| PLANETOUT INC Item 1A Risk Factors We have a history of significant losses |
| If we do not sustain profitability, our financial condition and stock price could suffer |
| We have experienced significant net losses and we may continue to incur losses in the future given our anticipated increase in sales and marketing expenditures |
| As of December 31, 2005, our accumulated deficit was approximately dlra34dtta6 million |
| Although we had positive net income in the year ended December 31, 2005, we may not be able to sustain or increase profitability in the near future, causing our financial condition to suffer and our stock price to decline |
| If our efforts to attract and retain subscribers are not successful, our revenue will decrease |
| Because the largest portion of our revenue is derived from our subscription services, we must continue to attract and retain subscribers |
| Many of our new subscribers originate from word-of-mouth referrals from existing subscribers within the LGBT community |
| If our subscribers do not perceive our service offerings or publications to be of high quality or sufficient breadth, if we introduce new services or publications that are not favorably received or if we fail to introduce compelling new content or features or enhance our existing offerings, we may not be able to attract new subscribers or retain our current subscribers |
| Our current online content, shopping and personals platforms may not allow us to maximize potential cross-platform synergies and may not provide the most effective platform from which to launch new or improve current services for our members |
| If there is a delay in our plan to improve and consolidate these platforms, and this delay prevents or delays the development or integration of new features or enhancements to existing features, our subscriber growth could slow |
| Our base of likely potential subscribers is also limited to members of the LGBT community, who collectively comprise a small portion of the general adult population |
| While seeking to add new subscribers, we must also minimize the loss of existing subscribers |
| We lose our existing subscribers primarily as a result of cancellations and credit card failures due to expirations or exceeded credit limits |
| Subscribers cancel their subscription to our services for many reasons, including a perception, among some subscribers, that they do not use the service sufficiently, that the service or publication is a poor value and that customer service issues are not satisfactorily resolved |
| We also believe that online customer satisfaction has suffered as a result of the presence in the chat rooms of our websites of adbots, which are software programs that create a member registration profile, enter a chat room and display third-party advertisements |
| Online members may decline to subscribe or existing online subscribers may cancel their subscriptions if our websites experience a disruption or degradation of services, including slow response times or excessive down time due to scheduled or unscheduled hardware or software maintenance or denial of service attacks |
| We must continually add new subscribers both to replace subscribers who cancel or whose subscriptions are not renewed due to credit card failures and to continue to grow our business beyond our current subscriber base |
| If excessive numbers of subscribers cancel their subscription, we may be required to incur significantly higher marketing expenditures than we currently anticipate in order to replace canceled subscribers with new subscribers, which will harm our financial condition |
| Our limited operating history makes it difficult to evaluate our business |
| As a result of our recent growth and limited operating history, it is difficult to forecast our revenue, gross profit, operating expenses and other financial and operating data |
| Our inability, or the inability of the financial community at large, to accurately forecast our operating results could cause us to grow slower or our net profit to be smaller than expected, which could cause a decline in our stock price |
| We expect our operating results to fluctuate, which may lead to volatility in our stock price |
| Our operating results have fluctuated in the past and may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control |
| As a result, we believe that period-over-period comparisons of our operating results are not necessarily meaningful and that you should not rely on the results 18 _________________________________________________________________ [77]Table of Contents of one period as an indication of our future or long-term performance |
| Our operating results in future quarters may be below the expectations of public market analysts and investors, which may result in a decline in our stock price |
| We have significantly expanded our operations and anticipate that further expansion will be required to address current and future growth in our customer base and market opportunities |
| Our expansion has placed, and is expected to continue to place, a significant strain on our technological infrastructure, management, operational and financial resources |
| If we continue to expand our marketing efforts, we may expend cash and create additional expenses, including additional investment in our technological infrastructure, which might harm our financial condition or results of operations |
| If despite such additional investments our technological infrastructure is unable to keep pace with our online subscriber and member growth, members using our online services may experience degraded performance and our online subscriber growth could slow and our revenue may decline |
| If we are unable to successfully expand our international operations, our business will suffer |
| We offer services and products to the LGBT community outside the United States, and we intend to continue to expand our international presence, which may be difficult or take longer than anticipated especially due to international challenges, such as language barriers, currency exchange issues and the fact that the Internet infrastructure in foreign countries may be less advanced than Internet infrastructure in the United States |
