| VERTRUE INC Item 1A Risk Factors |
| 8 Item 1A Risk Factors ------------ The statements in this section describe the major risks to our business and constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995 |
| These risks discussed below and elsewhere in this 2006 Form 10-K should be considered carefully when evaluating our business operations and strategies |
| Additionally, there may be risks and uncertainties that we are not aware of or that we currently deem immaterial, which may become material factors affecting our operations and business success |
| 8 Our disclosure and analysis in this 2006 Form 10-K contain some forward-looking statements |
| From time to time, we also provide forward-looking statements in other materials we release to the public |
| These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements |
| Such statements give our current expectations or forecasts of future events and they do not relate strictly to historical or current facts |
| We have generally identified such statements by using words such as "e anticipate, "e "e estimate, "e "e project, "e "e intend, "e "e plan, "e "e believe, "e "e will, "e "e target, "e "e forecast "e and similar expressions in connection with any discussion of future operating or financial performance |
| All statements that address activities, events or developments that we intend, expect or believe may occur in the future are forward-looking statements |
| In particular, these include statements relating to future actions, future performance or results of current and anticipated revenues, expenses, interest rates, foreign exchange rates, the outcome of contingencies, such as legal proceedings, and financial results |
| We cannot guarantee that any forward-looking statement will be realized |
| Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions |
| Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated, or projected |
| You should bear this in mind as you consider forward-looking statements |
| We undertake no obligation to publicly update 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 Form 10-Q and Form 8-K reports to the SEC The risks that follow, individually or in the aggregate, are those that we think could cause our actual results to differ materially from those stated or implied in forward-looking statements |
| Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties |
| Our long-term profitability depends on our ability to replace the members of our membership programs or customers of our personals services that we lose in the ordinary course of business, and, if we fail to do so, our member or customer base and consequently our revenue will decline |
| We lose a significant number of members of our membership programs and customers of our personals and management services segments each year in the ordinary course of business |
| The loss of such members or customers may occur as a result of numerous factors including: o changing consumer preferences; o competitive price pressures; o general economic conditions; o customer dissatisfaction; and o credit or debit card holder turnover |
| Failure to obtain new members or customers who produce revenue at least equivalent to the revenue from the lost members or customers would result in a decrease in the number of our members or customers and, consequently, in a reduction of our revenue |
| There can be no assurance that we can successfully replace the lost members or customers |
| In addition, even if we are successful in adding new members and customers to replace lost revenue, our profitability and cash flow may still decline since we generally incur losses and negative cash flow during the initial stages of an individual membership program and customer procurement, as compared with renewal periods, due primarily to higher marketing costs associated with initial membership and customer procurement |
| Increased cancellations could impair our financial condition, results of operations and cash flows |
| Monthly members of our membership programs are billed each month after their trial period until they cancel their membership |
| Annual members who cancel their membership at any time during the membership period generally receive a pro rata refund of the membership fee based on the remaining portion of the membership period |
| Increased cancellations could have a material adverse effect on our business, financial condition, results of operations, and cash flows |
| 9 The success of our business depends on the introduction of popular new programs or services or the enhancement of existing membership programs or personals services |
| Our business is substantially dependent on our ability to develop and successfully introduce popular new membership programs or to provide enhancements to existing membership programs which generate consumer loyalty |
| Failure to introduce new membership programs in a timely manner could result in our competitors acquiring additional market share |
| In addition, the introduction or announcement of new innovative membership programs or personals services by us or by others could render existing membership programs or personals services obsolete or result in a delay or decrease in orders for existing membership programs or personals services as customers evaluate new membership programs or personals services |
| Therefore, the announcement or introduction of new innovative membership programs by us or others, or our failure to introduce new membership programs which generate broad consumer appeal, or our inability to refine our service offerings or introduce new services in our personals business could have a material adverse effect on our business, financial condition, results of operations, and cash flows |
| 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 as a result of our advertising efforts, fluctuations in our advertising spending generally, or with respect to our Internet-based spending specifically, could have an adverse impact on our revenue and our profitability |
| We depend on payment processors to process revenue and obtain payments for us |
| We depend on payment processors to obtain payments for us |
| The payment processors operate pursuant to agreements that may be terminated with limited prior notice |
| In the event a payment processor ceases operations or terminates its agreement with us, there can be no assurance a replacement payment processor could be retained on a timely basis, if at all |
