| You should carefully consider each of the risks and uncertainties we describe below and all of the other information in this Report before deciding to invest in our shares |
| The risks and uncertainties we describe below are not the only ones we face |
| Additional risks and uncertainties that we do not currently know or that we currently believe to be immaterial may also adversely affect our business |
| If general economic conditions are unfavorable our partner companies may be unable to attract or retain customers and our ability to grow our business may be adversely affected |
| Numerous external forces, including fear of terrorism, hostilities in the Middle East involving United States armed forces, lack of consumer confidence and interest rate or currency rate fluctuations, could affect the economy |
| If our partner companies are unable to attract new customers or retain existing customers, our ability to grow our business will be adversely affected |
| We may not be able to deploy capital effectively and on acceptable terms |
| Our strategy includes effectively deploying capital by acquiring interests in new partner companies |
| We may not be able to identify attractive acquisition candidates that fit our strategy and, even if we are able to identify such candidates, we may not be able to reach agreement with potential acquisition candidates to acquire an interest in such companies on acceptable terms |
| Our stock price has been volatile in the past and may continue to be volatile in the future |
| Our stock price has historically been volatile |
| Stock prices of technology companies have generally been volatile as well |
| This volatility may continue in the future |
| The following factors, among others, may add to our common stock price’s volatility: • general economic conditions, such as a recession or interest rate or currency rate fluctuations, and the reluctance of enterprises to increase spending on new technologies; • actual or anticipated variations in our quarterly results and those of our partner companies; • changes in the market valuations of our partner companies and other technology and internet companies; • conditions or trends in the information technology and e-commerce industries; • negative public perception of the prospects of information technology companies; 10 _________________________________________________________________ [43]Table of Contents • changes in our financial estimates and those of our partner companies by securities analysts; • new products or services offered by us, our partner companies and their competitors; • announcements by our partner companies and their competitors of technological innovations; • announcements by us or our partner companies or our competitors of significant acquisitions, strategic partnerships or joint ventures; • additional sales of our securities; • additions to or departures of our key personnel or key personnel of our partner companies; and • our debt obligations |
| These factors may decrease the market price of our common stock, regardless of our operating performance |
| Fluctuations in our quarterly results may adversely affect our stock price |
| We expect that our quarterly results will fluctuate significantly due to many factors, including: • the operating results of our partner companies; • significant fluctuations in the financial results of information technology and e-commerce companies generally; • changes in equity losses or income; • the acquisition or divestiture of interests in partner companies; • changes in our methods of accounting for our partner company interests, which may result from changes in our ownership percentages of our partner companies; • sales of equity securities by our partner companies, which could cause us to recognize gains or losses under applicable accounting rules; • the pace of development or a decline in growth of the information technology and e-commerce markets; • competition for the goods and services offered by our partner companies; and • our ability to effectively manage our growth and the growth of our partner companies |
| If our operating results in one or more quarters do not meet securities analysts’ or investors’ expectations, the price of our common stock could decrease |
| Approximately 4dtta1 million shares of our common stock could be sold in the public market in connection with the conversion of our senior convertible debt, and future sales of our common stock, or the perception that such future sales may occur, may cause our stock price to decline |
| Approximately 4dtta1 million shares of our common stock could be sold into the public market if the holders of our senior convertible notes due April 2009 elect to convert such notes |
| The notes are convertible at the option of the holder at any time on or before maturity into shares of our common stock at a conversion price of dlra9dtta108 per share |
| The sale of a large number of shares of our common stock, or the perception that such sales could occur, could materially and adversely affect the market price of our common stock and could impair our ability to obtain capital through an offering of equity securities |
| 11 _________________________________________________________________ [44]Table of Contents Fluctuation in the price of the common stock of our publicly-traded partner companies may affect the price of our common stock |
| Currently, Blackboard, Inc |
| (“Blackboard”), GoIndustry plc (“GoIndustry”) and Traffic |
| Fluctuations in the price of Blackboard’s, GoIndustry’s and Traffic |
| com’s and other future publicly-traded partner companies’ common stock are likely to affect the price of our common stock |
| The price of our publicly-traded partner companies common stock has been highly volatile |
| As of December 31, 2005, the market value of the Company’s interest in our one publicly-traded partner company as of such date (Blackboard) was dlra63dtta4 million |