| In October 2005, we began offering our online premium services free of charge for a limited time in some international markets in an effort to develop critical mass in those markets |
| Expansion into international markets requires significant resources that we may fail to recover by generating additional revenue |
| If we are unable to successfully expand our international operations, if our limited time offer of free online premium services to some international markets fails to develop critical mass in those markets, or if critical mass is achieved in those markets and members are then unwilling to pay for our online premium services after the limited time offer of free premium services ends, our revenue may decline and our profit margins will be reduced |
| Recent and potential future acquisitions could result in operating difficulties and unanticipated liabilities |
| In November 2005, we significantly expanded our operations by acquiring substantially all of the assets of LPI In March 2006, we acquired substantially all of the assets of RSVP In order to address market opportunities and potential growth in our customer base, we anticipate additional expansion in the future, including possible additional acquisitions of third-party assets, technologies or businesses |
| Such acquisitions may involve the issuance of shares of stock that dilute the interests of our other stockholders, or require us to expend cash, incur debt or assume contingent liabilities |
| Our recent acquisitions of LPI and RSVP and other potential future acquisitions may be associated with a number of risks, including: • the difficulty of integrating the acquired assets and personnel of the acquired businesses into our operations; • the potential absorption of significant management attention and significant financial resources for the ongoing development of our business; • the potential impairment of relationships with and difficulty in attracting and retaining employees of the acquired companies or our employees as a result of the integration of acquired businesses; • the difficulty of integrating the acquired company’s accounting, human resources and other administrative systems; 19 _________________________________________________________________ [78]Table of Contents • the potential impairment of relationships with subscribers, customers and partners of the acquired companies or our subscribers, customers and partners as a result of the integration of acquired businesses; • the difficulty in attracting and retaining qualified management to lead the combined businesses; • the potential difficulties associated with entering new lines of business with which we have little experience, such as some of the businesses we have acquired from LPI and RSVP; • the difficulty of complying with additional regulatory requirements that may become applicable to us as the result of an acquisition, such as various regulations that may become applicable to us as a result of our acquisition of LPI, including the acquisition of a related entity that produces some content and other materials intended for mature audiences; and • the impact of known or unknown liabilities associated with the acquired businesses |
| If we are unable to successfully address these or other risks associated with our recent acquisitions of LPI and RSVP or potential future acquisitions, we may be unable to realize the anticipated synergies and benefits of our acquisitions, which could adversely affect our financial condition and results of operations |
| In addition, the businesses we recently acquired from LPI and RSVP are in more mature markets than our online businesses |
| The value of these new businesses to us depends in part on our expectation that by cross-marketing their services to our existing user, member and subscriber bases, we can increase revenues in the newly acquired businesses |
| If this cross-marketing is unsuccessful, or if revenue growth in our acquired businesses is slower than expected, our financial condition and results of operation would be harmed |
| If we do not continue to attract and retain qualified personnel, we may not be able to expand our business |
| Our success depends on the collective experience of our senior executive team and board of directors and on our ability to recruit, hire, train, retain and manage other highly skilled employees and directors |
| Disruptions in our senior executive team could harm our business and financial results or limit our ability to grow and expand our business |
| We cannot provide assurance that we will be able to attract and retain a sufficient number of qualified employees or that we will successfully train and manage the employees that we do hire |
| Our success depends, in part, upon the growth of Internet advertising and upon our ability to accurately predict the cost of customized campaigns |
| Online advertising represents a significant portion of our advertising revenue |
| We compete with traditional media including television, radio and print, in addition to high-traffic websites, such as those operated by Yahoo!, Google, AOL and MSN, for a share of advertisers’ total online advertising expenditures |
| We face the risk that advertisers might find the Internet to be less effective than traditional media in promoting their products or services, and as a result they may reduce or eliminate their expenditures on Internet advertising |
| Many potential advertisers and advertising agencies have only limited experience advertising on the Internet and historically have not devoted a significant portion of their advertising expenditures to Internet advertising |
| Additionally, filter software programs that limit or prevent advertisements from being displayed on or delivered to a user’s computer are becoming increasingly available |
| If this type of software becomes widely accepted, it would negatively affect Internet advertising |
| Our business could be harmed if the market for Internet advertising does not grow |
| Currently, we offer advertisers a number of alternatives to advertise their products or services on our websites, in our publications and to our members, including banner advertisements, rich media advertisements, traditional print advertising, email campaigns, text links and sponsorships of our channels, topic sections, directories, sweepstakes, awards and other online databases and content |
