensees of our content will always take actions to protect the value of our proprietary rights and reputation |
| Intellectual property laws, our agreements and our patents may not be sufficient to prevent others from copying or otherwise obtaining and using our content or technologies |
| Others may develop technologies that are similar or superior to ours |
| In seeking to protect our trademarks, copyrights and other proprietary rights, or defending ourselves against claims of infringement brought by others, with or without merit, we could face costly litigation and the diversion of our management’s attention and resources |
| Notwithstanding the efforts that we have taken to ensure that we have sufficient rights to the intellectual property that we use, we could still be subject to claims of infringement |
| For instance, there has been a recent increase in the granting and attempted enforcement of business process patents that cover practices that may be widely employed in the Internet industry |
| We have, on occasion, been approached by holders of patents alleging that our services infringe on their patents |
| Many companies that offer services similar to ours have been approached and, in some cases, sued by other patent holders alleging patent infringement |
| We could be required to enter into costly royalty arrangements with the holders of these patents or to revise our services to ensure non-infringement or to avoid litigation |
| If we are unsuccessful in avoiding litigation, we would incur significant expenses and could be subject to damage awards, including damages for past infringement and royalties for future use of the patented method or technology |
| If we are found to violate any such patent, and we are unable to enter into a license agreement on reasonable terms, our ability to offer services could be materially and adversely affected |
| We do not have insurance for patent infringement |
| In seeking to protect our trademarks, copyrights and other proprietary rights, or defending ourselves against claims of infringement brought by others, with or without merit, we could face costly litigation and the diversion of our management’s attention and resources |
| These claims could result in the need to develop alternative trademarks, content or technology or to enter into costly royalty or licensing agreements, which could have a material adverse effect on our business, results of operations and financial condition |
| 13 ______________________________________________________________________ [37]Table of Contents Our business involves risks of liability claims for Internet and print content, which could result in significant costs |
| As a publisher and a distributor of content through the Internet and print publications, we may face potential liability for: • defamation/libel; • negligence; • copyright, patent or trademark infringement; or • other claims based on the nature and content of the materials published or distributed |
| These types of claims have been brought, sometimes successfully, against online services and publishers of print publications |
| In addition, we could be exposed to liability in connection with material posted to our Internet sites by third parties |
| For example, many of our sites offer users an opportunity to post profiles, software, videos, photos, reviews and opinions |
| Some of this user-generated content, and the content that appears in our indexes and directories, may infringe on third party intellectual property rights or privacy rights or may otherwise be subject to challenge under copyright laws |
| Although we do not believe that our listing of any such material should expose us to liability, it is possible that such a claim may be successfully brought |
| Our insurance may not cover potential claims of defamation, libel, negligence and similar claims, and it may or may not apply to a particular claim or be adequate to reimburse us for all liability that may be imposed |
| Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on our financial condition |
| There are a number of risks associated with international operations that could adversely affect our business |
| We maintain an international presence through a variety of international structures and business operations |
| We have wholly-owned operations in Australia, France, Germany, Japan, Russia, Singapore, Switzerland and the United Kingdom and majority-owned joint ventures in Korea |
| We also have license arrangements in various other countries throughout the world |
| We operate our operations in China through a variety of entities some of which are owned by local employees in order to comply with local ownership and regulatory licensing requirements |
| We believe our current ownership structure complies with all existing Chinese laws |
| It is possible, however, that the Chinese government may change the applicable laws or take a different interpretation of existing laws |
| If we were found to be in violation of any existing or future Chinese laws or regulations, we could be subject to fines and other financial penalties, have our licenses revoked, or be forced to discontinue our business entirely |
| There are additional risks inherent in doing business in international markets, such as the following: • weak economic conditions in foreign markets, especially in the business sector; • uncertainty of product acceptance in different countries, • longer collection cycles in some countries; • current, and unforeseen changes in, legal and regulatory requirements; • difficulties in staffing and managing multinational operations; • currency exchange-rate fluctuations, which could reduce our revenues as determined under US GAAP, increase our expenses, and dilute our operating margins; • difficulties in finding appropriate foreign licensees or joint venture partners; • potential adverse tax requirements; • distance, language and cultural differences in doing business with foreign entities; and • foreign political and economic uncertainty |