| Any service interruptions, processing cost increases, delays or quality problems could result in delays in collecting payments, decreased revenue and/or increased expense which could have a material adverse effect on our business, financial condition, results of operations, and cash flows |
| We depend in part on the communication channels through which we market and service our products and services such as telephone, internet, and the United States Postal Service |
| An interruption of, or an increase in the billing rate for, such services could adversely affect our business |
| We market and service our programs by various communication channels, including telephone, internet, and direct mail |
| Accordingly, our business is dependent on the quality of the postal and telephone services provided by the US Post Office and various local and long distance telephone companies |
| Any significant interruption of such services or any limitations in their ability to provide us with increased capacity could adversely impact our business, financial condition, and results of operation |
| In addition, rate increases imposed by providers would increase our and our marketing partners &apos operating expenses and could have a material adverse effect on our business, financial condition, results of operations, and cash flows |
| We depend on third-party vendors to supply the products and services that we market |
| The failure of these vendors to provide such products or services could result in customer dissatisfaction and could harm our business |
| We depend on third-party vendors to provide most of the products and services included in the membership programs and services that we market |
| The third-party vendors generally operate pursuant to non-exclusive agreements with us that may be terminated by the vendor with limited prior notice |
| There can be no assurance that, in the event a vendor ceases operations, terminates, breaches, or chooses not to renew its agreement with us, a replacement vendor could be retained on a timely basis, if at all |
| In addition, our third-party vendors are independent contractors and the level and quality of services they provide is outside our control |
| Any product or service interruptions, delays, or quality problems could result in customer dissatisfaction and membership cancellations and/or termination of marketing partners &apos relationships with us, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows |
| Our business is highly dependent on our existing computer, billing, communications, and other technological systems |
| Any temporary or permanent loss of any of our systems could have a negative effect on our business, financial condition, and results of operations |
| Our business depends upon ongoing investments in advanced computer database and telecommunications technology as well as upon our ability to protect our telecommunications and information technology systems against damage or system interruptions from natural disasters, technical failures, and other events beyond our control |
| In order to compete effectively and to meet the needs of our clients, members, and customers, we must maintain our systems as well as invest in improved technology |
| A temporary or permanent loss of any of our systems or networks could cause significant damage to our reputation and could result in a loss of revenue |
| 10 In addition, we receive credit data electronically, and this delivery method is susceptible to damage, delay, or inaccuracy |
| A significant portion of our business involves telephonic customer service as well as mailings, both of which depend upon the data generated from our computer systems |
| Unanticipated problems with our telecommunications and information technology systems may result in a significant system outage or data loss, which could interrupt our operations |
| Our infrastructure may also be vulnerable to computer viruses, hackers, or other disruptions entering our systems from the credit reporting agencies, our marketing partners, members, customers, or other authorized or unauthorized sources |
| Any damage to our telecommunications and information technology systems, failure of communication links, or other loss that causes interruption in, or damage to, our operations could have a material adverse effect on our business, financial condition, results of operations, and cash flows |
| If our clients make significant changes to the materials that decrease our results or if they limit the information that they provide to us, our ability to generate new customers may be adversely affected |
| There can be no assurance that our clients will continue to provide us with the use of such customer information |
| Our marketing efforts are largely dependent on obtaining approval of the solicitation materials from our clients |
| We market our programs and services based on tested marketing materials, and any significant changes to those materials that are required by our clients could have a negative impact on our results |
| The material terms of each marketing campaign must be mutually agreed upon by the parties |
| There can be no assurance that we will obtain approvals of our marketing materials from our clients, and the failure to do so could have a material adverse impact on our business, financial condition, results of operations, and cash flows |
| The loss of key clients could have a material adverse effect on our results of operations |
| The loss of key clients could have a material adverse effect on our results of operations |
| Membership programs marketed through one of these clients, West Corporation, accounted for approximately 12prca of our total revenue for the fiscal year ended June 30, 2006 |
| Though the status of members that have already joined our membership programs through existing clients would not be affected, a loss of key clients or a decline in their respective businesses would result in the loss of our ability to draw new customers to our membership programs marketed through these clients and could have a material adverse effect on our financial condition, results of operations, and cash flows |
| There can be no assurance that one or more of our clients will not terminate its relationship with us or suffer a decline in its business |
| We market certain of our membership programs through credit card issuers |
| A downturn in the credit card industry or changes in the marketing techniques of credit card issuers could adversely affect us |