| The results of operations, and accordingly the price of the common stock, of Blackboard and Traffic |
| com may be adversely affected by the risk factors in its SEC filings, which are publicly available at www |
| Our business depends upon the performance of our partner companies, which is uncertain |
| If our partner companies do not succeed, the value of our assets and the price of our common stock may decline |
| Economic, governmental, industry and company factors outside our control affect each of our partner companies |
| The material risks relating to our partner companies include: • fluctuations in the market price of the common stock of Blackboard, GoIndustry and Traffic |
| com, our publicly-traded partner companies, which are likely to affect the price of our common stock; • many of our partner companies have limited operating histories, have not yet attained significant revenues and are operating at or near break-even and may not achieve profitability in the future; • lack of the widespread commercial use of the internet, decreased spending on information technology software and services and elongated sales cycles which may prevent our partner companies from succeeding; • intensifying competition for the products and services our partner companies offer, which could lead to the failure of some of our partner companies; and • the inability of our partner companies to secure additional financing, which may force some of our partner companies to cease or scale back operations |
| Of our dlra346dtta5 million in total assets as of December 31, 2005, dlra71dtta5 million, or 20dtta6prca, consisted of ownership interests in our private partner companies accounted for under the equity and cost methods of accounting |
| The carrying value of our partner company ownership interests includes our original acquisition cost, the effect of accounting for certain of our partner companies under the equity method of accounting and the effect of impairment charges recorded for the decrease in value of certain partner companies |
| The carrying value of our partner companies will be impaired and decrease if one or more of our partner companies do not succeed |
| This decline would likely affect the price of our common stock |
| As of December 31, 2005, the value of our one publicly-traded partner company as of such date (Blackboard) was dlra63dtta4 million and reflected as “Marketable Securities” in our Consolidated Financial Statements |
| A decline in the market value of our publicly-traded partner companies will likely cause a decline in the price of our common stock |
| The success of our partner companies depends on the development of the e-commerce market, which is uncertain |
| Most of our partner companies rely on e-commerce markets for the success of their businesses |
| If widespread commercial use of the internet does not develop, or if the internet does not develop as an effective medium for providing products and services, our partner companies may not succeed |
| 12 _________________________________________________________________ [45]Table of Contents A number of factors could prevent widespread market acceptance of e-commerce, including the following: • the unwillingness of businesses to shift from traditional processes to e-commerce processes; • the network necessary for enabling substantial growth in usage of e-commerce may not be adequately developed; • increased government regulation or taxation, which may adversely affect the viability of e-commerce; • insufficient availability of telecommunication services or changes in telecommunication services which could result in slower response times for the users of e-commerce; and • concern and adverse publicity about the security of e-commerce transactions |
| The companies that we have identified as Core partner companies may not succeed |
| We have identified certain partner companies that we believe offer the greatest long-term value proposition as Core partner companies |
| We cannot ensure that the companies we have identified as Core partner companies are those that actually have the greatest long-term value proposition or are those to which we will continue to allocate capital |
| Although we have identified certain of our partner companies as Core partner companies, this categorization does not necessarily imply that every one of our Core partner companies is a success at this time or will become successful in the future |
| There is no guarantee that a Core partner company will remain categorized as Core or that it will be able to successfully continue operations |
| We have had a general history of losses and expect continued losses in the foreseeable future |
| We have had significant operating losses and, excluding the effect of any future non-operating gains, such as from the sale of partner companies, we expect to continue incurring operating losses in the future |
| As a result, we may not have sufficient resources to expand or maintain our operations in the future |
| We can give no assurances as to when or whether we will achieve profitability, and if we ever have profits, we may not be able to sustain them |
| Certain of our partner companies are early-stage companies with limited operating histories, have significant historical losses and may never be profitable |
| Many of these companies have incurred substantial costs to develop and market their products and expand operations, have incurred net losses and cannot fund their cash needs from operations |
| Operating expenses of these companies could increase in the foreseeable future as they continue to develop products, increase sales and marketing efforts and expand operations |
| Even if a number of our partner companies achieve profitability, we may not be able to extract cash from such companies, which could have a negative impact on our operations |
| One of our goals is to help our partner companies achieve profitability |
| Even if a number of our partner companies do meet such goal, we may not be able to access cash generated by such partner companies to fund our own operations, which could have a negative impact on our operations |
