Initial Public Offering (IPO): Pre-Effective Amendment to Registration Statement (General Form) — Form S-1 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: S-1/A Namemedia, Inc. HTML 2.11M
2: EX-10.1 EX-10.1 Investor Rights Agreement HTML 234K
9: EX-10.10 EX-10.10 Google Services Agreement HTML 187K
10: EX-10.11 EX-10.11 Yahoo! Search Marketing Agreement HTML 104K
11: EX-10.12 EX-10.12 Executive Agreement - Kelly P. Conlin HTML 60K
12: EX-10.13 EX-10.13 Executive Agreement - Vincent A. Chippari HTML 59K
13: EX-10.14 EX-10.14 Executive Agreement - Jeffrey S. Bennett HTML 65K
3: EX-10.2 EX-10.2 Amended and Restated 2005 Stock Option and HTML 238K
Grant Plan
4: EX-10.4 EX-10.4 Form of Warrant by and Between the HTML 55K
Registrant and Lighthouse Capital
Partners V. L.P.
5: EX-10.5 EX-10.5 Form of Warrant by and Between the HTML 77K
Registrant and Morefocus Group, Inc.
6: EX-10.6 EX-10.6 Lease Agreement Between the Registrant and HTML 316K
Boston Properties Limited Partnership
7: EX-10.7 EX-10.7 Credit Agreement Dated as of November 21, HTML 483K
2007
8: EX-10.8 EX-10.8 Asset Purchase Agreement HTML 263K
14: EX-21.1 EX-21.1 List of Subsidiaries of the Registrant HTML 10K
15: EX-23.1 EX-23.1 Consent of Ernst & Young LLP HTML 8K
16: EX-23.2 EX-23.2 Consent of Margolis & Company P.C. HTML 8K
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
Mark T. Bettencourt, Esq.
John B. Steele, Esq.
Danielle M. Lauzon, Esq.
Goodwin Procter LLP
Exchange Place Boston, Massachusetts02109
(617) 570-1000
Robert Evans III, Esq.
Danielle Carbone, Esq.
Shearman & Sterling LLP
599 Lexington Avenue New York, New York10022
(212) 848-4000
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this
Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434 please check the following
box. o
The registrant hereby amends this registration statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until the registration statement shall
become effective on such date as the Commission, acting pursuant
to said Section 8(a), shall determine.
The
information in this prospectus is not complete and may be
changed. Neither we nor the selling stockholders may sell these
securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where
the offer or sale is not permitted.
Prior to
this offering, there has been no public market for our common
stock. The initial public offering price of our common stock is
expected to be between $ and
$ per share. We will apply to list
our common stock on The Nasdaq Global Market under the symbol
“NAME.”
We are
selling shares of common
stock and the selling stockholders are
selling shares of common
stock. We will not receive any of the proceeds from the sale of
common stock by the selling stockholders.
The
underwriters have an option to purchase a maximum
of additional shares
from the selling stockholders to cover over-allotments.
Investing in our
common stock involves risks. See “Risk Factors”
beginning on page 9.
Underwriting
Proceeds to
Price to
Discounts and
Proceeds to
Selling
Public
Commissions
NameMedia
Stockholders
Per Share
$
$
$
$
Total
$
$
$
$
Delivery
of the shares of common stock will be made on or
about , .
Neither
the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
You should rely only on the information contained in this
document or to which we have referred you. We have not
authorized anyone to provide you with information that is
different. This document may only be used where it is legal to
sell these securities. The information in this document may only
be accurate on the date of this document.
Dealer Prospectus
Delivery Obligation
Until , (25 days
after commencement of the offering), all dealers that effect
transactions in these securities, whether or not participating
in this offering, may be required to deliver a prospectus. This
is in addition to the dealers’ obligation to deliver a
prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
The following is a brief summary of selected contents of this
prospectus. To understand this offering fully, you should read
the following summary together with the entire prospectus,
including the more detailed information regarding our business
and our financial statements and the related notes appearing
elsewhere in this prospectus. You should carefully consider,
among other things, the matters discussed in the section
entitled “Risk Factors,” before making an investment
decision.
NameMedia,
Inc.
Our
Company
We operate a leading targeted online media business and a
leading online marketplace for domain names. We monetize a
high-quality
portfolio of more than 2,250,000 domain names, including more
than 750,000 domain names that we own and more than 1,500,000
domain names that are owned by third parties. We generate
revenue primarily from two sources: online advertising in our
media business, and the sale of domain names in our marketplace
business.
Our media business enables advertisers to reach
highly-targeted
online audiences through a network of proprietary and
third-party websites. This network of websites, which attracted
more than 60,000,000 visitors in September 2007, creates a large
amount of
highly-targeted
traffic which is desirable to
performance-based
advertisers. Our proprietary website publishing platform,
SiteSense, allows us to dynamically generate and manage a
variety of websites — from lead-generating websites to
premium online communities — to provide the most
relevant user experience and most revenue potential for our
network.
Our domain name marketplace combines our proprietary portfolio
of domain names with those of
third-party
domain name owners that want to list their domain names for
sale, creating what we believe is an efficient and liquid
marketplace for high-quality domain names. Like the Multiple
Listing Service, or MLS, for residential real estate, our Domain
Listing Service, or DLS, aims to have the largest inventory for
sale and the broadest distribution to buyers. Our customers can
find and purchase these domain names on our sites BuyDomains.com
and Afternic.com, or on sites that use our DLS, which include
seven of the top ten domain registrars. Our proprietary trading
platform, SiteMarket, is used to identify and value
high-quality
domain names that are most relevant to small and
medium-sized
businesses seeking online identities.
We generated $61.0 million in revenue in 2006 and
$58.3 million in revenue during the nine months ended
September 30, 2007. We generated $28.5 million in
Adjusted EBITDA in 2006 and $24.1 million in Adjusted
EBITDA during the nine months ended September 30, 2007. Our
media business accounted for approximately 49% of our revenue in
2006 and 52% of our revenue during the nine months ended
September 30, 2007, and our domain name marketplace
business accounted for approximately 51% of our revenue in 2006
and 48% of our revenue during the nine months ended
September 30, 2007.
Our
Industry
Domain names are often referred to as the real estate of the
Internet, providing opportunities to buy, sell and develop
digital properties. We believe that the value of this online
real estate is being positively influenced by several underlying
Internet industry trends. According to a 2007 report by
International Data Corporation, or IDC, the number of global
Internet users is projected to grow from approximately
950 million in 2005 to over 1.5 billion in 2009. We
believe that over time, advertising expenditures will follow
consumer behavior and businesses will allocate a larger share of
their marketing budgets to online advertising. We believe that a
significant and increasing amount of Internet traffic is
generated by consumers typing a search term directly into the
web browser address bar, effectively using the browser address
bar as a search engine. By typing a search term directly into
the web browser address bar, Internet users indicate an interest
in a particular subject, which results in
highly-targeted
online traffic.
In addition, businesses are increasingly incorporating the
Internet into their sales and marketing strategies. According to
JupiterResearch, the total Internet advertising market,
excluding display advertising, is projected
to grow 15% in 2008 to $14.1 billion, representing 62% of
the total U.S. Internet advertising market. Advertisers are
seeking to reach specific online audiences, and
performance-based
online advertising distribution providers, such as Google and
Yahoo!, are continually seeking to add more
highly-targeted
online properties to their networks to satisfy this growing
demand for
performance-based
online advertising.
According to IDC, there were approximately 8.3 million
small and
medium-sized
businesses in the United States in 2007. We believe that
businesses, particularly small and
medium-sized
businesses, will use domain name marketplaces to assess the
inventory of available domain names, or digital real estate,
like they would review a database of real estate listings to
evaluate available properties. In addition, the volume of
undeveloped domain name properties is growing. According to
VeriSign, there were approximately 65.0 million .com and
.net domain names registered as of December 31, 2006, an
increase of 30% compared to December 31, 2005. This
increase in registered domain names is leading to a need to
create the equivalent of the MLS for domain names to make a
market in the buying, selling and development of domain names.
We believe that as the volume of undeveloped domain names
continues to grow, the demand from domain name owners for
monetization services will increase.
Our
Business
We provide a leading domain name monetization solution that is
comprised of our media business, which generates advertising
revenue from the domain names that we develop into websites, and
our domain name marketplace, which generates revenue through the
selling of domain names. The key attributes of our business
include:
Large and
High-Quality
Domain Name Portfolio. We believe that our
proprietary portfolio of more than 750,000 domain names is among
the largest in the world. From this portfolio we have created an
extensive network of websites that generates an increasing
amount of Internet traffic across approximately 500 content
categories.
Leading Website Creation and Management
Platform. We use our SiteSense platform to create
and manage the websites in our network. This platform’s
flexibility allows us to pursue a variety of development
approaches, from websites that are focused on generating
advertising leads as efficiently as possible, to sites that are
enthusiast communities offering a combination of content,
commerce and community elements in selected consumer niche
categories.
Leading Domain Name Marketplace and Trading
Expertise. With an inventory of more than
2,000,000 owned and third-party domain names for sale, we
believe that our domain name marketplace is among the largest in
the world. We believe that the depth and quality of the
inventory we offer makes it a valuable resource and an efficient
marketplace for small and
medium-sized
businesses that are seeking to acquire a particular domain name.
We use our SiteMarket platform to value and acquire domain names
to continually add inventory to our marketplace.
Our
Strategy
Our objective is to enhance our position as a leading targeted
online media business and a leading online marketplace for
domain names. To achieve this objective, we intend to:
•
Continue to develop our premium domain names into enthusiast
online communities
•
Continue to grow our proprietary domain name portfolio
•
Enhance our SiteSense platform to optimize the value of our
proprietary and affiliate domain name portfolios
•
Enhance our SiteMarket domain name trading platform and expand
distribution for our DLS
Our business is subject to numerous risks, which are highlighted
in the section entitled “Risk Factors.” These risks
represent challenges to the successful implementation of our
strategy and the growth of our business. Some of these risks are:
•
We have a limited operating history on which you can base your
evaluation of our business;
•
We operate in a relatively new industry and have an unproven
business model;
•
We depend on the Google, Inc. and Yahoo Search
Marketing/Overture,
Inc. advertising networks for a significant portion of our
revenue and upon the quality of traffic in our network to
provide value to online advertisers;
•
We do not control the means by which Internet users access our
websites and technological changes and material changes to
navigation or marketing practices could disrupt Internet traffic
to our websites; and
•
We may be unable to acquire or market premium domain names.
For further discussion of these and other risks you should
consider before making an investment in our common stock, see
the section entitled “Risk Factors” beginning on page
9.
Information
About Us
We were incorporated in Delaware in February 2005 for the
purpose of acquiring Rare Names LLC and Raredomains.com, LLC,
which are referred to collectively as the Predecessor. The
Predecessor began buying and selling domain names in 1999 and
generating advertising revenue from its websites in 2002. On
February 22, 2005, we acquired Rare Names, LLC and
substantially all of the assets of Raredomains.com LLC. As of
September 30, 2007, we had 136 employees.
Our principal executive offices are located at 230 Third Avenue,
Waltham, Massachusetts02451 and our telephone number is
(781) 839-2800.
Our corporate website address is www.namemedia.com.
Information contained on our corporate website, or that can be
accessed through that website or any of our network of websites,
does not constitute a part of this prospectus. In this
prospectus, the terms “NameMedia,”“we,”“us,”“our” and, with respect to the
financial statements and other financial information included in
this prospectus, “Successor” refer to NameMedia, Inc.,
its subsidiaries and any subsidiary that may be acquired or
formed in the future.
Our registered servicemarks include Afternic, BuyDomains.com and
SmartName. Our servicemarks include ActiveAudience, DavesGarden,
NameMedia, SiteMarket and SiteSense. This prospectus includes
the registered and unregistered trademarks and servicemarks of
other persons.
We intend to use the net proceeds to us from this offering to
repay a portion of the principal and interest outstanding under
our term loan and the remainder for working capital and other
general corporate purposes, including to finance the expansion
of our operations, investment in new product development and
strategic initiatives, capital expenditures and the costs of
operating as a public company. We may also use a portion of the
net proceeds to us for acquisitions of businesses, websites and
technologies. We will not receive any proceeds from the sale of
common stock by the selling stockholders. See “Use of
Proceeds.”
An investment in our common stock involves a high degree of
risk. See “Risk Factors” and other information
included in this prospectus for a discussion of some of the
factors you should carefully consider before deciding to invest
in shares of our common stock.
Proposed Nasdaq Global Market symbol
“NAME”
The number of shares of common stock described above as
outstanding immediately after this offering is based on
25,605,071 shares of common stock outstanding as of
September 30, 2007, and excludes:
•
643,750 shares of common stock issuable upon exercise of
warrants outstanding as of September 30, 2007, at a
weighted-average price of $1.93 per share;
•
3,224,668 shares of common stock issuable upon the exercise
of options outstanding as of September 30, 2007, at a
weighted-average exercise price of $3.65 per share;
•
2,616,462 shares of common stock issuable upon payment of
restricted stock units outstanding as of September 30,2007; and
•
269,694 shares of common stock reserved for future issuance
as of September 30, 2007, under our stock-based
compensation plans.
Unless otherwise stated, all information in this prospectus
assumes:
•
an initial public offering price of
$ per share, the midpoint of
the price range set forth on the cover of this prospectus;
•
the conversion of all outstanding shares of our Series A
convertible redeemable preferred stock and Series Z
convertible redeemable preferred stock into
25,400,000 shares of common stock upon completion of this
offering;
•
no exercise of the over-allotment option granted to the
underwriters; and
•
the filing of our amended and restated certificate of
incorporation immediately prior to the completion of this
offering.
References
to Website Sizes and Audience Measurements
Throughout this prospectus, we use Google analytics measurement
services to report our Internet audience metrics. Google
analytics measurements are generated by our placement of
“tags” on our websites, which are used to count and
report audience metrics.
Other third-party services that also measure audiences may
provide different data than those reported by our Google
analytics deployments. These discrepancies may result from
differences in the methodologies applied or the sampling
approaches used by third-party services. Since we
“tag” each of the pages on our websites, Google
analytics measures the number of actual visitors who come to our
websites.
The measurement term “monthly visitor,” to which we
refer in this prospectus, refers to the total number of
user-initiated sessions with our websites within a month. By way
of example, if a single user returns to one of our websites more
than once per month, each visit is counted as one visitor for
this purpose.
The following tables set forth summary financial information for
the periods indicated. You should read this information together
with our financial statements and related notes and the
information under “Selected Financial Data” and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in
this prospectus.
Income before cumulative effect of change in accounting principle
8,845
1,664
6,969
3,512
3,037
160
Cumulative effect of change in accounting principle
—
—
—
(872
)
(872
)
—
Net income
$
8,845
$
1,664
$
6,969
$
2,640
$
2,165
$
160
Net income (loss) per share(3):
Basic
—
—
$
—
$
(11.24
)
$
(8.24
)
$
(15.05
)
Fully Diluted
—
—
$
0.13
$
(11.24
)
$
(8.24
)
$
(15.05
)
Number of shares used in per share calculations:
Basic
—
—
—
126,492
106,999
191,876
Fully Diluted
—
—
492,581
126,492
106,999
191,876
Other data (unaudited):
Adjusted EBITDA(4)
$
9,885
$
1,893
$
16,919
$
28,484
$
20,428
$
24,129
The pro forma balance sheet in the table below reflects the
conversion of our convertible redeemable preferred stock, our
receipt of estimated net proceeds from our sale
of shares
common stock in
this offering at an assumed public offering price of
$ per share, which is the midpoint
of the range listed on the cover of this prospectus, after
deducting the estimated underwriting discount and commissions
and estimated offering expenses payable by us, and the repayment
of our existing debt and issuance of a new term note.
Operating costs of the Predecessor include the compensation
charge paid to their owner of approximately $3.9 million
and $0 for the year ended December 31, 2004 and for the
period from January 1, 2005 to February 21, 2005,
respectively. See our audited financial statements beginning on
page F-1
of this prospectus.
(2)
From inception in 1999 to February 21, 2005, the
Predecessor operated as a subchapter S corporation for tax
purposes. For periods following the acquisition of the
Predecessor on February 22, 2005, we have operated as a
subchapter C corporation for tax purposes.
(3)
As a result of the Predecessor’s status as a subchapter S
corporation for the year ended December 31, 2004 and for
the period from January 1, 2005 through February 21,2005, earnings per share information has not been presented for
those periods.
(4)
The following table reconciles Net income before cumulative
effect of change in accounting principle to Adjusted EBITDA for
the periods presented and is unaudited:
EBITDA and Adjusted EBITDA are each a measurement not in
accordance with accounting principles generally accepted in the
United States of America, or U.S. GAAP. EBITDA represents
net income before net interest expense, income tax expense,
depreciation and amortization of intangible assets and
amortization of registration rights. Adjusted EBITDA represents
EBITDA plus stock-based compensation expense and non-cash
charges related to the early extinguishment of debt. Management
believes that the supplemental presentation of EBITDA and
Adjusted EBITDA provides useful information to investors
regarding our results of operations because such presentation
assists in analyzing the operating performance of our business.
This supplemental disclosure backs out potential differences
caused by differences in capital structure (impacting interest
expense), tax strategies (impacting our effective tax rates),
the composition of our fixed assets (impacting our relative
depreciation rates), the impact of purchase price allocations
for acquired companies (impacting amortization of intangible
assets expense) and the impact of non-cash stock-based
compensation expense and charges related to the early
extinguishment of debt. Although we use EBITDA and Adjusted
EBITDA as a financial measure to assess the performance of our
business, the use of EBITDA and Adjusted EBITDA is limited
because it does not include certain material costs, such as
interest and taxes, necessary to operate our business.
Adjusted EBITDA is also presented because covenants in our
credit facility contain ratios based on this measure. Our credit
facility is material to us because it is one of our primary
sources of liquidity. If our Adjusted EBITDA was to decline
below certain levels, covenants in our credit facility that are
based on Adjusted EBITDA may be violated and could cause, among
other things, an inability to incur further indebtedness under
the credit facility and in certain circumstances a default or
mandatory prepayment under our credit facility. See
“Management Discussion and Analysis of Financial Condition
and Results of Operations — Credit Facility” for
additional information on the covenants in our credit facility.
The supplemental presentation of EBITDA and Adjusted EBITDA
included in this prospectus should be considered in addition to,
and not as a substitute for, net income in accordance with
U.S. GAAP as a measure of performance or net cash provided
by operating activities as determined in accordance with
U.S. GAAP as a measure of liquidity. We understand that
although EBITDA and Adjusted EBITDA are frequently used by
securities analysts, lenders and others in their evaluation of
companies, EBITDA and Adjusted EBITDA have limitations as
analytical tools, and you should not consider these in
isolation, or as a substitute for analysis of our results as
reported under U.S. GAAP. Some of these limitations are due
to the exclusion from Adjusted EBITDA of:
•
Stock-based compensation expense, a non-cash charge that is a
significant component of overall employee costs;
•
Cash expenditures for the acquisition of registration rights;
•
Cash expenditures for the acquisition of property and equipment;
•
Interest expense on our debts;
•
Income tax expense on our earnings; and
•
Changes in, or cash requirements for, working capital.
To compensate for these limitations, we evaluate our liquidity
by considering the economic effect of the excluded expense items
independently as well as in connection with its analysis of cash
flows from operations and through the use of other financial
measures, such as capital expenditure budget variances,
investment spending levels and return on capital analysis. Other
companies in our industry may calculate Adjusted EBITDA
differently than we do, limiting its usefulness as a comparative
measure.
An investment in our common stock involves a high degree of
risk. You should carefully consider the risks and uncertainties
described below and other information in this prospectus,
including our financial statements, and the related notes to
these financial statements included at the end of this
prospectus, before making an investment decision. If any of the
following risks or uncertainties actually occurs, our business,
prospects, financial condition, results of operations or cash
flows would likely suffer, possibly materially. In any such
case, the trading price of our common stock could decline and
you could lose all or part of your investment. You should read
the section entitled “Special Note Regarding
Forward-Looking Statements” immediately following these
risk factors for a discussion of what types of statements are
forward-looking statements, as well as the significance of such
statements in the context of this prospectus.
Risks
Related to Our Business
We
have a limited operating history on which you can base your
evaluation of our business, and our future profitability is
uncertain.
We were incorporated in February 2005 to acquire a business
which was formed in 1999 and to primarily engage in buying and
selling Internet domain names. Accordingly, although the
Predecessor commenced operations in 1999, we have a limited
operating history and limited financial results that you can use
to evaluate our business and prospects. Although we have
experienced significant growth in recent periods, we may not be
able to sustain this growth. Because we have limited historical
financial data upon which to base planned operating expenses and
forecast operating results, we cannot be certain that our
revenue will grow at rates that will allow us to maintain
profitability on a quarterly or annual basis. If we fail to grow
our business or maintain profitability, the market price of our
common stock will likely fall. You must consider our prospects
in light of the risks, expenses and difficulties we face as an
early stage company with a limited operating history.
We
operate in a relatively new industry and have an unproven
business model, which may make it difficult for you to evaluate
our business and prospects.
We derive nearly all of our revenue from the sale of domain
names and performance-based online advertising, both of which
industries are undergoing rapid and dramatic change. Our
business model is new and evolving and it may not be successful.
Our business and prospects are difficult to evaluate and must be
considered in light of the risks and uncertainties often
encountered by companies in the early stages of development.
Some of these risks and uncertainties relate to our ability to
do the following:
•
continue to grow our revenue and meet anticipated growth targets;
•
maintain and develop relationships with online advertising
providers;
•
maintain and develop relationships with sources of domain names;
•
successfully acquire domain names that can be resold profitably;
•
maintain and increase the number of affiliate websites and
domain names;
•
successfully develop websites that Internet users will visit in
increasing numbers;
•
increase the number of our premium enthusiast websites and the
Internet traffic on these websites;
•
attract and retain qualified management and employees;
•
continue to identify attractive acquisition candidates;
•
successfully integrate acquired businesses, websites and
technologies;
•
enhance and build upon our existing technology platforms;
•
manage our expanding operations and implement and improve our
operational, financial and management controls;
respond to government regulations relating to the Internet and
other aspects of our business.
If we are unable to do any of these successfully, our business,
results of operations and prospects could suffer.
Fluctuations
in our operating results could make our results of operations
difficult to predict or fall short of market expectations, which
may cause our stock price to decline.
Our prior quarterly operating results have fluctuated due to
changes in our business. Similarly, our future operating results
may vary significantly from quarter to quarter due to a variety
of factors, many of which are beyond our control. In addition,
because our business is changing and evolving, our historical
operating results may not be useful to you in predicting our
future operating results. Fluctuations in our operating results
could cause our results to be below investors’
expectations, causing the price of our common stock to fall.
Factors that may increase the volatility of our operating
results include the following:
•
changes in the number of new websites in our proprietary network;
•
changes in the number of visitors to existing websites;
•
changes in demand and pricing for online advertising;
•
the timing of our introduction of new premium enthusiast
websites and the costs we incur to acquire or develop these
websites;
•
the timing and amount of marketing expenses incurred to attract
new visitors to our websites;
•
changes in the online advertising systems of our
cost-per
click, or CPC, advertisement distribution partners;
•
changes in the quantity or quality of domain names available for
purchase;
•
changes in the selling prices of domain names and other related
services;
•
changes in the number of third parties using, or the number of
websites in, our affiliate network;
•
changes in the economic prospects of advertisers or the economy
generally, which could alter current or prospective online
advertisers’ spending priorities;
•
changes in our charges for stock-based compensation; and
•
overall Internet usage.
Our quarterly results have also fluctuated in the past and will
fluctuate in the future due to seasonal fluctuations in the
level of Internet usage. As is typical in our industry, the
second and third quarters of the calendar year generally
experience relatively lower usage than the first and fourth
quarters. The extent to which usage may decrease during these
off-peak periods is difficult to predict. As a result of this
seasonality and the factors above, we do not believe that
period-to-period comparisons of our results of operations are
necessarily meaningful, or should be relied upon to predict
future results of operations. Also, it is possible that our
results of operations may not meet the expectations of investors
or analysts in future periods, which may cause the price of our
common stock to decline.
We are
dependent on Google and Yahoo!, our third-party,
cost-per-click
advertisement distribution providers, for a significant portion
of our revenue. A termination of our agreements with Google or
Yahoo! or a decrease in revenue that we derive from these
relationships would adversely affect our business.
We derive a significant portion of our revenue from Google, Inc.
and Yahoo Search Marketing/Overture, Inc., or Yahoo!. Pursuant
to our agreements with these advertisement distribution
providers, we deliver advertisements on our network of websites
and share a portion of the revenue generated from these
advertisements. For the year ended December 31, 2006,
Yahoo! delivered advertising to our entire network of websites,
which generated approximately 44% of our total revenue. For the
nine months ended September 30, 2007, we generated
approximately 38% of our total revenue from advertising
delivered to our websites by these advertisement distribution
providers.
We use Google exclusively for CPC advertising on our proprietary
domain name portfolio, and we use Yahoo! exclusively for CPC
advertising on our affiliate network of websites. Our exclusive
arrangement with Google expires in the first quarter of 2010 and
our exclusive arrangement with Yahoo! expires in the fourth
quarter of 2009. These advertisement distribution providers,
however, can terminate their respective agreements with us
before the expiration of the term upon the occurrence of certain
events. There can be no assurances that our agreements with
these advertisement distribution providers will be extended or
renewed after their respective expirations or that we will be
able to extend or renew our agreements with these advertisement
distribution providers on terms and conditions favorable to us.
If our agreements with these advertisement distribution
providers are terminated, we may not be able to enter into
agreements with alternative third-party advertisement
distribution partners on acceptable terms or on a timely basis
or both. Any termination of our relationships with these
advertisement distribution providers, and any extension or
renewal after the initial term on terms and conditions less
favorable to us, would have a material adverse effect on our
business, financial condition and results of operations.
Our agreements with these advertisement distribution providers
may not continue to generate levels of revenue commensurate with
what we have achieved during past periods. Our ability to
generate online advertising revenue from these advertisement
distribution providers depends on their assessment of the
quality of Internet traffic resulting from online advertisements
on our network of websites as well as other elements of their
advertising technology platforms. We have no control over any of
these quality assessments or over their advertising technology
platforms. These advertisement distribution providers may from
time to time change their existing, or establish new,
methodologies and metrics for valuing the quality of Internet
traffic and delivering CPC advertisements. Any changes in these
methodologies, metrics and advertising technology platforms
could decrease the amount of revenue that we generate from
online advertisements. In addition, these advertisement
distribution providers may at any time change or suspend the
nature of the service that they provide to online advertisers
and the catalog of advertisers from which online advertisements
are sourced. These types of changes or suspensions would
adversely impact our ability to generate revenue from CPC
advertising. Any decrease in revenue due to lower traffic or a
change in the type of services that these advertisement
distribution providers provide to us would have a material
adverse effect on our business, financial condition and results
of operations.
We do
not control the means by which Internet users access our
websites and material changes to navigation practices,
technologies or marketing practices could disrupt Internet
traffic to our network of websites.
The success of our business depends in large part upon access to
our websites. Internet users access our websites primarily
through the following methods: directly by typing descriptive
keywords or keyword strings into the web browser’s address
bar; by clicking on bookmarked websites; through search engines,
such as Google and Yahoo!, and web directories. Each of these
methods of access requires the use of a third-party product or
service, such as a web browser, search engine or directory. Web
browsers may provide alternatives to the URL address box to
locate websites, and search engines may from time to time change
existing, or establish new algorithms, methodologies or rules
relating to the listing of paid and unpaid search results.
Product developments and market practices for these means of
accessing our websites are not within our control. We may
experience a decline in traffic to our websites if web browser
technologies or search engine algorithms, methodologies or rules
are changed to our disadvantage. Any of these changes could
reduce traffic to our network of websites, which would reduce
our revenue from online advertising.
We are
dependent upon the quality of traffic in our network to provide
value to online advertisers, and any failure in our quality
control could have a material adverse effect on the value of our
websites to our third-party advertisement distribution providers
and online advertisers and adversely affect our
revenue.
We use certain monitoring processes to monitor the quality of
the Internet traffic that we deliver to online advertisers.
Among the factors we seek to monitor are sources and causes of
low quality clicks such as
non-human
processes, including robots, spiders or other software; the
mechanical automation of clicking; and other types of invalid
clicks, click fraud, or click spam, the purpose of which is
something other than to view the underlying content. Even with
such monitoring in place, there is a risk that a certain amount
of low-quality traffic, or traffic that is deemed to be less
valuable by online advertisers, will be delivered to such online
advertisers, which may be detrimental to our relationships with
Google and Yahoo!, our current third-party advertisement
distribution providers, and online advertisers, and could
adversely affect our revenue.
We
generate a significant portion of our revenue from our affiliate
network of websites. A decrease in the number of third parties
who utilize our affiliate network could have a material adverse
impact on our business and operating results.
We generated approximately 18% of our total revenue from our
affiliate network of websites for the year ended
December 31, 2006 and approximately 21% of our total
revenue from such network during the nine months ended
September 30, 2007. Our affiliate network is available for
use by third parties on an at-will basis. Accordingly, the third
parties who utilize our affiliate network to sell or otherwise
monetize their domain names may decide, at any time, to no
longer use our affiliate network. A decrease in the number of
third parties using our affiliate network, a decrease in the
number of websites in our affiliate network or both would cause
our revenue to decline.
We may
need additional funding to support our operations and capital
expenditures, which may not be available to us on favorable
terms or at all.
For the foreseeable future, we intend to fund our operations and
capital expenditures from cash flow from operations, our cash on
hand and the net proceeds of this offering. If our capital
resources are insufficient, we will need to raise additional
funds. We cannot assure you that financing in addition to our
revolving line of credit will be available in amounts or on
terms acceptable to us, if at all. Furthermore, the sale of
additional equity or convertible debt securities may result in
dilution to existing stockholders, and incurring additional debt
may hinder our operational flexibility. If sufficient additional
funds are not available, we may be required to delay, reduce the
scope of or eliminate material parts of our business strategy,
including growth in our domain name portfolio, development of
premium domain names into enthusiast websites and acquisitions
of complementary businesses and technologies.
We
depend on our senior management team and other key personnel,
and if we are unable to retain them we may not be able to
effectively manage our operations and meet our strategic
objectives.
We depend on the continued services of our senior management
team and other key personnel. We are heavily dependent upon the
continued services of Kelly P. Conlin, our chairman and
chief executive officer, Vincent A. Chippari, our chief
financial officer, and Jeffrey S. Bennett, our president
and chief operating officer, and the other members of our senior
management team. Our ability to retain our senior management
team will be a critical factor in determining whether we will be
successful in the future. Each member of our senior management
team may terminate their employment with us at any time. The
loss of any of our senior management team or key personnel could
harm our business.
Our
potential inability to compete effectively for and retain and
recruit qualified personnel could slow the growth of our
business.
Competition for experienced personnel in the Internet industry
is intense. We may be unable to continue to attract qualified
employees or retain those employees who are important to the
success of our business. We have experienced, and expect to
continue to experience, difficulty in hiring and retaining
highly-skilled
employees with appropriate qualifications as a result of our
rapid growth and expansion. If we cannot continue to attract new
personnel or retain and motivate our current personnel, our
business may not succeed.
We may
be unable to effectively manage our growth.
As our operations have expanded, we have experienced rapid
growth in our headcount. When we acquired the Predecessor in
2005, it had 17 employees. As of September 30, 2007,
we had 136 employees. We expect to continue to increase
headcount in the future. Our rapid growth has demanded, and will
continue to demand, substantial resources and attention from our
management. We will need to continue to hire additional
qualified personnel for operations and portfolio management,
product development, and sales and marketing and improve and
maintain our technology to properly manage our growth. If we do
not effectively manage our growth, our business could suffer and
our costs could increase, which could harm our reputation,
increase our expenses, and reduce our profitability.
If we
are unable to acquire, renew or sell premium domain names, we
may not be able to grow our domain name marketplace
business.
The continued growth of our domain name marketplace business
depends on our ability to acquire high-quality premium domain
names from a variety of sources. These sources include
previously registered domain names that are not renewed at the
domain name registry by the current owner, private sales of
domain names, participation in domain name auctions and
registering new names identified by us. Changes in the way
expired registrations of domain names are made available for
acquisition could make it more difficult to acquire high-quality
domain names. Similarly, increasing competition from other
potential buyers could make it more difficult for us to acquire
high-quality domain names on a cost-effective basis. Any such
adverse change in our ability to acquire high-quality,
previously-owned domain names, as well as any increase in
competition in the domain name reseller market, could have a
material adverse affect on our ability to grow our domain name
marketplace business. In addition, our failure to renew our
domain name registrations or any increase in the cost of renewal
could have a material adverse effect on our revenue or
profitability.
Our
growth strategy includes the development of premium enthusiast
website properties, which is a new and unproven business for
us.
A major part of our growth strategy includes the development of
a network of premium website properties based upon enthusiast
communities, such as photography and gardening. We did not
generate significant revenue from premium enthusiast websites in
2006, but we expect revenue from premium enthusiast websites to
be the fastest growing portion of our business. We do not have
significant historical experience to assess the likelihood of
achieving the anticipated revenue from premium enthusiast
websites, the related costs of development, and whether we will
be able to introduce a sufficient number of premium websites to
achieve expected revenue growth in the segment. If we fail to
launch new premium enthusiast websites as quickly as we expect,
our revenue may not meet our expectations and our business may
not grow or may grow at a slower pace.
If we
are unable to close and integrate suitable future acquisitions,
our business may not grow.
A key part of our growth strategy is to acquire additional
businesses, websites or technologies. If we are unable to
identify a sufficient number of attractive opportunities, or to
complete acquisitions on satisfactory terms, our business will
grow at a slower pace. Acquisitions involve a high degree of
risk. If we complete acquisitions, we may experience:
•
difficulties in integrating any acquired businesses, personnel,
operations, technologies and websites into our existing business;
•
delays in realizing the benefits of the acquired businesses,
technologies and websites;
•
diversion of financial resources or our management’s time
and attention from other business concerns;
difficulties in retaining key employees of the acquired business
who are necessary to manage these acquisitions; or
•
difficulties in protecting acquired intellectual property.
For any of these reasons or as a result of other factors, we may
not realize the anticipated benefits of acquisitions.
We may
incur unforeseen liabilities from our domain names and websites,
which could negatively impact our financial
results.
We have acquired, and intend to continue to acquire,
previously-owned domain names and websites. Any of these
previously-owned domain names and websites may have trademark
significance that is not readily apparent to us or is not
identified by us in the acquisition process. We have in the past
faced, and may in the future face, demands by third-party
trademark owners asserting infringement or dilution of their
rights and seeking transfer of acquired domain names under the
Uniform Domain Name Dispute Resolution Policy administered by
ICANN or actions under the U.S. Anti-Cybersquatting
Consumer Protection Act. We cannot guarantee that we will be
able to resolve these disputes without litigation. The potential
violation of third-party intellectual property rights and
potential causes of action under consumer protection laws may
subject us to unforeseen liabilities including injunctions and
judgments for money damages.
Our
acquisitions of domain names and websites may inadvertently
include registered trademarks or company names, vulgar or
obscene language, or language associated with any illegal
enterprise, which would violate the terms of certain third-party
agreements.
We may inadvertently acquire domain names and websites that
could include, among others, registered trademarks or company
names, vulgar or obscene language or content, or language or
content associated with any illegal enterprise. The acquisition
of these domain names could violate the terms of our existing
credit facility and our agreements with Google and Yahoo!. Any
such violation of our credit facility could result in an event
of default and any such violation of our agreements with Google
and Yahoo! could result in the suspension or termination of
these relationships. In addition, our business reputation could
suffer and we may experience a loss of advertisers and a
decrease in revenue.
We may
finance future acquisitions by issuing equity securities which
are dilutive to our current stockholders or by incurring
additional indebtedness.
Following this offering, we intend to pursue the acquisition of
businesses, websites or technologies, and we may finance these
acquisitions with substantial portions of our available cash or
dilutive issuances of securities. In the event that we use debt
to finance an acquisition, the debt may contain financial or
other covenants, which could reduce our future operating
flexibility. These covenants may also require us to maintain
certain levels of financial performance and we may not be able
to do so; any such failure may result in the acceleration of
such debt and the foreclosure by those creditors on any
collateral we used to secure the debt. In the event of a
bankruptcy or liquidation of our company, any outstanding debt
would rank senior to our outstanding capital stock, including
the shares of common stock offered in this offering. In
addition, an acquisition could impair our operating results if
we are required to recognize acquisition expenses or amortize,
depreciate or impair acquired assets.
The
failure of online advertising and marketing to grow at projected
rates could adversely affect our operating
results.
Our operating results will be subject to fluctuations based on
the level of online advertising spending. If there were to be a
general economic downturn that affected consumer activity in
particular, the levels of spending on online advertising and
marketing budgets may not increase or may be reduced. We believe
that during periods of lower consumer activity, spending on
online advertising and marketing is more likely to be reduced,
and more quickly, than many other types of business expenses,
and such a reduction could adversely affect our operating
results.
We
rely on third-party technology, server and hardware providers,
and if they fail to provide service or if they suffer sustained
or repeated system failures, our business and reputation could
be adversely affected.
We rely upon third-party co-location providers for our data
servers, storage devices and network access. If these providers
experience any interruption in operations or cease operations
for any reason or if we are unable to agree on satisfactory
terms for continued hosting relationships, we would be forced to
enter into a relationship with other service providers or assume
hosting responsibilities ourselves. If we are forced to switch
hosting facilities, we may not be successful in finding an
alternative service provider on acceptable terms or in hosting
the computer servers ourselves. We may also be limited in our
remedies against these providers in the event of a failure of
service. We also rely on third-party providers for components of
our technology platform, such as hardware and software
providers, and domain name registrars. A failure or limitation
of service or available capacity by any of these third-party
providers could adversely affect our business and reputation.
Sustained or repeated system failures could significantly impair
our operations and reduce the attractiveness of our services and
websites to our current and potential users and advertisers. The
continuous and uninterrupted performance of our systems is
critical to our success. Our advertisers and users may become
dissatisfied by any systems disruption or failure that
interrupts our ability to provide our services and content to
them. Substantial or repeated system disruptions or failures
would reduce the attractiveness of our online websites
significantly.
We do not presently have any redundant systems or a formal
disaster recovery plan. We may be unable to develop or implement
adequate protections or safeguards to overcome any of these
events. We also may not have anticipated or addressed many of
the potential events that could threaten or undermine our
technology network such as fire, floods, earthquakes, power
loss, natural disasters, network failures, hardware failures,
software failures, telecommunications failures, terrorism or
war, vandalism and other malicious acts, break-ins and similar
events that could damage these systems. In addition, if a person
is able to circumvent our security measures, he or she could
destroy or misappropriate valuable information or disrupt our
operations. In addition, we continue to make investment in and
modify our software technology platform. If we fail to
accomplish these technology upgrades in a manner which is not
disruptive to our business, our business and reputation will
likely suffer.
Although we maintain property insurance and business
interruption insurance, our insurance may not be adequate to
compensate us for all losses that may occur as a result of a
catastrophic system failure or other loss, and our insurers may
not be able or may decline to do so for a variety of reasons. If
we fail to address these issues in a timely manner, we may lose
the confidence of our users, online advertisers and our
third-party advertisement distribution providers, our revenue
may decline and our business could suffer.
We do
not rely on patent protection for our proprietary technology,
which may make it less difficult for competitors to develop
competing technology.
We do not rely on patent protection for our proprietary
technology. We rely primarily on trade secrets, servicemarks,
common law and registered trademarks and copyrights to protect
our proprietary rights. We do not own registrations for the
servicemarks SiteSense and SiteMarket; we rely on common law
protection for these marks and have filed servicemark
applications in the United States for SiteMarket and SiteSense.
We routinely enter into confidentiality agreements with our
employees and other third parties. In the event these agreements
are breached, they may not provide adequate remedies in the
event of unauthorized use or disclosure of confidential
information. Despite our efforts to protect our trade secrets,
our employees or consultants may unintentionally or willfully
disclose our proprietary information to competitors.
Our confidential and proprietary information and technology
might also be independently developed by or otherwise become
known by third parties, which may damage our competitive
position. If we fail to maintain our trade secrets, or
competitors otherwise develop competing technologies, our
competitive position could suffer, which could harm our results
of operations. Enforcement of claims that a third party has
illegally obtained and is using trade secrets is expensive, time
consuming and the outcome is uncertain. If our
competitors independently develop equivalent knowledge, methods
and know-how, we would not be able to assert our trade secrets
against them and our business could be harmed.
Our
services may infringe the intellectual property rights of others
and we may be subject to claims of intellectual property
infringement.
We may be subject to claims against us alleging infringement of
the intellectual property rights of others, including our
competitors. Any intellectual property claims, regardless of
merit, could be expensive to litigate or settle and could
significantly divert our management’s attention from other
business concerns. Our technologies and content may not be able
to withstand third-party claims of infringement. If we were
unable to successfully defend against such claims, we might have
to pay significant damages, stop using the technology or content
found to be in violation of a third party’s rights, seek a
license for the infringing technology or content, or develop
alternative non-infringing technology or content. Licenses for
such infringing technology or content may not be available on
reasonable terms, if at all. In addition, developing alternative
non-infringing technology or content could require significant
effort and expense. If we cannot license or develop technology
or content for any infringing aspects of our business, we may be
forced to limit our service offerings. Any of these results
could reduce our ability to compete effectively and harm our
business.
Expansion
of our international operations may require management attention
and resources and may be unsuccessful, which could harm our
future business development and existing domestic
operations.
To date, we have conducted limited international operations, but
we may expand into international markets in order to grow our
business. Expansion into international markets would require
management attention and resources and may be unsuccessful. We
have limited experience in conforming our products and services
to local cultures, standards and policies. We may have to
compete with local companies that understand the local market
better than we do. We may not be successful in expanding into
any international markets or in generating revenue from foreign
operations. In addition, different privacy, censorship and
liability standards and regulations and different intellectual
property laws in foreign countries may cause our business to be
harmed.
We are
exposed to risks associated with credit card fraud and credit
payment, and we may suffer losses as a result of fraudulent
data.
Our failure to control fraudulent credit card transactions
adequately could reduce our revenue and gross margin and
negatively impact our standing with applicable credit card
authorization agencies.
Risks
Related to Our Industry
If we
are unable to compete in highly competitive markets for domain
name sales and performance-based online advertising, we may
experience reduced demand for our products and
services.
We operate in a highly competitive and changing environment, and
we face significant competition in each of our primary markets.
We expect competition to increase because of the business
opportunities presented by the continued growth of the Internet
and online advertising.
Our ability to remain competitive will depend to a great extent
upon our ability to maintain and enhance our portfolio of owned
domain names and websites, as well as the number of third
parties who utilize our platforms to sell or otherwise monetize
their domain names through our affiliate network. We cannot
assure you that our domain name portfolio or media network will
continue to compete favorably or that we will be successful in
the face of increasing competition from existing competitors or
new companies entering our principal markets.
Many of our current and potential competitors, such as Google,
Microsoft, and Yahoo! in the performance-based advertising
solution business, have longer operating histories,
significantly greater financial, technical and marketing
resources, greater name recognition and substantially larger
user or customer bases than we have and, therefore, have a
significantly greater ability to attract advertisers and
Internet users. Many
of our competitors may be able to respond more quickly than we
can to new or emerging technologies and changes in Internet user
requirements, as well as devote greater resources than we can to
the development, promotion and sale of services.
If we
are not able to respond to the rapid technological changes in
the Internet industry, we may not be competitive.
The market for our services is characterized by rapid change in
business models and technological infrastructure, and we will
need to constantly adapt to changing markets and technologies to
provide new and competitive services. If we are unable to ensure
that third-party domain owners and online advertisers and our
third-party advertisement distribution providers have a
high-quality experience with our services, then they may become
dissatisfied and move to competitors’ services.
Accordingly, our future success will depend, in part, upon our
ability to develop and offer competitive services for both our
target markets and in new markets. We may not, however, be able
to successfully do so, and our competitors may develop
innovations that render our products and services obsolete or
uncompetitive.
Our
growth depends on the continued growth of the Internet, and any
decrease or less than anticipated growth in Internet usage could
adversely affect our business prospects.
Our future revenue and profits, if any, depend upon the
continued widespread use of the Internet as an effective
commercial and business medium. Factors which could reduce the
widespread use of the Internet include:
•
possible disruptions or other damage to the Internet or
telecommunications infrastructure;
•
failure of the networking infrastructures of our online
advertisers and third-party advertisement distribution providers
to alleviate potential overloading and delayed response times;
•
a decision by advertisers and consumers to spend less of their
marketing dollars online;
•
increased governmental regulation and taxation; and
•
actual or perceived lack of security or privacy protection.
In particular, concerns over the privacy of users and security
of transactions conducted over the Internet, including the risk
of identity theft, may inhibit the growth of the Internet and
online services. Any decrease or less than anticipated growth in
Internet usage could have a material adverse effect on our
business prospects.
Government
regulation of the Internet may adversely affect our business and
operating results.
The application of existing laws and regulations to the Internet
industry is continually evolving and is not entirely settled.
For example, we may be subject to the new applications and
interpretations of existing laws and regulations relating to a
wide variety of issues such as privacy, data security,
sweepstakes, promotions, financial market regulation, and
intellectual property ownership and infringement. In addition,
existing laws that regulate or require advertisers to obtain
licenses or permits may be unclear in their application to our
business, including those related to insurance and securities
brokerage, law offices and pharmacies. Our business may be
negatively affected by a variety of new or existing laws and
regulations, which may expose us to substantial compliance costs
and liabilities and may impede the growth in the use of the
Internet.
Companies engaging in online search,
e-commerce
and related businesses face uncertainty related to future
government regulation of the Internet through the enactment of
new and/or
reinterpretation of existing laws at the international, federal,
state, local or foreign level. Due to the rapid growth and
widespread use of the Internet, legislatures at the
international, federal, state, local and foreign levels have
enacted and are considering various laws and regulations
relating to the Internet. Individual states may also enact
stricter legislation that affects the conduct of our business,
particularly as such legislation pertains to consumer
protection. State legislation can be particularly burdensome as
differences and inconsistencies from state to state may lead to
difficult compliance challenges.
Existing federal laws that may impact our business and pose
compliance challenges include, among others:
•
The Children’s Online Privacy Protection Act, which imposes
restrictions on the ability of online services to collect user
information from minors.
•
The Protection of Children from Sexual Predators Act of 1998,
which requires online service providers to report evidence of
violations of federal child pornography laws under certain
circumstances.
•
The CAN-SPAM Act of 2003 and certain state laws, which impose
limitations and penalties on the transmission of unsolicited
commercial electronic mail via the Internet.
These laws are relatively new and have not been subject to a
significant amount of interpretation by the courts. Courts may
apply each of these laws in unintended and unexpected ways. We
may be subject to an action brought under any of these or future
laws governing various aspects of
e-commerce
and online services.
In addition, several existing and proposed federal laws could
have an impact on our ability to conduct our business and the
costs involved with conducting our business. Among the types of
legislation currently being considered at the federal and state
levels are consumer laws regulating the practices for software
applications or downloads. These laws may introduce requirements
for user consent and other restrictions. These proposed laws are
intended to target applications often referred to as spyware,
invasiveware or adware, although the scope may also include some
software applications currently used in the online advertising
industry to serve and distribute advertisements. At the federal
level, there have also been proposals for new legislation in
areas of data security, online marketing and information
brokerage, some of which may have negative implications for the
way in which we conduct our business or the costs that are
involved with conducting our business.
In operating our business, we may unknowingly be conduits for
illegal or prohibited materials, which could subject us to
liability. For example, it is possible that courts could find
strict liability or impose “know your customer”
standards of conduct in some circumstances. Although we may not
be directly involved in any of these practices, under current
and future regulation, we may ultimately be held responsible for
the actions of our online advertisers or third-party advertising
distribution providers.
We may also be subject to costs and liabilities with respect to
privacy and data security issues. Several companies have
incurred costs and paid penalties for violating their privacy
policies. In addition, several states have adopted legislation
that requires businesses to implement and maintain reasonable
security procedures and practices to protect sensitive personal
information and to provide notice to consumers of unauthorized
access to their personal information. In addition, the Federal
Trade Commission, or FTC, has commenced enforcement actions
against companies for their failure to adequately protect the
personal data in their possession. Further, it is anticipated
that new legislation will be adopted by federal and state
governments with respect to user privacy and data security. Such
legislation may result in increased costs for our business,
additional compliance obligations and could negatively affect
our business.
