SEC Info  
   Home     Search     My Interests     Help     Sign In     Please Sign In  

Comscore, Inc. · IPO:  S-1/A · On 6/12/07

Filed On 6/12/07, 6:13am ET   ·   Accession Number 950133-7-2643   ·   SEC File 333-141740

  in   Show  and 
Help... Wildcards:  ? (any letter),  * (many).  Logic:  for Docs:  & (and),  | (or);  for Text:  | (anywhere),  "(&)" (near).
 
  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 6/12/07  Comscore, Inc.                    S-1/A                 10:3.8M                                   Bowne - DC/FA

Initial Public Offering (IPO):  Pre-Effective Amendment to Registration Statement (General Form)   —   Form S-1
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-1/A       Pre-Effective Amendment to Registration Statement   HTML   1.69M 
                          (General Form)                                         
 2: EX-3.1      Articles of Incorporation/Organization or By-Laws   HTML    127K 
 3: EX-3.3      Articles of Incorporation/Organization or By-Laws   HTML     25K 
 4: EX-3.4      Articles of Incorporation/Organization or By-Laws   HTML    133K 
 5: EX-4.1      Instrument Defining the Rights of Security Holders  HTML      8K 
 6: EX-10.19    Material Contract                                   HTML     13K 
 7: EX-10.20    Material Contract                                   HTML     61K 
 8: EX-10.21    Material Contract                                   HTML     14K 
 9: EX-10.22    Material Contract                                   HTML    415K 
10: EX-23.1     Consent of Experts or Counsel                       HTML      7K 


S-1/A   —   Pre-Effective Amendment to Registration Statement (General Form)
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Prospectus Summary
"Risk Factors
"Cautionary Note Regarding Forward-Looking Statements and Industry Data
"Use of Proceeds
"Dividend Policy
"Capitalization
"Dilution
"Selected Consolidated Financial Data
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Business
"Management
"Executive Compensation
"Compensation Discussion and Analysis
"Certain Relationships and Related Party Transactions
"Principal and Selling Stockholders
"Description of Capital Stock
"Shares Eligible for Future Sale
"U.S. Federal Tax Consequences to Non-U.S. Holders
"Underwriting
"Notice to Canadian Residents
"Legal Matters
"Experts
"Where You Can Find More Information
"Index to Consolidated Financial Statements
"Report of Independent Registered Public Accounting Firm
"Consolidated balance sheets
"Consolidated statements of operations
"Consolidated statements of stockholders' deficit
"Consolidated statements of cash flows
"Notes to consolidated financial statements

This is an HTML Document rendered as filed.  [ Alternative Formats ]



  sv1za  

 

As filed with the Securities and Exchange Commission on June 12, 2007
Registration No. 333-141740
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Amendment No. 3
to
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
 
 
 
 
COMSCORE, INC.
(Exact name of Registrant as specified in its charter)
 
 
 
 
         
Delaware   7389   54-19555550
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
11465 Sunset Hills Road
Suite 200
Reston, Virginia 20190
(703) 438-2000
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
 
 
 
 
Magid M. Abraham, Ph.D.
President and Chief Executive Officer
comScore, Inc.
11465 Sunset Hills Road
Suite 200
Reston, Virginia 20190
(703) 438-2000
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
 
 
 
Copies to:
 
         
Jeffrey D. Saper, Esq.
Robert G. Day, Esq.
Wilson Sonsini Goodrich & Rosati,
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
  Christiana L. Lin, Esq.
General Counsel
comScore, Inc.
11465 Sunset Hills Road, Suite 200
Reston, Virginia 20190
Telephone: (703) 438-2000
Facsimile: (703) 438-2051
  Andrew J. Pitts, Esq.
Cravath, Swaine & Moore LLP
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Telephone: (212) 474-1000
Facsimile: (212) 474-3700
Mark R. Fitzgerald, Esq.
Wilson Sonsini Goodrich & Rosati,
Professional Corporation
1700 K Street, N.W., Fifth Floor
WashingtonD.C. 20006
Telephone: (202) 973-8800
Facsimile: (202) 973-8899
       
 
 
 
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this Registration Statement.
 
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
 
CALCULATION OF REGISTRATION FEE
 
                         
            Proposed Maximum
    Proposed Maximum
    Amount of
Title of each Class of
    Amount to be
    Offering Price per
    Aggregate Offering
    Registration
Securities to be Registered     Registered(1)     Share(2)     Price(2)     Fee(3)
Common Stock, par value $0.001 per share
    5,750,000     $16.00     $92,000,000     $2,825
                         
 
(1) Includes 750,000 shares the underwriters have an option to purchase to cover over-allotments, if any.
 
(2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457 under the Securities Act of 1933, as amended.
 
(3) $2,648 previously paid by the Registrant.
 
 
 
 
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 of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 



 

The information in this prospectus is not complete and may be changed. We may not 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 jurisdiction where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED JUNE 12, 2007
PRELIMINARY PROSPECTUS
 
5,000,000 Shares
 
(COMSCORE LOGO)
 
Common Stock
 
 
We are selling 5,000,000 shares of common stock. Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $14.00 and $16.00 per share. We have applied to list our common stock on The NASDAQ Global Market under the symbol “SCOR.”
 
The underwriters have an option to purchase a maximum of 750,000 additional shares from us and the selling stockholders to cover over-allotments of shares. The underwriters can exercise this right at any time within 30 days from the date of this prospectus. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders.
 
Investing in our common stock involves risks. See “Risk Factors” on page 9.
 
             
        Underwriting
   
    Price to
  Discounts and
  Proceeds to
    Public   Commissions   comScore
 
Per Share
  $                $                $             
Total
  $                $                $             
 
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.
 
Delivery of the shares of common stock will be made on or about          , 2007.
 
Credit Suisse Deutsche Bank Securities
 
William Blair & Company  
  Friedman Billings Ramsey  
  Jefferies & Company
 
 
The date of this prospectus is          , 2007



 

 
 
TABLE OF CONTENTS
 
         
    Page
 
  1
  9
  28
  29
  29
  30
  32
  34
  39
  62
  81
  86
  92
  101
  103
  107
  113
  115
  118
  122
  123
  123
  124
  F-1
 
 
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          , 2007 (25 days after the commencement of this 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.
 
 
“comScore”, “Media Metrix” and “MyMetrix” are registered trademarks in the U.S. and several other countries. Our unregistered trademarks and service marks include: “Ad Metrix”, “Campaign R/F”, “Campaign Metrix”, “comScore Marketing Solutions”, “Marketing Solutions”, “Plan Metrix”, “qSearch”, “Video Metrix” and “World Metrix”.



 

 
PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before buying shares in this offering. Therefore, you should read this entire prospectus carefully, including the “Risk Factors” section beginning on page 9 and our consolidated financial statements and the related notes. Unless the context requires otherwise, the words “we,” “us,” “our” and “comScore” refer to comScore, Inc. and its consolidated subsidiaries.
 
comScore, Inc.
 
We provide a leading digital marketing intelligence platform that helps our customers make better-informed business decisions and implement more effective digital business strategies. Our products and solutions offer our customers deep insights into consumer behavior, including objective, detailed information regarding usage of their online properties and those of their competitors, coupled with information on consumer demographic characteristics, attitudes, lifestyles and offline behavior.
 
Our digital marketing intelligence platform is comprised of proprietary databases and a computational infrastructure that measures, analyzes and reports on digital activity. The foundation of our platform is data collected from our comScore panel of more than two million Internet users worldwide who have granted us explicit permission to confidentially measure their Internet usage patterns, online and certain offline buying behavior and other activities. By applying advanced statistical methodologies to our panel data, we project consumers’ online behavior for the total online population and a wide variety of user categories.
 
We deliver our digital marketing intelligence through our comScore Media Metrix product family and through comScore Marketing Solutions. Media Metrix delivers digital media intelligence by providing an independent, third-party measurement of the size, behavior and characteristics of Web site and online advertising network audiences among home, work and university Internet users as well as insights into the effectiveness of online advertising. Our Marketing Solutions products combine the proprietary information gathered from the comScore panel with the vertical industry expertise of comScore analysts to deliver digital marketing intelligence, including the measurement of online advertising effectiveness, customized for specific industries. We typically deliver our Media Metrix products electronically in the form of weekly, monthly or quarterly reports. Customers can access current and historical Media Metrix data and analyze these data anytime online. Our Marketing Solutions products are typically delivered on a monthly, quarterly or ad hoc basis through electronic reports and analyses.
 
In 2006, we generated revenues of $66.3 million and had cash flow from operations of $10.9 million. For the three months ended March 31, 2007, we generated revenues of $18.7 million and had cash flow from operations of $3.2 million. We derive our revenues primarily from the fees that we charge for subscription-based products and customized projects. A significant characteristic of our business model is our large percentage of subscription-based contracts. Subscription-based revenues have grown to 77% of our total revenues in the first quarter of 2007. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this prospectus for a discussion of how we determine subscription-based revenues.
 
Our Industry
 
The Internet is a global digital medium for commerce, content, advertising and communications. According to International Data Corporation, or IDC, the number of global Internet users is projected to grow from approximately 968 million in 2005 to over 1.7 billion in 2010. As the online population continues to grow, the Internet is increasingly becoming a tool for research and commerce and for distributing and consuming media.
 
The interactive nature of digital media on the Internet enables businesses to access a wealth of user information that was virtually unavailable through offline audience measurement and marketing intelligence techniques. Digital media provide businesses with the opportunity to measure detailed user activity, such as


1



 

how users interact with Web page content; to assess how users respond to online marketing, such as which online ads users click on to pursue a transaction; and to analyze how audiences and user behavior compare across various Web sites. This type of detailed user data can be combined with demographic, attitudinal and transactional information to develop a deeper understanding of user behavior, attributes and preferences.
 
We believe that the growth in the online and digital media markets for digital commerce, content, advertising and communications creates an unprecedented opportunity for businesses to acquire a deeper understanding of both their customers and their competitive market position. Businesses can use accurate, relevant and objective digital marketing intelligence to develop and validate key strategies and improve performance.
 
The comScore Digital Marketing Intelligence Platform
 
We provide a leading digital marketing intelligence platform that enables our customers to devise and implement more effective digital business strategies.
 
Key attributes of our platform include:
 
Panel of global Internet users.  Our ability to provide digital marketing intelligence is based on information continuously gathered from a broad cross-section of more than two million Internet users worldwide who have granted us explicit permission to confidentially measure their Internet usage patterns, online and certain offline buying behavior and other activities.
 
Scalable technology infrastructure.  We developed our databases and computational infrastructure to support the growth in online activity among our global Internet panel and the increasing complexity of digital content formats, advertising channels and communication applications. The design of our technology infrastructure is based on distributed processing and data capture environments that allow for the collection and organization of vast amounts of data on online activity.
 
Benefits of our platform include:
 
Advanced digital marketing intelligence.  We use our proprietary technology to compile vast amounts of data on Internet user activity and to organize that data into discrete, measurable elements that can be used to provide actionable insights to our customers.
 
Objective third-party resource for digital marketing intelligence.  We are an independent company that is not affiliated with the digital businesses we measure and analyze, allowing us to serve as an objective third-party provider of digital marketing intelligence.
 
Vertical industry expertise.  We have developed expertise across a variety of industries to provide digital marketing intelligence specifically tailored to the needs of our customers operating in specific industry sectors. We have dedicated personnel to address the automotive, consumer packaged goods, entertainment, financial services, media, pharmaceutical, retail, technology, telecommunications and travel industries.
 
Ease of use and functionality.  The comScore digital marketing intelligence platform is designed to be easy to use by our customers. Our products are primarily available through the Internet using a standard browser; our customers do not need to install additional hardware or software to access our products.
 
Our Strategy
 
Our objective is to be the leading provider of global digital marketing intelligence products. We plan to pursue our objective through internal initiatives and, potentially, through acquisitions and other investments. The principal elements of our strategy are to:
 
  •  deepen relationships with current customers;
 
  •  grow our customer base;
 
  •  expand our digital marketing intelligence platform;


2



 

 
  •  address emerging digital media;
 
  •  extend technology leadership;
 
  •  build brand awareness through media exposure; and
 
  •  grow internationally.
 
Risks Related to Our Business
 
Our business is subject to a number of risks that you should be aware of before making an investment decision. These risks are discussed more fully in the section entitled “Risk Factors” immediately following this prospectus summary. We have a limited operating history, and we must continue to retain and attract customers. We must be able to maintain an Internet user panel of sufficient size in order to provide the quality of marketing intelligence demanded by our customers. Although we were profitable in each quarter of 2006 and the first quarter of 2007, we were not profitable in 2005, and we had, at March 31, 2007, an accumulated deficit of $98.6 million.
 
Company Information
 
We incorporated in August 1999 in Delaware. Our principal offices are located at 11465 Sunset Hills Road, Suite 200, Reston, Virginia 20190. Our telephone number is (703) 438-2000. You can access our Web site at www.comscore.com. Information contained on our Web site is not part of this prospectus and is not incorporated in this prospectus by reference.
 
comScore, Media Metrix and MyMetrix are registered trademarks in the U.S. and several other countries. Our unregistered trademarks and service marks include: Ad Metrix, Campaign R/F, Campaign Metrix, comScore Marketing Solutions, Marketing Solutions, Plan Metrix, qSearch, Video Metrix and World Metrix.


3



 

The Offering
 
Common stock offered by us 5,000,000 shares
 
Common stock outstanding after this offering
27,385,274 shares
 
Use of proceeds We intend to use the net proceeds from this offering for working capital, for capital expenditures and for other general corporate purposes. We may also use a portion of our net proceeds to fund potential acquisitions. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders, including for sales of their shares in the event that the underwriters exercise their option to purchase an additional 750,000 shares of our common stock from us and the selling stockholders. See “Use of Proceeds.”
 
Proposed NASDAQ Global Market symbol
SCOR
 
Risk factors See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.
 
The number of shares of common stock that will be outstanding after this offering is based on the number of shares outstanding as of March 31, 2007 and assumes the conversion of our preferred stock into an aggregate of 17,257,362 shares of our common stock. This number excludes:
 
  •  2,497,424 shares of common stock issuable upon exercise of options outstanding at a weighted-average exercise price of $2.07 per share;
 
  •  52,850 shares of our common stock issuable upon the settlement of outstanding restricted stock unit awards;
 
  •  456,754 shares of common stock reserved for future issuance under our 1999 Stock Plan;
 
  •  1,400,000 shares of common stock reserved for future issuance under our 2007 Equity Incentive Plan, which will be effective upon completion of this offering; and
 
  •  175,186 shares of common stock issuable upon the exercise of warrants, which total includes warrants for our preferred stock that will become exercisable for common stock after this offering, at a weighted-average exercise price of $4.87 per share.
 
Unless otherwise indicated, all information in this prospectus assumes:
 
  •  a 1-for-5 reverse split of our common stock that will occur prior to the consummation of this offering;
 
  •  the conversion, in accordance with our certificate of incorporation, of all our shares of outstanding preferred stock into an aggregate of 17,257,362 shares of our common stock;
 
  •  no exercise by the underwriters of their option to purchase up to 750,000 additional shares to cover over-allotments, consisting of 63,030 shares to be issued directly by us and 686,970 shares to be purchased from the selling stockholders; and
 
  •  the adoption of our amended and restated certificate of incorporation and bylaws that will occur immediately prior to the consummation of this offering.


4



 

Summary Historical Financial Data
 
You should read the summary historical financial data set forth below in conjunction with our consolidated financial statements, the notes to our consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this prospectus. The consolidated statements of operations data and the consolidated statements of cash flows data for each of the three years ended December 31, 2004, 2005 and 2006 as well as the consolidated balance sheet data as of December 31, 2005 and 2006 are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The consolidated statements of operations data for the three months ended March 31, 2006 and 2007 and the consolidated balance sheet data as of March 31, 2007 have been derived from our unaudited consolidated financial statements that are included elsewhere in this prospectus. We have prepared this unaudited financial information on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for such period. Our historical results are not necessarily indicative of results to be expected for future periods. Results for the three months ended March 31, 2007 are not necessarily indicative of results expected for the full year.
 
                                         
          Three Months Ended
 
    Year Ended December 31,     March 31,  
    2004     2005     2006     2006     2007  
                      (Unaudited)  
    (In thousands)  
 
Consolidated Statement of Operations Data:
                                       
Revenues
  $ 34,894     $ 50,267     $ 66,293     $ 14,985     $ 18,681  
                                         
Cost of revenues(1)
    13,153       18,218       20,560       5,148       5,388  
Selling and marketing(1)
    13,890       18,953       21,473       5,345       6,451  
Research and development(1)
    5,493       7,416       9,009       2,137       2,556  
General and administrative(1)
    4,982       7,089       8,293       1,918       2,507  
Amortization
    356       2,437       1,371       371       293  
                                         
Total expenses from operations
    37,874       54,113       60,706       14,919       17,195  
                                         
(Loss) income from operations
    (2,980 )     (3,846 )     5,587       66       1,486  
Interest (expense) income, net
    (246 )     (208 )     231       11       97  
(Loss) gain from foreign currency
          (96 )     125       6       (8 )
Revaluation of preferred stock warrant liabilities
          (14 )     (224 )     2       11  
                                         
(Loss) income before income taxes and cumulative effect of change in accounting principle
    (3,226 )     (4,164 )     5,719       85       1,586  
(Benefit) provision for income taxes
          (182 )     50             46  
                                         
Net (loss) income before cumulative effect of change in accounting principle
    (3,226 )     (3,982 )     5,669       85       1,540  
Cumulative effect of change in accounting principle
          (440 )                  
                                         
Net (loss) income
    (3,226 )     (4,422 )     5,669       85       1,540  
Accretion of redeemable preferred stock
    (2,141 )     (2,638 )     (3,179 )     (742 )     (885 )
                                         
Net (loss) income attributable to common stockholders
  $ (5,367 )   $ (7,060 )   $ 2,490     $ (657 )   $ 655  
                                         
 
 
(1) Amortization of stock-based compensation is included in the line items above as follows:
 
                                         
          Three Months Ended
 
    Year Ended December 31,     March 31,  
    2004     2005     2006     2006     2007  
                      (Unaudited)  
    (In thousands)  
 
Cost of revenues
  $    —     $    —     $ 12     $    —     $ 9  
Selling and marketing
                82       6       39  
Research and development
                13             8  
General and administrative
    14       3       91       1       51  


5



 

The following table presents consolidated balance sheet data as of March 31, 2007:
 
  •  on an actual basis without any adjustments to reflect subsequent or anticipated events;
 
  •  on a pro forma basis reflecting (i) the conversion of all outstanding shares of our Series A, Series B, Series C, Series C-1, Series D and Series E preferred stock into an aggregate of 17,257,362 shares of our common stock effective immediately prior to the completion of this offering, for a total of 22,385,274 shares of common stock, which amount includes 347,635 shares subject to put rights and (ii) the reclassification of our preferred stock warrant liabilities from current liabilities to additional paid in capital effective upon the completion of this offering; and
 
  •  on a pro forma as adjusted basis reflecting the conversion and reclassification described above and the receipt by us of the net proceeds from the sale of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share, the mid-point of the range on the front cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
 
                         
    As of March 31, 2007  
                Pro Forma
 
    Actual     Pro Forma     as Adjusted  
          (Unaudited)        
          (In thousands)        
 
Consolidated Balance Sheet Data:
                       
Cash, cash equivalents and short-term investments
  $ 18,181     $ 18,181     $ 84,931  
Total current assets
    34,520       34,520       101,270  
Total assets
    45,479       45,479       112,229  
Total current liabilities
    34,897       33,902       33,902  
Capital lease obligations, long-term
    1,896       1,896       1,896  
Common stock subject to put
    4,392       4,392       4,392  
Redeemable preferred stock
    102,580              
Stockholders’ equity (deficit)
    (98,683 )     4,892       71,642  
 
                                         
          Three Months Ended
 
    Year Ended December 31,     March 31,  
    2004     2005     2006     2006     2007  
                      (Unaudited)  
    (In thousands)  
 
Consolidated Statement of Cash Flows Data:
                                       
Net cash provided by operating activities
  $  1,907     $  4,253     $ 10,905     $ 2,824     $ 3,156  
Depreciation and amortization
    2,745       5,123       4,259       1,059       1,154  
Capital expenditures
    1,208       1,071       2,314       292       494  


6



 

                                         
          Three Months Ended
 
    Year Ended December 31,     March 31,  
    2004     2005     2006     2006     2007  
                      (Unaudited)  
    (In thousands)  
 
Other Financial and Operating Data (unaudited):
                                       
Adjusted EBITDA(2)
  $ (221 )   $ 730     $ 9,945     $ 1,140     $ 2,750  
 
 
(2) We define Adjusted EBITDA as net income plus the (benefit) provision for income taxes, depreciation, amortization of purchased intangible assets and stock-based compensation; plus interest expense (income) and other income. Adjusted EBITDA is not a measure of liquidity calculated in accordance with GAAP, and should be viewed as a supplement to — not a substitute for — our results of operations presented on the basis of GAAP. Adjusted EBITDA does not purport to represent cash flow provided by, or used in, operating activities as defined by GAAP. Our statement of cash flows presents our cash flow activity in accordance with GAAP. Furthermore, Adjusted EBITDA is not necessarily comparable to similarly-titled measures reported by other companies.
 
We prepare Adjusted EBITDA to eliminate the impact of items that we do not consider indicative of our core operating performance. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. Our presentation of Adjusted EBITDA should not be construed as an implication that our future results will be unaffected by unusual or non-recurring items.
 
We believe Adjusted EBITDA is useful to an investor in evaluating our operating performance for the following reasons:
 
  •  Adjusted EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest expense, taxes, depreciation and amortization, and stock-based compensation, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired;
 
  •  analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of companies in our industry;
 
  •  we believe Adjusted EBITDA is an important indicator of our operational strength and the performance of our business because it provides a link between profitability and operating cash flow. Although our cash flow from operations presented is a similar measure, Adjusted EBITDA is a better measure of our true operating results because it adjusts for the effects of collections of receivables, disbursements of payables, and other factors that are influenced by seasonal conditions; and
 
  •  prior to January 1, 2006, we accounted for stock-based compensation plans under the recognition and measurement provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, as permitted by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which is a revision of SFAS No. 123. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their estimated fair values. Pro forma disclosure is no longer an alternative permitted under SFAS 123R. We adopted the provisions of SFAS 123R on January 1, 2006, using the prospective method. Unvested stock-based awards issued to employees prior to January 1, 2006, the date that we adopted the provisions of SFAS 123R, were accounted for at the date of adoption using the intrinsic value method originally applied to those awards. We recorded approximately $198,000 in stock-based compensation expense subsequent to the adoption of SFAS 123R for the fiscal year ended December 31, 2006 as compared with approximately $14,000 and $3,000 for the years ended December 31, 2004 and 2005, respectively, prior to the adoption of SFAS 123R. By comparing our Adjusted EBITDA our investors can evaluate our operating results without the additional variations of stock compensation expense, which is not necessarily


7



 

  comparable from year to year due to the change in accounting treatment and is a non-cash expense that is not a primary measure of our operations.
 
Our management uses Adjusted EBITDA:
 
  •  as a measure of operating performance, because it does not include the impact of items not directly resulting from our core operations;
 
  •  for planning purposes, including the preparation of our annual operating budget;
 
  •  to allocate resources to enhance the financial performance of our business;
 
  •  as a metric for evaluating the performance of Dr. Magid M. Abraham, our Chief Executive Officer, and Mr. Gian M. Fulgoni, our Executive Chairman of the Board of Directors. The Company uses Adjusted EBITDA as a quantitative metric for setting both Dr. Abraham and Mr. Fulgoni’s respective salaries and bonuses. In addition, option grants held by both Dr. Abraham and Mr. Fulgoni include vesting which can be accelerated upon achieving certain targets tied to EBITDA;
 
  •  to evaluate the effectiveness of our business strategies; and
 
  •  in communications with our board of directors, stockholders, analysts and investors concerning our financial performance.
 
We understand that although Adjusted EBITDA is frequently used by securities analysts, lenders and others in their evaluation of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of, our results of operations as reported under GAAP. Some of these limitations are:
 
  •  Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or other contractual commitments;
 
  •  Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
 
  •  Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, related to our debts;
 
  •  Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and
 
  •  Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
 
A reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure, for each of the fiscal periods indicated is as follows:
 
                                         
          Three Months Ended
 
    Year Ended December 31,     March 31,  
    2004     2005     2006     2006     2007  
                      (Unaudited)  
    (In thousands)  
 
Net (loss) income
  $ (3,226 )   $ (4,422 )   $ 5,669     $ 85     $ 1,540  
(Benefit) provision for income taxes
          (182 )     50             46  
Amortization
    356       2,437       1,371       371       293  
Depreciation
    2,389       2,686       2,888       688       861  
Stock-based compensation
    14       3       198       7       107  
Interest expense (income), net
    246       208       (231 )     (11 )     (97 )
                                         
Adjusted EBITDA
  $ (221 )   $ 730     $ 9,945     $ 1,140     $ 2,750  
                                         


8



 

 
RISK FACTORS
 
An investment in our common stock offered by this prospectus involves a substantial risk of loss. You should carefully consider these risk factors, together with all of the other information included in this prospectus, before you decide to purchase shares of our common stock. The occurrence of any of the following risks could materially adversely affect our business, financial condition or operating results. In that case, the trading price of our common stock could decline, and you may lose part or all of your investment.
 
Risks Related to Our Business and Our Technologies
 
If we are not able to maintain a panel of sufficient size and scope, or if the costs of maintaining our panel materially increase, our business would be harmed.
 
We believe that the quality, size and scope of our Internet user panel are critical to our business. There can be no assurance, however, that we will be able to maintain a panel of sufficient size and scope to provide the quality of marketing intelligence that our customers demand from our products. If we fail to maintain a panel of sufficient size and scope, customers might decline to purchase our products or renew their subscriptions, our reputation could be damaged and our business could be materially and adversely affected. We expect that our panel costs may increase and may comprise a greater portion of our cost of revenues in the future. The costs associated with maintaining and improving the quality, size and scope of our panel are dependent on many factors, many of which are beyond our control, including the participation rate of potential panel members, the turnover among existing panel members and requirements for active participation of panel members, such as completing survey questionnaires. Concerns over the potential unauthorized disclosure of personal information or the classification of our software as “spyware” or “adware” may cause existing panel members to uninstall our software or may discourage potential panel members from installing our software. To the extent we experience greater turnover, or churn, in our panel than we have historically experienced, these costs would increase more rapidly. In addition, publishing content on the Internet and purchasing advertising space on Web sites may become more expensive or restrictive in the future, which could decrease the availability and increase the cost of advertising the incentives we offer to panel members. To the extent that such additional expenses are not accompanied by increased revenues, our operating margins would be reduced and our financial results would be adversely affected.
 
Our quarterly results of operations may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of securities analysts or investors, which could cause our stock price to decline.
 
Our quarterly results of operations may fluctuate as a result of a variety of factors, many of which are outside of our control. If our quarterly revenues or results of operations do not meet or exceed the expectations of securities analysts or investors, the price of our common stock could decline substantially. In addition to the other risk factors set forth in this “Risk Factors” section, factors that may cause fluctuations in our quarterly revenues or results of operations include:
 
  •  our ability to increase sales to existing customers and attract new customers;
 
  •  our failure to accurately estimate or control costs;
 
  •  our revenue recognition policies related to the timing of contract renewals, delivery of products and duration of contracts and the corresponding timing of revenue recognition;
 
  •  the mix of subscription-based versus project-based revenues;
 
  •  the impact on our contract renewal rates, in particular for our subscription-based products, caused by our customers’ budgetary constraints, competition, customer dissatisfaction or our customers’ actual or perceived lack of need for our products;
 
  •  the potential loss of significant customers;
 
  •  the effect of revenues generated from significant one-time projects;
 
  •  the amount and timing of capital expenditures and operating costs related to the maintenance and expansion of our operations and infrastructure;
 
  •  the timing and success of new product introductions by us or our competitors;


9



 

 
  •  variations in the demand for our products and the implementation cycles of our products by our customers;
 
  •  changes in our pricing and discounting policies or those of our competitors;
 
  •  service outages, other technical difficulties or security breaches;
 
  •  limitations relating to the capacity of our networks, systems and processes;
 
  •  maintaining appropriate staffing levels and capabilities relative to projected growth;
 
  •  adverse judgments or settlements in legal disputes;
 
  •  the timing of costs related to the development or acquisition of technologies, services or businesses to support our existing customer base and potential growth opportunities; and
 
  •  general economic, industry and market conditions and those conditions specific to Internet usage and online businesses.
 
We believe that our quarterly revenues and results of operations on a year-over-year and sequential quarter-over-quarter basis may vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful. You should not rely on the results of prior quarters as an indication of future performance.
 
The market for digital marketing intelligence is at an early stage of development, and if it does not develop, or develops more slowly than expected, our business will be harmed.
 
The market for digital marketing intelligence products is at a relatively early stage of development, and it is uncertain whether these products will achieve high levels of demand and increased market acceptance. Our success will depend to a substantial extent on the willingness of companies to increase their use of such products. Factors that may affect market acceptance include:
 
  •  the reliability of digital marketing intelligence products;
 
  •  public concern regarding privacy and data security;
 
  •  decisions of our customers and potential customers to develop digital marketing intelligence capabilities internally rather than purchasing such products from third-party suppliers like us;
 
  •  decisions by industry associations in the United States or in other countries that result in association-directed awards, on behalf of their members, of digital measurement contracts to one or a limited number of competitive vendors;
 
  •  the ability to maintain high levels of customer satisfaction; and
 
  •  the rate of growth in eCommerce, online advertising and digital media.
 
The market for our products may not develop further, or may develop more slowly than we expect, either of which could adversely affect our business and operating results.
 
We have a limited operating history and may not be able to achieve financial or operational success.
 
We were incorporated in 1999 and introduced our first syndicated Internet audience measurement product in 2000. Many of our other products were first introduced during the past few years. Accordingly, we are still in the early stages of development and have only a limited operating history upon which our business can be evaluated. You should evaluate our likelihood of financial and operational success in light of the risks, uncertainties, expenses, delays and difficulties associated with an early-stage business in an evolving market, some of which may be beyond our control, including:
 
  •  our ability to successfully manage any growth we may achieve in the future;
 
  •  the risks associated with operating a business in international markets, including China; and
 
  •  our ability to successfully integrate acquired businesses, technologies or services.


10



 

 
We have a history of significant net losses, may incur significant net losses in the future and may not maintain profitability.
 
We have incurred significant losses in recent periods, including net losses of $3.2 million and $4.4 million in 2004 and 2005, respectively. Although we achieved net income of $5.7 million in 2006 and $1.5 million for the three months ended March 31, 2007, we cannot assure you that we will continue to sustain or increase profitability in the future. As of March 31, 2007, we had an accumulated deficit of $98.6 million. Because a large portion of our costs are fixed, we may not be able to reduce or maintain our expenses in response to any decrease in our revenues, which would adversely affect our operating results. In addition, we expect operating expenses to increase as we implement certain growth initiatives, which include, among other things, the development of new products, expansion of our infrastructure, plans for international expansion and general and administrative expenses associated with being a public company. If our revenues do not increase to offset these expected increases in costs and operating expenses, our operating results would be materially and adversely affected. You should not consider our revenue growth in recent periods as indicative of our future performance, as our operating results for future periods are subject to numerous uncertainties.
 
Material defects or errors in our data collection and analysis systems could damage our reputation, result in significant costs to us and impair our ability to sell our products.
 
Our data collection and analysis systems are complex and may contain material defects or errors. In addition, the large amount of data that we collect may cause errors in our data collection and analysis systems. Any defect in our panelist data collection software, network systems, statistical projections or other methodologies could result in:
 
  •  loss of customers;
 
  •  damage to our brand;
 
  •  lost or delayed market acceptance and sales of our products;
 
  •  interruptions in the availability of our products;
 
  •  the incurrence of substantial costs to correct any material defect or error;
 
  •  sales credits, refunds or liability to our customers;
 
  •  diversion of development resources; and
 
  •  increased warranty and insurance costs.
 
Any material defect or error in our data collection systems could adversely affect our reputation and operating results.
 
Our business may be harmed if we deliver, or are perceived to deliver, inaccurate information to our customers or to the media.
 
If the information that we provide to our customers or the media is inaccurate, or perceived to be inaccurate, our brand may be harmed. The information that we collect or that is included in our databases and the statistical projections that we provide to our customers may contain inaccuracies. Any dissatisfaction by our customers or the media with our digital marketing intelligence, measurement or data collection and statistical projection methodologies could have an adverse effect on our ability to retain existing customers and attract new customers and could harm our brand. Additionally, we could be contractually required to pay damages, which could be substantial, to certain of our customers if the information we provide to them is found to be inaccurate. Any liability that we incur or any harm to our brand that we suffer because of actual or perceived irregularities or inaccuracies in the data we deliver to our customers could harm our business.


11



 

 
Our business may be harmed if we change our methodologies or the scope of information we collect.
 
We have in the past and may in the future change our methodologies or the scope of information we collect. Such changes may result from identified deficiencies in current methodologies, development of more advanced methodologies, changes in our business plans or expressed or perceived needs of our customers or potential customers. Any such changes or perceived changes, or our inability to accurately or adequately communicate to our customers and the media such changes and the potential implications of such changes on the data we have published or will publish in the future, may result in customer dissatisfaction, particularly if certain information is no longer collected or information collected in future periods is not comparable with information collected in prior periods. For example, in 2002, we integrated our existing methodologies with those of Jupiter Media Metrix, which we had recently acquired. As part of this process, we discontinued reporting certain metrics. Some customers were dissatisfied and either terminated their subscriptions or failed to renew their subscriptions because of these changes. Future changes to our methodologies or the information we collect may cause similar customer dissatisfaction and result in loss of customers.
 
We may lose customers or be liable to certain customers if we provide poor service or if our products do not comply with our customer agreements.
 
Errors in our systems resulting from the large amount of data that we collect, store and manage could cause the information that we collect to be incomplete or to contain inaccuracies that our customers regard as significant. The failure or inability of our systems, networks and processes to adequately handle the data in a high quality and consistent manner could result in the loss of customers. In addition, we may be liable to certain of our customers for damages they may incur resulting from these events, such as loss of business, loss of future revenues, breach of contract or loss of goodwill to their business.
 
Our insurance policies may not cover any claim against us for loss of data, inaccuracies in data or other indirect or consequential damages and defending a lawsuit, regardless of its merit, could be costly and divert management’s attention. Adequate insurance coverage may not be available in the future on acceptable terms, or at all. Any such developments could adversely affect our business and results of operations.
 
The market for digital marketing intelligence is highly competitive, and if we cannot compete effectively, our revenues will decline and our business will be harmed.
 
The market for digital marketing intelligence is highly competitive and is evolving rapidly. We compete primarily with providers of digital media intelligence and related analytical products and services. We also compete with providers of marketing services and solutions, with full-service survey providers and with internal solutions developed by customers and potential customers. Our principal competitors include:
 
  •  large and small companies that provide data and analysis of consumers’ online behavior, including Compete Inc., Hitwise Pty. Ltd and NetRatings, Inc.;
 
  •  online advertising companies that provide measurement of online ad effectiveness, including aQuantive, Inc., DoubleClick Inc., ValueClick, Inc. and WPP Group plc;
 
  •  companies that provide audience ratings for TV, radio and other media that have extended or may extend their current services, particularly in certain international markets, to the measurement of digital media, including Arbitron Inc., Nielsen Media Research, Inc. and Taylor Nelson Sofres plc;
 
  •  analytical services companies that provide customers with detailed information of behavior on their own Web sites, including Omniture, Inc., WebSideStory, Inc. and WebTrends Corporation;
 
  •  full-service market research firms and survey providers that may measure online behavior and attitudes, including Harris Interactive Inc., Ipsos Group, Taylor Nelson Sofres plc and The Nielsen Company; and
 
  •  specialty information providers for certain industries that we serve, including IMS Health Incorporated (healthcare) and Telephia, Inc. (telecommunications).


