| AQUANTIVE INC Item 1A Risk Factors You should carefully consider the following factors that may affect our business, future operating results and financial condition, as well as other information included in this Annual Report |
| The risks and uncertainties described below are not the only ones we face |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations |
| If any of the following risks actually occur, our business, financial condition and operating results could be materially adversely affected |
| We are subject to risks frequently encountered by companies in the Internet marketing and advertising industry |
| Our prospects for financial and operational success must be considered in light of the risks frequently encountered by companies in the Internet marketing and advertising industry |
| These risks include the need to: • attract new clients and maintain current client relationships; • achieve effective advertising campaign results for our clients; • continue to expand the number of services and technologies we offer; • successfully implement our business model, which is evolving; • respond to pricing pressure in some of our lines of business; • maintain our reputation and build trust with our clients; and • identify, attract, retain and motivate qualified personnel |
| If we do not successfully address these risks, our business could suffer |
| Our operating results may fluctuate from quarter to quarter and we cannot assure you that we will be profitable in subsequent quarters |
| Our revenue, expenses and operating results could vary significantly from quarter to quarter for several reasons, including: • addition of new clients or loss of current clients; • seasonal fluctuations in advertising spending; • timing variations on the part of advertisers with regard to implementing advertising campaigns; • changes in the availability and pricing of advertising space; • timing and amount of our costs; • costs related to any possible future acquisitions of technologies or businesses; • changes in revenue contribution by our business lines, which historically have had varying operating margins; and • timing in the completion of web development projects or in the recognition of revenue on those projects |
| Fluctuations in our quarterly operating results and seasonality may cause our stock price to decline |
| It is possible that in the future our operating results in a particular quarter or quarters will not meet the expectations of securities analysts, investors or us |
| If our operating results fail to meet these expectations, the market price of our common stock could decline |
| As is typical in our industry, certain aspects of our business may experience seasonality |
| For example, our first calendar quarter is impacted by relatively lower web media advertising expenditures, while we typically benefit in our fourth quarter from increased advertising 8 _________________________________________________________________ [62]Table of Contents expenditures |
| To date, our quarterly revenue growth has masked any seasonality effects; however, seasonality may have a more pronounced effect on our operating results in the future |
| We believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance and should not be relied upon to predict the future performance of our stock price |
| We may not be able to compete successfully in the market for Internet advertising |
| The market for Internet advertising and consulting services is competitive |
| In the digital marketing services segment, Avenue A|Razorfish competes with interactive advertising agencies, including Internet advertising arms of traditional advertising agencies, and other companies that provide marketing services, such as Agency |
| com, Carat, Digital Edge, Digitas, Euro RSG 4D, Grey Digital Marketing and Ogilvy Interactive |
| We also compete in the digital marketing services market with several technology system integrators, such as IBM Global Solutions and Accenture |
| Our digital marketing technologies, through Atlas, compete with third-party ad serving companies and campaign management technology companies, such as DoubleClick and ValueClick |
| In addition, the Atlas Search offering competes with providers of search management capabilities, such as Did-it and Bid Rank, and Atlas Site Optimization competes with providers of website usability and effectiveness metrics tools, such as Keynote Systems, Optimost and Offermatica |
| Our digital performance media, through DRIVEpm and MediaBrokers, competes with providers of performance media such as Advertising |
| com ValueClick, BURST! |
| Media and Tribal Fusion; publisher tool providers, such as TACODA Systems and Revenue Science; and companies that provide broad distribution of advertising across the Internet, such as AOC, MSN, Yahoo and Google |
| Many of our competitors have longer operating histories, greater name recognition, larger client bases and significantly greater financial, technical and marketing resources than we have |
| Also, many of our current and potential competitors have established or may establish cooperative relationships among themselves or with third parties |
| In addition, several of our competitors have combined or may combine in the future with larger companies with greater resources than ours |
| These competitors may engage in more extensive research and development, undertake more far-reaching marketing campaigns and make more attractive offers to existing and potential employees and clients than we do |
| They could also adopt more aggressive pricing policies and may even provide services similar to ours at no additional cost by bundling them with their other product and service offerings |