| 13 _________________________________________________________________ [46]Table of Contents Our partner companies may not be able to successfully compete |
| If our partner companies are unable to compete successfully against their competitors, our partner companies may fail |
| Competition for information technology and e-commerce products and services is intense |
| As the markets for information technology and e-commerce grow, we expect that competition will intensify |
| Barriers to entry are minimal and competitors can offer products and services at a relatively low cost |
| Our partner companies compete for a share of a customer’s: • purchasing budget for information technology and services, materials and supplies with other online providers and traditional distribution channels; and • dollars spent on consulting services with many established information systems and management consulting firms |
| In addition, some of our partner companies compete to attract and retain a critical mass of buyers and sellers |
| Many companies offer competitive solutions that compete with one or more of our partner companies |
| Furthermore, our partner companies’ competitors may develop products or services that are superior to, or have greater market acceptance than, the solutions offered by our partner companies |
| Many of our partner companies’ competitors have greater brand recognition and greater financial, marketing and other resources than our partner companies |
| This may place our partner companies at a disadvantage in responding to their competitors’ pricing strategies, technological advances, advertising campaigns, strategic partnerships and other initiatives |
| Our partner companies may fail to retain significant customers |
| During the years ended December 31, 2005 and 2003, approximately 13prca and 21prca, respectively, of our consolidated revenue relates to single customers |
| If our partner companies are not able to retain significant customers, such partner companies and our results of operation and financial position could be adversely affected |
| The inability of our partner companies’ customers to pay their obligations to them in a timely manner, if at all, could have an adverse effect on our partner companies |
| Some of the customers of our partner companies may have inadequate financial resources to meet all their obligations |
| If one or more significant customers are unable to pay amounts owed to a partner company, such partner company’s results of operations and financial condition could be adversely affected |
| When we divest partner company interests, we may be unable to obtain maximum value for such interests |
| When we divest all or part of an interest in a partner company, we may not receive maximum value for our position |
| We may divest our interests in partner companies to generate cash or for strategic reasons |
| Because we hold significant stakes of restricted securities in thinly-traded public companies, we may have difficulty selling our interest in such companies and, if we are able to sell our shares, such sales may be subject to volume limitations |
| Furthermore, for those partner companies that do not have publicly-traded stock, the realizable value of our interests may ultimately prove to be lower than the carrying value currently reflected in our Consolidated Financial Statements |
| We continually evaluate the carrying value of our ownership interests in and advances to each of our partner companies for possible impairment based on achievement of business plan objectives and milestones, the value of each ownership interest in the partner company relative to carrying value, the financial condition and prospects of the partner company and other relevant factors |
| We cannot guarantee that we will receive maximum value in connection with the disposition of our stakes in partner companies |
| Additionally, we may be unable to find buyers for certain of our assets, which could adversely affect our business |
| 14 _________________________________________________________________ [47]Table of Contents We may not be able to increase our ownership stakes in select partner companies |
| One of our goals is to increase our ownership in a small group of companies that we believe have major growth opportunities |
| We may not be able to achieve this goal because of limited resources and/or the unwillingness of other stockholders of such companies to enter into a transaction that would result in an increase in our ownership stake |
| We may have to buy, sell or retain assets when we would otherwise choose not to in order to avoid registration under the Investment Company Act, which would impact our investment strategy |
| We believe that we are actively engaged in the businesses of information technology and e-commerce through our network of subsidiaries and companies that we are considered to “control |
| ” Under the Investment Company Act of 1940, as amended (the “Investment Company Act”), a company is considered to control another company if it owns more than 25prca of that company’s voting securities and is the largest stockholder of such company |
| A company may be required to register as an investment company if more than 45prca of its total assets consist of, and more than 45prca of its income/loss and revenue attributable to it over the last four quarters is derived from, ownership interests in companies that it does not control |
| Because many of our partner companies are not majority-owned subsidiaries, and because we own 25prca or less of the voting securities of a number of our partner companies, changes in the value of our interests in our partner companies and the income/loss and revenue attributable to our partner companies could subject us to regulation under the Investment Company Act unless we take precautionary steps |