| Frequently, advertisers request advertising campaigns consisting of a combination of these offerings, including some that may require custom development |
| If we are unable to accurately predict the cost of developing these custom campaigns for our advertisers, our expenses will increase and our margins will be reduced |
| 20 _________________________________________________________________ [79]Table of Contents If advertisers do not find the LGBT market to be economically profitable, our business will be harmed |
| We focus our services exclusively on the LGBT community |
| Advertisers and advertising agencies may not consider the LGBT community to be a broad enough or profitable enough market for their advertising budgets, and they may prefer to direct their online and offline advertising expenditures to larger higher-traffic websites and higher circulation publications that focus on broader markets |
| If we are unable to attract new advertisers, if our advertising campaigns are unsuccessful with the LGBT community or if our existing advertisers do not renew their contracts with us, our revenue will decrease and operating results will suffer |
| Any significant disruption in service on our websites or in our computer and communications hardware and software systems could harm our business |
| Our ability to attract new visitors, members, subscribers, advertisers and other customers to our websites is critical to our success and largely depends upon the efficient and uninterrupted operation of our computer and communications hardware and software systems |
| Our systems and operations are vulnerable to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, catastrophic events and errors in usage by our employees and customers, which could lead to interruption in our service and operations, and loss, misuse or theft of data |
| Our websites could also be targeted by direct attacks intended to cause a disruption in service or to siphon off customers to other Internet services |
| Among other risks, our chat rooms may be vulnerable to infestation by software programs or scripts that we refer to as adbots |
| An adbot is a software program that creates a member registration profile, enters a chat room and displays third-party advertisements |
| Our members’ email accounts could be compromised by phishing or other means, and used to send spam email messages clogging our email servers and disrupting our members ability to send and receive email |
| Any successful attempt by hackers to disrupt our websites services or our internal systems could harm our business, be expensive to remedy and damage our reputation, resulting in a loss of visitors, members, subscribers, advertisers and other customers |
| If we are unable to compete effectively, we may lose market share and our revenue may decline |
| Our markets are intensely competitive and subject to rapid change |
| Across all three of our service lines, we compete with traditional media companies focused on the general population and the LGBT community, including local newspapers, national and regional magazines, satellite radio, cable networks and network, cable and satellite television shows |
| In our advertising business, we compete with a broad variety of online and offline content providers, including large media companies such as Yahoo!, MSN, Time Warner and Viacom, as well as a number of smaller companies focused specifically on the LGBT community |
| In our subscription business, our competitors include these companies as well as other companies that offer more targeted online service offerings, such as Match |
| Personals, and a number of other smaller online companies focused specifically on the LGBT community |
| In our transaction business, we compete with traditional and online retailers |
| Most of these transaction service competitors target their products and services to the general audience while still serving the LGBT market |
| Other competitors, however, specialize in the LGBT market, particularly in the gay and lesbian travel space |
| If we are unable to successfully compete with current and new competitors, we may not be able to achieve or maintain adequate market share, increase our revenue or achieve and maintain profitability |
| We believe that the primary competitive factors affecting our business are quality of content and service, functionality, brand recognition, customer affinity and loyalty, ease of use, reliability and critical mass |
| Some of our current and many of our potential competitors have longer operating histories, larger customer bases and greater brand recognition in other business and Internet markets and significantly greater financial, marketing, technical and other resources than we do |
| Therefore, these competitors may be able to devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing policies or may try to attract readers, users or traffic by offering services for free and devote substantially more resources to developing their services and systems than we can |
| Increased competition may result in reduced operating margins, loss of market share and reduced revenue |
| 21 _________________________________________________________________ [80]Table of Contents If we are unable to protect our domain names, our reputation and brand could be harmed if third parties gain rights to, or use, these domain names in a manner that would confuse or impair our ability to attract and retain customers |
| We have registered various domain names relating to our brands, including Gay |
| If we fail to maintain these registrations, a third party may be able to gain rights to or cause us to stop using these domain names, which will make it more difficult for users to find our websites and our service |
| For example, the injunction issued in the DIALINK matter has forced us to temporarily change our domain name in France during our appeal of that decision and may make it more difficult for French users to find our French website |
| The acquisition and maintenance of domain names are generally regulated by governmental agencies and their designees |
| The regulation of domain names in the United States may change in the near future |