12



 

 
Some of our current competitors have longer operating histories, access to larger customer bases and substantially greater resources than we do. As a result, these competitors may be able to devote greater resources to marketing and promotional campaigns, panel retention, panel development or development of systems and technologies than we can. In addition, some of our competitors may adopt more aggressive pricing policies. Furthermore, large software companies, Internet portals and database management companies may enter our market or enhance their current offerings, either by developing competing services or by acquiring our competitors, and could leverage their significant resources and pre-existing relationships with our current and potential customers.
 
If we are unable to compete successfully against our current and future competitors, we may not be able to retain and acquire customers, and we may consequently experience a decline in revenues, reduced operating margins, loss of market share and diminished value from our products.
 
Concern over spyware and privacy, including any violations of privacy laws or perceived misuse of personal information, could cause public relations problems and could impair our ability to recruit panelists or maintain a panel of sufficient size and scope, which in turn could adversely affect our ability to provide our products.
 
Any perception of our practices as an invasion of privacy, whether legal or illegal, may subject us to public criticism. Existing and future privacy laws and increasing sensitivity of consumers to unauthorized disclosures and use of personal information may create negative public reaction related to our business practices. Public concern has increased recently regarding certain kinds of downloadable software known as “spyware” and “adware.” These concerns might cause users to refrain from downloading software from the Internet, including our proprietary technology, which could make it difficult to recruit additional panelists or maintain a panel of sufficient size and scope to provide meaningful marketing intelligence. In response to spyware and adware concerns, numerous programs are available, many of which are available for free, that claim to identify and remove spyware and adware from users’ computers. Some of these anti-spyware programs have in the past identified, and may in the future identify, our software as spyware or as a potential spyware application. We actively seek to prevent the inclusion of our software on lists of spyware applications or potential spyware applications, to apply best industry practices for obtaining appropriate consent from panelists and protecting the privacy and confidentiality of our panelist data and to comply with existing privacy laws. However, to the extent that we are not successful, or to the extent that new anti-spyware programs classify our software as spyware or as a potential spyware application, our brand may be harmed and users of these programs may uninstall our software. Any resulting reputational harm or decrease in the size or scope of our panel could reduce the demand for our products, increase the cost of recruiting panelists and adversely affect our ability to provide our products to our customers. Any of these effects could harm our business.
 
Any unauthorized disclosure or theft of private information we gather could harm our business.
 
Unauthorized disclosure of personally identifiable information regarding Web site visitors, whether through breach of our secure network by an unauthorized party, employee theft or misuse, or otherwise, could harm our business. If there were an inadvertent disclosure of personally identifiable information, or if a third party were to gain unauthorized access to the personally identifiable information we possess, our operations could be seriously disrupted and we could be subject to claims or litigation arising from damages suffered by panel members or pursuant to the agreements with our customers. In addition, we could incur significant costs in complying with the multitude of state, federal and foreign laws regarding the unauthorized disclosure of personal information. For example, California law requires companies that maintain data on California residents to inform individuals of any security breaches that result in their personal information being stolen. Finally, any perceived or actual unauthorized disclosure of the information we collect could harm our reputation, substantially impair our ability to attract and retain panelists and have an adverse impact on our business.


13



 

 
We may encounter difficulties managing our growth, which could adversely affect our results of operations.
 
We have experienced significant growth in recent periods. We have substantially expanded our overall business, customer base, headcount, data collection and processing infrastructure and operating procedures as our business has grown. We increased our total number of full time employees from 176 employees as of December 31, 2003 to 386 employees as of March 31, 2007, and we expect to continue to expand our workforce to meet our strategic objectives. In addition, during this same period, we made substantial investments in our network infrastructure operations as a result of our growth. We believe that we will need to continue to effectively manage and expand our organization, operations and facilities in order to accommodate our expected future growth. If we continue to grow, our current systems and facilities may not be adequate. Our need to effectively manage our operations and growth requires that we continue to assess and improve our operational, financial and management controls, reporting systems and procedures. If we are not able to efficiently and effectively manage our growth, our business may be impaired.
 
If the Internet advertising and eCommerce markets develop slower than we expect, our business will suffer.
 
Our future success will depend on continued growth in the use of the Internet as an advertising medium, a continued increase in eCommerce spending and the proliferation of the Internet as a platform for a wide variety of consumer activities. These markets are evolving rapidly, and it is not certain that their current growth trends will continue.
 
The adoption of Internet advertising, particularly by advertisers that have historically relied on traditional offline media, requires the acceptance of new approaches to conducting business. Advertisers may perceive Internet advertising to be less effective than traditional advertising for marketing their products. They may also be unwilling to pay premium rates for online advertising that is targeted at specific segments of users based on their demographic profile or Internet behavior. The online advertising and eCommerce markets may also be adversely affected by privacy issues relating to such targeted advertising, including that which makes use of personalized information. Furthermore, online merchants may not be able to establish online commerce models that are cost effective and may not learn how to effectively compete with other Web sites or offline merchants. In addition, consumers may not continue to shift their spending on goods and services from offline outlets to the Internet. As a result, growth in the use of the Internet for eCommerce may not continue at a rapid rate, or the Internet may not be adopted as a medium of commerce by a broad base of customers or companies worldwide. Because of the foregoing factors, among others, the market for Internet advertising and eCommerce may not continue to grow at significant rates. If these markets do not continue to develop, or if they develop slower than expected, our business will suffer.
 
Our growth depends upon our ability to retain existing large customers and add new large customers; however, to the extent we are successful in doing so, our ability to maintain profitability and positive cash flow may be impaired.
 
Our success depends in part on our ability to sell our products to large customers and on the renewal of the subscriptions of those customers in subsequent years. For the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2007, we derived over 38%, 41%, 39% and 39%, respectively, of our total revenues from our top 10 customers. The loss of any one or more of those customers could decrease our revenues and harm our current and future operating results. The addition of new large customers or increases in sales to existing large customers may require particularly long implementation periods and other costs, which may adversely affect our profitability. To compete effectively, we have in the past been, and may in the future be, forced to offer significant discounts to maintain existing customers or acquire other large customers. In addition, we may be forced to reduce or withdraw from our relationships with certain existing customers or refrain from acquiring certain new customers in order to acquire or maintain relationships with important large customers. As a result, new large customers or increased usage of our products by large customers may cause our profits to decline and our ability to sell our products to other customers could be adversely affected.
 
We derive a significant portion of our revenues from a single customer, Microsoft Corporation. For the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2007, we derived


14



 

approximately 5%, 14%, 12% and 12%, respectively, of our total revenues from Microsoft. If Microsoft were to cease or substantially reduce its use of our products, our revenues and earnings might decline.
 
If we fail to develop our brand, our business may suffer.
 
We believe that building and maintaining awareness of comScore and our portfolio of products in a cost-effective manner is critical to achieving widespread acceptance of our current and future products and is an important element in attracting new customers. We rely on our relationships with the media and the exposure we receive from numerous citations of our data by media outlets to build brand awareness and credibility among our customers and the marketplace. Furthermore, we believe that brand recognition will become more important for us as competition in our market increases. Our brand’s success will depend on the effectiveness of our marketing efforts and on our ability to provide reliable and valuable products to our customers at competitive prices. Our brand marketing activities may not yield increased revenues, and even if they do, any increased revenues may not offset the expenses we incur in attempting to build our brand. If we fail to successfully market our brand, we may fail to attract new customers, retain existing customers or attract media coverage to the extent necessary to realize a sufficient return on our brand-building efforts, and our business and results of operations could suffer.
 
Failure to effectively expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our products.
 
Increasing our customer base and achieving broader market acceptance of our products will depend to a significant extent on our ability to expand our sales and marketing operations. We expect to continue to rely on our direct sales force to obtain new customers. We plan to continue to expand our direct sales force both domestically and internationally. We believe that there is significant competition for direct sales personnel with the sales skills and technical knowledge that we require. Our ability to achieve significant growth in revenues in the future will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of direct sales personnel. In general, new hires require significant training and substantial experience before becoming productive. Our recent hires and planned hires may not become as productive as we require, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we currently operate or where we seek to conduct business. Our business will be seriously harmed if the efforts to expand our sales and marketing capabilities are not successful or if they do not generate a sufficient increase in revenues.
 
We have limited experience with respect to our pricing model, and if the prices we charge for our products are unacceptable to our customers, our revenues and operating results will be harmed.
 
We have limited experience in determining the prices for our products that our existing and potential customers will find acceptable. As the market for our products matures, or as new competitors introduce new products or services that compete with ours, we may be unable to renew our agreements with existing customers or attract new customers at the prices we have historically charged. As a result, it is possible that future competitive dynamics in our market may require us to reduce our prices, which could have an adverse effect on our revenues, profitability and operating results.
 
We derive a significant portion of our revenues from sales of our subscription-based digital marketing intelligence products. If our customers terminate or fail to renew their subscriptions, our business could suffer.
 
We currently derive a significant portion of our revenues from our subscription-based digital marketing intelligence products. Subscription-based products accounted for 70%, 75% and 77% of our revenues in 2005, 2006 and the first quarter of 2007, respectively. However, if our customers terminate their subscriptions for our products, do not renew their subscriptions, delay renewals of their subscriptions or renew on terms less favorable to us, our revenues could decline and our business could suffer.
 
Our customers have no obligation to renew after the expiration of their initial subscription period, which is typically one year, and we cannot assure you that current subscriptions will be renewed at the same or higher price levels, if at all. Some of our customers have elected not to renew their subscription agreements


15



 

with us in the past. If we experience a change of control, as defined in such agreements, some of our customers have the right to terminate their subscriptions. Moreover, some of our major customers have the right to cancel their subscription agreements without cause at any time. We have limited historical data with respect to rates of customer subscription renewals, so we cannot accurately predict future customer renewal rates. Our customer renewal rates may decline or fluctuate as a result of a number of factors, including customer satisfaction or dissatisfaction with our products, the prices or functionality of our products, the prices or functionality of products offered by our competitors, mergers and acquisitions affecting our customer base or reductions in our customers’ spending levels.
 
If we are unable to sell additional products to our existing customers or attract new customers, our revenue growth will be adversely affected.
 
To increase our revenues, we believe we must sell additional products to existing customers and regularly add new customers. If our existing and prospective customers do not perceive our products to be of sufficient value and quality, we may not be able to increase sales to existing customers and attract new customers, and our operating results will be adversely affected.
 
We depend on third parties for data that is critical to our business, and our business could suffer if we cannot continue to obtain data from these suppliers.
 
We rely on third-party data sources for information regarding certain offline activities of our panelists. The availability and accuracy of these data is important to the continuation and development of our products that link online activity to offline purchases. If this information is not available to us at commercially reasonable terms, or is found to be inaccurate, it could harm our reputation, business and financial performance.
 
System failures or delays in the operation of our computer and communications systems may harm our business.
 
Our success depends on the efficient and uninterrupted operation of our computer and communications systems and the third-party data centers we use. Our ability to collect and report accurate data may be interrupted by a number of factors, including our inability to access the Internet, the failure of our network or software systems, computer viruses, security breaches or variability in user traffic on customer Web sites. A failure of our network or data gathering procedures could impede the processing of data, cause the corruption or loss of data or prevent the timely delivery of our products.
 
In the future, we may need to expand our network and systems at a more rapid pace than we have in the past. Our network or systems may not be capable of meeting the demand for increased capacity, or we may incur additional unanticipated expenses to accommodate these capacity demands. In addition, we may lose valuable data, be unable to obtain or provide data on a timely basis or our network may temporarily shut down if we fail to adequately expand or maintain our network capabilities to meet future requirements. Any lapse in our ability to collect or transmit data may decrease the value of our products and prevent us from providing the data requested by our customers. Any disruption in our network processing or loss of Internet user data may damage our reputation and result in the loss of customers, and our business and results of operations could be adversely affected.
 
We rely on a small number of third-party service providers to host and deliver our products, and any interruptions or delays in services from these third parties could impair the delivery of our products and harm our business.
 
We host our products and serve all of our customers from two third-party data center facilities located in Virginia and Illinois. While we operate our equipment inside these facilities, we do not control the operation of either of these facilities, and, depending on service level requirements, we may not continue to operate or maintain redundant data center facilities for all of our products or for all of our data, which could increase our vulnerability. These facilities are vulnerable to damage or interruption from earthquakes, hurricanes, floods,


16



 

fires, power loss, telecommunications failures and similar events. They are also subject to break-ins, computer viruses, sabotage, intentional acts of vandalism and other misconduct. A natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems could result in lengthy interruptions in availability of our products. We may also encounter capacity limitations at our third-party data centers. Additionally, our data center facility agreements are of limited durations, and our data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, if at all. Our agreement for our data center facility located in Virginia expires on October 3, 2008, if not renewed, and our agreement for our data center facility located in Illinois expires on April 28, 2008, if not renewed. Although we are not substantially dependent on either data center facility because of planned redundancies, and although we currently are able to migrate to alternative data centers, such a migration may result in an interruption or delay in service. If we are unable to renew our agreements with the owners of the facilities on commercially reasonable terms, or if we migrate to a new data center, we may experience delays in delivering our products until an agreement with another data center facility can be arranged or the migration to a new facility is completed.
 
Further, we depend on access to the Internet through third-party bandwidth providers to operate our business. If we lose the services of one or more of our bandwidth providers for any reason, we could experience disruption in the delivery of our products or be required to retain the services of a replacement bandwidth provider. It may be difficult for us to replace any lost bandwidth on commercially reasonable terms, or at all, due to the large amount of bandwidth our operations require.
 
Our operations also rely heavily on the availability of electrical power and cooling capacity, which are also supplied by third-party providers. If we or the third-party data center operators that we use to deliver our products were to experience a major power outage or if the cost of electrical power increases significantly, our operations and profitability would be harmed. If we or the third-party data centers that we use were to experience a major power outage, we would have to rely on back-up generators, which may not function properly, and their supply may be inadequate. Such a power outage could result in the disruption of our business. Additionally, if our current facilities fail to have sufficient cooling capacity or availability of electrical power, we would need to find alternative facilities.
 
Any errors, defects, disruptions or other performance problems with our products caused by third parties could harm our reputation and may damage our business. Interruptions in the availability of our products may reduce our revenues due to increased turnaround time to complete projects, cause us to issue credits to customers, cause customers to terminate their subscription and project agreements or adversely affect our renewal rates. Our business would be harmed if our customers or potential customers believe our products are unreliable.
 
Because our long-term success depends, in part, on our ability to expand the sales of our products to customers located outside of the United States, our business will become increasingly susceptible to risks associated with international operations.
 
We have very limited experience operating in markets outside of the United States. Our inexperience in operating our business outside of the United States may increase the risk that the international expansion efforts we have begun to undertake will not be successful. In addition, conducting international operations subjects us to new risks that we have not generally faced in the United States. These risks include:
 
  •  recruitment and maintenance of a sufficiently large and representative panel both globally and in certain countries;
 
  •  different customer needs and buying behavior than we are accustomed to in the United States;
 
  •  difficulties and expenses associated with tailoring our products to local markets, including their translation into foreign languages;
 
  •  difficulties in staffing and managing international operations;
 
  •  longer accounts receivable payment cycles and difficulties in collecting accounts receivable;


17



 

 
  •  potentially adverse tax consequences, including the complexities of foreign value-added taxes and restrictions on the repatriation of earnings;
 
  •  reduced or varied protection for intellectual property rights in some countries;
 
  •  the burdens of complying with a wide variety of foreign laws and regulations;
 
  •  fluctuations in currency exchange rates;
 
  •  increased accounting and reporting burdens and complexities; and
 
  •  political, social and economic instability abroad, terrorist attacks and security concerns.
 
Additionally, operating in international markets requires significant management attention and financial resources. We cannot be certain that the investments and additional resources required to establish and maintain operations in other countries will hold their value or produce desired levels of revenues or profitability. We cannot be certain that we will be able to maintain and increase the size of the Internet user panel that we currently have in various countries or that we will be able to recruit a representative sample for our audience measurement products. In addition, there can be no assurance that Internet usage and eCommerce will continue to grow in international markets. In addition, governmental authorities in various countries have different views regarding regulatory oversight of the Internet. For example, the Chinese government has recently taken steps to restrict the content available to Internet users in China.
 
The impact of any one or more of these risks could negatively affect or delay our plans to expand our international business and, consequently, our future operating results.
 
If we fail to respond to technological developments, our products may become obsolete or less competitive.
 
Our future success will depend in part on our ability to modify or enhance our products to meet customer needs, to add functionality and to address technological advancements. For example, online publishers and advertisers have recently started to use Asynchronous JavaScript and XML, or AJAX, a development technique that allows Web applications to quickly make incremental updates without having to refresh the entire Web page. AJAX may make page views a less useful metric for measuring the usage and effectiveness of online media. If our products are not effective at addressing evolving customer needs that result from increased AJAX usage, our business may be harmed. Similarly, technological advances in the handheld device industry may lead to changes in our customers’ requirements. For example, if certain handheld devices become the primary mode of receiving content and conducting transactions on the Internet, and we are unable to adapt our software to collect information from such devices, then we would not be able to report on online activity. To remain competitive, we will need to develop new products that address these evolving technologies and standards. However, we may be unsuccessful in identifying new product opportunities or in developing or marketing new products in a timely or cost-effective manner. In addition, our product innovations may not achieve the market penetration or price levels necessary for profitability. If we are unable to develop enhancements to, and new features for, our existing products or if we are unable to develop new products that keep pace with rapid technological developments or changing industry standards, our products may become obsolete, less marketable and less competitive, and our business will be harmed.
 
The success of our business depends in large part on our ability to protect and enforce our intellectual property rights.
 
We rely on a combination of patent, copyright, service mark, trademark and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights, all of which provide only limited protection. While we have filed a number of patent applications and own one issued patent, we cannot assure you that any additional patents will be issued with respect to any of our pending or future patent applications, nor can we assure you that any patent issued to us will provide adequate protection, or that any patents issued to us will not be challenged, invalidated, circumvented, or held to be unenforceable in actions against alleged infringers. Also, we cannot assure you that any future trademark or service mark registrations will be issued with respect to pending or future applications or that any of our


18



 

registered trademarks and service marks will be enforceable or provide adequate protection of our proprietary rights. Furthermore, adequate (or any) patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are available.
 
We endeavor to enter into agreements with our employees and contractors and with parties with whom we do business in order to limit access to and disclosure of our proprietary information. We cannot be certain that the steps we have taken will prevent unauthorized use of our technology or the reverse engineering of our technology. Moreover, third parties might independently develop technologies that are competitive to ours or that infringe upon our intellectual property. In addition, the legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in Internet-related industries are uncertain and still evolving, both in the United States and in other countries. The protection of our intellectual property rights may depend on our legal actions against any infringers being successful. We cannot be sure any such actions will be successful.
 
An assertion from a third party that we are infringing its intellectual property, whether such assertions are valid or not, could subject us to costly and time-consuming litigation or expensive licenses.
 
The Internet, software and technology industries are characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets and by frequent litigation based on allegations of infringement or other violations of intellectual property rights, domestically or internationally. As we grow and face increasing competition, the probability that one or more third parties will make intellectual property rights claims against us increases. In such cases, our technologies may be found to infringe on the intellectual property rights of others. Additionally, many of our subscription agreements may require us to indemnify our customers for third-party intellectual property infringement claims, which would increase our costs if we have to defend such claims and may require that we pay damages and provide alternative services if there were an adverse ruling in any such claims. Intellectual property claims could harm our relationships with our customers, deter future customers from subscribing to our products or expose us to litigation. Even if we are not a party to any litigation between a customer and a third party, an adverse outcome in any such litigation could make it more difficult for us to defend against intellectual property claims by the third party in any subsequent litigation in which we are a named party. Any of these results could adversely affect our brand, business and results of operations.
 
One of our competitors has filed patent infringement lawsuits against others, demonstrating this party’s propensity for patent litigation. It is possible that this third party, or some other third party, may bring an action against us, and thus cause us to incur the substantial costs and risks of litigation. Any intellectual property rights claim against us or our customers, with or without merit, could be time-consuming and expensive to litigate or settle and could divert management resources and attention. An adverse determination also could prevent us from offering our products to our customers and may require that we procure or develop substitute products that do not infringe on other parties’ rights.
 
With respect to any intellectual property rights claim against us or our customers, we may have to pay damages or stop using technology found to be in violation of a third party’s rights. We may have to seek a license for the technology, which may not be available on reasonable terms or at all, may significantly increase our operating expenses or may significantly restrict our business activities in one or more respects. We may also be required to develop alternative non-infringing technology, which could require significant effort and expense. Any of these outcomes could adversely affect our business and results of operations.
 
Domestic or foreign laws, regulations or enforcement actions may limit our ability to collect and use information about Internet users or restrict or prohibit our product offerings, causing a decrease in the value of our products and an adverse impact on the sales of our products.
 
Our business could be adversely impacted by existing or future laws or regulations of, or actions by, domestic or foreign regulatory agencies. For example, privacy concerns could lead to legislative, judicial and regulatory limitations on our ability to collect, maintain and use information about Internet users in the United States and abroad. Various state legislatures, including those of Utah and California, have enacted legislation designed to protect Internet users’ privacy, for example by prohibiting spyware. In recent years, similar legislation has been


19



 

proposed in other states and at the federal level and has been enacted in foreign countries, most notably by the European Union, which adopted a privacy directive regulating the collection of personally identifiable information online. These laws and regulations, if drafted or interpreted broadly, could be deemed to apply to the technology we use, and could restrict our information collection methods or decrease the amount and utility of the information that we would be permitted to collect. In addition, our ability to conduct business in certain foreign jurisdictions, including China, is restricted by the laws, regulations and agency actions of those jurisdictions. The costs of compliance with, and the other burdens imposed by, these and other laws or regulatory actions may prevent us from selling our products or increase the costs associated with selling our products, and may affect our ability to invest in or jointly develop products in the United States and in foreign jurisdictions.
 
In addition, failure to comply with these and other laws and regulations may result in, among other things, administrative enforcement actions and fines, class action lawsuits and civil and criminal liability. State attorneys general, governmental and non-governmental entities and private persons may bring legal actions asserting that our methods of collecting, using and distributing Web site visitor information are illegal or improper, which could require us to spend significant time and resources defending these claims. For example, some companies that collect, use and distribute Web site visitor information have been the subject of governmental investigations and class-action lawsuits. Any such regulatory or civil action that is brought against us, even if unsuccessful, may distract our management’s attention, divert our resources, negatively affect our public image or reputation among our panelists and customers and harm our business.
 
The impact of any of these current or future laws or regulations could make it more difficult or expensive to attract or maintain panelists, particularly in affected jurisdictions, and could adversely affect our business and results of operations.
 
Laws related to the regulation of the Internet could adversely affect our business.
 
Laws and regulations that apply to communications and commerce over the Internet are becoming more prevalent. In particular, the growth and development of the market for eCommerce has prompted calls for more stringent tax, consumer protection and privacy laws in the United States and abroad that may impose additional burdens on companies conducting business online. The adoption, modification or interpretation of laws or regulations relating to the Internet or our customers’ digital operations could negatively affect the businesses of our customers and reduce their demand for our products.
 
If we fail to respond to evolving industry standards, our products may become obsolete or less competitive.
 
The market for our products is characterized by rapid technological advances, changes in customer requirements, changes in protocols and evolving industry standards. For example, industry associations such as the Advertising Research Foundation, the Council of American Survey Research Organizations, the Internet Advertising Bureau, or IAB, and the Media Ratings Council have independently initiated efforts to either review online market research methodologies or to develop minimum standards for online market research. On April 19, 2007, we received a letter from the IAB, citing discrepancies between our audience measurement data, those of our competitors and those provided by the server logs of IAB’s member organizations. In its letter, the IAB asked us to submit to an independent audit and accreditation process of our audience measurement systems and processes. On May 16, 2007, we attended a meeting hosted by the IAB in which we indicated a commitment to finalizing a timeline for a full audit and accreditation by the Media Ratings Council within the 90 days of the meeting.
 
Any standards adopted by the IAB or similar organizations may lead to costly changes to our procedures and methodologies. As a result, the cost of developing our digital marketing intelligence products could increase. If we do not adhere to standards prescribed by the IAB or other industry associations, our customers could choose to purchase products from competing companies that meet such standards. Furthermore, industry associations based in countries outside of the United States often endorse certain vendors or methodologies. If our methodologies fail to receive an endorsement from an important industry association located in a foreign country, advertising agencies, media companies and advertisers in that country may not purchase our products. As a result, our efforts to further expand internationally could be adversely affected.


20



 

 
The success of our business depends on the continued growth of the Internet as a medium for commerce, content, advertising and communications.
 
Expansion in the sales of our products depends on the continued acceptance of the Internet as a platform for commerce, content, advertising and communications. The use of the Internet as a medium for commerce, content, advertising and communications could be adversely impacted by delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease-of-use, accessibility and quality-of-service. The performance of the Internet and its acceptance as a medium for commerce, content commerce, content, advertising and communications has been harmed by viruses, worms, and similar malicious programs, and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If for any reason the Internet does not remain a medium for widespread commerce, content, advertising and communications, the demand for our products would be significantly reduced, which would harm our business.
 
We rely on our management team and need additional personnel to grow our business, and the loss of one or more key employees or the inability to attract and retain qualified personnel could harm our business.
 
Our success and future growth depends to a significant degree on the skills and continued services of our management team, including our founders, Magid M. Abraham, Ph.D. and Gian M. Fulgoni. Our future success also depends on our ability to retain, attract and motivate highly skilled technical, managerial, marketing and customer service personnel, including members of our management team. All of our employees work for us on an at-will basis. We plan to hire additional personnel in all areas of our business, particularly for our sales, marketing and technology development areas, both domestically and internationally, which will likely increase our recruiting and hiring costs. Competition for these types of personnel is intense, particularly in the Internet and software industries. As a result, we may be unable to successfully attract or retain qualified personnel. Our inability to retain and attract the necessary personnel could adversely affect our business.
 
We may expand through investments in, or acquisitions of, other companies, any of which may not be successful and may divert our management’s attention.
 
Our business strategy may include acquiring complementary products, technologies or businesses. We also may enter into relationships with other businesses in order to expand our product offerings, which could involve preferred or exclusive licenses, discount pricing or investments in other companies.
 
Negotiating any such transactions could be time-consuming, difficult and expensive, and our ability to close these transactions may be subject to regulatory or other approvals and other conditions which are beyond our control. Consequently, we can make no assurances that any such transactions, if undertaken and announced, would be completed.
 
An acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to be employed by us, and we may have difficulty retaining the customers of any acquired business due to changes in management and ownership. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for ongoing development of our business. Moreover, we cannot assure you that the anticipated benefits of any acquisition, investment or business relationship would be realized or that we would not be exposed to unknown liabilities. In connection with any such transaction, we may:
 
  •  encounter difficulties retaining key employees of the acquired company or integrating diverse business cultures;
 
  •  issue additional equity securities that would dilute the common stock held by existing stockholders;
 
  •  incur large charges or substantial liabilities;
 
  •  become subject to adverse tax consequences, substantial depreciation or deferred compensation charges;


21



 

 
  •  use cash that we may need in the future to operate our business; and
 
  •  incur debt on terms unfavorable to us or that we are unable to repay.
 
The impact of any one or more of these factors could adversely affect our business or results of operations or cause the price of our common stock to decline substantially.
 
Changes in, or interpretations of, accounting rules and regulations, including recent rules and regulations regarding expensing of stock options, could result in unfavorable accounting charges or cause us to change our compensation policies.
 
Accounting methods and policies, including policies governing revenue recognition, expenses and accounting for stock options are continually subject to review, interpretation, and guidance from relevant accounting authorities, including the Financial Accounting Standards Board, or FASB, and the SEC. Changes to, or interpretations of, accounting methods or policies in the future may require us to reclassify, restate or otherwise change or revise our financial statements, including those contained in this prospectus.
 
On December 16, 2004, the FASB issued SFAS No. 123R (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123R). SFAS No. 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. We were required to adopt SFAS No. 123R on January 1, 2006, and have adopted it as of that date.
 
As permitted by SFAS No. 123, we accounted for share-based payments to employees through December 31, 2005 using APB Opinion No. 25’s intrinsic value method and, as such, generally recognized no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123R’s fair value method has had a significant impact on the presentation of our results of operations, although it has not impacted our overall financial position. The long-term impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future and the assumptions for the variables which impact the computation of the fair value of any such grants.
 
Historically, we have used stock options as part of our compensation programs to motivate and retain existing employees and to attract new employees. Because we are now required to expense stock options, we may choose to reduce our reliance on stock options as part of our compensation packages. If we reduce our use of stock options, it may be more difficult for us to retain and attract qualified employees. If we do not reduce our use of stock options, our expenses in future periods may increase. Beginning in 2007, we issued restricted stock awards and restricted stock units, and we expect to reduce our use of stock options as a form of stock-based compensation, but we cannot be certain whether or how our stock-based compensation policy will change in the future.
 
Investors could lose confidence in our financial reports, and our business and stock price may be adversely affected, if our internal control over financial reporting is found by management or by our independent registered public accounting firm to not be adequate or if we disclose significant existing or potential deficiencies or material weaknesses in those controls.
 
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to include a report on our internal control over financial reporting in our Annual Report on Form 10-K for each year beginning with the year ending December 31, 2008. That report must include management’s assessment of the effectiveness of our internal control over financial reporting as of the end of that and each subsequent fiscal year. Additionally, our independent registered public accounting firm will be required to issue a report on management’s assessment of our internal control over financial reporting and on their evaluation of the operating effectiveness of our internal control over financial reporting.
 
We continue to evaluate our existing internal controls against the standards adopted by the Public Company Accounting Oversight Board, or PCAOB. During the course of our ongoing evaluation of our


22



 

internal controls, we have in the past identified, and may in the future identify, areas requiring improvement, and may have to design enhanced processes and controls to address issues identified through this review. Remedying any significant deficiencies or material weaknesses that we or our independent registered public accounting firm may identify could require us to incur significant costs and expend significant time and management resources. We cannot assure you that any of the measures we may implement to remedy any such deficiencies will effectively mitigate or remedy such deficiencies. In addition, we cannot assure you that we will be able to complete the work necessary for our management to issue its management report in a timely manner, or that we will be able to complete any work required for our management to be able to conclude that our internal control over financial reporting is operating effectively. If we are not able to complete the assessment under Section 404 in a timely manner or to remedy any identified material weaknesses, we and our independent registered public accounting firm would be unable to conclude that our internal control over financial reporting is effective as of December 31, 2008. If our internal control over financial reporting is found by management or by our independent registered public accountant to not be adequate or if we disclose significant existing or potential deficiencies or material weaknesses in those controls, investors could lose confidence in our financial reports, we could be subject to sanctions or investigations by The NASDAQ Global Market, the Securities and Exchange Commission or other regulatory authorities and our stock price could be adversely affected.
 
A determination that there is a significant deficiency or material weakness in the effectiveness of our internal control over financial reporting could also reduce our ability to obtain financing or could increase the cost of any financing we obtain and require additional expenditures to comply with applicable requirements.
 
Our net operating loss carryforwards may expire unutilized or underutilized, which could prevent us from offsetting future taxable income.
 
We have experienced “changes in control” that have triggered the limitations of Section 382 of the Internal Revenue Code on our net operating loss carryforwards. As a result, we may be limited in the portion of net operating loss carryforwards that we can use in the future to offset taxable income for U.S. Federal income tax purposes.
 
At December 31, 2006, we had both federal and state net operating loss carryforwards of approximately $81.2 million, which are available to offset future taxable income. The federal net operating loss carryforwards will begin to expire in 2020. The state net operating loss carryforwards begin to expire in 2010.
 
In addition, at December 31, 2005 and 2006, we had net operating loss carryforwards for tax purposes related to our foreign subsidiaries of $966,000 and $703,000, respectively, which begin to expire in 2010.
 
In 2006, deferred tax assets, before valuation allowance, decreased approximately $2.4 million due to our use of net operating loss carryforwards to offset taxable income.
 
We periodically assess the likelihood that we will be able to recover our deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible profits. As a result of this analysis of all available evidence, both positive and negative, we concluded that a full valuation allowance against deferred tax assets should be applied as of December 31, 2006. To the extent we determine that all or a portion of our valuation allowance is no longer necessary, we will recognize an income tax benefit in the period such determination is made for the reversal of the valuation allowance. Once the valuation allowance is eliminated or reduced, its reversal will no longer be available to offset our current tax provision. These events could have a material impact on our reported results of operations.
 
We may require additional capital to support business growth, and this capital may not be available on acceptable terms or at all.
 
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new products or enhance our existing products, enhance our operating infrastructure and acquire complementary businesses and technologies.


23



 

Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could include restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited. In addition, the terms of any additional equity or debt issuances may adversely affect the value and price of our common stock.
 
Risks Related to this Offering
 
We cannot assure you that a market will develop for our common stock or what the market price of our common stock will be.
 
Before this offering, there was no public trading market for our common stock, and we cannot assure you that one will develop or be sustained after this offering. If a market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at an attractive price or at all. We cannot predict the prices at which our common stock will trade.
 
The initial public offering price for our common stock will be determined through our negotiations with the underwriters, and may not bear any relationship to the market price at which our common stock will trade after this offering or to any other established criteria of the value of our business. The price of our common stock that will prevail in the market after this offering may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control and may not be related to our operating performance. It is possible that, in future quarters, our operating results may be below the expectations of securities analysts or investors. As a result of these and other factors, the price of our common stock may decline, possibly materially. These fluctuations could cause you to lose all or part of your investment in our common stock. The public trading price for our common stock after this offering will be affected by a number of factors, including:
 
  •  price and volume fluctuations in the overall stock market from time to time;
 
  •  volatility in the market price and trading volume of technology companies and of companies in our industry;
 
  •  actual or anticipated changes or fluctuations in our operating results;
 
  •  actual or anticipated changes in expectations regarding our performance by investors or securities analysts;
 
  •  the failure of securities analysts to cover our common stock after this offering or changes in financial estimates by analysts;
 
  •  actual or anticipated developments in our competitors’ businesses or the competitive landscape;
 
  •  actual or perceived inaccuracies in information we provide to our customers or the media;
 
  •  litigation involving us, our industry or both;
 
  •  regulatory developments;
 
  •  privacy and security concerns, including public perception of our practices as an invasion of privacy;
 
  •  general economic conditions and trends;
 
  •  major catastrophic events;
 
  •  sales of large blocks of our stock;


24



 

 
  •  the timing and success of new product introductions or upgrades by us or our competitors;
 
  •  changes in our pricing policies or payment terms or those of our competitors;
 
  •  concerns relating to the security of our network and systems;
 
  •  our ability to expand our operations, domestically and internationally, and the amount and timing of expenditures related to this expansion; or
 
  •  departures of key personnel.
 
In addition, the stock prices of many technology companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies.
 
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation, which could result in substantial costs and divert our management’s attention and resources from our business.
 