| For example, in order to avoid having excessive income from “non-controlled” interests, we may not sell minority interests we would otherwise want to sell or we may have to generate non-investment income by selling interests in partner companies that we are considered to control |
| We may also need to ensure that we retain more than 25prca ownership interests in our partner companies after any equity offerings |
| In addition, we may have to acquire additional income or loss generating majority-owned or controlled interests that we might not otherwise have acquired or may not be able to acquire “non-controlling” interests in companies that we would otherwise want to acquire |
| It is not feasible for us to be regulated as an investment company because the Investment Company Act rules are inconsistent with our strategy of actively managing, operating and promoting collaboration among our network of partner companies |
| On August 23, 1999, the SEC granted our request for an exemption under Section 3(b)(2) of the Investment Company Act declaring us to be primarily engaged in a business other than that of investing, reinvesting, owning, holding or trading in securities |
| This exemptive order reduces, but it does not eliminate, the risk that we may have to take action to avoid registration as an investment company |
| Our accounting estimates with respect to the ultimate recoverability of our basis in our partner companies could change materially in the near term |
| Our accounting estimates with respect to the useful life and ultimate recoverability of our carrying basis, including goodwill, in our partner companies could change in the near term and the effect of such changes on the financial statements could be significant |
| In the first quarter of 2000, we announced several significant acquisitions that were financed principally with shares of our stock and based on the price of our stock at that time, that were valued in excess of dlra1dtta0 billion |
| Based on our periodic review of our partner company holdings, we have recorded cumulative impairment charges of dlra1dtta7 billion to write off certain partner company holdings, primarily in 2000, 2001 and 2002 |
| As of December 31, 2005, our recorded amount of carrying basis including goodwill is not impaired, although we cannot assure that our future results will confirm this assessment |
| We performed our latest annual impairment test during the fourth quarter of 2005 and we will perform our next annual impairment test in the fourth quarter of 2006 |
| In October 2005, in conjunction with the CommerceQuest and Metastorm merger, we reevaluated our carrying value of CommerceQuest goodwill as of September 30, 2005 and recorded a goodwill impairment charge of dlra1dtta8 million and a dlra0dtta9 million intangible asset charge related to CommerceQuest for the three months ended September 30, 2005 |
| It is possible that a significant write-down or write-off of partner company carrying basis, including goodwill, may be required in the future, or that a significant loss will be recorded in the future upon the sale of a partner company |
| 15 _________________________________________________________________ [48]Table of Contents The loss of any of our or our partner companies’ executive officers or other key personnel or our or our partner companies’ inability to attract additional key personnel could disrupt our business and operations |
| If one or more of our executive officers or key personnel, or our partner companies’ executive officers or key personnel were unable or unwilling to continue in their present positions, or if we or our partner companies were unable to hire qualified personnel, our business and operations could be disrupted and our operating results and financial condition could be seriously harmed |
| The success of some of our partner companies also depends on their having highly trained technical and marketing personnel |
| A shortage in the number of trained technical and marketing personnel could limit the ability of our partner companies to increase sales of their existing products and services and launch new product offerings |
| Our partner companies could make business decisions that are not in our best interests or that we do not agree with, which could impair the value of our partner company interests |
| Although we generally seek a significant equity interest and participation in the management of our partner companies, we may not be able to control significant business decisions of our partner companies |
| In addition, although we currently own a controlling interest in several of our partner companies, we may not maintain this controlling interest |
| Equity interests in partner companies in which we lack control or share control involve additional risks that could cause the performance of our interest and our operating results to suffer, including the management of a partner company having economic or business interests or objectives that are different from ours and partner companies not taking our advice with respect to the financial or operating difficulties that they may encounter |
| Our inability to prevent dilution of our ownership interests in our partner companies or our inability to otherwise have a controlling influence over the management and operations of our partner companies could have an adverse impact on our status under the Investment Company Act |
| Our inability to adequately control our partner companies could also prevent us from assisting them, or could prevent us from liquidating our interest in them at a time or at a price that is favorable to us |
| Additionally, our partner companies may not collaborate with each other or act in ways that are consistent with our business strategy |
| These factors could hamper our ability to capture value on our interests and cause us to recognize losses on our interests in partner companies |
| Our stakes in some partner companies have been and are likely to be diluted, which could materially reduce the value of our stake in such partner companies |