| They may also develop services that are equal or superior to our services or that achieve greater market acceptance than our services |
| Increased competition is likely to result in price reductions, reduced margins and loss of market share |
| We cannot assure you that we will be able to compete successfully, and competitive pressures may harm our business |
| In addition, our ability to maintain existing client relationships and generate new clients will depend to a significant degree on the quality of our services and our reputation among clients and potential clients, as compared with our competitors |
| To the extent we lose clients to our competitors because of dissatisfaction with our services or because our reputation is harmed for any other reason, our business could be negatively affected |
| Consolidation of Internet advertising networks, web portals, Internet search engine sites and web publishers may impair our ability to serve advertisements, to acquire advertising space at favorable rates and to collect campaign data |
| The consolidation of Internet advertising networks, web portals, Internet search engine sites and web publishers, and increasing industry presence of companies such as Google, could harm our business |
| This type of consolidation could eventually lead to a concentration of desirable advertising space on a very small number of networks and websites |
| This type of concentration could substantially impair our ability to serve advertisements if these networks or websites decide not to permit us to serve, track or manage advertisements on their websites, or if they develop ad placement systems that are not compatible with our ad serving systems |
| These networks or websites could also use their greater bargaining power to increase their rates for advertising space or prohibit or limit our aggregation of advertising campaign data |
| In addition, concentration of desirable advertising space in a small number of networks and websites could diminish the value of our advertising campaign databases, as the value of these databases depends to some degree on the continuous aggregation of data from advertising 9 _________________________________________________________________ [63]Table of Contents campaigns on a variety of different advertising networks and websites |
| Further, major networks and publishers can terminate our ability to serve advertisements on their properties on short notice |
| 9dtta1 _________________________________________________________________ [64]Table of Contents The loss of a major client or a reduction in a major client’s Internet advertising or marketing budget could significantly reduce our revenue and profitability |
| Our business would be harmed by the loss of any of our major clients, a reduction in the Internet advertising or marketing budgets of any of these clients or any significant reduction in revenue and profits generated from these clients |
| Current clients may decide not to continue purchasing advertising or marketing services from us or may significantly reduce their advertising or marketing spending, and we may not be able to successfully attract additional clients |
| For example, in July 2003, a major client discontinued its use of most of our services |
| A single customer accounted for 11prca, 13prca and 32prca of our revenues in 2005, 2004 and 2003, respectively |
| In addition, the non-payment of amounts due to us from one or more of our significant clients could harm our business |
| Our client contracts have short termination periods, and the loss of a significant one of these contracts in a short period of time would harm our business |
| We derive a significant portion of our revenue from the sale of advertising services under advertising campaign services contracts, all of which are terminable upon 90 days’ or less notice |
| In addition, these contracts generally do not contain penalty provisions for termination before the end of the contract term |
| As a result of our acquisition of SBIRazorfish, a significant portion of our revenue is now derived from the provision of Internet marketing and consulting services, which tend to be project based and terminable on short notice |
| The non-renewal, termination or deferral of a significant number of these contracts or the termination or deferral of engagements for Internet marketing and consulting services in any one period could cause an immediate and significant decline in our revenue and harm our business |
| The Internet advertising or marketing market may deteriorate, or develop more slowly than expected, which could harm our business |
| If the market for Internet advertising or marketing deteriorates, or develops more slowly than we expect, our business could suffer |
| Our future success is highly dependent on an increase in the use of the Internet, the commitment of advertisers and marketers to the Internet as an advertising and marketing medium, the willingness of our potential clients to outsource their Internet advertising and marketing needs, and our ability to sell technology services to advertising agencies |
| The Internet advertising and marketing market is relatively new and rapidly evolving |
| As a result, demand and market acceptance for Internet advertising, marketing and technology services is uncertain |
| Many of our current or potential clients have little or no experience using the Internet for advertising or marketing purposes and have allocated only a limited portion of their advertising or marketing budgets to Internet advertising or marketing |
| Also, we must compete with traditional advertising media, including television, radio, cable and print, for a share of our clients’ total advertising budgets |