| Governing bodies may designate additional top-level domains, such as |
| eu, in addition to currently available domains such as |
| tv, for example, appoint additional domain name registrars or modify the requirements for holding domain names |
| If a third party acquires domain names similar to ours and engages in a business that may be harmful to our reputation or confusing to our subscribers and other customers, our revenue may decline, and we may incur additional expenses in maintaining our brand and defending our reputation |
| Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear |
| We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights |
| If we fail to adequately protect our trademarks and other proprietary rights, or if we get involved in intellectual property litigation, our revenue may decline and our expenses may increase |
| We rely on a combination of confidentiality and license agreements with our employees, consultants and third parties with whom we have relationships, as well as trademark, copyright and trade secret protection laws, to protect our proprietary rights |
| If the protection of our proprietary rights is inadequate to prevent use or appropriation by third parties, the value of our brands and other intangible assets may be diminished, competitors may be able to more effectively mimic our service and methods of operations, the perception of our business and service to subscribers and potential subscribers may become confused in the marketplace and our ability to attract subscribers and other customers may suffer, resulting in loss of revenue |
| The Internet content delivery market is characterized by frequent litigation regarding patent and other intellectual property rights |
| As a publisher of online content, we face potential liability for negligence, copyright, patent or trademark infringement or other claims based on the nature and content of materials that we publish or distribute |
| For example, we have received, and may receive in the future, notices or offers from third parties claiming to have intellectual property rights in technologies that we use in our businesses and inviting us to license those rights |
| Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity, and we may not prevail in any future litigation |
| We may also attract claims that our print and online media properties have violated the copyrights, rights of privacy, or other rights of others |
| Adverse determinations in litigation could result in the loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from third parties or prevent us from licensing our technology or selling our products, any of which could seriously harm our business |
| An adverse determination could also result in the issuance of a cease and desist order, which may force us to discontinue operations through our website or websites |
| For example, the injunction issued in the DIALINK matter has forced us to temporarily change our domain name in France during our appeal of that decision and may make it more difficult for French users to find our French website |
| Intellectual property litigation, whether or not determined in our favor or settled, could be costly, could harm our reputation and could divert the efforts and attention of our management and technical personnel from normal business operations |
| 22 _________________________________________________________________ [81]Table of Contents Existing or future government regulation in the United States and other countries could limit our growth and result in loss of revenue |
| We are subject to federal, state, local and international laws, including laws affecting companies conducting business on the Internet, including user privacy laws, regulations prohibiting unfair and deceptive trade practices and laws addressing issues such as freedom of expression, pricing and access charges, quality of products and services, taxation, advertising, intellectual property rights, display and production of material intended for mature audiences and information security |
| In particular, we are currently required, or may in the future be required, to: • conduct background checks on our members prior to allowing them to interact with other members on our websites or, alternatively, provide notice on our websites that we have not conducted background checks on our members, which may result in our members canceling their membership or failing to subscribe or renew their subscription, resulting in reduced revenue; • provide advance notice of any changes to our privacy policies or to our policies on sharing non-public information with third parties, and if our members or subscribers disagree with these policies or changes, they may wish to cancel their membership or subscription, which will reduce our revenue; • with limited exceptions, give consumers the right to prevent sharing of their non-public personal information with unaffiliated third parties, and if a significant portion of our members choose to request that we don’t share their information, our advertising revenue that we receive from renting our mailing list to unaffiliated third parties may decline; • provide notice to residents in some states if their personal information was, or is reasonably believed to have been, obtained by an unauthorized person such as a computer hacker, which may result in our members or subscribers deciding to cancel their membership or subscription, reducing our membership base and subscription revenue; • comply with current or future anti-spam legislation by limiting or modifying some of our marketing and advertising efforts, such as email campaigns, which may result in a reduction in our advertising revenue; for instance, two states recently passed legislation creating a “do not contact” registry for minors that would make it a criminal violation to send an e-mail message to an address on that state’s registry if the e-mail message contained an advertisement for or even a link to a website that offered products or services that minors are prohibited from accessing; • comply with the European Union privacy directive and other international regulatory requirements by modifying the ways in which we collect and share our users’ personal information; if these modifications render our services less attractive to our members