Additionally, foreign governments may pass laws which could
negatively impact our business
and/or
foreign governmental authorities may commence legal actions
against us for claims relating to our products and services
based upon existing laws. Any such legal actions
and/or costs
incurred in addressing compliance with foreign laws and
regulations could negatively affect our business or cause us to
incur greater expenditures on compliance-related activities.
The restrictions imposed by, and cost of complying with, current
and possible future laws and regulations related to our business
could impact the way we are permitted to conduct operations,
resulting in harm to our business and having a negative impact
upon our operating results.
Future
regulation of online advertising may adversely affect our
ability to generate revenue from our websites.
The FTC has reviewed the way in which search engines disclose
paid placements or paid inclusion practices to Internet users.
The FTC has issued guidance recommending that all search engine
companies ensure that all sponsored links are clearly
distinguished from non-sponsored links, that the use of paid
inclusion is clearly and conspicuously explained and disclosed
and that other disclosures are made to avoid misleading users
about the possible effects of paid placement or paid inclusion
listings on search results. If such FTC disclosure reduces the
desirability of our websites and “click-throughs” of
our sponsored links decrease, our business could be adversely
affected.
Changes
in regulations or user concerns regarding privacy and protection
of user data could harm our business.
Federal, state and international laws and regulations may govern
the collection, use, sharing and security of personally
identifiable data that we receive from our customers and users.
In addition, we have, and post on our website, our privacy
policies and practices concerning the collection, use and
disclosure of customer and user data. Any failure, or perceived
failure, by us to comply with our posted privacy policies or
with any data-related consent orders, FTC requirements or other
federal, state or international privacy-related laws and
regulations could result in proceedings or actions against us by
governmental entities or other third parties, including class
action lawsuits, which could potentially harm our business.
Further, failure or perceived failure to comply with our
policies or applicable requirements related to the collection,
use or security of personal information or other privacy-related
matters could damage our reputation and result in a reduction in
Internet traffic to our websites.
We may
be sued for information posted on or retrieved from our
sites.
Our operations do not involve manual screening and review of all
content posted by users on our premium websites. Although our
website terms of use specifically require customers to represent
that they have the right and authority to reproduce the content
they provide and that the content does not infringe the rights
of others or otherwise violate laws or regulations, we do not
have the ability to determine the accuracy of these
representations on a
case-by-case
basis for all content provided to our websites by users. There
is a risk that a user, member or customer may supply an image or
other content that is the property of another party used without
permission, that infringes the copyright or trademark of another
party, or that would be considered to be defamatory,
pornographic, hateful, racist, scandalous, obscene or otherwise
offensive, objectionable or illegal under the laws or court
decisions of the jurisdiction where that user or customer lives.
The Digital Millennium Copyright Act is intended to reduce the
liability of online service providers for listing or linking to
third-party websites that include materials that infringe
copyrights or rights of others. If we did not meet the safe
harbor requirements of the Digital Millennium Copyright Act, we
could be exposed to copyright actions, which could be costly and
time-consuming. Further, while the Digital Millennium Copyright
Act does provide a limited safe harbor for unintentional
copyright infringement, it does not provide protection for other
types of claims that may result from materials made available by
third parties.
There is, therefore, a risk that customers and users may
intentionally or inadvertently access information and content
from us that is in violation of the rights of another party or a
law or regulation of a particular jurisdiction. If we should
become legally obligated in the future to perform manual
screening and review all content posted by third parties, we
will incur additional expenses and may cease accepting
third-party content, each of which could substantially harm our
business and results of operations. We may be subject to claims
for defamation, negligence, copyright or trademark infringement
or personal injury, or claims based on other legal theories,
relating to the information we publish on our websites. These
types of claims have been brought, sometimes successfully,
against online services as well as other print publications in
the past. Our insurance, which covers commercial general
liability, may not adequately protect us against these types of
claims. Any dispute or litigation might result in substantial
costs and diversion of resources and management attention and
could affect our ability to compete or have a material adverse
effect on our business or financial condition.
Risks
Related to Our Common Stock and this Offering
There
is no public market for our common stock, and an active and
liquid trading market may not develop or be sustained after this
offering is completed.
Before this offering, there was no public market for shares of
our common stock. Following this offering, an active, liquid
trading market for our common stock may not develop or be
sustained. As a result, you may not be able to sell all or a
significant portion of your holdings quickly. The initial public
offering price of the shares offered by this prospectus will be
determined by negotiations between us and representatives of the
underwriters based upon a number of factors, including the
history of, and the prospects for, our company and our industry,
and may not be indicative of prices that will prevail following
completion of this offering. The market price of our common
stock may decline below the initial public offering price, and
you may not be able to resell your shares of our common stock at
or above the initial public offering price.
Our
stock price may be volatile, and your investment in our common
stock could suffer a decline in value.
There has been significant volatility in the market price and
trading volume of equity securities, particularly in the
Internet industry. This volatility is often unrelated or
disproportionate to the financial performance of particular
companies. These broad market fluctuations may negatively affect
the market price of our common stock.
Price fluctuations could be in response to various factors,
including:
•
actual or forecasted changes in our quarterly or annual
operating results;
•
our announcements or our competitors’ announcements of new
products or services or marketing initiatives;
•
the market’s reaction to our press releases, our other
public announcements and our filings with the Securities and
Exchange Commission, or SEC;
•
strategic actions by us or our competitors, involving
acquisitions, significant strategic partnerships or
restructurings;
•
new laws or regulations or new interpretations of existing laws
or regulations applicable to our business;
•
changes in accounting standards, policies, guidance,
interpretations or principles;
•
the financial projections we may provide to the public, any
changes in these projections or our failure to meet these
projections;
•
the loss of key personnel;
•
changes in our growth rates or our competitors’ growth
rates;
•
developments regarding our proprietary rights or those of our
competitors;
•
our inability to raise additional capital;
•
changes in financial markets or general economic conditions,
including those resulting from war, incidents of terrorism and
responses to such events;
•
sales of common stock, or the expectation that such sales may
occur, by us, our directors, officers or principal
stockholders; and
•
changes in stock market analyst recommendations or earnings
estimates regarding our common stock, other comparable companies
or our industry generally or failure to meet or exceed these
estimates.
As a result of these and other factors, you may not be able to
resell your shares of common stock at or above the initial
public offering price. In the past, following periods of
volatility in the market price of a company’s securities,
securities class action litigation has often been instituted. We
may be the target of
similar litigation in the future. A securities class action suit
against us could result in potential liabilities, substantial
costs and the diversion of our management’s attention and
resources that would otherwise be used to benefit the future
performance of our business, regardless of the outcome.
Our
directors, officers and current principal stockholders own a
large percentage of our common stock and could limit new
stockholders’ influence over corporate
decisions.
After this offering, our directors, officers and current
stockholders holding more than 5% of our common stock
collectively will beneficially own, in the aggregate,
approximately % of our outstanding
common stock, assuming the exercise of all options held by such
persons. As a result, these stockholders, if they act together,
would be able to control most matters requiring stockholder
approval, including the election of directors and approval of
mergers or other significant corporate transactions. This
concentration of ownership may have the effect of delaying or
preventing a change in control. The interests of these
stockholders may not always coincide with our corporate
interests or the interests of our other stockholders, and they
may act in a manner with which you may not agree or that may not
be in the best interests of our other stockholders.
Our
stock price could decline due to the large number of outstanding
shares of our common stock eligible for future
sale.
Sales of substantial amounts of our common stock in the public
market following this offering, or the perception that these
sales could occur, could cause the market price of our common
stock to decline. These sales could also make it more difficult
for us to sell equity or equity-related securities in the future
at a time and price that we deem appropriate.
Upon completion of this offering, we will
have outstanding
shares of common stock, assuming no exercise of outstanding
options or warrants after September 30, 2007.
The shares
sold pursuant to this offering will be immediately tradable
without restriction. Of the remaining shares:
•
no shares will be eligible for sale immediately upon completion
of this offering;
•
shares
will be eligible for sale upon the expiration of
lock-up
agreements, subject in some cases to volume and other
restrictions of Rule 144 and Rule 701 under the
Securities Act; and
•
shares
will be eligible for sale upon the exercise of vested options
after the expiration of the
lock-up
agreements.
The lock-up
agreements expire 180 days after the date of this
prospectus. The representatives of the underwriters may, in
their sole discretion and at any time without notice, release
all or any portion of the securities subject to
lock-up
agreements.
Holders
of shares
of our common stock have contractual rights to require us to
register their shares for resale to the public or to include
their shares in registration statements that we may file or that
we may file for other stockholders. See “Description of
Capital Stock — Registration Rights.”
After the closing of this offering, we intend to register
approximately shares
of common stock that have been issued or reserved for future
issuance under our stock incentive plans. Once we register these
shares, they can be freely sold in the public market upon
issuance, subject to some restrictions under the securities laws
and the
lock-up
agreements described above.
If any of these stockholders cause a large number of securities
to be sold in the public market, or if there is an expectation
that such sales may occur, the sales could cause the trading
price of our common stock to decline.
We
will incur significant increased costs as a result of operating
as a public company, and our management will be required to
devote substantial time to SEC and Nasdaq compliance
rules.
We expect that the obligations of being a public company will
require significant additional expenditures and place additional
demands on our management, administrative, operational and
accounting resources as we
comply with the reporting requirements of a public company. We
currently expect an increase of $1.5 million to
$2.0 million per year in our general and administrative
expenses due to the costs of being a public company. As a public
company, we will be subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended, the Sarbanes-Oxley
Act of 2002 and the listing requirements of the Nasdaq Stock
Market, Inc. The Sarbanes-Oxley Act requires, among other
things, that we maintain effective internal controls over
financial reporting and disclosure controls and procedures. In
particular, commencing in 2009, we must perform system and
process evaluation and testing of our internal controls over
financial reporting to allow management and our independent
registered public accounting firm to report on the effectiveness
of our internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act. Our testing, or the
subsequent testing by our independent registered public
accounting firm, may reveal deficiencies in our internal control
over financial reporting that are deemed to be material
weaknesses. Our compliance with Section 404 will require
that we incur substantial accounting expense and expend
significant management time on compliance-related issues. If we
are not able to comply with the requirements of Section 404
in a timely manner, or if we or our independent registered
public accounting firm identifies deficiencies in our internal
control over financial reporting, the market price of our stock
could decline and we could be subject to sanctions or
investigations by the Nasdaq Stock Market, the SEC or other
regulatory authorities.
We will also need to upgrade our systems, implement additional
financial and management controls, reporting systems and
procedures, hire an internal audit group and additional
accounting, auditing and financial staff with appropriate public
company experience and technical accounting knowledge. This will
increase our general and administrative expenses and capital
expenditures. The rules and regulations applicable to public
companies may make it more difficult and more costly for us to
obtain directors’ and officers’ liability insurance,
and we may be forced to accept reduced policy limits and
coverage or incur substantially higher premiums.
As a
new investor, you will experience immediate and substantial
dilution in net tangible book value.
If you purchase common stock in this offering, you will pay more
for your shares than the amounts paid by existing stockholders
for their shares. As a result, you will incur immediate and
substantial dilution of approximately
$ per share, representing the
difference between the initial public offering price for our
shares in this offering and our pro forma net tangible book
value per share after giving effect to this offering at an
assumed public offering price of
$ , the mid-point of the range on
the cover page of this prospectus. If the holders of outstanding
options to purchase our common stock exercise these options in
the future, you will incur further dilution. If we raise
additional equity by issuing equity securities or convertible
debt, or if we acquire other companies or technologies by
issuing equity, the newly issued shares will further dilute your
percentage ownership and may reduce the value of your investment.
Provisions in our restated certificate of incorporation and
restated bylaws may discourage, delay or prevent an acquisition
involving us that our stockholders may consider favorable,
including transactions in which you might receive a premium for
you shares. In addition, these provisions could make it more
difficult for our stockholders to replace or remove our board of
directors.
The provisions include:
•
authorizing the issuance of preferred stock with rights that may
be senior to those of the common stock without any further
action by the holders of our common stock;
•
providing for a classified board of directors with staggered
terms;
•
requiring that our stockholders provide advance notice when
nominating our directors or proposing matters that can be acted
on by stockholders at stockholders meetings;
eliminating the ability of our stockholders to convene a
stockholders’ meeting; and
•
prohibiting our stockholders to act by written consent.
After this offering, we will also be subject to the
anti-takeover provisions of Section 203 of the Delaware
General Corporation Law. Under these provisions, if anyone
becomes an “interested stockholder,” we may not enter
into a “business combination” with that person for
three years without special approval, which could discourage a
third party from making a takeover offer and could delay or
prevent a change of control. For purposes of Section 203,
“interested stockholder” means, generally, someone
owning 15% or more of our outstanding voting stock or an
affiliate of ours that owned 15% or more of our outstanding
voting stock during the past three years, subject to certain
exceptions as described in Section 203.
We do
not expect to pay dividends in the future, and any return on
your investment in our common stock will be limited to any
appreciation in the value of our common stock.
We have never declared or paid cash dividends on our common
stock and we do not anticipate paying cash dividends in the
foreseeable future. As a result, you should not rely on any
investment our stock to provide dividend income as part of your
investment return. Any return on your investment in our common
stock would result from an increase in the market price of your
stock, which is uncertain and unpredictable.
Our
management will have broad discretion in the use of certain
proceeds from this offering.
Our management will have broad discretion in the application of
our net proceeds of this offering in excess of the amounts we
owe under our credit facility. We currently intend to use our
net proceeds from this offering to repay a portion of the
principal and interest outstanding under our credit facility,
and to finance our working capital needs and for general
corporate purposes. We may also use a portion of our net
proceeds to acquire businesses, technologies or websites as
described under the heading “Use of Proceeds.” Within
those categories, our management will have broad discretion over
the use and investment of our net proceeds of this offering, and
you will need to rely upon the judgment of our management with
respect to the use of proceeds. Our management may spend our net
proceeds from this offering in ways that our stockholders may
not agree with or that may not result in a significant or any
return on your investment.
This prospectus includes forward-looking statements. All
statements contained in this prospectus other than statements of
historical facts, including statements regarding our future
results of operations and financial position, our business
strategy and plans and our objectives for future operations, are
forward-looking statements. The words “believe,”“may,”“will,”“estimate,”“continue,”“anticipate,”“intend”
and “expect” and similar expressions are intended to
identify forward-looking statements. We have based these
forward-looking statements largely on our current expectations
and projections about future events and financial trends that we
believe may affect our financial condition, results of
operations, business strategy, short-term and long-term business
operations and objectives, and financial needs. These
forward-looking statements are subject to a number of risks,
uncertainties and assumptions, including those described in
“Risk Factors.” In light of these risks, uncertainties
and assumptions, the future events and trends discussed in this
prospectus may not occur and actual results could differ
materially and adversely from those anticipated or implied in
the forward-looking statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
We are under no duty to update any of these forward-looking
statements after the date of this prospectus to conform these
statements to actual results or revised expectations.
This prospectus also contains estimates and other information
concerning our industry, including market size and growth rates
of the markets in which we participate, that are based on
industry publications, surveys and forecasts generated by IDC,
JupiterResearch, the National Gardening Association and
VeriSign. The industry in which we operate is subject to a high
degree of uncertainty and risk due to a variety of factors
including those described in “Risk Factors.” These and
other factors could cause results to differ materially from
those expressed in these publications, surveys and forecasts.
You should read this prospectus, the documents to which we refer
in this prospectus and those we have filed as exhibits to the
registration statement of which this prospectus is a part,
completely and with the understanding that our actual future
results may be materially different from what we expect. We
qualify all of our forward-looking statements by these
cautionary statements.
We operate in a very competitive and rapidly changing
environment. New risk factors emerge from time to time and it is
not possible for our management to predict all risk factors, nor
can we assess the impact of all factors on our business or the
extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any
forward-looking statements.
You should not rely upon forward-looking statements as
predictions of future events. We cannot assure you that the
events and circumstances reflected in the forward-looking
statements will be achieved or occur and actual results could
differ materially from those projected in the forward-looking
statements.
We estimate that we will receive net proceeds of
$ from the sale of common stock
offered by us in this offering, assuming an initial public
offering price of $ per share, the
midpoint of the price range set forth on the cover page of this
prospectus, and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses
payable by us. A $ increase
(decrease) in the assumed initial offering price of
$ per share would increase
(decrease) the net proceeds to us from this offering by
$ , assuming that the number of
shares offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting the estimated
underwriting discounts and commissions and estimated offering
expenses payable by us. We will not receive any of the proceeds
from the sale of common stock by the selling stockholders.
We currently estimate that of the net proceeds we receive from
this offering we will repay a portion of the principal and
interest outstanding under our term loan. As of
November 30, 2007 we have approximately $90.2 million
in principal and interest outstanding. The term loan currently
accrues interest at an annual rate equal to the British Bankers
Association LIBOR rate, or BBA LIBOR, two business days prior to
the interest period plus 4.00%, which rate was 9.05% as of
November 30, 2007. The stated maturity of the term loan is
November 21, 2012. Our credit agreement requires that we
use the proceeds of this offering to repay the lesser of
$25 million, or the balance required to bring our net
leverage ratio to 2.0 or below (as further described elsewhere
in this prospectus). We used the proceeds we received from the
term loan, together with a portion of existing cash and
restricted cash on hand, to retire all outstanding debt under a
previous credit agreement.
We intend to use the remainder of the net proceeds to us from
this offering for working capital and other general corporate
purposes, including financing the expansion of our operations,
the investment in new product development and strategic
initiatives, capital expenditures and the costs of operating as
a public company. We may also use a portion of the net proceeds
to us for acquisitions of businesses, websites and technologies,
although we have no agreements or understandings with respect to
any acquisition at this time.
Pending the uses described above, we intend to invest the net
proceeds from this offering in short-term, interest-bearing,
investment-grade securities.
DIVIDEND
POLICY
We have never declared or paid any cash dividends on our capital
stock and do not expect to pay any cash dividends for the
foreseeable future. We intend to use future earnings, if any, in
the operation and expansion of our business. In addition, the
terms of our credit facility restrict our ability to pay
dividends, and any future indebtedness that we may incur could
preclude us from paying dividends.
The following table sets forth our cash and cash equivalents,
short term debt and capitalization as of September 30,2007, as follows:
•
on an actual basis; and
•
on an as adjusted basis to give effect to the conversion of all
of our outstanding shares of convertible redeemable preferred
stock, the conversion of our Series A convertible redeemable
preferred stock warrant to a common stock warrant, the repayment
by us of a portion of our outstanding indebtedness, the filing
of our amended and restated certificate of incorporation to
increase the number of authorized shares of common stock and the
sale
of shares
of common stock by us in this offering at an assumed initial
public offering price of $ per
share, the midpoint of the price range set forth on the cover of
this prospectus, after deducting the estimated underwriting
discounts and commissions and estimated offering expenses
payable by us and the application by us of the proceeds to us
from this offering.
A $ increase (decrease) in the
assumed initial offering price of
$ per share would increase
(decrease) the net proceeds to us from this offering by
$ , assuming that the number of
shares offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting the estimated
underwriting discounts and commissions and estimated offering
expenses payable by us.
You should read this table together with “Selected
Financial Data,”“Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
and our financial statements and the related notes appearing
elsewhere in this prospectus.
Series A convertible redeemable preferred stock warrant
$
4,105
$
—
Convertible redeemable preferred stock, $.001 par value per
share, 5,350,000 shares authorized, 5,080,000 shares
issued and outstanding, actual; 5,000,000 shares
authorized, no shares issued and outstanding pro forma as
adjusted
61,368
Stockholders equity:
Common stock, $.001 par value per share,
74,000,000 shares authorized, 289,176 shares issued and
205,071 shares outstanding actual; 200,000,000 shares
authorized, shares
issued and outstanding pro forma as adjusted
643,750 shares of common stock issuable upon exercise of
warrants outstanding as of September 30, 2007, at a
weighted-average price of $1.93 per share;
•
3,224,668 shares of common stock issuable on the exercise
of options outstanding as of September 30, 2007, at a
weighted-average exercise price of $3.65 per share;
•
2,616,462 shares of common stock issuable upon payment of
restricted stock units outstanding as of September 30,2007; and
•
269,694 shares of common stock reserved for future issuance
as of September 30, 2007, under our stock-based
compensation plans.
If you invest in our common stock, your interest will be diluted
to the extent of the difference between the initial public
offering price per share of our common stock and the pro forma
as adjusted net tangible book value per share of our common
stock immediately after this offering. Pro forma net tangible
book value per share represents the amount of our total pro
forma stockholders’ equity less total goodwill and
intangible assets, divided by the number of shares of common
stock outstanding as of September 30, 2007 after giving
effect to the assumed conversion of all of our outstanding
Series A convertible redeemable preferred stock and
Series Z convertible redeemable preferred stock, into an
aggregate of 25,400,000 shares of our common stock and the
conversion of our Series A convertible redeemable preferred
stock warrant into a common stock warrant.
Investors participating in this offering will incur immediate,
substantial dilution. Our pro forma net tangible book value was
approximately $(33.9) million, computed as total pro forma
stockholders’ equity less total goodwill and intangible
assets, or $(1.32) per share of common stock as of
September 30, 2007. After giving effect to the sale
of shares
of common stock by us in this offering at the assumed initial
public offering price of $ per
share, the midpoint of the range on the cover page of this
prospectus, after deducting underwriting discounts, commissions
and estimated offering expenses we are responsible for paying,
our pro forma as adjusted net tangible book value as of
September 30, 2007 would have been
$ million, or
$ per share of common stock. This
represents an immediate increase in pro forma net tangible book
value of $ per share of common
stock to our existing stockholders and an immediate dilution of
$ per share to the new investors
purchasing shares in this offering. The following table
illustrates this per share dilution:
Assumed initial public offering price
$
Pro forma net tangible book value per share before this offering
at September 30, 2007
$
(1.32
)
Increase in net tangible book value per share attributable to
new investors in this offering
Pro forma as adjusted net tangible book value per share after
this offering
Dilution per share to new investors
$
A $ increase (decrease) in the
assumed initial offering price of
$ per share would increase
(decrease) the as adjusted net tangible book value by
$ and the as adjusted net tangible
book value per share after this offering by
$ per share and decrease
(increase) the dilution per share to new investors by
$ per share, assuming that the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting the
estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
The following table summarizes, as of September 30, 2007,
on a pro forma as adjusted basis, the total number of shares,
the consideration paid to us, and the average price per share
paid by existing stockholders and by new investors purchasing
shares of common stock in this offering from us at the assumed
initial public offering price of $
per share, the midpoint of the range on the cover page of this
prospectus, and before deducting the underwriting discounts,
commissions and estimated offering expenses we are responsible
for paying (dollars in thousands except per share amounts):
The number of shares and total consideration of the existing
stockholders includes 750,000 shares of Series Z
convertible redeemable preferred stock valued at $10 per
share that were issued in connection with the acquisition of the
Predecessor.
If the underwriters exercise their over-allotment option in
full, the following will occur: (1) the number of shares of
common stock held by our existing stockholders will represent
approximately % of the total number
of shares of common stock outstanding; and (2) the number
of newly issued shares of common stock held by new investors
will be increased to , or
approximately % of the total number
of shares of our common stock outstanding after this offering.
The discussion and tables above are based on the number of
shares of common stock, Series A convertible redeemable
preferred stock and Series Z convertible redeemable
preferred stock outstanding as of September 30, 2007.
The table above excludes the following shares:
•
643,750 shares of common stock issuable upon exercise of
warrants outstanding as of September 30, 2007, at a
weighted-average price of $1.93 per share;
•
3,224,668 shares of common stock issuable on the exercise
of options outstanding as of September 30, 2007, at a
weighted-average exercise price of $3.65 per share;
•
2,616,462 shares of common stock issuable upon payment of
restricted stock units outstanding as of September 30,2007; and
•
269,694 shares of common stock reserved for future issuance
as of September 30, 2007, under our stock-based
compensation plans.
The following statement of income data for the year ended
December 31, 2004, the period from January 1, 2005 to
February 21, 2005, the period from February 22, 2005
to December 31, 2005 and the year ended December 31,2006, and the balance sheet data as of December 31, 2005
and 2006 are derived from our audited financial statements
included elsewhere in this prospectus. The statements of income
data for the year ended December 31, 2002 and balance sheet
data as of December 31, 2002 are unaudited. The statements
of income data for the year ended December 31, 2003 and
balance sheet data as of December 31, 2003 is derived from
our audited financial statements for that period, which is not
included in this prospectus. The statement of income data for
the nine months ended September 30, 2006 and 2007 and the
balance sheet data as of September 30, 2006 and
September 30, 2007 have been derived from our unaudited
consolidated financial statements and related notes, which have
been included elsewhere in the prospectus. The selected
financial data presented below should be read together with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our financial
statements and related notes included elsewhere in this
prospectus. The historical results are not necessarily
indicative of the results to be expected for any future periods.
Operating costs of the Predecessor include compensation charges
paid to the owner of approximately $545,000, $1.5 million,
$3.9 million and $0 for the years ended December 31,2002, 2003 and 2004 and the period from January 1, 2005 to
February 21, 2005, respectively. See our audited financial
statements beginning on
page F-1
of this prospectus.
(3)
Amortization of intangible assets is calculated based on the
assets acquired on a straight line basis generally over a two to
five year basis. See our audited financial statements beginning
on
page F-1
of this prospectus.
(4)
From inception in 1999 to February 21, 2005, the
Predecessor operated as a subchapter S corporation for tax
purposes. Commencing with the acquisition of the Predecessor on
February 22, 2005, we have operated as a subchapter
C corporation.
(5)
As a result of the Predecessor’s status as a
subchapter S corporation for the years ended 2002, 2003 and
2004 and for the period from January 1, 2005 through
February 21, 2005, earnings per share information has not
been presented for those periods.
(6)
Pro forma to give effect to the conversion of convertible
redeemable preferred stock and the conversion of the
Series A convertible redeemable preferred stock warrant
into a common stock warrant as if such conversion had occurred
at the beginning of the period.
The following table reconciles Net income before cumulative
effect of change in accounting principle to Adjusted EBITDA for
the periods presented and is unaudited:
Net income before cumulative effect of change in accounting
principle
$
2,762
$
4,525
$
8,845
$
1,664
$
6,969
$
3,512
$
3,037
$
160
Interest expense, net
—
6
133
11
2,524
6,962
3,252
10,972
Provision (benefit) for income taxes
—
—
—
—
4,334
4,414
3,817
(2
)
Depreciation and amortization
63
67
102
18
675
2,355
1,237
5,019
Amortization of registration rights
45
283
805
200
2,224
5,934
4,743
4,500
EBITDA
$
2,870
$
4,881
$
9,885
$
1,893
$
16,726
$
23,177
$
16,086
$
20,649
Loss on early extinguishment of debt
—
—
—
—
—
717
717
—
Stock-based compensation
—
—
—
—
193
4,590
3,625
3,480
Adjusted EBITDA
$
2,870
$
4,881
$
9,885
$
1,893
$
16,919
$
28,484
$
20,428
$
24,129
EBITDA and Adjusted EBITDA are each a measurement not in
accordance with accounting principles generally accepted in the
United States of America, or U.S. GAAP. EBITDA represents
net income before net interest expense, income tax expense,
depreciation and amortization of intangible assets and
amortization of registration rights. Adjusted EBITDA represents
EBITDA plus stock-based compensation expense and non-cash
charges related to the early extinguishment of debt. We believe
that the supplemental presentation of EBITDA and Adjusted EBITDA
provides useful information to investors regarding our results
of operations because such presentation assists in analyzing the
operating performance of our business. This supplemental
disclosure backs out potential differences caused by differences
in capital structure (impacting interest expense), tax
strategies (impacting our effective tax rates), the composition
of our fixed assets (impacting our relative depreciation rates),
the impact of purchase price allocations for acquired companies
(impacting amortization of intangible assets expense) and the
impact of non-cash stock-based compensation expense and charges
related to the early extinguishment of debt. Although we use
EBITDA and Adjusted EBITDA as a financial measure to assess the
performance of our business, the use of EBITDA and Adjusted
EBITDA is limited because it does not include certain material
costs, such as interest and taxes, necessary to operate our
business.
Adjusted EBITDA is also presented because covenants in our
credit facility contain ratios based on this measure. Our credit
facility is material to us because it is one of our primary
sources of liquidity. If our Adjusted EBITDA was to decline
below certain levels, covenants in our credit facility that are
based on Adjusted EBITDA may be violated and could cause, among
other things, an inability to incur further indebtedness under
the credit facility and in certain circumstances a default or
mandatory prepayment under our credit facility. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Credit
Facility” for additional information on the covenants in
our credit facility.
The supplemental presentation of EBITDA and Adjusted EBITDA
included in this prospectus should be considered in addition to,
and not as a substitute for, net income in accordance with
U.S. GAAP as a measure of performance or net cash provided
by operating activities as determined in accordance with
U.S. GAAP as a measure of liquidity. We understand that
although EBITDA and Adjusted EBITDA are frequently used by
securities analysts, lenders and others in their evaluation of
companies, EBITDA and Adjusted EBITDA have limitations as
analytical tools, and you should not consider these in
isolation, or as a substitute for analysis of
our results as reported under U.S. GAAP. Some of these
limitations are due to the exclusion from Adjusted EBITDA of:
•
Stock-based compensation expense, a non-cash charge that is a
significant component of overall employee costs;
•
Cash expenditures for the acquisition of registration rights;
•
Cash expenditures for the acquisition of property and equipment;
•
Interest expense on our debts;
•
Income tax expense on our earnings; and
•
Changes in, or cash requirements for, working capital.
To compensate for these limitations, we evaluate our liquidity
by considering the economic effect of the excluded expense items
independently as well as in connection with its analysis of cash
flows from operations and through the use of other financial
measures, such as capital expenditure budget variances,
investment spending levels and return on capital analysis. Other
companies in our industry may calculate Adjusted EBITDA
differently than we do, limiting its usefulness as a comparative
measure.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and
results of operations should be read together with the financial
statements and related notes that are included elsewhere in this
prospectus. This discussion may contain forward-looking
statements based upon current expectations that involve risks
and uncertainties. Our actual results may differ materially from
those anticipated in these forward-looking statements as a
result of various factors, including those described under
“Risk Factors” or elsewhere in this prospectus. We
have prepared our discussion of the results of operations by
comparing our results for the year ended December 31, 2006
to the combined results of the Predecessor and Successor for the
year ended December 31, 2005 (the “Combined 2005
Results”). The Combined 2005 Results have been compared to
the Predecessor’s combined results for the year ended
December 31, 2004.
Overview
We operate a leading targeted online media business and a
leading online marketplace for domain names. We monetize a
high-quality portfolio of more than 2,250,000 domain names,
including more than 750,000 domain names that we own and more
than 1,500,000 domain names that are owned by third-party
affiliates. We generate revenue from online media, primarily
through advertising, and from the sale of domain names and
related services.
Our media business enables advertisers to reach highly-targeted
online audiences through a network of proprietary and
third-party websites. This network of owned and affiliate
websites, which attracted more than 60,000,000 visitors in
September 2007, creates a large amount of highly-targeted
traffic which is desirable to performance-based advertisers. Our
proprietary website publishing platform, SiteSense, allows us to
dynamically update and manage a variety of websites —
from lead-generating websites to premium online
communities — to provide the most relevant user
experience and most revenue potential for our network. The depth
of development of an individual website is generally based on
the nature of the specific domain name and the category to which
it relates.
Our domain name marketplace combines our proprietary portfolio
of domain names with those of third-party domain name owners
that want to list their domain names for sale, creating what we
believe is an efficient and liquid marketplace for high-quality
domain names. Like the Multiple Listing Service, or MLS, for
residential real estate, our Domain Listing Service, or DLS,
aims to have the largest inventory for sale and the broadest
distribution to buyers. Our customers can find and purchase
these domain names on our websites BuyDomains.com and
Afternic.com, or on websites that use our DLS, which include
seven of the top ten domain registrars. Our proprietary trading
platform, SiteMarket, is used to identify and value high-quality
domain names that are most relevant to small and medium-sized
businesses seeking online identities. Our objective is to create
an efficient, comprehensive marketplace of all available domain
names for sale in the secondary market for business owners
looking to purchase a premium domain name.
We evaluate our operating results based on the performance of
our media business and our domain name marketplace, the two
segments described above. In our media business, we strive to
increase advertising revenue through improved technology and
segmentation of our portfolio, creating a more compelling user
experience and delivering more targeted and effective
performance-based online advertising messages. We also plan to
expand our network of leading online enthusiast communities in
categories that have a high degree of consumer engagement,
interaction and commerce. To date, we have launched premium
enthusiast web properties in the photography, gardening,
astrology and automotive categories, and our strategy is to
replicate this model across multiple enthusiast categories
through internal development and selected acquisitions. In our
domain name marketplace, our goal is to create an extensive and
efficient domain name marketplace by providing an aggregation
point for available domain name inventory. We are undertaking a
broad distribution strategy which, along with improvements in
the functionality of our SiteMarket platform, are intended to
increase the volume of domain names that we sell. We expect that
our media business and our domain name marketplace will benefit
from continued growth in the size of our domain name portfolio.
We were incorporated in Delaware in February 2005 for the
purpose of acquiring Rare Names, LLC and Raredomains.com, LLC,
which are referred to collectively as the Predecessor. The
Predecessor began buying and selling domain names in 1999 and
generating advertising revenue from its websites in 2002. In
2003, the Predecessor generated total revenue of
$9.3 million, including $8.4 million from the sale of
Internet domain names and related services, and in 2004, total
Predecessor revenue increased to $19.5 million. Since
acquiring the Predecessor, we have developed our SiteSense media
platform and our SiteMarket domain name trading platform. We
generated total revenue of $31.4 million in 2005 and
$61.0 million in 2006.
Acquisitions
Since the acquisition of the Predecessor in February 2005, we
have completed eight acquisitions of businesses and technologies
and one acquisition of a large, premium domain name portfolio.
Aggregate initial consideration for these acquisitions of
approximately $62.5 million was funded from operating cash
flow and from the proceeds of a debt financing we completed in
September 2006. We anticipate the majority of our acquisition
activity in the future to be in our media business. Acquisitions
have included the following:
SmartName
LLC
In September 2006, we acquired the assets of SmartName, LLC, a
provider of affiliate domain name monetization services, for
approximately $16.5 million. The acquisition was funded
with the proceeds of our debt financing. This acquisition
enabled us to market a set of services that complement the
domain name monetization services provided by our SiteSense
platform.
Premium
Domain Name Portfolio
In December 2006, we acquired approximately 40 domain names from
an unrelated third party for cash consideration of approximately
$13.5 million. The acquisition was funded with the proceeds
of our debt financing. Approximately half of these names are
being held for development as premium enthusiast websites. The
remainder are included in registration rights available for sale.
Visionary
Networks, Inc.
In January 2007, we acquired the assets of Visionary Networks,
Inc., which provides an online community in astrology and other
related subjects. The purchase price of the acquisition was
approximately $14.1 million. Terms of the acquisition also
provide for future purchase payments, not to exceed
$7.5 million, contingent upon achieving certain financial
milestones for the years ended December 31, 2007 and 2008.
Other
Acquisitions
In addition to the acquisitions detailed above, we completed six
additional acquisitions for aggregate initial cash consideration
of $18.4 million. Three of these acquisitions provide for
potential future purchase payments, not to exceed
$2.6 million in the aggregate, contingent upon achievement
of financial and other milestones.
Components
of Our Statement of Operations
Our revenue is classified into two types: online media, and
domain name sales and related services. Revenue from online
media accounted for 19.5% of our combined total revenue in 2004,
27.0% of our combined total revenue in 2005, 48.9% of our total
revenue in 2006, 44.1% of our total revenue during the nine
months ended September 30, 2006 and 52.2% of our total
revenue during the nine months ended September 30, 2007.
Revenue from domain name sales and related services accounted
for 80.5% of our combined total revenue in 2004, 73.0% of our
combined total revenue in 2005, 51.1% of our total revenue in
2006, 55.9% of our total revenue during the nine months ended
September 30, 2006 and 47.8% of our total revenue during
the nine months ended September 30, 2007.
Online Media Revenue. Our online media revenue
is derived primarily from performance-based advertising. The
vast majority of advertising revenue we derive is on a
cost-per-click,
or CPC, basis. Under this model, we earn revenue when a visitor
to one of our websites clicks on a sponsored advertising link.
The advertising revenue we generate on our websites is based on
agreements with third-party advertising distribution providers
that maintain direct relationships with advertisers. These
providers pay us a percentage of their net revenue generated
from these advertising services. In instances where the CPC
advertising is generated by a visit to a website within our
affiliate network, we share the revenue that we receive with our
affiliate.
Domain Name Sales and Related Services
Revenue. Our domain name sales revenue consists
primarily of the sale of domain names. Domain name sales are
recorded on a transaction basis and are most often paid for at
the time of sale by credit card. We also generate a small amount
of revenue from other sources, including business services
referral fees and commission-based revenue for the sale of
domain names owned by our affiliates.
Cost of Online Media Revenue. Cost of online
media revenue consists primarily of performance-based
advertising costs, compensation and associated costs related to
technology operations and portfolio management personnel and, to
a lesser extent, the cost of maintaining the computer systems
and technology infrastructure supporting our media network and
the amortization of developed software and technology.
Cost of Domain Name Sales and Related Services
Revenue. Cost of domain name sale revenue
consists primarily of the costs of our domain name portfolio,
compensation and associated costs related to technology
operations and portfolio management personnel and, to a lesser
extent, the cost of maintaining the computer systems and
technology infrastructure supporting our domain name portfolio
and the amortization of developed software and technology. Our
domain name portfolio management team is primarily responsible
for identifying, acquiring, analyzing and managing our portfolio
of domain names.
Operating
Expenses
Product development. Our product development
expenses primarily consist of the compensation and associated
costs for technology personnel and consultants, as well as costs
for other services and supplies. We expect product development
expenses to increase as we grow our business and as we expand
and upgrade our product offerings and websites.
Sales and marketing. Our sales and marketing
expenses primarily consist of the compensation and associated
costs for sales, marketing and customer service personnel,
certain marketing and advertising activities, general business
development activities, and related consulting services. We
expect sales and marketing expenses to increase with the growth
of our business.
General and administrative. Our general and
administrative expenses primarily consist of the compensation
and associated costs for management, finance, legal and
administrative personnel, facility costs, and other costs such
as insurance. We expect that general and administrative expenses
will increase as we hire additional personnel and incur costs
related to the anticipated growth of our business and our
operation as a public company.
Amortization of intangible
assets. Amortization of intangible assets
consists of amortization of identifiable intangible assets,
excluding the amortization of developed software and technology,
recorded in connection with our acquisitions. Intangible assets
which consist of developed software, developed technology, trade
names, customer lists and non-competition agreements, are
amortized on a straight-line basis over their useful lives
generally ranging from three to five years, with the
amortization of developed software and technology included in
cost of revenue.
Interest expense, net. Net interest expense
includes interest incurred on debt financing, the amortization
of debt issuance costs and fair market value adjustments related
to convertible redeemable preferred stock warrants, partially
offset by interest income earned on our cash and cash
equivalents.
Income taxes. We are a subchapter
C corporation subject to United States federal and state
income taxes. The accounting for income taxes is discussed in
more detail in the section below entitled “Critical
Accounting Policies and Use of Estimates — Accounting
for Income Taxes.”
Stock-Based
Compensation Expense
Prior to January 1, 2006, we accounted for stock option
grants in accordance with Accounting Principles Board, or APB,
Opinion No. 25, Accounting for Stock Issued to
Employees, or APB 25, and complied with the disclosure
provisions of Statement of Financial Accounting Standards, or
SFAS, No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation —
Transition and Disclosure. Under APB 25, deferred
stock-based compensation expense is recorded for the intrinsic
value of options (the difference between the deemed fair value
of our common stock and the option exercise price) at the grant
date and is amortized ratably over the option’s vesting
period. We also accounted for non-employee option grants on a
fair-value basis using the Black-Scholes model and recognized
this expense over the applicable vesting period.
On January 1, 2006, we adopted the requirements of
SFAS No. 123(R), Share-based Payment, or
SFAS No. 123(R). SFAS No. 123(R) requires us
to measure the cost of employee services received in exchange
for an award of equity instruments, based on the fair value of
the award on the date of grant, and to recognize the cost over
the period during which the employee is required to provide the
services in exchange for the award. We adopted
SFAS No. 123(R) using the modified prospective method,
which requires us to apply its provisions to non-vested
stock-based awards to employees granted prior to January 1,2006 and all employee awards granted or modified subsequent to
January 1, 2006. For the years ended December 31, 2005
and 2006, we recorded expense of approximately $193,000 and
approximately $4.6 million, respectively, in connection
with share-based payment awards. For the nine months ended
September 30, 2007, we recorded expense of approximately
$3.5 million in connection with share-based payment awards.
As of September 30, 2007, unrecognized stock-based
compensation expense for non-vested options and restricted stock
units of $11.3 million is expected to be recognized using
the straight-line method over a weighted-average period of
2.58 years. The adoption of SFAS No. 123(R) will
have no effect on our cash flow for any period.
Critical
Accounting Policies and the Use of Estimates
Our financial statements are prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue, costs and expenses and related
disclosures. We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. We
evaluate our estimates and assumptions on an ongoing basis.
Actual results may differ from these estimates under different
assumptions or conditions.
Our significant accounting policies are described in Note 2
of the notes to our financial statements, and of those policies,
we believe that the following accounting policies involve the
greatest degree of judgment and complexity. Accordingly, these
are the policies we believe are the most critical to aid you in
fully understanding and evaluating our financial condition and
results of operations.
Principles
of Consolidation
The accompanying consolidated financial statements for the
period from February 22, 2005 through December 31,2005, for the year ended December 31, 2006, and for the
nine month periods ended September 30, 2006 and 2007
include our accounts and those of our wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated.
The accompanying combined financial statements, for the year
ended December 31, 2004 and for the period from
January 1, 2005 through February 22, 2005 include the
accounts of Raredomains.com, LLC and Rare Names, LLC. The
Predecessor had substantially similar member ownership and
interrelated operations.
Accordingly, combining Raredomains.com, LLC and Rare Names, LLC
into a single combined financial statement presentation is
considered by management to be most meaningful. All significant
intercompany accounts and transactions have been eliminated.
Revenue
Recognition
We recognize revenue when the price is fixed or determinable,
persuasive evidence of an arrangement exists, the product is
delivered or the services are performed, and collectibility of
the resulting receivable is reasonably assured.
We recognize the components of our online media revenue as
follows:
Advertising Revenue. Advertising revenue is
generated through our relationship with third-party advertising
distribution providers that pay us a fee based on the number of
advertisement-related clicks, actions or impressions on our
network of proprietary and affiliate websites. Revenue is
recognized in the period in which the click, action or
impression occurs. On our owned websites, we recognize revenue
net of our advertising distribution providers’ share. On
our affiliated websites, we recognize revenue net of our
advertising distribution providers’ share and net of our
affiliates’ share.
We recognize the components of our domain name marketplace
revenue as follows:
•
Sales of our Domain Name Registration
Rights. Revenue from sales of our domain name
registration rights is recognized upon reaching an agreement as
to the terms of the sale and the receipt of payment.
•
Business Services Revenue. Business Services
revenue consists of commissions received from affiliates selling
their domain name registration rights through our SiteMarket
platform and from partners that provide business services to our
customers, such as domain name registration and website-hosting.
This revenue is recognized when the sale is completed or a
referral is transmitted.
Domain
Name Registration Rights
Substantially all of our domain name registration rights are
both held for sale and used to generate advertising revenue.
Domain name registration rights are carried at the lower of
unamortized cost or net realizable value. Cost includes the fees
paid to initially register or acquire the rights to use a domain
name registration right. We aggregate monthly purchases of
domain names and such costs are charged to cost of revenue based
on the greater of (a) the percentage of the number of
domain names sold during the period compared to the number of
names estimated to be sold over the estimated life of the domain
names or (b) the straight-line amortization of domain name
registration rights over their estimated economic life. The
economic life of the domain name registration rights is
estimated to be seven years based on several factors including
the projected traffic and sales pattern for acquired domain
names. The estimate of the number of domain names to be sold in
a period is based upon historical sales trends, current and
projected sales staffing levels, the number of domain name
acquisitions, market conditions, seasonality and sales
strategies.
We periodically assess our costing model to ensure that our
projections are a reasonable basis for the rate at which the
cost of our acquired domain name registration rights is
expensed. We assess our sales volume assumptions assigned to our
domain name registration rights collection on at least an annual
basis or when facts and circumstances indicate to management
that sales trends may materially differ from our projections.
This assessment is based on a comparison of the actual sales
rate to the projected sales rate by acquisition year.
A small number of domain name registration rights are held
solely for our own use and are classified as long term assets.
These domain name registration rights, which represent less than
one percent of our total registration rights, are held primarily
for development of websites and are not currently offered for
sale. The economic life of the domain name registration rights
held for use is estimated to be seven years, consistent with the
useful life of registration rights available for sale.
At least at each balance sheet date, we compare the unamortized
costs to the net realizable value of the domain name
registration rights by acquisition month, taking into
consideration estimated future revenue from sales of the domain
name registration rights and advertising revenue, and we record
a reserve if necessary to reduce the carrying value of the names
to net realizable value.
Domain
Name Registration Rights Renewal Costs
Following the initial domain name registration period, in order
to retain the rights of a domain name, we are required to renew
annually the domain name registration right. These renewal fees,
which are typically between six to eight dollars per domain
name per year, are recorded as a prepaid asset and are expensed
on a straight-line basis over the one-year renewal period.
Goodwill
and Intangible Assets
Goodwill represents the excess of the purchase price over the
fair value of identifiable assets acquired and liabilities
assumed in business combinations accounted for under the
purchase method. Purchase price is assigned to the acquired
assets and liabilities based on their estimated fair value as
determined by management, generally with the assistance of an
independent appraiser.
Intangible assets other than goodwill are carried at cost less
accumulated amortization. Intangible assets are generally
amortized on a straight-line basis over the useful lives of the
respective assets, generally three to five years. Long-lived
assets and certain identifiable intangible assets to be held and
used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets
may not be recoverable.
We apply the provisions of the Financial Accounting Standards
Board’s, or FASB, SFAS No. 142, Goodwill and
Other Intangible Assets, or SFAS No. 142. Goodwill
and intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are
not amortized, but instead are tested for impairment on a
reporting unit basis in accordance with the provisions of
SFAS No. 142.
We perform impairment tests of goodwill assigned to reporting
units on an annual basis or when facts and circumstances
indicate to management that impairment may exist. Impairment
tests are based on a comparison of the fair value of the
reporting unit to the carrying value of the assets assigned to
that reporting unit. In instances where impairment exists,
goodwill is written down to fair value.
We review long-lived assets when facts and circumstances
indicate to management that the carrying value of those assets
may not be fully realizable over the remainder of their useful
lives. If impairment exists, we compare the fair value of the
asset, based on a discounted cash flow projection or other
method as deemed appropriate by management, to the carrying
value. If fair value is determined to be less than the carrying
value, we record an impairment charge to reduce the carrying
value to fair value.
Income
Taxes
The Predecessor elected to be taxed under the provisions of
subchapter S of the Internal Revenue Code. Therefore, no
provision or benefit for federal income taxes has been included
in the Predecessor financial statements since taxable income or
losses pass through to, and are reportable by, its members
individually. The Predecessor made distributions to members to
fund income tax payments. Upon our incorporation in February
2005, we elected to be taxed under the provisions of
subchapter C of the Internal Revenue Code, and are subject
to federal and state income taxes. We account for income taxes
in accordance with the provisions of SFAS No. 109,
Accounting for Income Taxes, or SFAS No. 109.
SFAS No. 109 requires us to account for income taxes
using an asset and liability approach, which requires the
recognition of deferred income tax assets and liabilities for
the expected future tax consequences of events that have been
recognized in our financial statements or tax returns. Deferred
income taxes have been provided for the differences between the
financial reporting carrying values and the income tax reporting
basis of our assets and liabilities. These temporary differences
consist of differences between the timing of the deduction of
certain amounts for income tax and financial statement reporting
purposes. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
those periods in which those temporary differences become
deductible.