| Businesses, including current and potential clients, may find Internet advertising or marketing to be less effective than traditional advertising media or marketing methods for promoting their products and services, and therefore the market for Internet advertising, marketing and technology services may deteriorate or develop more slowly than expected |
| In addition, “filter” software programs are available that limit or prevent advertising from being delivered to an Internet user’s computer |
| Further, legitimate online businesses may not be able to adequately protect and distinguish themselves from those who are pursuing illegal activities using the Internet |
| The widespread adoption of “filter” software, or the inability of legitimate businesses to address challenges to the online advertising business model posed by activities such as click fraud, could significantly undermine the commercial viability of Internet advertising and seriously harm our business |
| Acquisitions or investments may be unsuccessful and may divert our management’s attention and consume significant resources |
| We have completed several acquisitions in recent years and we may in the future acquire or make investments in other businesses, or acquire products and technologies, to complement our current businesses |
| Any future acquisition or investment may require us to use significant amounts of cash, issue potentially 10 _________________________________________________________________ [65]Table of Contents dilutive equity securities or incur debt |
| In addition, acquisitions involve numerous risks, any of which could harm our business, including: • difficulties in integrating the operations, technologies, services and personnel of acquired businesses; • ineffectiveness or incompatibility of acquired technologies or services; • diversion of management’s attention from other business concerns; • unavailability of favorable financing for future acquisitions; • potential loss of key employees of acquired businesses; • inability to maintain the key business relationships and the reputations of acquired businesses; • responsibility for liabilities of acquired businesses; • inability to maintain our standards, controls, procedures and policies, which could affect our ability to receive an unqualified attestation from our independent accountants regarding management’s required assessment of the effectiveness of our internal control structure and procedures for financial reporting; and • increased fixed costs |
| We may not be able to adapt to rapidly changing Internet technology trends and evolving industry standards |
| The Internet and Internet advertising markets are characterized by rapidly changing technologies, evolving industry standards, frequent new product and service introductions and changing client demands, particularly in the areas of search marketing and rich media |
| The introduction of new products and services embodying new technologies and the emergence of new industry standards may render our services obsolete |
| Our future success will depend on our ability to adapt to rapidly changing technologies, enhance our existing Internet advertising services and develop and introduce a variety of new services to address our clients’ changing demands |
| We may experience difficulties that could delay or prevent the successful design, development, introduction or marketing of our services or that cause our development costs to be higher than anticipated |
| In addition, any new services or enhancements must meet the requirements of our current clients and must achieve market acceptance |
| Material delays in introducing new services and enhancements may cause clients to discontinue use of our services and to use the services of our competitors Internet users may eliminate the placement of cookies through their Internet browser or limit the functionality of cookies through third party software |
| Users may limit or eliminate the placement of cookies on their computers by using third-party software that blocks cookies, or by disabling or restricting the cookie functions of their Internet browser software |
| Internet browser software upgrades may also result in limitations on the use of cookies or Web Beacons (also known as action tags) |
| Technologies like the Platform for Privacy Preferences (P3P) Project may limit collection of cookie and Web Beacon information |
| These factors could limit or eliminate our ability to use cookie or Web Beacon technology, which may harm our business by adversely affecting our ability to conduct targeted advertising campaigns and compile data to formulate campaign strategies and measure the effectiveness of these campaigns |
| We may be subject to legal claims, government action, and damage to our reputation if we, or our clients, vendors, or associates, act or are perceived to act inconsistently with the law, customer expectations, or our privacy policies |
| Legal claims or government action could limit or eliminate our ability to conduct targeted advertising campaigns and compile data that we use to formulate campaign strategies and measure campaign effectiveness for our clients, including limitations on our use of cookie or action tag technology |
| Third parties may bring class action lawsuits against us and other companies relating to online privacy and data collection |
| We 11 _________________________________________________________________ [66]Table of Contents disclose our information collection and dissemination practices in a published privacy statement on our websites, and we may be subject to claims if we act or are perceived to act inconsistently with these published policies |
| Any claims or inquiries could require significant monetary and human resources, and the outcome of such claims or inquiries may be uncertain and may harm our business |