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 27,385,274 outstanding shares of common stock based on the number of shares outstanding on March 31, 2007 and assuming no exercise of the underwriters’ over-allotment option and no exercise of outstanding options or warrants after March 31, 2007. The 5,000,000  shares sold pursuant to this offering will be immediately tradable without restriction. Of the remaining shares:
 
  •  1,174,021 shares will be eligible for sale immediately upon completion of this offering, subject in some cases to volume and other restrictions of Rule 144 and Rule 701 under the Securities Act; and
 
  •  an additional 21,211,253 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.
 
The lock-up agreements expire 180 days after the date of this prospectus, provided that the 180-day period may be extended in certain cases for up to 34 additional days under certain circumstances where we announce or pre-announce earnings or a material event within approximately 17 days prior to, or approximately 16 days after, the termination of the 180-day period. Credit Suisse Securities (USA) LLC may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreement. Credit Suisse Securities (USA) LLC has agreed that certain existing and former employees designated by us may sell an amount of shares valued at approximately $2.1 million based on the initial public offering price during the 180-day lock-up period following the offering. Based on an assumed offering price of $15.00 per share, the mid-point of the range on the front cover of this prospectus, such designated existing and former employees would be permitted to sell up to 140,000 shares of common stock during the 180-day lock-up period following the offering. The totals indicated above do not reflect this exception to the lock-up agreements. After the closing of this offering, we intend to register approximately 4,500,000 shares of common stock that have been reserved for future issuance under our stock incentive plans.
 
Insiders will continue to have substantial control over us after this offering, which could limit your ability to influence the outcome of key transactions, including a change of control.
 
Our directors, executive officers and each of our stockholders who own greater than 5% of our outstanding common stock and their affiliates, in the aggregate, will beneficially own approximately 71% of the outstanding


25



 

shares of our common stock after this offering. As a result, these stockholders, if acting together, would be able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might affect the market price of our common stock.
 
Our management will have broad discretion over the use of the proceeds from this offering and may not apply the proceeds of this offering in ways that increase the value of your investment.
 
Our management will have broad discretion to use the net proceeds we receive from this offering, and you will be relying on its judgment regarding the application of these proceeds. We expect to use the net proceeds from this offering for general corporate purposes, which may include working capital, capital expenditures, other corporate expenses and potential acquisitions of complementary products, technologies or businesses. We have not allocated these net proceeds for any specific purposes. However, management may not apply the net proceeds of this offering in ways that increase the value of your investment.
 
If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution.
 
If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution of $12.30 per share based on an assumed initial public offering price of $15.00 per share, the mid-point of the range shown on the cover of this prospectus, because the price that you pay will be substantially greater than the net tangible book value per share of the common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock. You will experience additional dilution upon the exercise of options to purchase common stock under our equity incentive plans, if we issue restricted stock to our employees under these plans or if we otherwise issue additional shares of our common stock. See “Dilution.”
 
We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting a public company, which could adversely affect our operating results.
 
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as rules implemented by the Securities and Exchange Commission and The NASDAQ Stock Market, requires certain corporate governance practices for public companies. Our management and other personnel will need to devote a substantial amount of time to public reporting requirements and corporate governance. We expect these rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We will also incur additional costs associated with our public company reporting requirements. We are unable to currently estimate these costs with any degree of certainty. If these costs are not offset by increased revenues and improved financial performance, our operating results would be adversely affected. We also expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors or as executive officers.
 
Provisions in our certificate of incorporation and bylaws and under Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.
 
Our certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change of control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:


26



 

 
  •  establish a classified board of directors so that not all members of our board of directors are elected at one time;
 
  •  authorize “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;
 
  •  prohibit stockholder action by written consent, which means that all stockholder actions must be taken at a meeting of our stockholders;
 
  •  prohibit stockholders from calling a special meeting of our stockholders;
 
  •  provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and
 
  •  establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
 
Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder and which may discourage, delay or prevent a change of control of our company.


27



 

 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
 
This prospectus, including the sections entitled “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. These statements may relate to, but are not limited to, expectations of future operating results or financial performance, capital expenditures, introduction of new products, regulatory compliance, plans for growth and future operations, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. These risks and other factors include, but are not limited to, those listed under “Risk Factors.” In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential,” “might,” “would,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.
 
We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we do not plan to publicly update or revise any forward-looking statements after we distribute this prospectus, whether as a result of any new information, future events or otherwise. Potential investors should not place undue reliance on our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of any of the events described in the “Risk Factors” section and elsewhere in this prospectus could harm our business, prospects, operating results and financial condition. 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.
 
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, including those generated by Forrester Research, IDC, JupiterResearch, Infonetics, the Internet Advertising Bureau and PricewaterhouseCoopers. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. These industry publications, surveys and forecasts generally indicate that their information has been obtained from sources believed to be reliable. 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 actual results to differ materially from those expressed in these publications, surveys and forecasts.


28



 

 
USE OF PROCEEDS
 
We estimate that the net proceeds from the sale of the 5,000,000 shares of our common stock that we are selling in this offering will be approximately $66.8 million, based on an assumed initial public offering price of $15.00 per share, the mid-point of the range on the front cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses. If the underwriters’ over-allotment option is exercised in full, we estimate that we will receive additional net proceeds of approximately $0.9 million. We will not receive any proceeds from any sale of shares of our common stock by the selling stockholders pursuant to the exercise of the underwriters’ over-allotment option.
 
The principal purposes of this offering are to create a public market for our common stock and to facilitate our future access to the public equity markets, as well as to obtain additional capital.
 
Except as discussed below, we currently have no specific plans for the use of a significant portion of the net proceeds of this offering. However, we anticipate that we will use the net proceeds from this offering for general corporate purposes, which may include working capital, capital expenditures, other corporate expenses and acquisitions of complementary products, technologies or businesses. We expect to use approximately $4 million of the net proceeds for capital expenditures related to computer hardware and equipment as well as office improvements. We currently have no agreements or commitments with respect to acquisitions of complementary products, technologies or businesses. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business. Pending these uses, we intend to invest the net proceeds of this offering primarily in short-term, investment-grade, interest-bearing instruments.
 
If we were to price the offering at $14.00 per share, the low end of the range on the cover of this prospectus, we estimate that we would receive net proceeds of $62.1 million, assuming the total number of shares offered by us remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If we were to price the offering at $16.00 per share, the high end of the range on the cover of this prospectus, then we estimate that we would receive net proceeds of $71.4 million, assuming the total number of shares offered by us remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
 
DIVIDEND POLICY
 
We have never declared or paid any dividends on our capital stock. We anticipate that we will retain any earnings to support operations and to finance the growth and development of our business. Accordingly, we do not expect to pay cash dividends on our common stock in the foreseeable future.


29



 

 
CAPITALIZATION
 
The following table sets forth our capitalization as of March 31, 2007:
 
  •  on an actual basis without any adjustments to reflect subsequent or anticipated events;
 
  •  on a pro forma basis reflecting (i) the conversion of all outstanding shares of our Series A, Series B, Series C, Series C-1, Series D and Series E preferred stock into an aggregate of 17,257,362 shares of our common stock effective immediately prior to the completion of this offering, for a total of 22,385,274 shares of common stock, which amount includes 347,635 shares subject to put rights and (ii) the reclassification of our preferred stock warrant liabilities from current liabilities to additional paid in capital effective upon the completion of this offering; and
 
  •  on a pro forma as adjusted basis reflecting the conversion and reclassification described above and the receipt by us of the net proceeds from the sale of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share, the mid-point of the range on the front cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
 
You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.
 
                         
    As of March 31, 2007  
                Pro Forma
 
    Actual     Pro Forma     as Adjusted  
    (In thousands, except share data)  
 
Preferred stock warrant liabilities
    995              
Redeemable preferred stock, $0.001 par value, 73,673,224 shares authorized; 14,365,936 shares issued and outstanding actual; no shares issued or outstanding pro forma and pro forma as adjusted
    102,580              
Common stock subject to put right, 347,635 shares outstanding
    4,392       4,392       4,392  
Stockholders’ equity (deficit):
                       
Preferred stock, $0.001 par value; no shares authorized, issued or outstanding on an actual and pro forma basis; 5,000,000 shares authorized, no shares issued and outstanding on a pro forma as adjusted basis
                 
Common stock, $0.001 par value; 130,000,000 shares authorized, 4,780,277 shares issued and outstanding actual; 100,000,000 shares authorized, 22,037,639 shares issued and outstanding pro forma and 27,037,639 shares issued and outstanding pro forma as adjusted
    5       22       27  
Additional paid-in capital
          103,558       170,303  
Accumulated other comprehensive loss
    (70 )     (70 )     (70 )
Accumulated deficit
    (98,618 )     (98,618 )     (98,618 )
                         
Total stockholders’ equity (deficit)
    (98,683 )     4,892       71,642  
                         
Total capitalization
  $ 9,284     $ 9,284     $ 76,034  
                         


30



 

 
The preceding table excludes, as of March 31, 2007:
 
  •  2,497,424 shares of common stock issuable upon exercise of options outstanding at a weighted-average exercise price of $2.07 per share;
 
  •  52,850 shares of our common stock issuable upon the settlement of outstanding restricted stock unit awards;
 
  •  456,754 shares of common stock reserved for future issuance under our 1999 Stock Plan;
 
  •  1,400,000 shares of common stock reserved for future issuance under our 2007 Equity Incentive Plan, which will be effective upon completion of this offering; and
 
  •  175,186 shares of common stock issuable upon the exercise of warrants, which total includes warrants for our preferred stock that will become exercisable for common stock after this offering, at a weighted-average exercise price of $4.87 per share.
 
A $1.00 decrease or increase in the offering price would result in an approximately $4.7 million increase or decrease in each of pro forma as adjusted additional paid-in capital, pro forma as adjusted total stockholders’ equity and pro forma as adjusted total capitalization, assuming the total number of shares offered by us remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.


31



 

 
DILUTION
 
If you invest in our common stock, your interest will be diluted to the extent of the difference between the 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 after this offering. Our pro forma net tangible book value as of March 31, 2007 was $7.2 million, or $0.32 per share of common stock. Pro forma net tangible book value per share represents total tangible assets less total liabilities, divided by the number of shares of common stock outstanding after giving effect to (i) the conversion of all outstanding shares of our Series A, Series B, Series C, Series C-1, Series D and Series E preferred stock into an aggregate of 17,257,362 shares of our common stock effective immediately prior to the completion of this offering, for a total of 22,385,274 shares of common stock outstanding on March 31, 2007, which amount includes 347,635 shares subject to put rights and (ii) the reclassification of our preferred stock warrant liabilities from current liabilities to additional paid in capital effective upon the completion of this offering. After giving effect to the sale by us of 5,000,000 shares of our common stock in this offering at the assumed initial public offering price of $15.00 per share, the mid-point of the range on the front cover of this prospectus, and after deducting the underwriting discounts and commissions and our estimated offering expenses, our pro forma as adjusted net tangible book value as of March 31, 2007 would have been $74.0 million, or $2.70 per share. This represents an immediate increase in net tangible book value of $2.38 per share to our existing stockholders and an immediate dilution of $12.30 per share to our new investors purchasing shares of common stock in this offering. The following table illustrates this dilution on a per share basis:
 
                 
Assumed initial public offering price per share
          $ 15.00  
Pro forma net tangible book value per share as of March 31, 2007
  $ 0.32          
Increase in pro forma net tangible book value per share attributable to this offering per share to existing investors
    2.38          
                 
Pro forma as adjusted net tangible book value per share after this offering
               
              2.70  
                 
Dilution per share to new investors
          $ 12.30  
                 
 
The following table sets forth as of March 31, 2007, on a pro forma as adjusted basis, the differences between the number of shares of common stock purchased from us, the total consideration paid, and the average price per share paid by existing stockholders and new investors purchasing shares of our common stock in this offering based on an assumed initial public offering price of $15.00 per share, the mid-point of the range on the front cover of this prospectus, and before deducting underwriting discounts and commissions and estimated offering expenses.
 
                                         
    Shares Purchased     Total Consideration     Average Price
 
    Number     Percent     Amount     Percent     per Share  
 
Existing stockholders
    22,385,274       82 %   $ 88,892,972       54 %   $ 3.97  
New investors
    5,000,000       18       75,000,000       46       15.00  
                                         
Total
    27,385,274       100.0 %   $ 163,892,972       100.0 %        
                                         
 
If the underwriters exercise their over-allotment option in full, the percentage of shares of common stock held by existing stockholders will decrease to approximately 80% of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors will be increased to 5,750,000, or approximately 20% of the total number of shares of our common stock outstanding after this offering.
 
A $1.00 decrease in the assumed offering price would decrease our net tangible book value after this offering by $4.7 million and dilution in net tangible book value per share to new investors by $0.83, assuming the total number of shares offered by us remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 decrease in the assumed offering price would decrease each of total consideration paid by new investors in the offering and total consideration paid by all stockholders by $5.0 million, assuming the total number of shares offered by us


32



 

remains the same and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
 
A $1.00 increase in the assumed offering price would increase our net tangible book value after this offering by $4.7 million and dilution in net tangible book value per share to new investors by $0.83, assuming the total number of shares offered by us remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase in the assumed offering price would increase each of total consideration paid by new investors in the offering and total consideration paid by all stockholders by $5.0 million, assuming the total number of shares offered by us remains the same and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
 
The preceding table excludes, as of March 31, 2007:
 
  •  2,497,424 shares of common stock issuable upon exercise of options outstanding at a weighted-average exercise price of $2.07 per share;
 
  •  52,850 shares of our common stock issuable upon the settlement of outstanding restricted stock unit awards;
 
  •  456,754 shares of common stock reserved for future issuance under our 1999 Stock Plan;
 
  •  1,400,000 shares of common stock reserved for future issuance under our 2007 Equity Incentive Plan, which will be effective upon completion of this offering; and
 
  •  175,186 shares of common stock issuable upon the exercise of warrants, which total includes warrants for our preferred stock that will become exercisable for common stock after this offering, at a weighted-average exercise price of $4.87 per share.
 
Assuming the exercise of all options and warrants outstanding as of March 31, 2007, the effects would be as follows:
 
  •  pro forma as adjusted net tangible book value per share after this offering would decrease from $2.70 to $2.66, resulting in additional dilution to new investors of $0.04 per share;
 
  •  our existing stockholders, including the holders of these options and warrants, would own 83%, and our new investors would own 17% of the total number of shares of our common stock outstanding upon the completion of this offering; and
 
  •  our existing stockholders, including the holders of these options and warrants, would have paid 56% of the total consideration, at an average price per share of $3.79, and our new investors would have paid 44% of the total consideration.


33



 

 
SELECTED CONSOLIDATED FINANCIAL DATA
 
You should read the selected consolidated financial data set forth below in conjunction with our consolidated financial statements, the notes to our consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this prospectus.
 
The consolidated statements of operations data and the consolidated statements of cash flows data for the years ended January 31, 2003 and December 31, 2003 as well as the consolidated balance sheet data as of January 31, 2003 and December 31, 2003 and 2004 are derived from our audited consolidated financial statements not included in this prospectus. The consolidated statements of operations data and the consolidated statements of cash flows data for each of the three years ended December 31, 2004, 2005 and 2006 as well as the consolidated balance sheet data as of December 31, 2005 and 2006 are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. In 2003, we changed our fiscal year to the twelve months ended December 31. The year ended January 31, 2003 and the year ended December 31, 2003 in the table below both include the results of operations for the month ended January 31, 2003. The consolidated statements of operations data for the three months ended March 31, 2006 and 2007 and the consolidated balance sheet data as of March 31, 2007 have been derived from our unaudited consolidated financial statements that are included elsewhere in this prospectus. We have prepared this unaudited financial information on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for such period. Our historical results are not necessarily indicative of results to be expected for future periods. Results for the three months ended March 31, 2007 are not necessarily indicative of results expected for the full year.
 
The pro forma basic net income per share data are unaudited and give effect to (i) the conversion into common stock of all outstanding shares of our Series A, Series B, Series C, Series C-1, Series D and Series E preferred stock from their dates of original issuance and (ii) the reclassification of our preferred stock warrant liabilities from current liabilities to additional paid in capital as of the beginning of each period.
 


34



 

                                                         
    Year Ended
          Three Months Ended
 
    January 31,     Year Ended December 31,     March 31,  
    2003     2003     2004     2005     2006     2006     2007  
                                  (Unaudited)  
    (In thousands, except share and per share data)  
 
Consolidated Statement of Operations Data:
                                                       
Revenues
  $ 15,400     $ 23,355     $ 34,894     $ 50,267     $ 66,293     $ 14,985     $ 18,681  
                                                         
Cost of revenues(1)
    14,925       15,671       13,153       18,218       20,560       5,148       5,388  
Selling and marketing(1)
    9,134       11,677       13,890       18,953       21,473       5,345       6,451  
Research and development(1)
    6,172       5,444       5,493       7,416       9,009       2,137       2,556  
General and administrative(1)
    4,431       4,124       4,982       7,089       8,293       1,918       2,507  
Amortization
    562       772       356       2,437       1,371       371       293  
                                                         
Total expenses from operations
    35,224       37,688       37,874       54,113       60,706       14,919       17,195  
                                                         
(Loss) income from operations
    (19,824 )     (14,333 )     (2,980 )     (3,846 )     5,587       66       1,486  
Interest (expense) income, net
    (885 )     (595 )     (246 )     (208 )     231       11       97  
(Loss) gain from foreign currency
                      (96 )     125       6       (8 )
Revaluation of preferred stock warrant liabilities
                      (14 )     (224 )     2       11  
                                                         
(Loss) income before income taxes and cumulative effect of change in accounting principle
    (20,709 )     (14,928 )     (3,226 )     (4,164 )     5,719       85       1,586  
(Benefit) provision for income taxes
                      (182 )     50             46  
                                                         
Net (loss) income before cumulative effect of change in accounting principle
    (20,709 )     (14,928 )     (3,226 )     (3,982 )     5,669       85       1,540  
Cumulative effect of change in accounting principle
                      (440 )                  
                                                         
Net (loss) income
    (20,709 )     (14,928 )     (3,226 )     (4,422 )     5,669       85       1,540  
Accretion of redeemable preferred stock
    (2,742 )     (3,795 )     (2,141 )     (2,638 )     (3,179 )     (742 )     (885 )
                                                         
Net (loss) income attributable to common stockholders
  $ (23,451 )   $ (18,723 )   $ (5,367 )   $ (7,060 )   $ 2,490     $ (657 )   $ 655  
                                                         
                                                         
Net (loss) income attributable to common stockholders per common share:
                                                       
Basic and diluted
  $ (9.08 )   $ (6.96 )   $ (1.88 )   $ (2.30 )   $ 0.00     $ (0.19 )   $ 0.00  
Weighted-average number of shares used in per share calculations:
                                                       
Basic and diluted
    2,583,798       2,690,288       2,871,713       3,130,194       3,847,213       3,609,928       4,196,736  
Pro forma net (loss) income attributable to common stockholders per common share:
                                                       
Basic
                                  $ 0.27             $ 0.07  
Diluted
                                  $ 0.24             $ 0.06  
Pro forma weighted-average number of shares used in per share calculations:
                                                       
Basic
                                    21,102,787               21,454,187  
Diluted
                                    23,355,721               23,497,480  

35



 

 
(1) Amortization of stock-based compensation is included in the preceding line items above as follows:
 
                                                         
    Year Ended
                                     
    January 31,     Year Ended December 31,     Three Months Ended March 31,  
    2003     2003     2004     2005     2006     2006     2007  
                                  (Unaudited)  
    (In thousands)  
 
Cost of revenues
  $     $     $     $     $ 12     $     $ 9  
Selling and marketing
                            82       6       39  
Research and development
                            13             8  
General and administrative
    128       171       14       3       91       1       51  
                                                         
                                                         
                                                         
    As of
                            As of
       
    January 31,
    As of December 31,     March 31,
       
    2003     2003     2004     2005     2006     2007        
                                  (Unaudited)        
    (In thousands)  
 
Consolidated Balance Sheet Data:
                                                       
Cash, cash equivalents and short-term investments
  $ 6,973     $ 9,557     $ 8,404     $ 9,174     $ 16,032     $ 18,181          
Total current assets
    11,778       15,482       15,678       20,792       31,493       34,520          
Total assets
    23,603       22,154       23,618       29,477       42,087       45,479          
Total current liabilities
    13,645       15,515       18,591       27,220       32,880       34,897          
Equipment loan and capital lease obligations, long-term
    4,072       2,421       1,438       1,283       2,261       1,896          
Preferred stock warrant liabilities and common stock subject to put
    404       349       (2,141 )     4,997       5,362       5,387          
Redeemable preferred stock
    78,586       93,737       95,878       98,516       101,695       102,580          
Stockholders’ deficit
    (73,735 )     (89,919 )     (95,230 )     (102,294 )     (99,557 )     (98,683 )        
                                                         
                                                         
                                                         
    Year Ended
                                     
    January 31,
    Year Ended December 31,     Three Months Ended March 31,  
    2003     2003     2004     2005     2006     2006     2007  
                                  (Unaudited)  
    (In thousands)  
 
Consolidated Statement of Cash Flows Data:                                                        
Net cash provided by (used in) operating activities
  $ (12,653 )   $ (3,912 )   $ 1,907     $ 4,253     $ 10,905     $ 2,824     $ 3,156  
Depreciation and amortization
    5,865       6,604       2,745       5,123       4,259       1,059       1,154  
Capital expenditures
    1,962       726       1,208       1,071       2,314       292       494  
Other Financial and Operating Data (unaudited):                                                
Adjusted EBITDA(2)
  $ (13,930 )   $ (7,558 )   $ (221 )   $ 730     $ 9,945     $ 1,140     $ 2,750  
 
(2) We define Adjusted EBITDA as net income plus the (benefit) provision for income taxes, depreciation, amortization of purchased intangible assets and stock-based compensation; plus interest expense (income) and other income. Adjusted EBITDA is not a measure of liquidity calculated in accordance with GAAP, and should be viewed as a supplement to — not a substitute for — our results of operations presented on the basis of GAAP. Adjusted EBITDA does not purport to represent cash flow provided by, or used in, operating activities as defined by GAAP. Our statement of cash flows presents our cash flow activity in


36



 

accordance with GAAP. Furthermore, Adjusted EBITDA is not necessarily comparable to similarly-titled measures reported by other companies.
 
We prepare Adjusted EBITDA to eliminate the impact of items that we do not consider indicative of our core operating performance. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. Our presentation of Adjusted EBITDA should not be construed as an implication that our future results will be unaffected by unusual or non-recurring items.
 
We believe Adjusted EBITDA is useful to an investor in evaluating our operating performance for the following reasons:
 
  •  Adjusted EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest expense, taxes, depreciation and amortization, and stock-based compensation, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired;
 
  •  analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of companies in our industry;
 
  •  we believe Adjusted EBITDA is an important indicator of our operating performance because it provides a link between profitability and operating cash flow. Although our cash flow from operations presented is a similar measure, Adjusted EBITDA is a better measure of our true operating results because it adjusts for the effects of collections of receivables, disbursements of payables, and other factors that are influenced by seasonal conditions; and
 
  •  prior to January 1, 2006, we accounted for stock-based compensation plans under the recognition and measurement provision s of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, as permitted by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which is a revision of SFAS No. 123. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their estimated fair values. Pro forma disclosure is no longer an alternative permitted under SFAS 123R. We adopted the provisions of SFAS 123R on January 1, 2006, using the prospective method. Unvested stock-based awards issued prior to January 1, 2006, the date that we adopted the provisions of SFAS 123R, were accounted for at the date of adoption using the intrinsic value method originally applied to those awards. We recorded approximately $198,000 in stock-based compensation expense subsequent to the adoption of SFAS 123R for the fiscal year ended December 31, 2006 as compared with approximately $14,000 and $3,000 for the years ended December 31, 2004 and 2005, respectively, prior to the adoption of SFAS 123R. By comparing our Adjusted EBITDA our investors can evaluate our operating results without the additional variations of stock compensation expense, which is not necessarily comparable from year to year due to the change in accounting treatment and is a non-cash expense that is not a primary measure of our operations.
 
Our management uses Adjusted EBITDA:
 
  •  as a measure of operating performance, because it removes the impact of items not directly resulting from our core operations;
 
  •  for planning purposes, including the preparation of our internal annual operating budget;
 
  •  to allocate resources to enhance the financial performance of our business;
 
  •  as a metric for evaluating the performance of Dr. Magid M. Abraham, our Chief Executive Officer, and Mr. Gian M. Fulgoni, our Executive Chairman of the Board of Directors. The Company uses Adjusted EBITDA as a quantitative metric for setting both Dr. Abraham and Mr. Fulgoni’s respective salaries


37



 

  and bonuses. In addition, option grants held by both Dr. Abraham and Mr. Fulgoni include vesting which can be accelerated upon achieving certain targets tied to EBITDA;
 
  •  to evaluate the effectiveness of our operational strategies; and
 
  •  in communications with the board of directors, stockholders, analysts and investors concerning our financial performance.
 
We understand that although Adjusted EBITDA is frequently used by securities analysts, lenders, investors and others in their evaluation of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis, of our results of operations as reported under GAAP. Some of these limitations are:
 
  •  Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or other contractual commitments;
 
  •  Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
 
  •  Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, related to our debts;
 
  •  Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and
 
  •  Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
 
A reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure, for each of the fiscal periods indicated is as follows:
 
                                                         
    Year Ended
          Three Months Ended
 
    January 31,
    Year Ended December 31,     March 31,  
    2003     2003     2004     2005     2006     2006     2007  
                                  (Unaudited)  
    (In thousands)  
 
Net (loss) income
  $ (20,708 )   $ (14,928 )   $ (3,226 )   $ (4,422 )   $ 5,669     $ 85     $ 1,540  
(Benefit) provision for income taxes
                      (182 )     50             46  
Amortization
    562       772       356       2,437       1,371       371       293  
Depreciation
    5,303       5,832       2,389       2,686       2,888       688       861  
Stock-based compensation
    28       171       14       3       198       7       107  
Interest expense (income), net
    885       595       246       208       (231 )     (11 )     (97 )
                                                         
Adjusted EBITDA
  $ (13,930 )   $ (7,558 )   $ (221 )   $ 730     $ 9,945     $ 1,140     $ 2,750  
                                                         


38



 

 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this prospectus. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this prospectus. See “Cautionary Note Regarding Forward-Looking Statements.”
 
Overview
 
We provide a leading digital marketing intelligence platform that helps our customers make better-informed business decisions and implement more effective digital business strategies. Our products and solutions offer our customers deep insights into consumer behavior, including objective, detailed information regarding usage of their online properties and those of their competitors, coupled with information on consumer demographic characteristics, attitudes, lifestyles and offline behavior.
 
Our digital marketing intelligence platform is comprised of proprietary databases and a computational infrastructure that measures, analyzes and reports on digital activity. The foundation of our platform is data collected from our comScore panel of more than two million Internet users worldwide who have granted us explicit permission to confidentially measure their Internet usage patterns, online and certain offline buying behavior and other activities. By applying advanced statistical methodologies to our panel data, we project consumers’ online behavior for the total online population and a wide variety of user categories.
 
We deliver our digital marketing intelligence through our comScore Media Metrix product family and through comScore Marketing Solutions. Media Metrix delivers digital media intelligence by providing an independent, third-party measurement of the size, behavior and characteristics of Web site and online advertising network audiences among home, work and university Internet users as well as insight into the effectiveness of online advertising. Our Marketing Solutions products combine the proprietary information gathered from the comScore panel with the vertical industry expertise of comScore analysts to deliver digital marketing intelligence, including the measurement of online advertising effectiveness, customized for specific industries. We typically deliver our Media Metrix products electronically in the form of weekly, monthly or quarterly reports. Customers can access current and historical Media Metrix data and analyze these data anytime online. Our Marketing Solutions products are typically delivered on a monthly, quarterly or ad hoc basis through electronic reports and analyses.
 
Our company was founded in August 1999. By 2000, we had established a panel of Internet users and began delivering digital marketing intelligence products that measured online browsing and buying behavior to our first customers. We also introduced netScore, our initial syndicated Internet audience measurement product. We accelerated our introduction of new products in 2003 with the launch of Plan Metrix (formerly AiM 2.0), qSearch, the Campaign R/F (Reach and Frequency) analysis system and product offerings that measure online activity at the local market level. By 2004, we had built a global panel of over two million Internet users. In that year, in cooperation with Arbitron, we launched a service that provides ratings of online radio audiences. In 2005, we expanded our presence in Europe by opening an office in London. In 2006, we continued to expand our measurement capabilities with the launch of World Metrix, a product that provides worldwide data on digital media usage, and Video Metrix, our product that measures the audience for streaming online video.
 
We have complemented our internal development initiatives with select acquisitions. On June 6, 2002, we acquired certain Media Metrix assets from Jupiter Media Metrix, Inc. Through this acquisition, we acquired certain Internet audience measurement services that report details of Web site usage and visitor demographics. On July 28, 2004, we acquired the outstanding stock of Denaro and Associates, Inc, otherwise known as Q2 Brand Intelligence, Inc. or Q2, to improve our ability to provide our customers more robust survey research integrated with our underlying digital marketing intelligence platform. The total cost of the


39



 

acquisition was approximately $3.3 million, consisting of cash and shares of our common stock. For the ninety-day period beginning July 28, 2007, the former shareholder of Q2 (or its transferees) has the right to sell 212,000 shares of our common stock back to us for an aggregate price of $2.65 million, or $12.50 per share. On January 4, 2005, we acquired the assets and assumed certain liabilities of SurveySite Inc., or SurveySite. Through this acquisition, we acquired proprietary Internet-based data-collection technologies and increased our customer penetration and revenues in the survey business. The total cost of the acquisition was approximately $3.6 million, consisting of cash and shares of our common stock. For the ninety-day period beginning January 1, 2008, the former shareholders of SurveySite (or their transferees) have the right to sell 135,635 shares of our common stock back to us for an aggregate price of approximately $1.8 million, or $13.35 per share.
 
Our total revenues have grown from $15.4 million during the fiscal year ending January 31, 2003 to $66.3 million during the fiscal year ended December 31, 2006, a compounded annual growth rate of approximately 63%. By comparison, our total expenses from operations have grown from $35.2 million to $60.7 million over the same period, a compounded annual growth rate of approximately 20%. The growth in our revenues was primarily the result of:
 
  •  increased sales to existing customers, as a result of our efforts to deepen our relationships with these clients by increasing their awareness of, and confidence in, the value of our digital marketing intelligence platform;
 
  •  growth in our customer base through the addition of new customers;
 
  •  increases in the prices of our products and services;
 
  •  the sales of new products to existing and new customers; and
 
  •  growth in sales outside of the U.S. as a result of entering into new international markets.
 
As of March 31, 2007, we had 743 customers, compared to 334 as of January 31, 2003. We sell most of our products through our direct sales force.
 
Our Revenues
 
We derive our revenues primarily from the fees that we charge for subscription-based products and customized projects. We define subscription-based revenues as revenues that we generate from products that we deliver to a customer on a recurring basis. We define project revenues as revenues that we generate from customized projects that are performed for a specific customer on a non-recurring basis. We market our subscription-based products, customized projects and survey services within the comScore Media Metrix product family and through comScore Marketing Solutions.
 
A significant characteristic of our business model is our large percentage of subscription-based contracts. Subscription-based revenues accounted for 78% of our total revenues in 2004 and decreased to 70% of total revenues in 2005 primarily due to the acquisition of SurveySite. Subscription-based revenues increased to 75% of total revenues in 2006 and to 77% of total revenues during the first quarter of 2007.
 
Many of our customers who initially purchased a customized project have subsequently purchased one of our subscription-based products. Similarly, many of our subscription-based customers have subsequently purchased additional customized projects.
 
Historically, we have generated most of our revenues from the sale and delivery of our products to companies and organizations located within the United States. We intend to expand our international revenues by selling our products and deploying our direct sales force model in additional international markets in the future. For the fiscal year ended December 31, 2006, our international revenues were $5.7 million, an increase of $2.4 million over international revenues of $3.4 million for the fiscal year ended December 31, 2005. For the three months ended March 31, 2007, our international revenues were $1.8 million, an increase of $670,000 over international revenues of $1.1 million for the three months ended March 31, 2006. International revenues


40



 

comprised approximately 7%, 9% and 10% of our total revenues for the fiscal years ended December 31, 2005 and 2006 and the three months ended March 31, 2007, respectively.
 
We anticipate that revenues from our U.S. customers will continue to constitute the substantial majority of our revenues, but we expect that revenues from customers outside of the U.S. will increase as a percentage of total revenues as we build greater international recognition of our brand and expand our sales operations globally.
 
Subscription Revenues
 
We generate a significant proportion of our subscription-based revenues from our Media Metrix product family. Products within the Media Metrix family include Media Metrix 2.0, Plan Metrix, World Metrix and Video Metrix. We intend to commercially launch Ad Metrix in the second quarter of 2007. These product offerings provide subscribers with intelligence on digital media usage, audience characteristics, audience demographics and online and offline purchasing behavior. Customers who subscribe to our Media Metrix products are provided with login IDs to our Web site, have access to our database and can generate reports at anytime.
 
We also generate subscription-based revenues from certain reports and analyses provided through comScore Marketing Solutions, if that work is procured by customers for at least a nine month period and the customer enters into an agreement to continue or extend the work. Through our Marketing Solutions products, we deliver digital marketing intelligence relating to specific industries, such as automotive, consumer packaged goods, entertainment, financial services, media, pharmaceutical, retail, technology, telecommunications and travel. This marketing intelligence leverages our global consumer panel and extensive database to deliver information unique to a particular customer’s needs on a recurring schedule, as well as on a continual-access basis. Our Marketing Solutions customer agreements typically include a fixed fee with an initial term of at least one year. We also provide these products on a non-subscription basis as described under “Project Revenues” below.
 
In addition, we generate subscription-based revenues from survey products that we sell to our customers. In conducting our surveys, we generally use our global Internet user panel. After questionnaires are distributed to the panel members and completed, we compile their responses and then deliver our findings to the customer, who also has ongoing access to the survey response data as they are compiled and updated over time. These data include responses and information collected from the actual survey questionnaire and can also include behavioral information that we passively collect from our panelists. If a customer contractually commits to having a survey conducted on a recurring basis, we classify the revenues generated from such survey products as subscription-based revenues. Approximately half of the revenues derived from survey products are generated on a subscription basis. Our contracts for survey services typically include fixed fee agreements that range from two months to one year.
 
Project Revenues
 
We generate project revenues by providing customized information reports to our customers on a non-recurring basis as part of our comScore Marketing Solutions. For example, a customer in the media industry might request a custom report that profiles the behavior of the customer’s active online users and contrasts their market share and loyalty with similar metrics for a competitor’s online user base. If this customer continues to request the report beyond an initial project term of at least nine months and enters into an agreement to purchase the report on a recurring basis, we begin to classify these future revenues as subscription-based.
 
In the second quarter of 2007, we intend to commercially launch Campaign Metrix, a product that will provide detailed information about online advertising campaigns. Project revenues from Campaign Metrix will be generated when a customer accesses or downloads a report through our Web site. Pricing for our Campaign Metrix product will initially be based on the scope of the information provided in the report generated by the customer.


41



 

 
Critical Accounting Policies and Estimates
 
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and the accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. While our significant accounting policies are described in more detail in the notes to our consolidated financial statements included in this prospectus, we believe the following accounting policies to be the most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
 
Revenue Recognition
 
We recognize revenues in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104). SAB 104 requires that four basic criteria must be met prior to revenue recognition: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or the services have been rendered, (iii) the fee is fixed and determinable, and (iv) collection of the resulting receivable is reasonably assured.
 