Accounting
for Stock-Based Compensation
Through December 31, 2005, we accounted for our stock-based
compensation awards to employees using the intrinsic value
method prescribed in APB 25 and related interpretations.
Under the intrinsic value method, compensation expense is
measured on the date of grant as the difference between the
deemed fair value of our common stock and the option exercise
price multiplied by the number of options granted.
On December 16, 2004, the FASB issued
SFAS No. 123(R), which requires all share-based
payments to employees, including grants of employee stock
options and restricted stock units, to be recognized in the
income statement based on their fair values. We adopted
SFAS No. 123(R) effective January 1, 2006.
SFAS No. 123(R) allows companies that used the fair
value method under SFAS No. 123 for either recognition
or pro forma disclosures to apply SFAS No. 123(R)
using the modified prospective-transition method. Effective with
our adoption of SFAS No. 123(R) on January 1,2006, we have elected to use the Black-Scholes option pricing
model to determine the weighted-average fair value of options
granted. In accordance with SFAS No. 123(R), we will
recognize the compensation cost of share-based awards on a
straight-line basis over the vesting period of the award.
The volatility factor used for the computation of fair value of
equity awards has been determined using an average of the
historical volatility measures of a peer group of companies for
a period equal to the expected life of the option. The expected
volatility for equity awards during the period from
February 22, 2005 to December 31, 2005 was 71%, for
the year ended December 31, 2006 was 71% and during the
nine months ended September 30, 2007 was 71%. The expected
life of equity awards issued to employees has been determined
utilizing the “simplified” method as prescribed by the
Staff Accounting Bulletin No. 107, Share-Based
Payment. The expected life of equity awards during the
period from February 22, 2005 to December 31, 2005 was
6.13 years, the year ended December 31, 2006 was
6.02 years and during the nine months ended
September 30, 2007 was 6.16 years. For the period from
February 22, 2005 to December 31, 2005, the weighted
average risk free interest rate used ranged from 3.76% to 4.49%,
the year ended December 31, 2006 ranged from 4.33% to 5.02%
and for the nine months ended September 30, 2007 ranged
from 4.82% to 4.92%. The risk-free interest rate is based on a
zero coupon United States treasury instrument with a term that
is consistent with the expected life of the stock options. We
have not paid and do not anticipate paying cash dividends on our
shares of common stock. Therefore, the expected dividend yield
is assumed to be zero. In addition, SFAS No. 123(R)
requires companies to utilize an estimated forfeiture rate when
calculating the expense for the period. SFAS No. 123
permitted companies to record forfeitures based on actual
forfeitures, which was our historical policy under
SFAS No. 123. As a result, we applied an estimated
forfeiture rate, based on our limited historical forfeiture
experience, of 3.75% in the period from February 22, 2005
to December 31, 2005, of 3.75% in the year ended
December 31, 2006 and of 2.52% in the nine months ended
September 30, 2007 in determining the expense recorded in
our consolidated statements of income.
We have historically granted stock options at exercise prices
equal to the fair value of our common stock as of the date of
grant, as determined by our board of directors. Because there
has been no public market for our common stock, in determining
the fair value of our common stock, our board of directors
considered a number of objective and subjective factors,
including our operating and financial performance and corporate
milestones, the prices at which we sold shares of convertible
redeemable preferred stock, the superior rights and preferences
of securities senior to our common stock at the time of each
grant, and the risk and non-liquid nature of our common stock.
For all equity awards during the period from October 1,2006 through September 30, 2007, including stock option
grants and awards of restricted stock units, our board of
directors has also considered contemporaneous valuations of the
fair value of our common stock in determining the fair value
thereof.
In 2006, in connection with the preparation of our 2005 and
first quarter 2006 financial statements, we retrospectively
reassessed the fair value of our common stock during the period
from September 2005 through
February 2006. For both retrospective and contemporaneous
assessments of the fair value of the common stock underlying the
equity awards granted during this period, we followed guidelines
set forth in the AICPA’s Practice Aid Valuation of
Privately-Held Company Equity Securities Issued as
Compensation, or the AICPA Practice Aid.
Significant
Factors, Assumptions, and Methodologies Used in Determining Fair
Value.
We estimated our enterprise value under the guideline public
company method by comparing our company to publicly-traded
companies in our industry group. In determining our enterprise
value under this method, we utilized certain revenue and EBITDA
multiples of publicity traded firms in similar lines of business.
The companies used for comparison under the guideline public
company method were selected based on a number of factors,
including but not limited to, the similarity of their industry,
business model, financial risk and other factors. We applied a
50%-60% weighting to the revenue multiple and 40%-50% weighting
to the EBITDA in determining the guideline public company fair
market value estimate. The discounted future cash flow method
involves applying appropriate risk-adjusted discount rates of
18-20% to
estimated debt-free cash flows, based on forecasted revenue and
costs. The projections used in connection with these valuations
were based on our expected operating performance over the
forecast period. There is inherent uncertainty in these
estimates. If the Company had used different discount rates or
assumptions, the valuation would have been different.
We also estimated our enterprise value under the discounted
future cash flow method, which involves applying appropriate
discount rates to estimated cash flows that are based on
forecasts of revenue and costs. Our revenue forecasts are based
on expected market growth rates as well as assumptions about our
future costs during the next five years. There is inherent
uncertainty in making these estimates. These assumptions
underlying the estimates are consistent with the plans and
estimates that we use to manage the business. The risks
associated with achieving our forecasts were assessed in
selecting the appropriate discount rates. If different discount
rates had been used, the valuations would have been different.
In order to allocate the enterprise value determined under the
guideline public company method and the discounted future cash
flow method to our common stock, we used the
probability-weighted expected return method. Under the
probability-weighted expected return method, the fair market
value of the common stock is estimated based upon an analysis of
future values for our company assuming various future outcomes.
The anticipated timing of these future outcomes is based on the
plans of our board and management. Share value is based on the
probability-weighted present value of expected future investment
returns, considering each of the possible outcomes available to
us as well as the rights of each class of stock.
The fair market value of our common stock was estimated using a
probability-weighted analysis of the present value of the
returns afforded to our stockholders under each of four possible
future scenarios. Three of the scenarios assume a stockholder
exit, through our initial public offering, sale or dissolution.
The fourth scenario assumes operations continue as a private
company and no exit transaction occurs.
For each of the first three scenarios, estimated future and
present values for our common stock were calculated using
assumptions including: the expected pre-money valuation
(pre-offering or pre-sale); the expected dates of the future
expected initial public offering or sale; and an appropriate
risk-adjusted discount rate. An estimated present value for our
common stock was calculated for the fourth scenario (private
company with no exit scenario) using a weighted average of the
discounted cash flow method and the guideline public company
method. For the private company with no exit scenario we used a
marketability discount of 30%. Finally, the present values
calculated for our common stock under each scenario were
weighted based our management’s estimates of the
probability of occurrence of each of the scenarios. The
resulting value indications represent the estimated fair market
value of our common stock at each valuation date.
In addition, in connection with the retrospective reassessment
of the fair value of our common stock made in connection with
our 2005 and first quarter 2006 financial statements, in 2006,
we offered the holders of then outstanding stock options granted
during the period from September 2005 through February 2006 the
opportunity to amend the terms of their stock option agreements
to increase the exercise price of such stock options to reflect
the retrospectively reassessed fair values of our common stock
during the period from September 2005 through February 2006.
Although we believe that all of the affected options were
granted with an exercise price per share equal to the fair value
of our common stock as of the date of original grant, our board
of directors determined that it was in our best interest and in
the best interest of the optionees to increase the exercise
price of affected options to avoid potential penalties under
Section 409A of the Internal Revenue Code. The number of
shares covered by each amended stock option were decreased to
ensure that the aggregate exercise price of that affected option
remained unchanged. In addition, for those holders who agreed
with us to amend their affected options, we awarded affected
optionees restricted stock units covering that number of shares
of our common stock as was equal to the number of shares by
which his or her affected options were reduced.
Based on this retrospective reassessment, we will recognize
additional compensation expense of $1.6 million to reflect
the difference between the value calculated using the
Black-Scholes option pricing model with the initial assessment
of fair value of common stock and the value calculated using the
Black-Scholes option pricing model with the reassessed fair
value of common stock for the stock-based awards granted in July
2006 which are accounted for under the fair value method of
SFAS No. 123(R). The compensation expense will be
recognized over the vesting schedule of the awards. As a result
of the reassessment, we recognized compensation expense under
APB 25 of approximately $193,000 during the year ended
December 31, 2005. Including stock-based compensation
expense related to the retrospective reassessment of the fair
value of our common stock, we recorded stock-based compensation
expense of approximately $4.6 million for the year ended
December 31, 2006 and approximately $3.5 million for
the nine months ended September 30, 2007. As of
September 30, 2007, a future expense of $11.3 million
related to our unvested stock option and restricted stock unit
awards is expected to be recognized over a weighted-average
period of 2.58 years. The fair value of all outstanding
stock options and restricted stock unit awards as of
September 30, 2007, based on the difference between
$ ,
which is the midpoint of the price range set forth on the cover
page of this prospectus, and the weighted-average exercise price
thereof, was
$ .
The following Management’s Discussion and Analysis of
Results of Operations is presented on a combined basis, in which
we and the Predecessor are viewed as one. We have prepared our
discussion of the results of operations by comparing our results
for the year ended December 31, 2006 to the results of the
Successor for the period from February 22, 2005 to
December 31, 2005. The period from February 22, 2005
to December 31, 2005 has been compared to the
Predecessor’s combined results for the year ended
December 31, 2004. The Predecessor financial statements do
not reflect the application of purchase accounting relating to
our acquisition of the Predecessor. Upon the acquisition in
February 2005, an independent third party assessed the fair
value of our domain name registration rights to be
$15.0 million, an increase of more than $7.0 million
over book value. In addition, we recorded $3.1 million of
intangible assets which are being amortized over three to five
years from the date of acquisition. Subsequent to our
acquisition of the Predecessor, we are subject to the payment of
income taxes whereas the Predecessor was not. The following
table sets forth the items in our historical statements of
income for the periods indicated:
Online media. The increase in online media
revenue was attributable primarily to an increase of
$4.4 million in
cost-per-click
advertising and to $6.2 million in revenue derived from
newly-acquired or -launched premium enthusiast websites. This
increase in
cost-per-click
advertising resulted from our acquisitions of domain names and
businesses and technical improvements to our SiteSense platform
which produced more targeted advertising. The increase in
premium enthusiast website revenue was due to acquisitions
completed in 2007. We anticipate that our online media revenue
will increase as a percentage of total revenue as we continue to
increase the number of developed websites and particularly
premium enthusiast websites.
Domain name sales and related services. In the
nine months ended September 30, 2006, we recognized revenue
of approximately $1.4 million associated with the
implementation of a policy not to own domain names that include,
among others, registered trademarks or company names, regular or
obscene language, or content or language associated with any
illegal enterprises. Excluding the impact of these sales, domain
name sales and related services increased by $5.7 million.
This increase was primarily attributable to an increase in the
volume of our domain names sold due to the increased size of our
domain name portfolio, number of domain name sales personnel and
use of resellers. We expect domain name sales revenue to
continue to grow as we continue to invest in our domain name
marketplace business to maintain our position as one of the
largest domain name marketplaces on the Internet.
Online media cost of revenue. The increase in
online media cost of revenue was primarily attributable to a
$477,000 increase in royalties and other product-related costs
for premium enthusiast websites, a $408,000 increase in
amortization of intangible assets related to acquired software
and technologies, and a $407,000 increase in hosting costs,
offset by a $796,000 decrease in marketing costs. We anticipate
that online media costs will decrease as a percentage of online
media revenue as result of our focus on increasing non-paid
sources of Internet traffic, such as Direct Search and referral
links.
Domain name sales and related services cost of
revenue. The increase in domain name sales and
related services cost of revenue is primarily attributable to a
$814,000 increase in amortization of domain name renewal fees, a
$764,000 increase in the marketing costs and a $661,000 increase
in commissions paid to our marketplace affiliates, offset by a
$390,000 decrease in amortization and specific identification
costs related to the sale of registration rights. We anticipate
our domain name sales and related services cost of revenue to
decrease as a percentage of total domain name sales and related
services revenue as we realize expected efficiencies from our
domain name portfolio management and network operations staff.
The increase in product development expenses was primarily
attributable to a $1.6 million increase related to hiring
additional technology personnel and a $674,000 increase in
consulting costs, both related to personnel involved in the
development of new and upgraded product offerings. We anticipate
our product development expenses to increase in absolute dollar
amounts and as a percentage of revenue as we continue to make
planned investments in additional product and technology
professionals and in the capabilities to provide additional
services to our customers.
Sales and
marketing
Nine Months Ended
September 30,
Percent
2006
2007
Increase
Change
(dollars in thousands)
(unaudited)
Sales and marketing expense
$
4,781
$
10,212
$
5,431
113.6
%
Percentage of revenue
11.4
%
17.5
%
The increase in sales and marketing expenses was primarily
attributable to a $3.0 million increase related to hiring
additional sales and marketing personnel, a $692,000 increase in
consulting costs, a $481,000 increase in stock-based
compensation and increases in travel, bad debt expense and other
items. We anticipate our sales and marketing expenses to
increase in absolute dollar amounts as we continue to build and
acquire new premium enthusiast websites, hire additional sales
professionals and expand our business services offerings. These
sales and marketing expense increases will be driven largely by
the full-year impact of acquisitions completed in 2006 as well
as by any acquisitions completed subsequent to 2006.
General
and administrative
Nine Months Ended
September 30,
Percent
2006
2007
Increase
Change
(dollars in thousands)
(unaudited)
General and administrative expense
$
8,236
$
9,575
$
1,339
16.3
%
Percentage of revenue
19.6
%
16.4
%
The increase in general and administrative expenses was
primarily attributable to an increase of $1.6 million in
legal and accounting costs, including approximately
$1.2 million of costs related to a dispute settled in June
2007, a $681,000 increase in salary expenses related to hiring
additional management and executive professionals, a $637,000
increase in facilities costs and higher depreciation costs,
offset by a $900,000 decrease in stock-based compensation
expense related to grants made in the first quarter of 2006 and
a $717,000 loss on early extinguishment of debt, incurred in
September 2006. We anticipate our general and administrative
expenses will increase in absolute dollar amounts as we continue
to expand our accounting, legal, human resources and finance
teams, and incur additional costs relating to operating as a
public company, including a significant increase in our
directors’ and officers’ insurance premiums.
The increase in amortization of intangible assets expense was
primarily due to identified intangible assets arising from our
acquisitions. We anticipate our amortization of intangibles
expenses to increase in absolute dollar amounts and as a
percentage of revenue as a result of the full-year impact of
amortization of acquisitions completed prior to
September 30, 2007 as well as any acquisitions completed
subsequent to September 30, 2007.
Interest
expense, net
Nine Months Ended
September 30,
Percent
2006
2007
Increase
Change
(dollars in thousands)
(unaudited)
Interest expense, net
$
3,252
$
10,972
$
7,720
237.4
%
Percentage of revenue
7.7
%
18.8
%
Our interest expense, net increased as a percentage of revenue
from 7.7% in 2006 to 18.8% in 2007. This increase was primarily
due to our September 2006 debt financing and the adoption of a
new accounting policy related to our Series A convertible
redeemable preferred stock warrant, offset by interest earned on
average cash balances in our money market accounts.
Provision (benefit) for income
taxes. Provision for income taxes decreased from
$3.8 million for the nine months ended September 30,2006 to a benefit of $2 for the nine months ended
September 30, 2007, due to a decrease in pre-tax income of
$6.7 million. We anticipate that our effective tax rate for
2007 will be 80.47%. We expensed approximately $3.6 million
and $3.5 million in stock-based compensation during in the
nine months ended September 2006 and 2007, respectively which is
not deductible for taxes.
Online media. The increase in online media
revenue was primarily attributable to increased
cost-per-click
advertising. This increase in
cost-per-click
advertising resulted from our acquisitions of domain names and
businesses, increased marketing, and technical improvements to
our SiteSense platform which produced more targeted advertising.
We also received a higher revenue share from our primary
third-party advertising distribution provider based on the
full-year impact in 2006 of a contract signed in December 2005.
Domain name sales and related services. For
the year ended December 31, 2006, we recognized revenue of
approximately $1.4 million from the sale of domain names in
association with the implementation of a policy not to own
domain names that include, among others, registered trademarks
or company names, vulgar or obscene language, or content or
language associated with any illegal enterprises. Excluding the
impact of these sales, domain name sales and related services
increased by $9.7 million. This increase was
primarily attributable to an increase in the volume of our
domain names sold due to the increased size of our domain name
portfolio, number of domain name sales personnel and use of
resellers.
Cost of
revenue
Period Ended
December 31,
Percent
2005
2006
Increase
Change
(dollars in thousands)
Online media
$
1,291
$
9,738
$
8,447
654.3
%
Domain name sales and related services
5,959
13,173
7,214
121.1
%
Total cost of revenue
$
7,250
$
22,911
$
15,661
216.0
%
Percentage of revenue
26.3
%
37.6
%
Online media cost of revenue. The increase in
online media cost of revenue was primarily attributable to an
increase in marketing programs designed to generate Internet
traffic to our websites.
Domain name sales and related services cost of
revenue. The increase in domain name sales and
related services cost of revenue is primarily attributable to a
$3.4 million increase in the amortization of domain name
registration rights and a $1.3 million increase in domain
name renewal costs, resulting in each case primarily from the
growth of our domain name portfolio. There was also an increase
of $556,000 related to the net book value of domain names sold
during the period, primarily due to increased domain name sales
volume. This increase was also attributable to an $829,000
increase in marketing costs.
Product
development
Period Ended
December 31,
Percent
2005
2006
Increase
Change
(dollars in thousands)
Product development expense
$
805
$
2,510
$
1,705
211.8
%
Percentage of revenue
2.9
%
4.1
%
The increase in product development expenses was primarily
attributable to a $1.3 million increase related to hiring
additional technology personnel, and small increases in
consulting costs and stock-based compensation, all related to
personnel involved in the development of new and upgraded
product offerings.
Sales and
marketing
Period Ended
December 31,
Percent
2005
2006
Increase
Change
(dollars in thousands)
Sales and marketing expense
$
2,264
$
7,480
$
5,216
230.4
%
Percentage of revenue
8.2
%
12.3
%
The increase in sales and marketing expenses was primarily
attributable to a $2.6 million increase related to hiring
additional sales and marketing personnel, an increase of sales
commissions of $802,000, consulting and market research of
$742,000, an increase of credit card fees and commissions paid
to third-party domain name resellers of $536,000, and a $402,000
increase in stock-based compensation.
The increase in general and administrative expenses was
primarily attributable to a $3.7 million increase in
stock-based compensation expense related to the hiring of
several senior executives, $1.6 million increase in salary
expenses related to hiring additional management and executive
professionals, a $671,000 increase in legal costs, a $717,000
expense related to the early extinguishment of debt in
connection with our September 2006 debt financing and a $647,000
increase in office costs related to our expansion into new
facilities.
Amortization
of intangible assets
Period Ended December 31,
Percent
2005
2006
Increase
Change
(dollars in thousands)
Amortization of intangible assets expense
$
393
$
1,584
$
1,191
303.1
%
Percentage of revenue
1.4
%
2.6
%
The increase in amortization of intangible assets expense was
primarily due to identified intangible assets arising from our
acquisitions.
Interest
expense, net
Period Ended
December 31,
Percent
2005
2006
Increase
Change
(dollars in thousands)
Interest expense, net
$
2,524
$
6,962
$
4,438
175.8
%
Percentage of revenue
9.1
%
11.4
%
Our interest expense, net increased as a percentage of revenue
from 9.1% in 2005 to 11.4% in 2006. This increase was primarily
due to our September 2006 debt financing and the adoption of a
new accounting policy in 2006 related to our Series A
convertible redeemable preferred stock warrant, offset by
interest earned on average cash balances in our money market
accounts.
Provision for income taxes. Provision for
income taxes increased from $4.3 million for the Successor,
an effective tax rate of 38.4%, for the period from
February 22, 2005 to December 31, 2005, to
$4.4 million, an effective tax rate of 55.7%, in 2006. The
increase in our 2006 effective tax rate was primarily related to
permanent differences between book expenses and tax expenses.
Significant permanent differences in 2006 include
$1.0 million in stock-based compensation and a
$1.5 million fair market value adjustment on a
Series A convertible redeemable preferred stock warrant.
Online media. The increase in online media
revenue was primarily attributable to increased cost-per-click
advertising derived from acquisitions of domain names and
technical improvements to our SiteSense platform which produced
more targeted advertising.
Domain name sales and related services. The
increase in revenue from our domain name marketplace was
primarily attributable to an increase in the number of domain
names sold, due to the increased size of our domain name
portfolio, and a higher average sales price.
Online media cost of revenue. The increase in
online media cost of revenue was primarily attributable to an
increase of $884,000 in marketing programs designed to generate
Internet traffic.
Domain name sales and related services cost of
revenue. The increase in domain name sales and
related services cost of revenue is primarily attributable to a
$1.4 million increase in the amortization of domain name
registration rights and a $665,000 increase in domain name
renewal costs, resulting in each case primarily from the growth
of our domain name portfolio.
Product
development
Period Ended December 31,
Percent
2004
2005
Increase
Change
(dollars in thousands)
Product development expense
$
472
$
805
$
333
70.6
%
Percentage of revenue
2.4
%
2.9
%
The increase in product development expenses was primarily
attributable to a $613,000 increase related to hiring additional
technology personnel, offset by a $328,000 decrease in
third-party website development costs.
Sales and
marketing
Period Ended
December 31,
Percent
2004
2005
Increase
Change
(dollars in thousands)
Sales and marketing expense
$
887
$
2,264
$
1,377
155.2
%
Percentage of revenue
4.6
%
8.2
%
The increase in sales and marketing expenses was primarily
attributable to a $699,000 increase related to hiring additional
sales and marketing personnel and a $355,000 increase in sales
commissions.
General
and administrative
Period Ended
December 31,
Percent
2004
2005
Decrease
Change
(dollars in thousands)
General and administrative expense
$
4,979
$
3,100
$
(1,879
)
(37.7
)%
Percentage of revenue
25.6
%
11.2
%
The decrease in general and administrative costs was primarily
due to a $3.9 million decrease in payments to members of
the Predecessor, partially offset by a $957,000 increase in
professional fees such as legal, accounting and recruiting, a
$546,000 increase related to the hiring of finance and
management personnel, $276,000 in office related costs, and
$110,000 in franchise taxes.
The increase in amortization of intangible assets expense was
primarily due to identified intangible assets arising from the
acquisition of the Predecessor in February 2005.
Interest
expense, net
Period Ended
December 31,
Percent
2004
2005
Increase
Change
(dollars in thousands)
Interest expense, net
$
133
$
2,524
$
2,391
1,797.7
%
Percentage of revenue
0.7
%
9.1
%
Interest expense, net increased from $133,000 in 2004 to
$2.5 million in 2005. Our interest expense, net increased
as a percentage of revenue from 0.7% in 2004 to 9.1% in 2005.
This increase was primarily due to our debt financing in
connection with our acquisition of the Predecessor in February
2005, offset by interest earned on average cash balances in our
money market accounts.
Provision for income taxes. A comparison to
the Predecessor is not meaningful because the Predecessor was a
subchapter S corporation and, as such, did not record any
income taxes.
The following table sets forth unaudited quarterly income
statement data for the eleven quarters ended September 30,2007. This data has been derived from the unaudited interim
financial statements prepared on the same basis as the audited
financial statements contained in this prospectus and, in our
opinion, includes all adjustments consisting only of normal
recurring adjustments that we consider necessary for a fair
presentation of such information. This data should be read
together with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our
financial statements and related notes thereto appearing
elsewhere in this prospectus. The operating results for any
quarter should not be considered indicative of results for any
future period.
Except for the three months ended June 30, 2007, our total
revenue increased in each quarter primarily from an increase in
the number of paid advertisements delivered across our media
network as well as an increase in the number of domains names
sold. Our total revenue decreased in the quarter ended
June 30, 2007 as a result of a decrease in our online media
revenue, as described below. Our costs of revenue generally
increased each quarter as a result of the increase in our
performance-based marketing initiatives as well as higher costs
related to our collection of domain names.
Our online media revenue for each of the three months ended
March 31, 2007 and June 30, 2007 declined sequentially
as a result of changing our exclusive CPC advertisement
distribution partner in March 2007. As a result of this change,
online media revenue from our affiliate network declined by
$1.1 million in the three months ended March 31, 2007
compared to the three months ended December 31, 2006, and
by $2.3 million in the three months ended June 30,2007 compared to the three months ended March 31, 2007.
These declines were due to decreased revenue realized per
affiliate website as a result of lower levels of monetization
that resulted from our transition to a new CPC advertisement
distribution partner. This lower level of monetization also
resulted in a decrease in the number of affiliate network
customers. In May 2007, we began using a dual-
source arrangement for CPC advertisements. Since that time, we
have engaged an exclusive CPC advertisement distribution partner
for our proprietary network of websites and another exclusive
CPC advertisement distribution partner for our affiliate
network. Online media revenue from our affiliate network began
to increase after implementing this dual-source arrangement, due
both to increasing revenue per website and an increase in the
number of affiliate network customers.
Additional significant quarterly changes include the following:
•
The results of SmartName LLC are included from the acquisition
date of September 7, 2006, which positively impacted our
online media revenue for the three months ended
December 31, 2006.
•
The quarter ended September 30, 2006 reflects a charge of
$717,000 in general and administrative expenses related to the
early extinguishment of debt.
•
The quarter ended September 30, 2006 includes revenue of
approximately $1.1 million and related cost of revenue from
the sale of a portfolio of domain names associated with the
implementation of our company policy not to own domain names
that include, among others, registered trademarks or company
names, vulgar or obscene language or content, or language or
content associated with any illegal enterprise.
•
We incurred approximately $675,000 during the quarter ended
December 31, 2006, approximately $190,000 during the
quarter ended March 31, 2007, approximately $950,000 during
the quarter ended June 30, 2007, and approximately $20,000
during the quarter ended September 30, 2007 in general and
administrative expenses in connection with the settlement of
litigation and related legal fees.
•
The quarter ended March 31, 2006 includes a change of
approximately $872,000 as a result of a change in accounting
principles related to our Series A convertible redeemable
preferred stock warrant effective as of January 1, 2006.
•
We adopted the provisions of SFAS No. 123(R) on
January 1, 2006, resulting in an increase in the amount of
stock-based compensation reflected in our statements of income.
Seasonality
and Cyclicality
Seasonal fluctuations in overall Internet usage has affected,
and will likely continue to affect, our business. Overall
Internet usage generally declines during the summer months,
which could result in lower Internet traffic to our network and
therefore lower revenue primarily during the third fiscal
quarter. In addition, domestic advertising spending generally is
cyclical in reaction to overall conditions in the
U.S. economy. Our rapid historical growth rate has masked
the impact of seasonality on our business. We expect the
seasonal pattern of our business to become more pronounced.
Liquidity
and Capital Resources
We were incorporated in February 2005 for the purpose of
acquiring the Predecessor. At that time, we issued
$50.6 million of Series A and Z convertible redeemable
preferred stock, as well as $30.0 million of debt
securities. None of the net proceeds from the sale of our
Series A and Z convertible redeemable preferred stock and
the debt securities was available to fund our initial
operations. In September 2006, we entered into a credit
agreement providing for $105.0 million of term debt
financing and for a $10.0 million revolving line of credit
which expired in September 2007. A portion of the net proceeds
of this financing was used to repay our original debt financing
used to fund the acquisition of the Predecessor. The balance of
the term debt financing after repayment of our original debt
financing, approximately $73.3 million, was available for
limited purposes, including permitted purchases of domain names
and acquisitions of businesses. As of September 30, 2007,
we had used approximately $61.6 million for such permitted
purchases. The remaining funds were recorded on our balance
sheet as restricted cash. At September 30, 2007, we had
approximately $33.0 million of cash, cash equivalents and
restricted cash on our balance sheet, of which approximately
$13.0 million was restricted cash. In November 2007, we
entered into a new $125.0 million credit agreement which
consists of a $90.0 million term loan and a
$35.0 million revolving line of credit. The term loan was
fully drawn in
November 2007. The proceeds from the term loan, together with a
portion of cash and restricted cash on hand, were used to repay
the full balance outstanding on our prior credit facility. As of
November 30, 2007, we had no borrowings under the revolving
line of credit. Our principal sources of liquidity are our cash
and cash equivalents and the cash flow that we generate from our
operations.
Operating
Activities
Our net cash provided by operating activities was
$10.1 million for the nine months ended September 30,2007. Our net cash provided by operating activities was
$8.4 million in 2006, compared to $9.2 million in 2005
and $4.2 million in 2004. Increases in the balance of
domain name registration rights is a use of cash within our cash
from operations and totaled $2.0 million in the nine months
ended September 30 2007, $6.1 million in 2006,
$3.4 million in 2005 and $4.4 million in 2004.
Our net cash provided by operating activities for the nine
months ended September 30, 2007 was derived from a net
income of $0.2 million, plus non-cash charges of
$18.2 million, less changes in operating assets and
liabilities of $8.3 million. Our most significant non-cash
charges included amortization of domain name registration rights
of $4.5 million, representing charges to cost of revenues
based on an estimated seven-year useful life; amortization of
domain name renewal fees of $3.2 million, representing
charges to cost of revenues based on the life of the renewal
period which is generally one year, stock-based compensation of
$3.5 million and amortization of intangible assets of
$4.4 million associated with identified intangible assets
arising from business acquisitions. Amortization of domain name
registration rights and domain name renewal fees are likely to
increase as we increase the size of our domain name portfolio.
Amortization of intangible assets is also expected to increase
based on the full-year impact of acquisitions completed in 2006
and 2007, and as a result of any acquisitions completed
subsequent to September 30, 2007. The increase in net
operating assets related primarily to the increase in domain
name registration rights discussed above and an increase in
prepaid domain name renewal fees. The $2.0 million increase
in domain name registration rights includes domain name
acquisitions of $2.7 million, partially offset by a
reduction of $0.7 million reflecting charges to cost of
revenues for domain name registration rights sold in the period.
In addition, we had increased prepaid expenses of
$1.6 million, primarily related to income taxes, largely
offset by a decrease in accounts receivable and other
receivables, primarily due to timing of collections. The
decrease of $1.2 million in accounts receivable was due
primarily to favorable timing of collections from our
third-party advertising distribution providers.
Our net cash provided by operating activities in 2006 was
derived from net income of $2.6 million, plus non-cash
charges of $17.9 million, less changes in operating assets
and liabilities of $12.2 million. Our most significant
non-cash charges included amortization of domain name
registration rights of $5.9 million, amortization of domain
name renewal fees of $3.5 million, stock-based compensation
of $4.6 million and amortization of intangible assets of
$1.9 million. Amortization of domain name registration
rights and domain name renewal fees are likely to increase as we
increase the size of our domain name portfolio. Amortization of
intangible assets is also expected to increase based on the
full-year impact of acquisitions completed in 2006, and as a
result of any acquisitions completed subsequent to 2006. The
2006 increase in net operating assets related primarily to the
increase in domain name registration rights discussed above and
the increase in prepaid domain name renewal fees. The $6.1
increase in domain name registration rights includes domain name
acquisitions of $7.2 million, partially offset by a
reduction of $1.1 million reflecting charges to cost of
revenues for domain name registration rights sold in the period.
In addition, our accounts receivable increased by approximately
$9.1 million in 2006, due primarily to the increasing
percentage of revenue derived from our media business. A
significant amount of this increase relates to advertising
revenue in our affiliate network. This increase in accounts
receivable was offset by an increase of $9.5 million in
accrued liabilities, including $5.4 million related to
payments due to affiliate network participants for their share
of advertising revenue and $2.9 million of interest
payable. We expect continued growth in net operating assets, due
primarily to increases in our domain name portfolio.
Our net cash generated from operations for the period
February 22, 2005 through December 31, 2005 resulted
from net income of $7.0 million, plus non-cash charges of
$6.0 million, less changes in operating assets and
liabilities of $3.8 million. Our most significant non-cash
charges were amortization of domain name
registration rights of $2.2 million and amortization of
domain name renewal fees of $2.2 million. Changes in our
net operating assets included an increase in domain name
registration rights of $3.4 million and an increase in
prepaid domain name renewal fees of $2.4 million, partially
offset by an increase in taxes payable of $1.7 million. The
Predecessor generated net cash from operations for the period
January 1, 2005 through February 21, 2005 from net
income of $1.7 million plus non-cash charges of
$0.5 million, less changes in operating assets and
liabilities of $0.3 million. The most significant non-cash
charges of the Predecessor were amortization of domain name
registration rights and amortization of domain name renewal fees.
Net cash generated from Predecessor operations in 2004 resulted
from net income of $8.8 million, plus non-cash charges of
$2.4 million, less changes in operating assets and
liabilities of $7.1 million. The most significant non-cash
charges were amortization of domain name registration rights of
$0.8 million and amortization of domain name renewal fees
of $1.5 million. Changes in net operating assets included
an increase in domain name registration rights of
$4.4 million and an increase in prepaid domain name renewal
fees of $2.3 million.
Investing
Activities
Our net cash used in investing activities was $5.7 million
for the nine months ended September 30, 2007, comprised
primarily of acquisitions of businesses of $23.8 million
and an increase in registration rights held for use of
$1.7 million, partially offset by a decrease in restricted
cash of $21.9 million. The decrease in restricted cash
relates to amounts funded from escrow under our credit facility
to fund permitted acquisitions of businesses and domain names.
Capitalized development costs and purchases of property and
equipment were $2.2 million in the aggregate in the period.
Our net cash used in investing activities was $72.6 million
in 2006, comprised primarily of acquisitions of
$23.7 million, an increase in domain name registration
rights held for use of $12.6 million and an increase in
restricted cash of $34.8 million. The increase in
restricted cash relates to amounts available under our credit
facility to fund permitted purchases of domain names and
acquisitions of businesses. Our acquisitions of domain name
registration rights held for use included the acquisition of a
portfolio of premium domain names in a single transaction for
approximately $11.4 million. We do not currently expect to
enter into similar transactions in the foreseeable future and,
accordingly, we expect acquisitions of domain name registration
rights to decrease below 2006 levels. Our purchases of property
and equipment were $1.3 million in 2006. Our property and
equipment needs are expected to increase modestly in the near
future.
Our net cash used in investing activities was $72.9 million
for the period February 22, 2005 through December 31,2005, including the acquisition of the Predecessor for
$72.5 million. Net cash used in Predecessor investing
activities was not significant for the period January 1,2005 through February 21, 2005 and the year ended
December 31, 2004.
Financing
Activities
Our net cash provided by financing activities was not
significant for the nine months ended September 30, 2007.
Net cash provided by financing activities was $70.4 million
in 2006, including net proceeds of $100.6 million from our
debt financing discussed above, less repayment of
$30.3 million of our original debt financing use to fund
the acquisition of the Predecessor.
Our net cash provided by financing activities was
$73.1 million for the period February 22, 2005 through
December 31, 2005 from the issuance of convertible
redeemable preferred stock and debt financing related to the
acquisition of the Predecessor. Net cash used in Predecessor
investing activities was not significant for the period
January 1, 2005 through February 21, 2005. Net cash
used in Predecessor financing activities was $4.7 million
in 2004, including a $3.4 million distribution to the
members of the Predecessor.
We believe that our current cash and cash equivalents,
availability under our new revolving line of credit and cash
flow from operations will be sufficient to meet our anticipated
cash needs for working capital purposes and purchases of domain
names and equipment for the foreseeable future. We may require
additional cash resources due to changed business conditions or
other future developments, including any investments or
acquisitions we may decide to pursue. If these sources of cash
are insufficient to satisfy our cash requirements, we may seek
to sell debt securities or additional equity securities or to
obtain a new credit facility. The sale of convertible debt
securities or additional equity securities could result in
additional dilution to our stockholders. The incurrence of
additional indebtedness would result in incurring debt service
obligations and could result in operating and financial
covenants that would restrict our operations. In addition, there
can be no assurance that any additional financing will be
available on acceptable terms, if at all.
A portion of the net proceeds to us from this offering will
provide us additional liquidity for use in the expansion of our
operations and for acquisitions of domain names, businesses and
technologies. After repayment of a portion our existing term
debt obligations as described below, we expect to invest a
portion of these net proceeds in short term
interest-bearing,
investment-grade
securities, which will result in additional interest income.
Credit
Facility
In November 2007, we entered into a $125.0 million credit
facility which consists of a $90.0 million term loan and a
$35.0 million revolving line of credit. The term loan was
fully drawn in November 2007 and, together with a portion of
existing cash and restricted cash on hand, was used to retire
all outstanding debt under a previous credit agreement. We are
required to pay interest every one, two, or three months, based
on interest period elections made by us. As of November 23,2007, we elected to pay interest for the first loan period at
the end of two months. The term loan, which requires repayment
quarterly at varying rates beginning March 31, 2008, with
the final payment due on November 21, 2012, currently
accrues interest at an annual rate equal to the British Bankers
Association LIBOR rate, or BBA LIBOR, as published two business
days prior to the commencement of such interest period plus
4.00%. As of November 23, 2007, this rate was 9.05%. We
have not drawn on the revolving line of credit. Borrowings under
the credit facility are secured by all of our assets. Our credit
agreement requires that we use the proceeds of an initial public
offering of equity securities to repay the lesser of
$25 million, or the balance required to bring the leverage
ratio described below to 2.0 or less.
Our credit facility contains certain affirmative covenants for
us, including provision of financial statements, preservation of
existence, maintenance of properties and insurance, compliance
with laws, and restrictions on the use of proceeds from the term
loan.
Our credit facility also contains certain financial covenants,
including the following:
•
Consolidated Net Leverage Ratio, which requires our ratio of net
indebtedness to Consolidated Adjusted EBITDA for the most
recently completed twelve months not to exceed certain
thresholds. The Consolidated Net Leverage Ratio is tested on a
quarterly basis. As of November 30, 2007, our leverage
ratio was required to be no greater than 3.50:1.00.
•
Consolidated Fixed Charge Coverage Ratio, which requires our
ratio of (a) the sum of (i) Consolidated Adjusted
EBITDA for the most recently completed twelve months less
(ii) capital expenditures for such period to
(b) consolidated fixed charges for the most recently
completed twelve month period, to be no less than 1.30:1.00.
Consolidated fixed charges include cash taxes, the cash portion
of consolidated interest charges, scheduled debt principal
payments, cash dividends and other distributions, and the amount
of any repurchases
and/or
redemptions of equity interests.
In addition, the credit facility restricts our ability, among
other things, to:
These financial and operating covenants may restrict our ability
to finance our operations, engage in business activities or
expand or pursue our business strategies. To the extent we are
unable to satisfy those covenants in the future, we will need to
obtain waivers to avoid being in default of the terms of this
credit facility. In addition to a covenant default, other events
of default under our credit facility include any material breach
of a representation or warranty or attachment of funds or a
material judgment against us. If a default occurs, we may be
required to repay all then outstanding amounts. After this
offering, we expect that we will have sufficient resources to
fund any amounts which may become due under this credit facility
as a result of a default by us or otherwise.
Contractual
Obligations
Our major outstanding contractual obligations relate to our
long-term
debt obligations and operating lease obligations. We have no
contractual obligations of more than five years. We have
summarized in the table below our fixed contractual cash
obligations as of September 30, 2007.
Contractual
Payments Due By Period
Obligations
Total
Less than 1 Year
1 to 3 Years
3 to 5 Years
More than 5 Years
(In thousands)
Long-term debt obligations
$
105,000
$
105,000
—
—
—
Operating lease obligations
1,301
657
592
52
—
Total
$
106,301
$
105,657
$
592
$
52
—
The $105.0 million in long-term debt obligations summarized
above was retired in November 2007 in connection with our new
$125.0 million credit facility. The above summary does not
reflect our contingent obligations, incurred in connection with
completed acquisitions, to pay up to approximately
$7.3 million in the first quarter of 2008, up to
approximately $1.3 million in the second quarter of 2008,
and up to approximately $2.5 million in the first quarter
of 2009, based upon achievement of financial milestones.
On November 21, 2007, we entered into a $125.0 million
credit facility which consists of a $90.0 million term
loan, which was used to retire the $105.0 million
outstanding term loan related to our September 2006 financing,
and a $35.0 million revolving line of credit. Under the
terms of the new credit facility, we are required to make the
following payments:
Payments Due by Period
Contractual Obligations
Total
Less than 1 Year
1 to 3 Years
3 to 5 Years
More than 5 Years
(In thousands)
Long-term debt obligations
$
90,000
$
3,375
$
27,000
$
45,563
$
14,063
Total
$
90,000
$
3,375
$
27,000
$
45,563
$
14,063
Off-Balance
Sheet Arrangements
We do not have any outstanding derivative financial instruments,
off-balance
sheet guarantees, interest rate swap transactions, foreign
currency forward contracts or any other
off-balance
sheet arrangements.
Quantitative
and Qualitative Disclosures about Market Risk
Foreign
Currency Risk
Our exposure to adverse movements in foreign currency exchange
rates is primarily related to nominal payments to international
website publishers. A hypothetical change of 10% in foreign
currency exchange rates would not have a material impact on our
financial statements or results of operations. All of our sales
are denominated in U.S. Dollars.
Our exposure to market risks for changes in interest rates
relates primarily to borrowings under our term loan facility and
our revolving line of credit. As of November 30, 2007, we
had $90.2 million of indebtedness outstanding under our
term loan facility, all of which was locked at a fixed rate of
interest until January 28, 2008. Based on our assets and
liabilities as of November 30, 2007, and assuming the
balance of these assets and liabilities remain unchanged until
November 30, 2008, a one percent increase or decrease in
BBA LIBOR would change our net income by approximately $521,000.
We anticipate that we will repay a portion of the outstanding
indebtedness under our term loan facility with the proceeds to
us from this offering. See “Use of Proceeds.”
Recently
Issued Accounting Standards
In July 2006, the FASB issued Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income
Taxes, an interpretation of SFAS 109. The provisions of
FIN 48 are effective for fiscal years beginning after
December 15, 2006 with the cumulative effect of a change in
accounting principle recorded as an adjustment to opening
retained earnings. The provisions of FIN 48 are to be
applied to all tax positions upon initial adoption of this
standard. FIN 48 requires that we recognize in the
financial statements, the impact of a tax position, if that
position is more likely than not of being sustained upon audit,
based on the technical merits of the position. FIN 48 also
provides guidance on the derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and
transition attributable to the tax position. Our adoption of
this interpretation in January 1, 2007 did not have a
material impact on our financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS 157 addresses how
companies should measure the fair value of assets and
liabilities when fair value recognition or disclosure is
required. Additionally, SFAS 157 formally defines fair
value as the amount the company would receive if it sold an
asset or transferred a liability to another company operating in
the same market. The guidance of SFAS 157 shall be applied
to the first reporting period beginning after November 15,2007. The adoption of SFAS 157 is not expected to have a
material impact on our financial position, results of operations
or cash flows.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities — Including an amendment of FASB
Statement No. 115. SFAS No. 159 permits
companies to choose to measure certain financial instruments and
other items at fair value. Unrealized gains and losses on items
for which fair value measurement has been elected will be
recognized in the income statement at each reporting date. The
guidance of SFAS No. 159 shall be applied to the first
reporting period beginning after November 15, 2007. The
adoption of SFAS No. 159 is not expected to have a
material impact on our financial position, results of
operations, or cash flows.
We operate a leading targeted online media business and a
leading online marketplace for domain names. We monetize a
high-quality portfolio of more than 2,250,000 domain names,
including more than 750,000 domain names that we own and more
than 1,500,000 domain names that are owned by third parties. We
generate revenue primarily from two sources: online advertising
in our media business, and the sale of domain names in our
marketplace business.
Our media business enables advertisers to reach highly-targeted
online audiences through a network of proprietary and
third-party websites. This network of owned and affiliate
websites, which attracted more than 60,000,000 visitors in
September 2007, creates a large amount of highly-targeted
traffic which is desirable to advertisers. Our proprietary
website publishing platform, SiteSense, allows us to dynamically
generate and manage a variety of websites — from
lead-generating websites to premium online
communities — to provide the most relevant user
experience and the most revenue potential for our network. The
depth of development of an individual website is generally based
on the nature of the specific domain name and the category to
which it relates. We currently have three levels of domain name
development:
•
Highly-targeted websites such as TennisClinics.com and
ParentingBooks.com, where consumers can find links to related
websites. The specificity of the domain name allows us to
generate revenue from highly relevant
cost-per-click,
or CPC, advertising links featured on these websites.
•
Lead-generating websites such as CellularPlans.com and
LowRate.com, that provide relevant content and comparison
information on certain products or services and give consumers
the opportunity to take a specific action, such as completing an
application. We generate revenue from these websites on a
cost-per-action,
or CPA, basis.
•
Premium enthusiast websites such as Photography.com and
Gardens.com, that represent the development of online social
networking communities around specific niche consumer
categories. For these websites, we employ an editorial model
that uses expertise and content provided by the community
itself, complemented by our SiteSense platform, to create a
compelling user experience. We generate revenue from these
websites through a combination of advertising, subscriptions and
e-commerce
sales.
Our domain name marketplace combines our proprietary portfolio
of domain names with those of third-party domain name owners
that want to list their domain names for sale, creating what we
believe is an efficient and liquid marketplace for high-quality
domain names. Like the MLS for residential real estate, our
Domain Listing Services, or DLS, aims to have the largest
inventory for sale and the broadest distribution to buyers. Our
customers can find and purchase these domain names on our sites
BuyDomains.com and Afternic.com, or on sites that use our DLS,
which includes seven of the top ten domain registrars. Our
proprietary trading platform, SiteMarket, is used to identify
and value high-quality domain names that are most relevant to
small and medium-sized businesses seeking online identities. Our
objective is to create an efficient, comprehensive, global
marketplace for business owners looking to purchase premium
domain names in the secondary market.
We generated $61.0 million in revenue in 2006 and
$58.3 million in revenue during the nine months ended
September 30, 2007. We generated $28.5 million in
Adjusted EBITDA in 2006 and $24.1 million in Adjusted
EBITDA during the nine months ended September 30, 2007. Our
media business accounted for approximately 49% of our revenue in
2006 and approximately 52% of our revenue during the nine months
ended September 30, 2007, and our domain name marketplace
business accounted for approximately 51% of our revenue in 2006
and approximately 48% of our revenue during the nine months
ended September 30, 2007.
Domain names are often referred to as the real estate of the
Internet, providing opportunities to buy, sell and develop
digital properties. We believe that the value of this online
real estate is being positively influenced by several underlying
Internet industry trends.
Growth
of Online Advertising and Internet Audience
According to a 2007 report by IDC, the number of global Internet
users is projected to grow from approximately 950 million
in 2005 to over 1.5 billion in 2009. In addition,
increasing broadband access to the Internet is growing the
number of Internet users and the amount of time consumers are
spending online. While U.S. online advertising budgets are
large and growing, online marketing expenditures represent a
relatively small portion of the total advertising market.
According to JupiterResearch, the U.S. online advertising
market was projected to be $19.9 billion in 2007,
representing approximately 8% of the total U.S. advertising
market. JupiterResearch found that in 2006, online users devoted
approximately 14 hours per week to consume each of
television and Internet media, as compared with approximately
four hours per week to radio and one hour per week to each of
newspapers and magazines. We believe that over time, advertising
expenditures will follow consumer behavior and businesses will
allocate a larger share of their marketing budgets to online
advertising.
Growth
in Direct Search Internet Traffic
We believe that a significant and increasing amount of Internet
traffic is generated by consumers who are effectively using the
web browser address bar as a search engine. We refer to this
type of online activity as Direct Search. For example, a
consumer could type photography.com directly into their web
browser address bar and be directed to the website associated
with the term, in this case www.photography.com, rather than
looking for information on photography using a search engine. By
typing a search term directly into their web browser address
bar, Internet users indicate an interest in a particular
subject, which results in more highly-targeted online traffic
when compared to typical search results.