| We may be held liable for the failure of our clients, vendors or business associates to comply with federal, state, and foreign laws governing consumer privacy as well as their own privacy policies |
| We cannot ensure that our clients, vendors, and business associates will comply with various privacy laws or their own privacy policies, and we may be held liable for their failure to do so |
| We may be subject to patent infringement claims in the future, including claims that our ad serving technologies, processes or methods infringe the patents of other parties |
| Patents have been issued to third parties that may cover some of the technologies, processes or methods that we use |
| We cannot assure you that we would be able to distinguish our technologies, processes or methods from those covered under any of these third-party patents or that these patents would be invalidated if challenged |
| The patent field covering Internet-related technologies is rapidly evolving and surrounded by a great deal of uncertainty, and other patents or patent applications relating to the delivery of Internet advertising may exist of which we are unaware |
| Several companies in the Internet advertising field have brought patent infringement suits against competitors in connection with patents relating to ad serving technologies, and we expect this type of litigation to increase in the future |
| In addition, we may be subject to indemnification claims from our clients if patent infringement claims relating to our web development work are brought against them by third parties |
| Any patent infringement claims brought against us may cause us to incur significant expenses and, if successfully asserted against us, may cause us to pay substantial damages and prevent us from using the intellectual property subject to these claims |
| Even if we were to prevail, any litigation would likely be costly and time-consuming and divert the attention of our management and key personnel from our business operations |
| Furthermore, as a result of a patent infringement suit, we may be prevented from providing some of our services, including our core ad serving services, unless we enter into royalty or license agreements |
| We may not be able to obtain royalty or license agreements on terms acceptable to us, if at all |
| We may be subject to trademark infringement claims and other legal challenges, which could cause us to incur significant expenses, pay substantial damages and prevent us from using our trademarks |
| Our use of our trademarks may result in infringement claims and other legal challenges, which could cause us to incur significant expenses, pay substantial damages and prevent us from using these marks |
| We are aware of third parties that use marks or names, including Internet domain names, that are the same or similar to the names for which we have sought trademark protection |
| There may be other third parties using names similar to ours of whom we are unaware |
| As a result of any infringement claims or challenges, we may incur significant expenses, pay substantial damages and be prevented from using our trademarks unless we enter into royalty, license or coexistence agreements |
| We may not be able to obtain such royalty, license or coexistence agreements on terms acceptable to us, if at all |
| Use of our trademarks by third parties may also cause confusion to our clients and confusion in the market, which could decrease the value of our brand and harm our reputation |
| In addition to patent and trademark claims, third parties may assert other intellectual property claims, which may cause us to incur significant expenses, pay substantial damages and be prevented from providing our services |
| In addition to patent and trademark claims, third parties may claim that we are infringing or violating their other intellectual property rights, including their copyrights and trade secrets, or otherwise challenge our intellectual property, which may cause us to incur significant expenses and, if successfully asserted against us, pay substantial damages and be prevented from providing our services |
| Even if we were to prevail, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of 12 _________________________________________________________________ [67]Table of Contents our management and key personnel from our business operations |
| Furthermore, as a result of an intellectual property challenge, we may be prevented from providing some of our services unless we enter into royalty, license or coexistence agreements |
| If our services fail to perform properly for our clients, we may be exposed to liability to our clients or to the customers for whom our clients used our services |
| We may also be subject to liability if we are unable to adequately identify and address invalid activity on the Internet, such as click fraud, the effects of ad-blocking software, or actions of other illegal or legitimate Internet technologies, that affects the services we perform for clients or the manner in which we bill clients |
| In addition, our clients may use our technology-based services in a manner that fails to comply with applicable laws, including but not limited to laws and regulations surrounding the Internet |
| For example, because our services may be used by clients to transmit information over the Internet, our services might be used by clients to transmit information that violates laws or regulations, or to transmit negative messages, unauthorized reproduction of copyrighted material, inaccurate data, harmful applications or computer viruses to end-users in the course of delivery |