| 14 ______________________________________________________________________ [38]Table of Contents Changes in regulations could adversely affect the way that we operate |
| It is possible that new laws and regulations in the US and elsewhere will be adopted covering issues affecting our business, including: • privacy and use of personally identifiable information; • copyrights, trademarks and domain names; • obscene or indecent communications; • pricing, characteristics and quality of Internet products and services; • marketing practices, such as direct marketing or adware; • the ability of children to access our services; and • taxation of Internet usage and transactions |
| Increased government regulation, or the application of existing laws to online activities, could: • decrease the growth rate of the Internet; • reduce our revenues; • increase our operating expenses; and • expose us to significant liabilities |
| We cannot be sure what effect any future material noncompliance by us with these laws and regulations or any material changes in these laws and regulations could have on our business, operating results and financial condition |
| We may be subject to system disruptions, which could adversely affect our revenues |
| Our ability to attract and maintain relationships with users, advertisers, and strategic partners will depend on the satisfactory performance, reliability and availability of our Internet infrastructure |
| Our Internet advertising revenues relate directly to the number of advertisements and other marketing opportunities delivered to our users |
| System interruptions or delays that result in the unavailability of Internet sites or slower response times for users would reduce the number of impressions and leads delivered |
| This could reduce revenue as the attractiveness of our sites to users, strategic partners and advertisers decreases |
| Our insurance policies provide only limited coverage for service interruptions and may not adequately compensate us for any losses that may occur due to any failures or interruptions in our systems |
| Further, we do not have multiple site capacity for all of our services in the event of any such occurrence |
| We may experience service disruptions for the following reasons: • occasional scheduled maintenance; • equipment failure; • when traffic volumes to our sites increase beyond our infrastructure’s capacity; • due to natural disasters, telecommunications failures, power failures, other system failures, maintenance, viruses, hacking or other events |
| Our networks may be vulnerable to unauthorized persons accessing our systems, which could disrupt our Internet operations and result in the theft of our proprietary information |
| A party who is able to circumvent our security measures could misappropriate either our proprietary information or the personal information of our users and customers or cause interruptions or malfunctions in our Internet operations |
| We may be required to expend significant capital and resources to protect against the threat of security breaches or to alleviate problems caused by breaches in security |
| For example, so-called “spiders” have and can be used in efforts to copy our databases, including our database of technology products and prices |
| 15 ______________________________________________________________________ [39]Table of Contents Our activities and the activities of third party contractors involve the storage and transmission of proprietary and personal information, such as computer software or credit card numbers |
| Accordingly, security breaches could expose us to a risk of loss or litigation and possible liability |
| We cannot assure you that contractual provisions attempting to limit our liability in these areas will be successful or enforceable, or that other parties will accept such contractual provisions as part of our agreements |
| Our business, operating results and financial condition may be impacted by certain contingencies related to our guarantee of certain lease obligations |
| In conjunction with the ZDNet acquisition in 2000, we assumed a guarantee of the obligations of Ziff Davis Media Inc, an unaffiliated company and primary lessee, under a New York City office lease for a total of 399cmam773 square feet |
| This lease expires in 2019 |
| The annual average cost per square foot is approximately thirty dollars over the remaining term of the lease |
| Ziff Davis Media Inc |
| subleases 205cmam951 square feet to The Bank of New York, FOJP Risk Management and Softbank, collectively |
| In addition, we currently sublease and occupy 49cmam140 square feet of the office space from Ziff Davis Media Inc |
| These leases and subleases fully cover the current monthly lease payments |
| As of December 31, 2005, the total lease payments remaining until the end of the lease term were dlra158dtta5 million, excluding the amounts attributable to our sublease with respect to the floor we occupy |
| If the financial condition of any of the sublessees or the primary lessee were to deteriorate and thereby result in their inability to make lease payments, we would be required to make their lease payments under the guarantee |
| In addition, any expiration of any sublease, the potential resulting vacancy and the inability of Ziff Davis Media Inc |