We generate revenues by providing access to our online database or delivering information obtained from our database, usually in the form of periodic reports. Revenues are typically recognized on a straight-line basis over the period in which access to data or reports are provided, which generally ranges from three to 24 months.
 
We also generate revenues through survey services under contracts ranging in term from two months to one year. Our survey services consist of survey and questionnaire design with subsequent data collection, analysis and reporting. We recognize revenues on a straight-line basis over the estimated data collection period once the survey or questionnaire design has been delivered. Any change in the estimated data collection period results in an adjustment to revenues recognized in future periods.
 
Certain of our arrangements contain multiple elements, consisting of the various services we offer. Multiple element arrangements typically consist of a subscription to our online database combined with periodic reports of customized data. These arrangements are accounted for in accordance with Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. We have determined that there is not objective and reliable evidence of fair value for any of our services and, therefore, account for all elements in multiple elements arrangements as a single unit of accounting. Access to data under the subscription element is generally provided shortly after the execution of the contract. However, the initial delivery of periodic reports of customized data generally occurs after the data has been accumulated for a specified period subsequent to contract execution, usually one calendar quarter. We recognize the entire arrangement fee over the performance period of the last deliverable. As a result, the total arrangement fee is recognized on a straight-line basis commencing upon the delivery of the first report of customized data over the period such reports are delivered.
 
Generally, our contracts are non-refundable and non-cancelable. In the event a portion of a contract is refundable, revenue recognition is delayed until the refund provisions lapse. A limited number of customers have the right to cancel their contracts by providing us with written notice of cancellation. In the event that a customer cancels its contract, it is not entitled to a refund for prior services, and it will be charged for costs incurred plus services performed up to the cancellation date.
 
Advance payments are recorded as deferred revenues until services are delivered or obligations are met and revenue can be recognized. Deferred revenues represent the excess of amounts invoiced over amounts recognized as revenues.


42



 

Goodwill and Intangible Assets
 
We record goodwill and intangible assets when we acquire other businesses. The allocation of acquisition costs to intangible assets and goodwill involves the extensive use of management’s estimates and assumptions, and the result of the allocation process can have a significant impact on our future operating results. We estimate the fair value of identifiable intangible assets acquired using several different valuation approaches, including the replacement cost, income and market approaches. The replacement cost approach is based on determining the discrete cost of replacing or reproducing a specific asset. We generally use the replacement cost approach for estimating the value of acquired technology/methodology assets. The income approach converts the anticipated economic benefits that we assume will be realized from a given asset into value. Under this approach, value is measured as the present worth of anticipated future net cash flows generated by an asset. We generally use the income approach to value customer relationship assets and non-compete agreements. The market approach compares the acquired asset to similar assets that have been sold. We generally use the market approach to value trademarks and brand assets.
 
Under Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS 142), intangible assets with finite lives are amortized over their useful lives while goodwill and indefinite lived assets are not amortized, but rather are periodically tested for impairment. An impairment review generally requires developing assumptions and projections regarding our operating performance. In accordance with SFAS 142, we have determined that all of our goodwill is associated with one reporting unit as we do not operate separate lines of business with respect to our services. Accordingly, on an annual basis we perform the impairment assessment for goodwill required under SFAS 142 at the enterprise level by comparing the fair value of a reporting unit, based on estimated future cash flow, to its carrying value including goodwill recorded by the reporting unit. If the carrying value exceeds the fair value, impairment is measured by comparing the derived fair value of the goodwill to its carrying value and any impairment determined is recorded in the current period. If our estimates or the related assumptions change in the future, we may be required to record impairment charges to reduce the carrying value of these assets, which could be material.
 
Long-lived assets
 
Our long-lived assets primarily consist of property and equipment and intangible assets. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we evaluate the recoverability of our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of such assets may not be recoverable. If an indication of impairment is present, we compare the estimated undiscounted future cash flows to be generated by the asset to its carrying amount. If the undiscounted future cash flows are less than the carrying amount of the asset, we record an impairment loss equal to the excess of the asset’s carrying amount over its fair value. The fair value is determined based on valuation techniques such as a comparison to fair values of similar assets or using a discounted cash flow analysis. Substantially all of our long-lived assets are located in the United States. Although we believe that the carrying values of our long-lived assets are appropriately stated, changes in strategy or market conditions or significant technological developments could significantly impact these judgments and require adjustments to recorded asset balances. There were no impairment charges recognized during the years ended December 31, 2004, 2005, or 2006.
 
Allowance for Doubtful Accounts
 
We manage credit risk on accounts receivable by performing credit evaluations of our customers on a selective basis, by reviewing our accounts and contracts and by providing appropriate allowances for uncollectible amounts. Allowances are based on management’s judgment, which considers historical experience and specific knowledge of accounts that may not be collectible. We make provisions based on our historical bad debt experience, a specific review of all significant outstanding invoices and an assessment of general economic conditions. If the financial condition of a customer deteriorates, resulting in an impairment of its ability to make payments, additional allowances may be required.


43



 

 
Income Taxes
 
We account for income taxes using the liability method in accordance with SFAS No. 109, Accounting for Income Taxes. We estimate our tax liability through calculations we perform for the determination of our current tax liability, together with assessing temporary differences resulting from the different treatment of items for income tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are recorded on our balance sheet. Management then assesses the likelihood that deferred tax assets will be recovered in future periods. In assessing the need for a valuation allowance against the net deferred tax asset, we consider factors such as future reversals of existing taxable temporary differences, taxable income in prior carryback years, if carryback is permitted under the tax law, tax planning strategies and future taxable income exclusive of reversing temporary differences and carryforwards. To the extent that we cannot conclude that it is more likely than not that the benefit of such assets will be realized, we establish a valuation allowance to adjust the net carrying value of such assets.
 
To date, we have recorded a full valuation allowance against our gross deferred tax assets, principally net operating loss carryforwards, due to uncertainty regarding our ability to generate future taxable income. Any deferred tax benefit or provision to date has been offset by changes in the valuation allowance against our deferred tax assets. To the extent we determine that all or a portion of our valuation allowance is no longer necessary, we will recognize an income tax benefit in the period such determination is made for the reversal of the valuation allowance. Once the valuation allowance is eliminated, its reversal will no longer be available to offset our current tax provision. These events could have a material impact on our reported results of operations.
 
As of December 31, 2006, we had $81.2 million of both federal and state net operating loss carryforwards which begin to expire in 2020 for federal and begin to expire in 2010 for state income tax reporting purposes. In addition, we had net operating loss carryforwards related to our foreign subsidiaries totaling $966,000 as of December 31, 2005 and $703,000 as of December 31, 2006, which begin to expire in 2010. Approximately $13.3 million of our net operating loss carryforwards are subject to annual limitations under Section 382 of the Internal Revenue Code based on changes in percentage of our ownership. We do not expect that this limitation will impact our ability to utilize all of our net operating losses prior to their expiration.
 
In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109. This interpretation clarifies the accounting for income taxes by prescribing that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax provisions that meet the more-likely-than-not recognition threshold should be measured as the largest amount of tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition, and explicitly excludes income taxes from the scope of SFAS No. 5, Accounting for Contingencies. FIN 48 is effective for fiscal years beginning after December 15, 2006, and was adopted by us on January 1, 2007. As of the adoption date of FIN 48 of January 1, 2007 and March 31, 2007, we do not have any material gross unrecognized tax benefits. We or one of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. For income tax returns filed by us, we are no longer subject to U.S. federal, state and local tax examinations by tax authorities for years before 2002, although carryforward tax attributes that were generated prior to 2002 may still be adjusted upon examination by tax authorities if they either have been or will be utilized. It is our policy to recognize interest and penalties related to income tax matters in income tax expense.
 
Stock-Based Compensation
 
Through December 31, 2005, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), we applied the intrinsic value method for accounting for stock-based compensation as set forth in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). For purposes of the pro forma disclosures required under SFAS 123, we used the minimum-value method to estimate the fair value of our stock-based awards. On January 1, 2006, we adopted SFAS No. 123R, Share-


44



 

Based Compensation (SFAS 123R). Under SFAS 123R, a non-public company that previously used the minimum value method for pro forma disclosure purposes is required to adopt the standard using the prospective method. Under the prospective method, all awards granted, modified or settled after the date of adoption are accounted for using the measurement, recognition and attribution provisions of SFAS 123R. As a result, stock-based awards granted prior to the date of adoption of SFAS 123R will continue to be accounted for under APB 25 with no recognition of stock-based compensation in future periods, unless such awards are modified or settled.
 
Subsequent to the adoption of SFAS 123R, we estimate the fair value of our stock-based awards on the date of grant using the Black-Scholes option-pricing model. The determination of fair value using the Black-Scholes model requires a number of complex and subjective variables. One key input into the model is the estimated fair value of our common stock on the date of grant. Our board of directors has estimated the fair value of our common stock for the purpose of determining stock-based compensation expense. Our board utilized valuation methodologies commonly used in the valuation of private company equity securities for purposes of estimating the fair value of our common stock.
 
Other key variables in the Black-Scholes option-pricing model include the expected volatility of our common stock price, the expected term of the award and the risk-free interest rate. In addition, under SFAS 123R, we are required to estimate forfeitures of unvested awards when recognizing compensation expense. If factors change and we employ different assumptions in the application of SFAS 123R in future periods, the compensation expense we record may differ significantly from what we have recorded during 2006.
 
At March 31, 2007, total estimated unrecognized compensation expense related to unvested stock-based awards granted prior to that date was $6.6 million, which is expected to be recognized over a weighted-average period of 2.39 years.
 
We expect stock-based compensation expense to increase in absolute dollars as a result of the adoption of SFAS 123R as options that were granted at the beginning of 2006 and beyond vest. Beginning in 2007, we expect to make use of restricted stock awards and reduce our use of stock options as a form of stock-based compensation. The actual amount of stock-based compensation expense we record in any fiscal period will depend on a number of factors, including the number of shares subject to the stock options issued, the fair value of our common stock at the time of issuance and the expected volatility of our stock price over time.
 
Estimation of Fair Value of Warrants to Purchase Redeemable Convertible Preferred Stock
 
On July 1, 2005, we adopted FASB Staff Position 150-5 (FSP 150-5). Our outstanding warrants to purchase shares of our redeemable convertible preferred stock are subject to the requirements in FSP 150-5, which require us to classify these warrants as current liabilities and to adjust the value of these warrants to their fair value at the end of each reporting period. At the time of adoption, we recorded $440,000 for the cumulative effect of this change in accounting principle to reflect the cumulative change in estimated fair value of these warrants as of that date. We recorded $14,000 and $224,000 for the years ended December 31, 2005 and 2006, respectively, to reflect increases in the estimated fair value of the warrants. We recorded a decrease in the estimated fair value of the warrants during the three months ended March 31, 2007 of $11,000. We estimated the fair value of these warrants at the respective dates using the Black-Scholes option valuation model, based on the estimated market value of the underlying redeemable convertible preferred stock at the valuation measurement date, the contractual term of the warrant, risk-free interest rates and expected dividends on and expected volatility of the price of the underlying redeemable convertible preferred stock. These estimates, especially the market value of the underlying redeemable convertible preferred stock and the expected volatility, are highly judgmental and could differ materially in the future.
 
Upon the closing of this offering, all outstanding warrants to purchase shares of our preferred stock will become warrants to purchase shares of our common stock and, as a result, will no longer be subject to FSP 150-5. The then-current aggregate fair value of these warrants will be reclassified from liabilities to additional paid-in capital, a component of stockholder’s equity, and we will cease to record any related periodic fair value adjustments. We anticipate that we will incur a non-cash charge relating to our outstanding warrants for preferred stock in the period in which this offering closes. Assuming that the price at which our common


45



 

stock is valued for these purposes is $15.00 per share, the mid-point of the range on the front cover of this prospectus, the amount of that charge would be approximately $275,000. The exact amount of the charge may depend on the closing trading price of our common stock on The NASDAQ Global Market on the expected date of the closing of this offering.
 
Seasonality
 
Historically, a slightly higher percentage of our customers have renewed their subscription products with us toward the end of the fourth quarter. While we execute projects for our customers throughout the year, we have historically experienced a slight upturn in our project-based business in the fourth quarter.
 
Results of Operations
 
The following table sets forth selected consolidated statements of operations data as a percentage of total revenues for each of the periods indicated.
 
                                         
          Three Months Ended
 
    Year Ended December 31,     March 31,  
    2004     2005     2006     2006     2007  
                      (Unaudited)  
 
Revenues
    100.0 %     100.0 %     100.0 %     100.0 %     100 %
                                         
Cost of revenues
    37.7       36.2       31.0       34.4       28.8  
Selling and marketing
    39.8       37.7       32.4       35.7       34.5  
Research and development
    15.7       14.8       13.6       14.3       13.7  
General and administrative
    14.3       14.1       12.5       12.8       13.4  
Amortization
    1.0       4.8       2.1       2.5       1.6  
                                         
Total expenses from operations
    108.5       107.7       91.6       99.6       92.0  
                                         
(Loss) income from operations
    (8.5 )     (7.7 )     8.4       0.4       8.0  
Interest (expense) income, net
    (0.7 )     (0.4 )     0.3       0.1       0.5  
(Loss) gain from foreign currency
          (0.2 )     0.2              
Revaluation of preferred stock warrant liabilities
                (0.3 )           0.1  
                                         
(Loss) income before income taxes and cumulative effect of change in accounting principle
    (9.2 )     (8.3 )     8.6       0.6       8.5  
(Benefit) provision for income taxes
          (0.4 )     0.1             0.2  
                                         
Net (loss) income before cumulative effect of change in accounting principle
    (9.2 )     (7.9 )     8.6       0.6       8.2  
Cumulative effect of change in accounting principle
          (0.9 )                  
                                         
Net (loss) income
    (9.2 )     (8.8 )     8.6       0.6       8.2  
Accretion of redeemable preferred stock
    (6.1 )     (5.2 )     (4.8 )     (5.0 )     (4.7 )
                                         
Net (loss) income attributable to common stockholders
    (15.4 )%     (14.0 )%     3.8 %     (4.4 )%     3.5 %
                                         
 
Three Months Ended March 31, 2006 and 2007
 
Revenues
 
                                 
    Three Months Ended
             
    March 31,           Percent
 
    2006     2007     Change     Change  
    (Dollars in thousands)  
 
Total revenues
  $ 14,985     $ 18,681     $ 3,696       24.7 %
 
Total revenues increased by approximately $3.7 million for the three months ended March 31, 2007 as compared to the three months ended March 31, 2006. This increase was primarily due to increased sales to existing customers based in the U.S. totaling $14.6 million in the first three months of 2007, which was $2.3 million higher than in the first three months of 2006. In addition, revenues in the first three months of


46



 

2007 from new U.S. customers were $2.3 million, an increase of approximately $707,000 as compared to the first three months of 2006. Revenues from customers outside of the U.S. totaled approximately $1.8 million, or approximately 10% of total revenues, in the first three months of 2007, which was an increase of $670,000 as compared to the first three months of 2006. This increase in the first three months of 2007 was due primarily to our ongoing expansion efforts in Europe, plus continued growth in Canada. We also experienced revenue growth due to general increases in our price levels in the first three months of 2007 as compared to the first three months of 2006.
 
Our total customer base grew during the first three months of 2007 by a net increase of 37 customers to a total of 743 customers as of March 31, 2007 compared to 706 customers as of December 31, 2006. There was continued revenue growth in both our subscription revenues, which increased by approximately $3.6 million from $10.9 million in the first three months of 2006 to $14.5 million in the first three months of 2007, and, to a lesser extent our project-based revenues, which increased by $100,000 from $4.1 million in the first three months of 2006 to $4.2 million in the first three months of 2007.
 
Cost of Revenues
 
                                 
    Three Months Ended
             
    March 31,           Percent
 
    2006     2007     Change     Change  
    (dollars in thousands)  
 
Cost of revenues
  $ 5,148     $ 5,388     $ 240       4.7 %
As a percentage of revenues
    34.4 %     28.8 %                
 
Cost of revenues consists primarily of expenses related to operating our network infrastructure and the recruitment, maintenance and support of our consumer panels. Expenses associated with these areas include the salaries and related expenses of network operations, survey operations, custom analytics and technical support, all of which are expensed as they are incurred. Cost of revenues also includes data collection costs for our products and operational costs associated with our data centers, including depreciation expense associated with computer equipment.
 
Cost of revenues increased in the three months ending March 31, 2007 as compared to the three months ending March 31, 2006, primarily due to increased salaries and related costs associated with supporting our consumer panel and data centers. Our data center costs increased as a result of the relocation in June 2006 of our Illinois data center to a new service provider and increased utility costs at our Virginia data center. Cost of revenues declined as a percentage of revenues by 5.6% over the same period primarily due to the increases in revenues as described above and a moderation of the increases in costs to build and maintain our panel. In addition, the headcount and costs associated with our technology staff grew at a lower rate than our growth in revenues. The decline in cost of revenues as a percentage of revenues was offset in part by increases in bandwidth costs, which grew approximately $91,000 from the prior period, an increase of approximately 16%.
 
We expect cost of revenues to increase in absolute dollar amounts as we seek to grow our business but vary as a percentage of revenues depending on whether we benefit from investments in our panel and network infrastructure.
 
Selling and Marketing Expenses
 
                                 
    Three Months Ended
             
    March 31,           Percent
 
    2006     2007     Change     Change  
    (Dollars in thousands)  
 
Selling and marketing expenses
  $ 5,345     $ 6,451     $ 1,106       20.7 %
As a percentage of revenues
    35.7 %     34.5 %                
 
Selling and marketing expenses consist primarily of salaries, benefits, commissions and bonuses paid to our direct sales force and industry analysts, as well as costs related to online and offline advertising, product


47



 

management, industry conferences, promotional materials, public relations, other sales and marketing programs, and allocated overhead, including rent and depreciation. All selling and marketing costs are expensed as they are incurred. Commission plans are developed for our account managers with criteria and size of sales quotas that vary depending upon the individual’s role. Commissions are paid to a salesperson and are expensed as selling and marketing costs when a sales contract is executed by both the customer and comScore. In the case of multi-year agreements, one year of commissions is paid initially, with the remaining amounts paid at the beginning of the succeeding years.
 
Selling and marketing expenses increased in the three months ending March 31, 2007 as compared to the three months ending March 31, 2006 primarily due to increased employee salaries and benefits and related costs associated with an increase in account management personnel for our sales force, the formation of our product management team and an increase in commission costs associated with increased revenues. Our selling and marketing headcount increased by approximately 40 employees to 170 employees as of March 31, 2007. In addition, we experienced an increase in recruiting and relocation fees associated with the hiring of additional personnel and an increase in advertising costs. Sales and marketing expenses as a percentage of revenues during this period reflect the increased productivity of our direct sales force.
 
We expect selling and marketing expenses to increase in absolute dollar amounts as we continue to grow our selling and marketing efforts but to vary in future periods as a percentage of revenues depending on whether we benefit from increased productivity in our sales force and from increased revenues resulting in part from our ongoing marketing initiatives.
 
Research and Development Expenses
 
                                 
    Three Months Ended
             
    March 31,           Percent
 
    2006     2007     Change     Change  
    (Dollars in thousands)  
 
Research and development expenses
  $ 2,137     $ 2,556     $ 419       19.6 %
As a percentage of revenues
    14.3 %     13.7 %                
 
Research and development expenses include new product development costs, consisting primarily of compensation and related costs for personnel associated with research and development activities, and allocated overhead, including rent and depreciation.
 
Research and development expenses increased in the three months ended March 31, 2007 as compared to the three months ended March 31, 2006 primarily due to an increased headcount and our continued focus on developing new products, such as World Metrix, Video Metrix, Campaign Metrix and Ad Metrix. Research and development costs decreased slightly as a percentage of revenues, primarily due to our growth in revenues outpacing our existing investments in research and development. We also experienced an increase in costs paid to outsourced services to support our development of new products.
 
We expect research and development expenses to increase in absolute dollar amounts as we continue to enhance and expand our product offerings. As a result of the size and diversity of our panel and our historical investment in our technology infrastructure, we expect that we will be able to develop new products with moderate increases in research and development spending as compared to our growth in revenues. We also expect research and development expenses to moderate due to our decision to outsource certain software development activities in 2005.


48



 

 
General and Administrative Expenses
 
                                 
    Three Months Ended
             
    March 31,           Percent
 
    2006     2007     Change     Change  
    (Dollars in thousands)  
 
General and administrative expenses
  $ 1,918     $ 2,507     $ 589       30.7 %
As a percentage of revenues
    12.8 %     13.4 %                
 
General and administrative expenses consist primarily of salaries and related expenses for executive management, finance, accounting, human capital, legal, information technology and other administrative functions, as well as professional fees, overhead, including allocated rent and depreciation, and expenses incurred for other general corporate purposes.
 
General and administrative expenses increased in the three months ending March 31, 2007 as compared to the three months ending March 31, 2006, primarily due to increased professional fees and expanding our finance department. General and administrative expenses also increased to a lesser extent due to our investment to support further revenue growth.
 
We expect general and administrative expenses to increase on an absolute basis in future annual periods as we incur increased costs associated with being a public company. Operating as a public company will present additional management and reporting requirements that will significantly increase our directors’ and officers’ liability insurance premiums and professional fees both in absolute dollars and as a percentage of revenues. We also anticipate hiring additional personnel to help manage future growth and our operations as a public company.
 
Amortization Expense
 
                                 
    Three Months Ended
             
    March 31,           Percent
 
    2006     2007     Change     Change  
    (Dollars in thousands)  
 
Amortization expense
  $ 371     $ 293     $ (78 )     (21.0 )%
As a percentage of revenues
    2.5 %     1.6 %                
 
Amortization expense consists of charges related to the amortization of intangible assets associated with past acquisitions.
 
Amortization expense decreased in the three months ended March 31, 2007 over the three months ended March 31, 2006 because certain intangible assets related to previous acquisitions were fully amortized during 2006.
 
Absent additional acquisitions, we expect amortization expense to continue to decline as the remaining amount of intangible assets related to previous acquisitions is amortized.
 
Interest (Expense) Income, Net
 
Interest income consists primarily of interest earned from short-term investments, such as auction rate securities, and our cash and cash equivalent balances. Interest expense is incurred due to capital leases pursuant to several equipment loan and security agreements and a line of credit that we have entered into in order to finance the lease of various hardware and other equipment purchases. Our capital lease obligations are secured by a senior security interest in eligible equipment.
 
Interest (expense) income, net was $11,000 and $97,000 for the three months ended March 31, 2006 and 2007, respectively. The quarterly change from 2006 to 2007 reflects the net effect of interest income that we earned on our cash balances offset by the interest expense associated with the capital leases that we had in place in each period. Our cash, cash equivalents and short-term investments balance increased by $2.1 million


49



 

in the first quarter of 2007. We also continued to reduce the outstanding balance on our outstanding capital lease obligations.
 
(Loss) Gain from Foreign Currency
 
Our gains and losses from foreign currency transactions arise from our Canadian and United Kingdom foreign subsidiaries that hold cash and receivables in currencies other than their functional currency. During the three months ended March 31, 2007 we recorded a loss of $8,000 compared to a gain of $6,000 in the three month period ended March 31, 2006. Our foreign currency transactions are recorded as a result of fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar, Euro and British Pound.
 
Provision for Income Taxes
 
As of March 31, 2007, we had net operating loss carryforwards for federal income tax purposes in the amount of approximately $78.9 million, which begin to expire in 2020 for federal and begin to expire in 2010 for state income tax reporting purposes. In the future, we intend to utilize any carryforwards available to us to reduce our tax payments. Approximately $13.3 million of our net operating loss carryforwards are subject to annual limitations under Section 382 of the Internal Revenue Code based on changes in percentage of our ownership. We do not expect that this limitation will impact our ability to utilize all of our net operating losses prior to their expiration. During the three months ended March 31, 2007, we recorded an income tax provision of $46,000 as compared to no provision recorded during the three months ended March 31, 2006. The tax provision is comprised of an income tax expense of $65,000 reflecting our alternative minimum tax and is partly offset by a decrease of $19,000 in the deferred tax liability associated with a temporary difference related to certain acquired intangible assets of SurveySite.
 
Years Ended December 31, 2004, 2005 and 2006
 
Revenues
 
                                                         
    Year Ended December 31,     Increase     Percent Change  
                      2004 v.
    2005 v.
    2004 v.
    2005 v.
 
    2004     2005     2006     2005     2006     2005     2006  
    (Dollars in thousands)  
 
Total revenues
  $ 34,894     $ 50,267     $ 66,293     $ 15,373     $ 16,026       44.1 %     31.9 %
 
Total revenues increased by approximately $16.0 million for the year ended December 31, 2006 as compared to the year ended December 31, 2005. This increase was primarily due to increased sales to existing customers based in the U.S. totaling $52.9 million in 2006, or $12.5 million higher than in 2005. In addition, revenues in 2006 from new U.S. customers were $7.7 million, an increase of $1.2 million compared to 2005. Revenues from customers outside of the U.S. totaled approximately $5.7 million, or approximately 9% of total revenues, in 2006, representing an increase of $2.3 million compared to 2005. This increase in 2006 was due primarily to our ongoing expansion efforts in Europe, which included the opening of an office in London in the first half of 2005, plus continued growth in Canada. We also experienced revenue growth due to general increases in our price levels in 2006 as compared to 2005.
 
Our total customer base grew during this period from 565 as of December 31, 2005 to 706 as of December 31, 2006. There was continued revenue growth in both our subscription revenues, which increased by approximately $14.6 million from 2005 to 2006, and our project-based revenues, which increased by $1.4 million from 2005 to 2006.
 
In 2005, total revenues increased approximately $15.4 million over 2004 revenues. This growth was principally driven by increased sales to existing U.S. customers of $40.4 million, an increase of $11.2 million over 2004. Further, revenues from new customers based in the U.S. were $6.5 million, which was a $2.6 million increase over 2004. Revenues from customers outside of the U.S. totaled $3.4 million, or approximately 7% of revenues, in 2005. This represented an increase of $1.6 million over 2004, when international revenues were $1.8 million, or 5% of total revenues. We also experienced revenue growth due to general increases in our price levels in 2005 compared to 2004.


50



 

Our total customer base grew during this period from 469 as of December 31, 2004 to 565 as of December 31, 2005. During this period, our subscription revenues increased by approximately $8.0 million from 2004 to 2005, while project-based revenues increased by approximately $7.4 million. Our 2005 revenues were positively impacted by the acquisitions of SurveySite and Q2. SurveySite, which we acquired on January 4, 2005, contributed $5.1 million in revenues in 2005. Q2, which we acquired on July 28, 2004, contributed $3.6 million in revenues in 2005 as compared to $1.5 million in revenues in 2004.
 
We generally invoice customers on an annual, quarterly or monthly basis, or at the completion of certain milestones, in advance of revenues being recognized. Amounts that have been invoiced are recorded in accounts receivable and any unearned revenues are recorded in deferred revenues until the invoice has been collected and the revenue recognized. As a result of the increased revenues in 2006 as compared to 2005, we experienced an increase in our cash, cash equivalents and short-term investments of $6.9 million, accounts receivable increased $3.8 million and deferred revenues increased by $3.2 million. In 2005 as compared to 2004, we experienced an increase in our cash, cash equivalents and short-term investments of $770,000, an increase in accounts receivables of $4.1 million and an increase in deferred revenues of $7.1 million.
 
Cost of Revenues
 
                                                         
    Year Ended December 31,     Increase     Percent Change  
                      2004 v.
    2005 v.
    2004 v.
    2005 v.
 
    2004     2005     2006     2005     2006     2005     2006  
    (Dollars in thousands)  
 
Cost of revenues
  $ 13,153     $ 18,218     $ 20,560     $ 5,065     $ 2,342       38.5 %     12.9 %
As a percentage of revenues
    37.7 %     36.2 %     31.0 %                                
 
Cost of revenues consists primarily of expenses related to operating our network infrastructure and the recruitment, maintenance and support of our consumer panels. Expenses associated with these areas include the salaries and related expenses of network operations, survey operations, custom analytics and technical support, all of which are expensed as they are incurred. Cost of revenues also includes data collection costs for our products and operational costs associated with our data centers, including depreciation expense associated with computer equipment.
 
Cost of revenues increased in 2006 as compared to 2005, primarily due to increased costs associated with supporting our consumer panel and data centers. Our panel costs increased in large part due to increased recruiting costs per panelist reflecting the impact of higher growth in online advertising and advertising rates. Our data center costs increased as a result of the relocation in 2006 of our Illinois data center to a new service provider and increased utility costs at our Virginia data center. Cost of revenues declined as a percentage of revenues over the same periods primarily due to the increases in revenues as described above and a moderation of the increases in costs to build and maintain our panel. The decline in cost of revenues as a percentage of revenues was offset in part by increases in bandwidth and data costs, which grew 9%. The headcount and costs associated with our technology staff grew at a lower rate than our growth in revenues.
 
Cost of revenues increased in 2005 as compared to 2004 primarily due to our acquisition of SurveySite and higher costs associated with data center operations and employee salaries, benefits and related costs required to support growth in our revenues and customer base during 2005. The cost of revenues as a percentage of revenues declined in 2005 compared to 2004 primarily due to the increases in revenues as described above as well as relatively flat panel costs and smaller increases in bandwidth and data center costs, which did not grow at the same rate as our customer base and revenues. The headcount and costs associated with our technology staff grew at a lower rate than our growth in revenues.


51



 

 
Selling and Marketing Expenses
 
                                                         
    Year Ended December 31,     Increase     Percent Change  
                      2004 v.
    2005 v.
    2004 v.
    2005 v.
 
    2004     2005     2006     2005     2006     2005     2006  
    (Dollars in thousands)  
 
Selling and marketing expenses
  $ 13,890     $ 18,953     $ 21,473     $ 5,063     $ 2,520       36.5 %     13.3 %
As a percentage of revenues
    39.8 %     37.7 %     32.4 %                                
 
Selling and marketing expenses consist primarily of salaries, benefits, commissions and bonuses paid to our direct sales force and industry analysts, as well as costs related to online and offline advertising, product management, industry conferences, promotional materials, public relations, other sales and marketing programs, and allocated overhead, including rent and depreciation. All selling and marketing costs are expensed as they are incurred. Commission plans are developed for our account managers with criteria and size of sales quotas that vary depending upon the individual’s role. Commissions are paid to a salesperson and are expensed as selling and marketing costs when a sales contract is executed by both the customer and comScore. In the case of multi-year agreements, one year of commissions is paid initially, with the remaining amounts paid at the beginning of the succeeding years.
 
Selling and marketing expenses increased in 2006 as compared to 2005 in absolute dollars, primarily due to increased employee salaries and benefits and related costs resulting from additional account management personnel in our sales force, plus an increase in commission costs associated with increased revenues. Our selling and marketing headcount increased from 143 employees as of December 31, 2005 to 155 employees as of December 31, 2006. In addition, the expansion of our European office in London and increased marketing efforts in Europe contributed to our increase in selling and marketing expenses and headcount in 2006. The decrease in selling and marketing expenses as a percentage of revenues during this period reflects the increased productivity of our direct sales force and an increase in revenues.
 
Selling and marketing expenses increased in 2005 as compared to 2004, primarily due to an increase in the number of account managers, higher commissions associated with our growth in revenues and an increase in online and offline advertising and promotional efforts in support of building our brands. In addition, our selling and marketing headcount increased from 77 employees as of December 31, 2004 to 143 employees as of December 31, 2005. The acquisition of SurveySite and the opening of our first European office in London also contributed to our increase in selling and marketing expenses and headcount in 2005. The decrease in selling and marketing expenses as a percentage of revenues during this period reflected the increased productivity of our direct sales force.
 
Research and Development Expenses
 
                                                         
    Year Ended December 31,     Increase     Percent Change  
                      2004 v.
    2005 v.
    2004 v.
    2005 v.
 
    2004     2005     2006     2005     2006     2005     2006  
    (Dollars in thousands)  
 
Research and development expenses
  $ 5,493     $ 7,416     $ 9,009     $ 1,923     $ 1,593       35.0 %     21.5 %
As a percentage of revenues
    15.7 %     14.8 %     13.6 %                                
 
Research and development expenses include new product development costs, consisting primarily of compensation and related costs for personnel associated with research and development activities, and allocated overhead, including rent and depreciation.
 
Research and development expenses increased in 2006 as compared to 2005 primarily due to increased headcount and our continued focus on developing new products, such as World Metrix, Video Metrix, Campaign Metrix and Ad Metrix. Research and development costs decreased slightly as a percentage of revenues, primarily due to our growth in revenues.


52



 

 
The increase in research and development expenses in 2005 compared to 2004 was due to new product development activity, including the launch of a streaming media audience measurement product. The acquisition and integration of SurveySite’s operations also contributed to the absolute dollar increase in research and development costs during this period.
 
General and Administrative Expenses
 
                                                         
    Year Ended December 31,     Increase     Percent Change  
                      2004 v.
    2005 v.
    2004 v.
    2005 v.
 
    2004     2005     2006     2005     2006     2005     2006  
    (Dollars in thousands)  
 
General and administrative expenses
  $ 4,982     $ 7,089     $ 8,293     $ 2,107     $ 1,204       42.3 %     17.0 %
As a percentage of revenues
    14.3 %     14.1 %     12.5 %                                
 
General and administrative expenses consist primarily of salaries and related expenses for executive management, finance, accounting, human capital, legal, information technology and other administrative functions, as well as professional fees, overhead, including allocated rent and depreciation, and expenses incurred for other general corporate purposes.
 
General and administrative expenses increased in 2006 as compared to 2005, primarily due to increased professional fees and expanding our finance department. As a percentage of revenues, general and administrative expenses decreased in 2006 as compared to 2005, due primarily to our growth in revenues.
 
General and administrative expenses increased in 2005 as compared to 2004, primarily due to higher salaries, benefits and related costs associated with our existing employees plus an increase in our general and administrative headcount from 14 employees as of December 31, 2004 to 27 employees as of December 31, 2005. The higher headcount was due primarily to an increase in employees in such functions as finance, accounting, human capital and legal, as we built our staff and infrastructure to support our growth. Our acquisition of SurveySite also contributed to the increase in general and administrative expenses and related headcount in 2005. On a percentage of revenues basis, general and administrative expenses were flat in 2005 as compared to 2004, as the increase in headcount related to broadening our administrative support capabilities and the acquisition of SurveySite was offset by the growth in our customer base and revenues.
 
Amortization Expense
 
                                                         
    Year Ended December 31,     Increase     Percent Change  
                      2004 v.
    2005 v.
    2004 v.
    2005 v.
 
    2004     2005     2006     2005     2006     2005     2006  
    (Dollars in thousands)  
 
Amortization expense
  $ 356     $ 2,437     $ 1,371     $ 2,081     $ (1,066 )     584.6 %     (43.7 )%
As a percentage of revenues
    1.0 %     4.8 %     2.1 %                                
 
Amortization expense consists of charges related to the amortization of intangible assets associated with past acquisitions.
 
Amortization expense decreased during fiscal year 2006 over 2005 because certain intangible assets related to previous acquisitions were fully amortized as of that period.
 
The increase in amortization expense from 2004 to 2005 in absolute dollars is attributable primarily to the amortization expense relating to the Q2 acquisition on July 28, 2004 and the SurveySite acquisition on January 4, 2005.
 
Interest (Expense) Income, Net
 
Interest income consists primarily of interest earned from short-term investments, such as auction rate securities, and our cash and cash equivalent balances. Interest expense is incurred due to capital leases pursuant to several equipment loan and security agreements and a line of credit that we have entered into in


53



 

order to finance the lease of various hardware and other equipment purchases. Our capital lease obligations are secured by a senior security interest in eligible equipment.
 