| Any claims made against us arising in connection with our clients’ use of our services, regardless of their outcome, may cause us to incur significant expenses and divert the attention of our management and key personnel from business operations |
| In addition, such claims may require us to pay substantial damages, modify or discontinue some of our services and otherwise seriously harm our business and damage our reputation |
| The loss of key personnel or any inability to attract and retain additional personnel could impair our ability to maintain or expand our business |
| The loss of the services of members of our management team or other key personnel could harm our business |
| Our future success depends to a significant extent on the continued service of our key management, client service, product development, sales and technical personnel |
| For example, Michael Vernon, our Chief Financial Officer, has announced plans to leave the company in the near future |
| We may not be able to find a suitable replacement on a timely basis |
| We do not maintain key person life insurance on any of our executive officers and do not intend to purchase any in the future |
| Although we generally enter into non-competition agreements with our employees, our business could be harmed if one or more of our officers or key employees decided to join a competitor or otherwise compete with us |
| Our business of delivering Internet professional services is dependent upon the expertise of highly skilled personnel |
| Accordingly, our future success also depends in large part on our ability to identify, attract, hire, train, retain and motivate highly skilled personnel who can provide the Internet strategy, technology, marketing and creative skills required by our clients |
| If we fail to hire and retain a sufficient number of qualified client service, product development, sales and technical personnel, we may not be able to maintain or expand our business |
| Our business may be harmed if we fail to accurately estimate the cost, scope, expectations or duration of a fixed fee engagement |
| The website design and development portion of our digital marketing services business performs some services on a fixed fee basis |
| Because of the complexity of many of these fixed fee engagements, accurately estimating the cost, scope, expectations and duration of a particular fixed fee engagement can be a difficult task |
| If we fail to appropriately structure fixed fee engagements, we could be forced to devote additional resources to these engagements for which we will not receive additional compensation |
| To the extent that an expenditure of additional resources is required on a fixed fee engagement, this could result in a loss on the engagement |
| This has occurred occasionally in the past and may occur in the future |
| 13 _________________________________________________________________ [68]Table of Contents Clients may attempt to prohibit us from providing services to their competitors, limiting our business opportunities |
| To use our services more effectively, clients often provide us with confidential business and marketing information |
| Many companies are wary of third parties having access to this information, because access by third parties increases the risk that confidential business and marketing information may become known, even if unintentionally, to these companies’ competitors |
| These confidentiality concerns may prompt our clients to attempt to contractually prohibit us from managing the Internet advertising campaigns of their competitors |
| Limitation of our client base in a particular industry in this manner could limit the growth of our business |
| In addition, we may be unable to work for some potential customers because they require restrictive exclusivity provisions that we are unwilling to accept |
| New privacy legislation, industry standards, and other regulations could adversely affect our business |
| New federal and state legislation or regulations could limit our ability to conduct targeted advertising campaigns and compile data, including limitations on our use of cookie or Web Beacon technology that we use to formulate campaign strategies and measure campaign effectiveness |
| The US Congress and state legislatures may enact legislation aimed at regulating the collection and use of data from Internet users |
| For example, initial drafts of proposed legislation intended to regulate spyware also covered technologies like cookies and Web Beacons |
| In addition, the US Senate Committee on Commerce, Science, and Transportation has conducted hearings regarding user profiling, the collection of non-personally identifiable information, and online privacy |
| New legislation or regulations in the European Union and other countries could also limit our ability to conduct targeted advertising campaigns and compile data |
| The European Union has adopted a directive addressing data privacy that limits the collection, disclosure, and use of information regarding European Internet users |
| The European Union has also enacted an electronic communications directive that imposes certain restrictions on the use of cookies and Web Beacons and also places restrictions on the sending of unsolicited communications |
| It is possible that to comply with these directives, European Union member countries may enact legislation limiting the use of cookies and Web Beacons |
| In addition, countries both in and out of the European Union may enact legislation around online privacy and data collection |
| For example, Germany has imposed its own laws limiting Internet user profiling |
| Industry groups to which we belong may adopt more burdensome privacy related guidelines, compliance with which may adversely affect our business |