| Our success is dependent in large part on continued demand for our membership programs within our clients &apos industries |
| Certain of our membership programs are marketed through our credit card issuer clients |
| A significant downturn in the credit card industry or a trend in that industry to reduce or eliminate its use of membership programs could adversely affect our business |
| Our failure to protect private data could damage our reputation and cause us to expend capital and other resources to protect against future security breaches and could harm our business |
| Certain of our services are based upon the collection, distribution, and protection of sensitive private data |
| Unauthorized users might access that data, and human error or technological failures might cause the wrongful dissemination of that data |
| If we experience a security breach, the integrity of certain of our services may be affected and such a breach could violate certain of our marketing partner agreements, which could give our marketing partners the right to terminate such agreements with us |
| We have incurred, and may incur in the future, significant costs to protect against the threat of a security breach |
| We may also incur significant costs to solve problems that may be caused by future breaches or to prevent such breaches |
| Any breach or perceived breach could subject us to legal claims from our marketing partners or customers and/or regulatory or law enforcement entities under laws that govern the protection of non-public personal information |
| Moreover, any public perception that we have engaged in the unauthorized release of, or have failed to adequately protect, private information could adversely affect our ability to attract and retain members and customers |
| In addition, unauthorized third parties might alter information in our databases, which would adversely affect both our ability to market our services and the credibility of our information |
| We depend on key executive and marketing personnel |
| We are dependent on certain key members of our management and marketing staff, particularly our Chief Executive Officer, Gary Johnson |
| In addition, we believe that our future success will depend in part upon our ability to attract and retain highly skilled managerial and marketing personnel |
| We face significant competition for such personnel, and we may be unsuccessful in hiring or retaining the personnel we require |
| The failure to hire and retain such personnel could have a material adverse effect on our business, financial condition and results of operations |
| 11 The industries in which we operate are highly competitive |
| We may be unable to compete effectively with other companies in our industries that have financial or other advantages and increased competition could lead to reduced market share, a decrease in margins and a decrease in revenue |
| We believe that the principal competitive factors in the industries in which we operate include the ability to identify, develop, and offer innovative programs and services, the quality and breadth of programs and services offered, competitive pricing and in-house marketing expertise |
| Our competitors offer programs and services which are similar to, or which compete directly with, those provided by us |
| In addition, in our Marketing Services segment, we could face competition if our current clients or other companies were to introduce their own in-house programs or services similar to ours |
| Some of the existing and potential competitors to our Marketing Services and Personals businesses have substantially larger customer bases and greater financial and other resources than we do |
| There can be no assurance that: o our competitors will not increase their emphasis on programs or services similar to those we offer; o our competitors will not provide programs or services comparable or superior to those we provide at lower costs; o our competitors will not adapt more quickly than us to evolving industry trends or changing market requirements; o new competitors will not enter the market; or o other businesses (including our current marketing partners) will not themselves introduce in-house programs or services similar to those we offer |
| In order to compete effectively with our competitors, we must be able to provide superior programs and services at competitive prices |
| In addition, we must be able to adapt quickly to evolving industry trends, a changing market and increased regulatory requirements |
| Failure to do so could result in our competitors acquiring additional market share in areas of consumer interest |
| Any increase in competition could result in price reductions, reduced gross margin, and loss of market share, any of which could have a material adverse impact on our business, financial condition, and results of operations |
| Additionally, because contracts between clients and program providers in our Marketing Services business are often exclusive with respect to a particular program, potential clients may be prohibited from contracting with us to promote a new program if the products and services provided by our program are similar to, or overlap with, the products and services provided by an existing program of a competitor |
| Our industry is increasingly subject to US state, federal, and foreign government regulation, which could impede our ability to market our programs and services and reduce our profitability |
| We market our membership programs and services through various distribution channels, including internet marketing, inbound call marketing, television and newspaper advertising, direct mail, and telemarketing |
| These channels are regulated at the state, federal, and foreign levels and we believe that these channels will be subject to increasing regulation, particularly in the area of consumer privacy |
| Such regulation may limit our ability to solicit new members or customers or to offer products or services to existing members or customers |
| Our Membership Services segment is subject to extensive regulation and oversight by the FTC, the Federal Communications Commission (the "e FCC "e ), state attorneys general and other state regulatory agencies, including state insurance regulators and various foreign regulatory entities |