Increasing
Value of Targeted Online Audiences
The value of targeted Internet traffic has increased as
advertisers continue to shift spending from offline media, such
as magazines and television, to online media while they increase
their adoption of performance-based online advertising
strategies. Advertisers are attracted to the performance-based
advertising models enabled by the Internet, where they pay for
advertising only when a consumer takes a specific action, such
as clicking on an advertising link, completing an application
form or making an online purchase. According to JupiterResearch,
the total Internet advertising market, excluding display
advertising, is projected to grow 15% in 2008 to
$14.1 billion, representing 62% of the total
U.S. Internet advertising market. The continued growth in
performance-based advertising depends on the ability to
effectively intersect consumers’ interests with advertising
targeted precisely to their expressed needs to produce a desired
consumer action. Consequently, advertisers are seeking to reach
specific online audiences, and performance-based online
advertising distribution providers, such as Google and Yahoo!,
are continually seeking to add more highly-targeted online
properties to their networks to satisfy this growing demand for
performance-based online advertising.
Growing
Importance for Businesses to Establish a Meaningful Online
Presence
According to IDC, there were approximately 8.3 million
small and medium-sized businesses in the United States in 2007.
As these companies look to establish online identities and
develop websites, they will need to acquire domain names that
accurately reflect their businesses. We believe that businesses,
particularly new and small and medium-sized businesses, will use
domain name marketplaces to assess the inventory of available
domain names, or digital real estate, like they would review a
database of real estate listings to evaluate available
properties.
Growth
in the Volume of Undeveloped Domain Name
Properties
The volume of undeveloped domain name properties is growing,
creating opportunities to make a market in the buying, selling
and development of domain names. According to VeriSign, there
were approximately 65.0 million .com and .net domain names
registered as of December 31, 2006, an increase of 30%
compared to December 31, 2005. VeriSign also estimates that
as of December 31, 2006, there were 15.4 million
domain names with a single-page website, which represented 23%
of all .com and .net domain names. Many of the owners of these
domain names seek services to generate revenue from their domain
name either by selling the domain names or by deriving
advertising revenue from the targeted traffic that the domain
names generate. The models for generating revenue from
undeveloped websites are evolving. In addition to the sale of
their domain name registration rights, owners of domain names
have several options for monetizing their online properties,
including creating simple websites featuring advertising links
related to the subject matter of the domain name; websites
providing information, offers and incentives to purchase a
product or complete an application for a particular service; and
premium websites providing compelling content on an area of
particular consumer interest. We believe that as the volume of
undeveloped domain names continues to grow, the demand for
domain name monetization providers will increase.
NameMedia
Domain Name Monetization Solution
We provide a leading domain name monetization solution that is
comprised of our media business, which generates advertising
revenue from the domain names that we develop into websites, and
our domain name marketplace, which generates revenue through our
selling of domain names. We use our high-quality portfolio of
more than 2,250,000 domain names, including more than
750,000 domain names that we own, to provide value to
multiple constituencies including Internet users, advertisers,
small and medium-sized businesses, and third-party domain name
owners. Internet users can benefit from the relevant content and
information that we provide through our extensive network of
websites generated by our SiteSense platform. Advertisers
benefit from access to large volumes of highly-targeted Internet
traffic and performance-based online advertising opportunities.
Small and medium-sized businesses benefit from access to our
comprehensive listing of more than 2,000,000 domain names
available for sale through our BuyDomains.com and Afternic.com
websites and our DLS, as they seek the right domain names to
establish online identities. Third-party domain name owners
benefit from the ability to generate advertising revenue through
our affiliate network, as well as from the ability to sell their
domain names through our SiteMarket platform.
Key
attributes of our business include:
Large and High-Quality Portfolio. We believe
that our proprietary portfolio of more than 750,000 domain
names is among the largest in the world. From this portfolio we
have created an extensive network of websites that generates an
increasing amount of Internet traffic across approximately 500
content categories. In addition to its breadth, we believe our
domain name portfolio is differentiated by its quality. We have
a policy not to own categories of domain names that include,
among other things, registered trademarks or company names,
vulgar or obscene language or content, or language or content
associated with any illegal enterprise. We believe our domain
name portfolio contains a significant number of high-quality
domain names that will enable us to develop multiple premium
websites that offer a compelling user experience. The size and
quality of our domain name portfolio also enhances our
marketplace business and enables us to create a more liquid
secondary market. We believe that, as a result, we offer a wider
selection of domain names for sale, making our marketplace more
valuable to its users.
Leading Website Creation and Management
Platform. We use our SiteSense platform to create
and manage the websites in our network. This platform’s
flexibility allows us to pursue a variety of development
approaches, from websites that are focused on generating
advertising leads as efficiently as possible, to websites that
are enthusiast communities offering a combination of content,
commerce and community elements in selected consumer niche
categories.
Leading Marketplace and Trading
Expertise. With an inventory of more than
2,000,000 owned and affiliate domain names for sale, we believe
that our domain name marketplace is among the largest in the
world. We believe that the depth and quality of the inventory
we offer makes it a valuable resource and an efficient
marketplace for small and medium-sized businesses that are
seeking to acquire a particular domain name that is owned by us
or one of our third-party affiliates. SiteMarket uses our
proprietary database of over seven years of records on domain
names, which, due to the span of these records, we believe is
the only database of its kind in the industry. We use SiteMarket
to assist us in assigning a domain name value and quality
ranking when we are evaluating the purchase of domain names,
which we believe enables us to acquire domain names that have a
high probability of resale on a cost-effective basis. We
consider SiteMarket to be a competitive advantage for us as it
allows us to make more informed domain name purchase and sale
decisions.
The
NameMedia Strategy
Our objective is to enhance our position as a leading targeted
online media business and a leading online marketplace for
domain names. To achieve this objective we intend to:
Continue to develop our premium domain names into enthusiast
online communities. We intend to continue to
develop our premium domain names to create a network of leading
enthusiast, online communities in categories that have a high
degree of consumer engagement, interaction and commerce. To
date, we have launched premium enthusiast web properties in the
photography, gardening, astrology and automotive categories and
our strategy is to replicate this model across multiple
enthusiast categories through internal development and selected
acquisitions. We intend to apply our social networking
technology across multiple categories to create a network of
compelling enthusiast web properties.
Continue to grow our proprietary domain name
portfolio. We intend to continue to grow and
enhance the quality of our proprietary domain name portfolio. We
plan to continue to acquire new high-quality domain names
through multiple sources including previously registered names
whose registration has expired, selected domain name portfolio
acquisitions, participation in domain name auctions and the
registration of new domain names.
Enhance our SiteSense platform to optimize the value of our
proprietary and affiliate domain name
portfolios. We will continue to enhance our
technology platform that dynamically generates and manages
websites in our network. We intend to enhance our ability to
optimize the value of domain names by improving the technology
features and functionality of our SiteSense platform. We plan to
implement platform improvements to better segment our domain
name portfolio, create a more relevant and compelling user
experience, deliver more targeted and effective
performance-based online advertising messages, and create
compelling premium online communities.
Enhance our SiteMarket domain name trading
platform. Our goal is to establish an extensive
and efficient domain name marketplace that provides an
aggregation point for available domain name inventory, much like
the MLS for residential real estate. With our DLS, we intend to
extend our distribution channels beyond our BuyDomains.com and
Afternic.com websites to selected domain name resellers to
ensure that our inventory is broadly available through channels
where small and medium-sized businesses and consumers may shop
for premium domain names. This broader distribution strategy,
along with improvements in the functionality of our SiteMarket
platform, are intended to increase the volume of domain names
that we sell.
Pursue selected acquisitions. We will continue
to evaluate potential opportunities to acquire businesses and
technologies. Our strategy will focus on acquiring domain name
portfolios, developed websites that supplement our consumer
enthusiast websites, and companies that offer technology
features or functionality that complement our existing products
and services.
Products
and Services
Media
Business
We have developed a network of websites that enables consumers
to find relevant content and product information across a wide
range of categories. Our network of websites has been developed
from our proprietary portfolio of more than 750,000 domain
names and our affiliate network of more than
250,000 websites that use our SiteSense technology and
website publishing platform. SiteSense automatically
assigns the domain name to one of approximately 500 categories,
selects a website template from more than
500,000 variations for website design and layout, generates
relevant related keywords for the domain name that enable
targeted advertising, incorporates original articles and news
feeds and delivers relevant advertising, resulting in a website
populated with targeted content, commerce and advertising.
Our SiteSense platform also includes proprietary social
networking functionality, including user-generated content
publishing and media sharing modules that can be added to our
premium enthusiast websites. This functionality powers the
formation of robust online communities around common visitor
interests.
The SiteSense platform efficiently generates websites for more
than 1,000,000 domain names, generating a significant
amount of targeted user traffic and creating the opportunity to
deliver a large volume of performance-based online advertising.
We believe that, collectively, our proprietary and affiliate
website networks received more than 60,000,000 visitors in
September 2007. Historically, most of our Internet traffic has
come from non-paid sources, such as Direct Search and referral
links.
Given the size of our domain name portfolio, our network of
websites covers a wide variety of vertical content and consumer
interest categories. We divide our domain name portfolio into
approximately 500 individual categories that
roll-up to
16 general categories, such as travel, business, technology,
education, health, home, shopping, and sports, with no one
general category constituting more than 15% of our domain name
portfolio.
We also offer
third-party
domain owners the ability to generate advertising revenue from
their domains through use of the SiteSense platform. This
service is offered through three brands, SmartName.com,
ActiveAudience.com and Goldkey.com, which are differentiated
primarily by features and functions associated with the
portfolio size and quality of domain names to be monetized.
One of the key elements of our SiteSense platform is its ability
to automatically segment domain names and develop websites using
the appropriate amount of content and most relevant online
advertising format and message. The level of development of a
given website is generally dependent on the particular domain
name and the nature of the category to which it relates. We
currently have three broad levels of website development:
We use our SiteSense platform to dynamically generate the
majority of our websites and display advertising that relates to
the topic of the domain name. This performance-based advertising
includes
CPC-sponsored
links, which generate revenue to us when a visitor to one of our
websites clicks on the link. Examples of websites that we own in
this category include: GolfShop.com, LeatherLuggage.com,
GreatDate.com, TennisClinics.com, CoolPhones.com,
DiamondWatch.com, CouplesResorts.com, ComicBooks.com, Puzzle.com
and ParentingBooks.com. We also allow third-party domain name
owners to use our SiteSense platform through our affiliate
network. The CPC links presented on the websites in our network
are provided under our agreements with Google and Yahoo!. We
receive a share of the net revenue that Google and Yahoo!
receive from their advertisers when a user clicks on a CPC
sponsored link.
Our CPA websites feature useful content and comparison
information on certain products and services and include CPA
performance-based advertising that requires the website visitor
to perform an action, such as completing a credit card
application, submitting a form requesting information or making
a purchase. We typically earn revenue when the customer
completes the action. CPA advertising is designed to produce
valuable leads for advertisers. The revenue we earn from a given
CPA transaction is generally significantly higher than the
revenue we receive from a given CPC advertisement. In addition
to CPA advertising, some of these websites also provide display
advertising for which we are paid on a cost per
thousand-impressions basis. Examples of websites that we own
that generate CPA advertising revenue include:
CellularPlans.com, LowRate.com, CreditCardClub.com,
EducationalCentral.com, AutomotiveLoans.com,
ConsolidateYourDebts.com, AutomotiveCenter.com and
MortgageApprovals.com.
We are developing online communities that utilize our portfolio
of domain names and our SiteSense technology platform. These
websites offer a combination of content, commerce and community
elements designed to produce comprehensive destination websites
in selected consumer niche categories. We believe that we can
create a network of online communities that are highly relevant
to consumers and targeted to their interests. Unlike the model
of early-generation websites, which relied on editors to publish
content to readers, our strategy for developing our premium
enthusiast websites utilizes social networking functionality
where the expertise and experiences of the community generate
the majority of the website content through discussion forums,
blogs, media sharing and other user connectivity and
self-expression tools. Enabling this model is our proprietary
social networking functionality, including our Pixamo
media-sharing technology, that allows us to rapidly develop and
introduce new communities with a robust set of tools for the
community to use, engage, connect, and communicate. While social
networking first took hold among a young audience, we believe
social networking functionality is applicable across broader
audiences, particularly in areas of consumer interest where
Internet users hold lifelong, passionate interests in a specific
avocation.
Based on our experience in developing our premium enthusiast
properties, we have found that adding content and community
website features can significantly increase Internet user
traffic volume to these websites. By expanding and enhancing
content, these websites are more likely to be indexed by major
search engines such as Google or Yahoo! and benefit from the
incremental Internet traffic that can be generated by being
included in search results.
Photography. We believe that with the
introduction of affordable digital camera equipment, consumers
have shown growing interest in photography. According to a 2007
report by IDC, it is estimated that $37.4 billion will be spent
on over 122 million digital cameras in 2007. We own
photography.com, a photography enthusiast website, photo.net, a
leading online photography community, and more than 6,000 other
photography-related websites, including photography-related
domain names, such as familyphotos.com, rarephoto.com, and
photographersforum.com. Before we developed our photography.com
website, the majority of its user traffic was generated by
consumers who used Direct Search and were directed to the
website upon typing the domain name into their browser address
bar. Because the website had no editorial content prior to its
development, it was not indexed by the major search engines and
therefore, the website did not appear prominently, if at all, in
the search results provided by these services. After we launched
the developed photography.com website with content and commerce
features, the website regularly appears on the first page among
the top Google search results in response to searching on the
term photography, increasing the visits to the website from
search engines. Our photography-related websites now attract
more than 5,000,000 monthly visitors, with approximately
300,000 registered members who have uploaded more than
2,000,000 photos and participated in more than 45
discussion forums.
Gardening. According to a report by the
National Gardening Association, gardening is a pastime enjoyed
in 2006 by 85,000,000 households in the United States that
spent more than $34.1 billion on gardening-related
equipment, supplies and plants annually, highlighting the high
degree of consumer engagement and spending associated with the
category. We own Gardens.com, DavesGarden.com, a leading online
gardening community, and more than 2,000 other gardening-related
websites, such as landscaping.com, gardeneducation.com, and
asiangardens.com. Our garden-related websites attract more than
1,500,000 monthly visitors with approximately 275,000
registered members who have uploaded more than 750,000
gardening-related images and who have participated in more than
200 active online discussion forums.
In addition to the photography and gardening categories, we have
developed enthusiast categories such as Astrology (Tarot.com and
DailyHoroscope.com) and Automotive (Driving.com), and are
developing enthusiast categories, such as Biking (Biking.com)
and Boating (Boating.com). We generate revenue from these
websites through a combination of advertising, subscriptions and
e-commerce
sales. While our premium enthusiast websites did not generate a
significant percentage of our revenue in 2006, we expect them to
be a significant component of our revenue going forward.
Through our online domain name marketplace, we sell Internet
domain names owned by us or third parties primarily to small and
medium-sized businesses that are establishing or expanding their
online presence. We derive revenue from domain name sales
primarily by acquiring domain names that we believe are well
suited for resale and marketing and selling those domain names
through our BuyDomains.com and Afternic.com websites and through
selected resellers that use our DLS. We currently own more than
750,000 domain names, over two-thirds of which are .com
domain names and nearly all of which we offer for sale. We
acquire our owned domain names through multiple sources,
including the following:
•
Registering new names identified by us. For the nine months
ended September 30, 2007, this source represented 43% of
the domain names we acquired.
•
Previously registered domain names that are not renewed at the
domain name registry by the current owner. Each day a
significant number of names become available through the
registry in what is known as the daily drop. For the nine months
ended September 30, 2007, this source represented 38% of
the domain names we acquired.
•
Private sales of domain names, whereby domain name owners offer
to sell individual domain names or portfolios of domain names in
negotiated transactions. For the nine months ended
September 30, 2007, this source represented 14% of the
domain names we acquired.
•
Participation in domain name auctions, in which one of several
online domain name auction companies offers domain names for
sale in an auction process. For the nine months ended
September 30, 2007, this source represented 5% of the
domain names we acquired.
By combining our owned portfolio with that of third-party domain
owners that want to sell their domains, we operate what we
believe is an efficient and liquid domain name marketplace.
Marketed as the DLS, our objective is to have the largest
inventory of high-quality domains for sale and the broadest
distribution to buyers, much like the MLS for residential real
estate. Beyond listing the domain inventory on our own websites,
BuyDomains.com and Afternic.com, we have agreements with more
than 50 distribution partners, including seven of the top
ten registrars, such as GoDaddy.com and Register.com. To date,
we have sold domain names to customers in more than 100
countries.
We use our SiteMarket platform to assign values and quality
rankings to domain names, a valuation and ranking process that
is supported by a proprietary database that contains millions of
historical records and data elements on domain names, including
purchase and sales history, and third-party data. Our database
and valuation criteria have been continually updated and refined
since 1999.
BuyDomains.com
We offer nearly all of our owned domain names for sale directly
on our BuyDomains.com website and through selected resellers
that use our DLS. Many of our domain names carry a fixed price
and can be purchased directly on our website through an online
checkout system. Certain domain names require the customer to
request pricing information by email or by calling our sales
representatives. BuyDomains.com customers are primarily small
and medium-sized businesses that are establishing or expanding
their online presences. Recent domain names sold that illustrate
this approach include BargainCity.com, BeautifulBride.com,
CargoCarriers.com, FilmRentals.com, FitnessStore.com,
GeneticTests.com, HistoricalProperties.com, MrMortgage.com,
NewsForum.com, and WindTechnologies.com. The sales prices for
our domain names range from several hundreds to tens of
thousands of dollars.
Afternic.com
We also offer a service and technology platform that enables
third-party domain name owners to sell their names through our
Afternic.com website. To use Afternic.com, third-party domain
name owners must register
as a member and pay a membership fee. Domain names listed for
sale on Afternic.com are auctioned, meaning a domain name is
listed with a minimum bid price and customers can bid on a
domain name over a period of time. Domain names listed on
Afternic.com may also include an asking price which enables a
customer to buy the domain name immediately at that price. The
domain names are permitted to stay on the Afternic.com website
until they are sold. We receive a commission based on the sale
value of domain names sold through this platform. For an
additional commission, members may choose an expanded
distribution option and participate in our DLS. As of
September 30, 2007, there were more than 1,000,000 domain
names listed for sale on Afternic.com.
Business
Services
Customers that buy domain names often also need business
services such as domain name registration, website hosting
services and online marketing tools, among others.
BuyDomains.com features a business resources section that
provides links to providers of these business services and for
which we are generally paid on a CPA basis when we refer a lead
to a service provider.
Our Afternic.com website also offers additional services for
domain name owners including escrow services, where we manage
the transfer of domain names to ensure that a transaction is
completed successfully; domain name appraisal services, in which
we assist domain name owners in establishing valuations for
their domain names; domain name hosting services through a third
party; and assisted offer services for buyers. In addition, we
offer our SiteSense platform to enable third-party domain name
owners to generate advertising revenue while their domain names
are listed for sale.
Sales and
Marketing
The majority of our online media revenue is CPC advertising,
meaning we deliver online advertisements provided by Google and
Yahoo! and share a portion of the revenue generated from those
advertisements. In 2004, 2005 and 2006, we derived more than 10%
of our total revenue from Yahoo!. Google and Yahoo! maintain the
direct relationships with the advertisers and provide us with
CPC advertising services. We use Google for CPC advertising on
our proprietary domain name portfolio, and we use Yahoo! for CPC
advertising on our affiliate network of websites. Google and
Yahoo! can terminate their respective agreements with us before
the expiration of the term upon the occurrence of certain
events. For example, our agreement with Yahoo! can be terminated
by Yahoo! for our repeated abuse of the Yahoo! service or our
failure to cure a material breach within the applicable cure
period. Similarly, Google can terminate its agreement with us if
our service has been suspended for more than six months as a
result of our failure to cure a material breach in the
applicable cure period or our engaging in certain prohibited
actions. See “Risk Factor — We are dependent on
Google and Yahoo!, our third-party,
cost-per-click
advertisement distribution providers, for a significant portion
of our revenue. A termination of our agreements with Google or
Yahoo! or a decrease in revenue that we derive from these
relationships would adversely affect our business.” As of
September 30, 2007, we had three sales and business
development professionals that were responsible for CPA and
display advertising arrangements, and five people responsible
for qualifying and adding affiliate websites to our media
network.
In our domain name marketplace, we generate the majority of
revenue through a direct sales force. As of September 30,2007, we had 16 account executives that sell premium domain
names, primarily by responding to online and telephone-based
pricing requests. Domain name sales are also made through
selected resellers, the majority of which are domain name
registrars. We also had two business development professional
responsible for developing third-party relationships in the
business services area.
In both our online media and domain name marketplace businesses,
we purchase keyword advertising to generate a modest amount of
our Internet traffic. As of September 30, 2007, we had two
people dedicated to our keyword advertising strategy and
purchasing.
We operate principally in domestic markets with respect to our
online media business or domain name marketplace business and do
not currently generate significant revenue from international
geographic regions.
We have developed technologies and platforms throughout our
business that we believe provide us with a competitive
advantage. Significant technologies used in our business include
those associated with valuing, acquiring and maintaining our
domain names; systems used for automatically generating and
dynamically updating and managing websites and reporting on
advertising performance; and technologies used within our
premium enthusiast websites.
We use our SiteMarket platform to evaluate and rank large
numbers of domain names based on multiple proprietary and
third-party sources. Our SiteMarket platform analyzes our
proprietary database of over seven years of records on domain
names, including purchase and sales history, and third-party
data, to assist us in assigning a domain name value and quality
ranking. Our platform provides statistical outputs, such as
risk/return factors and risk adjusted value, which serve as a
screening tool for our domain name portfolio management team.
Our platform also partially automates the process of acquiring
expired domain names, bidding on names in auctions and
registering and transferring newly-acquired names. We intend to
continue to invest in our domain name valuation and acquisition
technologies, as well as the underlying database of historical
domain name purchase and sale activity.
With respect to our media business, we use our SiteSense
platform to dynamically generate and manage websites for our
large portfolio of domain names. Our SiteSense platform includes
the following features:
•
Proprietary semantic processing technology that uses
approximately 3,000,000 keywords to group websites into one
of approximately 500 categories
•
Template engine that dynamically generates and manages 500,000
variations of website designs and layouts to optimize revenue
potential
•
Content library that contextually selects from original articles
and dynamic news feeds from third-party sources
•
Reporting and analytics engine that facilitates the management
of large portfolios of domain names and continually reviews
statistical performance of individual websites
•
Ad serving technology that delivers category-specific
advertisements
Our premium enthusiast websites rely on extensions to our
SiteSense platform that are particularly applicable to community
building and social networking, including:
•
Registration functionality to establish user accounts and
password management
•
e-commerce
and user subscription capabilities
•
Online discussion forums
•
Collaborative community dictionaries
•
Blog hosting
•
A media module with extensive content tagging and community
features, incorporating our proprietary Pixamo media-sharing
technology
We rely on third-party providers for co-location of our data
servers, storage devices and network access.
As of September 30, 2007, we had 33 dedicated product
development professionals. We also use independent contractors
within the United States and abroad on an as-needed basis.
Competition
We have competitors in each of our product areas. As the
Internet continues to develop, we expect additional competitors
to arise.
Our current and potential future competitors in our media
business include:
•
Domain name portfolio owners whose primary business is online
advertising, such as Demand Media, Marchex and Oversee.net
•
Large Internet companies that provide performance-based
advertising solutions directly to advertisers, such as Google,
Microsoft and Yahoo!
•
Large category-specific websites that could potentially overlap
with some of our existing or future premium websites, such as
CNET and WebMD
•
Large media companies that offer advertising on their websites
that could develop or acquire Internet assets competitive with
our offerings
We also compete with traditional media companies for a share of
advertisers’ overall marketing spending.
Our current and potential future competitors in our domain name
marketplace include:
•
Aftermarket domain name resellers, such as Sedo, whose business
provides a marketplace for the resale of domain names
•
Registrars, whose primary business is domain name registration
and management of domain names, such as Demand Media, GoDaddy
and Register.com
•
Domain name auction companies, such as NameJet and SnapNames,
which acquire domain names from similar sources as we do and
sell them in an auction process
•
Media and online advertising businesses that have portfolios of
domain names, but do not currently offer them for sale
We believe we compete favorably in our principal markets based
on factors including the following:
•
Our substantial portfolio of owned domain names oriented towards
small and medium-sized businesses
•
Our experience with domain name transactions
•
Our media network that exceeds one million websites
•
Our relationships with domain name sellers and buyers, and
online advertising industry participants
•
Our technology assets and capabilities
Many of our current and potential competitors have longer
operating histories, significantly greater financial, technical
and marketing resources, greater name recognition and
substantially larger user or customer bases than we have, and,
therefore, have a significantly greater ability to attract
advertisers and Internet users. See “Risk
Factors — Risks Related to Our Industry — If
we are unable to compete in highly competitive markets for
domain name sales and performance-based online advertising, we
may experience reduced demand for our products and
services.”
Our ability to remain competitive will depend to a great extent
upon our ability to maintain and enhance our portfolio of owned
domain names and websites as well as the continued service of
our senior management team. We cannot assure you that our media
business or domain name marketplace will continue to compete
favorably or that we will be successful in the face of
increasing competition from existing competitors or new
companies entering our principal markets.
Intellectual
Property
We do not rely on patent protection for proprietary technology.
Instead, we rely primarily on a combination of trade secrets,
servicemarks, common law and registered trademarks and
copyrights to protect our proprietary rights. We strategically
pursue the registration of some of our trademarks and
servicemarks and have obtained registration in the United States
and other countries for some of our trademarks and
servicemarks, including “NameMedia.” We have obtained
registration for one international trademark,
“Afternic.”
Our means of protecting our proprietary rights may not be
adequate and our competitors may independently develop
technology that is similar to ours. Our existing legal
protections afford only limited protection for our technology.
Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products
or to obtain and use information that we regard as proprietary.
Enforcement of claims that a
third party
has illegally obtained and is using our proprietary rights is
expensive, time consuming and the outcome is uncertain. In
addition, if any of our products or services or the technology
underlying our products or services is covered by third-party
patents or other intellectual property rights, we could be
subject to various legal actions. We cannot assure you that our
products and services, or the technology underlying such
products and services, do not infringe patents or proprietary
rights held by others or that they will not in the future. We
have in the past faced, and may in the future face, demands by
third-party trademark owners asserting infringement or dilution
of their rights and seeking transfer of acquired domain names
under the Uniform Domain Name Dispute Resolution Policy
administered by ICANN or actions under the
U.S. Anti-Cybersquatting Consumer Protection Act. If we
were unable to successfully defend against such third-party
claims of infringement, we might have to pay significant
damages, stop using the technology or content found to be in
violation of a third party’s rights, seek a license for the
infringing technology or content, or develop alternative
non-infringing
technology or content. Any required licenses may not be
available to us on acceptable terms, if at all. In addition,
developing alternative
non-infringing
technology could require significant effort and expense. If we
cannot license or develop technology or content for any
infringing aspects of our business, we may be forced to limit
our service offerings. Any of these results could reduce our
ability to compete effectively and harm our business.
Government
Regulation
The legal and regulatory environment applicable to the Internet
is continuing to evolve in the United States and elsewhere.
The manner in which existing laws and regulations will be
applied to the Internet in general, and how they will relate to
our business in particular, has not yet been definitively
settled in many cases. For example, we often cannot be certain
how existing laws will apply in the online context, including,
without laws relating to topics such as privacy, defamation,
credit card fraud, advertising, taxation, content regulation,
quality of products and services and intellectual property
ownership and infringement. In addition, advertising and
Internet commerce trade and industry associations have in the
past and will continue to adopt guidelines and standards for
Internet advertising and commerce, some of which may be
applicable to parts of our business.
While we pay close attention to the shifting regulatory and
industry environments, we cannot predict the impact of future
changes in those environments, and we anticipate that it may be
necessary in the future to adapt our business in response to
such changes. Any changes in existing legislation or enactment
of new legislation applicable to us could expose us to
substantial liability. Such changes could also cause us to incur
significant expenses as a result of our compliance obligations.
Furthermore, such changes could dampen the growth in use of the
Internet in general, which, in turn, can have an overall
negative impact on our business and our revenue.
Laws that could have an impact on our business have already been
adopted. The
CAN-SPAM Act
of 2003 and similar laws adopted by a number of states and
foreign countries are intended to regulate unsolicited
commercial
e-mails,
create criminal penalties for unmarked sexually-oriented
material and
e-mails
containing fraudulent headers and control other abusive online
marketing practices. The Children’s Online Privacy
Protection Act imposes additional restrictions on the ability of
online services to collect user information from minors.
The foregoing legislation may impose significant additional
costs on our business or subject us to additional liabilities if
we were not to comply fully with their terms, whether
intentionally or not. Each of the Children’s Online Privacy
Protection Act and the
CAN-SPAM Act
of 2003 impose fines and penalties to persons and operators that
are not fully compliant with their requirements. We intend to
comply with the laws
and regulations that govern our industry, and we employ internal
resources and incur outside professional fees to establish,
review and maintain policies and procedures to reduce the risk
of noncompliance.
In addition to legislation, our business may also be impacted by
our ability to comply with our own privacy policies and to
provide adequate security to the personal data within our
possession. We post our privacy policy and practices concerning
the use and disclosure of any user data on our websites. Any
failure by us to comply with posted privacy policies, Federal
Trade Commission, or FTC, requirements or other domestic or
international privacy-related laws and regulations could result
in proceedings by governmental or regulatory bodies, or actions
by our customers or other affected third parties, all of which
could potentially harm our businesses, results of operations and
have a negative impact upon our overall financial condition. In
addition, if we, or service providers acting on our behalf, fail
to adequately secure the personal data that we collect from
consumers, we could be subject to enforcement actions by the FTC
and other governmental agencies. Such enforcement actions can
result in fines, mandatory changes to our business practices and
negative publicity.
In addition to existing legislation and regulatory enforcement
actions, there are a large number of legislative proposals
before the United States Congress and various state legislative
bodies regarding consumer protection and privacy issues which
relate to our businesses. It is not possible to predict whether
or when such legislation may be adopted, and certain proposals,
if adopted, could harm our business by resulting in a decrease
in user registrations for our services and a resulting decline
in revenue. These decreases could be caused by, among other
possible provisions, the required use of disclaimers or other
requirements before users can utilize our services.
Employees
As of September 30, 2007, we had 136 employees, all
located in the United States, including 14 in operations,
portfolio management and online keyword advertising, 33 in
product development, 75 in sales and marketing, and 14 in
general and administration. We have never had a work stoppage
and none of our employees is represented by a labor organization
or under any collective bargaining arrangements. We consider our
employee relations to be good.
Facilities
Our principal executive offices are located in Waltham,
Massachusetts, where we lease one property with approximately
19,931 square feet under a lease that expires in May 2009.
We also lease server space in Sterling, California; Ashburn,
Virginia; Dallas, Texas and Portland, Oregon. We believe that
our space will be adequate for our needs and that suitable
additional or substitute space in the future will be available
to accommodate the foreseeable expansion of our operations.
Legal
Proceedings
From time to time, we may be involved in litigation relating to
claims of alleged infringement, misuse or misappropriation of
intellectual property rights of third parties. In addition, in
the normal course of business, we may also be subject to claims
arising out of our operations, and may file collection claims
against delinquent advertisers. As of the date of this
prospectus, there are no claims or actions pending or threatened
against us that, if adversely determined, would have a material
adverse effect on us.
The following table sets forth information about our executive
officers and directors and as of the date of this prospectus:
Name
Age
Position
Kelly P. Conlin
47
Chairman and Chief Executive Officer
Vincent A. Chippari
47
Executive Vice President and Chief Financial Officer
Jeffrey S. Bennett
44
President and Chief Operating Officer and Director
Brian L. Farrey
47
Chief Technology Officer
Brian G. Carr
42
Senior Vice President and General Manager, Direct Search Network
Peter T. Lamson
44
Senior Vice President and General Manager, Domain Marketplace
Brian D. Lucy
41
Senior Vice President of Finance, Treasurer and Secretary
Hugh O’Neill, Jr.
53
Senior Vice President and General Manager, Portfolio Management
Maria A. Cirino (1)(2)
44
Director
Robert J. Davis (3)
51
Director
D. Richard de Silva
34
Director
Russell S. Lewis (1)(3)
53
Director
Martin J. Mannion (2)
47
Director
Joseph S. Tibbetts, Jr. (1)
55
Director
(1)
Member of the audit committee
(2)
Member of the compensation committee
(3)
Member of the nominating and corporate governance committee
Provided below are biographies for each of our executive
officers and directors listed in the table above.
Kelly P. Conlin has served as our Chief Executive Officer
since January 2006 and as our Chairman since March 2007. Prior
to joining NameMedia, Mr. Conlin was President and Chief
Executive Officer and a director of Primedia, Inc., a special
interest consumer media company, from October 2003 to October
2005. From September 1989 to September 2002, Mr. Conlin was
employed by International Data Group, or IDG, a technology
media, research and event company, serving as President and
Chief Executive Officer from March 1999 to September 2002, as
President from October 1995 to September 2002 and in other
executive roles from September 1989 to October 1995. From
January 2003 to September 2003, Mr. Conlin was an advisor
to Providence Equity Partners, a private investment firm
specializing in equity investments in communication and media
companies. He has a B.A. from Carleton College and an M.B.A.
from Harvard Business School.
Vincent A. Chippari has served as our Executive Vice
President and Chief Financial Officer since September 2006.
Prior to joining NameMedia, Mr. Chippari was Chief Strategy
Officer of Thomson Healthcare, a provider of information
solutions to professionals in the healthcare industry, from May
2005 to September 2006. From January 1998 to May 2005, he served
as Executive Vice President and Chief Financial Officer of
Information Holdings Inc., a provider of information solutions
to intellectual property and regulatory professionals.
Mr. Chippari holds a B.S.B.A. from Bryant University and an
M.B.A. from the University of Connecticut. Mr. Chippari is
a Certified Public Accountant.
Jeffrey S. Bennett has served as our President and Chief
Operating Officer and as a director since February 2005. Prior
to joining NameMedia, Mr. Bennett was Executive Vice
President of Corporate Development for Terra Lycos, a
wholly-owned subsidiary of Terra Networks, S.A., a global
Internet portal and access provider, from October 2000 to
December 2002. From December 1996 to October 2000,
Mr. Bennett
served in various executive roles that included General Manager
of
e-commerce,
Vice President of Business Development and Senior Vice President
of Corporate Development for Lycos, Inc., an Internet web
portal. From January 2003 to December 2004, Mr. Bennett was
an independent consultant. Mr. Bennett holds a B.S. from
Bentley College.
Brian L. Farrey has served as our Chief Technology
Officer since October 2006. Prior to joining NameMedia,
Mr. Farrey was employed by Monster Worldwide, Inc., a
global online career and recruitment resource, as President of
Monster Techologies from March 2002 to October 2006. Prior to
holding that position, Mr. Farrey was Group President of
Monster.com from March 2001 to February 2002. Mr. Farrey
holds a B.A. from the Rochester Institute of Technology and an
M.C.S. from Worcester State College.
Brian G. Carr has served as our Senior Vice President and
General Manager of Direct Search Network since February 2007.
Mr. Carr also served as our Vice President of Affiliate
Network from October 2006 to February 2007 and our Senior
Director of Affiliate Services from March 2005 through October
2006. Prior to joining NameMedia, Mr. Carr served as
General Manager of Business Operations for Terra Lycos, from
March 2001 to February 2005. Mr. Carr holds a B.S. from
Babson College.
Peter T. Lamson has served as our Senior Vice President
and General Manager, Domain Marketplace since October 2005.
Prior to joining NameMedia, Mr. Lamson served as Chief
Operating Officer of DirectoryM, a provider of Internet business
directories, from July 2004 to October 2005. From June 2000 to
April 2004, Mr. Lamson was employed by Monster Moving, a
division of Monster Worldwide that provides online consumer
relocation assistance, serving as Vice President of Products and
Operations from June 2000 to June 2001 and as Chief Operating
Officer from June 2001 to April 2004. Prior to its sale to
MonsterMoving, Mr. Lamson served as Vice President of
Product and Operations of MoveCentral from 1998 to 2000.
Mr. Lamson holds a B.A. from Middlebury College and an
M.B.A. from Harvard Business School.
Brian D. Lucy has served as our Senior Vice President of
Finance, Treasurer and Secretary since September 2006.
Mr. Lucy also served as our Vice President, Chief Financial
Officer, Treasurer and Secretary from February 2005 to September
2006. Prior to joining NameMedia, Mr. Lucy served as Vice
President and Chief Financial Officer of United States
Operations for Terra Lycos, from February 2001 to October 2004.
Mr. Lucy holds a B.A. from Villanova University and a B.S.
from Salem State College. Mr. Lucy is a Certified Public
Accountant.
Hugh O’Neill, Jr. has served as our Senior Vice
President and General Manager of Portfolio Management since May
2006. Prior to joining NameMedia, Mr. O’Neill was
employed by Sun Life Financial, Inc., where he was responsible
for worldwide derivatives and served as Vice President of
Derivatives and Investment Strategies from February 2003 to May
2006, and as Assistant Vice President of Derivatives and
Investment Strategies from October 2001 to February 2003.
Mr. O’Neill holds a B.S. from West Chester University,
an M.S. from Drexel University and has completed doctoral level
work in Physics at Tufts University.
Maria A. Cirino has served as a director since December
2005. Since March 2006, Ms. Cirino has served as a Partner
at .406 Ventures, a venture capital firm. From February 2005
until March 2006, Ms. Cirino served as Senior Vice
President of VeriSign Managed Security Services, a division of
VeriSign, Inc., a provider of infrastructure services for
Internet and telecommunications networks. From February 2000
until February 2005, Ms. Cirino served as Chief Executive
Officer and Chairman of Guardent, Inc., a managed security
services corporation. Ms. Cirino served as a board member
of Keane, Inc., a public company that provides information
technology and business process services, from May 2000 until
June 2007, and has also served on the board of a number of
private companies. Ms. Cirino holds a B.A. from Mount
Holyoke College.
Robert J. Davis has served as a director since February
2005. Since February 2001 to present, Mr. Davis has been
with Highland Capital Partners, a venture capital firm, where he
is presently Managing General Partner. From October 2000 to
February 2001, Mr. Davis served as Chief Executive Officer
of Terra Lycos. From 1995 to October 2000, Mr. Davis served
as Chief Executive Officer of Lycos, an Internet web portal.
Mr. Davis also serves as a board member of several private
companies. Mr. Davis holds a B.S. from Northeastern
University and an M.B.A. from Babson College.
D. Richard de Silva has served as a director since
February 2006. Since December 2007, Mr. de Silva has served as a
General Partner at Highland Capital Partners. Mr. de Silva
initially joined Highland Capital Partners in April 2003 and
served as a Principal from December 2004 to December 2006 and as
a Partner from December 2006 through November 2007. From May
2000 to December 2002, Mr. de Silva served as President of
SiteBurst, Inc., an enterprise software vendor of channel
management solutions, which he co-founded. Mr. de Silva holds an
A.B. in History from Harvard College, an M.Phil. in
International Relations from Cambridge University and an M.B.A.
from Harvard Business School.
Russell S. Lewis has served as a director since January
2006. Since August 2007, Mr. Lewis has served as Senior
Vice President of Strategic Development of VeriSign, Inc., a
provider of infrastructure services for Internet and
telecommunications networks. From January 2005 to August 2007,
Mr. Lewis served as Senior Vice President of Corporate
Development at VeriSign. From February 2002 to January 2005,
Mr. Lewis served as the General Manager of VeriSign Naming
and Directory Services Group. Prior to joining VeriSign,
Mr. Lewis ran TransCore, a wireless transportation systems
integration company. Mr. Lewis has also served on the board
of Delta Petroleum Corporation since June 2002 and has served on
the boards of a number of private companies. Mr. Lewis
holds a B.A. in Economics from Haverford College and an M.B.A.
from Harvard Business School.
Martin J. Mannion has served as a director since February
2005. Since April 2001, Mr. Mannion has served as Managing
Partner and Managing Member of various entities affiliated with
Summit Partners, a private equity and venture capital firm.
Mr. Mannion has been employed at Summit Partners since
August 1985 and has been a General Partner since January 1987.
Mr. Mannion also has served on the board of American Dental
Partners, Inc., a public company that assists dental practices
manage their operations, since 1996 and has served on the board
of a number of private companies. Mr. Mannion holds an A.B.
from Princeton University and an M.B.A. from Harvard Business
School.
Joseph S. Tibbetts, Jr. has served as a director
since December 2006. Since October 2006, Mr. Tibbetts has
served as Senior Vice President and Chief Financial Officer of
Sapient, Inc., a technology consulting services company. From
February 2003 to June 2006, Mr. Tibbetts served as Senior
Vice President and Chief Financial Officer of Novell, Inc., an
enterprise software company. From March 2000 to June 2002,
Mr. Tibbetts served as a General Partner at Charles River
Ventures, a venture capital firm. From May 1998 to February
2000, Mr. Tibbetts was Chief Financial Officer of
Lightbridge, Inc., a wireless telecommunications software and
services provider, and from June 1996 to March 1998, he held the
same position at SeaChange International, Inc., a digital video
systems provider. Mr. Tibbetts holds a B.S. from the
University of New Hampshire.
Composition
of the Board of Directors after this Offering
Our board of directors currently consists of eight members, of
whom Mr. Davis and Mr. Mannion were elected as
directors under the board composition provisions of a
stockholders agreement. The board composition provisions of the
stockholders agreement will be terminated upon the consummation
of this offering. Upon the termination of these provisions,
there will be no further contractual obligations regarding the
election of our directors. Our directors hold office until their
successors have been elected and qualified or until the earlier
of their resignation or removal. Our by-laws permit our board of
directors to establish by resolution the authorized number of
directors, and our amended and restated certificate of
incorporation provides that the authorized number of directors
may be changed only by resolution of the board of directors.
Following the offering, the board of directors will be divided
into three classes with members of each class of directors
serving for staggered three-year terms. The board of directors
will consist of Class I
directors (currently
and ), Class II
directors (currently ,
and )
and Class III directors
(currently ,
and ), whose initial terms will
expire at the annual meetings of stockholders held in 2008, 2009
and 2010, respectively. Our classified board could have the
effect of making it more difficult for a third party to acquire
control of us.
Our board of directors has considered the relationships of all
directors and, where applicable, the transactions involving them
described below under “Certain Relationships and Related
Party Transactions” and
determined that each of the directors, with the exception of
Mr. Conlin, our Chairman and Chief Executive Officer, and
Mr. Bennett, our President and Chief Operating Officer,
qualifies as an “independent director” under the
applicable rules of the Nasdaq Global Market and the SEC.
Board
Committees
Our board of directors has established an audit committee, a
compensation committee and a nominating and corporate governance
committee. The composition and function of each of our
committees complies with the rules of the SEC and the Nasdaq
Global Market that will be applicable to us, and we intend to
comply with additional requirements to the extent that they
become applicable to us.
Audit Committee. Joseph S. Tibbetts, Jr., Maria A.
Cirino and Russell S. Lewis currently serve on the audit
committee. Mr. Tibbetts is the chairman of our audit
committee. The audit committee’s responsibilities include:
•
appointing, approving the compensation of, and assessing the
independence of our independent registered public accounting
firm;
•
pre-approving auditing and permissible non-audit services, and
the terms of such services, to be provided by our independent
registered public accounting firm;
•
reviewing and discussing with management and the independent
registered public accounting firm our annual and quarterly
financial statements and related disclosures;
•
coordinating the oversight and reviewing the adequacy of our
internal control over financial reporting;
•
establishing policies and procedures for the receipt and
retention of accounting related complaints and concerns; and
•
preparing the audit committee report required by Securities and
Exchange Commission rules to be included in our annual proxy
statement.
Our board of directors has determined that Mr. Tibbetts
qualifies as an “audit committee financial expert” as
defined under the Securities Exchange Act of 1934 and the
applicable rules of the Nasdaq Global Market.
Compensation Committee. Martin J. Mannion and Maria A.
Cirino currently serve on the compensation committee.
Mr. Mannion is the chairman of our compensation committee.
The compensation committee’s responsibilities include, but
are not limited to:
•
annually reviewing and approving corporate goals and objectives
relevant to compensation of our chief executive officer;
•
evaluating the performance of our chief executive officer in
light of such corporate goals and objectives and determining the
compensation of our chief executive officer;
•
reviewing and approving the compensation of our other executive
officers;
•
overseeing and administering our compensation, welfare, benefit
and pension plans and similar plans; and
•
reviewing and making recommendations to the board with respect
to director compensation.
Nominating and Corporate Governance Committee. Robert J.
Davis and Russell S. Lewis currently serve on the nominating and
corporate governance committee. Mr. Davis is the chairman
of our nominating and corporate governance committee. The
nominating and corporate governance committee’s
responsibilities include, but are not limited to:
•
developing and recommending to the board criteria for board and
committee membership;
•
establishing procedures for identifying and evaluating director
candidates including nominees recommended by stockholders;
identifying individuals qualified to become board members;
•
recommending to the board the persons to be nominated for
election as directors and to each of the board’s committees;
•
developing and recommending to the board a code of business
conduct and ethics and a set of corporate governance
guidelines; and
•
overseeing the evaluation of the board and management.
Compensation
Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the board
of directors or compensation committee, or other committee
serving an equivalent function, of any other entity that has one
or more of its executive officers serving as a member of our
board of directors or compensation committee. None of the
current members of our compensation committee has ever been one
of our employees.
Corporate
Governance
We will adopt a code of business conduct and ethics that applies
to all of our employees, officers and directors, including those
officers responsible for financial reporting. The code of
business conduct and ethics will be available on our website at
www.namemedia.com. We expect that any amendments to the code, or
any waivers of its requirements, will be disclosed on our
website.
Executive
Officers
Each of our executive officers has been elected by our board of
directors and serves until his or her successor is duly elected
and qualified.
Vincent A. Chippari, Executive Vice President and Chief
Financial Officer;
•
Jeffrey S. Bennett, President and Chief Operating Officer;
•
Brian D. Lucy, Senior Vice President of Finance; and
•
Peter T. Lamson, Senior Vice President and General Manager,
Domain Marketplace.
Compensation
Discussion and Analysis
Evolution
of our Compensation Approach
Our compensation approach is tied to our stage of development as
a company with a limited operating history. Historically, our
board of directors reviewed and approved all of our compensation
packages, including executive officer salaries, annual cash
incentive bonuses and equity incentive grants. Our board of
directors determined the appropriate level of each compensation
component for each executive officer based upon compensation
data and surveys regarding private venture capital-backed
companies collected from research informally conducted and
supplied by board members. Our board of directors has also
relied on its members’ business judgment and collective
experience in the technology industry. Although it did not
benchmark our executive compensation program and practices, our
board of directors has historically aimed to set our executive
compensation at levels that it believes are necessary to
attract, retain and motivate our executive officers. For
determining an executive officer’s target compensation,
other than our Chief Executive Officer, our board of directors
considered input from our Chief Executive Officer regarding an
executive officer’s responsibilities, performance and
compensation and our Chief Executive Officer’s
recommendation for such executive officer’s compensation.
Our board of directors meets in executive session, and our Chief
Executive Officer is not permitted to attend during board
director determinations regarding his compensation. Our board of
directors has the ability to materially increase or decrease the
recommendations made by our Chief Executive Officer with regard
to the compensation provided to our executive officers. For all
of our NEOs, each of their base salary, annual cash incentive
bonus target levels and equity incentive grants were determined
pursuant to written agreements negotiated at the time of their
employment or subsequently renegotiated. In setting the amount
and mix of compensation elements for our NEOs, our board of
directors did not apply any quantitative formula. Rather, our
board of directors relied upon its judgment and considered the
following:
•
the board’s understanding of the compensation paid by other
companies with which we believe we compete for executive
officers;
•
the seniority and responsibility levels of such executive
officer;
•
our ability to replace the executive officer; and
•
the total cash compensation of the executive officer at his or
her prior employment.
Beginning with 2008 compensation decisions, our recently formed
compensation committee will review and approve all of our
compensation programs and packages, including executive officer
salaries, annual cash incentive bonuses and equity incentive
grants. As we gain experience as a public company, we expect
that the specific direction, emphasis and components of our
executive compensation program will continue to evolve. For
example, over time, we expect to reduce our reliance upon
informal research and surveys in favor of a more
empirically-based approach that uses benchmarks as a tool to
establish executive salary and compensation levels commensurate
with our industry. Our compensation committee expects, on an
annual basis, to set base salaries and annual cash incentive
bonus targets for the following year, as well as to determine
equity incentive awards for our executive officers.