or subscribers, for example by limiting the amount or type of personal information our members or subscribers could post to their profiles, they may cancel their memberships or subscriptions, resulting in reduced revenue; • qualify to do business in various states and countries, in addition to jurisdictions where we are currently qualified, because our websites are accessible over the Internet in multiple states and countries, which if we fail to so qualify, may prevent us from enforcing our contracts in these states or countries and may limit our ability to grow our business; • limit our domestic or international expansion because some jurisdictions may limit or prevent access to our services as a result of the availability of some content intended for mature viewing on some of our websites and through some of the businesses we acquired from LPI which may render our services less attractive to our members or subscribers and result in a decline in our revenue; and • limit or prevent access, from some jurisdictions, to some or all of the member-generated content available through our websites, which may render our services less attractive to our members or subscribers and result in a decline in our revenue |
| For example, in June 2005, the United States Department of Justice (the “DOJ”) adopted regulations purporting to implement the Child Protection and Obscenity Act of 1988, as amended (the “Act”), by requiring primary and secondary producers, as defined in the regulations, of certain adult materials to obtain, maintain and make available for 23 _________________________________________________________________ [82]Table of Contents inspection specified records, such as a performer’s name, address and certain forms of photo identification as proof of a performer’s age |
| Failure to properly obtain, maintain or make these records available for inspection upon request of the DOJ could lead to an imposition of penalties, fines or imprisonment |
| We could be deemed a secondary producer under the Act because we allow our members to display photographic images on our websites as part of member profiles |
| In addition, we may be deemed a primary producer under the Act because a portion of one of the businesses we acquired in the LPI acquisition is primarily involved in production of adult content |
| Enforcement of these regulations has been stayed pending resolution of a legal challenge to their constitutionality on the grounds that the regulations exceed the DOJ’s statutory authority and violate First Amendment and privacy rights, among others |
| If the legal challenge is unsuccessful, we will be subject to significant and burdensome recordkeeping compliance requirements and/or we will have to evaluate and implement additional registration and recordkeeping processes and procedures, each of which would result in additional expenses to us |
| Further, if our members and subscribers feel these additional registration and recordkeeping processes and procedures are too burdensome, this may result in an adverse impact on our subscriber growth and churn which, in turn, will have an adverse effect on our financial condition and results of operations |
| The restrictions imposed by, and costs of complying with, current and possible future laws and regulations related to our business could limit our growth and reduce our membership base, revenue and profit margins |
| The risks of transmitting confidential information online, including credit card information, may discourage customers from subscribing to our services or purchasing goods from us |
| In order for the online marketplace to be successful, we and other market participants must be able to transmit confidential information, including credit card information, securely over public networks |
| Third parties may have the technology or know-how to breach the security of our customer transaction data |
| Any breach could cause consumers to lose confidence in the security of our websites and choose not to subscribe to our services or purchase goods from us |
| We cannot guarantee that our security measures will effectively prohibit others from obtaining improper access to our information or that of our users |
| If a person is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt our operations |
| Any security breach could expose us to risks of data loss, litigation and liability and may significantly disrupt our operations and harm our reputation, operating results or financial condition |
| If we are unable to provide satisfactory customer service, we could lose subscribers |
| Our ability to provide satisfactory customer service depends, to a large degree, on the efficient and uninterrupted operation of our customer service centers |
| Any significant disruption or slowdown in our ability to process customer calls resulting from telephone or Internet failures, power or service outages, natural disasters or other events could make it difficult or impossible to provide adequate customer service and support |
| Further, we may be unable to attract and retain adequate numbers of competent customer service representatives, which is essential in creating a favorable interactive customer experience |
| If we are unable to continually provide adequate staffing for our customer service operations, our reputation could be harmed and we may lose existing and potential subscribers |
| In addition, we cannot assure you that email and telephone call volumes will not exceed our present system capacities |
| If this occurs, we could experience delays in responding to customer inquiries and addressing customer concerns |
| We may be the target of negative publicity campaigns or other actions by advocacy groups that could disrupt our operations because we serve the LGBT community |
| Advocacy groups may target our business through negative publicity campaigns, lawsuits and boycotts seeking to limit access to our services or otherwise disrupt our operations because we serve the LGBT community |
| These actions could impair our ability to attract and retain customers, especially in our advertising business, resulting in decreased revenue, and cause additional financial harm by requiring that we incur significant expenditures to defend our business and by diverting management’s attention |