| We are a member of the Network Advertising Initiative (NAI), the Email Sender and Provider Coalition (ESPC), and other industry groups that have published guidelines relating to the collection and use of Internet user information |
| If these groups adopt more stringent privacy standards than those currently in place, compliance with these standards may limit our ability to conduct targeted advertising campaigns and measure campaign effectiveness |
| These limitations, and any limitations arising from new legislation or regulations, could materially and adversely affect us |
| Our stock price has been and may continue to be volatile |
| The trading price of our common stock has been and is likely to continue to be highly volatile |
| For example, during the 52-week period ended February 24, 2006, the sales price of our common stock ranged from dlra10dtta28 to dlra29dtta94 per share |
| The market price of our common stock may fluctuate significantly in response to a number of factors, including: • quarterly variations in our operating results; • announcements by us or our competitors of new products or services, significant contracts, acquisitions or business relationships with other companies; • publicity about our company, our services, our competitors or Internet advertising in general; • additions or departures of key personnel; • acquisitions or losses of significant clients; 14 _________________________________________________________________ [69]Table of Contents • releases to the public of financial and other information about companies we have acquired; • any future sales of our common stock or other securities; and • stock market price and volume fluctuations of other publicly traded companies in general and, in particular, those that are Internet or advertising related |
| In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation |
| We have been the subject of securities class action litigation in the past and may be the target of additional lawsuits in the future |
| Any securities class action litigation against us could result in substantial costs and divert our management’s attention from business concerns, which could harm our business |
| Sustained or repeated system failures could significantly impair our operations and lead to client dissatisfaction |
| Sustained or repeated system failures could significantly impair our operations and reduce the attractiveness of our services to our current and potential clients |
| The continuous and uninterrupted performance of our systems is critical to our success |
| Our operations depend on our ability to protect these systems against damage from fire, power loss, water damage, earthquakes, telecommunications failures, viruses, vandalism and other malicious acts and similar unexpected adverse events |
| Clients may become dissatisfied by any system failure that interrupts our ability to provide our services to them |
| In particular, the failure of our ad serving systems, including failures that delay or prevent the delivery of targeted advertisements to websites and advertising networks, could reduce client satisfaction and damage our reputation |
| Our services are substantially dependent on certain systems provided by third parties over whom we have little control |
| Interruptions in our services could result from the failure of telecommunications providers and other third parties to provide the necessary data communications capacity in the time frame required |
| Our ad serving systems and computer hardware are primarily located in the Seattle, Washington metropolitan area and in Weehawken, New Jersey, Dallas, Texas, Boston, Massachusetts and London, England at facilities operated by Savvis, Inc, AT&T Inc |
| Additionally, Speedera Networks Inc, now part of Akamai Technologies, provides content delivery for us at its facilities |
| We depend on these third-party providers of Internet communication services to provide continuous and uninterrupted service |
| We also depend upon Internet service providers that provide access to our services |
| In the past, we have occasionally experienced significant difficulties delivering advertisements to Internet advertising networks and websites due to system failures unrelated to our own systems |
| Any disruption in the Internet access provided by third-party providers or any failure of third-party providers to handle higher volumes of user traffic could impair our ability to deliver advertisements and harm our business |
| We have significant debt as a result of the sale of convertible notes |
| In August and September 2004, we incurred dlra80dtta0 million of indebtedness through the sale of convertible notes, substantially all of the proceeds of which were used to repay in full certain indebtedness incurred in connection with the closing of the acquisition of SBIRazorfish in July 2004 |
| As a result of this indebtedness, we have substantial principal and interest payment obligations, which we previously did not have |
| The degree to which we are leveraged could materially and adversely affect our ability to obtain financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures |
| Our ability to meet our debt service obligations will depend on our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control |
| If we become subject to increased or unforeseen expenses associated with our international expansion, our revenue and cash flows and the growth of our business could be harmed |
| We believe international markets represent long-term growth opportunities for us and, therefore, intend to make additional investments to support international growth into European and Asian markets |
| We cannot 15 _________________________________________________________________ [70]Table of Contents assure you that we will be successful in these efforts |