Interest (expense) income, net was $(246,000) in 2004, $(208,000) in 2005 and $231,000 in 2006. The year-to-year change from 2004 to 2005 and from 2005 to 2006 primarily reflects the net effect of interest income that we earned on our cash balances offset by the interest expense associated with the capital leases that we had in place in each year. Our net interest expense decreased from 2004 to 2005 due to our larger cash and investments balances and the lower amounts outstanding under our capital leases. We reported net interest income in 2006 due to a $6.9 million increase in our cash and investments balance. We also continued to reduce the outstanding balance on our outstanding capital lease obligations.
 
(Loss) Gain from Foreign Currency Transactions
 
Our gains and losses from foreign currency transactions arise from our Canadian and United Kingdom foreign subsidiaries that hold cash and receivables in currencies other than their functional currency. Our loss on foreign currency transactions in 2005 was $96,000. We recorded a gain of $125,000 in 2006 as a result of fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar, Euro and British Pound.
 
Provision for Income Taxes
 
As of December 31, 2006, we had net operating loss carryforwards for federal income tax purposes in the amount of approximately $81.2 million, which begin to expire in 2020 for federal and begin to expire in 2010 for state income tax reporting purposes. In the future, we intend to utilize any carryforwards available to us to reduce our tax payments. Approximately $13.3 million of the net operating loss carryforwards are subject to annual limitations under Section 382 of the Internal Revenue Code based on changes in percentage of our ownership. We do not expect that this limitation will impact our ability to utilize all of our net operating losses prior to their expiration. In 2005, we had an income tax benefit of $182,000 related to a deferred tax liability of $356,000 associated with a temporary difference related to certain acquired intangible assets of SurveySite. This compares to an income tax expense of $50,000 in 2006 reflecting a payment of alternative minimum tax (AMT) partly offset by a decrease in the deferred tax liability.


54



 

 
Quarterly Results of Operations
 
The following tables set forth selected unaudited quarterly consolidated statement of operations data for each of the quarters indicated. The consolidated financial statements for each of these quarters have been prepared on the same basis as the audited consolidated financial statements included in this prospectus and, in the opinion of management, include all adjustments necessary for the fair presentation of the consolidated results of operations for these periods. You should read this information together with our consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of the results for any future period.
 
                                                                         
    Three Months Ended  
    Mar. 31,
    Jun. 30,
    Sept. 30,
    Dec. 31,
    Mar. 31,
    Jun. 30,
    Sept. 30,
    Dec. 31,
    Mar. 31,
 
    2005     2005     2005     2005     2006     2006     2006     2006     2007  
    (In thousands) (Unaudited)  
 
Revenues
  $ 11,135     $ 13,150     $ 12,953     $ 13,029     $ 14,985     $ 16,906     $ 16,165     $ 18,237     $ 18,681  
                                                                         
Cost of revenues(1)
    3,936       4,863       4,602       4,817       5,148       5,205       4,977       5,230       5,388  
Selling and marketing(1)
    4,234       4,813       4,821       5,085       5,345       5,323       5,171       5,634       6,451  
Research and development(1)
    1,678       1,876       1,908       1,954       2,137       2,258       2,273       2,341       2,556  
General and administrative(1)
    1,489       1,804       1,779       2,017       1,918       2,176       1,897       2,302       2,507  
Amortization
    621       603       612       601       371       333       333       334       293  
                                                                         
Total expenses from operations
    11,958       13,959       13,722       14,474       14,919       15,295       14,651       15,841       17,195  
                                                                         
(Loss) income from operations
    (823 )     (809 )     (769 )     (1,445 )     66       1,611       1,514       2,396       1,486  
Interest (expense) income, net
    (58 )     (71 )     (39 )     (40 )     11       23       84       113       97  
(Loss) gain from foreign currency
    (21 )     (1 )     (72 )     (2 )     6       (33 )     3       149       (8 )
Revaluation of preferred stock warrant liabilities
                (6 )     (8 )     2       (211 )     (6 )     (9 )     11  
                                                                         
(Loss) income before income taxes and cumulative effect of change in accounting principle
    (902 )     (881 )     (886 )     (1,495 )     85       1,390       1,595       2,649       1,586  
(Benefit) provision for income taxes
    (53 )     (52 )     (38 )     (39 )                       50       46  
                                                                         
Net (loss) income before cumulative effect of change in accounting principle
    (849 )     (829 )     (848 )     (1,456 )     85       1,390       1,595       2,599       1,540  
Cumulative effect of change in accounting principle
                (440 )                                    
                                                                         
Net (loss) income
    (849 )     (829 )     (1,288 )     (1,456 )     85       1,390       1,595       2,599       1,540  
Accretion of redeemable preferred stock
    (611 )     (643 )     (675 )     (709 )     (742 )     (777 )     (812 )     (848 )     (885 )
                                                                         
Net (loss) income attributable to common stockholders
  $ (1,460 )   $ (1,472 )   $ (1,963 )   $ (2,165 )   $ (657 )   $ 613     $ 783     $ 1,751     $ 655  
                                                                         
 
 
(1) Amortization of stock-based compensation is included in the line items above as follows:
                                                                         
    Three Months Ended  
    Mar. 31,
    Jun. 30,
    Sept. 30,
    Dec. 31,
    Mar. 31,
    Jun. 30,
    Sept. 30,
    Dec. 31,
    Mar. 31,
 
    2005     2005     2005     2005     2006     2006     2006     2006     2007  
    (In thousands) (Unaudited)  
 
Cost of revenues
  $     $     $     $     $     $ 2     $ 4     $ 6     $ 9  
Selling and marketing
                            6       26       23       27       39  
Research and development
                                  2       4       7       8  
General and administrative
          1       1       1       1       10       40       40       51  
 


55



 

                                                                         
    As a Percentage of Total Revenues  
    Three Months Ended  
    Mar. 31,
    Jun. 30,
    Sept. 30,
    Dec. 31,
    Mar. 31,
    Jun. 30,
    Sept. 30,
    Dec. 31,
    Mar. 31,
 
    2005     2005     2005     2005     2006     2006     2006     2006     2007  
    (Unaudited)  
 
Revenues
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
                                                                         
Cost of revenues
    35.3       37.0       35.5       37.0       34.4       30.8       30.8       28.7       28.8  
Selling and marketing
    38.0       36.6       37.2       39.0       35.7       31.5       32.0       30.9       34.5  
Research and development
    15.1       14.3       14.7       15.0       14.3       13.4       14.1       12.9       13.7  
General and administrative
    13.4       13.7       13.7       15.5       12.8       12.9       11.7       12.6       13.4  
Amortization
    5.6       4.6       4.7       4.6       2.5       2.0       2.1       1.8       1.6  
                                                                         
Total expenses from operations
    107.4       106.2       105.8       111.1       99.6       90.5       90.6       86.9       92.0  
                                                                         
(Loss) income from operations
    (7.4 )     (6.2 )     (5.8 )     (11.1 )     0.4       9.5       9.4       13.1       8.0  
Interest (expense) income, net
    (0.5 )     (0.5 )     (0.3 )     (0.3 )     0.1       0.1       0.5       0.6       0.5  
(Loss) gain from foreign currency
    (0.2 )           (0.6 )                 (0.2 )           0.8        
Revaluation of preferred stock warrant liabilities
                                  (1.2 )                 0.1  
                                                                         
(Loss) income before income taxes and cumulative effect of change in accounting principle
    (8.1 )     (6.7 )     (6.8 )     (11.4 )     0.6       8.2       9.9       14.5       8.5  
(Benefit) provision for income taxes
    (0.5 )     (0.4 )     (0.3 )     (0.3 )                       0.3       0.2  
                                                                         
Net (loss) income before cumulative effect of change in accounting principle
    (7.6 )     (6.3 )     (6.5 )     (11.1 )     0.6       8.2       9.9       14.3       8.2  
Cumulative effect of change in accounting principle
                (3.4 )                                    
                                                                         
Net (loss) income
    (7.6 )     (6.3 )     (9.9 )     (11.1 )     0.6       8.2       9.9       14.3       8.2  
Accretion of redeemable preferred stock
    (5.5 )     (4.9 )     (5.2 )     (5.4 )     (5.0 )     (4.6 )     (5.0 )     (4.6 )     (4.7 )
                                                                         
Net (loss) income attributable to common stockholders
    (13.1 )     (11.2 )     (15.1 )     (16.6 )     (4.4 )     3.6       4.8       9.6       3.5 %
                                                                         
 
Over the nine quarters presented in the preceding tables, revenues have generally increased due primarily to increases in subscription revenues from existing customers, growth in our customer base (both domestically and internationally), general increases in pricing for our products and the acquisition of SurveySite. In 2005, revenues increased sequentially from the first quarter to the second quarter before declining slightly in the third quarter and remaining relatively flat in the fourth quarter. Over these quarterly periods, fluctuations in project revenues partially offset the steady growth in subscription revenues and contributed to the relatively flat revenues on a sequential basis from the second through the fourth quarters of 2005. In 2006, revenues increased significantly on a sequential basis in the first and second quarters before decreasing in the third quarter due to fluctuations in the closing of agreements relating to, and the execution of, projects. Revenues increased significantly in the fourth quarter of 2006 due to increased growth in subscription revenues for existing and new customers. Subscription revenues increased sequentially in each of the quarters presented.
 
Cost of revenues as a percentage of total revenues held relatively steady in each of the quarters in 2005 before declining in 2006. The decrease in cost of revenues on a percentage basis was due to the growth in revenues relative to the moderation in fixed costs to support our consumer panel, data center and technical infrastructure.
 
On an absolute basis, total expenses from operations increased significantly in the second quarter of 2005 due primarily to costs associated with the integration of the Q2 and SurveySite acquisitions and certain expenses for external data sources. Total expenses from operations remained relatively flat in the third quarter of 2005 and

56



 

increased in the fourth quarter of 2005, primarily due to higher sales costs related to the opening of our first European sales office, located in London, and increased general and administrative costs in support of overall business growth. On an absolute basis, total expenses from operations declined slightly in the first quarter of 2006 before increasing in the second quarter of 2006, due to increases in general and administrative expenses associated with the hiring of new finance personnel and increases in professional services fees related to anticipated business expansion. In addition, expenses from operations increased in the second quarter of 2006 due to higher research and development costs tied to the development of several new products. After a decline in the third quarter, expenses from operations increased again in the fourth quarter of 2006 and the first quarter of 2007, due to increased commissions tied to higher sales growth plus higher salaries, benefits and related costs associated with hiring additional personnel in our operations, technology, sales, research and development and general and administrative organizations to support the growth of our business. The total expenses from operations in 2006 increased at a lower rate than revenues and we were consequently able to better leverage our cost structure.
 
We became profitable on a net income basis in the first quarter of 2006, and were profitable on a net income basis every quarter in 2006 as our revenues increased significantly during these periods and our costs grew at a lower rate.
 
Liquidity and Capital Resources
 
The following table summarizes our cash flows:
 
                                         
    For the Year Ended
    Three Months Ended
 
    December 31,     March 31,  
    2004     2005     2006     2006     2007  
                      (Unaudited)  
    (In thousands)  
 
Consolidated Cash Flow Data:
                                       
Net cash provided by operating activities
  $ 1,907     $ 4,253     $ 10,905     $ 2,824     $ 3,156  
Net cash used in investing activities
    (1,332 )     (2,505 )     (9,573 )     (2,694 )     (971 )
Net cash used in financing activities
    (952 )     (1,092 )     (1,381 )     (271 )     (525 )
Effect of exchange rate changes on cash
    25       (36 )     (43 )     18       14  
Net increase (decrease) in cash and equivalents
    (352 )     620       (92 )     123       1,674  
 
Since our inception, we have funded our operations and met our capital expenditure requirements primarily with venture capital and private equity funding. In five separate issuances of preferred stock, from Series A on September 27, 1999 to Series E on August 1, 2003, we have raised over $88 million from a number of institutional investors. The proceeds from all of these issuances have been used for general business purposes, with the exception of the Series E Preferred Stock offering, which was partially used to extinguish a $1.5 million bank note. Each share of preferred stock is convertible into common stock at the respective conversion ratio for each series of preferred stock at any time, subject to adjustment triggered by changes in our capitalization such as a stock split. Conversion is automatic in the event of a public offering of common stock at a price of at least $2.50 per share with gross proceeds of at least $25 million. This conversion is expected to take place upon consummation of this offering.
 
Our principal uses of cash historically have consisted of payroll and other operating expenses and payments related to the purchase of equipment primarily to support our consumer panel and technical infrastructure required to support our customer base. Since the beginning of 2004, we have purchased over $4.6 million in property and equipment, made $3.9 million in principal payments on capital lease obligations, and spent $1.9 million as the cash component of consideration paid for acquisitions.
 
As of March 31, 2007, our principal sources of liquidity consisted of cash, cash equivalents and short-term investments of $18.2 million.


57



 

 
Operating Activities
 
Our cash flows from operating activities are significantly influenced by our investments in personnel and infrastructure to support the anticipated growth in our business, increases in the number of customers using our products and the amount and timing of payments made by these customers.
 
We generated approximately $3.2 million of net cash from operating activities during the three months ended March 31, 2007. The significant components of cash flows from operations were net income of $1.5 million, $1.2 million in non-cash depreciation and amortization expenses, a $2.4 million increase in amounts collected from customers in advance of when we recognize revenues as a result of our growing customer base, offset by a $843,000 increase in accounts receivable and a $1.2 million decrease in accounts payable and accrued expenses.
 
We generated approximately $2.8 million of net cash from operating activities during the three months ended March 31, 2006. The significant components of cash flows from operations were $1.1 million in non-cash depreciation and amortization expenses and a $2.3 million decrease in accounts receivable, offset by a $1.1 million decrease in amounts collected from customers in advance of when we recognize revenues.
 
We generated approximately $10.9 million of net cash from operating activities during 2006. The significant components of cash flows from operations were net income of $5.7 million, $4.3 million in non-cash depreciation and amortization expenses, a $1.4 million increase in accounts payable and accrued expenses and a $3.1 million increase in amounts collected from customers in advance of when we recognize revenues as a result of our growing customer base, offset by a $3.9 million increase in accounts receivable.
 
We generated $4.3 million of net cash from operating activities during 2005. The significant components of cash flows from operations were a $6.4 million increase in amounts collected from customers in advance of when we recognized revenues as a result of our growing customer base, and $5.1 million in non-cash depreciation and amortization expenses. These items were partially offset by a $3.5 million net increase in accounts receivable related to our larger customer base, a net loss of $4.4 million and other uses of cash in operations.
 
We generated $1.9 million of net cash from operating activities in 2004. The significant components of cash flows from operations were a $0.6 million increase in amounts collected from customers in advance of when we recognized revenues as a result of our growing customer base, a $1.7 million net increase in accounts payable and accrued expenses due to the timing of payments to our vendors when compared to the same period in 2003 and $2.7 million in non-cash depreciation and amortization expenses. These items were partially offset by a $0.7 million net increase in accounts receivable due to our larger customer base, a net loss of $3.2 million and other uses of cash in operations.
 
Investing Activities
 
Our primary investing activities have consisted of purchases of computer network equipment to support our Internet user panel and maintenance of our database, furniture and equipment to support our operations, and payments related to the acquisition of several companies. As our customer base continues to expand, we expect purchases of technical infrastructure equipment to grow in absolute dollars. The extent of these investments will be affected by our ability to expand relationships with existing customers, grow our customer base, introduce new digital formats and increase our international presence.
 
We used $971,000 of net cash in investing activities during the three months ended March 31, 2007, a net $475,000 of which was used to purchase short-term investments, and $494,000 of which was used to purchase property and equipment.
 
We used $2.7 million of net cash in investing activities during the three months ended March 31, 2006, a net $2.1 million of which was used to purchase short-term investments, $292,000 of which was used to purchase property and equipment, and $300,000 of which was used to pay contingent consideration associated with our acquisition of Q2.
 
We used $9.6 million of net cash in investing activities during 2006, a net $7.0 million of which was used to purchase short-term investments, $2.3 million of which was used to purchase property and equipment


58



 

and $0.3 million of which was used to pay contingent considerations associated with our Q2 and SurveySite acquisitions. We used $2.5 million of net cash in investing activities during 2005, of which $1.1 million was used to purchase property and equipment, $0.9 million was used as part of the acquisition of SurveySite and $0.3 million was used to pay contingent consideration associated with the Q2 acquisition. In 2004, we used $1.3 million of net cash in investing activities, $1.2 million of which was used to purchase property and equipment and $0.9 million of which was used as part of the consideration for the acquisition of Q2, partially offset by $0.8 million in net proceeds from the sale of short-term investments.
 
We expect to achieve greater economies of scale and operating leverage as we expand our customer base and utilize our Internet user panel and technical infrastructure more efficiently. While we anticipate that it will be necessary for us to continue to invest in our Internet user panel, technical infrastructure and technical personnel to support the combination of an increased customer base, new products, international expansion and new digital market intelligence formats, we believe that these investment requirements will be less than the revenue growth generated by these actions. This should result in a lower rate of growth in our capital expenditures to support our technical infrastructure. In any given period, the timing of our incremental capital expenditure requirements could impact our cost of revenues, both in absolute dollars and as a percentage of revenues.
 
Financing Activities
 
Our primary financing activities since 2004 have consisted of financings to fund the acquisition of capital assets. We entered into an equipment lease agreement with GE Capital in 2003 and a line of credit agreement with GE Capital in 2005 to finance the purchase of hardware and other computer equipment to support our business growth. These borrowings were secured by a senior security interest in the equipment acquired under the facility. In December 2006, we entered into an equipment lease agreement with Banc of America Leasing & Capital, LLC to finance the purchase of new hardware and other computer equipment as we continue to expand our technology infrastructure in support of our business growth. This agreement includes a $5 million line of credit available through December 31, 2007. Through December 31, 2006, we used this credit facility to establish an equipment lease for the amount of approximately $2.9 million. The base term for this lease is three years and includes a small charge in the event of prepayment.
 
We used $525,000 of net cash in financing activities during the three months ended March 31, 2007. We used $665,000 to make payments on our capital lease obligations partially offset by $140,000 in proceeds from the exercise of our common stock options.
 
We used $271,000 of net cash in financing activities during the three months ended March 31, 2006. We used $387,000 to make payments on our capital lease obligations partially offset by $116,000 in proceeds from the exercise of our common stock options.
 
We used $1.4 million of net cash in financing activities during 2006. We used $1.6 million to make payments on our capital lease obligations partially offset by $241,000 in proceeds from the exercise of our common stock options.
 
We used $1.1 million of net cash from financing activities during 2005. We used $1.2 million to make payments on our capital lease obligations partially offset by $136,000 in proceeds from the exercise of our common stock options.
 
In 2004, we used approximately $1.0 million of cash in financing activities. Substantially all of the use of this cash resulted from payments on our capital lease obligations.
 
We do not have any special purpose entities, and other than operating leases for office space, described below, we do not engage in off-balance sheet financing arrangements.


59



 

 
Contractual Obligations and Known Future Cash Requirements
 
Set forth below is information concerning our known contractual obligations as of December 31, 2006 that are fixed and determinable.
 
                                         
          Less Than
                More Than
 
    Total     1 Year     1-3 Years     3-5 Years     5 Years  
    (In thousands)  
 
Capital lease obligations
  $ 4,418     $ 1,986     $ 2,432              
Operating lease obligations
    5,058       2,009       2,063       760       226  
                                         
Total
  $ 9,476     $ 3,995     $ 4,495     $ 760     $ 226  
                                         
 
Our principal lease commitments consist of obligations under leases for office space and computer and telecommunications equipment. We finance the purchase of some of our computer equipment under a capital lease arrangement over a period of 36 months. Our purchase obligations relate to outstanding orders to purchase computer equipment and are typically small; they do not materially impact our overall liquidity.
 
We currently have a line of credit for up to $5.0 million available to us until December 31, 2007. We have used $2.9 million of such line of credit to establish an equipment lease for the amount of approximately $2.9 million bearing interest at a rate of 7.75% per annum.
 
Future Capital Requirements
 
We believe that our existing cash, cash equivalents, and short-term investments and operating cash flow, will be sufficient to meet our projected operating and capital expenditure requirements for at least the next twelve months. In addition, we expect that the net proceeds from this offering will provide us with the financial flexibility to execute our strategic objectives, including the ability to make acquisitions and strategic investments. Our ability to generate cash, however, is subject to our performance, general economic conditions, industry trends and other factors. To the extent that funds from this offering, combined with existing cash, cash equivalents, short-term investments and operating cash flow are insufficient to fund our future activities and requirements, we may need to raise additional funds through public or private equity or debt financing. If we issue equity securities in order to raise additional funds, substantial dilution to existing stockholders may occur.
 
For the ninety-day period beginning July 28, 2007, the former shareholder of Q2 has the right to sell its 212,000 shares back to us for an aggregate price of $2.65 million, or $12.50 per share. For the ninety-day period beginning January 1, 2008, the former shareholders of SurveySite have the right to sell their 135,635 shares back to us for an aggregate price of approximately $1.8 million, or $13.35 per share.
 
Quantitative and Qualitative Disclosures about Market Risk
 
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. We do not hold or issue financial instruments for trading purposes or have any derivative financial instruments. To date, most payments made under our contracts are denominated in U.S. dollars and we have not experienced material gains or losses as a result of transactions denominated in foreign currencies. As of March 31, 2007, our cash reserves were maintained in money market investment accounts and fixed income securities totaling $11.5 million. These securities, like all fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. We have the ability to hold our fixed income investments until maturity and, therefore, we would not expect to experience any material adverse impact in income or cash flow.
 
Foreign Currency Risk
 
A portion of our revenues is derived from transactions denominated in U.S. dollars, even though we maintain sales and business operations in foreign countries. As such, we have exposure to adverse changes in exchange rates associated with operating expenses of our foreign operations, but we believe this exposure to be immaterial at this time. As such, we do not currently engage in any transactions that hedge foreign currency


60



 

exchange rate risk. As we grow our international operations, our exposure to foreign currency risk could become more significant.
 
Recent Accounting Pronouncements
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. The purpose of this statement is to define fair value, establish a framework for measuring fair value and enhance disclosures about fair value measurements. The measurement and disclosure requirements are effective for us as of January 1, 2008 and are applied prospectively. We are currently evaluating the potential impact of adopting this new guidance on our results of operations and financial position.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159), to permit all entities to choose to elect, at specified election dates, to measure eligible financial instruments at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in earnings as incurred and not deferred. SFAS No. 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS No. 157. An entity is prohibited from retrospectively applying SFAS No. 159, unless it chooses early adoption. We are currently evaluating the impact of the provisions of SFAS No. 159 on our consolidated financial statements.


61



 

 
BUSINESS
 
Overview
 
We provide a leading digital marketing intelligence platform that helps our customers make better-informed business decisions and implement more effective digital business strategies. Our products and solutions offer our customers deep insights into consumer behavior, including objective, detailed information regarding usage of their online properties and those of their competitors, coupled with information on consumer demographic characteristics, attitudes, lifestyles and offline behavior.
 
Our digital marketing intelligence platform is comprised of proprietary databases and a computational infrastructure that measures, analyzes and reports on digital activity. The foundation of our platform is data collected from our comScore panel of more than two million Internet users worldwide who have granted us explicit permission to confidentially measure their Internet usage patterns, online and certain offline buying behavior and other activities. By applying advanced statistical methodologies to our panel data, we project consumers’ online behavior for the total online population and a wide variety of user categories.
 
We deliver our digital marketing intelligence through our comScore Media Metrix product family and through comScore Marketing Solutions. Media Metrix delivers digital media intelligence by providing an independent, third-party measurement of the size, behavior and characteristics of Web site and online advertising network audiences among home, work and university Internet users as well as insight into the effectiveness of online advertising. Our Marketing Solutions products combine the proprietary information gathered from the comScore panel with the vertical industry expertise of comScore analysts to deliver digital marketing intelligence, including the measurement of online advertising effectiveness, customized for specific industries. We typically deliver our Media Metrix products electronically in the form of weekly, monthly or quarterly reports. Customers can access current and historical Media Metrix data and analyze these data anytime online. Our Marketing Solutions products are typically delivered on a monthly, quarterly or ad hoc basis through electronic reports and analyses.
 
Industry Background
 
Growth of Digital Commerce, Content, Advertising and Communications
 
The Internet is a global digital medium for commerce, content, advertising and communications. According to IDC, the number of global Internet users is projected to grow from approximately 968 million in 2005 to over 1.7 billion in 2010. As the online population continues to grow, the Internet is increasingly becoming a tool for research and commerce and for distributing and consuming media. According to IDC, the global business-to-consumer eCommerce market is projected to grow from $411 billion in 2005 to $1 trillion in 2010. According to Jupiter Research, over 80% of online users in the United States research offline purchases using the Internet, making the Internet an important channel for both online and offline merchants. Consumers are also using the Internet to access an increasing amount of digital content across media formats including video, music, text and games. According to IDC, the domestic markets for online video and music consumption are projected to reach over $1.7 billion and over $3.3 billion, respectively, in 2010.
 
As consumers increasingly use the Internet to research and make purchases and to consume digital media, advertisers are shifting more of their marketing budgets to digital channels. According to the Internet Advertising Bureau and PricewaterhouseCoopers, domestic online advertising spending, including search advertising, grew to $16.8 billion in 2006, an increase of 34% over 2005. Despite the size and growth of the digital marketing sector, the shift of traditional advertising spending to the Internet has yet to match the rate of consumption of online media. According to Forrester Research, digital advertising represented only 6% of the total United States advertising market in 2004 despite consumers spending 16% of their available media time online. As advertisers spend more of their marketing budgets to reach Internet users, we believe that digital marketing will continue to grow.
 
In addition to the growth in online commerce, content and marketing, a number of new digital technologies and devices are emerging that enable users to access content and communicate in new ways.


62



 

Internet-enabled mobile phones allow users to access digital content such as games, music, video and news on their mobile devices through a wireless connection to the Internet. According to IDC, the worldwide number of shipments of converged mobile devices is projected to grow from 57 million in 2005 to 261 million in 2010, representing compounded annual growth of 36% over that period. Other digital communications technologies such as voice over Internet protocol (VoIP) utilize the Internet network infrastructure to enable efficient and cost-effective personal communications such as chat and VoIP-based telephony. According to Infonetics, the worldwide number of VoIP subscribers is projected to grow from 24.5 million in 2005 to 140.7 million in 2009. Delivery of digital television services over a network infrastructure using Internet Protocol, or IPTV, has a number of advantages over conventional television, including two-way communications, digital content and features, and interactivity. According to Infonetics, the worldwide number of IPTV subscribers is projected to grow from 2.4 million in 2005 to 68.9 million in 2009. We believe these and other new digital media and communications devices and services offer a similar opportunity as the Internet for us to measure and analyze user behavior.
 
Importance of Digital Marketing Intelligence
 
The interactive nature of digital media such as the Internet enables businesses to access a wealth of user information that was virtually unavailable through offline audience measurement and marketing intelligence techniques. Digital media provide businesses with the opportunity to measure detailed user activity, such as how users interact with Web page content; to assess how users respond to online marketing, such as which online ads users click on to pursue a transaction; and to analyze how audiences and user behavior compare across various Web sites. This type of detailed user data can be combined with demographic, attitudinal and transactional information to develop a deeper understanding of user behavior, attributes and preferences. Unlike offline media such as television and radio, which generally only allow for the passive measurement of relative audience size, digital media enable businesses to actively understand the link between digital content, advertising and user behavior.
 
We believe that the growth in the online and digital media markets for digital commerce, content, advertising and communications creates an unprecedented opportunity for businesses to acquire a deeper understanding of both their customers and their competitive market position. Businesses can use accurate, relevant and objective digital marketing intelligence to develop and validate key strategies and improve performance. For example, with a deep understanding of the size, demographic composition and other characteristics of its audience, an online content provider can better communicate the value of its audience to potential advertisers. With detailed metrics on the effectiveness of an online advertising campaign and how that campaign influences online and offline purchasing behavior, a business can refine its marketing initiatives. With insight into market share and customer behavior and preferences, a business can understand not only how its digital business is performing relative to its competitors but also the drivers behind such performance. Moreover, by using the appropriate digital marketing intelligence, businesses can refine their digital content, commerce, advertising and communications initiatives to enhance the effectiveness and return on investment of their marketing spending, enabling them to build more successful businesses.
 
Challenges in Providing Digital Marketing Intelligence
 
While the interactive and dynamic nature of digital markets creates the opportunity for businesses to gain deep insights into user behavior and competitive standing, there are a number of issues unique to the Internet that make it challenging for companies to provide digital marketing intelligence. Compared to offline media such as television or radio, the markets for digital media are significantly more fragmented, complex and dynamic. As of December 2006, we believe that there were more than 17,000 and 25,000 U.S. and global Web sites, respectively, that each receive more than 30,000 unique visitors per month, as compared to only a few hundred channels typically available with standard digital cable or satellite television and broadcast or satellite radio. The complexities of online user activity and the breadth of digital content and advertising make providing digital marketing intelligence a technically challenging and highly data-intensive process.
 
Digital media continues to develop at a rapid pace and includes numerous formats such as textual content, streaming and downloadable video and music, instant messaging, VoIP telephony, online gaming and email.


63



 

Digital advertising also includes multiple formats such as display, search, rich media and video. Detailed user activity such as viewing, clicking or downloading various components of a Web page across digital media or interacting with various advertising formats creates a substantial amount of data that must be captured on a continuous basis. The data must also be cleansed for quality, relevancy and privacy protection and be organized to enable companies to obtain relevant digital marketing intelligence. This capture of audience data can prove extremely challenging when it involves millions of Internet users with varying demographic characteristics accessing tens of thousands of Web sites across diverse geographies. In addition, the ongoing development of digital media programming languages and technologies contributes to the challenge of accurately measuring user activity. For example, online publishers and advertisers have recently started to use Asynchronous JavaScript and XML, or AJAX, a development technique that allows Web applications to quickly make incremental updates without having to refresh the entire Web page. Prior to AJAX, marketers relied heavily on page view statistics to plan and evaluate their online media spending programs. With AJAX, we believe marketers are beginning to question the definition of, and need for, page views, and are seeking alternative metrics for measuring the usage and effectiveness of online media. To maintain their relevance, audience and media measurement technologies must keep pace with the continued evolution and increasing complexity of digital media.
 
Need for Accuracy and Reliability.  Relevant digital marketing intelligence requires access to accurate and reliable global data that measure online user activity. Existing data collection methodologies, including those that rely on third party sources, surveys or panels, face significant challenges and limitations. Survey or panel methodologies must measure a sufficiently large and representative sample size of Internet users to accurately capture data that is statistically projectable to the broader Internet population. In addition, the international composition of Internet audiences requires a geographically dispersed sample to accurately capture global digital activity. Digital marketing intelligence that depends on third-party sources to obtain Internet audience usage data has the potential to be biased, may be constrained by the data that the third party is capable of capturing, and may be limited in its application. For example, a solution that relies on data supplied by an Internet service provider, or ISP, may show a bias toward the demographic composition or other characteristics of that ISP’s users. We believe that a meaningful digital media sourcing methodology must be based on data sourced from a large, representative global sample of online users that can be parsed, enhanced, mined and analyzed; must evolve rapidly and be flexible to adapt to changing technologies; and must be able to provide actionable digital marketing intelligence that can be used to improve business decision-making.
 
Need for Third-Party Objectivity.  We believe that the availability of objective third-party data that measure digital audience size, behavior, demographic and attitudinal characteristics represents a key factor in the continued growth of digital content, advertising and commerce. This is similar to offline media markets, such as television and radio, whose development was significantly enhanced by the introduction of third-party audience measurement ratings that provided a basis for the pricing of advertising in those media. As the buying and selling of online advertising continues to grow, we believe that companies on both sides of the advertising transaction will increasingly seek third-party marketing intelligence to assess the value and effectiveness of digital media. In addition, as advertisers work with Web site publishers to target online advertising campaigns to reach a specific demographic or behavioral user profile, the need for objective audience and user information, unbiased by either party to the transaction, will become increasingly important.
 
Need for Competitive Information.  In addition to the scope, complexity and rapid evolution of online digital media, the lack of data on competitors makes it difficult for companies to gain a comprehensive view of user behavior beyond their own digital businesses. While products and tools exist that enable companies to understand user activity on their own Web sites, these products are unable to provide a view of digital audience activity on other Web sites or offline. In order for publishers, marketers, merchants and service providers to benefit from accurate and comprehensive digital marketing intelligence they need to understand user activity on Web sites across the Internet and how online consumer behavior translates into offline actions.


64



 

 
The comScore Digital Marketing Intelligence Platform
 
We provide a leading digital marketing intelligence platform that enables our customers to devise and implement more effective digital business strategies. Our platform is comprised of proprietary databases and a computational infrastructure that measures, analyzes and reports digital activity from our global panel of more than two million Internet users. We offer our customers deep insights into consumer behavior on their own online properties and those of their competitors, including objective, detailed information on users’ demographic characteristics, attitudes, lifestyles and multi-channel buying activity. We also provide industry-specific metrics to our customers.
 
We deliver our digital marketing intelligence through our comScore Media Metrix product family and through comScore Marketing Solutions. Media Metrix provides intelligence on digital media usage, including a measurement of the size, behavior and characteristics of the audiences for individual Web sites and advertising networks within the global home, work and university Internet user populations as well as insight into the effectiveness of online advertising. Our Marketing Solutions products combine the proprietary information gathered from our user panel with the vertical industry expertise of comScore analysts to deliver digital marketing intelligence customized for specific industries. Media Metrix and Marketing Solutions products are typically delivered electronically in the form of periodic reports, through customized analyses or are generally available online via a user interface on the comScore Web site.
 
Key attributes of our platform include:
 
  •  Panel of global Internet users.  Our ability to provide digital marketing intelligence is based on information continuously gathered from a broad cross-section of more than two million Internet users worldwide who have granted us explicit permission to confidentially measure their Internet usage patterns, online and certain offline buying behavior and other activities. Through our proprietary technology, we measure detailed Internet audience activity across the spectrum of digital content and marketing channels. Many comScore panelists also participate in online survey research that captures and integrates demographic, attitudinal, lifestyle and product preference information with Internet behavior data. The global nature of our Internet panel enables us to provide digital marketing intelligence for over 30 individual countries. Our global capability is valuable to companies based in international markets as well as to multi-national companies that want to better understand their global Internet audiences and the effectiveness of their global digital business initiatives.
 
  •  Scalable technology infrastructure.  We developed our databases and computational infrastructure to support the growth in online activity among our global Internet panel and the increasing complexity of digital content formats, advertising channels and communication applications. The design of our technology infrastructure is based on distributed processing and data capture environments that allow for the collection and organization of vast amounts of data on online activity, including usage of proprietary networks such as AOL, instant messaging and audio and video streaming. Our database infrastructure currently captures approximately 182 million Web pages and 4.5 billion URL records each week from our global Internet panel, resulting in over 28 terabytes of data collected by our platform each month. We believe that our efficient and scalable technology infrastructure allows us to operate and expand our data collection infrastructure on a cost-effective basis. In recognition of the scale of our data collection and warehousing technology, we have received multiple awards, including the 2003, 2004 and 2005 Winter Corporation Grand Prize for Database Size on a Windows NT Platform.
 