| Further, some investors, investment banking entities, market makers, lenders and others in the investment community may 24 _________________________________________________________________ [83]Table of Contents decide not to invest in our securities or provide financing to us because we serve the LGBT community, which, in turn, may hurt the value of our stock |
| Adult content in our media properties may be the target of negative publicity campaigns or subject us to restrictive or costly regulatory compliance |
| A portion of the content of our media properties is adult in nature |
| Our adult content increased significantly as a result of our November 2005 acquisition of assets from LPI, which included several adult-themed media properties |
| Advocacy groups may target our business through negative publicity campaigns, lawsuits and boycotts seeking to limit access to our services or otherwise disrupt our operations because we are a provider of adult content |
| These actions could impair our ability to attract and retain customers, especially in our advertising business, resulting in decreased revenue, and cause additional financial harm by requiring that we incur significant expenditures to defend our business and by diverting management’s attention |
| Further, some investors, investment banking entities, market makers, lenders and others in the investment community may decide not to invest in our securities or provide financing to us because of our adult content, which, in turn, may hurt the value of our stock |
| Additionally, future laws or regulations, or new interpretations of existing laws and regulations, may restrict our ability to provide adult content, or make it more difficult or costly to do so, such as the regulations recently adopted by the DOJ purporting to implement the Child Protection and Obscenity Act of 1988 |
| If one or more states or countries successfully assert that we should collect sales or other taxes on the use of the Internet or the online sales of goods and services, our expenses will increase, resulting in lower margins |
| In the United States, federal and state tax authorities are currently exploring the appropriate tax treatment of companies engaged in online commerce, and new state tax regulations may subject us to additional state sales and income taxes, which could increase our expenses and decrease our profit margins |
| In 2003, the European Union implemented new rules regarding the collection and payment of value added tax, or VAT These rules require VAT to be charged on products and services delivered over electronic networks, including software and computer services, as well as information and cultural, artistic, sporting, scientific, educational, entertainment and similar services |
| Historically, suppliers of digital products and services that existed outside the European Union were not required to collect or remit VAT on digital orders made to purchasers in the European Union |
| With the implementation of these rules, we are required to collect and remit VAT on digital orders received from purchasers in the European Union, effectively reducing our revenue by the VAT amount because we currently do not pass this cost on to our customers |
| We also do not currently collect sales, use or other similar taxes for sales of our subscription services or for physical shipments of goods into states other than California and New York |
| In the future, one or more local, state or foreign jurisdictions may seek to impose sales, use or other tax collection obligations on us |
| If these obligations are successfully imposed upon us by a state or other jurisdiction, we may suffer decreased sales into that state or jurisdiction as the effective cost of purchasing goods or services from us will increase for those residing in these states or jurisdictions |
| We are exposed to pricing and production capacity risks associated with our magazine publishing business, which could result is lower revenues and profit margins |
| As a result of our November 2005 acquisition of assets from LPI, we publish and distribute magazines, such as The Advocate, Out, The Out Traveler and HIVPlus, among others |
| The commodity prices for paper products have been increasing over the recent years, and producers of paper products are often faced with production capacity limitations, which could result in delays or interruptions in our supply of paper |
| In addition, mailing costs have also been increasing, primarily due to higher postage rates |
| If pricing of paper products and mailing costs continue to increase, or if we encounter shortages in our paper supplies, our revenues and profit margins could be adversely affected |
| 25 _________________________________________________________________ [84]Table of Contents We may need additional capital and may not be able to raise additional funds on favorable terms or at all, which could increase our costs, limit our ability to grow and dilute the ownership interests of existing stockholders |
| We anticipate that we may need to raise additional capital in the future to facilitate long-term expansion, to respond to competitive pressures or to respond to unanticipated financial requirements |
| We cannot be certain that we will be able to obtain additional financing on commercially reasonable terms or at all |
| If we raise additional funds through the issuance of equity, equity-related or debt securities, these securities may have rights, preferences or privileges senior to those of the rights of our common stock, and our stockholders will experience dilution of their ownership interests |
| A failure to obtain additional financing or an inability to obtain financing on acceptable terms could require us to incur indebtedness that has high rates of interest or substantial restrictive covenants, issue equity securities that will dilute the ownership interests of existing stockholders, or scale back, or fail to address opportunities for expansion or enhancement of, our operations |
| We cannot assure you that we will not require additional capital in the near future |
| In the event of an earthquake, other natural or man-made disaster, or power loss, our operations could be interrupted or adversely affected, resulting in lower revenue |