| Since we allocate our financial resources to certain partner companies, our ownership interests in other partner companies have been and are likely to continue to be diluted due to our decision not to participate in financings |
| Additionally, in connection with new rounds of financing, our partner companies may create liquidation preferences that are senior to existing preferences |
| If we do not participate in these rounds, our rights to receive preferences upon a sale of the Company may be diminished at certain valuations |
| This dilution and the creation of senior liquidation preferences could result in a reduction in the value of our stakes in such partner companies |
| Our outstanding indebtedness could negatively impact our future prospects |
| In April 2004, we issued dlra60dtta0 million of senior convertible notes due in April 2009, dlra37dtta0 million of which is currently outstanding and was outstanding at December 31, 2005 |
| This indebtedness may make it more difficult to obtain additional financing and may inhibit our ability to pursue needed or favorable opportunities |
| 16 _________________________________________________________________ [49]Table of Contents We may compete with some of our partner companies, and our partner companies may compete with each other, which could deter companies from partnering with us and may limit future business opportunities |
| We may compete with our partner companies to acquire interests in information technology and e-commerce companies and our partner companies may compete with each other for information technology e-commerce opportunities |
| This competition may deter companies from partnering with us and may limit our business opportunities |
| We have implemented certain anti-takeover provisions that could make it more difficult for a third party to acquire us |
| Provisions of our amended certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders |
| Our amended certificate of incorporation provides that our board of directors may issue preferred stock without stockholder approval and also provides for a staggered board of directors |
| We are subject to the provisions of Section 203 of the Delaware General Corporation Law, which restricts certain business combinations with interested stockholders |
| Additionally, we have a Rights Agreement which has the effect of discouraging any person or group from beneficially owning more than 15prca of our outstanding common stock unless our board has amended the plan or redeemed the rights |
| The combination of these provisions may inhibit a non-negotiated merger or other business combination |
| Some of our partner companies may be unable to protect their proprietary rights and may infringe on the proprietary rights of others |
| The complexity of international trade secret, copyright, trademark and patent law, coupled with the limited resources of our partner companies and the demands of quick delivery of products and services to market, create the risk that our partner companies will be unable to protect their proprietary rights |
| Further, the nature of internet business demands that considerable detail about their innovative processes and techniques be exposed to competitors, because it must be presented on the websites in order to attract clients |
| Some of our partner companies also license content from third parties, and it is possible that they could become subject to infringement actions based upon the content licensed from those third parties |
| Our partner companies generally obtain representations as to the origin and ownership of such licensed content |
| However, these representations may not adequately protect them |
| Any claims against our partner companies’ proprietary rights, with or without merit, could subject our partner companies to costly litigation and the diversion of their technical and management personnel |
| If our partner companies incur costly litigation and their personnel are not effectively deployed, the expenses and losses incurred by our partner companies will increase and their profits, if any, will decrease |
| Government regulation of the internet and e-commerce may harm our partner companies’ businesses |
| Government regulation of the internet and e-commerce is evolving and unfavorable changes could harm our partner companies’ respective businesses |
| Our partner companies are subject to general business regulations and laws specifically governing the internet and e-commerce |
| Such existing and future laws and regulations may impede the growth of the internet or other online services |
| These regulations and laws may cover taxation, user privacy, pricing content, copyrights, distribution, electronic contracts, consumer protection, the provision of online payment services, broadband residential internet access and the characteristics and quality of products and services |
| It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the internet and e-commerce |
| Unfavorable resolution of these issues may harm our partner companies’ business |
| 17 _________________________________________________________________ [50]Table of Contents Our partner companies that publish or distribute content over the internet may be subject to legal liability |
| Some of our partner companies may be subject to legal claims relating to the content on their websites, or the downloading and distribution of this content |
| Claims could involve matters such as defamation, invasion of privacy and copyright infringement |
| Providers of internet products and services have been sued in the past, sometimes successfully, based on the content of material |
| In addition, some of the content provided by our partner companies on their websites is drawn from data compiled by other parties, including governmental and commercial sources |
| If any of our partner companies’ website content is improperly used or if any of our partner companies supply incorrect information, it could result in unexpected liability |