Benefits of our platform include:
 
  •  Advanced digital marketing intelligence.  We use our proprietary technology to compile vast amounts of data on Internet user activity and to organize the data into discrete, measurable elements that can be used to provide actionable insights to our customers. We believe that our digital marketing intelligence platform enables companies to gain a deeper understanding of their digital audiences, which allows them to better assess and improve their company and product-specific competitive position. Because our marketing intelligence is based on a large sample of global Internet users and can incorporate


65



 

  multi-channel transactional data, we are able to provide companies with an enhanced understanding of digital audience activity beyond their own Web sites and the ability to better assess the link between digital marketing and offline user activity. Digital content providers, marketers, advertising agencies, merchants and service providers can use the insights our platform provides to craft improved marketing campaigns and strategies and to measure the effectiveness and return on investment of their digital initiatives.
 
  •  Objective third-party resource for digital marketing intelligence.  We are an independent company that is not affiliated with the digital businesses we measure and analyze, allowing us to serve as an objective third-party provider of digital marketing intelligence. Because businesses use our data to plan and evaluate the purchase and sale of online advertising and to measure the effectiveness of digital marketing, it is important that we provide unbiased data, marketing intelligence, reports and analyses. We deploy advanced statistical methodologies in building and maintaining the comScore global Internet user panel and utilize proven data capture, and computational practices in collecting, statistically projecting, aggregating and analyzing information regarding online user activity. We believe that our approach ensures that the insights we provide are as objective as possible and allows us to deliver products and services that are of value to our customers in their key business decision-making. We believe that the media industry views us as a highly recognized and credible resource for digital marketing intelligence. For example, between March 1 and December 31, 2006, our information on digital activity was cited more than 16,500 times by third-party media outlets, an average of approximately 55 citations per day. Our data are regularly cited by well-known media outlets such as the Associated Press, Reuters, Bloomberg, CNBC, The New York Times and The Wall Street Journal.  Moreover, many of the leading Wall Street investment banks also purchase and cite our data in their published research reports prepared by financial analysts that cover Internet businesses.
 
  •  Vertical industry expertise.  We have developed expertise across a variety of industries to provide digital marketing intelligence specifically tailored to the needs of our customers operating in specific industry sectors. We have dedicated personnel to address the automotive, consumer packaged goods, entertainment, financial services, media, pharmaceutical, retail, technology, telecommunications and travel sectors. We believe that companies across different industries have distinct information and marketing intelligence needs related to understanding their digital audiences and buyers, evaluating marketing initiatives and understanding company or product-specific competitive position. For example, a pharmaceutical company may want to understand how online research by consumers influences new prescriptions for a particular drug, while a financial services company may want to assess the effectiveness of its online advertising campaigns in signing up new consumers and how this compares to the efforts of its competitors. By working with companies in various industries over the course of multiple years, we have developed industry-specific applications of our data and our client service representatives have developed industry-specific knowledge and expertise that allow us to deliver relevant and meaningful marketing insight to our customers.
 
  •  Ease of use and functionality.  The comScore digital marketing intelligence platform is designed to be easy to use by our customers. Our Media Metrix products are available through the Internet using a standard browser. Media Metrix customers can also run customized reports and refine their analyses using an intuitive interface available on our Web site. Our Marketing Solutions products are available either through the Internet or by using standard software applications such as Microsoft Excel, Microsoft PowerPoint or SPSS analytical software. Our customers do not need to install additional hardware or complex software to access and use our products.


66



 

 
Strategy
 
Our objective is to be the leading provider of global digital marketing intelligence products. We plan to pursue our objective through internal initiatives and, potentially, through acquisitions and other investments. The principal elements of our strategy are to:
 
  •  Deepen relationships with current customers.  We intend to work closely with our customers to enable them to continuously enhance the value they obtain from our digital marketing intelligence platform. Many of our customers are Fortune 1000 companies that deploy multiple marketing initiatives, and we believe many of our customers would benefit from more extensive use of our product offerings to gain additional insights into their key digital initiatives. We will work to develop and expand our customer relationships to increase our customers’ use of our digital marketing intelligence platform.
 
  •  Grow our customer base.  As the digital media, commerce, marketing and communications sectors continue to grow, we believe the demand for digital marketing intelligence products will increase. To meet this increase in market demand, we intend to invest in sales, marketing and account management initiatives in an effort to expand our customer base. We intend to offer both general and industry-specific digital marketing products that deliver value to a wide range of potential customers in current and new industry verticals.
 
  •  Expand our digital marketing intelligence platform.  We expect to continue to increase our product offerings through our digital marketing intelligence platform. As digital markets become more complex, we believe that companies will require new information and insights to measure, understand and evaluate their digital business initiatives. We intend to develop new applications that leverage our digital marketing intelligence platform to be able to provide the most timely and relevant information to our customers. For example, in 2003 we were one of the first companies to offer data, analysis and reports on the fast-growing Internet search market.
 
  •  Address emerging digital media.  The extension of digital media and communications to include new formats such as VoIP, IP television, content for mobile phones and next generation gaming consoles creates new opportunities to measure and analyze emerging digital media. We intend to extend our digital marketing platform to capture, measure and analyze user activity in these emerging digital media and communications formats.
 
  •  Extend technology leadership.  We believe that the scalability and functionality of our database and computational infrastructure provide us with a competitive advantage in the digital media intelligence market. Accordingly, we intend to continue to invest in research and development to extend our technology leadership. We intend to continue to enhance our technology platform to improve scalability, performance and cost effectiveness and to expand our product offerings.
 
  •  Build brand awareness through media exposure.  Our digital media, commerce and marketing information is frequently cited by media outlets. In addition, we proactively provide them with data and insights that we believe may be relevant to their news reports and articles. We believe that media coverage increases awareness and credibility of the comScore and Media Metrix brands and supplements our marketing efforts. We intend to continue to work with media outlets, including news distributors, newspapers, magazines, television networks, radio stations and online publishers, to increase their use of comScore data in content that discusses digital sector activity.
 
  •  Grow internationally.  While we are currently in the early stages of providing customers with international services, we believe that a significant opportunity exists to provide our product offerings to multi-national and international companies. Approximately half of the existing comScore Internet user panel resides outside of the United States. In July 2006, we launched World Metrix, a product that measures global digital media usage. World Metrix is based on a sample of online users from countries that comprise approximately 95% of the global Internet population. We plan to expand our sales and marketing and account management presence outside the U.S. as we provide a broader array of digital marketing intelligence products that are tailored to local country markets as well as the global marketplace.


67



 

 
Our Product Offerings
 
We deliver our digital marketing intelligence through our comScore Media Metrix product family and through comScore Marketing Solutions.
 
comScore Media Metrix
 
Media Metrix provides its subscribers, consisting primarily of publishers, marketers, advertising agencies and advertising networks, with intelligence on digital media usage and a measurement of the size, behavior and characteristics of the audiences for Web sites and advertising networks among home, work and university Internet populations. Media Metrix also provides insights into the effectiveness of online advertising. Media Metrix data can be used to accurately identify and target key online audiences, evaluate the effectiveness of digital marketing and commerce initiatives, support the selling of online advertising by publishers, and to identify and exploit relative competitive standing. The vast majority of our Media Metrix subscribers access selected reports and analyses through the MyMetrix user interface on our Web site.
 
Our flagship product, Media Metrix 2.0, details the online activity and site visitation behavior of Internet users, including use of proprietary networks such as AOL, instant messaging, audio and video streaming, and other digital applications. Our customers subscribe to ongoing access to our digital marketing intelligence reports and analyses, including:
 
  •  comprehensive reports detailing online behavior for home, work and university audiences;
 
  •  demographic characteristics of visitors to Web sites and properties;
 
  •  buying power metrics that profile Web site audiences based on their online buying behavior;
 
  •  detailed measurement and reporting of online behavior for over 30 countries and over 100 U.S. local markets;
 
  •  measurement of key ethnic segments, including the online Hispanic population; and
 
  •  reach and frequency metrics for online advertising campaigns that show the percent of a target audience reached and the frequency of exposure to advertising messages.
 
A representative MyMetrix screenshot, detailing the most visited online properties in the United States for December 2006, is shown on the following page.


68



 

 
(KEY MEASURES REPORT)


69



 

In addition to our core offering, customers can subscribe to the following additional products in the Media Metrix product family:
 
Plan Metrix.  Plan Metrix is a product that combines the continuously and passively observed Internet behavior provided by Media Metrix with comprehensive attitude, lifestyle and product usage data collected through online surveys of our U.S. Internet user panel. Plan Metrix provides advertising agencies, advertisers and publishers with multiple views of Web site audiences including their online behavior, demographics, lifestyles, attitudes, technology product ownership, product purchases and offline media usage. These data are used in the design and evaluation of online marketing campaigns. For example, an online auto retailer could use Plan Metrix to help understand which Web sites a prospective automobile purchaser is most likely to visit prior to making a purchase decision.
 
World Metrix.  We provide insights into worldwide Internet activity through our World Metrix product, which delivers aggregate information about the behavior of online users on a global basis, for approximately 30 individual countries and for regional aggregations such as Latin America, Europe and Asia Pacific. For example, a content publisher can understand its market share of the global Internet audience using our World Metrix product.
 
Video Metrix.  Video Metrix provides insights into the viewing of streaming video by U.S. Internet users. The product measures a wide range of video players and formats, including Windows Media, Flash, RealMedia and QuickTime. Video Metrix offers site-level measurement and audience ratings by demographics and time-of-day to assist agencies, advertisers and publishers in designing and implementing media plans that include streaming video. For example, an advertiser that is seeking to maximize the exposure of its streaming video ads to its target audience could use Video Metrix to help understand on which sites and at what times of the day its target audience is viewing the most streaming video.
 
Ad Metrix.  Available through the Media Metrix client interface, Ad Metrix provides advertisers, agencies and publishers with a variety of online advertising metrics relating to impressions, or advertisements on a Web site that reach a target audience. Ad Metrix helps customers determine the impressions delivered by advertising campaigns across Web sites and online properties, including how many visitors are reached with advertisements and how often. In addition, Ad Metrix allows customers to determine the demographic profile of the advertising audience at a particular site, as well as how the volume of impressions changes over time on that site. The Ad Metrix data are consistent with offline media planning metrics such as GRPs, or gross rating points, which measure the percent of a target audience that is reached with an advertisement weighted by the number of exposures. For example, an advertiser might use Ad Metrix to plan the online portion of an advertising campaign for a sports product on sites that have previously successfully delivered advertising impressions to a target demographic audience. A publisher might use Ad Metrix data to measure its share of advertising impressions relative to competitive publishers. Ad Metrix was launched in early 2007 in beta format.


70



 

Some examples of Media Metrix digital marketing intelligence measurements and their customer uses are described in the following table.
 
       

Digital Marketing Intelligence Measurement
    Examples of Customer Uses
Site Traffic & Usage Intensity
   
• rank Web sites based on online usage metrics such as unique visitors, page views or minutes of use
     
• drill-down to standard or customer-defined site subsets such as channels or sub-channels (such as Yahoo! Finance and Yahoo! Sports)
     
• analyze statistics over time such as trends in site visitors within demographic segments
     
• assess which Web site audiences are growing or declining, which sites are most attractive to particular demographic segments or which sites or digital applications have the highest level of usage
     
• identify the source of traffic to a particular Web site or channel within a site
Quantitative Consumer Information
   
• profile site users based on life-stage or offline behavior such as panelist-reported TV usage, car ownership, health conditions or offline purchases
     
• efficiently identify and target a particular user segment (e.g., people who say they are likely to buy a car in the next six months)
     
• quantify the audience overlap between different consumer segments or Web sites to identify the number of unique visitors reached
Online Buying Power
   
• quantify the propensity of a particular Web site’s audience to purchase certain categories of products (e.g., consumer electronics) online
Competitive Intelligence
   
• compare the standings of Web sites within particular content categories, such as finance or health information
     
• quantify audience size relative to competitors, including share of usage within a category and usage trends across competitors
     
• track major competitors, quantify their growth, and identify initiatives to promote growth and market share
Reach and Frequency
   
• identify and quantify the size of audiences reached by individual Web sites and determine how often they reach those audiences
     
• assist with the planning of online advertising campaigns that need to achieve specific reach or frequency objectives against a targeted audience across multiple Web sites
     
• design the most cost-effective media plans that can achieve campaign objectives for reach and frequency
       


71



 

comScore Marketing Solutions
 
comScore Marketing Solutions products use our global database, computational infrastructure and our staff of experienced analytical personnel to help customers design more effective marketing strategies that increase sales, reduce costs, deepen customer relationships and ultimately enhance a customer’s competitive position. We offer solutions tailored for specific industry verticals, including the automotive, consumer packaged goods, entertainment, financial services, media, pharmaceutical, retail, technology, telecommunications and travel sectors. Many of our Marketing Solutions products are delivered to subscribers on a recurring schedule such as monthly or quarterly. In some cases, we provide customized reports and analyses that combine our expertise with other proprietary information to address a specific customer need.
 
The core information products offered by comScore Marketing Solutions include:
 
Market Share Reports.  These reports track a company’s share of market as measured by industry-specific performance metrics. The metrics of choice vary by industry vertical, including as examples: share of online credit card spending for credit card issuers; share of online travel spending for travel companies; or share of subscribers for ISPs. In each case, market share reports provide an ongoing measurement of competitive performance and insight into the factors driving changes in market share.
 
Competitive Benchmark Reports.  These reports allow customers to compare themselves to competitors using various industry-specific metrics. For example, retailers may look at metrics such as the rate of conversion of site visitors to buyers, average order size or rate of repeat purchases among existing customers. Banks may focus on the percentage of bank customers using online bill payment services, or compare the effectiveness of customer acquisition programs as reflected by the percentage of leads they acquire that ultimately sign up for an online account. In each case, a customer may define and obtain best-of-category metrics and use them as a benchmark to monitor its business performance over time.
 
Loyalty and Retention Analysis.  These analyses provide an understanding of the extent to which consumers are also engaged with competitors, and identifies loyalty drivers to assist customers in capturing a higher share of the consumer’s wallet. For example, a travel company might quantify the potential business lost when consumers visit its site, do not complete a purchase but then visit a competing site to book a travel reservation. Retention or churn analyses quantify consumer losses to competitors and the key drivers of such losses. For example, a narrowband Internet service provider may track the rate of attrition among its customer base, identify which competitors are capturing those lost customers, and analyze the characteristics of the lost customers in order to gain insight into ways to improve retention.
 
Customer Satisfaction Reports.  These reports are based on panelist responses to survey questionnaires that ascertain the degree of satisfaction with various products or services offered to consumers. This information is often integrated with the online usage information that we collect from our panelists in order to identify which digital media usage activities affect customer satisfaction. For instance, a sports portal may use these reports to determine which features, such as participating in fantasy sports leagues or viewing streaming video clips, affect customer satisfaction and loyalty the most.
 
qSearch.  This product is a monthly scorecard of the search market that provides a comparison of search activity across portals and major search engines. It helps identify the reach of a search engine, the loyalty of its user base, the frequency of search queries, and the effectiveness of sponsored links displayed on search result pages in driving referrals to advertiser sites. qSearch is used by major search engines and advertising agencies in planning search campaigns.
 
Campaign Metrix.  This product provides detailed information about specific online advertising campaigns. These reports, available through a Web-based interface, describe for each advertising image, or “creative” within an advertising campaign, the size and demographic composition of the audience exposed to that particular advertisement, the average number of impressions delivered and other details regarding ad formats and ad sizes used in the campaign. An advertiser, agency or publisher could use Campaign Metrix to gain insight into the effectiveness of an online advertising campaign by examining the number of unique users exposed to the campaign, the number of times on average that a unique user was exposed to the campaign and


72



 

whether the campaign reached the targeted audience demographic. This product was launched in February 2007 in beta format and we plan to commercially launch this product in the second quarter of 2007.
 
Internet Advertising Effectiveness Studies.  These studies provide an understanding of the effectiveness of particular advertising campaigns by measuring the online and offline behavior of a “target group” of comScore panelists, following their exposure to a particular advertisement, and comparing their behavior to that of a “control group” of comScore panelists who were not exposed to such advertisements. This type of a study allows a marketer to understand the impact of their advertising campaign and to estimate the return on their investment in online marketing.
 
Survey-Based Products.  These products leverage our ability to administer surveys to our panel members to obtain valuable information that can be seamlessly integrated with online behavioral data to provide our clients with additional insights into the drivers of consumer behavior.
 
Customers
 
As of March 31, 2007, we had 743 customers, including over 100 Fortune 1000 customers. Our customers include:
 
  •  fifteen of the top twenty online properties, based on total unique visitors, as ranked by our Media Metrix database for the month of December 2006, including Microsoft, Yahoo!, AOL and Google;
 
  •  ten of the top twenty U.S. Internet service providers, based on the number of subscribers as of the third quarter of 2006, as ranked by ISP Planet;
 
  •  ten of the top eleven investment banks, based on 2006 revenues, as ranked by Dealogic;
 
  •  97 advertising and media buying agencies;
 
  •  five of the top six consumer banks, based on consolidated assets as of December 31, 2006, as ranked by the Federal Reserve System, National Information Center;
 
  •  five of the top six cable companies, based on total subscribers in the first quarter of 2007, as reported by Leichtman Research Group;
 
  •  seven of the top ten pharmaceutical companies, based on 2005 worldwide sales, as ranked by IMS Health; and
 
  •  seven of the top eight credit card issuers, based on total credit cards outstanding in 2006, as ranked by the 2006 Nilson Report.
 
One of our customers, Microsoft Corporation, accounted for 5%, 14%, 12% and 12% of our revenues in the year ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2007, respectively.
 
The following examples are provided as an illustration of the development and growth of our relationships with our customers:
 
  •  Microsoft is a leading provider of software, services and solutions. Since 2001, Microsoft’s Internet division, MSN, has used our global panel data to better understand the needs of consumers, to help guide product planning strategies and to measure the impact of online marketing efforts, and has increased its use of our products in each subsequent year. Since 2004, MSN has purchased detailed Internet clickstream data patterns to study how consumers use MSN and competitive services, in order to better meet consumer needs. Since June 2005, MSN has used our qSearch product to measure and benchmark the behavior of consumers and competitors in the Internet search market. Since 2005, we have also provided MSN with advertising studies that it has used to measure the impact of MSN’s online marketing campaigns and demonstrate to clients the effectiveness of online advertising. In addition, since 1999, Microsoft has been a customer of SurveySite, a company that we acquired on December 31, 2004. comScore SurveySite provides Microsoft with insights about their customers, partners and employees by conducting online qualitative research and quantitative surveys, including ongoing customer satisfaction tracking programs. comScore SurveySite has been a Premier Vendor for


73



 

  Online Research to Microsoft since 2002. comScore SurveySite was also the winner of the 2005 Microsoft Vendor Program Excellence Award in Technology in recognition of its innovative SiteRecruit system. In 2006, comScore SurveySite was also named a Relationship Marketing Specialty Vendor, a designation shared by only five market research vendors worldwide. comScore SurveySite has worked across all of Microsoft’s principal business groups including Platform Products and Services, Business Products and Services and Entertainment and Devices.
 
  •  Verizon Communications is a leader in delivering broadband and other wireline and wireless communication innovations to business, government and wholesale and retail customers. Since 2001, Verizon Communications has used comScore Marketing Solutions products to better understand the competitive landscape in the Internet access industry and trends in broadband offerings. Starting with the purchase of an ISP market share analysis for two specific markets, Verizon Communications now uses our data and analyses in over 40 markets to not only understand its competitive position in the industry, but also to determine the efficacy of its broadband product line and to help guide marketing strategies. Verizon Communications also uses other comScore Marketing Solutions products to obtain answers to a variety of other business issues.
 
  •  Starcom USA is an independent operating unit of Starcom MediaVest Group, a global advertising and marketing agency. Starcom has been a customer of comScore’s Marketing Solutions products since 2004, when it purchased an analysis to quantify the impact of a Fortune 500 client’s online advertising on its share of consumer eCommerce spending during the 2003 holiday shopping season. In 2005, Starcom expanded the relationship to include comScore Marketing Solutions’ online survey capabilities. Since 2004, Starcom’s purchases of our products have expanded from purchasing surveys and holiday season eCommerce tracking to purchases covering almost the entire year. Starcom uses our digital market intelligence to analyze the impact of online advertising on its clients’ share of consumer eCommerce spending at a total Internet and product category level. Starcom also uses our marketing solutions brand accountability analyses that we generate from survey results from our global consumer Internet panel.
 
  •  Yahoo! is a leading global Internet portal. Yahoo! became a customer when we acquired certain Media Metrix assets in 2002. Since then, Yahoo! has purchased additional Media Metrix products and in 2004 chose comScore as Yahoo!’s source of record for Internet audience measurement and search. Yahoo! has exclusively used Media Metrix for digital marketing intelligence in the U.S. since 2006. In 2002, our relationship with Yahoo! expanded with the launch of our qSearch product that tracks consumers’ use of various search engines. qSearch information is used by Yahoo! in numerous aspects of managing its search business, including product development, market share tracking, competitive analysis, ad effectiveness and executive reporting. Yahoo! also commissioned us to conduct several analyses that measured the degree to which offline sales and latent online sales (sales made days or weeks after the initial click-through) were impacted by search advertising. In late 2005 and throughout 2006, Yahoo! integrated our advertising effectiveness testing products into its suite of advertiser products, thereby enabling its advertisers to analyze campaign effectiveness by measuring a variety of different metrics including offline sales, surveyed branding and awareness, online site usage and trademark search activity. In 2006, we completed two significant studies for Yahoo! entitled “Close the Loop” — a study on the link between search and image advertising, and “Brand Advocates: The Impact of Search and Social Media on Branding.” We became a preferred provider of services to Yahoo! in 2006. In 2007, our relationship with Yahoo! grew with the addition of international and worldwide data and ongoing adoption of certain of our new syndicated and custom comScore digital marketing intelligence products.
 
Selling and Marketing
 
We sell the majority of our products through a direct sales force. Sales of the comScore Media Metrix product suite to new clients are managed by sales representatives assigned specifically to new business development. A separate group of account managers within our sales organization is assigned to manage, renew and increase sales to existing Media Metrix customers. The comScore Marketing Solutions sales


74



 

organization is organized vertically by industry with account executives dedicated to selling into the automotive, consumer packaged goods, entertainment, financial services, media, pharmaceutical, retail, technology, telecommunications and travel sectors and other industries. Marketing Solutions account executives are tasked with both identifying and generating new business in specific verticals as well as servicing existing customers. Our sales and account representatives receive a base salary and are eligible for bonuses or commissions based on performance.
 
Our marketing communications staff is primarily focused on leveraging the use of comScore data and insights by the media and maximizing the number of times that comScore is cited as a source of information. We believe that the use of our data by general and industry-specific media outlets increases recognition of the comScore brand name and serves to help validate the value of the analyses and products we provide. In order to accomplish this goal, we seek to maintain relationships with key news distributors, publications, TV networks, reporters and other media outlets. We believe that the media views us as a highly recognized and credible resource for digital marketing intelligence. For example, between March 1 and December 31, 2006, comScore data were cited more than 16,500 times by third-party media outlets, an average of over 55 citations per day. Moreover, we are regularly cited by well-known news distributors, publications and TV networks such as the Associated Press, Reuters, Bloomberg, CNBC, The New York Times and The Wall Street Journal. We also target various industry conferences and tradeshows as part of our marketing efforts. These events are typically focused on a particular industry, allowing us to demonstrate to industry participants the value of our products to businesses in that industry.
 
Panel and Methodology
 
The foundation of our digital marketing intelligence platform is data collected from our comScore panel, which includes more than two million persons worldwide whose online behavior we have explicit permission to measure on a continuous, passive basis. We believe that our panel is one of the largest global panels of its kind, delivering a multi-faceted view of digital media usage and transactional activity as well as selected offline activity. By applying advanced statistical methodologies to our panel data, we project the behavior of the total online population.
 
We recruit our panel through a variety of online recruitment programs that have been tested and refined since our inception to ensure a diverse sample that sufficiently represents the broader global Internet population. In addition, in the United States we enlist a sub-sample of panelists through various offline recruiting methods. Participants in the comScore research panel receive a package of benefits that is designed to appeal to a broad variety of user categories. Examples of such benefits include, as of December 2006, free security applications such as server-based virus protection, encrypted file protection, encrypted network disk storage locations for user backups; free general purpose applications such as screensavers and games; sweepstakes; cash payments; and points that may be redeemed for prizes. Participants’ data and privacy are protected by defined privacy policies that safeguard personally-identifiable information. This combination of recruiting methods allows us to maintain a panel large enough to provide statistically representative samples in most demographic segments.
 
We continuously determine the size, demographics and other characteristics of the online population using enumeration surveys of tens of thousands of persons annually, whereby respondents are asked a variety of questions about their Internet use, as well as demographic and other descriptive questions about themselves and their households. The sample of participants in each enumeration survey is selected using a random recruiting methodology. The result is an up-to-date picture of the population to which the comScore sample is then projected. We use the results from the enumeration surveys to weight and statistically project the panel data to ensure that the projected data reflect the characteristics of the Internet population.
 
Privacy
 
We believe that a key factor differentiating our digital marketing intelligence is our ability to track and analyze online usage behavior using the data collected from our panel. Since the founding of our company, we have endeavored to undertake such data collection and analysis responsibly and only with consumer


75



 

permission. Participation in our research panel is voluntary. Participants must consent to our privacy and data security practices before our software collects information on the user’s online activity. In addition, we provide panelists with multiple opportunities and methods to remove themselves from our panel. We limit the type of information that we collect by identifying and filtering certain personal information from the data collected. The collected data is secured using multiple layers of physical and digital security mechanisms. Moreover, we maintain a strict policy of not sharing panelists’ personally identifiable information with our customers. These actions and policies are consistent with the AICPA/CICA WebTrust criteria for online privacy.
 
Technology and Infrastructure
 
We have developed a proprietary system for the measurement of the activity of our global online panel. This system is continuously refined and developed to address the changing digital media landscape and to meet new customer business needs. The system is comprised of hundreds of servers that operate using software built on Microsoft and other technologies. Our technology infrastructure is operated in two third-party Tier-1 co-location facilities (one in Virginia and the other in Illinois). Our systems have multiple redundancies and are structured to ensure the continuation of business operations in the event of network failure or if one of our data centers has been rendered inoperable. As of December 31, 2006, our technology team (excluding employees devoted to research and development) was comprised of over 105 full-time employees (or full-time equivalents) working in four different geographic locations, who design, develop, maintain and operate our entire technology infrastructure. In addition, we have established a relationship with a third party firm for software development in an economically beneficial locale as a means to augment our technology efforts for discrete projects.
 
Our development efforts have spanned all aspects of our business. We have developed a data capture system that operates across our panelists’ computers in almost 200 countries and is used for the real-time capture of consumer Internet behavior. We have built a large scale, efficient and proprietary system for processing massive amounts of data. Typically our systems handle and process data in excess of 10 billion input records per month. Despite the scale of processing required, these data are generally available on a daily basis for our business use. We have also developed a highly efficient and scalable system for the extraction and tabulation of all online activities of our panelists. Likewise, we have created a highly scalable data warehousing environment that allows ready access and analysis of the data we collect. This system, based on Sybase IQ, was awarded the 2003, 2004 and 2005 Grand Prize for the largest Microsoft-based decision support warehouse by the Winter Corporation. In December 2006, we were recognized as a 2007 Technology Pioneer by the World Economic Forum. We believe our scalable and highly cost-effective systems and processing methods provide us with a significant competitive advantage.
 
Our customers access our digital marketing intelligence product offerings through a variety of methods including MyMetrix, our proprietary, Web-based analysis and reporting system, which in the month of December 2006 was used by 4,020 users to produce more than 170,000 reports.
 
Research and Development
 
Our research and development efforts focus on the enhancement of our existing products and the development of new products to meet our customers’ digital marketing intelligence needs across a broad range of industries and applications. Because of the rapidly growing and evolving use of the Internet and other digital mediums for commerce, content, advertising and communications, these efforts are critical to satisfying our customers’ demand for relevant digital marketing intelligence. As of March 31, 2007, we had approximately 85 full-time employees (or full-time equivalents) working on research and development activities (excluding employees on our technology team cited under “Technology and Infrastructure” above). In addition, we involve management and operations personnel in our research and development efforts. In 2006, 2005 and 2004, we spent $9.0 million, $7.4 million and $5.5 million, respectively, on research and development. During the three months ended March 31, 2007, we spent $2.6 million on research and development.


76



 

 
Intellectual Property
 
We rely on a combination of patent, trademark, copyright and trade secret laws in the United States and other jurisdictions together with confidentiality procedures and contractual provisions to protect our proprietary technology and our brand. We seek patent protection on inventions that we consider important to the development of our business. We control access to our proprietary technology and enter into confidentiality and invention assignment agreements with our employees and consultants and confidentiality agreements with other third parties.
 
Our success depends in part on our ability to develop patentable products and obtain, maintain and enforce patent and trade secret protection for our products, including successfully defending these patents against any third-party challenges, both in the United States and in other countries. We may be able to protect our technologies from unauthorized use by third parties to the extent that we own or have licensed valid and enforceable patents or trade secrets that cover them. However, the degree of future protection of our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage.
 
Currently, we own U.S. patent 7,181,412, which was filed March 22, 2000 and covers, among other things, techniques for collecting consumer data. Under current U.S. law, the statutory term for a patent is 20 years from its earliest effective filing date. Accordingly, U.S. patent 7,181,412 is expected to expire on March 22, 2020. However, various circumstances, such as the provisions under U.S. patent law for patent term adjustment and patent term extension, may extend the duration of this patent. Similarly, various circumstances may shorten the duration of this patent, such as a change in U.S. law or a need or decision on our part to terminally disclaim a portion of the statutory term of this patent.
 
We also currently have twelve U.S. and foreign patent applications pending, and we intend to file, or request that our licensors file, additional patent applications for patents covering our products. However, patents may not be issued for any pending or future pending patent applications owned by or licensed to us, and claims allowed under any issued patent or future issued patent owned or licensed by us may not be valid or sufficiently broad to protect our technologies. Any issued patents owned by or licensed to us now or in the future may be challenged, invalidated, held unenforceable or circumvented, and the rights under such patents may not provide us with the expected benefits. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture or increase their market share with respect to related technologies. Although we are not currently involved in any legal proceedings related to intellectual property, we could incur substantial costs to defend ourselves in suits brought against us or in suits in which we may assert our patent rights against others. An unfavorable outcome in any such litigation could have a material adverse effect on our business and results of operations.
 
In addition to patent and trade secret protection, we also rely on several trademarks and service marks to protect our intellectual property assets. We are the owner of numerous trademarks and service marks and have applied for registration of our trademarks and service marks in the United States and in certain other countries to establish and protect our brand names as part of our intellectual property strategy. Some of our registered marks include comScore, Media Metrix and MyMetrix.
 
Our intellectual property policy is to protect our products, technology and processes by asserting our intellectual property rights where we believe it is appropriate and prudent. Any pending or future pending patent applications owned by or licensed to us (in the United States or abroad) may not be allowed or may in the future be challenged, invalidated, held unenforceable or circumvented, and the rights under such patents may not provide us with competitive advantages. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. Protecting our intellectual property rights is costly and time consuming. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and harm our operating results.
 
There is always the risk that third parties may claim that we are infringing upon their intellectual property rights and, if successful in proving such claims, we could be prevented from selling our products.


77



 

 
For additional, important information related to our intellectual property, please review the information set forth in “Risk Factors — Risks Related to Our Business, Our Technologies and Our Industry.”
 
Competition
 
The market for digital marketing intelligence is highly competitive and evolving rapidly. We compete primarily with providers of digital marketing intelligence and related analytical products and services. We also compete with providers of marketing services and solutions, with survey providers, as well as with internal solutions developed by customers and potential customers. Our principal competitors include:
 
  •  large and small companies that provide data and analysis of consumers’ online behavior, including Compete Inc., Hitwise Pty. Ltd and NetRatings, Inc.;
 
  •  online advertising companies that provide measurement of online ad effectiveness, including aQuantive, Inc., DoubleClick Inc., ValueClick Inc., and WPP Group plc;
 
  •  companies that provide audience ratings for TV, radio and other media that have extended or may extend their current services, particularly in certain international markets, to the measurement of digital media, including Arbitron Inc., Nielsen Media Research, Inc. and Taylor Nelson Sofres plc;
 
  •  analytical services companies that provide customers with detailed information of behavior on their own Web sites, including Omniture, Inc., WebSideStory, Inc. and WebTrends Corporation;
 
  •  full-service market research firms and survey providers that may measure online behavior and attitudes, including Harris Interactive Inc., Ipsos Group, Taylor Nelson Sofres plc and The Nielsen Company; and
 
  •  specialty information providers for certain industries that we serve, including IMS Health Incorporated (healthcare) and Telephia, Inc. (telecommunications).
 
Some of our current competitors have longer operating histories, relationships with more customers and substantially greater resources than we do. As a result, these competitors may be able to devote more resources to marketing and promotional campaigns, panel retention and development techniques or technology and systems development than we can. In addition, some of our competitors may be able to adopt more aggressive pricing policies. Furthermore, large software companies, Internet portals and database management companies may enter the market or enhance their current offerings, either by developing competing services or by acquiring our competitors, and could leverage their significant resources and pre-existing relationships with our current and potential customers.
 
We believe the principal competitive factors in our markets include the following:
 
  •  the ability to provide actual and perceived high-quality, accurate and reliable data regarding Internet and other digital media audience behavior and activity in a timely manner, including the ability to maintain a large and statistically representative sample panel;
 
  •  the ability to adapt product offerings to emerging digital media technologies and standards;
 
  •  the breadth and depth of our products and their flexibility and ease of use;
 
  •  the availability of data across various industry verticals and geographic areas and our expertise across these verticals and in these geographic areas;
 
  •  the ability to offer survey-based information combined with digital media usage, eCommerce data and other online information collected from panelists;
 
  •  the ability to offer high-quality analytical services based on Internet and other digital media audience measurement information;
 
  •  the ability to offer products that meet the changing needs of customers and provide high-quality service; and
 
  •  the prices that are charged for products based on the perceived value delivered.


78



 

 
We believe that we compete favorably with our competitors on the basis of these factors. However, if we are unable to compete successfully against our current and future competitors, we may not be able to acquire and retain customers, and we may consequently experience a decline in revenues, reduced operating margins, loss of market share and diminished value from our products.
 
Government Regulation
 
Although we do not believe that significant existing laws or government regulations adversely impact us, our business could be affected by different interpretations or applications of existing laws or regulations, future laws or regulations, or actions by domestic or foreign regulatory agencies. For example, privacy concerns could lead to legislative, judicial and regulatory limitations on our ability to collect, maintain and use information about Internet users in the United States and abroad. Various state legislatures, including those of Utah and California, have enacted legislation designed to protect Internet users’ privacy, for example by prohibiting spyware. In recent years, similar legislation has been proposed in other states and at the federal level and has been enacted in foreign countries, most notably by the European Union, which adopted a privacy directive regulating the collection of personally identifiable information online. These laws and regulations, if drafted or interpreted broadly, could be deemed to apply to the technology we use, and could restrict our information collection methods or decrease the amount and utility of the information that we would be permitted to collect. In addition, our ability to conduct business in certain foreign jurisdictions, including China, is restricted by the laws, regulations and agency actions of those jurisdictions. The costs of compliance with, and the other burdens imposed by, these and other laws or regulatory actions may prevent us from selling our products or increase the costs associated with selling our products, and may affect our ability to invest in or jointly develop products in the United States and in foreign jurisdictions. In addition, failure to comply with these and other laws and regulations may result in, among other things, administrative enforcement actions and fines, class action lawsuits and civil and criminal liability. State attorneys general, governmental and non-governmental entities and private persons may bring legal actions asserting that our methods of collecting, using and distributing Web site visitor information are illegal or improper, which could require us to spend significant time and resources defending these claims. For example, some companies that collect, use and distribute Web site visitor information have been the subject of governmental investigations and class-action lawsuits. Any such regulatory or civil action that is brought against us, even if unsuccessful, may distract our management’s attention, divert our resources, negatively affect our public image or reputation among our panelists and customers and harm our business. The impact of any of these current or future laws or regulations could make it more difficult or expensive to attract or maintain panelists, particularly in affected jurisdictions, and could adversely affect our business and results of operations.
 