| Our executive offices and our data center are located in the San Francisco Bay area and we have significant operations in Los Angeles |
| Our business and operations could be disrupted in the event of electrical blackouts, fires, floods, earthquakes, power losses, telecommunications failures, acts of terrorism, break-ins or similar events |
| Because our California operations are located in earthquake-sensitive areas, we are particularly susceptible to the risk of damage to, or total destruction of, our systems and infrastructure |
| We are not insured against any losses or expenses that arise from a disruption to our business due to earthquakes |
| Further, the State of California has experienced deficiencies in its power supply over the last few years, resulting in occasional rolling blackouts |
| If rolling blackouts or other disruptions in power occur, our business and operations could be disrupted, and we will lose revenue |
| Revenue from our recently acquired RSVP travel business depends in significant part on ocean-going cruises, and could be adversely affected by hurricanes, tsunamis and other meteorological events affecting areas to be visited by future cruises |
| Our travel business could also be materially adversely affected by concerns about communicable infectious diseases, including future varieties of influenza |
| Recent and proposed regulations related to equity compensation could adversely affect our ability to attract and retain key personnel |
| We have used stock options and other long-term incentives as a fundamental component of our employee compensation packages |
| We believe that stock options and other long-term equity incentives directly motivate our employees to maximize long-term stockholder value and, through the use of vesting, encourage employees to remain with our company |
| Several regulatory agencies and entities are considering regulatory changes that could make it more difficult or expensive for us to grant stock options to employees |
| For example, the Financial Accounting Standards Board has adopted changes to the US generally accepted accounting principles that will require us to record a charge to earnings for employee stock option grants |
| In addition, regulations implemented by the Nasdaq National Market generally requiring stockholder approval for all stock option plans could make it more difficult for us to grant options to employees in the future |
| To the extent that new regulations make it more difficult or expensive to grant stock options to employees, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could materially and adversely affect our business |
| In the event we are unable to satisfy regulatory requirements relating to internal control over financial reporting, or if these internal controls are not effective, our business and our stock price could suffer |
| Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to do a comprehensive and costly evaluation of their internal controls |
| As a result, our management is required on an ongoing basis to perform an evaluation of our internal control over financial reporting and have our independent registered public accounting firm attest to such evaluations |
| Our efforts to comply with Section 404 and related regulations 26 _________________________________________________________________ [85]Table of Contents regarding our management’s required assessment of internal control over financial reporting and our independent registered public accounting firm’s attestation of that assessment has required, and will continue to require, the commitment of significant financial and managerial resources |
| If we fail to timely complete these evaluations, or if our independent registered public accounting firm cannot timely attest to our evaluations, we could be subject to regulatory scrutiny and a loss of public confidence in our internal controls, which could have an adverse effect on our business and our stock price |
| Our stock price may be volatile and you may lose all or a part of your investment |
| Since our initial public offering in October 2004, our stock price has been and may continue to be subject to wide fluctuations |
| From October 14, 2004 through December 31, 2005, the closing sale prices of our common stock on the Nasdaq ranged from dlra6dtta25 to dlra13dtta60 per share |
| Our stock price may fluctuate in response to a number of events and factors, such as quarterly variations in our operating results, changes in financial estimates and recommendations by securities analysts and the operating and stock price performance of other companies that investors or analysts deem comparable to us |
| In addition, the stock markets have experienced significant price and trading volume fluctuations, and the market prices of Internet-related and e-commerce companies in particular have been extremely volatile and have recently experienced sharp share price and trading volume changes |
| These broad market fluctuations may impact the trading price of our common stock |
| In the past, following periods of volatility in the market price of a public company’s securities, securities class action litigation has often been instituted against that company |
| This type of litigation could result in substantial costs to us and a likely diversion of our management’s attention |
| Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable |
| Our charter documents may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable because they will: • authorize our board of directors, without stockholder approval, to issue up to 5cmam000cmam000 shares of undesignated preferred stock; • provide for a classified board of directors; • prohibit our stockholders from acting by written consent; • establish advance notice requirements for proposing matters to be approved by stockholders at stockholder meetings; and • prohibit stockholders from calling a special meeting of stockholders |
| As a Delaware corporation, we are also subject to Delaware law anti-takeover provisions |
| Under Delaware law, a corporation may not engage in a business combination with any holder of 15prca or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction |
| Our board of directors could rely on Delaware law to prevent or delay an acquisition of us |