| Our international expansion will require management’s attention and resources and will subject us to foreign currency exchange risks and the laws of foreign jurisdictions |
| These laws may change, or new, more restrictive laws may be enacted in the future which may limit our ability to do business in these countries |
| Failure to comply with applicable foreign laws and regulations could result in liability |
| International litigation is often expensive and time-consuming and could distract management’s attention away from the operation of the business |
| International operations are subject to other inherent risks, including, but not limited to, the impact of recessions in economies outside the United States, changes in and differences between domestic and foreign regulatory requirements, advertising practices and Internet usage, reduced protection for intellectual property rights in some countries, potentially adverse tax consequences, difficulties and costs of staffing and managing foreign operations, political and economic instability and seasonal reductions in business activity |
| We may need to develop expertise in the operation of the advertising business in foreign markets and we may be unable to do so |
| Our failure to address these risks adequately could materially and adversely affect our business, results of operations and financial condition |
| We may need additional financing in the future, which we may be unable to obtain |
| We may need additional funds to finance our operations in the future, as well as to enhance our services, respond to competitive pressures or acquire complementary businesses or technologies |
| We may be unable to obtain financing on terms favorable to us, if at all |
| Poor financial results, unanticipated expenses or unanticipated opportunities that require financial commitments could give rise to additional financing requirements sooner than we expect |
| If we raise additional funds through the issuance of equity or convertible debt securities, this may reduce the percentage ownership of our existing shareholders, and these securities might have rights, preferences or privileges senior to those of our common stock |
| Debt financing may also require us to comply with restrictive covenants that could impair our business and financial flexibility |
| If adequate funds are not available or are not available on acceptable terms, our ability to enhance our services, respond to competitive pressures or take advantage of business opportunities would be significantly limited, and we might need to significantly restrict our operations |
| We rely on strategic relationships that could be terminated |
| In the website design and development portion of our digital marketing services, we have a number of strategic relationships with leading hardware and software companies |
| The loss of any one of these strategic relationships would deprive us of the opportunity to gain early access to leading-edge technology, cooperatively market products with the vendor, cross-sell additional services and gain enhanced access to vendor training and support |
| Maintenance of our strategic relationships is based primarily on an ongoing mutual business opportunity and a good overall working relationship |
| The legal contracts associated with these relationships would not be sufficient to force the strategic relationship to continue effectively if the strategic partner wanted to terminate the relationship |
| In the event that any strategic relationship is terminated, our business may be negatively affected |
| The infringement or misuse of intellectual property rights could harm our business |
| We regard our intellectual property rights, such as copyrights, trademarks, trade secrets, practices and tools, as important to our success |
| To protect our intellectual property rights, we rely on a combination of trademark and copyright law, trade secret protection and confidentiality agreements and other contractual arrangements with our employees, affiliates, clients, strategic partners, acquisition targets and others |
| Effective trademark, copyright and trade secret protection may not be available in every country in which we intend to offer our services |
| The steps we have taken to protect our intellectual property rights may not be adequate, third parties may infringe or misappropriate our intellectual property rights and we may not be able to detect unauthorized use and take appropriate steps to enforce our rights |
| 16 _________________________________________________________________ [71]Table of Contents If we do not perform to our clients’ expectations, we face potential liability |
| Many of our consulting engagements regarding website design and development in our digital marketing services business involve the development, implementation and maintenance of applications that are critical to the operations of our clients’ businesses |
| Our failure or inability to meet a client’s expectations in the performance of its services could injure our business reputation or result in a claim for substantial damages against us, regardless of our responsibility for the failure |
| In addition, we possess technologies and content that may include confidential or proprietary client information |
| Although we have implemented policies to prevent this client information from being disclosed to unauthorized parties or used inappropriately, any unauthorized disclosure or use of this information could result in a claim for substantial damages |
| Contractual damages limitation provisions that we attempt to implement to limit our damages from negligent acts, errors, mistakes or omissions in rendering professional services may not be enforceable or may not otherwise protect us from liability for damages |