We believe that the compensation of our executive officers
should reinforce a sense of ownership and overall
entrepreneurial spirit and focus executive behavior on the
achievement of our annual financial targets as well as long-term
business objectives and strategies. Accordingly, our executive
officer compensation packages are designed to achieve the
following objectives:
•
to provide competitive compensation that attracts, motivates and
retains talented and experienced executive officers with the
skills necessary for us to achieve our business plan; and
•
to align an executive officer’s interest with
stockholders’ value creation by:
•
linking a significant portion of the total cash compensation
paid to our NEOs to the achievement of our annual corporate
performance objectives, or annual performance objectives for a
division of our business for which an executive has management
responsibility, by basing annual cash incentive compensation to
corresponding financial targets, primarily revenue and Adjusted
EBITDA; and
•
utilizing appropriate performance goals and long-term incentives
for our equity awards.
We use a mix of short-term compensation (base salaries and
annual cash incentive compensation) and long-term compensation
(primarily stock options and, in certain cases, restricted stock
units) to provide a total compensation structure that is
designed to reward our executive officers for past performance,
provide cash incentives to motivate and reward our executive
officers for future performance and align the interests of
management and stockholders by providing management with
incentives through equity ownership. In addition, we provide our
executive officers a variety of benefits that are available
generally to all salaried employees. We view these compensation
components as related but distinct.
The compensation policy described above is applied to all of our
NEOs in the same manner. All of our NEOs total compensation is
comprised of the same elements which are base salary, annual
cash incentives, long-term incentive awards and benefits. Any
differences in the amounts of compensation actually paid to our
NEOs upon application of our compensation policy is based upon
our board of directors’ judgment and application of the
factors described above. In October 2007, our board of directors
authorized the entry into and execution of the executive
agreements with Messrs. Conlin, Chippari and Bennett, which
among other things, includes their annual base salary and annual
cash incentive bonus target levels. For additional information
regarding these executive agreements, see
“— Executive Agreements and Change of Control
Arrangements” below. Our board of directors entered into
executive agreements with only these NEOs because it determined
that the seniority and responsibility levels of these NEOs as
the Chief Executive Officer, Executive Vice President and Chief
Financial Officer and President and Chief Operating Officer,
were significantly higher than our other NEOs.
Executive
Compensation Components
Our compensation program consists of the following components:
•
base salary;
•
an annual cash incentive program;
•
long-term incentive awards, primarily in the form of stock
options and restricted stock units; and
•
benefits.
Although each element of compensation described below is
considered separately, our board of directors and our
compensation committee takes into account the aggregate
compensation package for each individual in its determination of
each individual component of that package. Our compensation
philosophy is to put significant weight on those aspects of
compensation tied to performance, such as long-term incentives
in the form of stock options and restricted stock units and
annual cash incentives based on measurable performance
objectives, such as corporate and divisional revenue and
Adjusted EBITDA.
Our board of directors has fixed executive officer base salaries
at a level it believes enables us to hire and retain individuals
in a competitive environment and to reward satisfactory
individual performance and contribution to our overall business
goals. Base salaries for our executive officers have been
initially set in an offer letter or employment agreement with
the executive officer at the outset of employment and were
negotiated with our board of directors taking into account the
factors described above.
We hired Mr. Conlin as our Chief Executive Officer in
January 2006 and established his base salary at $275,000 per
year. We hired Mr. Chippari as our Executive Vice President
and Chief Financial Officer in September 2006 and established
his base salary at $275,000 per year. In February 2006, we
appointed Mr. Bennett as our President and Chief Operating
Officer and established his base salary at $275,000 per year.
Our board of directors determined these 2006 base salary amounts
were appropriate after negotiations with each NEO. In each
instance our board of directors placed significant weight on
what they believed was a competitive salary for chief executive
officers, presidents and chief financial officers in the
technology industry. Additionally our board of directors
determined that the base salary for Messrs. Conlin, Chippari and
Bennett should be higher than our other NEOs because they are
the most senior officers and therefore would have the most
responsibility.
Messrs. Lucy’s and Lamson’s base salaries reflect
the initial base salaries that we negotiated with each of them
at the time of their initial employment in February 2005 and
September 2005, respectively, and our subsequent adjustments to
their base salaries to reflect market increases, our growth and
development, their individual performance and experience,
changes in the cost of living, and changes in their individual
roles and responsibilities.
The base salaries of all executive officers are reviewed
annually and may be adjusted based on the factors described
above. We may also increase the base salary of an executive
officer at other times if a change in the scope of the
officer’s responsibilities justifies such a change or in
order to maintain salary equity among executive officers.
Historically we have not applied specific formulas to set base
salary or to determine salary increases, nor have we sought to
formally benchmark base salary against similarly situated
companies. The following table sets forth base salaries of our
NEOs for 2006 and 2007 and the percentage increase for each NEO.
% Increase
Executive
2006 Salary(1)
2007 Salary
(2006-2007)
Kelly P. Conlin
275,000
275,000
0
%
Vincent A. Chippari
275,000
275,000
0
%
Jeffrey S. Bennett
275,000
275,000
0
%
Brian D. Lucy
200,000
208,000
4.0
%
Peter T. Lamson
200,000
208,000
4.0
%
(1)
Represents base salary during 2006 on an annualized basis. For
amounts actually paid during 2006, see “— Summary
Compensation Table — 2006” below.
In 2007, our board of directors determined that since
Messrs. Conlin’s, Chippari’s and Bennett’s
negotiated base salaries remained competitive, no increase was
necessary to motivate and retain them. In October 2007, we
entered into executive agreements with each of Messrs. Conlin,
Chippari and Bennett pursuant to which such NEO’s base
salary remained at $275,000. For additional information
regarding these executive agreements, see
“— Executive Agreements and Change of Control
Arrangements” below. Messrs. Lucy’s and
Mr. Lamson’s salary increased to $208,000 which
reflected an annual merit increase over their 2006 base salary.
Annual
Cash Incentive Program
We maintain an annual cash incentive program in which each of
our executive officers participates. We designed our annual cash
incentive program to motivate our executives to achieve key
corporate financial
objectives and to reward substantial achievement of these
company financial objectives. Our board of directors based
annual cash incentives on both operational revenue and Adjusted
EBITDA. Adjusted EBITDA represents EBITDA plus stock-based
compensation expense and non-cash charges related to the early
extinguishment of debt. For more information regarding our
Adjusted EBITDA calculation see Footnote 4 in “Summary
Financial Data.” For purposes of calculating Adjusted
EBITDA for the determination of 2006 annual cash incentives,
Adjusted EBITDA also excluded the impact of certain litigation
costs. Our board of directors believes that establishing
corporate financial goals as targets for the annual cash
incentives appropriately encourages our executive officers’
success as a team. Our board of directors chose operational
revenue because it believed that, as a growth-oriented company,
we should reward revenue growth. Our board of directors chose
Adjusted EBITDA because it believed that Adjusted EBITDA is a
measure of our efficiency and our board of directors wants to
promote cost effectiveness.
Under our annual cash incentive program, bonuses are paid based
on the aggregate percentage attainment against these goals, with
100% attainment resulting in a payment of 100% of the target
cash incentive bonus. No bonus is paid if the aggregate
attainment falls below certain minimum thresholds, and at such
minimum thresholds only 50% of the target cash incentive bonus
is paid. If we overachieve against our goals, the plan also
provides for bonus payments of up to 150% of target bonuses. The
target percentage is adjustable up or down on a pro rata basis
based on our corporate performance as measured against the
attainment of these goals.
For 2006, operational revenue and Adjusted EBITDA targets, for
all of our NEOs other than Mr. Lamson, were based on the
company’s overall performance. For Mr. Lamson,
operational revenue and Adjusted EBITDA targets were based on
our overall performance as well as our marketplace
division’s contributions to the company’s performance.
Our board of directors felt that it was more appropriate to
structure Mr. Lamson’s cash incentives this way
because he manages and oversees the domain marketplace division.
Each NEOs bonus target amount was set by our board of directors,
and the overall weighting for each NEO as set forth below
(although in the case of Mr. Chippari, pro rated from his
date of hire in September 2006):
Target
Marketplace
Bonus At
Corporate
Marketplace
Divisional
100%
Corporate
Adjusted
Divisional
Adjusted
Achievement
Revenue
EBITDA
Revenue
EBITDA
of
Executive
Goal
Goal
Goal
Goal
Goals ($)
Kelly P. Conlin
35
%
65
%
—
—
$
225,000
Vincent A. Chippari
35
%
65
%
—
—
75,000
Jeffrey S. Bennett
35
%
65
%
—
—
125,000
Brian D. Lucy
35
%
65
%
—
—
50,000
Peter T. Lamson
10
%
15
%
25
%
50
%
50,000
The target and maximum payout amounts were set at levels our
board of directors determined were appropriate in order to
motivate performance at or above the levels necessary for us to
achieve our business plan. Messrs. Conlin’s and
Chippari’s target and maximum payout amounts were
determined at the time of their hire in 2006.
Mr. Bennett’s target and maximum payout amounts were
determined at the time of his appointment as President and Chief
Operating Officer in 2006. Our board of directors determined
these amounts were appropriate after negotiations with each NEO
for the same reasons discussed above in “— Base
Salary.” Further details about the annual cash incentive
program and the payments made to our executive officers in 2006
are provided below in the “— Summary Compensation
Table” and “— Grants of Plan-Based
Awards-2006” table and the corresponding footnotes.
For 2006, corporate revenue was 99.53% of our $61.3 million
target and the corporate Adjusted EBITDA was 99.65% of our
$29.2 million target, and our marketplace divisional
revenue was 92.29% of its $33.8 million target and its
divisional Adjusted EBITDA was 90.81% of its $23.1 million
target. Based on the targeted thresholds discussed previously,
for our NEOs other than Mr. Lamson, annual cash incentive
bonuses were awarded based on a 98% achievement of the bonus
target. Mr. Lamson’s annual cash incentive bonus was
awarded based on a 67% achievement of his bonus target. In
addition to the annual cash incentive bonus,
Mr. Lamson also received a $15,500 discretionary cash bonus
from our board of directors in recognition of his importance to
our future strategic success.
The above-referenced performance targets and results were
determined using our unaudited financial results and thus differ
from the actual results as reported in our audited consolidated
financial statements included elsewhere in this prospectus. You
should read these consolidated financial statements, the related
notes to these financial statements and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” included elsewhere in this prospectus. The
above-referenced performance targets should not be interpreted
as a prediction of how we will perform in future periods. As
described above, the purpose of these targets was to establish a
method for determining the payment of cash based incentive
compensation. You are cautioned not to rely on these performance
goals as a prediction of our future performance.
Long
Term Incentive Awards
The purpose of our equity-based long-term incentives are to
attract and retain talented employees, further align employee
and stockholder interests, and continue to closely link employee
compensation with company performance. Our equity-based
long-term incentive program provides an essential component of
the total compensation package offered to employees, reflecting
the importance that we place on motivating and rewarding
superior results with long-term and performance-based
incentives. Our board of directors believes that stock options
are an effective tool in achieving our objective of tying equity
incentives to corporate achievement and, moreover, align our
executives’ interests with stockholder value creation. Our
board of directors has not applied specific formulas to
determine equity award grants, nor has it sought to formally
benchmark equity award grants against similarly situated
companies.
Our board of directors granted restricted stock units to certain
of our executives officers in connection with the amendment of
some of the stock options held by these individuals. As
discussed in greater detail in the section entitled
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Critical
Accounting Policies — Accounting for Stock-Based
Compensation,” in 2006 our board of directors determined
that, in order to preserve the value of previously granted stock
options which were granted with the intent of aligning our
executives’ incentives with stockholder value creation, it
was in our best interest and the best interest of our optionees
to increase the exercise price of certain options to avoid
potential penalties under Section 409A of the Internal
Revenue Code. Our board of directors felt that the potential for
such penalties significantly diminished the intended purpose of
these equity awards. The number of shares covered by each
amended stock option was decreased to ensure that the aggregate
exercise price of the affected option remained unchanged. In
addition, our board of directors awarded affected optionees who
agreed with us to amend their affected options, including
Messrs. Conlin, Bennett and Lamson, restricted stock units
covering that number of shares of our common stock as equal to
the number of shares by which their affected options were
reduced. Our board believes that these restricted stock unit
grants helped preserve the intended objective of the original
option award. Our board of directors has not subsequently
granted any restricted stock units. Equity incentive awards are
made under our 2005 Equity Incentive Plan, which is discussed in
more detail below in “Benefit Plans — 2005 Equity
Incentive Plan.”
We do not have any program, plan or obligation that requires us
to grant equity compensation on specified dates and, because we
have not been a public company, we have not made equity grants
in connection with the release or withholding of material
non-public information. We expect that our compensation
committee will establish an equity grant policy.
The primary form of long-term equity incentives granted by our
board has been stock options, however, our board of directors
has granted restricted stock units in limited circumstances as
described above. Our board of directors has granted stock
options and restricted stock units under our equity award plans
at exercise prices equal to the fair market value of the
underlying common stock on the date of grant. For information on
the determination of the per share grant date fair value for
prior stock option and restricted stock unit awards, see the
section entitled “Management’s Discussion and Analysis
of Financial Condition and Results of Operations —
Critical Accounting Policies — Accounting for
Stock-Based Compensation”. The stock options granted to our
executive officers have an exercise price equal to the fair
market value of our common stock on
the date of grant, and will expire ten years after the date of
grant. Stock options and restricted stock units will vest over
4 years, with 25% of the underlying shares vesting on the
one-year anniversary of the vesting start date, and the
remainder vesting thereafter in 36 equal monthly installments.
Such vesting will be determined by the compensation committee as
the administrator of our equity award plans. We believe that
these time-based vesting provisions reward longevity and
commitment of our executive officers and encourage retention.
If we experience a change of control and our executive
officer’s employment is terminated, however, then all or a
portion of their unvested options or shares underlying the
restricted stock units, as applicable, will become fully vested
and immediately exercisable. Our board of directors determined
that providing such acceleration in those circumstances is
necessary in order to enable our executives to remain focused on
our business and the execution of a change in control
transaction, in the event one occurred, without being distracted
by any uncertainty regarding their unvested equity awards. For
additional information on the acceleration of vesting for
executive officer’s upon a change of control refer to
“Executive Agreements and Change of Control
Arrangements” and “Potential Payments Upon Termination
and Change in Control” below. For more information
regarding the terms of our 2005 Equity Incentive Plan, see
“Benefit Plans — 2005 Equity Incentive Plan”
below.
In 2006, Messrs. Conlin, Bennett, Lucy and Lamson were not
granted any new long-term incentive awards. As discussed above,
in 2006, we agreed with Messrs. Conlin, Bennett and Lamson
to amend their existing stock option agreements and in
connection with those amendments entered into stock option
agreements with each of them under which they were issued stock
options to purchase 341,931, 209,848 and 61,599 shares of
our common stock, respectively and restricted stock unit award
agreements with each of them under which 1,210,255, 780,607 and
166,964 shares of our common stock in respect of restricted
stock units, respectively, were issued. In 2006, we also granted
Mr. Chippari options to purchase 470,505 shares of our
common stock pursuant to his offer letter. Our board of
directors determined this award was appropriate after
negotiations with Mr. Chippari based on the factors
described above.
Benefits
All of our executive officers are also eligible for the
following benefits offered to employees generally:
•
life insurance;
•
health and dental insurance;
•
disability insurance; and
•
401(k) plan.
Consistent with our compensation philosophy, we intend to
continue to maintain our current benefits for our executive
officers. There were no special benefits or perquisites provided
to any executive officer in 2006. The compensation committee in
its discretion may revise, amend or add to the officer’s
executive benefits if it deems it advisable.
Our executive officers are also parties to severance or
employment agreements which provide for certain benefits that
may be triggered as a result of the termination of the executive
officer’s employment under certain circumstances. Our board
of directors decided that it was appropriate to enter into such
agreements in order to provide each named executive officer with
sufficient cash continuity protection such that each
officer’s full time and attention will focus on the
requirements of the business rather than the potential
implication for his or her position. We also wanted to negotiate
the terms of any severance package with our named executive
officers in advance because we prefer to have certainty
regarding the potential severance amounts payable under certain
circumstances, rather than negotiating severance at the time
that a named executive officer’s employment terminates. Our
board of directors determined that providing such severance
benefits to our executive officers is aligned with our
compensation philosophy. For additional information on severance
benefits upon a change of control refer to “—Executive
Agreements and Change of Control Arrangements” and
“—Potential Payments upon Termination and Change in
Control” below.
Section 162(m) of the Internal Revenue Code places a limit
of $1 million on the amount of compensation that public
companies may deduct in any one year with respect to certain of
its named executive officers. Certain performance-based
compensation approved by stockholders is not subject to this
deduction limit. Our compensation committee’s strategy in
this regard is to be cost and tax efficient. Therefore, the
compensation committee intends to preserve corporate tax
deductions, while maintaining the flexibility in the future to
approve arrangements that it deems to be in our best interests
and the best interests of our stockholders, even if such
arrangements do not always qualify for full tax deductibility.
Executive
Agreements and Change of Control Arrangements
In October 2007, we entered into executive agreements with each
of Messrs. Conlin, Chippari and Bennett.
•
Kelly P. Conlin. Mr. Conlin’s
agreement provides that he will serve as our Chief Executive
Officer with an annual base salary of $275,000, subject to
redetermination by our board of directors, and an annual cash
incentive bonus of up to $225,000, subject to redetermination by
our board of directors, based on the achievement of performance
criteria as determined by our board of directors or compensation
committee.
•
Vincent A.Chippari. Mr. Chippari’s
agreement provides that he will serve as our Executive Vice
President and Chief Financial Officer with an annual base salary
of $275,000, subject to redetermination by our board of
directors, and an annual cash incentive bonus of up to $75,000,
subject to redetermination by our board of directors, based on
the achievement of performance criteria as determined by our
board of directors or compensation committee.
•
Jeffrey S. Bennett. Mr. Bennett’s
agreement provides that he will serve as our President and Chief
Operating Officer with an annual base salary of $275,000,
subject to redetermination by our board of directors, and an
annual cash incentive bonus of up to $125,000, subject to
redetermination by our board of directors, based on the
achievement of performance criteria as determined by our board
of directors or compensation committee. Mr. Bennett’s
executive agreement also provides that he shall receive a bonus
of $239,928 in 2008.
The executive agreements provide that Messrs. Conlin,
Chippari and Bennett are “at will” employees. The term
of each of the executive agreements is one year, subject to an
automatic renewal of one additional year unless we or the
executive provide notice of termination at least 90 days
prior to the expiration of then current term. Each of
Messrs. Conlin, Chippari and Bennett is eligible to
participate in our employee benefit plans on the same terms as
our other executive officers. Each executive agreement may be
terminated upon the executive’s death or disability, the
termination of the executive’s employment by us for
“cause,” the termination of the executive’s
employment by us without “cause” if approved by our
board of directors or our chief executive officer, as
applicable, and the termination of the executive’s
employment by him for “good reason.” If we terminate
the executive’s employment without “cause” or he
terminates his employment for “good reason,” then,
subject to such executive delivering a release to us, he is
entitled to receive severance payments in an amount equal to his
earned but unpaid base salary, unpaid expense reimbursement,
accrued but unused vacation, and 50% of his annual base salary.
Each of Messrs. Conlin, Chippari and Bennett will also
receive certain benefits, including health, dental and vision
insurance, for twelve months following the date of termination
in such instances. Additionally, each of these NEOs is entitled
to certain payments upon a change in control. For more
information on these payments, see “— Potential
Payments Upon Termination and Change in Control” below. For
purposes of the executive agreements, “cause” means:
•
failure to perform a substantial portion of the executive’s
duties and responsibilities, which failure continues after
written notice given to the executive and the executive’s
failure to cure such failure to perform within thirty days
receipt of such notice;
gross negligence, dishonesty, breach of fiduciary duty or
material breach of the terms of the executive agreement or such
executive’s non-competition, non-solicitation, proprietary
information and inventions agreement;
•
the commission by the executive of an act of fraud, embezzlement
or willful disregard of our rules or policies, the commission by
the executive of any other action which injures the Company, or
his misappropriation of any money or other assets or property
(whether tangible or intangible);
•
the conviction or indictment of the executive for a felony or
any misdemeanor involving moral turpitude, deceit, or dishonesty;
•
the commission of an act which constitutes unfair competition
with us or which induces any of our customers or suppliers to
breach a contract with us; or
•
willful failure to cooperate with a bona fide internal
investigation or any investigation by regulatory or law
enforcement authorities, after being instructed by us to
cooperate, or the willful destruction or failure to preserve
documents or other materials known to be relevant to such
investigation or the willful inducement of others to fail to
cooperate or to produce documents or other materials.
For purposes of the executive agreements, the term “good
reason” shall mean a termination of employment by the
executive for one or more of the following reasons:
•
a material breach of the executive agreement by us;
•
a material and permanent diminution in such executive’s
duties and responsibilities as set forth in the executive
agreement without his consent;
•
a material reduction in such executive’s base salary
without his consent; or
•
a material change in such executive’s permanent place of
employment.
We do not have employment agreements with Mr. Lucy or
Mr. Lamson. The initial compensation of Messrs. Lucy
and Lamson was set forth in an offer letter that we executed
with each of them at the time their employment with us
commenced. Each offer letter provides that such NEO’s
employment with us is on an
“at-will”
basis. In addition, we executed a severance agreement with
Mr. Lucy which provides that if we terminate his employment
other than for “cause,” he is entitled to a severance
payment equal to six months of annual base salary, six months of
accelerated vesting of his options, and continued payment of
health, dental and vision insurance coverage for six months. Our
severance agreement with Mr. Lamson provides that if we
terminate his employment other than for “cause,” the
executive, subject to his delivery of a release to us, is
entitled to a severance payment equal to three months of annual
base salary. For purposes of these severance arrangements,
“cause” has substantially the same meaning as is set
forth in the executive agreements above.
As a condition to each NEO’s employment, each NEO entered
into a non-competition, non-solicitation agreement, proprietary
information and inventions agreement. Under these agreements,
each NEO has agreed not to compete with us or to solicit our
employees during their employment and for a period of twelve
months after the termination of their employment and to protect
our confidential and proprietary information and to assign
intellectual property developed during the course of their
employment to us.
Equity
Benefit Plans
Our 2008 Stock Option and Incentive Plan, or 2008 Stock Option
Plan, was adopted by our board of directors and approved by our
stockholders
in .
The 2008 Option Plan permits us to make grants of incentive
stock options, non-qualified stock options, stock appreciation
rights, deferred stock awards, restricted stock awards,
performance shares, unrestricted stock awards, dividend
equivalent rights and cash-based awards. We
reserved shares
of our common stock for the issuance of awards under the 2008
Option Plan. This number is subject to adjustment in the event
of a stock split, stock dividend or other change in our
capitalization. Generally, shares that are forfeited or canceled
from awards under the 2008 Option Plan also will be available
for future awards. As
of 2008,
no awards had been granted under the 2008 Option Plan.
The 2008 Option Plan may be administered by either a committee
of at least two non-employee directors or by our full board of
directors, in either case referred to herein as the
administrator. The administrator has full power and authority to
select the participants to whom awards will be granted, to make
any combination of awards to participants, to accelerate the
exercisability or vesting of any award and to determine the
specific terms and conditions of each award, subject to the
provisions of the 2008 Option Plan.
All full-time and part-time officers, employees, non-employee
directors and other key persons (including consultants and
prospective employees) are eligible to participate in the 2008
Option Plan, subject to the discretion of the administrator.
There are certain limits on the number of awards that may be
granted under the 2008 Option Plan. For example, no more
than shares
of common stock may be granted in the form of stock options or
stock appreciation rights to any one individual during any
one-calendar-year period.
The exercise price of stock options awarded under the 2008
Option Plan may not be less than the fair market value of our
common stock on the date of the option grant and the term of
each option may not exceed ten years from the date of grant. The
administrator will determine at what time or times each option
may be exercised and, subject to the provisions of the 2008
Option Plan, the period of time, if any, after retirement,
death, disability or other termination of employment during
which options may be exercised.
To qualify as incentive options, stock options must meet
additional federal tax requirements, including a $100,000 limit
on the value of shares subject to incentive options which first
become exercisable in any one calendar year, and a shorter term
and higher minimum exercise price in the case of certain large
stockholders.
Stock appreciation rights may be granted under our 2008 Option
Plan. Stock appreciation rights allow the recipient to receive
the appreciation in the fair market value of our common stock
between the exercise date and the date of grant. The
administrator determines the terms of stock appreciation rights,
including when such rights become exercisable.
Restricted stock awards may be granted under our 2008 Option
Plan. Restricted stock awards are shares of our common stock
that vest in accordance with terms and conditions established by
the administrator. The administrator will determine the number
of shares of restricted stock granted to any employee. The
administrator may impose whatever conditions to vesting it
determines to be appropriate. For example, the administrator may
set restrictions based on the achievement of specific
performance goals. Shares of restricted stock that do not vest
are subject to our right of repurchase or forfeiture.
Deferred and unrestricted stock awards may be granted under our
2008 Option Plan. Deferred stock awards are units entitling the
recipient to receive shares of stock paid out on a deferred
basis, and are subject to such restrictions and conditions as
the administrator shall determine. Our 2008 Option Plan also
gives the administrator discretion to grant stock awards free of
any restrictions.
Performance share awards entitle the recipient to receive shares
of stock upon attainment of pre-established performance goals.
The administrator determines the terms of such awards, including
the establishment of the performance goals.
Dividend equivalent rights may be granted under our 2008 Option
Plan. Dividend equivalent rights are awards entitling the
grantee to current or deferred payments equal to dividends on a
specified number of shares of stock. Dividend equivalent rights
may be settled in cash or shares and are subject to other
conditions as the administrator shall determine.
Cash-based awards may be granted under our 2008 Option Plan.
Each cash-based award shall specify a cash-denominated payment
amount, formula or payment ranges as determined by the
administrator. Payment, if any, with respect to a cash-based
award may be made in cash or in shares of stock, as the
administrator determines.
Unless the administrator provides otherwise, our 2008 Option
Plan does not allow for the transfer of awards and only the
recipient of an award may exercise an award during his or her
lifetime.
In the event of a merger, sale or dissolution, or a similar
“sale event,” unless assumed or substituted, all stock
options and stock appreciation rights granted under the 2008
Option Plan will automatically become fully exercisable, all
other awards granted under the 2008 Option Plan will become
fully vested and non-
forfeitable and awards with conditions and restrictions relating
to the attainment of performance goals may become vested and
non-forfeitable in connection with a sale event in the
administrator’s discretion. In addition, upon the effective
time of any such sale event, the 2008 Option Plan and all awards
will terminate unless the parties to the transaction, in their
discretion, provide for appropriate substitutions or assumptions
of outstanding awards. Any award so assumed or continued or
substituted shall be deemed vested and exercisable in full upon
the date on which the grantee’s employment or service
relationship with us terminates if such termination occurs
(i) within 18 months after such sale event and
(ii) such termination is by us or a successor entity
without cause or by the grantee for good reason.
No awards may be granted under the 2008 Option Plan
after 2018.
In addition, our board of directors may amend or discontinue the
2008 Option Plan at any time and the administrator may amend or
cancel any outstanding award for the purpose of satisfying
changes in law or for any other lawful purpose. No such
amendment may adversely affect the rights under any outstanding
award without the holder’s consent. Other than in the event
of a necessary adjustment in connection with a change in our
stock or a merger or similar transaction, the administrator may
not “reprice” or otherwise reduce the exercise price
of outstanding stock options or stock appreciation rights.
Further, amendments to the 2008 Option Plan will be subject to
approval by our stockholders if the amendment (i) increases
the number of shares available for issuance under the 2008
Option Plan, (ii) expands the types of awards available
under, the eligibility to participate in, or the duration of,
the plan, (iii) materially changes the method of
determining fair market value for purposes of the 2008 Option
Plan, (iv) is required by the Nasdaq Global Market rules,
or (v) is required by the Internal Revenue Code of 1986, as
amended, or the Code, to ensure that incentive options are
tax-qualified.
2005
Equity Incentive Plan
Our 2005 Amended and Restated Stock Option and Grant Plan, or
our 2005 Equity Incentive Plan, was adopted by our board of
directors and approved by our stockholders in February 2007.
Currently, there are a maximum of 6,400,000 shares of our
common stock reserved for issuance under the 2005 Equity
Incentive Plan. As of September 30, 2007, there were
outstanding options to purchase 3,224,668 shares of our
common stock and restricted stock units in respect of
2,616,462 shares of our common stock. After completion of
this offering, no additional awards will be made under out 2005
Equity Incentive Plan.
Our 2005 Equity Incentive Plan is administered by our
compensation committee. The board of directors has full power
and authority to select the individuals to whom awards will be
granted, to make any combination of awards to participants, to
accelerate the exercisability or vesting of any award, to
provide substitute awards and to determine the specific terms
and conditions of each award, subject to the provisions of the
2005 Equity Incentive Plan.
Our 2005 Equity Incentive Plan permits us to make grants of
incentive stock options, non-qualified stock options, restricted
stock awards, restricted stock units and unrestricted stock
awards to officers, employees, directors, consultants and other
key persons. Stock options granted under the 2005 Equity
Incentive Plan have a maximum term of ten years from the date of
grant and incentive stock options have an exercise price of no
less than the fair market value of our common stock on the date
of grant.
Upon a sale event in which all awards are not assumed, continued
or substituted by the successor entity, all stock options and
the 2005 Equity Incentive Plan will terminate upon the effective
time of such sale event following an exercise period. Restricted
stock and restricted stock units shall be treated as provided in
the relevant award agreement. Under the 2005 Equity Incentive
Plan, a sale event is defined as the consummation of (i) a
dissolution or liquidation, (ii) a sale of all or
substantially all of the assets on a consolidated basis to an
unrelated person or entity, (iii) a merger, reorganization
or consolidation in which the outstanding shares are converted
into or exchanged for securities of the successor entity and the
holders of the outstanding voting power immediately prior to
such transaction do not own a majority of the outstanding voting
power of the successor entity immediately upon completion of
such transaction, (iv) the sale of all or a majority of the
outstanding capital stock to an unrelated person or entity or
(v) any other transaction in which the owners of the
outstanding voting power prior to such transaction do not own at
least a majority of the outstanding voting power of the
successor entity immediately upon completion of the transaction.
The following table summarizes the compensation earned during
2006 by our principal executive officer, our principal financial
officer and our other three most highly compensated executive
officers who were serving as executive officers as of
December 31, 2006. We refer to these individuals as our
named executive officers.
Option
Non-Equity
Stock Awards
Awards ($)
Incentive Plan
Name And Principal Position
Year
Salary ($)
Bonus
($)(2)
(3)
Compensation ($)
Total ($)
Kelly P. Conlin Chief Executive Officer
2006
$
259,135
(4)
—
$
3,366,475
$
951,124
$
206,605
(4)
$
4,783,339
Vincent A. Chippari Executive Vice President And Chief Financial Officer
2006
88,846
(5)
—
—
1,783,360
23,560
(5)
1,895,766
Jeffrey S. Bennett (6) President And Chief Operating Officer
2006
275,000
—
2,100,852
567,054
122,500
3,065,406
(7)
Brian D. Lucy (8) Senior Vice President Of Finance, Treasurer And Secretary
2006
200,000
—
—
294,488
49,000
543,488
Peter T. Lamson Senior Vice President And General Manager, Domain
Marketplace
2006
200,000
15,500
473,867
174,824
33,500
897,691
(1)
Columns disclosing compensation under the headings “Change
In Pension Value And Nonqualified Deferred Compensation
Earnings” and “All Other Compensation” are not
included because no compensation in any of these categories was
paid to our named executive officers in 2006. The compensation
in this table also does not include certain perquisites and
other personal benefits received by the named executive officers
that did not exceed $10,000 in the aggregate during 2006.
(2)
These amounts represent stock-based compensation expense for
restricted stock unit awards recognized in 2006 for financial
statement reporting purposes. Stock-based compensation expense
for these awards was calculated in accordance with
SFAS No. 123(R) and is being amortized over the
vesting period of the related awards. As of December 31,2006, this unamortized amount was $479,512 for Mr. Conlin,
$135,373 for Mr. Bennett and $66,152 for Mr. Lamson.
These amounts exclude the estimate of forfeitures applied by us
under SFAS No. 123(R) when recognizing stock-based
compensation expense for financial statement reporting purposes.
For additional information regarding the assumptions used in
these calculations refer to the section entitled
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Critical
Accounting Policies and the Use of Estimates —
Accounting for Stock-Based Compensation” and Note 12
in the financial statements.
(3)
These amounts represent stock-based compensation expense for
stock option grants recognized in 2006 for financial statement
reporting purposes. Stock-based compensation expense for these
awards was calculated in accordance with
SFAS No. 123(R) and is being amortized over the
vesting period of the related awards. As of December 31,2006, this unamortized amount was $3,215,743 for
Mr. Conlin, $1,361,722 for Mr. Chippari, $1,103,830
for Mr. Bennett, $99,853 for Mr. Lucy and $345,851 for
Mr. Lamson. The amounts reflected in this table exclude the
estimate of forfeitures applied by us under
SFAS No. 123(R) when recognizing stock-based
compensation expense for financial statement reporting purposes
in fiscal 2006. For additional information regarding the
assumptions used in these calculations refer to the section
entitled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Critical Accounting Policies and the Use of
Estimates — Accounting for Stock-Based
Compensation” and Note 12 in the financial statements.
All option awards granted prior to 2006 were expensed in
accordance with APB Opinion No. 25. Accordingly, there was
no stock-based compensation expense associated with the awards
prior to 2006.
The following table sets forth certain information regarding the
terms of non-equity incentive plan awards and grants of our
common stock, restricted stock units covering our common stock
and options to purchase our common stock under our 2005 Equity
Incentive Plans made by us to the named executive officers
during 2006.
All Other
Option
All Other
Awards:
Exercise or
Stock Awards:
Number of
Base Price
Grant Date Fair
Estimated Possible Payouts Under Non-Equity Incentive Plan
Awards (3)
Number of
Securities
of Option
Value of Stock
Threshold
Target
Maximum
Shares of Stock
Underlying
Awards
and Option
Name
Grant Date
($)
($)
($)
or Units(#)
Options(#)
($/Sh)
Awards ($)(4)
Kelly P. Conlin (5)
—
—
225,000
337,500
—
—
—
7/27/06
—
341,931
(6)(7)
$
3.45
$
951,124
7/27/06
1,210,255
(7)
$
3,366,475
Vincent A. Chippari (5)
—
—
75,000
112,500
—
—
—
11/10/06
470,505
$
4.89
$
1,783,360
Jeffrey S. Bennett
—
—
125,000
187,500
—
—
—
7/27/06
—
119,997
(7)(8)
$
3.54
$
241,209
7/27/06
—
89,852
$
3.65
$
325,845
7/27/06
780,606
(7)
$
2,100,852
Brian D. Lucy
—
—
50,000
75,000
—
—
—
—
Peter T. Lamson
—
—
50,000
75,000
—
—
—
7/27/06
—
61,599
(7)(9)
$
2.82
$
174,824
7/27/06
166,964
(7)
$
473,867
(1)
Column disclosing grants of plan-based awards under the heading
“Estimated Possible Payouts Under Equity Incentive Plan
Awards” is not included in this table because no plan-based
grants in this category was paid to our named executive officers
in 2006.
(2)
All stock, restricted stock unit and option awards were made
under our 2005 Equity Incentive Plan and are subject to related
award agreements.
(3)
Represents target and maximum bonuses potentially available to
our named executive officers under our annual cash incentive
plan. See the section entitled “Executive
Compensation — Compensation Discussion and
Analysis — Annual Cash Incentive Plan” for a
description of the program and the “Summary Compensation
Table” above for actual bonuses earned by our named
executive officers in 2006.
(4)
The amounts reported in this column reflect the grant date fair
value of those awards computed in accordance with
SFAS No. 123(R).
(5)
The target and maximum bonuses potentially available to
Mr. Conlin and Mr. Chippari are pro rated to account
for the length of their employment in 2006.
(6)
Excludes the incentive stock option award to Mr. Conlin on
January 30, 2006, which was subsequently amended on
July 27, 2006 as described in footnote (7) below. The
table above reflects the terms of the amended option award.
On July 27, 2006, we increased the exercise price of
certain options to reflect the value of our common stock that
our auditors believe in hindsight reflected the fair market
value of the stock on the original date of grant. Although we
believe that all of the affected options were granted with an
exercise price per share equal to the fair market value of our
common stock on the original grant date, our board determined it
was in the best interest of the company and the optionees to
increase the affected options’ exercise price to avoid
potential penalties under Section 409A of the Internal
Revenue Code. The number of shares covered by the affected
options were decreased such that the aggregate exercise price
remained unchanged. In addition, the affected optionees were
granted restricted stock units in an amount equal to the
reduction of shares covered by any such options. Consequently,
the affected option holders remained entitled to receive the
same number of shares, and were obligated to pay the same
aggregate exercise price. For additional information on the
reassessment of the fair value for prior stock option awards and
the related amendment to existing stock option agreements, see
the section entitled “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Critical Accounting Policies —
Accounting for Stock-Based Compensation.” The amounts
reflected in this column include the value of any options that
were amended, as described above, as well as the value of any
related restricted stock unit grants.
(8)
Excludes the incentive stock option award to Mr. Bennett on
February 22, 2006, which was subsequently amended on
July 27, 2006 as described in footnote (7) above, and
the February 22, 2006 restricted stock award to
Mr. Bennett which Mr. Bennett and we agreed on
July 27, 2006 to rescind. The table above reflects the
terms of the amended option award.
(9)
Excludes the incentive stock option award to Mr. Lamson on
October 19, 2005, which was subsequently amended on
July 27, 2006 as described in footnote (7) above. The
table above reflects the terms of the amended option award.
Outstanding
Equity Awards At Fiscal Year End — 2006 (1)
The following table sets forth certain information regarding
equity awards to our named executive officers at the end of 2006.
Option awards
Stock Awards
Number of
Number of
Number of
Securities
Securities
Shares or
Market Value of
Underlying
Underlying
Units of
Shares or Units
Unexercised
Unexercised
Option
Option
Stock That
of Stock That
Options(#)
Options(#)
Exercise
Expiration
Have Not
Have Not Vested
Name
Exercisable
Unexercisable
Price ($)
Date
Vested(#)
($)(2)
Kelly P. Conlin
—
341,931
(3)
$
3.45
1/30/16
1,210,255
(4)
Vincent A. Chippari
—
470,505
(5)
$
4.89
11/10/16
—
Jeffrey S. Bennett
89,952
(6)
—
$
3.54
7/27/16
—
19,354
100,643
(7)
$
3.54
7/27/16
368,138
(8)
Brian D. Lucy
139,677
165,073
(9)
$
0.76
6/9/15
—
Peter T. Lamson
17,966
43,632
(10)
$
2.82
10/19/15
118,266
(11)
(1)
Columns disclosing outstanding equity awards at fiscal year end
under the headings “Equity Incentive Plan Awards: Number of
Securities Underlying Unexercised Unearned Options,”“Equity Incentive Plan Awards: Number of Unearned Shares,
Units or Other Rights That Have Not Vested” and
“Equity Incentive Plan Awards: Market or Payout of Unearned
Shares, Units or Other Rights That Have Not Vested” are not
included in this table because no equity awards were outstanding
in these categories for the fiscal year ending 2006.
(2)
There was no public market for our common stock in 2006. We have
estimated the market value of the restricted stock unit awards
that have not vested based on an assumed initial public offering
price of $ per share, the
midpoint of the price range set forth on the cover of this
prospectus.
25% of the shares in this grant vest on January 23, 2007
and the remainder vest monthly at the rate of 2.083333% per
month on the last day of each month for 36 months.
(4)
25% of the units in this award vest on January 23, 2007 and
the remainder vest monthly at the rate of 2.083333% per
month on the last day of each month for 36 months.
(5)
25% of the shares in this grant vest on September 5, 2007
and the remainder vest monthly at the rate of 2.083333% per
month on the last day of each month for 36 months.
(6)
100% of the shares in this grant vested on July 27, 2006.
(7)
3.225806% of the shares in this grant vested on August 22,2006 and the remainder vest monthly at the rate of
3.225806% per month on the last day of each month for
30 months.
(8)
3.225806% of the units in this award vested on August 22,2006 and the remainder vest monthly at the rate of
3.225806% per month on the last day of each month for
30 months.
(9)
25% of the shares in this grant vested on February 22, 2006
and the remainder vest monthly at the rate of 2.083333% per
month on the last day of each month for 36 months.
(10)
25% of the shares in this grant vested on October 17, 2006
and the remainder vest monthly at the rate of 2.083333% per
month on the last day of each month for 36 months.
(11)
25% of the units in this award vested on October 17, 2006
and the remainder vest monthly at the rate of 2.083333% per
month on the last day of each month for 36 months.
Option
Exercises and Stock Vested — 2006 (1)
The following table summarizes the outstanding equity award
holdings held by our NEOs as of December 31, 2006.
Stock Awards
Number of Shares
Value Realized on
Name
Acquired on Vesting (#)
Vesting ($)(2)
Kelly P. Conlin
—
—
Vincent A. Chippari
—
—
Jeffrey S. Bennett
412,469
$
0
(3)
Brian D. Lucy
—
—
Peter T. Lamson
48,698
$
0
(3)
(1)
Columns disclosing option awards under the headings “Number
of Shares Acquired on Exercise” and “Value Realized On
Exercise” are not included in this table because no shares
were issued upon exercise of stock options to our named
executive officers in 2006.
(2)
There was no public market for our common stock in 2006. We have
estimated the market value of the vested restricted stock unit
awards based on an assumed initial public offering price of
$ per share; the midpoint of the
price range set forth on the cover of this prospectus.
(3)
In accordance with their respective terms, these vested
restricted stock units will be paid upon the earliest of
November 15, 2008, a change of control or termination of
the recipient’s employment with us, and therefore no amount
has been realized by the named executive officers with respect
to these awards.
Pension
Benefits
None of our NEOs participate in or have account balances in
qualified or non-qualified defined benefit plans sponsored by
the company at December 31, 2006 and, as a result, there is
not a pension benefits table included in this prospectus.
None of our NEOs participate in or have account balances in
non-qualified defined contribution plans maintained by the
company at December 31, 2006 and, as a result, there is not
a nonqualified deferred compensation table included in this
prospectus.
Potential
Payments Upon Termination and Change in Control
The following summaries set forth potential payments payable to
our NEOs in connection with both a “change in control”
(as defined below) and upon termination of his employment
following a “change in control”.
Messrs. Conlin, Chippari and Bennett. If
we terminate Messr. Conlin’s, Chippari’s or
Bennett’s employment without “cause” (as defined
above) or any of these executive officers terminates his
employment for “good reason” (as defined above) within
twelve months following a “change in control,’’
then such executive is entitled to receive payments equal to 50%
of his respective annual base salary. Each executive will also
receive certain benefits, including health, dental and vision
insurance, for twelve months following the date of such
“change in control.” In addition, upon a “change
in control,” all stock options and other equity-based
awards granted to each such executive will immediately
accelerate and become fully exercisable as of the effective date
of the “change in control.” If a change in control
occurs during the term of the executive agreement, the term
shall continue for not less than twelve months beyond the month
in which the change in control occurred. For additional
information on the terms and provisions of the executive
agreements, see “— Executive Agreements and
Change in Control Arrangements” above.
Under the executive agreements with Messrs. Conlin,
Chippari and Bennett, a change in control would include any of
the following events:
•
any “person,” as defined in the Securities Exchange of
1934, as amended, acquires 50% or more of our voting securities;
•
majority of our current directors are replaced;
•
the consummation of a consolidation, merger or consolidation or
sale or other disposition of all or substantially all of our
assets in which our stockholders would beneficially own less
than 50% of our voting securities after such transaction; or
•
our stockholders approve a plan or proposal for our liquidation
or dissolution.
In the event that, prior to October 31, 2009, any payments
to these executive officers made in connection with a change in
control would be subjected to the excise tax impose by
Section 4999 of the Internal Revenue Code, each executive
is entitled to a
“gross-up
payment” that, on an after-tax basis, is equal to the taxes
imposed on the severance payments under the executive agreements
in the event any payment or benefit to the executive is
considered an “excess parachute payment” and subject
to an excise tax under the Internal Revenue Code.
Messrs. Lucy and Lamson. In the event of
a change in control, all stock options granted to Mr. Lucy
will immediately accelerate and become fully exercisable as of
the effective date of the change in control. In the event of the
termination of Mr. Lamson’s employment without
“cause” (as defined above) or for “good
reason” (as defined above), within 12 months following
a change in control, 50% of Mr. Lamson’s stock options
and other equity-based awards will immediately accelerate and
become fully exercisable as of the effective date of his
termination.
The table below summarizes the potential payments to each of our
NEOs, both upon a “change in control”, and if he were
to be terminated without “cause” or terminate his
employment for “good reason” following a “change
in control” on December 31, 2006, the last day of our
most recently completed fiscal year.
Value of Additional
Vested Option and
Severance
Value of Benefits
Restricted Stock
Estimated Tax Gross Up
Total Amount
Name
Amount ($)
($)(1)
Awards(2) ($)
($)
$
Kelly P. Conlin
Change in Control
—
—
—
—
Termination following a change in control
137,500
12,838
Vincent A. Chippari
Change in Control
—
—
—
—
Termination following a change in control
137,500
12,838
Jeffery S. Bennett
Change in Control
239,928
—
—
239,928
Termination following a change in control
137,500
12,838
Brian D. Lucy
Change in Control
—
—
—
Termination following a change in control
—
—
—
—
Peter T. Lamson
Change in Control
—
—
—
—
Termination following a change in control
—
—
—
(1)
Calculated based on the estimated cost to us of providing these
benefits.
(2)
Valuation of these options and restricted stock is based on a
price per share of our common stock of
$ , which is the midpoint of the
price range set forth on the cover of this prospectus.
NameMedia,
Inc. 401(k) Profit Sharing Plan
We maintain a tax-qualified retirement plan that provides all
regular employees with an opportunity to save for retirement on
a tax-advantaged basis. Under the 401(k) plan, participants may
elect to defer a portion of their compensation on a pre-tax
basis and have it contributed to the plan subject to applicable
annual Internal Revenue Code limits. Pre-tax contributions are
allocated to each participant’s individual account and are
then invested in selected investment alternatives according to
the participants’ directions. Employee elective deferrals
are 100% vested at all times. The company does not currently
match employee contributions. As a tax-qualified retirement
plan, contributions to the 401(k) plan and earnings on those
contributions are not taxable to the employees until distributed
from the 401(k) plan and all contributions are deductible by us
when made.
In 2006, in connection with our efforts to attract and retain
additional highly qualified individuals to our board of
directors, we began compensating our non-employee directors with
equity-based compensation. In 2006, we granted Ms. Cirino
an option to purchase 33,567 shares of our common stock
with an exercise price of $3.45 per share, and awarded
Ms. Cirino restricted stock units covering
118,808 shares of our common stock, as compensation for
services on our board of directors. In 2006, we granted
Mr. Lewis an option to purchase 33,567 shares of our
common stock with an exercise price of $3.45 per share, and
awarded Mr. Lewis restricted stock units covering
118,808 shares of our common stock, as compensation for
services on our board of directors. In February 2007, we granted
Mr. Tibbetts an option to purchase 80,500 shares of
our common stock with an exercise price of $6.15 per share, as
compensation for services on our board of directors. The options
and restricted stock units granted to our directors as
compensation for services on our board of directors vest over a
four-year period. Mr. Tibbetts will also receive an annual
retainer of $35,000 in his capacity as chair of our audit
committee. We have not otherwise paid separate compensation for
services rendered as a director.
Prior to this offering, we expect that our compensation
committee will establish a non-employee director compensation
policy that may include the following components: an annual
retainer for board service, cash compensation for each meeting
attended, an annual retainer for chairing or serving on our
audit committee, compensation committee and nominating and
corporate governance committee and annual stock option or
restricted stock unit grants.
All of our directors are reimbursed for reasonable out-of-pocket
expenses incurred in attending meetings of the board of
directors. The following table sets forth a summary of the
compensation we paid to our non-employee directors in 2006.