| Our programs and services involve the use of nonpublic personal information that is subject to federal consumer privacy laws, such as the federal Gramm Leach Bliley Act, and various federal and state telemarketing regulations, including the FTCapstas Telemarketing Sales Rule, the FCCapstas Telephone Consumer Protection Act and implementing regulations, as well as various state telemarketing laws and regulations |
| While we do not believe that the laws and regulations passed to date will have a material impact on our business, additional federal, state or foreign laws and/or regulations, including subsequent amendments to existing laws and regulations, could cause a material adverse impact on our business, financial condition, results of operations, and cash flows |
| 12 Compliance with these laws and regulations is generally our responsibility, and we could be subject to a variety of enforcement and/or private actions for any failure to comply such laws and regulations |
| Any changes to these laws and regulations could materially increase our compliance costs |
| Noncompliance with any laws and regulations enforced by a state, federal, or foreign consumer protection authority may subject us or our management to fines or various forms of civil or criminal prosecution, any of which could have a material adverse effect on our business, financial condition and results of operations |
| Also, the media often publicizes perceived noncompliance with consumer protection laws and regulations and violations of notions of fair dealing with consumers and the membership services industry is susceptible to peremptory charges by the media of regulatory noncompliance and unfair dealing |
| We are subject to legal actions that could have a negative impact on our financial condition, results of operations, cash flows or reputation |
| We are involved in claims, legal proceedings, and governmental inquiries related to employment matters, contract disputes, business practices, trademark and copyright infringement claims, and other commercial matters |
| While we cannot predict the outcome of pending suits, claims, investigations, and inquiries, the cost of responding to and defending such suits, as well as the ultimate resolution of any of these matters, could have a material adverse effect on our business, financial condition, results of operations, cash flows, or reputation |
| We may experience operational and financial risks in connection with acquisitions |
| In addition, some of the businesses acquired by us may incur significant losses from operations or experience impairment of carrying value |
| Our future growth may depend, in part, on acquisitions |
| We may experience operational and financial risks in connection with acquisitions |
| To the extent that we grow through acquisitions, we will need to: o retain senior management and other key personnel at acquired businesses; and o successfully manage acquisition-related strain on our management, operations, and financial resources and on the management, operations, and financial resources of the acquired company |
| We may not be successful in addressing these challenges or any other problems encountered in connection with historical and future acquisitions, and, the failure to do so, could adversely affect our business, financial condition, and results of operations |
| In addition, we may not achieve the operational synergies and cost savings anticipated in connection with any such acquisition |
| The failure to realize anticipated benefits of one or more of our acquisitions and the undertaking of future acquisitions could result in potentially diluted issuances of equity securities, additional contingent liabilities, or the impairment of goodwill and/or other intangible assets, any of which could adversely affect our business, financial condition, and results of operations |
| We may need to raise additional capital in the future to fund liquidity and capital requirements, which may not be available to us on favorable terms or at all |
| Our future liquidity and capital requirements will depend upon numerous factors, including the success of our membership programs and other product and service offerings, market developments, potential acquisitions and additional repurchases of our common stock |
| We may need to raise additional funds to support expansion, develop new products or services, respond to competitive pressures, acquire complementary businesses or take advantage of unanticipated opportunities |
| The indenture governing our senior secured credit facility and our Senior Notes contain covenants that may restrict our ability to finance operations or capital needs |
| We cannot be certain that we will be able to obtain adequate financing on favorable terms or at all |
| Our quarterly operating results are volatile and may adversely affect the market price of our securities |
| Our quarterly revenues, expenses, and operating results have varied significantly in the past and may vary significantly from quarter to quarter in the future |
| Factors which could cause our financial results to fluctuate include: o increased or decreased cancellation of member enrollments; o the rate of renewal by existing members; o increased default on notes receivables; o our ability to introduce new programs or products or to enhance existing programs or products on a timely basis and the introduction of programs or products by our competitors; o the mix of our client base; o seasonality of the businesses of our clients; o market acceptance and demand for our and our clients &apos membership programs generally; o the mix of programs we offer and the price points of such programs; o increased commission rates and other compensation required by our clients; 13 o the mix of our marketing channels; o unanticipated service interruptions; o movement in foreign exchange rates; o adverse outcomes of litigation or regulatory matters; o the availability of vendors to support programs we offer; o the level of enthusiasm for health and fitness, travel, entertainment and leisure activities, and other lifestyle elements underlying our membership programs; and o competitive pressures on selling prices |
| Operating results would be adversely affected if projected revenues for a given quarter are not achieved |
| In addition, any future acquisitions by us could have a material adverse effect on our results of operations, particularly in quarters immediately following consummation of such transactions, while the operations of the acquired business are being integrated into our operations |