| Any of our partner companies that incur this type of unexpected liability may not have insurance to cover the claim or its insurance may not provide sufficient coverage |
| If our partner companies incur substantial cost because of this type of unexpected liability, the expenses incurred by our partner companies will increase and their profits, if any, will decrease |
| Our partner companies’ computer and communications systems may fail, which may discourage parties from using our partner companies’ systems |
| Some of our partner companies’ businesses depend on the efficient and uninterrupted operation of their computer and communications hardware systems |
| Any system interruptions that cause our partner companies’ websites to be unavailable to web browsers may reduce the attractiveness of our partner companies’ websites to third parties |
| If third parties are unwilling to use our partner companies’ websites, our business, financial condition and operating results could be adversely affected |
| Interruptions could result from natural disasters as well as power loss, telecommunications failure and similar events |
| Our partner companies’ businesses may be disrupted if they are unable to upgrade their systems to meet increased demand |
| Capacity limits on some of our partner companies’ technology, transaction processing systems and network hardware and software may be difficult to project and they may not be able to expand and upgrade their systems to meet increased use |
| As traffic on our partner companies’ websites continues to increase, they must expand and upgrade their technology, transaction processing systems and network hardware and software |
| Our partner companies may be unable to accurately project the rate of increase in use of their websites |
| In addition, our partner companies may not be able to expand and upgrade their systems and network hardware and software capabilities to accommodate increased use of their websites |
| If our partner companies are unable to appropriately upgrade their systems and network hardware and software, the operations and processes of our partner companies may be disrupted |
| Our partner companies may be unable to acquire or maintain easily identifiable website addresses or prevent third parties from acquiring website addresses similar to theirs |
| Some of our partner companies hold various website addresses relating to their brands |
| These partner companies may not be able to prevent third parties from acquiring website addresses that are similar to their addresses, which could adversely affect the use by businesses of our partner companies’ websites |
| In these instances, our partner companies may not grow as we expect |
| The acquisition and maintenance of website addresses generally is regulated by governmental agencies and their designees |
| The regulation of website addresses in the United States and in foreign countries is subject to change |
| As a result, our partner companies may not be able to acquire or maintain relevant website addresses in all countries where they conduct business |
| Furthermore, the relationship between regulations governing such addresses and laws protecting trademarks is unclear |
| 18 _________________________________________________________________ [51]Table of Contents If public and private capital markets are not favorable for the information technology and e-commerce sectors, we may not be able to execute on our strategy |
| Our success depends on the acceptance by the public and private capital markets of information technology and e-commerce companies in general, including initial public offerings of those companies |
| The information technology and e-commerce markets have experienced significant volatility and the market for initial public offerings of information technology and e-commerce companies has experienced periods of weakness since 2000 |
| If these markets are weak, we may not be able to create stockholder value by taking our partner companies public |
| In addition, reduced market interest in our industry may reduce the market value of our publicly-traded partner companies |
| Our operations and growth could be impaired by limitations on our and our partner companies’ ability to raise money |
| If the capital markets’ interest in our industry is depressed, our ability and the ability of our partner companies to grow and access the capital markets will be impaired |
| This may require us or our partner companies to take other actions, such as borrowing money on terms that may be unfavorable, or divesting of assets prematurely to raise capital |
| While we attempt to operate our business in such a manner so as to be independent from the capital markets, there is no assurance that we will be successful in doing so |
| Our partner companies are also dependent on the capital markets to raise capital for their own purposes |
| Because we have limited resources to dedicate to our partner companies, some of our partner companies may not be able to raise sufficient capital to sustain their operations |
| If our partner companies are not able to raise capital from other outside sources, then they may need to cease operations |
| Our allocation of resources to our partner companies is mostly discretionary |
| Because our resources and our ability to raise capital are limited, we may not commit to provide our partner companies with sufficient capital resources to allow them to reach a cash flow positive position |
| We allocate our resources to focus on those partner companies that we believe present the greatest potential to increase stockholder value |
| We cannot ensure that the companies we identified in this process are those that actually have the greatest value proposition |
| Our decision to not provide additional capital support to some of our partner companies could have a material adverse impact on the operations of such partner companies |