Director
Compensation Table — 2006(1)
Stock
Option
Awards
Awards
Total
Name
($)(2)
($)(3)
($)(4)
Maria A. Cirino
$
9,242
$
25,137(5
)
Robert J. Davis
—
—
—
Russell S. Lewis
$
9,242
$
25,137(6
)
Martin J. Mannion
—
—
—
Richard de Silva
—
—
—
Joseph S. Tibbetts Jr.
—
—
—
(1)
Columns disclosing compensation under the headings “Fees
Earned or Paid in Cash,”“Non-Equity Incentive Plan
Compensation,”“Change in Pension Value and
Nonqualified Deferred Compensation Earnings” and “All
Other Compensation” are not included in this table because
no compensation in any of these categories was paid to our
directors in 2006.
(2)
These amounts represent stock-based compensation expense for
restricted stock awards recognized in 2006 for financial
statement reporting purposes. Stock-based compensation expense
for these awards was calculated in accordance with
SFAS No. 123(R) and is being amortized over the
vesting period of the related awards. As of December 31,2006, this unamortized amount was $47,073 for Ms. Cirino and
$47,073 for Mr. Lewis. The amounts in this table exclude the
estimate of forfeitures applied by us under
SFAS No. 123(R) when recognizing stock-based
compensation expense for financial statement reporting purposes
in fiscal 2006. For additional information regarding the
assumptions used in these calculations refer to the section
entitled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Critical Accounting Policies and the Use of
Estimates — Stock-Based Compensation” and
note 12 in the financial statements. As of
December 31, 2006, each of Ms. Cirino and
Mr. Lewis had vested restricted stock units covering
29,703 shares of our common stock.
(3)
These amounts represent stock-based compensation expense for
stock option grants recognized in 2006 for financial statement
reporting purposes. Stock-based compensation expense for these
awards was calculated
in accordance with SFAS No. 123(R) and is being
amortized over the vesting period of the related awards. As of
December 31, 2006, this unamortized amount was $315,381 for
Ms. Cirino and $315,381 for Mr. Lewis. The amounts reflected in
this table exclude the estimate of forfeitures applied by us
under SFAS No. 123(R) when recognizing stock-based
compensation expense for financial statement reporting purposes
in fiscal 2006. For additional information regarding the
assumptions used in these calculations refer to the section
entitled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Critical Accounting Policies and the Use of
Estimates — Stock-Based Compensation” and
note 12 in the financial statements. As of
December 31, 2006, each of Ms. Cirino and
Mr. Lewis had vested stock options to purchase
8,391 share of our common stock at an exercise price of
$3.45.
(4)
Excludes reimbursements for out-of-pocket expenses incurred in
attending meetings of the board of directors.
(5)
Excludes the non-qualified stock option award to Ms. Cirino
on January 19, 2006, which was subsequently amended on
July 27, 2006. The table above reflects the terms of the
amended option award.
(6)
Excludes the non-qualified stock option award to Mr. Lewis
on January 19, 2006, which was subsequently amended on
July 27, 2006. The table above reflects the terms of the
amended option award.
Limitation
on Liability and Indemnity
As permitted by the Delaware General Corporation Law, we have
adopted provisions in our certificate of incorporation and
by-laws that limit or eliminate the personal liability of our
directors. Consequently, a director will not be personally
liable to us or our stockholders for monetary damages or breach
of fiduciary duty as a director, except for liability for:
•
any breach of the director’s duty of loyalty to us or our
stockholders;
•
any act or omission not in good faith or that involves
intentional misconduct or a knowing violation of law;
•
any unlawful payments related to dividends or unlawful stock
repurchases, redemptions or other distributions; or
•
any transaction from which the director derived an improper
personal benefit.
These limitations of liability do not alter director liability
under the federal securities laws and do not affect the
availability of equitable remedies such as an injunction or
rescission.
we will indemnify our directors, officers and, in the discretion
of our board of directors, certain employees to the fullest
extent permitted by the Delaware General Corporation
Law; and
•
we will advance expenses, including attorneys’ fees, to our
directors and, in the discretion of our board of directors, to
our officers and certain employees, in connection with legal
proceedings, subject to limited exceptions.
Contemporaneous with the completion of this offering, we intend
to enter into indemnification agreements with each of our
executive officers and directors. These agreements provide that
we will indemnify each of our directors to the fullest extent
permitted by law and advance expenses to each indemnitee in
connection with any proceeding in which indemnification is
available.
We also maintain general liability insurance that covers certain
liabilities of our directors and officers arising out of claims
based on acts or omissions in their capacities as directors or
officers, including liabilities under the Securities Act of
1933, as amended. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors,
officers, or persons controlling the registrant pursuant to the
foregoing provisions, we have been informed that in the opinion
of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and
is therefore unenforceable.
These provisions may discourage stockholders from bringing a
lawsuit against our directors for breach of their fiduciary
duty. These provisions may also have the effect of reducing the
likelihood of derivative litigation against directors and
officers, even though such an action, if successful, might
otherwise benefit us and our stockholders. Furthermore, a
stockholder’s investment may be adversely affected to the
extent we pay the costs of settlement and damage awards against
directors and officers pursuant to these indemnification
provisions. We believe that these provisions, the
indemnification agreements and the insurance are necessary to
attract and retain talented and experienced directors and
officers.
At present, there is no pending litigation or proceeding
involving any of our directors or officers where indemnification
will be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim
for such indemnification.
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Other than compensation agreements and other arrangements which
are described as required in “Executive Compensation”
and the transactions described below, since January 1,2004, there has not been, and there is not currently proposed,
any transaction or series of similar transactions to which we
were or will be a party in which the amount involved exceeded or
will exceed $120,000 and in which any director, executive
officer, holder of five percent or more of any class of our
capital stock or any member of their immediate family had or
will have a direct or indirect material interest.
Private
Placements of Securities
In February 2005, we issued approximately $7,500,000 of shares
of our Series Z convertible redeemable preferred stock. In
February 2005 and January 2006, we raised an aggregate amount of
$43,300,000 through the issuance of shares of our Series A
convertible redeemable preferred stock. Each share of
Series A convertible redeemable preferred stock and
Series Z convertible redeemable preferred stock will
convert into five shares of common stock upon the closing of
this offering.
The following table summarizes, on a common stock equivalents
basis, the participation in excess of $120,000 by our directors,
executive officers and five percent stockholders in these
private placements. Some of our directors are associated with
the stockholders participating in these private placements.
Total Common Stock
Aggregate
Date of
Investment
Purchaser(1)
Equivalents
Consideration Paid
Issuance
Participation
Highland Capital Partners(2)
12,930,000
$
25,860,000
February 2005
Series A
Summit Partners(3)
8,620,000
$
17,240,000
February 2005
Series A
Raredomains.com, LLC
3,750,000
$
7,500,000
February 2005
Series Z
(1)
See “Principal and Selling Stockholders” for more
detail on shares held by these purchasers.
(2)
Highland Capital Partners includes Highland Capital Partners VI
Limited Partnership, Highland Capital Partners VI-B Limited
Partnership and Highland Entrepreneurs’ Fund VI
Limited Partnership.
(3)
Summit Partners includes Summit Investors VI L.P., Summit
Ventures VI-A L.P., Summit Ventures VI-B L.P., Summit VI
Advisors Fund L.P. and Summit VI Entrepreneurs
Fund L.P.
In connection with our private placements of these preferred
securities, we entered into agreements with all of the
participating investors providing for registration rights with
respect to the shares sold in these transactions. For more
information regarding this agreement, see “Description of
Capital Stock — Registration Rights.”
Commercial
Transactions
We have engaged and continue to engage a third party to provide
us marketing services. We paid this third-party approximately
$708,000 in 2005, approximately $7.4 million in 2006, and
approximately $4.0 million for the nine months ended
September 30, 2007, for these services. One of our five
percent stockholders, Highland Capital Partners, owns an equity
interest in this third party, and one of our directors, Robert
J. Davis, is a member of the board of directors of this third
party. Two of our directors, Robert J. Davis and D. Richard
de Silva, are affiliated with Highland Capital Partners.
We sold domain names to a member of one of our five percent
stockholders, Raredomains.com, LLC, for an aggregate of
approximately $700,000 in 2005 and for aggregate of
approximately $1.1 million for the nine months ended
September 30, 2007.
Transactions
with our Executive Officers and Directors
We have agreements or arrangements with each of our executive
officers, which provide for certain salary, bonus, stock option
and severance compensation. In October 2007, we entered
into executive agreements with
Kelly P. Conlin, Vincent A. Chippari and Jeffrey S. Bennett
superseding our existing agreements or arrangements with each of
them and providing for severance payments, continuation of
certain benefits and acceleration of vesting of unvested stock
options in certain instances. For more information regarding
these agreements, see “Executive Compensation —
Executive Agreements and Change of Control Arrangements”
and “Executive Compensation — Potential Payments
Upon Termination and Change of Control.”
Contemporaneous with the completion of this offering, we intend
to enter into indemnification agreements with each of our
executive officers and directors, providing for indemnification
against expenses and liabilities reasonably incurred in
connection with their service for us on our behalf. For more
information regarding these agreements, see “Executive
Compensation — Limitation of Liability and
Indemnification.”
Stock-Based
Awards
For information regarding stock options and stock awards granted
to our named directors and executive officers, see
“Executive Compensation — Executive Compensation
Components” and “Executive Compensation —
Director Compensation.”
Policies
for Approval of Related Person Transactions
Our board of directors reviews and approves transactions with
directors, officers and holders of five percent or more of our
voting securities and their affiliates, or each, a related
party. Prior to this offering, prior to our board of
directors’ consideration of a transaction with a related
party, the material facts as to the related party’s
relationship or interest in the transaction are disclosed to our
board of directors, and the transaction is not considered
approved by our board of directors unless a majority of the
directors who are not interested in the transaction approve the
transaction.
Prior to the completion of this offering we will adopt a written
related person transaction policy to set forth the policies and
procedures for the review and approval or ratification of
related person transactions. This policy will cover any
transaction, arrangement or relationship, or any series of
similar transactions, arrangements or relationships in which we
were or are to be a participant, the amount involved exceeds
$120,000 and a related person had or will have a direct or
indirect material interest, including, without limitation,
purchases of goods or services by or from the related person or
entities in which the related person has a material interest,
indebtedness, guarantees of indebtedness and employment by us of
a related person.
Any related person transaction proposed to be entered into by us
must be reported to our general counsel and will be reviewed and
approved by the audit committee in accordance with the terms of
the policy, prior to effectiveness or consummation of the
transaction, whenever practicable. If our general counsel
determines that advance approval of a related person transaction
is not practicable under the circumstances, the audit committee
will review and, in its discretion, may ratify the related
person transaction at the next meeting of the audit committee.
Alternatively, our general counsel may present a related person
transaction arising in the time period between meetings of the
audit committee to the chair of the audit committee, who will
review and may approve the related person transaction, subject
to ratification by the audit committee at the next meeting of
the audit committee.
In addition, any related person transaction previously approved
by the audit committee or otherwise already existing that is
ongoing in nature will be reviewed by the audit committee
annually to ensure that such related person transaction has been
conducted in accordance with the previous approval granted by
the audit committee, if any, and that all required disclosures
regarding the related person transaction are made.
A related person transaction reviewed under this policy will be
considered approved or ratified if it is authorized by the audit
committee in accordance with the standards set forth in this
policy after full disclosure of the related person’s
interests in the transaction. As appropriate for the
circumstances, the audit committee will review and consider:
•
the related person’s interest in the related person
transaction;
•
the approximate dollar value of the amount involved in the
related person transaction;
the approximate dollar value of the amount of the related
person’s interest in the transaction without regard to the
amount of any profit or loss;
•
whether the transaction was undertaken in the ordinary course of
business;
•
whether the transaction with the related person is proposed to
be, or was, entered into on terms no less favorable to us than
terms that could have been reached with an unrelated third party;
•
the purpose of, and the potential benefits to us of, the
transaction; and
•
any other information regarding the related person transaction
or the related person in the context of the proposed transaction
that would be material to investors in light of the
circumstances of the particular transaction.
The audit committee will review all relevant information
available to it about the related person transaction. The audit
committee may approve or ratify the related person transaction
only if the audit committee determines that, under all of the
circumstances, the transaction is in or is not inconsistent with
our best interests. The audit committee may, in its sole
discretion, impose conditions as it deems appropriate on us or
the related person in connection with approval of the related
person transaction.
The following table sets forth information regarding the
beneficial ownership of our common stock as of
September 30, 2007, as adjusted to give effect to reflect
the sale of share of common stock offered by us and the selling
stockholders in this offering, for:
•
each person, or group of affiliated persons, known to us to
beneficially own 5% or more of our outstanding common stock;
•
each of our directors;
•
each of our named executive officers;
•
all of our executive officers and directors as a group; and
•
each of the selling stockholders.
Beneficial ownership of shares is determined in accordance with
the rules of the SEC and generally includes any shares over
which a person exercises sole or shared voting or investment
power. Except where indicated below, we believe that each
stockholder identified in the table possesses sole voting and
investment power over all shares of common stock shown as
beneficially owned by the stockholder. Shares of common stock
subject to options that are currently exercisable or exercisable
within 60 days of September 30, 2007, are considered
outstanding and beneficially owned by the person holding the
options for the purpose of computing the percentage ownership of
that person but are not treated as outstanding for the purpose
of computing the percentage ownership of any other person.
Unless otherwise indicated below, the address of each individual
listed below is
c/o NameMedia,
Inc., 230 Third Avenue, Waltham, MA02451.
Percentage ownership of our common stock in the table before the
offering is based on 25,605,071 shares of common stock
issued and outstanding as of September 30, 2007, which
includes the conversion of all of our outstanding Series A
and Z convertible redeemable preferred stock into an aggregate
of 25,400,000 shares of our common stock in connection with
the completion of this offering. Percentage ownership of our
common stock in the table after the offering assumes the sale
of shares
of common stock in this offering by us and the selling
stockholders, but no exercise of the underwriters’
over-allotment option. Any shares offered for sale by the
selling stockholders will be shares of common stock issuable
upon conversion of our Series A and Z convertible
redeemable preferred stock. For additional information regarding
the issuance of our Series A and Series Z convertible
redeemable preferred stock, see “Certain Relationships and
Related Party Transactions — Private Placements of
Securities.”
The underwriters have an option to purchase up to an
additional shares
of common stock from us and the selling stockholders exercisable
to cover over-allotments, if any, at the public offering price
less the underwriting discount shown on the cover page of this
prospectus. The underwriters may exercise this option at any
time until 30 days after the date of this prospectus.
Shares Beneficially Owned
Shares
Shares Beneficially Owned
Prior to the Offering
Offered
After the Offering
Beneficial Owner
Number
Percent
(12)
Number
Percent
5% Stockholders:
Highland Capital Partners(1)
12,930,000
50.5
%
Summit Partners(2)
8,620,000
33.7
%
Raredomains.com, LLC(3)
3,750,000
14.7
%
Directors and Executive Officers:
Maria A. Cirino(4)
123,013
*
Robert J. Davis(1)
12,930,000
50.5
%
D. Richard De Silva
—
—
Russell S. Lewis(5)
123,013
*
Martin J. Mannion(2)
8,620,000
33.7
%
Joseph S. Tibbetts Jr.
0
*
Kelly P. Conlin(6)
711,419
2.7
%
Vincent A. Chippari(7)
137,231
*
Jeffrey S. Bennett(8)
720,005
2.7
%
Peter T. Lamson(9)
119,043
*
Brian D. Lucy(10)
209,516
*
All executive officers and directors as a group
(14 persons)(11)
23,693,240
92.5
%
*
Represents beneficial ownership of less than one percent of the
outstanding shares of common stock.
(1)
Consists of 8,094,180 shares held by Highland Capital
Partners VI Limited Partnership (“Highland Capital
VI”), 4,434,990 shares held by Highland Capital
Partners VI-B Limited Partnership (“Highland Capital
VI-B”), 400,830 shares held by Highland
Entrepreneurs’ Fund VI Limited Partnership
(“Highland Entrepreneurs’ Fund” and together with
Highland Capital VI and Highland Capital VI-B, the
“Highland Investing Entities”). Highland Management
Partners VI Limited Partnership (“HMP”) is the general
partner of Highland Capital VI and Highland Capital VI-B. HEF VI
Limited Partnership (“HEF”) is the general partner of
Highland Entrepreneurs’ Fund. Highland Management Partners
VI, Inc. (“Highland Management”) is the general
partner of both HMP and HEF. Robert J. Davis, a member of our
board of directors, Robert F. Higgins, Paul A. Maeder, Daniel J.
Nova, Sean M. Dalton, Corey M. Mulloy, and Fergal J. Mullen are
the managing directors of Highland Management (together, the
“Managing Directors”). Highland Management, as the
general partner of the general partners of the Highland
Investing Entities, may be deemed to have beneficial ownership
of the shares held by the Highland Investing Entities. The
Managing Directors have shared voting and investment control
over all the shares held by the Highland Investing Entities and
therefore may be deemed to share beneficial ownership of the
shares held by Highland Investing Entities by virtue of their
status as controlling persons of Highland Management. Each of
the Managing Directors disclaims beneficial ownership of the
shares held by the Highland Investing Entities, except to the
extent of such Managing Director’s pecuniary interest
therein. The address for the entities affiliated with Highland
Capital Partners is 92 Hayden Avenue, Lexington, MA02421.
(2)
Consists of 5,798,150 shares held by Summit Ventures VI-A,
L.P., 2,418,060 shares held by Summit Ventures VI-B, L.P.,
185,140 shares held by Summit VI Entrepreneurs Fund, L.P.,
120,585 shares held by
Summit VI Advisors Fund, L.P. and 98,065 shares held by
Summit Investors VI, L.P. Summit Partners, L.P. is the managing
member of Summit Partners VI (GP), LLC, which is the general
partner of Summit Partners VI (GP), L.P., which is the general
partner of each of Summit Ventures VI-A, L.P., Summit Ventures
VI-B, L.P., Summit VI Entrepreneurs Fund, L.P., Summit VI
Advisors Fund, L.P., and Summit Investors VI, L.P. Summit
Partners, L.P., through a three-person investment committee
currently composed of Walter G. Kortschak, Martin J. Mannion and
Gregory M. Avis, has voting and dispositive authority over the
shares held by each of these entities and therefore beneficially
owns such shares. Decisions of the investment committee are made
by a majority vote of its members and, as a result, no single
member of the investment committee has voting or dispositive
authority over the shares. Gregory M. Avis, John R. Carroll,
Peter Y. Chung, Scott C. Collins, Bruce R. Evans, Charles J.
Fitzgerald, Walter G. Kortschak, Martin J. Mannion, Kevin P.
Mohan, Thomas S. Roberts, E. Roe Stamps, Joseph F. Trustey,
Stephen G. Woodsum, Harrison B. Miller, Craig D, Frances and
Christopher J. Dean are the members of Summit Master Company,
LLC, which is the general partner of Summit Partners, L.P., and
each disclaims beneficial ownership of the shares held by Summit
Partners. The address for each of these entities is
222 Berkeley Street, 18th Floor, Boston, MA02116.
Entities affiliated with Summit Partners hold private equity
investments in one or more broker-dealers, and as a result
Summit Partners is an affiliate of a broker-dealer. However,
Summit Partners acquired the securities to be sold in this
offering in the ordinary course of business for investment for
its own account and not as a nominee or agent and, at the time
of that purchase, had no contract, undertaking, agreement,
understanding or arrangement, directly or indirectly, with any
person to sell, transfer, distribute or grant participations to
such person or to any third person with respect to those
securities.
(3)
The address for Raredomains.com, LLC is 8800 Saunders Lane,
Bethesda, Maryland, 20817.
(4)
Includes 73,013 shares subject to options that are
exercisable, and to restricted stock unit awards that vest,
within 60 days of September 30, 2007.
(5)
Includes 73,013 shares subject to options that are
exercisable, and to restricted stock unit awards that vest,
within 60 days of September 30, 2007.
(6)
Consists of 711,419 shares subject to options that are
exercisable, and to restricted stock unit awards that vest,
within 60 days of September 30, 2007.
(7)
Consists of 137,231 shares subject to options that are
exercisable within 60 days of September 30, 2007.
(8)
Consists of 720,005 shares subject to options that are
exercisable, and to restricted stock unit awards that vest,
within 60 days of September 30, 2007.
(9)
Consists of 119,043 shares subject to options that are
exercisable, and to restricted stock unit awards that vest,
within 60 days of September 30, 2007.
(10)
Consists of 209,516 shares subject to options that are
exercisable within 60 days of September 30, 2007.
(11)
Includes an aggregate of 2,208,366 shares subject to
options that are exercisable, and to restricted stock unit
awards that vest, within 60 days of September 30,2007, held by 10 executive officers and directors.
(12)
If the underwriters’ over-allotment option is exercised in
full, a portion of the additional shares sold would be allocated
among the selling stockholders as follows:
Selling
Shares Subject to the
Stockholder
Over-allotment Option
If the underwriters’ over-allotment option is exercised in
part, the additional shares sold would be allocated pro rata
based upon the share amounts set forth in the preceding table.
Upon completion of this offering, our authorized capital stock
will consist of 200,000,000 shares of common stock,
$.001 par value per share, and 5,000,000 shares of
undesignated preferred stock, $.001 par value per share.
The following description of our capital stock is intended as a
summary only and is qualified in its entirety by reference to
our amended and restated certificate of incorporation and
amended and restated by-laws to be in effect at the closing of
this offering, which are filed as exhibits to the registration
statement, of which this prospectus forms a part, and to the
applicable provisions of the Delaware General Corporation Law.
We refer in this section to our amended and restated certificate
of incorporation as our certificate of incorporation, and we
refer to our amended and restated by-laws as our by-laws.
As of September 30, 2007, we had 205,071 shares of our
common stock outstanding held by 9 stockholders of record and
5,080,000 shares of our convertible redeemable preferred
stock outstanding held by 11 stockholders of record. Upon the
completion of this offering, all shares of our currently
outstanding convertible redeemable preferred stock will be
converted into an aggregate of 25,400,000 shares of common
stock.
Common
Stock
As of September 30, 2007, there were 25,605,071 shares
of our common stock outstanding and held of record by
approximately 20 stockholders, assuming conversion of all
outstanding shares of convertible redeemable preferred stock.
Holders of our common stock are entitled to one vote for each
share of common stock held of record for the election of
directors and on all matters submitted to a vote of
stockholders. Holders of our common stock are entitled to
receive dividends ratably, if any, as may be declared by our
board of directors out of legally available funds, subject to
any preferential dividend rights of any preferred stock then
outstanding. Upon our dissolution, liquidation or winding up,
holders of our common stock are entitled to share ratably in our
net assets legally available after the payment of all our debts
and other liabilities, subject to the preferential rights of any
preferred stock then outstanding. Holders of our common stock
have no preemptive, subscription, redemption or conversion
rights. The rights, preferences and privileges of holders of
common stock are subject to, and may be adversely affected by,
the rights of the holders of shares of any series of preferred
stock that we may designate and issue in the future. Except as
described below in “Certain Anti-Takeover Provisions of Our
Certificate of Incorporation and By-Laws,” a majority vote
of common stockholders is generally required to take action
under our certificate of incorporation and by-laws.
Preferred
Stock
Upon completion of this offering, our board of directors will be
authorized, without action by the stockholders, to designate and
issue up to 5,000,000 shares of preferred stock in one or
more series. Our board of directors can fix the rights,
preferences and privileges of the shares of each series and any
of its qualifications, limitations or restrictions. Our board of
directors may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the
voting power or other rights of the holders of common stock. The
issuance of preferred stock, while providing flexibility in
connection with possible future financings and acquisitions and
other corporate purposes could, under certain circumstances,
have the effect of delaying, deferring or preventing a change in
control and could harm the market price of our common stock.
Our board of directors will make any determination to issue such
shares based on its judgment as to our best interests and the
best interests of our stockholders. We have no current plans to
issue any shares of preferred stock.
As of September 30, 2007, we had outstanding options to
purchase 3,224,668 shares of our common stock and
restricted stock units in respect of 2,616,462 shares of
our common stock under our 2005 Equity Incentive Plan, 2,387,342
of which were vested.
Warrants
As of September 30, 2007, a warrant to purchase a total of
(i) 120,000 shares of our Series A preferred
stock, which are convertible into 600,000 shares of our
common stock, were outstanding with an exercise price of $10.00
per share of our Series A convertible redeemable preferred
stock (or $2.00 per share of our common stock) and
(ii) 43,750 shares of our common stock were
outstanding with an exercise price of $1.00. The Series A
convertible redeemable preferred stock warrant automatically
converts to a common stock warrant upon the closing of an
initial public offering and expires on the second anniversary of
the effective date of this offering. The common stock warrant
expires on July 28, 2011.
Registration
Rights
In February, 2005, we entered into the Investor Rights Agreement
with the holders of all series our of our convertible redeemable
preferred stock, which is filed as an exhibit to this
registration statement, of which this prospectus is a part. The
holders of an aggregate of 25,400,000 of our outstanding shares
of common stock have the following registration rights pursuant
to the Investor Rights Agreement with respect to those shares:
Demand Registration Rights. At any time after
the date that is six months following the effective date of this
offering, subject to certain exceptions, the holders our then
outstanding registrable securities, have the right to demand
that we file a registration statement covering the offering and
sale of their shares of our common stock that are subject to the
registration rights agreement. We are not obligated to file a
registration statement except upon the request of the holders of
more than seventy percent (70%) of registrable securities.
Form S-3
Registration Rights. If we are eligible to file a
registration statement on
Form S-3,
holders of registrable securities anticipated to have an
aggregate sale price (net of underwriting discounts and
commissions, if any) in excess of $1,000,000 shall have the
right, to request registration on
Form S-3
of the sale of the registrable securities held by the requesting
holder. We are not obligated to file a registration on
Form S-3
on more than one occasion in any six month period.
We have the ability to delay the filing of a registration
statement under specified conditions, such as for a period of
time following the effective date of a prior registration
statement, or if we are in possession of material nonpublic
information and our board of directors deems it advisable not to
disclose such information. Such postponements cannot exceed
30 days during any twelve month period.
Piggyback Registration Rights. All parties to
the registration rights agreement have piggyback registration
rights. Under these provisions, if we register any securities
for public sale these stockholders will have the right to
include their shares in the registration statement, subject to
customary exceptions. The underwriters of any underwritten
offering will have the right to limit the number of shares
having registration rights to be included in the registration
statement.
Expenses of Registration. We will pay all
registration expenses, other than underwriting discounts and
commissions, related to any demand or piggyback registration;
provided, however, that we are not obligated to pay registration
expenses for more than an aggregate of three demand or piggyback
registrations.
Indemnification. The registration rights
agreement contains customary cross-indemnification provisions,
under which we are obligated to indemnify the selling
stockholders in the event of material misstatements or omissions
in the registration statement attributable to us, and they are
obligated to indemnify us for material misstatements or
omissions attributable to them.
Expiration of Registration Rights. The
registration rights granted under the registration rights
agreement shall expire on the fifth anniversary of the effective
date of this offering.
Upon completion of this offering, our certificate of
incorporation and by-laws will include a number of provisions
that may have the effect of delaying, deferring or preventing
another party from acquiring control of us and encouraging
persons considering unsolicited tender offers or other
unilateral takeover proposals to negotiate with our board of
directors rather than pursue non-negotiated takeover attempts.
These provisions include the items described below.
Board Composition and Filling Vacancies. In
accordance with our certificate of incorporation, our board is
divided into three classes serving staggered three-year terms,
with one class being elected each year. Our certificate of
incorporation also provides that directors may be removed only
for cause and then only by the affirmative vote of the holders
of 75% or more of the shares then entitled to vote at an
election of directors. Furthermore, any vacancy on our board of
directors, however occurring, including a vacancy resulting from
an increase in the size of our board, may only be filled by the
affirmative vote of a majority of our directors then in office
even if less than a quorum.
No Written Consent of Stockholders. Our
certificate of incorporation provides that all stockholder
actions are required to be taken by a vote of the stockholders
at an annual or special meeting, and that stockholders may not
take any action by written consent in lieu of a meeting. This
limit may lengthen the amount of time required to take
stockholder actions and would prevent the amendment of our
by-laws or removal of directors by our stockholders without
holding a meeting of stockholders.
Meetings of Stockholders. Our certificate of
incorporation and by-laws provide that only a majority of the
members of our board of directors then in office may call
special meetings of stockholders and only those matters set
forth in the notice of the special meeting may be considered or
acted upon at a special meeting of stockholders. Our by-laws
limit the business that may be conducted at an annual meeting of
stockholders to those matters properly brought before the
meeting.
Advance Notice Requirements. Our by-laws
establish advance notice procedures with regard to stockholder
proposals relating to the nomination of candidates for election
as directors or new business to be brought before meetings of
our stockholders. These procedures provide that notice of
stockholder proposals must be timely given in writing to our
corporate secretary prior to the meeting at which the action is
to be taken. Generally, to be timely, notice must be received at
our principal executive offices not less than 90 days prior
to the first anniversary date of the annual meeting for the
preceding year. The notice must contain certain information
specified in the by-laws.
Amendment to Certificate of Incorporation and
By-Laws. As required by the Delaware General
Corporation Law, any amendment of our certificate of
incorporation must first be approved by a majority of our board
of directors, and if required by law or our certificate of
incorporation, must thereafter be approved by a majority of the
outstanding shares entitled to vote on the amendment and a
majority of the outstanding shares of each class entitled to
vote thereon as a class, except that the amendment of the
provisions relating to stockholder action, board composition,
limitation of liability and the amendment of our certificate of
incorporation must be approved by not less than 75% of the
outstanding shares entitled to vote on the amendment, and not
less than 75% of the outstanding shares of each class entitled
to vote thereon as a class. Our by-laws may be amended by the
affirmative vote of a majority of the directors then in office,
subject to any limitations set forth in the by-laws; and may
also be amended by the affirmative vote of at least 75% of the
outstanding shares entitled to vote on the amendment, or, if our
board of directors recommends that the stockholders approve the
amendment, by the affirmative vote of the majority of the
outstanding shares entitled to vote on the amendment, in each
case voting together as a single class.
Undesignated Preferred Stock. Our certificate
of incorporation provides for 5,000,000 authorized shares of
preferred stock. The existence of authorized but unissued shares
of preferred stock may enable our board of directors to render
more difficult or to discourage an attempt to obtain control of
us by means of a merger, tender offer, proxy contest or
otherwise. For example, if in the due exercise of its fiduciary
obligations, our board of directors were to determine that a
takeover proposal is not in the best interests of our
stockholders, our board of directors could cause shares of
preferred stock to be issued without stockholder approval in one
or more private offerings or other transactions that might
dilute the voting or other rights of the proposed acquirer or
insurgent stockholder or stockholder group. In this regard, our
certificate of incorporation grants our board of directors with
broad power to establish the rights and preferences of
authorized and unissued shares of preferred stock. The issuance
of shares of preferred stock could decrease the amount of
earnings and assets available for distribution to holders of
shares of common stock. The issuance may also adversely affect
the rights and powers, including voting rights, of these holders
and may have the effect of delaying, deterring or preventing a
change in control of us.
Section 203
of the Delaware General Corporation Law
Upon completion of this offering, we will be subject to the
provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a
“business combination” with an “interested
stockholder” for a three-year period following the time
that this stockholder becomes an interested stockholder, unless
the business combination is approved in a prescribed manner. A
“business combination” includes, among other things, a
merger, asset or stock sale or other transaction resulting in a
financial benefit to the interested stockholder. An
“interested stockholder” is a person who, together
with affiliates and associates, owns, or did own within three
years prior to the determination of interested stockholder
status, 15% or more of the corporation’s voting stock.
Under Section 203, a business combination between a
corporation and an interested stockholder is prohibited unless
it satisfies one of the following conditions:
•
before the stockholder became interested, our board of directors
approved either the business combination or the transaction
which resulted in the stockholder becoming an interested
stockholder;
•
upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the voting stock
outstanding, shares owned by persons who are directors and also
officers, and employee stock plans; or
•
at or after the time the stockholder became interested, the
business combination was approved by our board of directors and
authorized at an annual or special meeting of the stockholders
by the affirmative vote of at least two-thirds of the
outstanding voting stock which is not owned by the interested
stockholder.
Section 203 defines a business combination to include:
•
any merger or consolidation involving the corporation and the
interested stockholder;
•
any sale, transfer, pledge or other disposition involving the
interested stockholder of 10% or more of the assets of the
corporation;
•
subject to exceptions, any transaction that results in the
issuance of transfer by the corporation of any stock of the
corporation to the interested stockholder;
•
subject to exceptions, any transaction involving the corporation
that has the effect of increasing the proportionate share of the
stock of any class or series of the corporation beneficially
owned by the interest stockholder; and
•
the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
NASDAQ
Global Market Listing
We are applying to have our common stock approved for quotation
on the NASDAQ Global Market under the trading symbol
“NAME.”
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock
is .
Prior to this offering, there has been no market for our common
stock. Future sales of substantial amounts of our common stock
in the public market could adversely affect market prices
prevailing from time to time. Furthermore, because only a
limited number of shares will be available for sale shortly
after this offering due to existing contractual and legal
restrictions on resale as described below, there may be sales of
substantial amounts of our common stock in the public market
after the restrictions lapse. This may adversely affect the
prevailing market price for our stock and our ability to raise
equity capital in the future.
Upon completion of this offering, we will
have shares
of common stock outstanding, assuming no exercise of any
outstanding options or warrants. Of these shares,
the shares
sold in this offering will be freely transferable without
restriction or registration under the Securities Act, except for
any shares purchased by one of our existing
“affiliates,” as that term is defined in Rule 144
under the Securities Act. The
remaining shares
of common stock are “restricted shares” as defined in
Rule 144. Restricted shares may be sold in the public
market only if registered or if they qualify for an exemption
from registration under Rules 144 or 701 of the Securities
Act, as described below. As a result of the contractual
180-day
lock-up
period described below and the provisions of Rules 144 and
701, these shares will be available for sale into the public
market as follows:
Days after date of
Shares eligible
this prospectus
for sale
Comment
Upon effectiveness
Shares sold in the offering
Upon effectiveness
Freely tradable shares saleable under Rule 144(k) that are
not subject to the lock-up
90 Days
Shares saleable under Rules 144 and 701 that are not subject to
a lock-up
180 Days
Lock-up released; shares saleable under Rules 144 and 701
Thereafter
Restricted securities held for one year or less
Rule 144
In general, under Rule 144 as currently in effect,
beginning 90 days after the date of this prospectus, a
person who has beneficially owned shares of our common stock for
at least one year, including an affiliate, would be entitled to
sell in “broker’s transactions” or to market
makers, within any three-month period, a number of shares that
does not exceed the greater of:
•
1% of the number of shares of our common stock then outstanding,
which will equal
approximately shares
immediately after this offering; or
•
the average weekly trading volume in our common stock on the
NASDAQ Global Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to such
sale.
Sales under Rule 144 are generally subject to the
availability of current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been
an affiliate of ours at any time during the three months
preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, is entitled to sell
such shares without having to comply with the manner of sale,
public information, volume limitation or notice filing
provisions of Rule 144. Therefore, unless otherwise
restricted, “144(k) shares” may be sold immediately
upon the completion of this offering.
In general, under Rule 701, any of our employees,
directors, officers, consultants or advisors who purchases
shares from us in connection with a compensatory stock or option
plan or other written agreement before the effective date of
this offering is entitled to sell such shares 90 days after
the effective date of this offering in reliance on
Rule 144, without having to comply with the holding period
and notice filing requirements of Rule 144 and, in the case
of non-affiliates, without having to comply with the public
information, volume limitation or notice filing provisions of
Rule 144.
The SEC has indicated that Rule 701 will apply to typical
stock options granted by an issuer before it becomes subject to
the reporting requirements of the Securities Exchange Act of
1934, as amended, along with the shares acquired upon exercise
of such options, including exercises after the date of this
prospectus.
Registration
Rights
Upon completion of this offering, the holders of at least
25,400,000 shares of our common stock have certain rights
with respect to the registration of such shares under the
Securities Act. See “Description of Capital
Stock — Registration Rights.” Upon the
effectiveness of a registration statement covering these shares,
the shares would become freely tradable.
Employee
Benefit Plans
As of September 30, 2007, there were a total of
3,224,668 shares of our common stock subject to outstanding
options and restricted stock units in respect of
2,616,462 shares of our common stock under our 2005 Option
Plan, approximately 2,387,342 of which were vested and
exercisable. Immediately after the completion of this offering,
we intend to file registration statements on
Form S-8
under the Securities Act to register all of the shares of common
stock issued or reserved for future issuance under our 2005
Option Plan. On the date which is 180 days after the
effective date of this offering, a total of
approximately shares
of common stock subject to outstanding options will be vested
and exercisable. After the effective date of the registration
statement on
Form S-8,
shares purchased under our 2005 Option Plan generally would be
available for resale in the public market.
Lock-Up
Agreements
The holders of substantially all of our currently outstanding
capital stock have agreed, with certain limited exceptions,
that, without the prior written consent of Credit Suisse
Securities (USA) LLC on behalf of the underwriters, they will
not, during the period ending 180 days after the date of
this prospectus:
•
offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of our common stock or
securities convertible into or exchangeable or exercisable for
any shares of our common stock;
•
enter into any transaction that would have the same
effect; or
•
enter into any swap, hedge or other arrangement that transfers,
in whole or in part, any of the economic consequences of
ownership of our common stock
whether any transaction described above is to be settled by
delivery of shares of our common stock or other securities, in
cash or otherwise. Credit Suisse Securities (USA) LLC does not
have any pre-established conditions to waiving the terms of the
lock-up
agreements. Any determination to release any shares subject to
the lock-up
agreements would be based on a number of factors at the time of
determination, including but not necessarily limited to the
market price of the common stock, the liquidity of the trading
market for the common stock, general market conditions, the
number of shares proposed to be sold and the timing, purpose and
terms of the proposed sale.
Under the terms and subject to the conditions contained in an
underwriting agreement
dated ,
we and the selling stockholders have agreed to sell to the
underwriters named below, for whom Credit Suisse Securities
(USA) LLC is acting as representative, the following respective
numbers of shares of common stock:
Number
Underwriter
of Shares
Credit Suisse Securities (USA) LLC
Jefferies & Company, Inc.
Banc of America Securities LLC
RBC Capital Markets Corporation
Total
The underwriting agreement provides that the underwriters are
obligated to purchase all the shares of common stock in the
offering if any are purchased, other than those shares covered
by the over-allotment option described below. The underwriting
agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be
increased or the offering may be terminated.
The selling stockholders have granted to the underwriters a
30-day
option to purchase on a pro rata basis up
to
additional outstanding shares from the selling stockholders at
the initial public offering price less the underwriting
discounts and commissions. The option may be exercised only to
cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock
initially at the public offering price on the cover page of this
prospectus and to selling group members at that price less a
selling concession of $ per share.
The underwriters and selling group members may allow a discount
of $ per share on sales to other
broker/dealers. After the initial public offering, the
representative may change the public offering price and
concession and discount to broker/dealers.
The following table summarizes the underwriting discounts and
commissions and estimated expenses that we and the selling
stockholders will pay:
Per Share
Total
Without
With
Without
With
Over-allotment
Over-allotment
Over-allotment
Over-allotment
Underwriting Discounts and Commissions paid by us
$
$
$
$
Expenses paid by us
Underwriting Discounts and Commission paid by selling
stockholders
$
$
$
$
Expenses paid by the selling stockholders
The representative has informed us that it does not expect sales
to accounts over which the underwriters have discretionary
authority to exceed 5% of the shares of common stock being
offered.
We have agreed that we will not offer, sell, issue, contract to
sell, pledge or otherwise dispose of, directly or indirectly, or
file with the SEC a registration statement under the Securities
Act of 1933, or the Securities Act, relating to, any shares of
our common stock or securities convertible into or exchangeable
or exercisable for any shares of our common stock, or publicly
disclose the intention to make any offer, sale, issuance,
contract, pledge, disposition or filing, without the prior
written consent of Credit Suisse Securities (USA) LLC for a
period of 180 days after the date of this prospectus,
subject to mutually agreed exceptions.
The holders of substantially all of our currently outstanding
capital stock, have agreed that they will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or
indirectly, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares
of our common stock, enter into a transaction that would have
the same effect, or enter into any swap, hedge or other
arrangement that transfers, in whole or in part, any of the
economic consequences of ownership of our common stock, whether
any of these transactions are to be settled by delivery of our
common stock or other securities, in cash or otherwise, or
publicly disclose the intention to make any offer, sale, pledge
or disposition, or to enter into any transaction, swap, hedge or
other arrangement, without, in each case, the prior written
consent of Credit Suisse Securities (USA) LLC for a period
of 180 days after the date of this prospectus.
We and the selling stockholders have agreed to indemnify the
underwriters against liabilities under the Securities Act, or
contribute to payments that the underwriters may be required to
make in that respect.
We will apply to list the shares of our common stock on The
Nasdaq Global Market under the symbol “NAME.”
Prior to this offering, there has been no public market for the
common stock. The initial public offering price will be
determined by negotiations between the underwriters and our
board of directors. Among the factors to be considered in
determining the initial public offering price will be our future
prospects and those of our industry in general, our sales,
earnings and certain other financial operating information in
recent periods, the price-earnings ratios, price-sales ratios,
market prices of securities and certain financial and operating
information of companies engaged in activities similar to ours,
the ability of our management, the general conditions of the
securities markets at the time of the offering and the
information in this prospectus and otherwise available to the
underwriters.
We offer no assurances that the initial public offering price
will correspond to the price at which the common stock will
trade in the public market subsequent to this offering or that
an active trading market for the common stock will develop and
continue after the offering.
The underwriters and their affiliates have provided and may, in
the future, provide certain commercial banking, financial
advisory and investment banking services for us in the ordinary
course of business for which they have received and would
receive customary fees. Bank of America Securities LLC acted as
sole lead arranger and book manager under our credit facility
and affiliates of Banc of America Securities LLC and
Jefferies & Company, Inc. and an affiliate of RBC
Capital Markets Corporation have acted as lenders under our
credit facility.
In connection with the offering the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate
covering transactions and penalty bids in accordance with
Regulation M under the Securities Exchange Act of 1934.
•
Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
•
Over-allotment involves sales by the underwriters of shares in
excess of the number of shares the underwriters are obligated to
purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short
position. In a covered short position, the number of shares
over-allotted by the underwriters is not greater than the number
of shares that they may purchase in the over-allotment option.
In a naked short position, the number of shares involved is
greater than the number of shares in the over-allotment option.
The underwriters may close out any covered short position by
either exercising their over-allotment option
and/or
purchasing shares in the open market.
•
Syndicate covering transactions involve purchases of the common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In
determining the source of shares to close out the short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through
the over-allotment option. If the underwriters sell more shares
than could be covered by the over-allotment option, a naked
short position, the position can only be closed out by buying
shares
in the open market. A naked short position is more likely to be
created if the underwriters are concerned that there could be
downward pressure on the price of the shares in the open market
after pricing that could adversely affect investors who purchase
in the offering.
•
Penalty bids permit the representative to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common stock or preventing or slowing a
decline in the market price of the common stock. As a result,
the price of our common stock may be higher than the price that
might otherwise exist in the open market. These transactions may
be effected on The Nasdaq Global Market or otherwise and, if
commenced, may be discontinued at any time.
A prospectus in electronic format may be made available on the
websites maintained by one or more of the underwriters, or
selling group members, if any, participating in this offering
and one or more of the underwriters participating in this
offering may distribute prospectuses electronically. The
representative may agree to allocate a number of shares to
underwriters and selling group members for sale to their online
brokerage account holders. Internet distributions will be
allocated by the underwriters and selling group members that
will make Internet distributions on the same basis as other
allocations.
European
Economic Area
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a Relevant
Member State), each underwriter represents and agrees that with
effect from and including the date on which the Prospectus
Directive is implemented in that Relevant Member State (the
Relevant Implementation Date) it has not made and will not make
an offer of our common stock to the public in that Relevant
Member State prior to the publication of a prospectus in
relation to our common stock which has been approved by the
competent authority in that Relevant Member State or, where
appropriate, approved in another Relevant Member State and
notified to the competent authority in that Relevant Member
State, all in accordance with the Prospectus Directive, except
that it may, with effect from and including the Relevant
Implementation Date, make an offer of our common stock to the
public in that Relevant Member State at any time,
(a)
to legal entities which are authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities;
(b)
to any legal entity which has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than €43,000,000 and
(3) an annual net turnover of more than €50,000,000,
as shown in its last annual or consolidated accounts;
(c)
to fewer than 100 natural or legal persons (other than qualified
investors as defined in the Prospectus Directive) subject to
obtaining the prior consent of the manager for any such
offer; or
(d)
in any other circumstances which do not require the publication
by the Issuer of a prospectus pursuant to Article 3 of the
Prospectus Directive.
For the purposes of this provision, the expression an
“offer of our common stock to the public” in relation
to any of our common stock in any Relevant Member State means
the communication in any form and by any means of sufficient
information on the terms of the offer and our common stock to be
offered so as to enable an investor to decide to purchase or
subscribe any of our common stock, as the same may be varied in
that Member State by any measure implementing the Prospectus
Directive in that Member State and the expression Prospectus
Directive means Directive 2003/71/EC and includes any relevant
implementing measure in each Relevant Member State.
Each of the underwriters severally represents, warrants and
agrees as follows:
(a)
it has only communicated or caused to be communicated and will
only communicate or cause to be communicated an invitation or
inducement to engage in investment activity (within the meaning
of section 21 of the Financial Services and Markets Act
2000, or the FSMA) to persons who have professional experience
in matters relating to investments falling with
Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005 or in circumstances in
which section 21 of the FSMA does not apply to the
company; and
(b)
it has complied with, and will comply with all applicable
provisions of the FSMA with respect to anything done by it in
relation to the common stock in, from or otherwise involving the
United Kingdom.
The distribution of the common stock in Canada is being made
only on a private placement basis exempt from the requirement
that we and the selling stockholders prepare and file a
prospectus with the securities regulatory authorities in each
province where trades of the common stock are made. Any resale
of the common stock in Canada must be made under applicable
securities laws which will vary depending on the relevant
jurisdiction, and which may require resales to be made under
available statutory exemptions or under a discretionary
exemption granted by the applicable Canadian securities
regulatory authority. Purchasers are advised to seek legal
advice prior to any resale of the common stock.
Representations
of Purchasers
By purchasing common stock in Canada and accepting a purchase
confirmation a purchaser is representing to us, the selling
stockholders and the dealer from whom the purchase confirmation
is received that:
•
the purchaser is entitled under applicable provincial securities
laws to purchase the common stock without the benefit of a
prospectus qualified under those securities laws,
•
where required by law, that the purchaser is purchasing as
principal and not as agent,
•
the purchaser has reviewed the text above under Resale
Restrictions,
•
the purchaser acknowledges and consents to the provision of
specified information concerning its purchase of the common
stock to the regulatory authority that by law is entitled to
collect the information.
Rights of
Action — Ontario Purchasers Only
Under Ontario securities legislation, certain purchasers who
purchases a security offered by this prospectus during the
period of distribution will have a statutory right of action for
damages, or while still the owner of the common stock, for
rescission against us and the selling stockholders in the event
that this prospectus contains a misrepresentation without regard
to whether the purchaser relied on the misrepresentation. The
right of action for damages is exercisable not later than the
earlier of 180 days from the date the purchaser first had
knowledge of the facts giving rise to the cause of action and
three years from the date on which payment is made for the
common stock. The right of action for rescission is exercisable
not later than 180 days from the date on which payment is
made for the common stock. If a purchaser elects to exercise the
right of action for rescission, the purchaser will have no right
of action for damages against us or the selling stockholders. In
no case will the amount recoverable in any action exceed the
price at which the common stock were offered to the purchaser
and if the purchaser is shown to have purchased the securities
with knowledge of the misrepresentation, we and the selling
stockholders, will have no liability. In the case of an action
for damages, we and the selling stockholders, will not be liable
for all or any portion of the damages that are proven to not
represent the depreciation in value of the common stock as a
result of the misrepresentation relied upon. These rights are in
addition to, and without derogation from, any other rights or
remedies available at law to an Ontario purchaser. The foregoing
is a summary of the rights available to an Ontario purchaser.
Ontario purchasers should refer to the complete text of the
relevant statutory provisions.