Additionally, laws and regulations that apply to communications and commerce over the Internet are becoming more prevalent. In particular, the growth and development of the market for eCommerce has prompted calls for more stringent tax, consumer protection and privacy laws in the United States and abroad that may impose additional burdens on companies conducting business online. The adoption, modification or interpretation of laws or regulations relating to the Internet or our customers’ digital operations could negatively affect the businesses of our customers and reduce their demand for our products. For additional, important information related to government regulation of our business, please review the information set forth in “Risk Factors — Risks Related to Our Business and Our Technologies.”
 
Employees
 
As of December 31, 2006, we had 377 employees. None of our employees is represented by a labor union. We have experienced no work stoppages and believe that our employee relations are good.


79



 

 
Legal
 
Generally, we are involved in various legal proceedings arising from the normal course of business activities. Currently, we do not believe that resolution of these matters will have a material adverse impact on our consolidated results of operations, cash flows or our financial position. However, depending on the amount and timing, an unfavorable resolution of a matter could materially affect our future results of operations, cash flows or financial position in a particular period.
 
Facilities
 
Our corporate headquarters and executive offices are located in Reston, Virginia, where we occupy approximately 34,000 square feet of office space under a lease that expires in June 2008. We also lease space in various locations throughout the United States and in Toronto and London for sales and other personnel. If we require additional space, we believe that we would be able to obtain such space on commercially reasonable terms.


80



 

 
MANAGEMENT
 
Executive Officers and Directors
 
The following table sets forth certain information concerning our current executive officers and directors:
 
         
Name
 
Age
 
Position(s)
 
Executive Officers
       
Magid M. Abraham, Ph.D. 
  49   President, Chief Executive Officer and Director
Gian M. Fulgoni
  59   Executive Chairman of the Board of Directors
John M. Green
  55   Chief Financial Officer
Gregory T. Dale
  37   Chief Technology Officer
Christiana L. Lin
  37   General Counsel and Chief Privacy Officer
         
Non-Employee Directors:
       
Thomas D. Berman(1)(2)
  49   Director
Bruce Golden(3)
  48   Director
William J. Henderson(2)(3)
  59   Director
Ronald J. Korn(1)(3)
  67   Director
Frederick R. Wilson(1)(2)
  45   Director
 
 
(1) Member of the audit committee.
 
(2) Member of the compensation committee.
 
(3) Member of the nominating and governance committee.
 
Magid M. Abraham, Ph.D., one of our co-founders, has served as President, Chief Executive Officer and Director since September 1999. In 1995, Dr. Abraham founded Paragren Technologies, Inc., which specialized in delivering large scale Customer Relationship Marketing systems for strategic and target marketing, and served as its Chief Executive Officer from 1995 to 1999. Prior to founding Paragren, Dr. Abraham was employed by Information Resources, Inc. from 1985 until 1995, where he was President and Chief Operating Officer from 1993 to 1994 and later Vice Chairman of the Board of Directors from 1994 until 1995. Since May 2006, Dr. Abraham has also been a member of the board of directors of ES3, LLC, a storage and logistics services company. Dr. Abraham received the Paul Green Award in 1996 and the William F. O’Dell Award in 2000 from the American Marketing Association for a 1995 article that he co-authored in the Journal of Marketing Research. He received a Ph.D. in Operations Research and an M.B.A. from MIT. He also holds an Engineering degree from the École Polytechnique in France.
 
Gian M. Fulgoni, one of our co-founders, has served as Executive Chairman of the Board of Directors since September 1999. Prior to co-founding comScore, Mr. Fulgoni was employed by Information Resources, Inc., where he served as President from 1981 to 1989, Chief Executive Officer from 1986 to 1998 and Chairman of the Board of Directors from 1991 until 1995. Mr. Fulgoni has served on the board of directors of PetMed Express, Inc. since 2002 and previously served from August 1999 through November 2000. Mr. Fulgoni also serves on the board of directors of INXPO, LLC, an Illinois-based provider of virtual events, since July 2005. He also served on the board of directors of Platinum Technology, Inc. from 1990 to 1999, U.S. Robotics, Inc. from 1991 to 1994, and Yesmail.com, Inc. from 1999 to 2000. Mr. Fulgoni has twice been named an Illinois Entrepreneur of the Year. In 1992, he received the Wall Street Transcript Award for outstanding contributions as Chief Executive Officer of Information Resources, Inc. in enhancing the overall value of that company to the benefit of its shareholders. Educated in the United Kingdom, Mr. Fulgoni holds an M.A. in Marketing from the University of Lancaster and a B.Sc. in Physics from the University of Manchester.
 
John M. Green has served as Chief Financial Officer since May 2006. Prior to joining comScore, Mr. Green served as the Chief Financial Officer and U.S. Services Business Leader for BioReliance, a subsidiary of Invitrogen Corporation, from 2004 to March 2006. Prior to joining BioReliance, Mr. Green


81



 

served as the General Manager, Business Integrations at Invitrogen from September 2003 to April 2004. From March 2001 through August 2003, Mr. Green served as the Chief Financial Officer for InforMax, and as its Chief Operating Officer from October 2001 until the sale of InforMax and integration into Invitrogen in August 2003. Prior to 2001, Mr. Green held several financial and operating management roles, including serving as Executive Vice President of Operations at HMSHost Corporation, Senior Vice President of Finance and Corporate Controller at Marriott International Incorporated and Director of Business Planning and Director of Finance, Central Europe, at PepsiCo, Inc. Mr. Green received an M.Sc. in Economics from The London School of Economics and a B.A. in Political Science/International Relations from Tufts University.
 
Gregory T. Dale has served as Chief Technology Officer since October 2000. Prior to that, he served as Vice President, Product Management starting in September 1999. Prior to joining us, he served as Vice President of Client Service at Paragren Technologies, Inc., a company that specialized in enterprise relationship marketing. He holds a B.S. in Industrial Management from Purdue University.
 
Christiana L. Lin has served as General Counsel and Chief Privacy Officer since January 2006. Prior to that, she served as our Corporate Counsel and Chief Privacy Officer starting in March 2003. Prior to that, she served as our Deputy General Counsel starting in February 2001. Ms. Lin holds a J.D. from the Georgetown University Law Center and a B.A. in Political Science from Yale University.
 
Thomas D. Berman has served as a director since August 2001. Mr. Berman is a partner with Adams Street Partners, where he has led investments in information technology and business services companies since 1990. He served on the board of directors of PathScale, Inc. from May 2004 to April 2006 and has served on the board of directors of Adams Harris, Inc. since March 2006. Mr. Berman holds an S.B. in Electrical Engineering from MIT and an S.M. from the Sloan School of Management at MIT.
 
Bruce Golden has served as a director since June 2002. He is a partner at Accel Partners, which he joined in 1997. Mr. Golden has led a number of investments in enterprise software and Internet-related companies while at Accel and currently serves as a member of the boards of directors at several private companies. He holds an M.B.A. from Stanford University and a B.A. from Columbia University.
 
William J. Henderson has served as a director since August 2001. Mr. Henderson was the 71st Postmaster General of the United States. He served in that position from May 1998 until his retirement in May 2001. Mr. Henderson also served as the Chief Operations Officer of Netflix, Inc. from January 2006 until February 2007. Mr. Henderson also currently serves on the board of directors of Acxiom Corporation, where he has been a director since June 2001. Mr. Henderson holds a B.S. from the University of North Carolina at Chapel Hill and served in the U.S. Army.
 
Ronald J. Korn has served as a director since November 2005. Since 1991, he has served as the President of Ronald Korn Consulting, which provides business and marketing services. Mr. Korn served as a director, chairman of the audit committee, and member of the loan committee of Equinox Financial Corporation from 1999 until its acquisition in October 2005. Since 2002, he has served as a director, chairman of the audit committee and a member of the compensation and nominating and governance committees of PetMed Express, Inc. and since July 2003, he has served as a director, chairman of the audit committee and a member of the compensation committee of Ocwen Financial Corporation. Prior to that, Mr. Korn was a partner and employee of KPMG, LLP, from 1961 to 1991, where he was the managing partner of KPMG’s Miami office from 1985 until 1991. Mr. Korn holds a B.S. from the University of Pennsylvania, Wharton School and a J.D. from New York University Law School.
 
Frederick R. Wilson has served as a director since August 1999. He has served as managing partner of Union Square Ventures since August 2003. He is also a managing partner of Flatiron Partners and has held that position since August 1996. He holds an M.B.A. from the Wharton School of Business at the University of Pennsylvania and an S.B. in Mechanical Engineering from MIT.
 
Board Composition
 
Upon completion of this offering, our directors will be divided into three classes serving staggered three-year terms. Class I, Class II and Class III directors will serve until our annual meetings of stockholders in


82



 

2008, 2009 and 2010, respectively. Upon expiration of the term of class of directors, directors in that class will be eligible to be elected for a new three-year term at the annual meeting of stockholders in the year in which their term expires. This classification of directors could have the effect of increasing the length of time necessary to change the composition of a majority of our board of directors. In general, at least two annual meetings of stockholders will be necessary for stockholders to effect a change in a majority of the members of our board of directors.
 
Our board of directors currently consists of seven members. Messrs. Abraham, Berman and Wilson are Class I directors and will serve for one year. Messrs. Henderson and Korn are Class II directors and will serve for two years. Messrs. Fulgoni and Golden are Class III directors and will serve for three years.
 
Board Committees
 
Our board of directors has established an audit committee, a compensation committee and a nominating and governance committee.
 
Audit Committee
 
Our audit committee consists of Messrs. Berman, Korn and Wilson, with Mr. Korn serving as chairman. Our audit committee oversees our corporate accounting and financial reporting process and internal controls over financial reporting. Our audit committee evaluates the independent registered public accounting firm’s qualifications, independence and performance; engages and provides for the compensation of the independent registered public accounting firm; approves the retention of the independent registered public accounting firm to perform any proposed permissible non-audit services; reviews our consolidated financial statements; reviews our critical accounting policies and estimates and internal controls over financial reporting; and discusses with management and the independent registered public accounting firm the results of the annual audit and the reviews of our quarterly consolidated financial statements. We believe that our audit committee members meet the requirements for independence and financial literacy under the current requirements of the Sarbanes-Oxley Act of 2002, The NASDAQ Global Market and SEC rules and regulations. In addition, the board of directors has determined that Mr. Korn is qualified as an audit committee financial expert within the meaning of SEC regulations. We have made this determination based on information received by our board of directors, including questionnaires provided by the members of our audit committee. We believe that our audit committee complies with the applicable requirements of the Sarbanes-Oxley Act of 2002, The NASDAQ Global Market and SEC rules and regulations. We intend to comply with future requirements to the extent they become applicable to us. We have adopted an audit committee charter. We expect that the committee will meet no less frequently than quarterly. Our audit committee has previously met approximately two to four times each year in connection with the annual audit of our financial statements.
 
Compensation Committee
 
Our compensation committee consists of Messrs. Berman, Henderson and Wilson, with Mr. Henderson serving as chair. Our compensation committee reviews and recommends policy relating to compensation and benefits of our officers and employees, including reviewing and approving corporate goals and objectives relevant to compensation of the Chief Executive Officer and other senior officers, evaluating the performance of these officers in light of those goals and objectives and setting compensation of these officers based on such evaluations. The compensation committee also administers the issuance of stock options and other awards under our stock plans. We believe that the composition of our compensation committee meets the requirements for independence under, and the functioning of our compensation committee complies with, any applicable requirements of the Sarbanes-Oxley Act of 2002, The NASDAQ Global Market and SEC rules and regulations. We intend to comply with future requirements to the extent they become applicable to us. We have adopted a compensation committee charter. We expect that the committee will meet at least once a year. Our compensation committee has previously met on an annual basis to review key compensation decisions.


83



 

 
Nominating and Governance Committee
 
Our nominating and governance committee consists of Messrs. Golden, Henderson and Korn, with Mr. Golden serving as chairman, each of whom the board of directors has determined is an independent director under the rules of The NASDAQ Global Market. The nominating and governance committee recommends to the board of directors nominees for election as directors, and meets as necessary to review director candidates and nominees for election as directors.
 
Code of Business Conduct and Ethics
 
Our board of directors has adopted a code of business conduct and ethics, which establishes the standards of ethical conduct applicable to all directors, officers and employees of our company. The code addresses, among other things, conflicts of interest, compliance with disclosure controls and procedures and internal controls over financial reporting, corporate opportunities and confidentiality requirements. The audit committee is responsible for applying and interpreting our code of business conduct in situations where questions are presented to the committee.
 
Compensation Committee Interlocks and Insider Participation
 
None of the members of our compensation committee is an executive officer or employee of our company. None of our executive officers serves as a member of the compensation committee of any entity that has one or more executive officers serving on our compensation committee.
 
Director Compensation
 
None of our non-employee directors are currently compensated for service on the board of directors. We do, however, reimburse director expenses for attending meetings of the board of directors.
 
We previously granted equity awards for the purchase of our common stock to two of our present non-employee directors, William Henderson and Ronald Korn, upon their initial appointment to our board of directors. A warrant to purchase 20,000 shares of our common stock at an exercise price of $5.00 per share was issued on June 26, 2001 to Mr. Henderson, Such warrant shall terminate on the earlier of (i) June 26, 2011; (ii) the completion of this offering; or (iii) a change of control as defined in the warrant. In addition, Mr. Henderson was previously granted stock options for the purchase of 6,000 shares of our common stock at an exercise price of $2.50 per share on April 9, 2002 and for the purchase of 10,000 shares of our common stock at an exercise price of $4.50 per share on December 27, 2005. Mr. Korn was awarded stock options for the purchase of 20,000 shares of our common stock at an exercise price of $4.25 per share on November 25, 2005. The warrant for the purchase of 20,000 shares of our common stock issued to Mr. Henderson, the stock options for the purchase of 16,000 shares of common stock granted to Mr. Henderson and the stock option for the purchase of 20,000 shares of common stock granted to Mr. Korn remained outstanding as of December 31, 2006. Mr. Henderson subsequently exercised his warrant for 20,000 shares on May 15, 2007.
 
Upon the closing of this offering, our non-employee directors will be entitled to an annual grant of restricted stock having a value of $50,000 at the time of the grant. Non-employee directors will also be paid an annual cash retainer of $25,000 for serving on our board of directors, an additional annual cash retainer of $10,000 for serving as the chairman of our audit committee and $7,500 for serving as the chair of our compensation committee. On June 3, 2007, our board of directors further amended our compensation policies for non-employee directors. The total amount of each annual grant of restricted stock shall remain unvested until the earlier of (i) the date of the respective director’s first anniversary of joining our board of directors, (ii) the date of the first annual stockholders’ meeting following the date of grant or (iii) a change of control. The board of directors has discretion to accelerate or modify such vesting schedule due to special circumstances.
 
Our non-employee directors did not receive any compensation for their services as directors in 2006, and we did not incur stock-based compensation expense for any outstanding equity awards held by our non-employee directors during 2006.


84



 

 
Limitations on Director and Officer Liability and Indemnification
 
Our amended and restated certificate of incorporation as will be in effect upon completion of this offering limits the liability of our directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for:
 
  •  any breach of their duty of loyalty to the corporation or its stockholders;
 
  •  acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
 
  •  unlawful payments of dividends or unlawful stock repurchases or redemptions; or
 
  •  any transaction from which the director derived an improper personal benefit.
 
Our amended and restated certificate of incorporation and our amended and restated bylaws will provide that we are required to indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law. Any repeal of or modification to our amended and restated certificate of incorporation and our amended and restated bylaws may not adversely affect any right or protection of a director or officer for or with respect to any acts or omissions of such director or officer occurring prior to such amendment or repeal. Our bylaws will also provide that we shall advance expenses incurred by a director or officer in advance of the final disposition of any action or proceeding, and permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in connection with their services to us, regardless of whether our bylaws permit such indemnification.
 
We have entered into separate indemnification agreements with our directors and executive officers, in addition to the indemnification provided for in our bylaws. These agreements, among other things, provide that we will indemnify our directors and executive officers for certain expenses (including attorney’s fees), judgments, fines, penalties and settlement amounts incurred by a director or executive officer in any action or proceeding arising out of such person’s services as one of our directors or executive officers, or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers.
 
The limitation of liability and indemnification provisions that will be contained in our amended and restated certificate of incorporation and our amended and restated bylaws may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and other stockholders. Further, a stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions. There is no pending litigation or proceeding involving one of our directors or executive officers as to which indemnification is required or permitted and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification.


85



 

 
COMPENSATION DISCUSSION AND ANALYSIS
 
Our Philosophy
 
The objective of our compensation programs for employees is to retain and attract top talent. The plans are designed to reward, motivate and align employees to achieve business results and to reinforce accountability. In determining the compensation of senior executives, we are guided by the following key principles:
 
  •  Compensation to Retain and Attract Top Talent.  Compensation should allow us to retain, attract, and motivate talented executives. We recognize that the marketplace for our executives is not necessarily the same as for our business. For example, the marketplace for a chief financial officer may include all public companies, while the marketplace for a chief operating officer would focus on digital marketing intelligence providers. Although we have not previously conducted formal analyses of compensation levels in various marketplaces or engaged compensation consultants to do so on our behalf, we generally seek to compensate our executives at levels that our board of directors believes are consistent with or more attractive than other available opportunities in the executive’s marketplace.
 
  •  Accountability for Business Performance.  Compensation should be tied, in part, to financial performance, so that executives are held accountable through their compensation for contributions to our performance as a whole through the performance of the businesses for which they are responsible.
 
  •  Accountability for Individual Performance.  Compensation should be tied, in part, to the individual’s performance to encourage and reflect individual contributions to our performance. Our board of directors considers individual performance as well as performance of the businesses and responsibility areas that an individual oversees, and weights these factors as appropriate in assessing a particular individual’s performance.
 
  •  Alignment with Stockholder Interests.  Compensation should be tied, in part, to our financial performance through equity awards to align executives’ interests with those of our stockholders.
 
  •  Independence.  An independent committee of our board of directors should be, and is, responsible for reviewing and establishing the compensation for our Chief Executive Officer and Executive Chairman, and for reviewing and approving the compensation recommendations made by our Chief Executive Officer for all of our other executive officers.
 
Application of our Philosophy
 
Our executive compensation and benefit program aims to encourage our management team to continually pursue our strategic opportunities while effectively managing the risks and challenges inherent to our business. Specifically, we have created an executive compensation package that balances short versus long-term components, cash versus equity elements, and fixed versus contingent payments, in ways we believe are most appropriate to incentivize our senior management and reward them for achieving the following goals:
 
  •  develop a culture that embodies a passion for our business, creative contribution and a drive to achieve established goals and objectives;
 
  •  provide leadership to the organization in such a way as to maximize the results of our business operations;
 
  •  lead us by demonstrating forward thinking in the operation, development and expansion of our business;
 
  •  effectively manage organizational resources to derive the greatest value possible from each dollar invested; and
 
  •  take strategic advantage of the market opportunity to expand and grow our business.
 
Our executive compensation structure aims not only to compensate top talent at levels that our board of directors believes are consistent with or more attractive than other opportunities in an executive’s marketplace, but also to be fair relative to compensation paid to other professionals within our organization, relative to our short and long-term performance and relative to the value we deliver to our stockholders. We seek to maintain


86



 

a performance-oriented culture and a compensation approach that rewards our executive officers when we achieve our goals and objectives, while putting at risk an appropriate portion of their compensation against the possibility that our goals and objectives may not be achieved. Overall, our approach is designed to relate the compensation of our executive officers to: the achievement of short and longer term goals and objectives; their willingness to challenge and improve existing policies and structures; and their capability to take advantage of unique opportunities and overcome difficult challenges within our business.
 
Role of Our Compensation Committee
 
Our compensation committee approves, administers and interprets our executive compensation and benefit policies, including our 1999 Stock Plan, our 2007 Equity Incentive Plan and our short-term compensation, long-term incentives and benefits programs. Our compensation committee is appointed by our board of directors, and consists entirely of directors who are “outside directors” for purposes of Section 162(m) of the Internal Revenue Code and “non-employee directors” for purposes of Rule 16b-3 under the Exchange Act. Our compensation committee is comprised of Messrs. Berman, Henderson and Wilson, and is chaired by Mr. Henderson.
 
Our compensation committee reviews and makes recommendations to our board of directors to ensure that our executive compensation and benefit program is consistent with our compensation philosophy and corporate governance guidelines and, subject to the approval of our board of directors, is responsible for establishing the executive compensation packages offered to our executive officers. Although we have not previously conducted formal analyses of compensation levels in various marketplaces or engaged compensation consultants to do so on our behalf, we believe our executives’ base salary, target annual bonus levels and long-term incentive award values are set at levels that compensate top talent at levels that our board of directors believes are consistent with or more attractive than other opportunities in an executive’s marketplace. This belief is based on the collective experience and knowledge of our board of directors and executive management, as well as an informal review of compensation information gained through marketplace contacts and service providers.
 
Our compensation committee has taken the following steps to ensure that our executive compensation and benefit program is consistent with both our compensation philosophy and our corporate governance guidelines:
 
  •  regularly reviewed the performance of and the total compensation earned by or awarded to our Chief Executive Officer and Executive Chairman independent of input from them;
 
  •  examined on an annual basis the performance of our other named executive officers and other key employees with assistance from our Chief Executive Officer and Executive Chairman, and approved compensation packages that are believed to be consistent with or more attractive than those generally found in the executive’s marketplace; and
 
  •  regularly held executive sessions of the compensation committee meeting without management present.
 
Components of our Executive Compensation Program.
 
Our executive compensation program consists of three components: short-term compensation (including base salary and annual performance bonuses), long-term incentives and benefits.
 
Short-term Compensation
 
We utilize short-term compensation, including base salary, annual adjustments to base salary and annual performance bonuses, to motivate and reward our key executives in accordance with our performance-based program. Each individual’s short-term compensation components are tied to an annual assessment of his or her progress against established objectives.
 
Base salary is used to recognize the experience, skills, knowledge and responsibilities required of each executive officer, as well as competitive market conditions. As we transition to becoming a public company, we expect that base salary determinations will be guided primarily by our objective to provide compensation at levels to retain and attract top talent. In establishing the 2007 base salaries of the executive officers, our compensation committee and management took into account a number of factors, including the executive’s


87



 

seniority, position and functional role, level of responsibility and, to the extent such individual was employed by us for at least the prior six months, his or her accomplishments against personal and group objectives. For newly hired executives, we consider the base salary of the individual at his or her prior employment, any unique personal circumstances that motivated the executive to leave that prior position to join us and the compensation range for the particular role being filled. In addition, we consider the market for corresponding positions within comparable geographic areas and industries.
 
The base salary of our executive officer group is reviewed on an annual basis and adjustments are made to reflect performance-based factors, as well as marketplace conditions. Increases are considered within the context of our overall annual merit increase structure as well as individual and marketplace factors. We do not apply specific formulas to determine increases. Generally, executive officer salaries are adjusted effective the first quarter of each year based on a review of:
 
  •  their achievement of specific objectives established during the prior review;
 
  •  an assessment of their professional effectiveness, consisting of a portfolio of competencies that include leadership, commitment, creativity and organizational accomplishment; and
 
  •  their knowledge, skills and attitude, focusing on capabilities, capacity and the ability to drive results.
 
Annual performance bonuses for our executive officers are tied to the achievement of our annual company goals and objectives, functional area goals, and/or individual performance objectives. Annual performance bonuses are primarily guided by our objectives of accountability for individual and business performance. We set clearly defined goals for each executive officer, with an emphasis on quantifiable and achievable targets. A portion of each executive officer’s bonus is clearly tied to the achievement of specific targets relative to the performance of the particular business segment or functional area for which they are responsible, with the remainder tied to similar targets relative to our overall financial performance. Individual awards under the program are based on a thorough review of the applicable performance results of the company, business, function or individual as compared to the applicable goals.
 
Target bonuses are set at a percentage of base salary. Our compensation committee approves these percentages for our executive officers based on a determination of the appropriate portion of total compensation that should be at risk for a particular executive officer. Generally, target bonuses for our Chief Executive Officer and our Executive Chairman are set at a higher percentage of base salary than for our other executive officers, so as to recognize their broader responsibility for company-wide results and to place a greater portion of their total compensation at risk against the achievement of overall goals and objectives.
 
In 2006, Magid M. Abraham, our Chief Executive Officer, and Gian M. Fulgoni, our Executive Chairman of the Board of Directors, were our only named executive officers that had annual performance bonuses tied solely to quantitative factors. Both Dr. Abraham and Mr. Fulgoni’s respective bonuses were based on a combination of total revenue and EBITDA achieved by the Company in 2006. Dr. Abraham received $117,273 in bonus for the year ended December 31, 2006, which amount represented 80% of his target bonus of $146,591. Mr. Fulgoni received $111,409, which amount also represented 80% of his target bonus of $139,261. Target bonuses for Dr. Abraham and Mr. Fulgoni were set at 50% of base salary for 2006. We established these revenue and EBITDA targets such that, if the Company and the officer performed as expected, he will have achieved 50% to 75% of the target bonus.
 
The annual performance bonuses for our other named executive officers in 2006 were based on qualitative factors several of which were the satisfactory completion of specific projects or initiatives. At the end of each fiscal year, the executive officers complete a self-assessment of their performance in the context of their bonus criteria. Dr. Abraham reviews these self-assessments and makes a recommendation to our compensation committee. Messrs. Green and Dale and Ms. Lin each received 100% of their respective target bonus amounts for 2006, which amounts were $47,019, $44,423 and $29,815, respectively. Ms. Huston did not receive a bonus payment for 2006 as her employment terminated in February 2006. The target bonus for Mr. Green was set at 30% of base salary for 2006. Target bonuses for Mr. Dale and Ms. Lin were set at 20% of base salary for 2006. For Messrs. Green and Dale and Ms. Lin, bonus payments were not driven by formulas. Instead,


88



 

targets were based on qualitative factors, such as preparation for our initial public offering, development of new technology, or expansion into new markets.
 
Magid M. Abraham, our Chief Executive Officer, periodically reviews the performance of our executive officers on the basis noted above and recommends to the compensation committee any base salary changes or bonuses deemed appropriate.
 
For the 2005 and 2006 performance measurement years, executive bonuses were paid out in one installment during the month of February following the measurement year.
 
Long-term Compensation
 
Our long-term compensation program has historically consisted solely of stock options. Long-term equity based incentives are primarily guided by our objective of aligning executive compensation with the interests of our stockholders. Option grants made to executive officers are designed to provide them with incentive to execute their responsibilities in such a way as to generate long-term benefit to us and our stockholders. Through possession of stock options, our executives participate in the long-term results of their efforts, whether by appreciation of our company’s value or the impact of business setbacks, either company-specific or industry based. Additionally, stock options provide a means of ensuring the retention of key executives, in that they are in almost all cases subject to vesting over an extended period of time.
 
Stock options are granted periodically, and are subject to vesting based on the executive’s continued employment. Most options vest evenly over four years, beginning on the date of the grant. A portion of options granted to our executives vest according to defined performance milestones rather than solely based on time. Of the option grants and restricted stock currently outstanding and held by our executives, only the stock options held by Dr. Abraham and Mr. Fulgoni are subject to vesting based on performance milestones, as further described in the section entitled “Executive Compensation Outstanding Equity Awards at December 31, 2006.” These grants occurred in December 2003, and we have not used performance milestone-based vesting since then for any of our employees.
 
Upon joining us, each executive is granted an initial option award that is primarily based on competitive conditions applicable to the executive’s specific position. In addition, the compensation committee considers the number of options owned by other executives in comparable positions within our company. We believe this strategy is consistent with the approach of other companies at the same stage of development in our industry and, in our compensation committee’s view, is appropriate for aligning the interests of our executives with those of our stockholders over the long term.
 
Periodic awards to executive officers are made based on an assessment of their sustained performance over time, their ability to impact results that drive value to our stockholders and their organization level. Equity awards are not granted regularly or automatically to our executives on an annual basis. Magid Abraham, our Chief Executive Officer, periodically reviews the performance of our executive officers on the basis noted above and recommends to the compensation committee any equity awards deemed appropriate. The compensation committee reviews any such recommendations and presents them to our board of directors for approval, if appropriate.
 
During 2006, our board of directors granted stock options based upon the recommendations of our compensation committee. These grants were generally made during regularly scheduled board meetings. The exercise price of options was determined by our board of directors after taking into account a variety of factors, including the quality and growth of our management team and specific and general market comparables within our industry. In addition, our board of directors took into account the valuation opinion of our outside consultant, who provided valuations of our common stock at the end of each calendar quarter.
 
On March 25, 2007, we awarded an aggregate of 242,000 shares of restricted stock to our named executive officers based upon the recommendations of our compensation committee, taking into account the factors described above. Beginning in 2007, we expect to increase our use of restricted stock awards and reduce our use of stock options as a form of stock-based compensation.


89



 

 
Benefits
 
We provide the following benefits to our executive officers on the same basis as the benefits provided to all employees:
 
  •  health and dental insurance;
 
  •  life insurance;
 
  •  short-and long-term disability; and
 
  •  401(k) plan.
 
These benefits are consistent with those offered by other companies and specifically with those companies with which we compete for employees.
 
Our Competitive Market
 
The market for experienced management with the knowledge, skills and experience our organization requires is highly competitive. Our objective is to attract and retain the most highly qualified executives to manage each of our business functions. In doing so, we draw upon a pool of talent that is highly sought after by other companies in our industry and those industries that also produce the requisite skills we seek. We recognize that the marketplace for our executives is not necessarily the same as for our business. Once we identify the type of employee needed, we then identify the marketplace relevant to that employee based on the competencies and skills of that employee. For example, the marketplace for a chief financial officer may include all public companies, while the marketplace for a chief operating officer would focus on digital marketing intelligence providers. Upon identifying the target marketplace, we then solicit information through public data sources or through engaging consultants to assist us with an executive search. Currently, we do not have formal data describing compensation levels. Instead, we rely on the collective experience and knowledge of our board of directors and executive management, as well as an informal review of compensation information gained through marketplace contacts and service providers. In the future, we intend to engage a compensation consultant to assist us in obtaining necessary information regarding compensation levels within a particular marketplace.
 
We believe that our ability to offer significant upside potential through restricted stock and/or other equity instruments gives us a competitive advantage. Nonetheless, we must also offer cash compensation to our existing and prospective employees through base salaries and cash bonuses that are consistent with or more attractive than other opportunities in the marketplace and allow them to satisfy their day to day financial requirements.
 
We also compete on the basis of our vision of future success, our culture and company values and the excellence of our management personnel. In all of these areas, we compete with other market research and technology companies.
 
Total Compensation
 
We intend to continue our strategy of compensating our named executive officers at levels consistent with or more attractive than other opportunities for each type of executive, with the opportunity to impact their total annual compensation through performance-based incentive programs that include both cash and equity elements. Our approach to total executive compensation is designed to drive results that maximize our financial performance and deliver value to our stockholders. In light of our compensation philosophy, we believe that the total compensation package for our executives should continue to consist of base salary, annual cash performance bonus and long-term equity-based incentives, reflecting our key compensation principles of compensation to attract and retain top talent, accountability for individual and business performance, and alignment with stockholder interests, respectively. We do not consider benefits to be a key element in attracting executive officers, and we typically offer largely the same benefits to our executive officers. Historically, we have typically offered a combination of short-term and long-term compensation to suit our executives’ preferences. Certain of our executives who joined us earlier in our history preferred to accept more long-term compensation in the form of stock options, as the potential return was higher at that stage and our


90



 

ability to fund short-term cash compensation was more limited. At the same time, certain of our executives have preferred greater short-term compensation and reduced long-term compensation. As we have become more profitable, our ability to attract executives through short-term compensation has increased. As we transition to becoming a public company, we expect that our decisions regarding the relationship among our elements of compensation will become less dependent upon our stage as a growing company and more dependent upon our key compensation principles.
 
Evolution of our Compensation Approach
 
Our compensation approach is necessarily tied to our stage of development as a company. Accordingly, the specific direction, emphasis and components of our executive compensation program will continue to evolve as our company and its underlying business strategy continue to grow and develop. For example, we intend to reduce our executive compensation program’s emphasis on stock options as a long-term incentive component in favor of other forms of equity compensation such as restricted stock awards. Similarly, we may revise how we measure senior executive performance to take into account the unique requirements of being a public company, including, but not limited to, strict compliance with the standards of the Sarbanes Oxley Act. In addition, we may engage a compensation consultant to assist our compensation committee in continuing to evolve our executive compensation program, and we may look to programs implemented by comparable public companies in refining our compensation approach.


91



 

 
EXECUTIVE COMPENSATION
 
Summary Compensation Table
 
The following table sets forth the summary information concerning compensation during 2006 for the following persons: (i) our chief executive officer, (ii) our current chief financial officer and any individual serving as our chief financial officer during 2006 and (iii) the three most highly compensated of our other executive officers who received compensation during 2006 of at least $100,000 and who were executive officers on December 31, 2006. We refer to these persons as our “named executive officers” elsewhere in this prospectus.
 
                                                 
                      Option
    All Other
       
Name and Principal Position
  Year     Salary     Bonus     Awards(1)     Compensation     Total  
 
Magid M. Abraham, Ph.D.
    2006     $ 297,612     $ 117,273           $ 3,072 (2)   $ 417,957  
President, Chief Executive Officer and Director                                                
John M. Green
    2006       156,731       47,019     $ 87,366       42 (3)     291,158  
Chief Financial Officer                                                
Gian M. Fulgoni
    2006       281,635       111,409             3,072 (2)     396,116  
Executive Chairman of the Board
of Directors
                                               
Gregory T. Dale
    2006       222,115       44,423             3,072 (2)     269,610  
Chief Technology Officer                                                
Christiana L. Lin
    2006       149,077       29,815             2,173 (4)     181,065  
General Counsel and Chief
Privacy Officer
                                               
Sheri Huston
    2006       60,772                   141,345 (5)     202,117  
Former Chief Financial Officer                                                
 
 
(1) Amounts represent stock-based compensation expense for fiscal year 2006 for stock options granted in 2006 as calculated in accordance with SFAS 123R and as further described in Note 11 “Stockholders’ Deficit — 1999 Stock Option Plan” of the Notes to Consolidated Financial Statements included elsewhere in this prospectus.
 
(2) Includes discretionary matching contributions of $3,000 each by us to Dr. Abraham’s, Mr. Fulgoni’s and Mr. Dale’s respective 401(k) plan accounts and payment of life insurance premiums on behalf of each officer.
 
(3) Represents life insurance premium paid by us on behalf of Mr. Green.
 
(4) Includes discretionary matching contributions of $2,000 by us to Ms. Lin’s 401(k) plan account and payment of life insurance premiums on behalf of Ms. Lin.
 
(5) Includes discretionary matching contribution of $2,043 by us to Ms. Huston’s 401(k) plan account and payment of life insurance premiums on behalf of Ms. Huston prior to termination of Ms. Huston’s employment in February 2006. Pursuant to her termination, Ms. Huston received aggregate severance payments of $139,290, representing six months salary and unused accrued vacation, as well as payments of health insurance premiums on her behalf.
 