| to make the primary lease payments could result in us being required to make lease payments on these vacancies |
| In connection with that guarantee, we have a letter of credit for dlra15dtta0 million outstanding as a security deposit |
| As there is no present obligation to make any payments in connection with this guarantee, we have not recorded any liability for this guarantee in its financial statements |
| Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or internal control over financial reporting |
| The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations |
| As part of management’s review of our accounting policies and internal control over financial reporting for the year ended December 31, 2004 pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, management concluded that there was a material weakness in our internal control over financial reporting related to the lack of adequate staffing in the area of financial reporting resulting in management’s inability to consistently follow some its internal control over financial reporting related to (a) the timely preparation of comprehensive documentation supporting management’s analysis of the appropriate accounting treatment for non-routine and complex items and (b) the conducting of a critical secondary review of this supporting documentation by internal staff or outside advisors to determine its completeness and the accuracy of the conclusions |
| We concluded that we have remediated this material weakness as of December 31, 2005 |
| While management will continue to review the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we can not assure you that our disclosure controls and procedures or internal control over financial reporting will be effective in accomplishing all control objectives all of the time |
| Other deficiencies, particularly a material weakness in internal control over financial reporting, which may occur in the future could result in misstatements of our results of operations, restatements of our financial statements, a decline in our stock price, or otherwise materially adversely affect our business, reputation, results of operation, financial condition or liquidity |
| 16 ______________________________________________________________________ [40]Table of Contents Accounting rules regarding goodwill could make our reported results more volatile |
| Goodwill is tested for impairment annually or when an event occurs indicating the potential for impairment |
| The evaluation is prepared based on our current and projected performance for the identified reporting units |
| The fair value of our reporting units is determined using a combination of the cash flow and market comparable approaches |
| If we conclude at any time that the carrying value of our goodwill and other intangible assets for any of our reporting units exceeds its implied fair value, we will be required to recognize an impairment, which could materially reduce operating income and net income in the period in which such impairment is recognized |
| In the application of these methodologies, we were required to make estimates of future operating trends and judgments on discount rates and other variables |
| Actual future results and other assumed variables could differ from these estimates, including changes in the economy, the business environment in which we operate, and/or our own relative performance |
| Any differences in actual results compared to our estimates could result in further future impairments |
| Accordingly, our future earnings may be subject to significant volatility, particularly on a period-to-period basis |
| We will record substantial expenses related to our issuance of stock-based compensation which may have a material negative impact on our operating results for the foreseeable future |
| Effective January 1, 2006, we adopted the SFAS Nodtta 123 (R) for stock-based employee compensation |
| Our stock-based compensation expenses are expected to be significant in future periods, which will have an adverse impact on our operating income and net income |
| Our option-pricing model requires the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock |
| Changes in the subjective input assumptions can materially affect the amount of our stock-based compensation expense |
| Our estimated stock compensation expenses for 2006 may also be greater than expected if the fair value of our stock increases |
| In addition, an increase in the competitiveness of the market for qualified employees could cause us to issue more stock-based compensation than expected, which would increase our estimated expenses for 2006 |
| Our debt obligations expose us to risks that could adversely affect our financial condition |
| We have a substantial level of debt and interest expense |
| At December 31, 2005 we had approximately dlra141dtta8 million of outstanding indebtedness |
| The level of our indebtedness, among other things, could: • make it difficult for us to make payments on our debt as described below; • make it difficult for us to obtain any necessary financing in the future for working capital, capital expenditures, debt service, acquisitions or general corporate purposes; • limit our flexibility in planning for or reacting to changes in our business; • reduce funds available for use in our operations; • place us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have better access to capital resources; • impair our ability to incur additional debt because of financial and other restrictive covenants; and • make us more vulnerable in the event of a downturn in our business or an increase in interest rates |