Enforcement
of Legal Rights
All of our directors and officers as well as the experts named
herein and the selling stockholders may be located outside of
Canada and, as a result, it may not be possible for Canadian
purchasers to effect service of process within Canada upon us or
those persons. All or a substantial portion of our assets and
the assets of those persons may be located outside of Canada
and, as a result, it may not be possible to satisfy a judgment
against us or those persons in Canada or to enforce a judgment
obtained in Canadian courts against us or those persons outside
of Canada.
Canadian purchasers of common stock should consult their own
legal and tax advisors with respect to the tax consequences of
an investment in the common stock in their particular
circumstances and about the eligibility of the common stock for
investment by the purchaser under relevant Canadian legislation.
LEGAL
MATTERS
Selected legal matters with respect to this offering and the
validity of the common stock offered by this prospectus will be
passed upon for us by Goodwin Procter LLP, Boston,
Massachusetts. Selected legal matters in connection with this
offering will be passed upon for the underwriters by
Shearman & Sterling LLP, New York, New York.
EXPERTS
The consolidated financial statements at December 31, 2005
and 2006 and for the period from February 22, 2005 to
December 31, 2005 and the year ended December 31, 2006
of NameMedia, Inc. (Successor) and for the year ended
December 31, 2004 and period from January 1, 2005 to
February 21, 2005 of Rarenames.com LLC and Rare Names LLC
(Predecessor), appearing in this Prospectus have been audited by
Ernst & Young LLP, independent registered public
accounting firm, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report
given on the authority of such firm as experts in accounting and
auditing.
The financial statements of Smartname, LLC as of
December 31, 2005 and for the year ended December 31,2005, included in this prospectus have been so included in
reliance on the report of Margolis & Company P.C.,
independent public accounting firm, on the authority of said
firm as experts in accounting and auditing.
We have filed with the SEC a registration statement on
Form S-1
(File
Number 333- )
under the Securities Act with respect to the shares of common
stock we and the selling stockholders are offering by this
prospectus. This prospectus does not contain all of the
information included in the registration statement. For further
information pertaining to us and our common stock, you should
refer to the registration statement and to its exhibits.
Whenever we make reference in this prospectus to any of our
contracts, agreements or other documents, the references are not
necessarily complete, and you should refer to the exhibits
attached to the registration statement for copies of the actual
contract, agreement or other document.
Upon the closing of the offering, we will be subject to the
informational requirements of the Securities Exchange Act of
1934 and will file annual, quarterly and current reports, proxy
statements and other information with the SEC. You can read our
SEC filings, including the registration statement, over the
Internet at the SEC’s website at www.sec.gov. You may also
read and copy any document we file with the SEC at its public
reference facility at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549.
You may also obtain copies of the documents at prescribed rates
by writing to the Public Reference Section of the SEC at
100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at
1-800-SEC(732)-0330
for further information on the operation of the public reference
facilities.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of
Directors and Stockholders
NameMedia, Inc.
We have audited the accompanying consolidated balance sheets as
of December 31, 2005 and 2006 of NameMedia, Inc.
(Successor) and the related combined statements of income,
members equity and cash flows of Raredomains.com LLC and Rare
Names LLC (Predecessor) for the year ended December 31,2004 and the period from January 1, 2005 through
February 21, 2005 (Predecessor periods), and consolidated
statements of income, convertible redeemable preferred stock and
stockholders’ equity, and cash flows for the period from
February 22, 2005 (inception) through December 31,2005, and the year ended December 31, 2006 (Successor
periods). These financial statements are the responsibility of
the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position at December 31, 2005 and 2006 of
NameMedia, Inc., and the combined or consolidated results of the
Predecessor’s and Successor’s operations and cash
flows for the periods ended December 31, 2004,
February 21, 2005 and December 31, 2005 and 2006 in
conformity with U.S. generally accepted accounting
principles.
As discussed in Note 2 of the notes to the consolidated
financial statements, on January 1, 2006, the Company
adopted the provisions of Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment which
requires the Company to recognize expense related to the
fair-value of share-based compensation awards.
As discussed in Note 7 of the notes to the consolidated
financial statements, on January 1, 2006, the Company
adopted the provisions of FASB Staff Position
FAS 150-5:
Issuer’s Accounting under FASB Statement No. 150
for Freestanding Warrants and Other Similar Instruments on
Shares That Are Redeemable which requires the Company to
recognize the fair value of outstanding stock purchase warrants.
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS’ EQUITY
Current portion of note payable
$
5,146
$
—
$
105,000
$
3,375
Accounts payable
1,330
2,007
1,796
1,796
Accrued affiliate payments
—
5,305
3,942
3,942
Accrued interest payable
—
2,861
3,020
—
Deferred revenue
—
—
114
114
Accrued expenses
1,524
3,846
4,308
4,308
Income taxes payable
1,733
—
—
—
Total current liabilities
9,733
14,019
118,180
13,535
Note payable, net of current portion
24,233
105,000
—
86,625
Deferred tax liabilities
1,145
2,394
2,097
2,097
Series A convertible redeemable preferred stock warrant
—
3,180
4,105
—
Total liabilities
35,111
124,593
124,382
102,257
Series A convertible redeemable preferred stock,
4,600,000 shares authorized, 4,310,000, 4,330,000,
4,330,000 and 0 shares issued and outstanding (at
liquidation value) at December 31, 2005 and 2006 and
September 30, 2007 and September 30, 2007 pro forma,
respectively
46,045
49,707
52,305
—
Series Z convertible redeemable preferred stock,
750,000 shares authorized, 750,000 shares issued and
outstanding (at liquidation value) at December 31, 2005 and
2006 and September 30, 2007 and 0 shares issued and
outstanding September 30, 2007 pro forma
8,013
8,613
9,063
—
Series A convertible redeemable preferred stock warrant
COMBINED STATEMENTS OF MEMBERS’ INTEREST AND CONSOLIDATED
STATEMENTS OF
CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’
EQUITY
(Dollars in thousands)
COMBINED STATEMENTS OF MEMBERS’ INTEREST AND
CONSOLIDATED STATEMENTS OF
CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’
EQUITY (CONTINUED)
(Dollars in thousands)
NameMedia, Inc. (formerly BuyDomains Holdings, Inc. and
YesDirect, Inc.) (the Company or the Successor), a Delaware
Corporation, acquired the assets and certain liabilities of
Raredomains.com, LLC and Rare Names, LLC (Predecessor) on
February 22, 2005 in exchange for 750,000 shares of
Series Z convertible redeemable preferred stock and $72,500
in cash. NameMedia, Inc. was formed for the purpose of buying
the assets of Raredomains.com, LLC and Rare Names, LLC. The
Predecessor entities were formed under the Maryland Limited
Liability Act. BuyDomains Holdings, Inc. changed its name to
YesDirect, Inc. on November 4, 2005, and YesDirect, Inc.
changed its name to NameMedia, Inc. on June 14, 2006. The
Company’s primary businesses and main sources of revenue
include the sale of domain names and online advertising. The
Company also operates several Internet websites and offers
business services, including domain name registration and
hosting services.
2.
Summary
of Significant Accounting Policies
Principles
of Consolidation
The accompanying consolidated financial statements for the
period from February 22, 2005 (inception) through
December 31, 2005, for the year ended December 31,2006 and for the nine months ended September 30, 2006 and
2007 include the accounts of NameMedia, Inc. and its wholly
owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Principles
of Combination
The accompanying combined financial statements, for the year
ended December 31, 2004 and the period from January 1,2005 to February 21, 2005 includes the accounts of
Raredomains.com, LLC and Rare Names, LLC. The Predecessor
companies had substantially similar member ownership and
interrelated operations. Accordingly, combining Raredomains.com,
LLC and Rare Names, LLC into a single combined financial
statement presentation is considered most meaningful. All
significant intercompany accounts and transactions have been
eliminated.
Unaudited
Interim Financial Information
The accompanying consolidated balance sheet as of
September 30, 2007, the consolidated statements of
operations and cash flows for the nine months ended
September 30, 2006 and 2007, and the consolidated statement
of convertible redeemable preferred stock and stockholders’
equity for the nine months ended September 30, 2007 are
unaudited. The unaudited interim financial statements have been
prepared on the same basis as the annual consolidated financial
statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments,
necessary to state fairly our financial position as of
September 30, 2007 and results of operations and cash flows
for the nine months ended September 30, 2006 and 2007. The
financial data and other information disclosed in these notes to
financial statements as of September 30, 2007 and for the
nine month periods ended September 30, 2006 and 2007 are
unaudited. The results for the nine months ended
September 30, 2007 are not necessarily indicative of the
results to be expected for the year ending December 31,2007 or for any other interim period or for any future year.
Unaudited
Pro Forma Presentation
The unaudited pro forma balance sheet as of September 30,2007 gives effect to (i) the elimination of our convertible
redeemable preferred stock warrant liability of $4,105 upon the
automatic conversion of our Series A convertible redeemable
preferred stock warrant into a common stock warrant,
(ii) the automatic
conversion of all outstanding shares of convertible redeemable
preferred stock into an aggregate of 25,400,000 shares of
common stock upon the closing of the proposed offering and
(iii) the refinancing of the $105,000 term loan
(Note 17).
The computation of pro forma net income per share is as follows:
Accretion of Series A convertible redeemable preferred
stock warrant to fair value, net of tax
1,412
921
Interest expense on term loan, net of tax (1)
Pro forma net income
$
$
Weighted-average number of shares outstanding:
Weighted-average number of common shares outstanding:
126,492
191,876
Weighted-average number of preferred shares outstanding, on an
as converted basis:
25,388,056
25,400,000
Common shares to be issued in the proposed offering to repay
$ million of the term loan
Shares used in the computation of basic pro forma net income per
share
Dilutive impact of outstanding common stock equivalents
1,686,376
2,645,060
Shares used in the computation of diluted pro forma net income
per share
Pro forma net income per share:
Basic
$
$
Diluted
$
$
(1)
The term loan requires that the Company use the proceeds of an
initial public offering of equity securities to repay the lesser
of $25 million, or the balance required to bring the
leverage ratio of net indebtedness to Consolidated Adjusted
EBITDA for the most recently completed twelve months to 2.0 or
less.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires the Company’s management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and
Cash Equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less at the date of
purchase to be cash equivalents. Cash and cash equivalents
totaled approximately $9,433, $15,555 and $19,974 at
December 31, 2005 and 2006 and September 30, 2007,
respectively. Cash equivalents consist primarily of money market
funds at December 31, 2005 and 2006 and September 30,2007.
As of December 31, 2006, the Company had approximately
$34,933 in restricted cash consisting of $34,833 in cash
restricted for future acquisitions related to its 2006 debt
refinancing (Note 7) and $100 in restricted cash on
reserve at a credit card authorization agency. As of
December 31, 2005, the Company had $100 in restricted cash
on reserve at a credit card authorization agency. During 2006,
the Company borrowed $105,000 available under its term loan
credit facility. The remaining balance of $34,833 is being held
in escrow at the Company’s financial institution. Included
in cash and cash equivalents at December 31, 2006 was
$5,376 related to the acquisitions of Afternic and Dave’s
Garden that had been released from escrow but not yet paid to
the respective sellers.
At September 30, 2007, the restricted cash balance is
$13,026 consisting of $12,833 in cash restricted for future
acquisitions related to its 2006 debt refinancing (Note 7),
$100 in restricted cash on reserve at a credit and authorization
agency and $93 due to customers for which the Company has acted
as an escrow agent for domain sales. Included in cash and cash
equivalents at September 30, 2007 was $500 related to the
acquisition of Dave’s Garden that been released from escrow
but not yet paid to the seller.
Fair
Value of Financial Instruments
The Company had the following financial instruments as of
December 31, 2005 and 2006 and September 30, 3007:
cash and cash equivalents, restricted cash, accounts receivable,
note payable, and warrants. The carrying value of cash and cash
equivalents, restricted cash and accounts receivable
approximates their fair value based on the liquidity of these
financial instruments or based on their short-term nature. The
carrying value of the note payable, excluding the unamortized
issuance costs, approximate its fair value, given their market
rate of interest. At December 31, 2006 and
September 30, 2007, the carrying value of the warrant to
purchase preferred stock represents its fair value (Note 7).
Concentration
of Credit Risk
Financial instruments that potentially expose the Company to
concentrations of credit risk consist mainly of cash and cash
equivalents, restricted cash and accounts receivable. The
Company maintains its cash and cash equivalents and restricted
cash principally in accredited financial institutions of high
credit standing. Cash and restricted cash in certain accounts
may exceed federally insured limits; however, the Company has
not experienced any losses in such accounts. The Company does
not require collateral. The Company has no off-balance sheet
concentrations of credit risk, such as foreign exchange
contracts or other foreign hedging arrangements. The Company has
not experienced any significant losses related to individual
customers or groups of customers in any particular industry or
area. Accordingly, the Company does not maintain an allowance
for doubtful accounts or a sales return allowance, except if
determined to be necessary for specific customer accounts. The
activity in the allowance for doubtful accounts for the period
December 31, 2006 through September 30, 2007 is as
follows:
One customer accounted for 80% and 91% of accounts receivable at
December 31, 2005 and 2006, respectively, and two customers
accounted for 11% and 58% of accounts receivable, respectively,
at September 30, 2007. No other customer accounted for 10%
or more of our accounts receivable in those periods. For the
year ended December 31, 2004, the period from
January 1, 2005 through February 21, 2005,
the period from February 22, 2005 through December 31,2005, and the year ended December 31, 2006, one customer
accounted for 19%, 23%, 23%, and 44% of the Company’s total
revenue. For the nine months ended September 30, 2007, two
customers accounted for 13% and 25% of the Company’s total
revenue. No other customer accounted for greater than 10% of the
Company’s total revenues in those periods.
Long-Lived
Assets
Long-lived assets consist of property and equipment, goodwill
and other intangible assets. Goodwill and other intangible
assets arise from acquisitions and are recorded in accordance
with Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets. In
accordance with this statement, specifically identified
intangible assets must be recorded as a separate asset from
goodwill if either of the following two criteria is met:
(1) the intangible asset acquired arises from contractual
or other legal rights; (2) the intangible asset is
separable. Accordingly, the intangible assets consist of
specifically identified intangible assets. Goodwill is the
excess of any purchase price over the estimated fair market
value of net tangible assets acquired not allocated to specific
intangible assets.
As required by SFAS No. 142, goodwill and
indefinite-lived intangible assets are not amortized, but are
reviewed annually for impairment or more frequently if
impairment indicators arise. Separable intangible assets that
are not deemed to have an indefinite life are amortized over
their useful lives using the straight-line method over periods
generally ranging from three to five years, and are reviewed for
impairment when events or circumstances suggest that the assets
may not be recoverable under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets.The Company performs its annual test of impairment
of goodwill in the fourth quarter of each year or whenever
events or circumstances suggest that the carrying amount may not
be recoverable. Based on this evaluation, the Company believes
that, as of the balance sheet dates presented, none of the
Company’s goodwill or other long-lived assets were
impaired. Intangible assets consist of developed software,
developed technology, trade names, non-competition agreements
and customer lists arising from the purchase of the business on
February 22, 2005 and from acquisitions subsequent to that
date. Intangibles arising from acquisitions are valued on the
acquisition dates based on a combination of replacement cost,
comparable purchase methodologies and discounted cash flows by
an independent third-party appraiser and are amortized over
periods ranging from three to five years. Intangible
amortization related to developed technology acquired subsequent
to the purchase of the business on February 22, 2005 is
included in cost of revenue on the income statement.
Amortization of website development costs is included in general
and administrative expenses.
The Company categorized the following intangible assets
amortization expense in cost of revenue:
Revenue is recognized in accordance with Staff Accounting
Bulletin (SAB) No. 104, Revenue Recognition, and
Emerging Issues Task Force (EITF) Issue
No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an
Agent. Revenue is recognized only when the price is fixed or
determinable, persuasive evidence of
an arrangement exists, the product is delivered or the services
are performed, and collectibility of the resulting receivable is
reasonably assured. In arrangements where the Company is not the
primary obligor and credit risk is retained by a third-party
distribution partner, the Company recognizes revenue net of the
third party’s share and net of any payments made by the
Company to affiliates in accordance with the guidance of EITF
Issue
No. 99-19.
The Company is party to a license agreement with TierraNet, Inc.
(TierraNet), an accredited domain name registrar company.
Pursuant to the agreement, TierraNet provides domain
registration
and/or Web
hosting services for a fee which is paid directly to TierraNet
by the customer. In return, the Company receives a commission
from TierraNet for each customer transaction. The agreement
automatically renews on a
month-to-month
basis subject to termination by either party following
30 days’ prior written notice.
In October 2003, Raredomains.com, LLC (Predecessor) entered into
an agreement with Overture Services, Inc. (Overture), a provider
of commercial search services on the Internet including
pay-for-performance
search services. Pursuant to the agreement, Raredomains.com, LLC
(Predecessor) is compensated based on a specified average number
of monthly search queries by users and the corresponding number
of sponsored search click-throughs. Click-throughs are defined
as the number of times a user clicks on an advertisement or
search result. In November 2004, the agreement was amended to:
1) extend the term to October 31, 2005, 2) expand
the offering to include the Seeq toolbar, 3) restructure
the previous compensation arrangement, 4) exclude certain
Uniform Resource Locators from the scope of the arrangement,
5) remove guaranteed monthly search query provisions, and
6) amend certain other provisions. In December 2005, the
agreement was amended by the Company to extend the term to
February 2007.
On March 1, 2007, upon the expiration of the agreement with
Yahoo Search Marketing/Overture, Inc. (Yahoo!), the Company
entered into an agreement with Google, Inc. (Google), a provider
of commercial search services on the Internet including
pay-for-performance
search services. Pursuant to the Google agreement, the Company
is compensated based on a specified average number of monthly
search queries by users and the corresponding number of
sponsored search click-throughs.
On April 27, 2007, the Company entered into an agreement
with Yahoo! Pursuant to the Overture agreement, the Company is
compensated based on a specified average number of monthly
search queries by users and the corresponding number of
sponsored search click-throughs.
The revenue recognition policy for online media and domain name
sales and services is as follows:
The Company recognizes the components of online media revenue as
follows:
Advertising
Revenue
Advertising revenue is generated through our relationship with
third-party advertising distribution providers that pay us based
on the number of advertisement related clicks, actions or
impressions. Revenue is recognized in the period in which the
click, action, or impression occurs. On our owned websites, we
recognize revenue net of our advertising distribution
providers’ share of advertising. On our affiliated
websites, we recognize revenue net of our advertising
distribution providers’ and our affiliates’ share of
advertising.
The Company recognizes the components of domain name
registration rights revenue as follows:
Sales
of our Domain Name Registration Rights
Revenue from sales of our domain name registration rights is
recognized when persuasive evidence of an arrangement exists,
delivery of an authorization key to access the domain name has
occurred, the fee is fixed or determinable and collection is
deemed probable. Evidence of an arrangement consists of customer
acceptance of terms of use. Delivery occurs upon the delivery of
an authorization key to access the domain
name to the customer. Fees are fixed by the terms of the
arrangement and the Company receives payment prior to the
delivery of the authorization key.
Business
Services Revenue
Business services revenue consists of revenue earned through
both the BuyDomains.com and Afternic.com platforms. Business
services provided through the BuyDomains.com platform consists
of, among others, domain name registration and website-hosting
provided by third-party vendors. The Company recognizes
commissions earned from referring business services to
third-party vendors upon transmission of the referral to the
third-party. The Company has no ongoing performance obligation
relating to these business services.
Business services provided through the Afternic.com platform
consist of escrow services, through which the Company manages
the transfer of domain name registration rights process for
third party buyers and sellers, assisted offer services for
buyers, domain name appraisal services, and domain name hosting
services provided by a third party partner. The Company
recognizes commissions earned from the sale of affiliate domain
name registration rights and assisted offer services when
persuasive evidence of an arrangement exists, delivery of an
authorization key to access the domain name has occurred, the
commission is fixed or determinable and collection is deemed
probable. The Company recognizes revenue earned from domain name
appraisal services when persuasive evidence of an arrangement
exists, delivery of the appraisal to the customer has occurred,
the fee is fixed or determinable and collection is deemed
probable. The Company recognizes commissions earned from
referring business services to third-party vendors upon
transmission of the referral to the third-party. The Company has
no ongoing performance obligation relating to business services
performed by third-party vendors.
Registration
Rights
Domain
Names Held for Sale and Use
Substantially, all of the Company’s domain name
registration rights are both held for sale and used to generate
advertising revenue. Cost of domain name registration rights
includes the fees paid to initially acquire and register the
rights to use a domain name registration right. The Company
aggregates monthly purchases of domain names and charge such
costs to domain name sales and related services cost of revenues
based on the greater of (a) the percentage of the number of
domain names sold during the period compared to the number of
names estimated to be sold over the estimated life of the domain
names or (b) the straight-line amortization of domain name
registration rights over their estimated economic life.
The Company also includes in domain name sales and related
services cost of revenue, the specific identification
unamortized cost of domain names sold during the period.
The economic life of the domain name registration rights is
estimated to be seven years based on several factors including
the historic and projected traffic and sales pattern for
acquired domains. The estimate of the number of domain names to
be sold in a period and in the aggregate is based upon
historical sales trends, current and projected sales staffing
levels, the amount of domain name acquisitions, market
conditions, seasonality and sales strategies.
The Company periodically assesses its costing model to ensure
that our projections are a reasonable basis for the rate at
which the cost of our acquired domain name registration rights
is expensed. The Company assesses its sales volume assumptions
assigned to our domain name registration rights collection on at
least an annual basis or when facts and circumstances indicate
to management that sales trends may materially differ from our
projections may exist. This assessment is based on a comparison
of the actual sales rate to the projected sales rate by
acquisition year.
At least at each balance sheet date, the Company compares the
unamortized costs to the net realizable value of the domain name
registration rights by acquisition year, taking into
consideration estimated future revenues from sales of the domain
name registration rights and advertising revenues, and we record
a reserve if necessary to reduce the carrying value of the names
to net realizable value.
Domain
Names Held for Use
The Company maintains a portfolio of domain names which are held
are used primarily to generate advertising revenue in support of
the Company’s premium enthusiast websites. Cost of domain
name registration includes the fees paid to acquire the rights
to use a domain name registration right. The Company aggregates
the cost associated with these domain names and recognizes
expense on a straight-line amortization basis over their
estimated economic life. The economic life of the domain name
registration rights is estimated to be seven years based on
several factors including the historic and projected traffic
pattern for acquired domains.
Prepaid
Renewal Fees
Following the initial registration period, in order to retain
the right to a domain name, the Company is required to annually
renew the registration right. These renewal fees are recorded as
a prepaid asset and are expensed on a straight-line basis over
the one-year renewal period. During the year ended
December 31, 2004, the period from January 1, 2005
through February 21, 2005, the period from
February 22, 2005 through December 31, 2005, the year
ended December 31, 2006, and the nine months ended
September 30, 2007, the Company capitalized prepaid renewal
fees of $2,272, $223, $2,392, $4,027 and $3,393 and recorded
expense totaling $1,538, $318, $2,203, $3,523 and $3,206
respectively.
Product
Development
Product development costs consist primarily of payroll and
related expenses incurred for enhancements to, and maintenance
of, the Company’s network and software, research and
development expenses and technical and other development costs.
Such costs are expensed in the period incurred.
The Company accounts for website development costs according to
the guidance in the EITF Issue
No. 00-2,
Accounting for Website Development Costs, which requires
that costs incurred during the development of website
applications and infrastructure involving developing software to
operate a website be capitalized. No website development costs
were capitalized during 2004 or 2005. Website development costs
of $228, $29 and $78 were capitalized during the year ended
December 31, 2006, and nine months ended September 30,2006 and 2007, respectively.
Property
and Equipment
Property and equipment consists of computer equipment and
servers, furniture and fixtures, leasehold improvements and
software which are stated at cost and depreciated using the
straight-line method over the estimated useful life of the asset
of three to five years.
2006, the Company expensed advertising costs of $125. For the
nine months ended September 30, 2006 and 2007, the Company
expensed advertising costs of $87 and $137, respectively.
Income
Taxes
The Predecessor elected to be taxed under the provisions of
subchapter S of the Internal Revenue Code. Therefore, no
provision or benefit for federal income taxes has been included
in the Predecessor financial statements since taxable income or
losses pass through to, and are reportable by, the members
individually. The Predecessor made distributions to members to
fund income tax payments.
The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes,
which is the asset and liability method for accounting and
reporting for income taxes. Under SFAS No. 109,
deferred tax assets and liabilities are recognized based on
temporary differences between the financial reporting and income
tax bases of assets and liabilities using statutory rates. In
addition, SFAS No. 109 requires a valuation allowance
against net deferred tax assets if, based upon available
evidence, it is more likely that not that some or all of the
deferred tax assets will not be realized.
Stock-Based
Compensation
At December 31, 2005, the Company had one stock-based
employee compensation plan which is more fully described in
Note 12. Through December 31, 2005, the Company
accounted for its stock-based awards to employees using the
intrinsic value method prescribed under Accounting Principles
Board (APB) Opinion No. 25 and related interpretations.
Under the intrinsic value method, compensation expense is
measured on the date of the grant as the difference between the
deemed fair value of the Company’s common stock and the
exercise or purchase price multiplied by the number of stock
options or restricted stock awards granted.
Through December 31, 2005, the Company accounted for
stock-based compensation expense for nonemployees using the fair
value method prescribed by SFAS No. 123 and the
Black-Scholes option-pricing model, and recorded the fair value
of nonemployee stock options as an expense over the vesting term
of the option in accordance with
EITF 96-18:
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction With Selling,
Goods or Services.
In December 2004, FASB issued SFAS No. 123(R),
Share Based Payment, which requires companies to expense
the fair value of employee stock options and other forms of
stock-based compensation. The Company adopted
SFAS No. 123(R) effective January 1, 2006.
SFAS No. 123(R) allows companies that used the fair
value method under SFAS No. 123 for either recognition
or pro forma disclosures to apply SFAS No. 123(R)
using the modified prospective method, which requires us to
apply its provisions to unvested stock-based awards to employees
granted prior to January 1, 2006, and all employee awards
granted or modified subsequent to January 1, 2006.
Stock-based compensation expense recognized during 2006 is based
on the fair value of the stock-based payment awards that are
expected to vest, as required under SFAS No. 123(R).
Accordingly, stock-based compensation expense recorded in the
income statement for the year ended December 31, 2006 and
the nine months ended September 30, 2006 and 2007
reflect estimated forfeitures. SFAS No. 123(R)
requires that forfeitures be estimated at the time of grant and
be revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The Company based its
2006 and 2007 forfeiture rate on historical information related
to its stock options. Prior to the adoption of
SFAS No. 123(R), the Company recorded forfeitures as
they occurred. The cumulative impact of applying our estimated
forfeiture rates to previously expensed grants was not
significant. The Company will recognize the compensation cost of
employee stock-based awards using the straight line method over
the vesting period of the award. The Company has elected to use
the Black-Scholes option-pricing model to determine the fair
value of stock options granted. As required under
SFAS No. 123(R), the remaining unamortized deferred
stock-based compensation of $1,804 was reclassified to
additional paid-in capital effective upon adoption.
SFAS No. 130, Reporting Comprehensive Income,
establishes standards for reporting and displaying comprehensive
income (loss) and its components in the financial statements.
Comprehensive income (loss) is defined to include all changes in
equity during a period, except those resulting from investments
by stockholders and distributions to stockholders. For all
periods presented, comprehensive income was equal to the
reported net income.
Net
(Loss) Income Per Share
The Company calculated net (loss) income per share in accordance
with SFAS No. 128, Earnings Per Share, as
clarified by EITF Issue
No. 03-6,
which clarifies the use of the “two-class” method of
calculating earnings per share as originally prescribed in
SFAS No. 128. Effective for periods beginning after
March 31, 2004, EITF Issue
No. 03-6
provides guidance on how to determine whether a security should
be considered a “participating security” for purposes
of computing earnings per share and how earnings per share
should be allocated to a participating security when using the
two-class method for computing basic earnings per share. The
Company has determined that its convertible redeemable preferred
stock represents a participating security and therefore has
adopted the provisions of EITF Issue
No. 03-6.
Under the two-class method, basic net income (loss) per share is
computed by dividing the net income (loss) applicable to common
stockholders by the weighted-average number of common shares
outstanding for the period. Diluted net income (loss) per share
is computed using the more dilutive of (a) the two-class
method or (b) the if-converted method. The Company
allocated net income first to preferred stockholders based on
dividend rights under the Company’s charter and then to
common and preferred stockholders based on ownership interests.
Net losses are not allocated to preferred stockholders. Diluted
net income (loss) per share gives effect to all potentially
dilutive securities.
A reconciliation of the numerator and denominator used in the
calculation of basic and diluted net income (loss) per share is
as follows:
The following common stock equivalents were excluded from
computing diluted net loss per share attributable to common
stockholders because they had an anti-dilutive impact:
Total options, warrants and restricted stock units exercisable
into common stock
5,710,624
5,105,744
5,884,880
Recently
Issued Accounting Standards
In July 2006, the FASB issued Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income
Taxes, an interpretation of SFAS 109. The provisions of
FIN 48 are effective for fiscal years beginning after
December 15, 2006 with the cumulative effect of a change in
accounting principle recorded as an adjustment to opening
retained earnings. The provisions of FIN 48 are to be
applied to all tax positions upon initial adoption of this
standard. FIN 48 requires that the Company recognize in the
financial statements, the impact of a tax position, if that
position is more likely than not of being sustained upon audit,
based on the technical merits of the position. FIN 48 also
provides guidance on the derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and
transition attributable to the tax position. On January 1,2007, the Company adopted FIN 48. The adoption of
FIN 48 did not have a material impact on the Company’s
financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157 addresses
how companies should measure the fair value of assets and
liabilities when fair value recognition or disclosure is
required. Additionally, SFAS No. 157 formally defines
fair value as the amount the company would receive if it sold an
asset or transferred a liability to another company operating in
the same market. The guidance of SFAS No. 157 shall be
applied to the first reporting period beginning after
November 15, 2007. The adoption of SFAS No. 157
is not expected to have a material impact on the Company’s
financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities — Including an amendment of FASB Statement
No. 115. SFAS No. 159 permits companies to
choose to measure certain financial instruments and other items
at fair value. Unrealized gains and losses on items for which
fair value measurement has been elected will be recognized in
the income statement at each reporting date. The guidance of
SFAS No. 159 shall be applied to the first reporting
period beginning after November 15, 2007. The adoption of
SFAS No. 159 is not expected to have a material impact
on the Company’s financial position, results of operations,
or cash flows.
3.
Acquisitions
Raredomains.com,
LLC and Rare Names, LLC
Effective February 22, 2005, the Company completed an
acquisition of all of the assets of Raredomains.com, LLC and
Rare Names, LLC for $72,500 in cash and 750,000 shares of
Series Z convertible redeemable preferred stock valued at
$7,500. The total cost of the acquisition, including transaction
costs, was approximately $80,600. The issuance of the
Series Z convertible redeemable preferred stock represents
both a
noncash investing and financing activity for the period ended
December 31, 2005. At December 31, 2005 and 2006,
Raredomains.com, LLC owns 15% of the outstanding shares of the
Company.
The Company accrued estimated transaction costs of $1,925
consisting of legal, accounting and valuation services. As of
December 31, 2006, all of these costs have been paid.
The acquisition was accounted for using the purchase method of
accounting in accordance with SFAS No. 141. The
purchase price has been assigned to the assets acquired and
liabilities assumed based on their estimated fair value as
determined by management with the assistance of an independent
third-party appraiser. Based on the valuation allocation, the
intangible assets are being amortized over a period of three to
five years. The weighted-average amortization period in total is
4.68 years. The weighted-average amortization period by
major asset class is as follows: tradenames 4.89 years,
developed software 4.62 years and noncompete agreements
3.00 years. The financial position, results of operations
and cash flows of the acquired business have been included in
the Company’s consolidated financial statements effective
as of the purchase date.
The acquisition cost was allocated as follows:
Assets
Cash
$
603
Registration rights
15,000
Accounts receivable
1,148
Prepaid renewal fees
1,115
Other current assets
71
Property and equipment
171
Trade names
1,900
Developed software
700
Developed technology
300
Noncompete agreement
200
Goodwill
61,683
82,891
Liabilities
Accrued expenses
366
Accrued acquisition costs
1,925
Total purchase price, excluding liabilities assumed
$
80,600
GoldKey.com,
LLC
On March 16, 2006, the Company acquired the assets of
GoldKey.com, LLC, for $2,527, offset by cash acquired of $140.
Terms of the acquisition also provide for a future purchase
payment, not to exceed $500, contingent upon achieving certain
financial milestones. The payment for $500 was made in the first
quarter of 2007 and was recorded as an adjustment to goodwill.
The acquisition was funded from existing cash resources of the
Company. GoldKey.com, LLC provides domain name monetization
services to an affiliate network of domain name owners,
expanding the Company’s overall media business. The Company
accrued estimated transaction costs of $100, consisting of legal
and valuation services. As of December 31, 2006, all of
these costs have been paid.
The acquisition was accounted for using the purchase method of
accounting in accordance with SFAS No. 141. The
purchase price has been assigned to assets acquired and
liabilities assumed based on their estimated fair value as
determined by management with the assistance of an independent
third-party appraiser. Based on the valuation allocation, the
intangible assets are being amortized over a period of three
years.
Goodwill and other acquired intangible assets are being
amortized for tax purposes over a period of 15 years. The
weighted-average amortization period in total is three years.
The weighted-average amortization period by major asset class is
as follows: 3.0 years for customer relationships and
3.0 years developed software. The Company’s financial
statements include the results of the operations of GoldKey.com,
LLC subsequent to the acquisition date.
The acquisition cost was allocated as follows:
Assets
Cash
$
140
Prepaid expenses
20
Customer relationships
2,000
Developed software
180
Goodwill
370
2,710
Liabilities
Accrued expenses
83
Accrued acquisition costs
100
Total purchase price, excluding liabilities assumed
$
2,527
Morefocus
Group, Inc.
On July 28, 2006, the Company acquired the assets of
Morefocus Group, Inc., for $1,084. In connection with the
acquisition, the Company also issued a warrant to purchase
43,750 shares of common stock. The Company has allocated
$126 of the purchase price of Morefocus Group to equity in
accordance with
EITF 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company’s Own Stock, to
account for the fair value of this warrant. The fair value was
determined through the Black-Scholes valuation model with the
following assumptions: a volatility of 90%, an expected life of
two years, a risk-free interest rate of 4.98%, and no dividend
yield. The issuance of this warrant represented a non-cash
investing activity. Goodwill and other intangible assets are
being amortized for tax purposes over a period of fifteen years.
Morefocus Group, LLC is a developer of proprietary online
content being deployed across selected Company owned websites.
The Company accrued estimated transaction costs of $55
consisting of legal services. As of December 31, 2006, all
of these costs have been paid.
The acquisition was accounted for using the purchase method of
accounting in accordance with SFAS No. 141. The
purchase price has been assigned to the certain assets acquired
and liabilities assumed based on their estimated fair value as
determined by management. No value was assigned to acquired
intangibles. The Company’s financial statements include the
results of the operations of Morefocus Group, LLC subsequent to
the acquisition date.
Total purchase price, excluding liabilities assumed
$
1,084
During 2007, the Company recorded an adjustment to write down
the value of certain acquired liabilities by $102, which was
offset to goodwill.
SmartName,
LLC
On September 7, 2006, the Company acquired the assets of
SmartName, LLC for $16,500. The acquisition was funded by the
Credit and Guaranty agreement entered into with a lending
institution on September 7, 2006 (Note 7). SmartName,
LLC provides domain name monetization services to an affiliate
network of domain name owners, expanding the Company’s
overall media business. The Company accrued estimated
transaction costs of $230, consisting of legal and valuation
services. As of December 31, 2006, all of these costs have
been paid.
The acquisition was accounted for using the purchase method of
accounting in accordance with SFAS 141. The purchase price
has been assigned to certain assets acquired and liabilities
assumed based on their estimated fair value as determined by
management with the assistance of an independent third-party
appraiser. Based on the valuation allocation, the intangible
assets are being amortized over a period of three to five years.
Goodwill and other intangible assets are being amortized for tax
purposes over a period of 15 years. The weighted-average
amortization period in total is 4.96 years. The
weighted-average amortization period by major asset class is as
follows: 5.0 years for customer relationships and
3.0 years for developed software. The Company’s
financial statements include the results of the operations of
SmartName, LLC subsequent to the acquisition date.
The acquisition cost was allocated as follows:
Assets
Customer relationships
$
9,000
Developed software
180
Goodwill
7,550
16,730
Liabilities
Accrued acquisition costs
230
Total purchase price, excluding liabilities assumed
$
16,500
Subsequent to the acquisition the Company recorded and
adjustment to reduce accrued acquisition costs by $50, which was
offset to goodwill.
On November 3, 2006, the Company acquired the assets of
Afternic, Inc., a marketplace for the resale of domain names for
$4,050 less a working capital adjustment at closing of
approximately $324. Terms of the acquisition also provide for
future purchase payments, not to exceed $1,550, contingent upon
achieving certain financial milestones. The acquisition was
funded by the Credit and Guaranty agreement entered into with a
lending institution on September 7, 2006 (Note 7).
This acquisition enables the Company to provide a means for
independent third-party buyers and sellers of domain names to
come together in a marketplace. Additionally, in conjunction
with BuyDomains, NameMedia’s existing domain name
marketplace, the acquisition aids the Company in creating the
leading platform for the domain aftermarket. The Company accrued
estimated transaction costs of $120, consisting of legal and
valuation services. As of September 30, 2007, all of these
costs have been paid.
The acquisition was accounted for using the purchase method of
accounting in accordance with SFAS No. 141. The
purchase price has been assigned to the assets acquired and
liabilities assumed based on their estimated fair value as
determined by management with the assistance of an independent
third-party appraiser. Based on the valuation allocation, the
intangible assets are being amortized over a period of three to
five years. Goodwill and other intangible assets are being
amortized for tax purposes over a period of 15 years. The
weighted-average amortization period in total is 3.4 years.
The weighted-average amortization period by major asset class is
as follows: 4.1 years for customer relationships and
3.0 years for developed software. The Company’s
financial statements include the results of the operations of
Afternic, Inc. subsequent to the acquisition date.
The acquisition cost was allocated as follows:
Assets
Registration rights
$
114
Prepaid and other current assets
17
Property and equipment
29
Customer relationships
780
Developed software
1,390
Goodwill
1,772
4,102
Liabilities
Accrued expenses
256
Accrued acquisition costs
120
Total purchase price, excluding liabilities assumed
$
3,726
During 2007, the Company made a final payment of $218 and
recorded purchase accounting adjustments to working capital of
$277. The offset of these adjustments was recorded to goodwill.
Dave’s
Garden
On January 11, 2007, the Company acquired the assets of
StandardOut, Inc dba Dave’s Garden, an online
community for gardening enthusiasts for $3,500, of which $500
has been retained for future contingencies, and is expected to
be paid in the first quarter of 2008. The acquisition was funded
by the Credit and Guaranty agreement (Note 7). This enabled
the Company to expand its presence in the online enthusiast
community. Legal and valuation costs associated with the
transaction were insignificant.
The acquisition was accounted for using the purchase method of
accounting in accordance with SFAS No. 141. The
purchase price has been assigned to the assets acquired and
liabilities assumed based on
their estimated fair value as determined by management with the
assistance of an independent third-party appraiser. Based on the
valuation allocation, the intangible assets are being amortized
over a period of three to five years. Goodwill and other
intangible assets are being amortized for tax purposes over a
period of 15 years. The weighted-average amortization
period in total is 3 years. The weighted-average
amortization period by major asset class is as follows:
3.0 years for customer relationships and 3.0 years for
noncompete agreements. The Company’s financial statements
include the results of the operations of Dave’s Garden
subsequent to the acquisition date.
The acquisition cost was allocated as follows:
Assets
Registration rights
$
8
Property and equipment
5
Customer relationships
686
Noncompete agreements
63
Goodwill
2,738
Total purchase price
$
3,500
Visionary
Networks, Inc.
On January 26, 2007, the Company acquired the assets of
Visionary Networks, Inc., an online community for astrology and
related subjects for $14,077. Terms of the acquisition also
provide for future purchase payments, not to exceed $7,500,
contingent upon achieving certain financial milestones. The
acquisition was funded by the Credit and Guaranty agreement
(Note 7). This acquisition enabled the Company to expand
its presence in the online enthusiast community. The Company
accrued estimated transaction costs of $168, consisting of legal
and valuation services. As of September 30, 2007, all of
these costs have been paid.
The acquisition was accounted for using the purchase method of
accounting in accordance with SFAS No. 141. The
Company expects to complete its final purchase price allocation
in the fourth quarter of 2007 as determined by management with
the assistance of an independent third-party appraiser. Goodwill
and other intangible assets are being amortized for tax purposes
over a period of 15 years. The Company’s financial
statements include the results of the operations of Visionary
Networks, Inc. subsequent to the acquisition date.
Total purchase price, excluding liabilities assumed
$
14,077
Photo.net
On April 11, 2007, the Company acquired 100% of the stock
of Luminal Path Corporation dba Photo.net, an online
community for photography and related subjects for $6,000 offset
by cash of $15. The acquisition was funded by the Credit and
Guaranty agreement (Note 7). This acquisition enabled the
Company to expand its presence in the online enthusiast
community. The Company accrued estimated transaction costs of
$162, consisting of legal and valuation services. As of
September 30, 2007, all of these costs have been paid.
The acquisition was accounted for using the purchase method of
accounting in accordance with SFAS No. 141. The
Company expects to complete its final purchase price allocation
in the fourth quarter of 2007 as determined by management with
the assistance of an independent third-party appraiser. The
Company’s financial statements include the results of the
operations of Photo.net subsequent to the acquisition date.
The acquisition cost was allocated as follows:
Assets
Registration rights
$
15
Accounts receivable
2
Property and equipment
86
Cash
15
Customer relationships
1,500
Goodwill
5,176
6,794
Liabilities
Accrued acquisition costs
162
Deferred tax liabilities
632
Total purchase price, excluding liabilities assumed
The following unaudited pro forma information presents our
results of operations as if the 2006 acquisitions of SmartName
and Morefocus Group had taken place as of January 1, 2005
and the 2007 acquisition of Visionary Networks, Inc. had taken
place as of January 1, 2006. The pre-acquisition results of
GoldKey.com, LLC, Afternic, Inc., Dave’s Garden and Luminal
Path Corporation dba Photo.net were not material and are
excluded from the following information.
Net income before cumulative effect of change in accounting
principle
$
7,458
$
3,582
$
239
These pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of
the operating results that would have occurred had we acquired
SmartName and Morefocus Group on January 1, 2005 and
Visionary Networks, Inc. as of January 1, 2006, nor are
they necessarily indicative of our future operating results.
The changes in the carrying amount of goodwill by reportable
segment and in total for the periods ended December 31,2005 and 2006 and the nine months ended September 30, 2007
are as follows:
On January 2, 2004, Rare Names, LLC (Predecessor) entered
into an agreement with one of its members to repurchase a
member’s interest. In connection with the agreement, Rare
Names, LLC (Predecessor) paid the member $460 in cash and
entered into a $611 promissory note payable to the member. The
note, which was payable in annual installments of $100, accrued
interest at a rate of 3.52% per annum. In connection with the
acquisition of the Predecessor in February 2005 (Note 1),
this note was repaid in full.
Transactions
with Affiliates
The Predecessor was party to various arrangements with an
affiliate of a member including lease, administrative services
and employee sharing agreements. The Predecessor also paid this
affiliate for consulting fees and Website development services.
For the year ended December 31, 2004 and the period from
January 1, 2005 through February 21, 2005, expenses
for these arrangements and services were approximately $284 and
$17, respectively.
During 2004, the Predecessor transferred or sold a total of
1,538 domain name registration rights to a member and an
affiliate of a member. The cost of these domain name
registration rights was $95. The Predecessor received cash and
recognized revenue of $241 in connection with the transfer or
sale of these rights.
During 2004, a member of the Predecessor provided legal and
other consulting services totaling approximately $108.
During the year ended December 31, 2004 and the period from
January 1, 2005 through February 21, 2005, the
Predecessor paid bonuses totaling $3,519 and $91, respectively,
to its majority member. These payments have been included in
general and administrative expenses in the combined statement of
income.
In July 2005, the Company sold domain names to a member of one
of its five percent stockholders, Raredomains.com, LLC, for
approximately $700.
During the nine months ended September 30, 2007, the
Company sold domain names to a member of one of its five percent
stockholders, Raredomains.com LLC, for approximately $1,100.
The Company has engaged and continues to engage a third party to
provide marketing services. The Company paid this third party
approximately $708 in 2005, approximately $7,371 in 2006,
approximately $6,400 during the nine months ended
September 30, 2006 and approximately $4,006 during the nine
months ended September 30, 2007 for these services. One of
the Company’s five percent stockholders, Highland Capital
Partners, owns an equity interest in this third party, and one
of the Company’s directors, Robert Davis, serves on the
board of directors of this third party. Two of our directors,
Robert J. Davis and D. Richard de Silva, are affiliated with
Highland Capital Partners.
6.
Lines of
Credit
The Predecessor entered into a line of credit agreement, which
provided for maximum principal borrowings of $600, as amended,
accrued interest at the bank’s prime rate plus .25% and
expired in March 2005. Borrowings under the line were secured by
certain assets of the Predecessor and were personally guaranteed
by an officer and member of the Predecessor.
On February 22, 2005, the Company entered into a line of
credit agreement, which provides for maximum principal
borrowings of $2,000, as amended, accrues interest at the
bank’s prime rate plus .25% and expired on
December 31, 2006. Borrowings under the line were secured
by certain assets of the Company. As of December 31, 2006,
this line of credit was cancelled in connection with the
repayment of our $30,000 Loan and Security Agreement on
September 7, 2006.
On September 7, 2006, the Company entered into a revolving
line of credit agreement in conjunction with a credit and
guaranty agreement with a lending institution, which provides
for maximum principal borrowings of $10,000, accrues interest at
5.50%, and expired on September 6, 2007. Borrowings under
the line are secured by certain assets of the Company. As of
December 31, 2006, there were no amounts outstanding.
7.
Note
Payable
On February 22, 2005, the Company entered into a $30,000
Loan and Security Agreement (the Note) with a lending
institution. The Company was required to pay interest only for
the first 12 months of the Note. The Note, which was
repayable monthly beginning on March 1, 2006, accrued
interest at a rate of 9.0% per annum. As of September 7,2006, the balance outstanding on the note had been paid in full.
In connection with the Note, the Company entered into a
Series A convertible redeemable preferred stock warrant
dated February 22, 2005. The warrant offers the holder
120,000 shares of the Company’s Series A
preferred stock ($.001 par value) at a price of $10.00 per
share. As of December 31, 2005, the lending institution had
not exercised the warrant. If unexercised, the warrant expires
on February 22, 2012. The Company has allocated $844 of the
proceeds from the note payable to account for the fair value of
this warrant. The fair value was determined through the
Black-Scholes option pricing model with the following
assumptions: a volatility of 75%, an expected life of seven
years, a risk-free interest rate of 4.09%, and no dividend
yield. The issuance of this warrant represented a noncash
financing activity. Effective January 1, 2006, the Company
began accounting for these warrants in accordance with
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity. Upon adoption of SFAS No. 150, the Company
recorded the cumulative effect of the adoption totaling $872 by
increasing the carrying value of the warrant from $844 to
$1,716, the then fair value and reclassifying such amount to
long-term liabilities. The Company is required to revalue the
warrant each quarter, reflecting increases to fair value,
if any, as interest expense or income. For the nine months ended
September 30, 2006 and 2007, the Company has recorded
$1,464, $762 and $925 of interest expense, related to these
warrants.
The fair value at December 31, 2006 of $3,180 was
calculated with the following assumptions: a volatility of 90%,
an expected remaining life of 5.14 years, a risk-free
interest rate of 4.66%, and no dividend yield. The fair value at
September 30, 2007 of $4,105 (unaudited) was calculated
with the following assumptions: a volatility of 90%, an expected
remaining life of 4.39 years, a risk-free interest rate of
4.41%, and no dividend yield.