| Many of our engagements are complicated projects that involve the use of new technology, which may make it difficult for us to perform to the satisfaction of our clients |
| Clients often hire us for complex development engagements that they cannot complete themselves |
| These projects often involve the use of new technology that has not been extensively tested or used in actual applications |
| We attempt to negotiate appropriate provisions into our professional services agreements to protect us against unexpected delays or failures caused by this new technology, but we are often unable to do so |
| In any event, if we fail to successfully complete projects according to the agreed upon schedule and budget, our client relationships suffer, and our business could be adversely impacted |
| Our business may suffer if we have disputes over our right to reuse intellectual property developed for specific clients |
| Part of our business involves the development of software applications for discrete client engagements |
| Ownership of client-specific software is generally retained by the client, although we typically retain the right to reuse some of the applications, processes and other intellectual property developed in connection with client engagements |
| Issues relating to the rights to intellectual property can be complicated, and disputes may arise that could adversely affect our ability to reuse these applications, processes and other intellectual property |
| These disputes could damage our relationships with our clients and our business reputation, divert our management’s attention and have a material adverse effect on our business |
| Our billable employees may be underutilized, which could reduce our revenues and margins |
| The website design and development portion of our digital marketing services business derives much of its revenue from projects that use billable employees |
| If clients who use our services fail to retain us for future projects or if clients or prospective clients delay planned projects, we may be unable to quickly reassign billable employees to other engagements so as to minimize under-utilization of these employees |
| This under-utilization could reduce our revenues and gross margins |
| If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud |
| Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud |
| Any inability to provide reliable financial reports or prevent fraud could harm our business |
| The Sarbanes-Oxley Act of 2002 requires management and our auditors to evaluate and assess the effectiveness of our internal controls |
| These Sarbanes-Oxley requirements may be modified, supplemented or amended from time to time |
| Implementing these changes may take a significant amount of time and may require specific compliance training of our personnel |
| We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement |
| If we or our auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our stock price |
| We may not be able to effectively and timely implement necessary 17 _________________________________________________________________ [72]Table of Contents control changes and employee training to ensure continued compliance with the Sarbanes-Oxley Act and other regulatory and reporting requirements |
| Our rapid growth in recent periods, our anticipated geographic expansion and our planned expansion through additional acquisitions present challenges to maintain the internal control and disclosure control standards applicable to public companies |
| If we fail to maintain effective internal controls we could be subject to regulatory scrutiny and sanctions, our ability to recognize revenue could be impaired and investors could lose confidence in the accuracy and completeness of our financial reports |
| We cannot assure you that we will be able to fully comply with the requirements of the Sarbanes-Oxley Act or that management or our auditors will conclude that our internal controls are effective in future periods |
| Our business may be seriously harmed by litigation alleging violations of federal and state securities laws |
| We and some of the underwriters of our initial public offering of common stock in February 2000 are defendants in a consolidated class action lawsuit that alleges violations of federal securities laws in connection with our initial public offering |
| Razorfish is similarly involved in this lawsuit relating to its public offering in April 1999 |
| The claims in the lawsuit include, among other things, allegations of misrepresentations or failures to disclose alleged facts relating to the defendant underwriters’ compensation and commissions in connection with our initial public offering and alleged agreements between the underwriters and their customers relating to future purchases of our stock and/or the stock of other companies |
| In 2003 we accepted a settlement, which still must be granted final approval by the court |
| In February 2005 the court gave preliminary approval of the motion for approval of the settlement, over the objections of the co-defendant underwriters |
| The final settlement remains subject to the court’s decision on final approval and cannot be assured |
| Class action litigation is often expensive and time-consuming, and the outcome of such litigation is often uncertain |
| Such lawsuits, regardless of their outcome, may cause us to incur significant expenses and divert the attention of our management and key personnel from our business operations |
| In addition, such lawsuits may result in the payment by us of substantial damages and may otherwise seriously harm our business |