All bonuses received by our named executive officers were based on a percentage of their base salary. Our employees historically receive a grant of stock options upon hiring. All of our named executive officers were employed by us prior to the beginning of 2006 except for John M. Green, our Chief Financial Officer. Mr. Green received an option grant in connection with his hiring in May 2006.
 
Grants of Plan-Based Awards
 
Our board of directors approved awards under our 1999 Stock Plan to several of our named executive officers in 2006. See “Benefit Plans — 1999 Stock Plan” for more detail regarding these options.


92



 

 
The following table sets forth certain information concerning grants of plan-based awards to named executive officers in 2006:
 
                                 
          All Other Option
             
          Awards: Number of
          Grant Date
 
          Securities
    Exercise or Base
    Fair Value of
 
          Underlying
    Price per Share
    Stock and Option
 
Name
  Grant Date     Options     of Option Awards     Awards(2)  
 
Magid M. Abraham, Ph.D.
                       
President, Chief Executive Officer and Director                                
John M. Green
    5/9/2006       130,000 (1)   $ 7.50     $ 617,045  
Chief Financial Officer                                
Gian M. Fulgoni
                       
Executive Chairman of the Board of Directors                                
Gregory T. Dale
                       
Chief Technology Officer                                
Christiana L. Lin
                       
General Counsel and Chief Privacy Officer                                
Sheri Huston
                       
Former Chief Financial Officer                                
 
 
(1) 1/48th of the total number of shares subject to option vest monthly.
 
(2) Amounts represent fair value of stock options granted in 2006 as calculated in accordance with SFAS 123R and as further described in Note 11 “Stockholders’ Deficit — 1999 Stock Option Plan” of the Notes to Consolidated Financial Statements included elsewhere in this prospectus.


93



 

Outstanding Equity Awards at December 31, 2006
 
                                         
    Option Awards  
                Equity Incentive
             
                Plan Awards: Number
             
    Number of Securities
    of Securities
             
    Underlying
    Underlying
    Option
    Option
 
    Unexercised Options     Unexercised
    Exercise
    Expiration
 
Name
  Exercisable     Unexercisable     Unearned Options     Price     Date  
 
Dr. Magid M. Abraham
    216,693 (1)           324,406 (1)   $ 0.25       12/16/2013  
President, Chief Executive
Officer and Director
                                       
John M. Green
    16,250 (2)     113,750 (2)           7.50       5/9/2016  
Chief Financial Officer                                        
Gian M. Fulgoni
                233,345 (3)     0.25       12/16/2013  
Executive Chairman of the
Board of Directors
                                       
Gregory T. Dale
    34,127                   0.25       4/28/2014  
Chief Technology Officer
    25                   0.25       4/28/2014  
      11,979                   0.25       4/28/2014  
      70                   0.25       4/28/2014  
      18,125                   0.25       4/28/2014  
      20,000 (2)     10,000 (2)           0.25       4/28/2014  
      18,333 (2)     21,667 (2)           2.45       2/2/2015  
      3,750 (2)     11,250 (2)           4.50       12/28/2015  
Christiana L. Lin
    1,083                   0.25       4/28/2014  
General Counsel and Chief
    1,167                   0.25       4/28/2014  
Privacy Officer
    4,376 (4)     1,249 (4)           0.25       4/28/2014  
      5,080 (2)     3,871 (2)           0.25       4/28/2014  
      2,500 (2)     7,500 (2)           4.50       12/28/2015  
Sheri Huston
                             
Former Chief Financial Officer                                        
 
 
(1) Vesting for Dr. Abraham’s option grant for 661,099 shares is based on the following milestones related to our performance. Our board of directors has made good faith determinations that the following milestones and vesting have occurred as of December 31, 2006:
 
116,327 shares vested when we first achieved an EBITDA greater than $0 for a full fiscal quarter;
 
116,327 shares vested when we first achieved revenues of $40 million or greater for a twelve month period; and
 
104,039 shares vested when we first achieved revenues of $50 million or greater for a twelve month period.
 
Dr. Abraham has exercised his option for 120,000 of the vested shares above. As of December 31, 2006, our board of directors had not yet made a good faith determination that the following milestones and vesting have occurred:
 
116,327 shares shall vest when we first achieve net income of greater than $0 for a twelve month period;
 
104,040 shares shall vest when we first achieve pretax net income of $5 million or greater for a twelve month period; and
 
104,039 shares shall vest when we first achieve pretax net income of $10 million or greater for a twelve month period.
 
Any unvested shares remaining under the option, including any shares not addressed by the milestones above, shall vest on the earlier of (i) December 16, 2009 or (ii) the consummation of a change in control, provided that Dr. Abraham remains a service provider to us.
 
(2) 1/48th of the total number of shares subject to option vest monthly.


94



 

 
(3) Vesting for Mr. Fulgoni’s option grant for 475,527 shares is based on the following milestones related to our performance. Our board of directors has made good faith determinations that the following milestones and vesting have occurred as of December 31, 2006:
 
83,673 shares vested when we first achieved an EBITDA greater than $0 for a full fiscal quarter;
 
83,673 shares vested when we first achieved revenues of $40 million or greater for a twelve month period; and
 
74,836 shares vested when we first achieved revenues of $50 million or greater for a twelve month period.
 
Mr. Fulgoni has exercised his option for all 242,182 of the vested shares above. As of December 31, 2006, our board of directors had not yet made a good faith determination that the following milestones and vesting have occurred:
 
83,673 shares shall vest when we first achieve net income of greater than $0 for a twelve month period;
 
74,836 shares shall vest when we first achieve pretax net income of $5 million or greater for a twelve month period; and
 
74,836 shares shall vest when we first achieve pretax net income of $10 million or greater for a twelve month period.
 
Any unvested shares remaining under the option, including any shares not addressed by the milestones above, shall vest on the earlier of (i) December 16, 2009 or (ii) the consummation of a change in control, provided that Mr. Fulgoni remains a service provider to us.
 
(4) 1/38th of the total number of shares subject to option vest monthly.
 
Option Exercises and Stock Vested Table
 
The following table presents certain information concerning the exercise of options by each of the named executive officers during the fiscal year ended December 31, 2006.
 
There was no public trading market for our common stock at the time of exercise of the options listed below. The values realized on exercise have been calculated based on the initial public offering price of $15.00, the midpoint of the range on the front cover of this prospectus, less the applicable exercise price.
 
                 
    Option Awards  
    Number of Shares
    Value Realized
 
Name
  Acquired on Exercise     on Exercise  
 
Magid M. Abraham Ph.D.
           
President, Chief Executive Officer and Director                
John M. Green
           
Chief Financial Officer                
Gian M. Fulgoni
    167,346     $ 2,468,354  
Executive Chairman of the Board of Directors     74,836       1,103,831  
Gregory T. Dale
           
Chief Technology Officer                
Christiana L. Lin
           
General Counsel and Chief Privacy Officer                
Sheri Huston
    22,915       338,011  
Former Chief Financial Officer     33,334       491,662  
      22,916       337,996  
      22,917       337,996  
 
Employment Agreements and Potential Payments upon Termination or Change-In-Control
 
We currently do not have an employment agreement with any of our named executive officers. We have offer letter agreements with Gregory T. Dale, our Chief Technology Officer, Christiana L. Lin, our General Counsel and Chief Privacy Officer, and John M. Green, our Chief Financial Officer. We also had an offer


95



 

letter agreement with Sheri Huston, who was formerly our Chief Financial Officer. We do not have offer letter agreements or employment agreements with Magid M. Abraham, our President and Chief Executive Officer, or Gian M. Fulgoni, our Executive Chairman of the Board of Directors.
 
In September 1999, we entered into an offer letter agreement with Gregory T. Dale. The letter agreement set forth Mr. Dale’s base salary of $105,000 per year, an annual performance bonus of up to 15% of Mr. Dale’s base salary and a grant of options for the purchase of 50,000 shares of our common stock. Mr. Dale’s current annual base salary is $225,000, and the compensation committee of our board of directors has approved an increase of his annual base salary to $260,000 effective March 1, 2007. Mr. Dale is entitled to receive all normal benefits provided to our employees including health insurance and three weeks paid vacation. In December 1999, Mr. Dale was granted a stock option to purchase an aggregate of 55,000 shares of our common stock at an exercise price of $0.50 per share pursuant to this agreement. The shares subject to the options vested over the next four years in equal monthly installments.
 
In December 2003, we entered into an offer letter agreement with Christiana L. Lin. The letter agreement set forth Ms. Lin’s base salary of $106,000 per year. Ms. Lin’s current annual base salary is $150,000, and the compensation committee of our board of directors has approved an increase of her annual base salary to $200,000 effective March 1, 2007. Ms. Lin is entitled to receive all normal benefits provided to our employees including health insurance and twelve days paid vacation. The offer letter agreement provides that our employment relationship with Ms. Lin’s employment is at will, and we or Ms. Lin may terminate the relationship at anytime.
 
In August 2002, we entered into an offer letter agreement with Sheri L. Huston. The letter agreement set forth Ms. Huston’s base salary of $215,000 per year, an annual performance bonus of up to 30% of Ms. Huston’s base salary and a grant of options for the purchase of 50,000 shares of our common stock. In October 2002, Ms. Huston was granted a stock option to purchase an aggregate of 50,000 shares of our common stock at an exercise price of $1.25 per share pursuant to this agreement. The shares subject to the options vested over the next four years in equal monthly installments. On February 28, 2006, Ms. Huston terminated her employment and entered into a Separation Agreement with us. Pursuant to such Separation Agreement, we agreed to pay Ms. Huston severance benefits equivalent to six months base salary as well as Ms. Huston’s 2005 performance bonus and the amount of her health insurance premiums in a lump sum payment upon her termination.
 
In May 2006, we entered into an offer letter agreement with John M. Green. The letter agreement set forth Mr. Green’s base salary of $250,000 per year, an annual performance bonus of up to 30% of Mr. Green’s base salary and a grant of options for the purchase of 130,000 shares of our common stock. Mr. Green’s current annual base salary is $250,000, and the compensation committee of our board of directors has approved an increase of his annual base salary to $270,000 effective March 1, 2007. In May 2006, Mr. Green was granted a stock option to purchase an aggregate of 130,000 shares of our common stock at an exercise price of $7.50 per share pursuant to this agreement. The shares subject to the options vest over the four years following the start of Mr. Green’s employment in equal monthly installments. Upon a change of control, if Mr. Green loses his position as Chief Financial Officer or is not provided an equivalent position, any remaining unvested shares under this option shall fully vest. Also, upon a change of control, if Mr. Green is provided with an alternative but diminished position, the lesser of either (i) any remaining unvested shares under this option or (ii) 32,500 shares under this option shall fully vest. The offer letter agreement provides that we may terminate Mr. Green’s employment at any time with or without cause. In the event we terminate Mr. Green without cause, Mr. Green is entitled to severance for six pay periods. If we terminate his employment or he resigns, he is entitled to receive any unpaid prorated base salary along with all benefits and expense reimbursements to which he is entitled by virtue of his past employment with us.
 
Additionally, any unvested shares pursuant to stock options held by Magid M. Abraham and Gian M. Fulgoni would fully vest upon a change of control, provided that each respectively remained a service provider. These option grants are further described at the section entitled “Outstanding Equity Awards at December 31, 2006.”


96



 

 
Upon a change of control in the Company, the options held by the following executive officers at December 31, 2006 would immediately vest as indicated in the table below. Furthermore, assuming a fair market value of our common stock of $15, which is the mid-point of the range on the front cover of this prospectus, such executive officers would obtain an immediate increase in value in their stock holdings as indicated in the table below.
 
                         
    Shares Vesting Upon
  Exercise
  Increase
Name
  Change of Control   Price   in Value
 
Dr. Magid M. Abraham
    324,406     $ 0.25     $ 4,784,989 (1)
President, Chief Executive Officer and Director
                       
John M. Green
    113,750       7.50       853,125  
Chief Financial Officer
                       
Gian M. Fulgoni
    233,345       0.25       3,441,839 (2)
Executive Chairman of the Board of Directors
                       
 
 
(1) In March 2007, our board of directors made a good faith determination that two of the remaining three milestones to which Dr. Abraham’s remaining unvested shares are subject had occurred. As such, Dr. Abraham’s options vested in an additional 220,367 shares on March 29, 2007. The increase in value above is based on the acceleration of unvested option shares held by Dr. Abraham at December 31, 2006. However, given the completion of the aforementioned milestones subsequent to December 31, 2006, Dr. Abraham would only accelerate an additional 104,039 shares as of the date of this prospectus, resulting in an increase in value of $1,534,575.
 
(2) In March 2007, our board of directors made a good faith determination that two of the remaining three milestones to which Mr. Fulgoni’s remaining unvested shares are subject had occurred. As such, Mr. Fulgoni’s options vested in an additional 158,509 shares on March 29, 2007. The increase in value above is based on the acceleration of unvested option shares held by Mr. Fulgoni at December 31, 2006. However, given the completion of the aforementioned milestones subsequent to December 31, 2006, Dr. Abraham would only accelerate an additional 74,836 shares as of the date of this prospectus, resulting in an increase in value of $1,103,831.
 
Additionally, if Mr. Green is terminated by us without cause, he will receive a severance payment of $57,692.40. Other than the increases in value of unvested options listed in the table above and the severance payment to Mr. Green, our named executive officers are not otherwise entitled to additional payments or benefits upon a change in control or termination of their respective employment.
 
Benefit Plans
 
The following section provides more details concerning our 1999 Stock Plan and our 2007 Equity Incentive Plan.
 
1999 Stock Plan
 
Our 1999 Stock Plan, as amended (the “1999 Stock Plan”) was adopted by our board of directors and approved by our stockholders on September 23, 1999. The plan was last amended by our board of directors and approved by our stockholders on April 12, 2005. Our 1999 Stock Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), to our employees and any parent and subsidiary corporations’ employees, and for the grant of nonstatutory stock options and stock purchase rights to our employees, directors and consultants and any parent and subsidiary corporations’ employees and consultants. We do not intend to grant any additional awards under our 1999 Stock Plan following this offering. However, our 1999 Stock Plan will continue to govern the terms and conditions of outstanding awards granted thereunder.
 
We have reserved a total of 5,352,057 shares of our common stock for issuance pursuant to the 1999 Stock Plan. As of March 31, 2007, options to purchase 2,497,424 shares of common stock and restricted stock


97



 

unit awards for 52,850 shares of our common stock were outstanding and 456,754 shares were available for future grant under this plan.
 
The compensation committee of our board of directors currently administers our 1999 Stock Plan. Under our 1999 Stock Plan, the plan administrator has the power to determine the terms of the awards, including the employees, directors and consultants who will receive awards, the exercise price, the number of shares subject to each award, the vesting schedule and exercisability of awards and the form of consideration payable upon exercise.
 
With respect to all incentive stock options granted under the 1999 Stock Plan, the exercise price must at least be equal to the fair market value of our common stock on the date of grant. With respect to all nonstatutory stock options granted under the 1999 Stock Plan, the exercise price must at least be equal to 85% of the fair market value of our common stock on the date of grant. The term of an option may not exceed ten years, except that with respect to any participant who owns 10% of the voting power of all classes of our outstanding stock as of the grant date, the term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. The administrator determines the terms of all other options.
 
After termination of an employee, director or consultant, he or she may exercise his or her option for the period of time stated in the option agreement. If termination is due to disability or death, the option will remain exercisable for no less than six months. In all other cases, the option will generally remain exercisable for at least thirty days. In the absence of a specified period of time in the option agreement, the option will remain exercisable for a period of three months following termination (or twelve months in the event of a termination due to death of disability). However, an option generally may not be exercised later than the expiration of its term.
 
Stock purchase rights may be granted alone, in addition to or in tandem with other awards granted under our 1999 Stock Plan. Stock purchase rights are rights to purchase 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 subject to a stock purchase right granted to any employee, director or consultant. The administrator may impose whatever conditions to vesting it determines to be appropriate. Unless the administrator determines otherwise, we have a repurchase option exercisable upon termination of the purchaser’s service with us. Shares subject to stock purchase rights that do not vest are subject to our right of repurchase or forfeiture.
 
Our 1999 Stock Plan provides that in the event of certain change in control transactions, including our merger with or into another corporation or the sale of substantially all of our assets, the successor corporation will assume or substitute an equivalent award with respect to each outstanding award under the plan. If there is no assumption or substitution of outstanding awards, such awards will become fully vested and exercisable and the administrator will provide notice to the recipient that he or she has the right to exercise such outstanding awards for a period of fifteen days from the date of such notice. The awards will terminate upon the expiration of such stated notice period.
 
Unless otherwise determined by the administrator, the 1999 Stock Plan generally does not allow for the sale or transfer of awards under the 1999 Stock Plan other than by will or the laws of descent and distribution, and may be exercised only during the lifetime of the participant and only by such participant.
 
We have also established a U.K. sub-plan to our 1999 Stock Plan for option grants to U.K. residents.
 
Our board of directors has the authority to amend, alter, suspend or terminate the 1999 Stock Plan provided such action does not impair the rights of any participant without the written consent of such participant.
 
2007 Equity Incentive Plan
 
Our board of directors and stockholders have adopted our 2007 Equity Incentive Plan (the “2007 Equity Incentive Plan”), to become effective upon the completion of this offering. Our 2007 Equity Incentive Plan


98



 

provides for the grant of incentive stock options, within the meaning of Section 422 of the Code, to our employees and any parent and subsidiary corporations’ employees, and for the grant of nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to our employees, directors and consultants and our parent and subsidiary corporations’ employees and consultants.
 
We have reserved a total of 1,400,000 shares of our common stock for issuance pursuant to the 2007 Equity Incentive Plan, plus (a) any shares which have been reserved but not issued under our 1999 Stock Plan and are not subject to any awards granted thereunder, and (b) any shares subject to stock options or similar awards granted under the 1999 Stock Plan that expire or otherwise terminate without having been exercised in full and shares issued pursuant to awards granted under the 1999 Stock Plan that are forfeited to or repurchased by us. The maximum number of shares that may be added to the 2007 Equity Incentive Plan from the 1999 Stock Plan is 1,000,000 shares. In addition, our 2007 Equity Incentive Plan provides for annual increases in the number of shares available for issuance thereunder on the first day of each fiscal year, beginning with our 2008 fiscal year, equal to the least of:
 
  •  4% of the outstanding shares of our common stock on the last day of the immediately preceding fiscal year;
 
  •  1,800,000 shares; or
 
  •  such other amount as our board of directors may determine.
 
Our board of directors or a committee of our board administers our 2007 Equity Incentive Plan. In the case of options intended to qualify as “performance based compensation” within the meaning of Section 162(m) of the Code, the committee will consist of two or more “outside directors” within the meaning of Section 162(m) of the Code. The administrator has the power to determine the terms of the awards, including the exercise price, the number of shares subject to each such award, the exercisability of the awards and the form of consideration payable upon exercise. The administrator also has the authority to institute an exchange program whereby the exercise prices of outstanding awards may be reduced, outstanding awards may be surrendered or cancelled in exchange for awards with a higher or lower exercise price, or outstanding awards may be transferred to a third party.
 
The exercise price of options granted under our 2007 Equity Incentive Plan must at least be equal to the fair market value of our common stock on the date of grant. The term of an incentive stock option may not exceed ten years, except that with respect to any participant who owns 10% of the voting power of all classes of our outstanding stock as of the grant date, the term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. The administrator determines the terms of all other options.
 
After termination of an employee, director or consultant, he or she may exercise his or her option for the period of time stated in the option agreement. Generally, if termination is due to death or disability, the option will remain exercisable for twelve months. In all other cases, the option will generally remain exercisable for three months. However, an option generally may not be exercised later than the expiration of its term.
 
Stock appreciation rights may be granted under our 2007 Equity Incentive 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 and whether to pay the increased appreciation in cash or with shares of our common stock, or a combination thereof. Stock appreciation rights expire under the same rules that apply to stock options.
 
Restricted stock may be granted under our 2007 Equity Incentive 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


99



 

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.
 
Restricted stock units may be granted under our 2007 Equity Incentive Plan. Restricted stock units are awards that will result in a payment to a participant at the end of a specified period only if performance goals established by the administrator are achieved or the award otherwise vests. The administrator may impose whatever conditions to vesting, restrictions and conditions to payment it determines to be appropriate. For example, the administrator may set restrictions based on the achievement of specific performance goals, on the continuation of service or employment or any other basis determined by the administrator. Payments of earned restricted stock units may be made, in the administrator’s discretion, in cash or with shares of our common stock, or a combination thereof.
 
Performance units and performance shares may be granted under our 2007 Equity Incentive Plan. Performance units and performance shares are awards that will result in a payment to a participant only if performance goals established by the administrator are achieved or the awards otherwise vest. The administrator will establish organizational or individual performance goals in its discretion, which, depending on the extent to which they are met, will determine the number and/or the value of performance units and performance shares to be paid out to participants. Performance units shall have an initial dollar value established by the administrator prior to the grant date. Performance shares shall have an initial value equal to the fair market value of our common stock on the grant date. Payment for performance units and performance shares may be made in cash or in shares of our common stock with equivalent value, or in some combination, as determined by the administrator.
 
Unless the administrator provides otherwise, our 2007 Equity Incentive 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.
 
Our 2007 Equity Incentive Plan provides that in the event of a change in control, as defined in the 2007 Equity Incentive Plan, each outstanding award will be treated as the administrator determines, including that the successor corporation or its parent or subsidiary will assume or substitute an equivalent award for each outstanding award. The administrator is not required to treat all awards similarly. If there is no assumption or substitution of outstanding awards, the awards will fully vest, all restrictions will lapse, and the awards will become fully exercisable. The administrator will provide notice to the recipient that he or she has the right to exercise the option and stock appreciation right as to all of the shares subject to the award, all restrictions on restricted stock will lapse, and all performance goals or other vesting requirements for performance shares and units will be deemed achieved, and all other terms and conditions met. The option or stock appreciation right will terminate upon the expiration of the period of time the administrator provides in the notice. In the event the service of an outside director is terminated on or following a change in control, other than pursuant to a voluntary resignation, his or her options and stock appreciation rights will fully vest and become immediately exercisable, all restrictions on restricted stock will lapse, and all performance goals or other vesting requirements for performance shares and units will be deemed achieved, and all other terms and conditions met.
 
Our 2007 Equity Incentive Plan will automatically terminate in 2017, unless we terminate it sooner. In addition, our board of directors has the authority to amend, alter, suspend or terminate the 2007 Equity Incentive Plan provided such action does not impair the rights of any participant.


100



 

 
CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
 
Policies and Procedures for Transactions with Related Persons
 
Related person transactions, which we define as all transactions involving an executive officer, director or a holder of more than five percent of our common stock, including any of their immediate family members and any entity owned or controlled by such persons, are reviewed and approved by the audit committee of our board of directors and a majority of disinterested directors on our board.
 
In any transaction involving a related person, our audit committee and board of directors consider all of the available material facts and circumstances of the transaction, including: the direct and indirect interests of the related persons; in the event the related person is a director (or immediate family member of a director or an entity with which a director is affiliated), the impact that the transaction will have on a director’s independence; the risks, costs and benefits of the transaction to us; and whether any alternative transactions or sources for comparable services or products are available.
 
After considering all such facts and circumstances, our audit committee and board determine whether approval or ratification of the related person transaction is in our best interests. For example, if our audit committee determines that the proposed terms of a related person transaction are reasonable and at least as favorable as could have been obtained from unrelated third parties, it will recommend to our board of directors that such transaction be approved or ratified. In addition, once we become a public company, if a related person transaction will compromise the independence of one of our directors, our audit committee may recommend that our board of directors reject the transaction if it could affect our ability to comply with securities laws and regulations or NASDAQ listing requirements.
 
Each transaction described below was entered into prior to the adoption of our audit committee charter. Accordingly, each was approved by disinterested members of our board of directors after making a determination that the transaction was executed on terms no less favorable than those we could have obtained from unrelated third parties.
 
The policies and procedures described above for reviewing and approving related person transactions are not in writing. However, the charter for our audit committee provides that one of the committee’s responsibilities is to review and approve in advance any proposed related person transactions.
 
Transactions and Relationships with Directors, Officers and 5% Stockholders
 
On August 1, 2003, we sold shares of our Series E preferred stock to certain investors, including Citadel Equity Fund Ltd. Upon the closing of such sale, Citadel Equity Fund Ltd. obtained the right to appoint one member of our board of directors for so long as it held at least 600,000 shares of our capital stock. In addition, in connection with the sale of our Series E preferred stock, we entered into a Licensing and Services Agreement with Citadel Investment Group, L.L.C., an entity affiliated with Citadel Equity Fund. Pursuant to the terms of the Licensing and Services Agreement, we granted Citadel Investment Group, L.L.C. a license to our digital marketing intelligence data and products, subject to certain standard limitations, such as the right to resell or grant sublicenses to the data. In each of 2004, 2005 and 2006, we received license fees of $3 million and in 2007 we will receive an additional $3 million. The initial term of the Licensing and Service Agreement is five years and expires in August 2008. On November 27, 2006, Citadel Equity Fund sold its voting stock to several of our other stockholders and, as a result, no longer beneficially owns more than 5% of our outstanding voting stock nor has the right to appoint a representative on our board of directors.
 
In 2006, Linda Abraham, the spouse of our President and Chief Executive Officer, Magid Abraham, held the positions of acting Executive Vice President for Finance, Telecom and Pharmaceuticals and Executive Vice President for Product Management. In these positions, Ms. Abraham earned approximately $143,564 in salary. Ms. Abraham remains employed as our Executive Vice President for Product Management.
 
Registration Rights Agreements
 
We and certain holders of our capital stock have entered into an agreement, pursuant to which these stockholders will have registration rights with respect to their shares of common stock following this offering. See “Description of Capital Stock — Registration Rights” for a further description of the terms of this agreement.


101



 

 
Indemnification Agreements
 
We have entered into an indemnification agreement with each of our directors and officers. The indemnification agreements and our amended and restated certificate of incorporation and bylaws require us to indemnify our directors and officers to the fullest extent permitted by Delaware law. See “Management — Limitations on Director and Officer Liability and Indemnification.”


102



 

 
PRINCIPAL AND SELLING STOCKHOLDERS
 
The following table sets forth certain information with respect to the beneficial ownership of our common stock as of June 11, 2007 and as adjusted to reflect the sale of shares of our common stock offered by this prospectus, by:
 
  •  each beneficial owner of 5% or more of the outstanding shares of our common stock;
 
  •  each of our directors;
 
  •  each of our named executive officers;
 
  •  each selling stockholder; and
 
  •  all directors and executive officers as a group.
 
The table assumes the conversion of all shares of our preferred stock into shares of our common stock immediately prior to the completion of this offering. See “Description of Capital Stock — Preferred Stock”. Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of May 1, 2007 are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person. Percentage of beneficial ownership is based on 22,612,389 shares of common stock outstanding as of June 11, 2007 and 27,612,389 shares of common stock outstanding after this offering. The percentage of beneficial ownership assuming the underwriters exercise their option in full to purchase additional shares of common stock is based on 27,675,419 shares of common stock outstanding after the offering and exercise of such option.
 
To our knowledge, except as set forth in the footnotes to this table and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to the shares set forth opposite such person’s name. Except as otherwise indicated, the address of each of the persons in this table is c/o comScore, Inc., 11465 Sunset Hills Road, Suite 200, Reston, Virginia 20190.
 
                                                                 
                                        Shares Beneficially
 
                                  Number of Shares
    Owned After the Offering
 
    Shares Beneficially Owned
          Shares Beneficially Owned
    to be Sold
    if Underwriters’ Option
 
    Prior to the Offering     Number of
    After the Offering     if Underwriters’
    is Exercised in Full  
Name of Beneficial Owner
  Number     Percent     Shares Offered     Number     Percent     Option is Exercised in Full     Number     Percent  
5% Stockholders:
                                                               
Accel Partners(1)
    5,902,859       26.1 %           5,902,859       21.4 %           5,902,859       21.3 %
J.P. Morgan Partners SBIC, LLC and related entities(2)(19)
    2,506,086       11.1             2,506,086       9.1       250,608 (20)     2,255,478       8.2  
Institutional Venture Partners(3)
    2,189,835       9.7             2,189,835       7.9             2,189,835       7.9  
Lehman Brothers Inc.(4)(19)
    1,741,782       7.7             1,741,782       6.3             1,741,782       6.3  
Adams Street Partners(5)
    1,701,156       7.5             1,701,156       6.2             1,701,156       6.1  
Topspin Partners, L.P.(6)
    1,177,447       5.2             1,177,447       4.3             1,177,447       4.3  
                                                                 
Directors and Named Executive Officers:
                                                               
Magid M. Abraham, Ph.D.(7)
    1,906,585       8.3             1,906,585       6.8       144,512 (21)     1,762,073       6.3  
Gian M. Fulgoni(8)
    1,572,715       6.9             1,572,715       5.7       141,420 (20)     1,431,295       5.1  
Gregory T. Dale(9)
    192,583       *             192,583       *       14,943 (20)     177,640       *  
John M. Green(10)
    67,919       *             67,919       *             67,919       *  
Sheri Huston
    102,082       *             102,082       *             102,082       *  
Christiana L. Lin(11)
    57,587       *             57,587       *       10,587 (22)     47,000       *  
Thomas D. Berman(12)
    1,701,156       7.5             1,701,156       6.2               1,701,156       6.1  
Bruce Golden(13)
    5,902,859       26.1             5,902,859       21.4             5,902,859       21.3  
William J. Henderson(14)
    29,959       *             29,959       *             29,959       *  
Ronald J. Korn(15)
    8,750       *             8,750       *             8,750       *  
Frederick R. Wilson(16)
    739,946       3.3             739,946       2.7       73,994 (20)     665,952       2.4  
All directors and executive officers as a group (eleven persons)(17)
    12,282,141       52.5             12,282,141       43.3       385,456       11,896,685       41.8  
                                                                 
Additional Selling Stockholders:
                                                               
Flatiron Partners (16)
    739,946       3.3             739,946       2.7       73,994 (20)     665,952       2.4  
vSpring SBIC, L.P. (18)
    873,977       3.9             873,977       3.2       43,698 (20)     830,279       3.0  
Peter Daboll
    155,208       *             155,208       *       10,000 (20)     145,208 (20)     *  
 
 
Represents less than one percent (1%) of the outstanding shares of common stock.
 
(1) Includes 4,297,282 shares held by Accel VII L.P., 1,074,321 shares held by Accel Internet Fund III L.P., and 531,256 shares held by Accel Investors ‘99 L.P. (together, the “Accel Funds”). Accel VII Associates


103



 

L.L.C. is a general partner of Accel VII L.P. and has sole voting and dispositive power with respect to the shares held by Accel VII L.P. Accel Internet Fund III Associates L.L.C. is a general partner of Accel Internet Fund III L.P. and has sole voting and dispositive power with respect to the shares held by Accel Internet Fund III L.P. James W. Breyer, Arthur C. Patterson, Theresia Gouw Ranzetta, James R. Swartz, and J. Peter Wagner are managing members of Accel VII Associates L.L.C. and Accel Internet Fund III Associates L.L.C. and share voting and dispositive powers. They are also the General Partners of Accel Investors ’99 L.P. and share voting and dispositive power with respect to the shares held by Accel Investors ’99 L.P. The general partners and managing members disclaim beneficial ownership of the shares owned by the Accel Funds except to the extent of their proportionate pecuniary interest therein. The address for Accel Partners is 428 University Avenue, Palo Alto, California 94301.
 
(2) Includes 2,197,684 shares held by J.P. Morgan Partners (SBIC), LLC (“JPMP SBIC”) and 308,402 shares held by J.P. Morgan Partners (BHCA), L.P. (“BHCA”). The sole member of JPMP SBIC is BHCA. Pursuant to Rule 13d-3 under the Exchange Act, BHCA may be deemed to beneficially own the shares held by JPMP SBIC; however, the foregoing shall not be construed as an admission that BHCA is the beneficial owner of such shares. The general partner of BHCA is JPMP Master Fund Manager, L.P. (“JPMP MFM”). The general partner of JPMP MFM is JPMP Capital Corp. (“JPMP Capital”), a wholly owned subsidiary of JPMorgan Chase & Co. Each of JPMP MFM and JPMP Capital may be deemed, pursuant to Rule 13d-3 under the Exchange Act, to beneficially own the shares held by JPMP MFM and BHCA; however, the foregoing shall not be construed as an admission that JPMP SBIC or JPMP Capital is the beneficial owner of such shares. JPMP Capital exercises voting and dispositive power over the securities held by JPMP SBIC and BHCA. Voting and disposition decisions at JPMP Capital are made by an investment committee of three or more of its officers, and therefore no individual officer of JPMP Capital is the beneficial owner of the securities. The address for each of JPMP SBIC, BHCA, JPMP MFM and JPMP Capital is c/o J.P. Morgan Partners, LLC, 270 Park Avenue, New York, New York 10017.
 
(3) Includes 1,793,766 shares held by Institutional Venture Partners X, L.P. (“IVP X”) and 396,069 shares held by Institutional Venture Partners X GmbH & Co. Beteiligungs KG (“IVP X-KG”). Institutional Venture Management X, LLC (“IVM X”) is the general partner of IVP X and managing limited partner of IVP X-KG. Todd Chaffee, Reid Dennis, Norm Fogelsong, Steve Harrick and Dennis Phelps are managing directors of IVM X and share voting and investment control over these shares. Such individuals disclaim beneficial ownership of these shares except to the extent of his actual respective pecuniary interest therein. The address of Institutional Venture Partners is 3000 Sand Hill Road, Building 2, Suite 250, Menlo Park, California 94025.
 
(4) Shares which may deemed to be beneficially owned by Lehman Brothers Inc. include shares held by the following wholly owned subsidiaries and affiliates of Lehman Brothers Inc.: 765,975 shares held by LB I Group Inc., 631,548 shares held by Lehman Brothers Venture Partners L.P., and 1,721,299 shares held by Lehman Brothers Venture Capital Partners I, L.P. Lehman Brothers Inc. is a direct wholly owned subsidiary of Lehman Brothers Holding Inc., a reporting company under the Securities Exchange Act of 1934, which has voting and investment control over the shares held by these entities. No individual officer of Lehman Brothers Holding Inc. has voting or investment control over these shares. The address for Lehman Brothers Inc. is 3000 Sand Hill Road, Building 3, Suite 190, Menlo Park, CA 94025.
 
(5) BVCF IV, L.P., the entity that holds these shares, is managed by its general partner, Adams Street Partners, LLC. Adams Street Partners, LLC is an investment advisor registered with the U.S. Securities and Exchange Commission and is responsible for voting these shares. Adams Street Partners, LLC disclaims beneficial ownership of these shares except to the extent of its proportionate pecuniary interest therein. Mr. Thomas D. Berman is a partner and member of the direct investment sub-committee of Adams Street Partners, LLC and disclaims beneficial ownership of these shares except to the extent of his proportionate pecuniary interest therein.
 
(6) Includes 1,124,226 shares held by Topspin Partners, L.P. and 53,221 shares held by Topspin Associates, L.P. Topspin Partners, L.P. and Topspin Associates, L.P. are controlled by general partner Topspin Management, LLC. Topspin Management, LLC is a manager-managed limited liability company and may be deemed to be controlled by Leo A. Guthart. Mr. Guthart was previously a member of our board of directors. Mr. Guthart


104



 

disclaims beneficial ownership of these shares except to the extent of his actual pecuniary interest therein. The address for Topspin Partners is Three Expressway Plaza, Roslyn Heights,