On September 7, 2006, the Company entered into a $115,000
Credit and Guaranty Agreement (the Note) with a lending
institution. The $115,000 consisted of a $105,000 term loan
which was to be used for acquisitions, and to retire the
outstanding debt related to the prior Note and a $10,000
revolving line of credit (Note 6). The Company was required
to pay interest every three months. The Note, which was paid in
full on November 21, 2007 (Note 17) accrued interest
at a rate equal to the British Bankers Association Settlement
Rate (BBA LIBOR) two days prior to the interest period plus
6.00%. As of December 31, 2006, this rate was 11.37%. At
September 30, 2007, this rate was 11.33%. The Company had
drawn upon the entire value of the Note and had remaining
available funds of approximately $12,833 in a restricted escrow
account owned by the Company (Note 2). Funds were released
to the Company by the escrow agent upon repayment of the Note.
The Note was collateralized by all of the assets of the Company.
The Note contained certain negative covenants for the Company,
including maintaining certain levels of interest coverage,
leverage, and restrictions on capital expenditures.
Additionally, the Note contained certain affirmative covenants
for the Company, including financial statements, annual
financial plans, portfolio listings, that the Company maintains
its corporate existence, and paying taxes and other claims in a
timely manner. The Company was in compliance with these
covenants at December 31, 2006 and September 30, 2007.
8.
Employee
Retirement Plan
The Predecessor maintained a Simplified Employee Pension Plan
through a defined contribution plan that was qualified under
Section 408K of the Internal Revenue Code covering those
employees that met certain eligibility requirements, such as
age, term of employment, etc. Contributions are determined
annually by the members, but are limited to amounts deductible
for federal income tax purposes. For the year ended
December 31, 2004 and the period from January 1, 2005
through February 21, 2005, the Company accrued
contributions to the plan of $161 and $15, respectively.
The Company maintains a 401(k) Plan (the 401(k) Plan) for its
full-time employees in the United States. The 401(k) Plan allows
employees of the Company to contribute up to the Internal
Revenue Code prescribed maximum amount. Employees may elect to
contribute from 1 percent to 99 percent of their
annual compensation to the 401(k) Plan. The Company does not
match employee contributions. Employee contributions are fully
vested.
Total deferred provision for (benefit from) income taxes
503
(2,469
)
Total income tax provision
$
4,334
$4,414
The income tax provision for the period from February 22,2005 through December 31, 2005 and the year ended
December 31, 2006 differ from the amounts computed by
applying the statutory federal income tax rate to the
consolidated income before income taxes as follows:
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented below:
The Company has recorded a deferred tax asset for stock-based
compensation recorded on unexercised nonqualified stock options
and restricted stock units. The ultimate realization of this
asset is dependent upon the fair value of the Company’s
stock when the options are exercised and the shares relating to
the restricted stock units are issued. Although realization is
not assured, the Company believes it is more likely than not,
based on its operating performance and projections of future
taxable income, that the Company’s deferred tax assets will
be realized. The amount of the deferred tax assets considered
realizable, however, could be reduced if the Company’s
projections of future taxable income are reduced or if the
Company does not perform at the levels it is projecting. This
could result in the establishment of a valuation allowance for
deferred tax assets and a corresponding increase to income tax
expense.
The Company recognizes future tax benefits or expenses
attributable to its taxable temporary differences. Recognition
of deferred tax assets is subject to the Company’s
determination that realization is more likely than not. Based on
taxable income projections, the Company believes that the
recorded deferred tax assets will be realized.
The Company adopted the provisions of the FASB Interpretation
No. 48 (FIN), Accounting for Uncertainty in Income
Taxes, an interpretation of FAS 109, on January 1,2007. As a result of the implementation of FIN 48, the
Company recognized no material adjustment in the liability for
unrecognized income tax benefits. At January 1, 2007, the
Company did not have any unrecognized tax benefits.
The Company recognizes interest and penalties related to
uncertain tax positions in income tax expense. At
September 30, 2007, did not have any recorded interest or
penalties related to unrecognized tax benefits.
The Company and its subsidiaries file income tax returns in the
U.S. federal tax jurisdiction as well as in various state
and foreign jurisdictions. The tax years 2005 through 2007
remain open to examination by the major taxing jurisdictions for
which the Company is subject to income tax.
10.
Commitments
and Contingencies
The Company has entered into various service agreements with
ICANN accredited registrars, whereby the registrars provide
space in their respective data centers with a direct connection
to the Revising SRS registry using co-location servers provided
by the Company. The initial terms of these agreements range from
six months to one year and are renewable for various extended
terms.
The Company conducts its operations in leased office facilities
under various noncancelable operating lease agreements that
expire through June 2012. Certain of the Company’s
operating leases include escalating payment amounts. In
accordance with SFAS No. 13, Accounting for Leases,
the Company recognizes the related rent expense on a straight
line basis over the term of the lease. Total rent expense under
these leases was approximately $144, $560 and $563 for the
period February 22, 2005 through December 31, 2005,
the year ended December 31, 2006, and the nine months ended
September 30, 2007, respectively. During the year ended
December 31, 2004 and the period from January 1, 2005
through February 21, 2005, the Predecessor company did not
incur rent expense.
Future minimum lease payments under noncancelable operating
leases at December 31, 2006 are as follows:
From time to time and in the ordinary course of business, the
Company may be subject to various claims, charges, and
litigation. For the year ended December 31, 2004, the
period from January 1, 2005 through February 21, 2005,
and the period February 22, 2005 through December 31,2005, and the year ended December 31, 2006 and the nine
months ended September 30, 2007, the Company did not have
any pending claims, charges, or litigation that it expects would
have a material adverse effect on its consolidated financial
position, results of operations or cash flow.
Convertible
Redeemable Preferred Stock and Stockholders’
Equity
The current authorized capital stock consists of
74,000,000 shares of Common Stock, par value $.001 per
share (the Common Stock) and 5,350,000 shares of Preferred
Stock, par value $.001 per share of which 4,600,000 shares
were designated as Series A convertible redeemable
preferred stock, and 750,000 shares were designated as
Series Z convertible redeemable preferred stock. The
Series A convertible redeemable preferred stock and
Series Z convertible redeemable preferred stock are herein
collectively referred to as the Preferred Stock.
The Company has reserved an aggregate of 32,075,311 shares
of Common Stock for issuance upon conversion of the
Series A convertible redeemable preferred stock
(4,600,000), Series Z convertible redeemable preferred
stock (750,000) and the 2005 Amended and Restated Stock Option
and Grant Plan (4,575,311).
In December 2006, the Company repurchased 76,187 shares of
common stock at a price of $4.89 per share from a former
employee for $372. These shares had been issued upon the
exercise of vested stock options in February 2006. In September
2007, the Company repurchased 7,918 shares of common stock
at a price of $6.15 per share from a former employee for $49.
These shares had been issued upon vesting of restricted stock
units (see note 12). Under the 2005 Amended and Restated
Stock Option Grant Plan, the Company is able to repurchase
shares issued to employees at fair market value as determined by
an independent
third-party
valuation so long as the repurchased shares have been issued and
outstanding for more than six months.
Preferred
Stock
In February 2005, the Company issued 4,310,000 shares of
Series A convertible redeemable preferred stock at price of
$10.00 per share. Proceeds to the Company were $43,100. In
connection with the acquisition of the Predecessor, the Company
issued 750,000 shares of Series Z convertible
redeemable preferred stock valued at a price of $10.00 per share.
In January 2006, the Company issued 20,000 shares of
Series A convertible redeemable preferred stock at a price
of $10.00 per share to two members of the Board of Directors.
Proceeds to the Company were $200. The shares were fully vested
upon purchase. Upon issuance, the Company recorded a
compensation charge of $145.
Significant features of the Preferred Stock are as follows:
Voting
The holders of the Preferred Stock vote together with all other
classes and series of stock of the Company as a single class on
all actions to be taken by the stockholders of the Company. Each
holder of the shares of Preferred Stock is entitled to such
number of votes equal to the number of shares of common stock
into which the shares of Preferred Stock are then convertible.
Dividends
The holders of the Preferred Stock shall be entitled to receive,
if and when declared by the Board of Directors, cumulative
dividends equal to $0.80 per annum per share (subject to
appropriate and equitable adjustment upon the occurrence of any
stock split, stock dividend, reverse stock split, or combination
of the outstanding shares of Preferred Stock), which dividends
shall accrue daily in arrears whether or not such dividends are
declared by the Board of Directors. If the Company fails to
redeem the Preferred Stock on the redemption date (as discussed
below), the holders of Preferred Stock will be entitled to
receive cumulative dividends equal to $1.00 per annum per share.
In the event dividends are declared and paid on the Common
Stock, other than stock dividends, the holders of Preferred
Stock are entitled to receive an amount equal to the
amount payable as if the Preferred Stock had been converted into
the largest amount of whole common shares possible on such date.
Liquidation
Upon any liquidation, dissolution or
winding-up
of the Company, whether voluntary or involuntary (including an
extraordinary transaction such as a merger or consolidation into
another entity, the sale or transfer of all or substantially all
of the assets of the Company or a change of control
transaction), the holders of the shares of Preferred Stock are
entitled, before any distribution or payment is made upon any
stock ranking on liquidation junior to the Preferred Stock, to
be paid an amount equal to $10.00 per share of Series A
convertible redeemable preferred stock and Series Z
convertible redeemable preferred stock, (subject to appropriate
adjustment for any stock splits, stock dividends,
recapitalizations and the like with respect to such series of
preferred stock), plus any declared but unpaid dividends to
which such holder is then entitled provided that the holders of
Series A convertible redeemable preferred stock receive any
such distribution prior to the holders of Series Z
convertible redeemable preferred stock. Any net assets remaining
after payment of such preferential amount to the holders of all
preferred stock will be shared ratably by holders of all
Preferred Stock and the holders of the Common Stock.
Conversion
Each share of Series A convertible redeemable preferred
stock and Series Z convertible redeemable preferred stock,
is convertible at any time into that number of fully paid shares
of Common Stock as determined by dividing the respective
convertible redeemable preferred stock issue price by the
conversion price in effect at the time. The current conversion
price of the Series A convertible redeemable preferred
stock and Series Z convertible redeemable preferred stock
is $2.00 per share, subject to adjustment for certain
antidilutive events. The holders of Preferred Stock exercising
such conversion rights are also entitled upon conversion to
payment of any accrued but unpaid dividends.
Additionally, upon (i) the closing of the sale of shares of
Common Stock to the public at a price per share of at least
$6.00 (as adjusted from time to time) in a firm commitment
underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as
amended, resulting in at least $75,000 of gross proceeds to the
Corporation (a Qualified Public Offering) or (ii) the
written consent or affirmative vote of the holders of at least
seventy percent of the then outstanding shares of Preferred
Stock, all outstanding shares of Preferred Stock shall
automatically be converted into shares of Common Stock, at the
then effective conversion rate applicable to such shares of
Preferred Stock.
Redemption
On or after February 22, 2010, the holders of at least 70%
of the outstanding shares of Preferred Stock may require the
Company to redeem the outstanding shares of Preferred Stock in
their entirety for a cash price equal to $10.00 per share plus
the special dividend accruing at an annual rate of $0.80 from
the date of issuance (as discussed above) in three equal
installments. If the Company fails to redeem the Preferred Stock
on such redemption dates, the special dividend shall accrue at
an annual rate of $1.00.
12.
Stock-Based
Compensation Plans
Employee
Stock Option Plan
In 2005, the Company adopted the 2005 Stock Option and Grant
Plan. In 2006, the Company amended the plan and adopted the 2005
Amended and Restated Stock Option and Grant Plan (the Plan)
which provides for the issuance of equity-based awards to
employees, including executive officers and consultants. Under
the
Plan, the Board of Directors can grant incentive stock options,
nonqualified stock options, restricted stock, and restricted
stock units. The Board of Directors determines the exercise
price of options granted under the plan; the exercise price is
equal to or greater than the underlying fair market value of the
Company’s common stock. Options granted under the Plan
expire ten years after the grant date. Options generally become
exercisable over a four-year period based on continued
employment and vest either annually or monthly. Shares available
for future grants under the Plan totaled approximately 103,709
and 269,694 shares, as of December 31, 2006 and
September 30, 2007, respectively.
Restricted
Stock Units
In 2006, the Company awarded restricted stock units to employees
pursuant to the Plan who elected to remediate certain options
granted at below fair market value in 2005. An aggregate of
2,969,587 restricted stock units of the Company’s common
stock have been granted to date. The shares are available for
distribution, at no cost, to these individuals at the end of a
four year vesting period. Employees who terminate prior to the
end of the four year vesting period receive vested shares based
on length of service. A total of 477 and 64,680 common shares
have been issued for the year ended December 31, 2006 and
nine months ended September 30, 2007, respectively. The
fair value of the awards, based on intrinsic value at the grant
date, is charged to compensation expense on a straight line
basis over the vesting period.
Stock-Based
Compensation
Through December 31, 2005, the Company accounted for its
stock-based compensation awards to employees using the intrinsic
value method prescribed in APB Opinion No. 25, and related
interpretations. Under the intrinsic value method, compensation
expense is measured on the date of grant as the difference
between the deemed fair value of the Company’s common stock
and the option exercise price multiplied by the number of
options granted.
The Company adopted SFAS No. 123(R), effective
January 1, 2006. The Company has elected to use the
Black-Scholes option pricing model to determine the
weighted-average fair value of options granted. In accordance
with SFAS No. 123(R), the Company will recognize the
compensation cost of share-based awards on a straight-line basis
over the vesting period of the award.
As there has been no public market for the Company’s common
stock prior to this offering, the Company has determined the
volatility factor used for the computation of fair value of
equity awards based on an analysis of reported data for a peer
group of companies that issued equity with substantially similar
terms. The expected volatility of equity awards has been
determined using an average of the historical volatility
measures of this peer group of companies for a period equal to
the expected life of the option. The expected volatility for
equity awards during the year ended December 31, 2006 and
nine months ended September 30, 2007 was 71%. The expected
life of equity awards issued to employees has been determined
utilizing the “simplified” method as prescribed by
SAB No. 107, Share-Based Payment. The expected
life of equity awards granted during the year ended
December 31, 2006 and nine months ended September 30,2007 was 6.02 and 6.16 years, respectively. For the year
ended December 31, 2006, the weighted-average risk free
interest rate used ranged from 4.33% to 5.02%. For the nine
months ended September 30, 2007, the weighted-average risk
free interest rate used ranged from 4.82% to 4.92%. The
risk-free interest rate is based on a zero coupon United States
treasury instrument whose term is consistent with the expected
life of the stock options. The Company has not paid and does not
anticipate paying cash dividends on its shares of common stock.
Therefore, the expected dividend yield is assumed to be zero. In
addition, SFAS No. 123(R) requires companies to
utilize an estimated forfeiture rate when calculating the
expense for the period. SFAS No. 123 permitted
companies to record forfeitures based on actual forfeitures,
which was the Company’s historical policy under
SFAS No. 123. As a result, the Company applied an
estimated forfeiture rate, based on its limited historical
forfeiture experience,
of 3.75% and 2.52% in the year ended December 31, 2006 and
nine months ended September 30, 2007, respectively, in
determining the expense recorded in our consolidated statement
of income.
Because there has been no public market for the Company’s
common stock, in determining the fair value of its common stock,
the board of directors considered a number of objective and
subjective factors, including the Company’s operating and
financial performance and corporate milestones, the prices at
which the Company sold shares of convertible preferred stock,
the superior rights and preferences of securities senior to its
common stock at the time of each grant, and the risk and
nonliquid nature of its common stock. In May 2005, the Company
determined that the fair value of its common stock as of, and
after giving effect to our acquisition of the Predecessor on
February 22, 2005 was $0.76 per share. The Company’s
board of directors used this valuation in determining fair value
of its common stock for stock option grants during the period
through February 2006. The Company believed its determination of
fair value of its common stock during this period to be
reasonable based on the foregoing factors. For all equity awards
during the period from March 2006 through December 2006,
including stock option grants and awards of restricted stock
units, the Company’s board of directors considered
contemporaneous valuations of the fair value of the common stock
in determining the fair value thereof.
In 2006, in connection with the preparation of the
Company’s 2005 and first quarter 2006 financial statements,
the Company retrospectively reassessed the fair value of its
common stock during the period from September 2005 through
February 2006. In reviewing the fair value of the common stock
underlying the equity awards granted during this period, the
Company’s board of directors considered the factors used in
the historical determinations of fair value and determined that
the valuation as of February 22, 2005 did not appropriately
account for the Company’s operating performance since July
2005. As a result, the Company recognized additional
compensation expense under APB 25 of $193 during the period
ended December 31, 2005.
In connection with the retrospective reassessment of fair value
and the contemporaneous valuations, the Company followed
guidelines set forth in the AICPA’s Practice Aid
Valuation of Privately-Held Company Equity Securities Issued as
Compensation, or the AICPA Practice Aid.
In making such retrospective reassessments and contemporaneous
assessments of fair value, the Company used a
probability-weighted combination of the guideline public company
method and the discounted future cash flow method to estimate
its aggregate enterprise value at each valuation date. The
guideline public company method estimates the fair market value
of a company by applying to that company market multiples which,
in this case, were revenue and EBITDA multiples of publicly
traded firms in similar lines of business. The companies used
for comparison under the guideline public company method were
selected based on a number of factors, including but not limited
to, the similarity of their industry, business model, financial
risk and other factors. The Company applied a 50%-60% weighting
to the revenue multiple and 40%-50% weighting to the EBITDA in
determining the guideline public company fair market value
estimate. The discounted future cash flow method involves
applying appropriate risk-adjusted discount rates of
18-20% to
estimated debt-free cash flows, based on forecasted revenue and
costs. The projections used in connection with these valuations
were based on the Company’s expected operating performance
over the forecast period. There is inherent uncertainty in these
estimates. If the Company had used different discount rates or
assumptions, the valuation would have been different.
To allocate the enterprise value determined under the guideline
public company method and the discounted future cash flow method
to its common stock, the Company used the probability-weighted
expected return method. Under the probability-weighted expected
return method, the fair value of the Company’s common stock
was estimated based upon an analysis of future values for the
Company assuming various future outcomes, the timing of which
were based on the plans of the Company’s board and
management. Share value is based on the probability-weighted
present value of expected future investment returns, considering
each of the possible outcomes available to us as well as the
rights of each share class. The fair market value of the
Company’s common stock was estimated using a
probability-weighted analysis of the present value of the
returns afforded to its shareholders as a continuing private
company without a future liquidity event, as well as under each
of three possible future liquidity scenarios. Three of the
scenarios assume a shareholder exit, either through an initial
public offering, or IPO, or a sale of the Company, or a
liquidation not in connection with a sale. The other scenario
assumes operations continue as a private company and no exit
transaction occurs. For the IPO scenario, the estimated future
and present values for our common stock was calculated using
assumptions including: the expected premoney valuation prior to
any IPO based on the guideline public company method discussed
above; the expected dates of the future expected IPO; and an
appropriate risk-adjusted discount rate. For the sale scenario,
the estimated future and present values for our common stock
were calculated using assumptions including: an equal weighting
of the guideline public company method and the discounted cash
flow method discussed above; the expected date of the future
expected sale; and an appropriate risk-adjusted discount rate.
For the liquidation scenario, the estimated future and present
values for the Company’s common stock was calculated using
assumptions including: the expected liquidation proceeds based
upon a sale of the Company assets; the expected date of the
liquidation; and an appropriate risk-adjusted discount rate. For
the private company with no exit scenario, the Company used an
equal weighting of the guideline public company method and the
discounted cash flow method based on present day forecast
assumptions. The Company has also used a marketability discount
of 30% for the private company with no exit scenario. Finally,
the present value calculated for the Company’s common stock
under each scenario was probability weighted based on its
estimate of the relative occurrence of each scenario. In the
Company’s retrospective reassessments, it has increased the
probability associated with the occurrence of an IPO from 10% in
September 2005 to 20% in March 2006; the Company assumed the
probability of a sale of the Company remained constant at 10%
from September 2005 to March 2006; the Company increased the
probability of liquidation from 5% in September 2005 to 10% in
March 2006; the Company decreased the probability of continuing
operations as a private company from 75% in September 2005 to
60% in March 2006. In its contemporaneous valuations, the
Company increased the probability associated with the occurrence
of an IPO from 20% in March 2006 to 40% in December 2006 and
March 2007, and decreased the probability to 35% in June 2007
and September 2007; the Company assumed the probability of a
sale of the Company remained constant at 10% from March 2006 to
December 2006 increased the probability to, 30% in March 2007,
and to 35% in June 2007 and September 2007; the Company
decreased the probability of continuing operations as a private
company from 60% in March 2006 to 40% in December 2006, and to
20% in March 2007, June 2007 and September 2007. The estimated
fair market value of the Company’s common stock at each
valuation date is equal to the sum of the probability-weighted
present values for each scenario.
In July 2006, the Company offered the holders of then
outstanding stock options granted during the period from
September 2005 through February 2006 the opportunity to modify
the terms of their stock option agreements to increase the
exercise price of such stock options to reflect the
retrospectively reassessed fair values of the Company’s
common stock during the period from September 2005 through
February 2006. Although these awards were granted at a price
equal to the fair value as determined in the Company’s
February 2005 common stock valuation, the board of directors
determined that it was in the best interest of the Company and
the optionees to increase the exercise price of affected options
to avoid potential penalties
under Section 409A of the Internal Revenue Code. The number
of shares covered by each modified stock option was decreased to
ensure that the aggregate exercise price of that affected option
remained unchanged. In addition, for those holders who agreed to
modify their affected options, the Company awarded to them
restricted stock units covering that number of shares of its
common stock as equal to the number of shares by which his or
her affected options were reduced. As a result of these
modifications, the Company will recognize up to an additional
$1,600 of compensation expense relating to stock option and
restricted stock awards. This incremental amount represents the
fair value of the stock options and restricted stock units
immediately after the modification as compared to the value of
the original awards prior to the modification. A future expense
of $11,200 and $11,315 related to unvested stock option and
restricted stock unit awards is expected to be recognized over a
weighted-average period of 3.04 and 2.58 years at
December 31, 2006 and September 30, 2007, respectively.
Impact of Adoption of SFAS No. 123(R)
The Company recognized stock-based compensation expense under
SFAS No. 123(R) of $4,590 for the year ended
December 31, 2006, $3,635 for the nine months ended
September 30, 2006, and $3,480 for the nine months ended
September 30, 2007. The following table presents the
stock-based compensation expense for stock options and
restricted stock units by income statement category:
Cost of revenue — Domain name sales and related
services
80
41
95
Product development
235
137
346
Sales and marketing
461
288
768
General and administrative
3,717
3,091
2,191
Stock-based compensation expense before income taxes
4,590
3,625
3,480
Income tax benefit
(1,421
)
(1,434
)
(915
)
Stock-based compensation expense after income taxes
$
3,169
$
2,191
$
2,565
SFAS No. 123(R) requires that cash flows resulting
from excess tax benefits to be classified as part of cash flows
from financing activities. Excess tax benefits are realized tax
benefits from tax deductions for exercised options in excess of
the deferred tax asset attributable to stock compensation costs
for those options. No options were exercised prior to
January 1, 2006. No excess tax benefits have been recorded
by the Company as a result of adopting SFAS No. 123(R).
Pro Forma
Information for Periods Prior to the Adoption of
SFAS No. 123(R)
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options’
vesting period. Had compensation cost for the Company’s
stock option plan been determined based upon the fair value at
the grant date for awards under the plan consistent with the
methodology prescribed under SFAS No. 123, the
Company’s net income would have been the following:
Add stock-based compensation expense included in reported net
income
193
Deduct stock-based employee compensation cost determined under
the fair value method
(255
)
Pro forma net income
$
6,907
The fair value of stock options granted under the Plan were
estimated as of the date of the grant offering using a
Black-Scholes pricing model based on the following
weighted-average assumptions:
The weighted-average grant-date fair value of options granted
was $0.78, $3.22, and $4.56 for the years ended
December 31, 2005 and 2006 and the nine months ended
September 30, 2007, respectively.
A summary of the status and activity for stock option awards
under the Plan for the periods ended December 31, 2005 and
2006 and nine months ended September 30, 2007 are as
follows:
The following table summarizes by grant date the number of
shares of common stock subject to options granted during the
twelve months ended September 30, 2007, the per share
exercise price of the options and the per share fair value of
the Company’s common stock:
Number of Shares
Per Share
Per Share Fair
Subject to Option
Exercise Price
Value of Common
Grant
of Option(1)
Stock(2)
November 2006
793,059
$
4.89
$
4.89
February 2007
642,000
$
6.15
$
6.15
June 2007
66,000
$
6.15
$
6.15
(1)
The Per Share Exercise Price of Option represents the fair value
of our common stock on the date of grant.
(2)
The Per Share Fair Value of Common Stock represents the
determination by our Board of Directors, the fair value of our
common stock on the date of grant, taking into account our
contemporaneous valuation of our common stock.
During 2005, the Company issued options to purchase
2,490,436 shares of common stock at exercises prices less
than fair market value and recorded $1,996 of deferred
compensation and $193 of compensation expense relating to these
awards. A summary of the status and activity for restricted
stock units under the Plan for the year ended December 31,2006 and nine months ended September 30, 2007 are as
follows:
The aggregate intrinsic value in the table above represents the
difference between the fair value of the Company’s common
stock price as of December 31, 2006 and September 30,2007 and the grant date fair value multiplied by the number of
in-the-money restricted stock units that would have been
received by the restricted stock unit holders had all restricted
stock units been paid at December 31, 2006 and
September 30, 2007. The total amount of the aggregate
intrinsic unvested value will fluctuate based on the fair market
value of the Company’s common stock.
13.
Property
and Equipment
Property and equipment consisted of the following at:
Property and equipment, net of accumulated depreciation
$
371
$
1,512
$
1,991
The Company capitalized $228, $29 and $78 related to Website
development costs and recorded related amortization expense of
$48, $2 and $71 for the year ended December 31, 2006 and
nine months ended
SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, establishes standards
for reporting information about operating segments in annual
financial statements and requires selected information of these
segments be presented in interim financial reports to
stockholders. Operating segments are defined as components of an
enterprise about which separate financial information is
available that is evaluated regularly by the chief operating
decision maker, or decision making group, in making decisions on
how to allocate resources and assess performance. The
Company’s chief operating decision making group, as defined
under SFAS No. 131, consists of the Company’s
chief executive officer, president and chief operating officer,
and chief financial officer.
For all periods presented the Company operated in a single
geographic region principally in the United States providing
Internet merchant transaction services to enterprises. Assets
and liabilities and their related cash flows are not separately
identified on a segment basis.
For the year ended December 31, 2006, the Company managed
its business along two distinct revenue sources. The primary
areas of measurement and decision-making include the Online
Media network and Domain Marketplace. Our Online Media network
generates revenues primarily through the placement of
advertising on websites that are owned by the Company and in our
affiliate network. The Domain Marketplace segment generates
revenues primarily by the sale of domain names that are owned by
the Company and in our affiliate network, commissions received
on the referral of business services related to the
Company’s BuyDomains.com and Afternic.com platforms, and
the sale of business services, such as escrow services, assisted
offer services, and domain name appraisal services through the
Company’s Afternic.com platform. Other includes unallocated
costs, including technology, portfolio management and corporate
costs.
Management relies on an internal management reporting process
that provides revenue and adjusted earnings before interest,
taxes, depreciation and amortization (Adjusted EBITDA) for
making financial decisions and allocating resources. Adjusted
EBITDA is a measurement required by our Credit and Guaranty
Agreement (Note 7). Management believes that Adjusted
EBITDA is an appropriate measure for evaluating the performance
of the Company’s segments. However, this measure should be
considered in addition to income from operations or other
measures of financial performance prepared in accordance with
generally accepted accounting principles.
The following table presents the Company’s unaudited
quarterly consolidated results of operations for each of the
eight quarters in the period ended December 31, 2006 and
each of the three quarters in the period ended
September 30, 2007. The unaudited quarterly consolidated
information has been prepared on the same basis as our audited
consolidated financial statements. You should read the following
table presenting our quarterly consolidated results of
operations in conjunction with our audited consolidated
financial statements and the related notes included elsewhere in
this prospectus. The operating results for any quarter are not
necessarily indicative of the operating results for any future
period.
On November 21, 2007, the Company entered into a $125,000
Credit Agreement (the Term Note) with a group of lending
institutions. The $125,000 consists of a $90,000 term loan which
was used to retire the outstanding debt related to the prior
Note (Note 7) and a $35,000 revolving line of credit
(Note 6). The Company is required to pay interest every
one, two, or three months as elected by the Company after each
interest payment period. As of November 23, 2007, the
Company elected to pay interest for the first loan period at the
end of two months. The Term Note, which is payable quarterly at
varying rates beginning March 31, 2008, with the final
payment due on November 21, 2012, currently accrues
interest an annual rate equal to the British Bankers Association
LIBOR rate, or BBA LIBOR two business days prior to the interest
period plus 4.00%. As of November 23, 2007, this rate was
9.05%. The $90,000 Term Note was fully drawn on
November 21, 2007. The Company has not drawn on the
revolving line of credit. The Term Note is collateralized by all
the assets of the Company. The Term Note contains certain
affirmative covenants for the Company, including financial
statements, preservation of existence, maintenance of properties
and insurance, compliance with law and use of proceeds.
Additionally, the Term Note contains certain negative covenants,
including leverage ratio and fixed charge coverage ratio
requirements. The pro forma balance sheet presented as of
September 30, 2007 reflects, among other things, the
payment of the prior Note and the issuance of the new Term Note
as if the transactions had occurred on September 30, 2007,
the write off of the deferred financing costs associated with
the prior Note of $2.0 million, the payment of a
$1.1 million early termination fee, and the capitalization
of $2.1 million of debt issuance costs related to the Term
Note.
We have audited the accompanying balance sheet of Smartname, LLC
as of December 31, 2005 and 2004, and the related
statements of operations, members’ equity, and cash flows
for the years then ended. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Smartname, LLC as of December 31, 2005 and 2004, and the
results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally
accepted in the United States of America.
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
During the year ended December 31, 2005, $16,985 of
equipment was purchased by a member on behalf of the Company
thereby reducing the receivable from that member.
The notes to financial statements are an integral part of the
above statement.
Nature
of Business and Summary of Significant Accounting
Policies
Formation — Smartname, LLC (“the
Company”) was formed on October 30, 2003 by Ari
Goldberger. Larry Fischer was admitted as a member effective
January 1, 2005. The operating agreement provides for two
classes of membership units. Holders of Series A units are
entitled to appoint and remove the manager of the Company and to
voting rights. Holders of Series B units have no such
rights. The operating agreement provides that profits are
allocated 82% and 18%, respectively, to Series A members
and Series B members. Losses are allocated to Series A
members. The operating agreement provides for membership
interests as follows:
Ari Goldberger
1,200 Series A units
Larry Fischer
400 Series B units
Nature of business and revenue recognition —
The Company is a domain name parking service. As such, the
Company collects advertising revenue from an Internet company
(see Note 2) on behalf of third-party domain name
owners (which the Company refers to as “affiliates”)
and retains an
agreed-upon
percentage of the revenue. Gross revenue is recognized as
“click-throughs” occur. A “click-through”
occurs when a user clicks on an advertiser’s listing which
is displayed on the domain name’s website. The Company pays
the affiliates based on click-throughs on the advertiser’s
listings that are displayed on the websites of these affiliates.
In accordance with EITF Issue
No. 99-19,
“Reporting Revenue Gross as a Principal Versus Net as an
Agent,” the revenue derived from this arrangement is
reported gross of the payment to affiliates. This revenue is
reported gross due to the fact that the Company is the primary
obligor to the Internet company.
Accounts receivable — Accounts receivable are
stated at the amounts management expects to collect from
outstanding balances. The Company considers its receivables to
be fully collectible; accordingly, no allowance for doubtful
accounts is required. If amounts become uncollectible, they will
be charged to operations when that determination is made.
Due from member — For convenience, a
significant amount of the Company’s revenues are deposited
and a significant amount of the Company’s costs are
disbursed through a bank account maintained by a Company member.
The net of the Company’s cash receipts less cash
disbursements are reflected as due from member on the balance
sheet. This receivable is non-interest bearing and has no
specific repayment terms.
Equipment — Equipment is stated at cost.
Depreciation is provided principally using the straight-line
method over the estimated useful lives of the related assets.
Advertising expense — The Company expenses all
costs related to advertising in the year incurred.
Income taxes — The Company is treated as a
partnership for federal and state income tax purposes.
Consequently, federal and state income taxes are not payable by,
or provided for, by the Company. Members are taxed individually
on their share of the Company’s earnings.
Use of estimates — The presentation of
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2.
Concentrations
During 2005 and 2004, 99% and 96% of the Company’s revenue
was earned under a contract with one Internet company. The
contract expires on July 31, 2007 and will automatically
renew for one year periods unless either party gives notice of
non-renewal.
At December 31, 2005 and 2004, 100% and 99% of the accounts
receivable balance was due from that company, respectively.
Nature
of Business and Summary of Significant Accounting
Policies
Formation — Smartname, LLC (the
“Company”) was formed on October 30, 2003 by Ari
Goldberger. Larry Fischer was admitted as a member effective
January 1, 2005. The operating agreement provides for two
classes of membership units. Holders of Series A units are
entitled to appoint and remove the manager of the Company and to
voting rights. Holders of Series B units have no such
rights. The operating agreement provides that profits are
allocated 82% and 18%, respectively, to Series A members
and Series B members. Losses are allocated to Series A
members. The operating agreement provides for membership
interests as follows:
Ari Goldberger
1,200 Series A units
Larry Fischer
400 Series B units
Nature of business and revenue recognition —
The Company is a domain name parking service. As such, the
Company collects advertising revenue from an Internet company
(see Note 2) on behalf of third-party domain name
owners (which the Company refers to as “affiliates”)
and retains an
agreed-upon
percentage of the revenue. Gross revenue is recognized as
“click-throughs” occur. A “click-through”
occurs when a user clicks on an advertiser’s listing which
is displayed on the domain name’s website. The Company pays
the affiliates based on click-throughs on the advertiser’s
listings that are displayed on the websites of these affiliates.
In accordance with EITF Issue
No. 99-19,
“Reporting Revenue Gross as a Principal Versus Net as an
Agent,” the revenue derived from this arrangement is
reported gross of the payment to affiliates. This revenue is
reported gross due to the fact that the Company is the primary
obligor to the Internet company.
Accounts receivable — Accounts receivable are
stated at the amounts management expects to collect from
outstanding balances. The Company considers its receivables to
be fully collectible; accordingly, no allowance for doubtful
accounts is required. If amounts become uncollectible, they will
be charged to operations when that determination is made.
Due from member — For convenience, a
significant amount of the Company’s revenues are deposited
and a significant amount of the Company’s costs are
disbursed through a bank account maintained by a Company member.
The net of the Company’s cash receipts less cash
disbursements are reflected as due from member on the balance
sheet. This receivable is non-interest bearing and has no
specific repayment terms.
Advertising expense — The Company expenses all
costs related to advertising in the year incurred.
Income taxes — The Company is treated as a
partnership for federal and state income tax purposes.
Consequently, federal and state income taxes are not payable by,
or provided for, by the Company. Members are taxed individually
on their share of the Company’s earnings.
Use of estimates — The presentation of
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2.
Concentrations
During the six months ended June 30, 2006 and 2005, 99% and
99% of the Company’s revenue was earned under a contract
with one Internet company. The contract expires on July 31,2007 and will automatically renew for one year periods unless
either party gives notice of non-renewal.
The following unaudited pro forma statement of operations is
based on our historical consolidated financial statements and
Smartname, LLC’s historical financial statements included
in this registration statement, and adjusted to give effect to
the September 7, 2006 acquisition of Smartname, LLC by
NameMedia, Inc. The unaudited pro forma combined statement of
operations for the year ended December 31, 2006 gives
effect to the Smartname, LLC acquisition as if it had occurred
on January 1, 2006. A pro forma balance sheet has not been
prepared as the audited consolidated balance sheet of the
Company as of December 31, 2006 includes the accounts of
Smartname.
The unaudited pro forma statement of operations have been
prepared in accordance with the rules and regulations of the SEC
and are provided for comparison and analysis purposes only and
should not be considered indicative of actual results that would
have been achieved had our acquisition of Smartname actually
been consummated on the date indicated and does not purport to
be indicative of results of operations as of any future period.
The unaudited pro forma statement of operations should be read
in conjunction with the consolidated financial statements and
notes thereto and other financial information presented
elsewhere in this prospectus, including “Selected
Consolidated Financial Data” and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.” The unaudited pro forma statement of
operations is based on the assumptions set forth in the notes
thereto.
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(1)
Represents amortization of acquired intangible assets of
SmartName. As part of the purchase price allocation, we assigned
$9 million to customer relationships and $180,000 to
developed technology. These assets are amortized over useful
lives of five and three years, respectively.
(2)
Represents an adjustment to interest expense to reflect
financing costs that would have been incurred had the
acquisition been completed on January 1, 2006. The interest
was calculated based on assumed debt financing for the entire
purchase price of $16.5 million, at an interest rate of
11.39%.
(3)
Represents the income tax benefit of items (1) and
(2) above, plus income tax expense on the pre-tax income of
SmartName, at a tax rate of 39.6%. SmartName was a limited
liability company that did not record income tax expense.
The following table sets forth the costs and expenses, other
than the underwriting discount, payable by us in connection with
the sale of common stock being registered. All amounts are
estimated except the SEC registration fee and the NASD filing
fee.
Securities and Exchange Commission registration fee
$
5,296
National Association of Securities Dealers, Inc. filing fee
*
Nasdaq Global Market listing fee
*
Blue Sky fees and expenses
*
Accounting fees and expenses
*
Legal fees and expenses
*
Printing and engraving fees
*
Registrar and Transfer Agent’s fees
*
Miscellaneous fees and expenses
*
Total
$
*
*
To be filed by amendment
Item 14.
Indemnification
of Directors and Officers.
Section 145(a) of the Delaware General Corporation Law
provides, in general, that a corporation may indemnify any
person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the
corporation), because he or she is or was a director, officer,
employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including
attorneys’ fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in
connection with such action, suit or proceeding, if he or she
acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her
conduct was unlawful.
Section 145(b) of the Delaware General Corporation Law
provides, in general, that a corporation may indemnify any
person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in
the right of the corporation to procure a judgment in its favor
because the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys’ fees)
actually and reasonably incurred by the person in connection
with the defense or settlement of such action or suit if he or
she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made with
respect to any claim, issue or matter as to which he or she
shall have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery or other
adjudicating court determines that, despite the adjudication of
liability but in view of all of the circumstances of the case,
he or she is fairly and reasonably entitled to indemnity for
such expenses which the Court of Chancery or other adjudicating
court shall deem proper.
Section 145(g) of the Delaware General Corporation Law
provides, in general, that a corporation may purchase and
maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability
asserted
against such person and incurred by such person in any such
capacity, or arising out of his or her status as such, whether
or not the corporation would have the power to indemnify the
person against such liability under Section 145 of the
Delaware General Corporation Law.
Article VII of our Amended and Restated Certificate of
Incorporation, as amended to date (the “Charter”),
provides that no director of our company shall be personally
liable to us or our stockholders for monetary damages for any
breach of fiduciary duty as a director, except for liability
(1) for any breach of the director’s duty of loyalty
to us or our stockholders, (2) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing
violation of law, (3) in respect of unlawful dividend
payments or stock redemptions or repurchases, or (4) for
any transaction from which the director derived an improper
personal benefit. In addition, our Charter provides that if the
Delaware General Corporation Law is amended to authorize the
further elimination or limitation of the liability of directors,
then the liability of a director of our company shall be
eliminated or limited to the fullest extent permitted by the
Delaware General Corporation Law, as so amended.
Article VII of the Charter further provides that any repeal
or modification of such article by our stockholders or an
amendment to the Delaware General Corporation Law will not
adversely affect any right or protection existing at the time of
such repeal or modification with respect to any acts or
omissions occurring before such repeal or modification of a
director serving at the time of such repeal or modification.
Article V of our Amended and Restated By-Laws, as amended
to date (the “By-Laws”), provides that we will
indemnify each of our directors and officers and, in the
discretion of our board of directors, certain employees, to the
fullest extent permitted by the Delaware General Corporation Law
as the same may be amended (except that in the case of an
amendment, only to the extent that the amendment permits us to
provide broader indemnification rights than the Delaware General
Corporation Law permitted us to provide prior to such the
amendment) against any and all expenses, judgments, penalties,
fines and amounts reasonably paid in settlement that are
incurred by the director, officer or such employee or on the
director’s, officer’s or employee’s behalf in
connection with any threatened, pending or completed proceeding
or any claim, issue or matter therein, to which he or she is or
is threatened to be made a party because he or she is or was
serving as a director, officer or employee of our company, or at
our request as a director, partner, trustee, officer, employee
or agent of another corporation, partnership, limited liability
company, joint venture, trust, employee benefit plan,
foundation, association, organization or other legal entity, if
he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best
interests of our company and, with respect to any criminal
proceeding, had no reasonable cause to believe his or her
conduct was unlawful. Article V of the By-Laws further
provides for the advancement of expenses to each of our
directors and, in the discretion of our board of directors, to
certain officers and employees.
In addition, Article V of the By-Laws provides that the
right of each of our directors and officers to indemnification
and advancement of expenses shall be a contract right and shall
not be exclusive of any other right now possessed or hereafter
acquired under any statute, provision of the Charter or By-Laws,
agreement, vote of stockholders or otherwise. Furthermore,
Article V of the By-Laws authorizes us to provide insurance
for our directors, officers and employees, against any
liability, whether or not we would have the power to indemnify
such person against such liability under the Delaware General
Corporation Law or the provisions of Article V of the
By-Laws.
We intend to enter into indemnification agreements with each of
our directors and executive officers. These agreements provide
that we will indemnify each of our directors and executive
officers, and such entities to the fullest extent permitted by
law.
We also maintain a general liability insurance policy which
covers certain liabilities of directors and officers of our
company arising out of claims based on acts or omissions in
their capacities as directors or officers.
In any underwriting agreement we enter into in connection with
the sale of common stock being registered hereby, the
underwriters will agree to indemnify, under certain conditions,
us, our directors, our
officers and persons who control us within the meaning of the
Securities Act of 1933, as amended, against certain liabilities.
Item 15.
Recent
Sales of Unregistered Securities.
In the three years preceding the filing of this registration
statement, we have issued the following securities that were not
registered under the Securities Act:
(a) Issuances of Capital Stock.
In February 2005 and January 2006, we issued and sold an
aggregate of 4,330,000 shares of our Series A
convertible redeemable preferred stock to 10 accredited
investors for an aggregate purchase price of $43,300,000.
In February 2005, we issued and sold 750,000 shares of our
Series Z convertible redeemable preferred stock to 1
accredited investor for a purchase price of $7,500,000.
No underwriters were used in the foregoing transactions. All of
the purchasers in these transactions represented to us in
connection with their purchase that they were accredited
investors and were acquiring the shares for investment and not
distribution, that they could bear the risks of the investment
and could hold the securities for an indefinite period of time.
Such purchasers received written disclosures that the securities
had not been registered under the Securities Act and that any
resale must be made pursuant to a registration or an available
exemption from such registration. All sales of securities
described above were made in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act
(and/or Regulation D promulgated thereunder) for
transactions by an issuer not involving a public offering. All
of the foregoing securities are deemed restricted securities for
the purposes of the Securities Act.
(b) Grants and Exercises of Stock Options; Awards of
Restricted Stock and Restricted Stock Units.
Since February 2005, we granted stock options to purchase an
aggregate of 4,572,659 shares of our common stock, with
exercise prices ranging from $0.76 to $7.89 per share, to
employees, directors and consultants pursuant to our 2005 Stock
Option Plan. Since February 2005, we issued and sold an
aggregate of 125,673 shares of our common stock upon
exercise of stock options granted pursuant to our 2005 Stock
Option Plan for an aggregate consideration of $95,970. In
addition, since February 2005, we issued and sold
431,525 shares of restricted stock with a purchase price of
$0.76 to an employee in connection with an award of restricted
stock pursuant to our 2005 Stock Option Plan. In addition, since
February 2005, we issued restricted stock units in respect of
2,969,587 shares of our common stock to employees,
directors and consultants pursuant to our 2005 Stock Option
Plan. The issuance of common stock upon exercise of the options
and payment of restricted stock units were exempt either
pursuant to Rule 701, as a transaction pursuant to a
compensatory benefit plan, or pursuant to Section 4(2) of
the Securities Act (and Rule 506 of Regulation D
promulgated thereunder), as a transaction by an issuer not
involving a public offering. The common stock issued upon
exercise of options and payment of the restricted stock units
are deemed restricted securities for the purposes of the
Securities Act.
(c) Issuance of Warrants.
In February 2005, we issued a warrant to Lighthouse Capital
Partners V, L.P. to purchase up to 120,000 shares of
our Series A convertible redeemable preferred stock at an
exercise price of $10.00 per share (or $2.00 per share of our
common stock) in connection with a loan and security agreement
entered into with Lighthouse Capital Partners V, L.P. We
issued these warrants to Lighthouse Capital Partners V,
L.P. in consideration of this institution entering into a debt
financing arrangement with us. No cash or additional
consideration was received by us in consideration of our
issuance of these securities.
In July 2006, we issued a warrant to MoreFocus Group, Inc. to
purchase up to 43,750 shares of our common stock at an
exercise price of $1.00 per share in connection with an asset
purchase agreement entered into with MoreFocus Group, Inc. We
issued these warrants to MoreFocus Group, Inc. in consideration
of it entering into an asset purchase agreement with us. No cash
or additional consideration, other than assets
received pursuant to the asset purchase agreement, was received
by us in consideration of our issuance of these securities.
This issuances were made in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act
(and/or Regulation D promulgated thereunder) for
transactions by an issuer not involving a public offering. In
the case of each warrant issuance, these warrants were only
offered to the individual warrantholder. As a result, none of
these transactions involved a public offering. All of the
purchasers in these transactions represented to us in connection
with their purchase that they were accredited investors and were
acquiring the shares for investment and not distribution, that
they could bear the risks of the investment and could hold the
securities for an indefinite period of time. Such purchasers
received written disclosures that the securities had not been
registered under the Securities Act and that any resale must be
made pursuant to a registration or an available exemption from
such registration. The common stock issued upon exercise of the
warrant are deemed restricted securities for the purposes of the
Securities Act.
Financial Statement Schedules. All other
schedules have been omitted because they are not applicable.
Item 17.
Undertakings.
The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting
agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by the controlling precedent, submit to a court
of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
(1)
For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of Prospectus
filed as part of this Registration Statement in reliance upon
Rule 430A and contained in a form of prospectus filed by
the registrant pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2)
For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting
agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt
delivery to each purchaser.
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 1 to the
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Waltham,
Commonwealth of Massachusetts, on this
13th day
of December, 2007.
NAMEMEDIA, INC.
By:
/s/ Kelly
P. Conlin
Kelly P. Conlin
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been
signed by the following persons in the capacities and on the
date indicated.
Name
Title
Date
/s/ Kelly
P. Conlin
Kelly
P. Conlin
Chairman, Chief Executive Officer (Principal Executive Officer)
and Director
Lease Agreement between the Registrant and Boston Properties
Limited Partnership for the premises located at 230 Third
Avenue, Waltham, Massachusetts, dated as of July 28, 2005,
and amended on April 27, 2006
Asset Purchase Agreement by and among the Registrant, SmartName,
LLC, Ari Goldberger, Lawrence Fischer and Domain Parking
Services, LLC, dated as of September 1, 2006
*10
.9
Form of Indemnification Agreement by and between the Registrant
and its Directors and Officers
#10
.10
Google Services Agreement and Google Services Agreement Order
Form dated as of March 1, 2007 by and between Google Inc.
and the Registrant, as amended by Amendment No. 1 to the
Google Services Agreement Order Form
#10
.11
Yahoo! Search Marketing Agreement dated as of October 11,2007 by and between Overture Services, Inc. d/b/a Yahoo! Search
Marketing, Overture Search Services (Ireland) Limited and the
Registrant
Indicates a management contract or compensatory plan, contract
or arrangement.
#
Application will be made to the Securities and Exchange
Commission for confidential treatment of certain provisions.
Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and
Exchange Commission.
Dates Referenced Herein and Documents Incorporated by Reference