| If we experience a decline in revenues due to any of the factors described in this Risk Factors section or otherwise, we could have difficulty paying interest and principal amounts due on our indebtedness |
| If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we fail to comply with the various requirements of our indebtedness, we would be in default, which would permit the holders of our indebtedness to accelerate the maturity of the indebtedness and could cause defaults under our other indebtedness |
| Any default under our indebtedness could have a material adverse effect on our financial condition |
| If we do not achieve and sustain positive net income, we could have difficulty repaying or refinancing our outstanding debt |
| Our future effective tax rates could be unfavorably affected by changes in the valuation of our deferred tax assets and liabilities, changes in the mix of earnings in countries with differing statutory tax rates, or by changes in tax laws or their interpretations |
| In addition, we are subject to the continuous examination of our tax returns by the Internal Revenue Service and other tax authorities |
| We regularly assess the likelihood of adverse outcome resulting from these examinations to determine the adequacy of our provision for income taxes |
| The outcomes from examinations may have an adverse effect on our business, operating results and financial condition |
| The trading value of our common stock may be volatile and decline substantially |
| The trading price of our common stock is subject to wide fluctuations, which are a result of a number of events and factors, including: • quarterly variations in operating results; • announcements of innovations requiring significant expenditures; • new products, strategic developments or business combinations by us or our competitors; • changes in our financial estimates or that of securities analysts; • our sale of common stock or other securities in the future; • changes in recommendations of securities analysts; • the operating and securities price performance of other companies that investors may deem comparable to us; and • news reports, including those relating to trends in the Internet |
| In addition, the stock market in general, and the market prices for Internet-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of these companies |
| These broad market and industry fluctuations may adversely affect the trading price of our common stock |
| These fluctuations may make it more difficult to use stock as currency to make acquisitions that might otherwise be advantageous, or to use stock options as a means to attract and retain employees |
| Any shortfall in revenue or earnings compared to our or analysts’ or investors’ expectations could cause, and has in the past caused an immediate and significant decline in the trading price of our common stock |
| In addition, we may not learn of such shortfalls or delays until late in the fiscal quarter, which could result in an even more immediate and greater decline in the trading price of our common stock |
| Provisions of our certificate of incorporation, bylaws and Delaware law could deter takeover attempts |
| Some provisions in our certificate of incorporation and bylaws could delay, prevent or make more difficult a merger, tender offer, proxy contest or change of control |
| Our stockholders might view any transaction of this type as being in their best interest since the transaction could result in a higher stock price than the current market price for our common stock |
| Among other things, our certificate of incorporation and bylaws: • authorize our board of directors to issue preferred stock with the terms of each series to be fixed by our board of directors; • divide our board of directors into three classes so that only approximately one-third of the total number of directors is elected each year; • permit directors to be removed only for cause; and • specify advance notice requirements for stockholder proposals and director nominations In addition, with some exceptions, the Delaware General Corporation Law restricts or delays mergers and other business combinations between us and any stockholder that acquires 15prca or more of our voting stock |
| 18 ______________________________________________________________________ [42]Table of Contents A substantial number of shares of common stock may be sold, which could affect the trading price of our common stock |
| We have a substantial number of shares of common stock subject to stock options |
| As of December 31, 2005, we had 3cmam001cmam450 shares of common stock available for future grant under our employee stock option plans, 18cmam959cmam448 issuable upon the future conversion of outstanding stock options and 8cmam333cmam337 shares of common stock issuable upon conversion of our 0dtta75prca Convertible Senior Notes due 2024 |
| In addition, as of December 31, 2005, we have approximately 250 million shares of authorized but unissued shares of our common stock that are available for future sale |
| We have an effective Registration Statement on Form S-3 registering the sale of up to dlra300 million of securities, which we may use in the future to offer equity securities |
| We cannot predict the effect, if any, that future sales of shares of our common stock, or the availability of shares of our common stock for future sale, will have on the market price of our common stock |
| Sales of substantial amounts of our common stock, including shares issued in connection with acquisitions, upon the exercise of stock options or warrants or the conversion of debt securities, or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock |