Initial Public Offering (IPO): Pre-Effective Amendment to Registration Statement (General Form) — Form S-1 Filing Table of Contents
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after this Registration
Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act, 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
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. Neither we nor the selling stockholders may sell these
securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not
soliciting offers to buy these securities in any jurisdiction
where the offer or sale is not
permitted.
This is the initial public offering of The Go Daddy Group, Inc.
Class A common stock. We are
selling shares
of our Class A common stock, and the selling stockholders,
both of whom are members of our senior management, are
selling shares
of our Class A common stock. We will not receive any
proceeds from the sale of shares by the selling stockholders. No
public market currently exists for our shares. We anticipate
that the initial public offering price will be between
$ and
$ per
share.
We have applied to have our Class A common stock approved
for quotation on the Nasdaq Global Market under the symbol
“DADY.”
We have two classes of authorized common stock, Class A
common stock and Class B common stock. The rights of the
holders of Class A common stock and Class B common
stock are identical, except with respect to voting and
conversion. Each share of Class A common stock is entitled
to one vote per share. Each share of Class B common stock
is entitled to two votes per share and is convertible at any
time at the option of the holder into one share of Class A
common stock. All Class B common stock is currently
beneficially owned by Bob Parsons, our founder, chairman and
chief executive officer. After the closing of this offering,
assuming that the underwriters do not exercise their
over-allotment option, Mr. Parsons will
hold %
of the total voting power of our outstanding shares.
Investing in our Class A common stock involves risks.
See “Risk Factors” beginning on page 8 of this
prospectus.
Per Share
Total
Public offering price
$
$
Underwriting discounts and commissions
$
$
Proceeds, before expenses, to Go Daddy
$
$
Proceeds, before expenses, to the selling stockholders
$
$
Bob Parsons has also granted the underwriters the right to
purchase up to an
additional shares
of Class A common stock to cover over-allotments.
Neither the Securities and Exchange Commission nor any state
securities regulator has approved or disapproved these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
We expect delivery of the shares to the underwriters on or
about ,
2006.
You should rely only on the information contained in this
prospectus. Neither we nor the selling stockholders or any of
the underwriters have authorized anyone to provide you with
information different from that contained in this prospectus. We
and the selling stockholders are offering to sell, and seeking
offers to buy, shares of our Class A common stock only in
jurisdictions where offers and sales are permitted. The
information in this prospectus is accurate only as of the date
of this prospectus, regardless of the time of delivery of this
prospectus or any sale of shares of our Class A common
stock.
For investors outside the United States: Neither we nor the
selling stockholders or any of the underwriters have done
anything that would permit this offering or possession or
distribution of this prospectus in any jurisdiction where action
for that purpose is required, other than in the United States.
Persons outside the United States who come into possession of
this prospectus must inform themselves about, and observe any
restrictions relating to, the offering of the shares of
Class A common stock and the distribution of this
prospectus outside of the United States.
Until and
including ,
2006 (25 days after the commencement of this offering), all
dealers that buy, sell or trade shares of our Class A
common stock, whether or not participating in this offering, may
be required to deliver a prospectus. This delivery requirement
is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
This summary highlights information contained elsewhere in
this prospectus and does not contain all of the information you
should consider before buying shares of our Class A common
stock. Before deciding to invest in shares of our Class A
common stock, you should read the entire prospectus carefully,
including our consolidated financial statements and related
notes and the information set forth under the headings
“Risk Factors” and “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations,” in each case included elsewhere in this
prospectus.
The Go Daddy Group, Inc.
Go Daddy is a leading provider of services that enable
individuals and businesses to establish, maintain and evolve an
online presence. We provide a variety of domain name
registration and website hosting services as well as a broad
array of on-demand and other services. We are the world’s
largest domain name registrar, with approximately
14.6 million domain names under management as of
June 30, 2006, and North America’s largest shared
website hosting provider. During the final six months of 2005,
we registered approximately
one-third of all domain
names registered in the top five generic top-level domains, or
gTLDs — .com, .net, .org, .biz and .info. Our domain name
registration services act as a gateway product for our other
services, which include website hosting and creation tools,
ecommerce and security solutions and productivity and marketing
tools, and we market these other services both at the initial
time of purchase and throughout the customer lifecycle. Our
services can be purchased independently or as bundled suites
targeted to meet the specific needs of our customers. We have
developed substantially all of our service offerings internally
and believe our suite of services is
best-of-breed in the
industry in terms of comprehensiveness, performance,
functionality and ease of use. We seek to strengthen customer
relationships by providing what we believe are the highest
levels of customer care and support in the industry.
We generate revenue from sales made directly to customers
through our primary website, www.GoDaddy.com, and through
our customer care center, as well as indirectly through our
large network of resellers. As of June 30, 2006, we had
approximately 3.0 million customers under contract. Our
business model is characterized by non-refundable, up-front
payments, which lead to recurring revenue and positive operating
cash flow. Our company was founded in January 1997 and has
experienced rapid growth in recent periods. In 2005, we
generated $139.8 million of total revenue, an increase of
92% over 2004, and in 2004 we generated $73.0 million of
total revenue, an increase of 86% over 2003.
Market Opportunity
We believe there is significant growth potential in our current
and future markets as a result of the continued growth in
Internet users and usage, the increasing benefits to individuals
and businesses from establishing an online presence and the
relatively small percentage of Internet users who have
registered a domain name. The number of Internet users worldwide
is estimated to have been 1.2 billion in 2005, and is
estimated to grow to approximately 2.2 billion in 2010,
while only approximately 94 million domain names were
registered worldwide as of December 31, 2005. Additionally,
while most large corporations are already operating online, many
small and home-based
businesses have yet to establish a presence online, and even
fewer use their websites to transact business with their
customers online.
The dynamic nature of the Internet, including the proliferation
of content, ecommerce and applications online as well as the
continued advancement of its related technologies, creates a
number of challenges for individuals and businesses seeking to
establish, maintain and evolve an online presence, or an
electronic “address” on the Internet. Many lack the
technical knowledge and skills necessary to complete this
process, and attempting to do so is frequently time-consuming
and expensive, often requiring consultation with numerous online
and offline resources and procurement of software and services
from a variety of vendors.
We are a leading provider of services that enable individuals
and businesses to establish, maintain and evolve an online
presence quickly and easily. Key elements of our solution
include:
•
“One-stop shop” for establishing and maintaining an
online presence. We provide customers a single location
where they can register domain names, purchase the services and
functionality necessary to establish, maintain and update an
online presence, and access comprehensive technical support.
•
Value-oriented services, features and functionality focused
on customer needs. Our corporate philosophy is to offer our
customers competitively priced, value-oriented services that
directly address their evolving needs. We actively monitor
trends in customer usage and market demand in order to develop
services that anticipate and respond to these customer needs. We
believe our
customer-focused
approach enhances customer satisfaction and engenders a high
degree of loyalty within our customer base.
•
Focus on customer care and advice. Our professionally
trained customer care representatives provide technical
assistance and also operate as “business consultants,”
advising customers of additional services that best suit their
individual needs. In addition, our
easy-to-use website
contains extensive educational content designed to demystify the
process of establishing an online presence and to assist
customers in choosing the services that best meet their needs.
•
High level of system reliability and security. Our
technology infrastructure incorporates hardware, software and
services from leading suppliers and is designed to handle large
and expanding volumes of domain name registrations, website
hosting accounts and traffic on our own and our customers’
websites in an efficient, scalable and fault-tolerant manner.
Our Competitive Strengths
Our competitive strengths include the following:
•
Market leadership position. Our leading market positions
in total domain names under management, new domain name
registrations and shared website hosting provide us with a
number of competitive advantages. We benefit from increased
revenue opportunities through sales of additional services to
our existing customer base, and from reduced customer
acquisition costs as a result of the large number of referrals
we receive from our customers. In addition, we benefit from
economies of scale and are able to allocate research and
development, advertising and various other costs across a large
customer base.
•
Active customer relationship management and lifecycle
marketing. We actively market additional services both at
the time of a customer’s initial purchase and throughout
the customer lifecycle through our email, telephone, direct mail
and other targeted marketing campaigns. Our high level of
customer service affords us many opportunities to sell customers
additional higher-margin services and enhances our customer
retention rates.
•
Strong brand recognition. As a result of our strong brand
recognition, we attract a large number of potential customers
directly to our website, thus reducing our customer acquisition
costs and enhancing revenue growth. Additionally, our broad base
of registered domain name customers serves as an effective
marketing channel for our services, providing us with follow-on
sales opportunities and new sales through
word-of-mouth referrals.
•
Leading proprietary technology. We have invested
significant resources in the internal development of services we
offer to our customers. In-house development of our technology
enables flexibility in marketing and pricing and reduces our
licensing costs, thereby improving our margins. Our internal
development also enables us to offer a set of services that are
fully integrated and easy to use and support.
We believe there is significant growth potential in our current
and future markets, and we intend to achieve further growth by
pursuing the following key strategies:
•
continue to grow our customer base;
•
sell additional services to customers;
•
continue to expand and enhance our service offerings;
•
strengthen our customer relationships; and
•
pursue acquisitions and expand our international presence.
Risk Factors
We are subject to a number of risks and uncertainties that could
materially harm our business or inhibit our strategic plans.
Before investing in our Class A common stock, you should
carefully consider the following:
•
we have a history of losses and may not be able to operate
profitably or sustain positive cash flow in future periods;
•
we must further develop our brand recognition and market our
services in a cost-effective manner in order to grow our
business successfully;
•
we face significant competition in our markets and we expect
this competition to intensify;
•
our strategy of selling an array of on-demand and other services
beyond our core domain name registration and website hosting
services is still relatively unproven;
•
changes in the regulation and oversight of the domain name
registration system, including increases in the prices that
registrars must pay to registries for domain names, could
significantly affect our business model; and
•
the other factors described in the section entitled “Risk
Factors” starting on page 8, and other information
provided throughout this prospectus.
Reincorporation and Dual-Class Capital Structure
Prior to this offering, we are reincorporating in Delaware and
are converting from a subchapter S corporation into a
subchapter C corporation. In connection with this
reincorporation, we are adopting a dual-class capital structure,
consisting of Class A common stock and Class B common
stock. Each share of Class A common stock will have one
vote per share. Each share of Class B common stock will
have two votes per share, will be convertible into one share of
Class A common stock at any time, and will otherwise be
identical to our Class A common stock. Bob Parsons, our
founder, chairman and chief executive officer, beneficially owns
100% of our outstanding common stock prior to this offering and
will hold all shares of Class B common stock,
representing % of the combined
voting power of our Class A and Class B common stock,
assuming that the underwriters do not exercise their
over-allotment option, immediately following the completion of
this offering. Only our Class A common stock will be listed
for trading on the Nasdaq Global Market following this offering.
For a further description of our dual-class capital structure,
see “Description of Capital Stock.”
Our principal executive offices are located at
14455 N. Hayden Road, Scottsdale, Arizona85260, and
our telephone number is (480) 505-8800. Our primary website
address is www.GoDaddy.com. The information on, or that
can be accessed through, this or our other websites is not part
of this prospectus.
Except where the context requires otherwise, “Go
Daddy,”“we,”“us” and “our”
refer to The Go Daddy Group, Inc., and its wholly-owned
subsidiaries. Go Daddy, our logo, Website Tonight, Quick
Shopping Cart, Traffic Blazer, TheDomainNameAfterMarket and Wild
West Domains are registered trademarks of Go Daddy. This
prospectus also includes other trademarks of ours and other
persons.
Class A
common stock offered by the selling stockholders
shares
Total
shares
Shares of common stock to be outstanding after this offering:
Class A
common stock to be outstanding after this offering
shares
Class B
common stock to be outstanding after this offering
shares
Total
shares
Use of proceeds
We plan to use the net proceeds that we receive from this
offering to repay approximately $7.2 million in
indebtedness, and for working capital and other general
corporate purposes, including expansion of our customer care and
support and research and development organizations, further
development and expansion of our service offerings, capital
expenditures, including those relating to further build-out of
our data center, and possible acquisitions of complementary
businesses, technologies or other assets. Two members of our
senior management are selling shares in this offering. We will
not receive any of the proceeds from the sale of these shares.
See “Use of Proceeds.”
Proposed Nasdaq Global Market symbol
“DADY”
The number of shares of common stock that will be outstanding
after this offering is based on the 36,601,656 shares
outstanding at March 31, 2006, and excludes
13,700,000 shares of Class A common stock reserved for
issuance under our option plans, of which 6,616,300 shares
were subject to outstanding options, with a weighted average
exercise price of $2.24 per share, at March 31, 2006.
Since March 31, 2006, the Company has granted options to
purchase an aggregate of 4,073,521 shares of Class A
common stock with an exercise price of $14.52 per share.
Unless otherwise indicated, all information in this prospectus
assumes:
•
our reincorporation and, in connection therewith, the exchange
by Bob Parsons of all outstanding shares of our common stock for
shares of Class B common stock and the exchange of all
outstanding options to purchase shares of common stock for
options to purchase shares of Class A common stock;
•
the exercise by Barbara J. Rechterman, our Executive Vice
President and Chief Marketing Officer, of options to
purchase shares
of Class A common stock upon the commencement of trading of
our shares in connection with this offering, all of which shares
will be sold in this offering; and
•
no exercise by the underwriters of their option to purchase up
to shares
of Class A common stock from Bob Parsons to cover
over-allotments.
We present below summary consolidated financial and operating
data. The consolidated statement of operations and statement of
cash flows data for the years ended December 31, 2003, 2004
and 2005 and the consolidated balance sheet data as of
December 31, 2004 and 2005 have been derived from our
audited consolidated financial statements included elsewhere in
this prospectus. The consolidated statement of operations data
for the year ended December 31, 2002 and consolidated
balance sheet data as of December 31, 2003 have been
derived from our audited consolidated financial statements not
included in this prospectus. The consolidated statement of
operations data for the three months ended March 31, 2005
and 2006, the consolidated statement of cash flows data for the
three months ended March 31, 2006 and the consolidated
balance sheet data as of March 31, 2006 have been derived
from our unaudited consolidated financial statements included
elsewhere in this prospectus. The unaudited consolidated
financial statements include, in the opinion of management, all
adjustments, which include only normal recurring adjustments,
that management considers necessary for the fair presentation of
the financial information set forth in those statements. You
should read this information together with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated
financial statements and related notes, each included elsewhere
in this prospectus.
We are a subchapter S corporation and therefore we have not
reflected deferred taxes in our consolidated financial
statements. We are not required to pay federal and state
corporate income taxes until the revocation of our
subchapter S corporation status. The statement of
operations data do not include a pro forma adjustment for the
income taxes, calculated in accordance with SFAS No. 109,
Accounting for Income Taxes, that would have been
recorded if we were a subchapter C corporation, because we
would have provided a full valuation allowance on our net
deferred tax assets and thus no income tax provision would have
been recorded.
Our historical results are not necessarily indicative of the
results to be expected in any future period. Our results of
operations in the first quarters of 2005 and 2006 included
significant marketing and advertising expenditures that we
incurred in connection with our Super Bowl advertising campaign.
We do not expect similar levels of expenditures in later
quarters of 2006.
The pro forma balance sheet data below give effect to:
•
aggregate distributions of $3.5 million paid or to be paid
to our sole stockholder after March 31, 2006 and prior to
our reincorporation; and
•
the exercise of stock options by a selling stockholder in order
to sell shares in this offering.
The pro forma as adjusted balance sheet data below also give
effect to:
•
our receipt of the net proceeds from the sale
of shares
of Class A common stock offered by us at an assumed initial
public offering price of
$ per
share, after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us; and
•
the use of proceeds from this offering to repay approximately
$7.2 million of outstanding debt.
This offering and an investment in our Class A common
stock involve a high degree of risk. You should carefully
consider the risks and uncertainties described below, together
with all of the other information in this prospectus, including
the consolidated financial statements and related notes included
elsewhere in this prospectus, before deciding to invest in our
Class A common stock. If any of the following risks
actually occurs, our business, financial condition, results of
operations and future prospects could be materially and
adversely affected. In that event, the market price of our
Class A common stock could decline and you could lose part
or even all of your investment.
Risks Related to our Business
We have a history of losses and may not be able to operate
profitably or sustain positive cash flow in future
periods.
We have had a net loss in every year since inception. We had a
net loss of approximately $11.6 million in 2005 and
approximately $9.5 million in the first quarter of 2006. We
have budgeted for increases in all operating expense categories
in 2006, including significantly increased costs related to
becoming a public reporting company. As a result, becoming
profitable will depend in large part on our ability to generate
and sustain significantly increased revenue levels in future
periods. We are paid up front for substantially all of our
services, which enables us to generate positive cash flow.
However, we typically recognize revenue and cost of revenue from
each customer contract over the term of the relevant service
offering, while we recognize most of our other operating
expenses in the period in which they were incurred. Thus, we
have to generate significant sales activity in order to achieve
profitability on a basis consistent with U.S. generally accepted
accounting principles, or GAAP. Accordingly, we may not be able
to operate profitably, or sustain positive cash flow, in the
future on a quarterly or annual basis.
Our quarterly and annual operating results may fluctuate
or deteriorate, which could adversely affect the trading price
of our Class A common stock.
Our quarterly and annual operating results may fluctuate, or be
adversely affected, as a result of a variety of factors, many of
which are outside of our control. These include:
•
concentrated expenditures for advertising, such as our Super
Bowl advertisements in the first quarter of each of 2005 and
2006;
•
concentrated capital expenditures in any particular period to
support our growth or for other reasons;
•
increased research and development expenses relating to the
development of new services resulting from our decision to move
into new markets;
•
lower than anticipated levels of traffic to our primary website
or reduced rates at which we convert this traffic into customers;
•
a reduction in the number of domain names under management or in
the rate at which this number grows, due to slow growth or
contraction in our markets, lower renewal rates, or other
factors;
•
the mix of services sold in a particular period between our core
domain name registration services and our other higher-margin
services;
•
reductions in the percentage of our domain name registration
customers who purchase additional services from us;
•
changes in our pricing policies or those of our competitors,
changes in domain name fees charged to us by Internet registries
or the Internet Corporation for Assigned Names and Numbers, or
ICANN, or other competitive pressures on our prices;
the timing and success of new services and technology
enhancements introduced by our competitors, including free or
low-priced promotional offers, which could impact both new
customer growth and renewal rates;
•
the entry of new competitors in our markets;
•
technical difficulties or other factors that result in system
downtime;
•
federal, state or foreign regulation affecting our
business; and
•
weakness or uncertainty in general economic or industry
conditions.
It is possible that in one or more future quarters, due to any
of the factors listed above, a combination of those factors or
other reasons, our operating results may be below our
expectations and the expectations of public market analysts and
investors. In that event, the price of our shares of
Class A common stock could decline substantially.
In addition, in the past two years, we have experienced a
substantial increase in the number of new customers who register
domain names with us in our first fiscal quarter due to several
factors, including the effects of our Super Bowl advertising and
post-holiday consumer spending patterns. A significant spike in
our operating expenses has occurred during the first quarter of
each of 2005 and 2006 due to our Super Bowl advertising. These
patterns could have an adverse impact on the trading price of
our Class A common stock to the extent that they make it
more difficult to predict our financial results in future
periods.
We may not be able to grow our business unless we further
develop our brand recognition and market our services in a
cost-effective manner.
A growing number of companies offer services that compete with
ours. We believe that developing and maintaining our distinctive
brand image are critical to attracting additional customers.
Accordingly, we intend to continue pursuing an aggressive brand
enhancement strategy consisting primarily of online and offline
marketing initiatives. Some of our initiatives, such as our
television advertisements, are expensive. If these sales and
marketing expenditures do not result in increased revenue
sufficient to offset these expenses, our business and operating
results would be harmed. In addition, some of our
advertisements, radio shows and marketing efforts have tended to
be controversial, and our brand may be harmed if these
advertisements are not well received in the marketplace.
We use a variety of marketing channels to promote the Go Daddy
brand, including online keyword search, television, radio and
print advertising. If one or more of these channels, such as
online keyword search, become unavailable to us because the
costs of advertising become prohibitively expensive or for other
reasons, we may become unable to promote our brand effectively,
which could harm our ability to grow our business.
If visitors to our website do not perceive our existing services
to be valuable to them, or if we alter or modify our brand
image, introduce new services, enter into new business ventures
that are not favorably received, or fail to maintain customer
service levels, customer perception of our brand could be
harmed. If the value of our brand is diminished as a result of
any or all of these factors, our business would likely suffer.
We face significant competition in the domain name
registration and web-based services markets, which we expect
will continue to intensify, and we may not be able to maintain
or improve our competitive position or market share.
We face significant competition from existing registrars and
from new registrars that continue to enter the market. As of
June 30, 2006, ICANN had accredited 769 registrars to
register domain names in one or more of the generic top-level
domains, or gTLDs, that it oversees. There are relatively few
barriers to entry in this market, so as this market continues to
develop we expect the number of competitors to increase. The
continued entry into the domain name registration market of
competitive registrars and unaccredited entities
that act as resellers for registrars, and the rapid growth of
some competitive registrars and resellers that have already
entered the market, may make it difficult for us to maintain our
current market share.
The market for web-based services is intensely competitive and
rapidly evolving. We expect competition to increase from
existing competitors as well as from new market entrants. Most
of our existing competitors are expanding the variety of
services that they offer. These competitors include, among
others, domain name registrars, website design firms, website
hosting companies, Internet service providers, Internet portals
and search engine companies, including Google, Microsoft,
Network Solutions, VeriSign and Yahoo!. For a list of these
competitors, see “Business — Competition.”
Many of these competitors have greater resources, more brand
recognition and consumer awareness, greater international scope
and larger bases of customers than we do. As a result, we may
not be able to compete successfully against them in future
periods. This intense competition could also force us to enter
into strategic partnering relationships with third parties and,
to the extent we become reliant on these partners and these
relationships are subsequently terminated, our revenue levels
and operating results could be adversely affected.
In particular, Microsoft, Google and Yahoo! have recently
announced offerings or promotions that indicate that we may face
greater competition from these companies in the future.
Microsoft recently announced Office Live, a product targeted at
businesses with fewer than ten employees that, once generally
available, will allow them to register a domain name and
establish a website that Microsoft would host. Microsoft has
also announced that it will offer a free basic version of Office
Live, which will be advertising supported, and that, for a paid
monthly subscription, it will offer an enhanced version, which
will include additional features and services that are similar
to many of our current service offerings. Microsoft has
indicated that its Office Live product will be integrated with
Microsoft Office and other Microsoft desktop applications run by
many small businesses that have functionality not offered by any
of our services. In addition, Google recently announced its
Google Page Creator product, which includes a website design
tool together with free website hosting, as well as an online
group calendaring product. Similarly, Yahoo!, through its Yahoo!
Small Business portal, offers a number of web-based services,
including website hosting, email, ecommerce and security
services, that compete directly with many of our service
offerings. Microsoft, Google and Yahoo!, as well as other large
Internet companies, have the ability to offer these services for
free or at a reduced price as part of a bundle with other
service offerings. If these companies decide to devote greater
resources to the development, promotion and sale of these new
products and services, greater numbers of individuals and
businesses may choose to use these competitors as their starting
point for creating an online presence and as a general platform
for running their online business operations. In addition, these
and other large competitors, in an attempt to gain market share,
may offer aggressive price discounts on the services they offer.
These pricing pressures may require us to match these discounts
in order to remain competitive, which would reduce our margins,
or to lose customers altogether who decide to purchase the
discounted service offerings of our competitors. As a result of
these factors, in the future it may become increasingly
difficult for us to compete successfully.
We may be required to reduce our selling prices in the
future or may otherwise incur higher cost of revenue in our core
businesses as a result of competitive pressures.
Given the volatile nature of our industry, it is difficult to
predict whether we will be able to maintain our average selling
prices. We may be required, due to competitive pressures or
otherwise, to reduce the prices we charge for our core domain
name registration, website hosting and other services. If we
reduce our prices, it would likely impact our profitability for
these services, and could adversely affect our operating
results. This could be particularly severe in our largest
business, domain name registrations, where our cost of revenue
is a relatively high percentage of related revenue compared to
our other services and increases in fees we must pay to
registries or ICANN are likely to occur in future periods. In
addition, we have a significant number of resellers of our
services, and our cost of revenue through these transactions is
higher than for our direct sales. To the extent that our
reseller base continues to grow and these sales increase as a
percentage of total revenue, our cost of revenue levels would
increase which, in turn, could impair our ability to establish
or maintain long-term profitability.
Our cost of revenue could also increase and our revenue could
suffer if competitive pressures force us to alter our current
arrangement with respect to advertising revenue we generate from
“parked pages” — domain names we have
registered for customers but that do not yet contain an active
website. In each of 2005 and the first quarter of 2006, we
generated $1.6 million in advertising revenue from parked
pages, or approximately 1.2% and 3.3% of total revenue during
these respective periods. We have only recently begun to share
with a small percentage of the registrants of the domain names
on which these advertisements are served the revenue we receive
from advertising on these parked pages. We expect revenue
generated from advertising on parked pages to continue to
represent a meaningful portion of total revenue in future
periods. If over time we share more of this revenue from parked
pages with the registrants of the domain names, our cost of
revenue associated with parked pages would increase, which could
harm our operating results.
If we are not successful in preserving our corporate
culture and current levels of productivity as we grow, our
business could be harmed.
We believe that a key element of our corporate performance has
been our corporate culture, which we believe fosters innovation,
creativity and teamwork. As our organization grows and we are
required to implement more complex organizational management
structures, we may find it increasingly difficult to maintain
the beneficial aspects of our corporate culture. If our growth
adversely impacts our corporate culture, our business could be
harmed.
We have expanded our operations and our employee headcount
significantly in recent periods and anticipate that further
expansion will be required to realize our growth strategy. Our
operations growth has placed significant demands on our
management and other resources, which demands are likely to
continue. To manage our future growth, we will need to attract,
hire, retain and incentivize highly skilled and motivated
officers, managers and employees. We will also need to improve
existing systems and/or implement new infrastructure and systems
relating to our operations and financial controls. In addition,
we intend to continue to expand our operations by offering new
and complementary services and by expanding our market presence
through relationships with third parties. We may not be able to
accomplish this expansion in a cost-effective or timely manner,
or these efforts may not increase the overall market acceptance
of our services. Expansion of our operations in this manner
could also require significant additional expenditures and
strain our management, financial and operational resources. If
we are unable to successfully manage the growth we expect in our
operations, we may be unable to execute our business model.
This, in turn, could make us vulnerable to increased competitive
pressures and harm our business.
If our customers do not renew their domain name
registrations, or if they transfer their existing registrations
to our competitors, and we fail to replace their business, our
business would be adversely affected.
Our success depends in large part on our customers’
renewals of their domain name registrations. Domain name
registrations represented approximately 60% of total revenue in
2005 and 56% of total revenue in the first quarter of 2006, and
our customer renewal rate for expiring domain name registrations
was approximately 62% in 2005 and 63% in the first quarter of
2006. If we are unable to maintain or increase our overall
renewal rates for domain name registrations or if any decrease
in our renewal rates is not more than offset by increases in new
customer growth rates, our customer base and our revenue would
likely decrease. This would also reduce the number of domain
name registration customers to whom we could market our other
higher-margin services, thereby further potentially impacting
our revenue and profitability, driving up our customer
acquisition costs and harming our operating results. Since our
strategy is to expand the number of services we provide to our
customers, any decline in renewals of domain name registrations
not offset by new domain name registrations would likely have an
adverse effect on our business and results of operations.
If our customers do not find our on-demand service
offerings appealing, or if we fail to establish ourselves as a
reliable source for these services, our revenue may fall below
current levels and our profitability would be adversely
impacted.
Our primary businesses, domain name registration and website
hosting, together accounted for approximately 86% of total
revenue during 2004, 82% of total revenue during 2005 and 79% of
total revenue during the first quarter of 2006. As competition
in the domain name registration and website hosting markets
continues to intensify, a key aspect of our strategy is to
diversify our revenue base by offering our customers an array of
other value-added, higher-margin services. This strategy is
still relatively unproven, as these services only accounted for
approximately 14% of total revenue during 2004, 18% of total
revenue during 2005 and 21% of total revenue during the first
quarter of 2006. If we introduce services that do not function
properly due to flaws in design, operation or interoperability,
that fail to meet the needs of our customers, or that our
customers simply do not purchase, we will likely be unable to
realize a return on our investment in the development of these
failed service offerings, which could harm our operating
results. In addition, if, over time, our customers elect not to
purchase our other services altogether because they do not
perceive them as valuable or because we have not sufficiently
differentiated them from those offered by our competitors, our
revenue may decline below current levels. In such an event, our
profitability would be adversely affected because our additional
service offerings, such as email, our website design tool, our
search engine optimization service and Secure Sockets Layer, or
SSL, certificates, generally have lower cost of revenue as a
percentage of total revenue than our core businesses of domain
name registrations and website hosting. Thus, if we experience
difficulty selling value-added services in future periods, our
ability to achieve and sustain profitability would be harmed.
Our international expansion exposes us to business risks
that could limit the effectiveness of our growth strategy and
cause our results of operations to suffer.
Expansion into international markets is an element of our growth
strategy. Introducing and marketing our services
internationally, developing direct and indirect international
sales and support channels and managing foreign personnel and
operations will require significant management attention and
financial resources. We face a number of risks associated with
expanding our business internationally that could negatively
impact our results of operations, including:
•
management, communication and integration problems resulting
from cultural differences and geographic dispersion;
•
compliance with foreign laws, including laws regarding liability
of online service providers for activities of customers and more
stringent laws in foreign jurisdictions relating to the privacy
and protection of third-party data;
•
accreditation and other regulatory requirements to provide
domain name registration, website hosting and other services in
foreign jurisdictions;
•
competition from companies with international operations,
including large international competitors and entrenched local
companies;
•
to the extent we choose to make acquisitions to enable our
international expansion efforts, the identification of suitable
acquisition targets in the markets into which we want to expand;
•
difficulties in protecting intellectual property rights in
international jurisdictions;
•
political and economic instability in some international markets;
•
sufficiency of qualified labor pools in various international
markets;
•
currency fluctuations and exchange rates;
•
potentially adverse tax consequences or inability to realize tax
benefits; and
•
the lower level of adoption of the Internet in many
international markets.
We may not succeed in our efforts to expand our international
presence as a result of the factors described above or other
factors that may have an adverse impact on our overall financial
condition and results of operations.
Because we are required to recognize revenue for our
services over the term of the applicable agreement, changes in
our sales may not be immediately reflected in our operating
results.
We recognize revenue from our customers ratably over the
respective terms of their agreements with us as required by
GAAP. Typically, our domain name registration agreements have
terms that range from one to ten years, and our website hosting
agreements have annual or
month-to-month terms.
Accordingly, increases in sales during a particular period do
not translate into immediate, proportional increases in revenue
during that period, and a substantial portion of the revenue
that we recognize during a quarter is derived from deferred
revenue from customer agreements that we entered into during
previous quarters. As a result, we may not generate net earnings
despite substantial sales activity during a particular period,
since we are not allowed under GAAP to recognize all of the
revenue from these sales immediately, and because we are
required to reflect a significant portion of our related
operating expenses in full during that period. Conversely the
existence of substantial deferred revenue may prevent
deteriorating sales activity from becoming immediately
observable in our consolidated statement of operations.
In addition, we may not be able to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall, and
any significant shortfall in revenue relative to planned
expenditures could negatively impact our business and results of
operations.
System failures or capacity constraints could reduce or
limit traffic on our websites and harm our business.
We have experienced system failures or outages in the past, and
will likely experience future system failures or outages that
disrupt the operation of our websites and harm our business. Our
revenue depends in large part on the volume of traffic to our
websites and on the number of customers whose websites we host
on our servers. Accordingly, the performance, reliability and
availability of our websites, servers for our corporate
operations and infrastructure are critical to our reputation and
our ability to generate a high volume of traffic to our websites
and to attract and retain customers.
We are continually expanding and enhancing our website features,
technology and network infrastructure, and other technologies to
accommodate substantial increases in the volume of traffic on
our websites, the number of customer websites we host and the
overall size of our customer base. We may be unsuccessful in
these efforts or we may be unable to project accurately the rate
or timing of these increases. We cannot predict whether
additional network capacity will be available from third-party
suppliers as we require it. In addition, our network or our
suppliers’ networks might be unable to achieve in a timely
manner or maintain data transmission capacity sufficiently high
to process orders or download data effectively in a timely
manner, especially if the volume of our customer orders
increases. Our failure, or our suppliers’ failure, to
achieve or maintain high data transmission capacity could
significantly reduce consumer demand for our services.
Our computer hardware operations and backup systems are located
in our facilities in the Phoenix, Arizona area. If these
locations experienced a significant system failure or
interruption, our business would be harmed. In particular, in
June 2006 we opened a new facility in Phoenix, Arizona to house
some of our customer website hosting servers and servers for our
corporate operations. If we experience system failures
associated with opening this new facility, or thereafter, our
website hosting operations could suffer, which, in turn, could
harm our business.
Our systems are also vulnerable to damage from fire, power loss,
telecommunications failures, computer viruses, physical and
electronic break-ins and similar events. The property and
business interruption insurance we carry may not have coverage
adequate to compensate us fully for losses that may occur.
If our security measures are breached and unauthorized
access is obtained, existing and potential customers might not
perceive our services as being secure and might terminate or
fail to purchase our services.
Our business involves the storage and transmission of personal
information. If third parties succeed in penetrating our network
security or otherwise misappropriate our customers’, or
their customers’, personal or payment card information, we
could be subject to liability. For example, hackers or
individuals who attempt to breach our network security could, if
successful, misappropriate personal information, suspend our
website hosting operations or cause interruptions in our
services. If we experience any breaches of our network security
or sabotage, we might be required to expend significant capital
and resources to protect against or alleviate these problems. We
may not be able to remedy any problems caused by hackers or
saboteurs in a timely manner, or at all. Because techniques used
to obtain unauthorized access or to sabotage systems change
frequently and generally are not recognized until launched
against a target, we may be unable to anticipate these
techniques or to implement adequate preventative measures. If an
actual or perceived breach of our security occurs, the
perception of the effectiveness of our security measures and our
reputation could be harmed and we could lose current and
potential customers.
These types of security breaches could result in claims against
us for unauthorized purchases with payment card information,
identity theft or other similar fraud claims as well as for
other misuses of personal information, including for
unauthorized marketing purposes, which could result in a
material adverse effect on our business or financial condition.
Moreover, these claims could cause us to incur penalties from
payment card associations, including those resulting from our
failure to adhere to industry data security standards,
termination by payment card associations of our ability to
accept credit or debit card payments, litigation and adverse
publicity, any of which could have a material adverse effect on
our business and financial condition.
In addition, the U.S. Federal Trade Commission and certain state
agencies have investigated various Internet companies’ use
of their customers’ personal information. The federal
government has also enacted laws protecting the privacy of
consumers’ nonpublic personal information. Our failure to
comply with existing laws, including those of foreign countries,
the adoption of new laws or regulations regarding the use of
personal information that require us to change the way we
conduct our business or an investigation of our privacy
practices could increase the costs of operating our business.
Any future acquisitions could disrupt our business and
harm our financial condition and results of operations.
We may decide to acquire businesses, products or technologies in
order to expand our addressable market. We have not made any
large acquisitions to date, and therefore our ability to execute
acquisitions successfully is unproven. Any acquisition could
require significant capital outlays and could involve many
risks, including, but not limited to, the following:
•
to the extent an acquired company has a corporate culture
different from ours, we may have difficulty assimilating this
organization, which could lead to morale issues, increased
turnover and lower productivity than anticipated, and could also
have a negative impact on the culture of our existing
organization;
•
we may be required to record substantial accounting charges;
•
an acquisition may involve entry into geographic or business
markets in which we have little or no prior experience;
•
integrating acquired business operations, systems, employees,
services and technologies into our existing business, workforce
and services could be complex, time-consuming and expensive;
•
an acquisition may disrupt our ongoing business, divert
resources, increase our expenses and distract our management;
•
we may incur debt in order to fund an acquisition, or we may
assume debt or other liabilities, including litigation risk, of
the acquired company; and
we may have to issue equity securities to complete an
acquisition, which would dilute our stockholders’ ownership
position and could adversely affect the market price of our
Class A common stock.
Any of the foregoing or other factors could harm our ability to
achieve anticipated levels of profitability from acquired
businesses or to realize other anticipated benefits of
acquisitions. We may not be able to identify or consummate any
future acquisitions on favorable terms, or at all. If we do
effect an acquisition, it is possible that the financial markets
or investors will view the acquisition negatively. Even if we
successfully complete an acquisition, it could adversely affect
our business.
We could face liability, or our corporate image might be
impaired, as a result of the activities of our customers or the
content of their websites.
Our role as a registrar of domain names and a provider of
website hosting services may subject us to potential liability
for illegal activities by our customers on their websites. We
provide an automated service that enables users to register
domain names and populate websites with content. We do not
monitor or review the appropriateness of the domain names we
register or the content of our customer websites, and we have no
control over the activities in which our customers engage. While
we have adopted policies regarding illegal use of our services
by our customers and retain authority to terminate domain name
registrations and to take down websites that violate these
policies, customers could nonetheless engage in these activities.
Several bodies of law may be deemed to apply to us with respect
to various customer activities. Because we operate in a
relatively new and rapidly evolving industry, and since this
field is characterized by rapid changes in technology and in new
and growing illegal activity, these bodies of laws are
constantly evolving. Some of the laws that apply to us with
respect to customer activity include the following:
•
The Communications Decency Act of 1996, or CDA, generally
exempts online service providers, such as Go Daddy, from
liability for the activities of their customers unless the
online service provider is participating in the illegal conduct.
However, cases that are currently being litigated under the CDA,
and cases that may be brought in the future, may expose us to
liability in the future.
•
The Digital Millennium Copyright Act of 1998, or DMCA, provides
recourse for owners of copyrighted material who believe that
their rights under U.S. copyright law have been infringed
on the Internet. Under this statute, we generally are not liable
for infringing content posted by third parties. However, if we
receive a proper notice from a copyright owner alleging
infringement of its protected works by web pages for which we
provide hosting services, and we fail to remove or disable
access to the allegedly infringing material, the owner may seek
to impose liability on us for contributory or vicarious
infringement.
Although established statutory law and case law in these areas,
to date, have generally shielded us from liability for customer
activities, court rulings in pending or future litigation may
serve to narrow the scope of protection afforded us under these
laws. In addition, laws governing these activities are unsettled
in many international jurisdictions, or may prove difficult or
impossible for us to comply with in some international
jurisdictions. Also, notwithstanding the exculpatory language of
these bodies of law, we are frequently embroiled in complaints
and lawsuits which, even if ultimately resolved in our favor,
add cost to our doing business and may divert management’s
time and attention. Finally, other existing bodies of law,
including the criminal laws of various states, may be deemed to
apply or new statutes or regulations may be adopted in the
future, any of which could expose us to further liability and
increase our costs of doing business.
We may face liability or become involved in disputes over
registration of domain names and control over websites.
As a domain name registrar, we regularly become involved in
disputes over registration of domain names. Most of these
disputes arise as a result of a third party registering a domain
name that is identical or similar to another party’s
trademark or the name of a living person. These disputes are
typically resolved through the Uniform Domain-Name
Dispute-Resolution Policy, or the UDRP, ICANN’s
administrative
process for domain name dispute resolution, or less frequently
through litigation under the Anticybersquatting Consumer Protect
Act, or ACPA, or under general theories of trademark
infringement or dilution. The UDRP generally does not impose
liability on registrars, and the ACPA provides that registrars
may not be held liable for registering or maintaining a domain
name absent a showing of bad faith intent to profit or reckless
disregard of a court order by the registrar. However, we may
face liability if we fail to comply in a timely manner with
procedural requirements under these rules. In addition, these
processes typically require at least limited involvement by us,
and therefore increase our cost of doing business. The volume of
domain name registration disputes may increase in the future as
the overall number of registered domain names increases.
Domain name registrars also face potential tort law liability
for their role in wrongful transfers of domain names. The
leading case in this area, Kremen v. Cohen, involved
a dispute over the transfer of a domain name by a registrar and
ultimately resulted in a multi-million dollar judgment against
the registrar for its failure to verify the accuracy of the
request to transfer the domain name and its role in effecting
the transfer. The safeguards and procedures we have adopted may
not be successful in insulating us against liability from
similar claims in the future. In addition, we face potential
liability for other forms of “domain name hijacking,”
including misappropriation by third parties of customer websites
and attempts by third parties to operate these websites or to
extort the customer whose website was misappropriated.
Furthermore, our risk of incurring liability for a security
breach on a customer website would increase if the security
breach were to occur following our sale to a customer of an SSL
certificate that proved ineffectual in preventing it. Finally,
we are exposed to potential liability as a result of our private
domain name registration service, wherein we become the domain
name registrant, on a proxy basis, on behalf of our customers.
While we have a policy of canceling privacy services on domain
names giving rise to domain name disputes, the safeguards we
have in place may not be sufficient to avoid liability in the
future, which could increase our cost of doing business.
Our standard agreements might not be enforceable.
We rely on standard agreements that govern the terms of the
services we provide to our customers. These agreements contain a
number of provisions intended to limit our potential liability
arising from providing services to our customers, including
liability resulting from our failure to register or maintain
domain names properly, from downtime or poor performance with
respect to our hosting services, or for insecure or fraudulent
transactions where we have issued SSL certificates. As most of
our customers purchase our services online, execution of our
agreements by customers occurs electronically or, in the case of
our terms of use, is deemed to occur because of a user’s
continued use of the website following notice of those terms. We
believe that our reliance on these agreements is consistent with
the practices in our industry, but if a court were to find that
either one of these methods of execution is invalid or that key
provisions of our services agreements are unenforceable, we
could be subject to liability that has a material adverse effect
on our business or could be required to change our business
practices in a way that increases our cost of doing business.
The success of our business depends in large part on our
ability to protect and enforce our intellectual property
rights.
To establish and protect our intellectual property rights, we
rely on a combination of patent, copyright, service mark,
trademark and trade secret laws and contractual restrictions,
all of which offer only limited protection. We enter into
agreements with our employees and contractors, and parties with
which we do business, in order to limit access to and disclosure
of our proprietary information. The steps we have taken to
protect our intellectual property may not prevent the
misappropriation of proprietary rights or the reverse
engineering of our technology. Moreover, others may
independently develop technologies that are competitive with
ours or that infringe our intellectual property. The enforcement
of our intellectual property rights may depend on our taking
legal action against these infringers, and we cannot be sure
that these actions will be successful, even when our rights have
been infringed.
We currently have no issued patents, and existing patent
applications may not result in issued and valid patents. Any
future issued patents or registered trademarks or service marks
might not be enforceable or provide adequate protection for our
proprietary rights.
Because of the global nature of the Internet, our websites can
be viewed worldwide. However, we do not have intellectual
property protection in every jurisdiction. Furthermore,
effective patent, trademark, service mark, copyright and trade
secret protection may not be available in every country in which
our services become available over the Internet. 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.
If a third party asserts that we are infringing its
intellectual property, whether or not it is true, it could
subject us to costly and time-consuming litigation or cause us
to obtain expensive licenses, which could harm our
business.
The software and Internet industries are generally characterized
by the existence of large numbers of trade secrets, patents,
trademarks, service marks and copyrights and by frequent
litigation based on allegations of infringement or other
violations of intellectual property rights. Several of our
competitors are involved in litigation, defending against claims
of patent infringement. Third parties may assert patent and
other intellectual property infringement claims against us in
the form of lawsuits, letters or other types of communications.
If a third party successfully asserts a claim that we are
infringing its proprietary rights, royalty or licensing
agreements might not be available on terms we find acceptable,
or at all. As not all currently pending patent applications are
publicly available, we cannot anticipate all such claims or know
with certainty whether our technology infringes the intellectual
property rights of third parties. We expect that the number of
infringement claims will increase as the number of services and
competitors in our industry grows. These claims against us,
whether or not successful, could:
•
divert our management’s attention;
•
result in costly and time-consuming litigation;
•
require us to enter into royalty or licensing agreements, which
might not be available on acceptable terms, or at all; or
•
require us to redesign our software and services to avoid
infringement.
As a result, any third-party intellectual property claims
against us could increase our expenses and adversely affect our
business. Even if we have not infringed a third party’s
intellectual property rights, our legal defense could prove
unsuccessful and require us to expend significant financial and
management resources.
On June 19, 2006, Web.com, Inc. filed a lawsuit against us
in the United States District Court for the Northern
District of Georgia alleging that we infringe U.S. Patent
No. 6,789,103, or the ‘103 patent. Web.com is seeking,
among other things, injunctive relief and unspecified damages.
At this time, we have not been served with the complaint filed
by Web.com. Nevertheless, we have begun an investigation of
Web.com’s claims, and, based on the information available
to us at this time, we believe we have meritorious defenses to
Web.com’s suit. In the event that we are served with the
complaint, we intend to defend ourselves vigorously in this
lawsuit.
Since the outcome of any litigation is uncertain, we may not
prevail in the lawsuit brought by Web.com. If our website
hosting services were found to infringe the
‘103 patent and we were unable to obtain a license on
satisfactory terms, or if an injunction were issued, we could be
required to modify or cease offering our website hosting
services and/ or pay substantial monetary damages. Any of these
outcomes would likely have a material adverse effect on our
business. Even if we prevail, the defense of this litigation
could be expensive and could consume substantial amounts of
management time and attention.
We may be unable to respond to the rapid technological
changes in the industry, particularly in light of the internal
development of our services, and our attempts to respond may
require significant capital expenditures.
The Internet and electronic commerce are characterized by rapid
technological change. Sudden changes in user and customer
requirements and preferences, the frequent introduction of new
services embodying new technologies and the emergence of new
industry standards and practices could make our services and
systems obsolete. The rapid evolution of Internet-based
applications and services will require that we continually
improve the performance, features and reliability of our
services. Our success will depend, in part, on our ability:
•
to develop new services and technologies that address the
increasingly sophisticated and varied needs of our current and
prospective customers; and
•
to respond to technological advances and emerging industry
standards and practices on a cost-effective and timely basis.
We have elected to develop substantially all of our services
internally, rather than licensing or acquiring technology from
third-party vendors. The development of new services is complex,
and we may not be able to complete development in a timely
manner, or at all. Our internal development teams may be unable
to keep pace with new technological developments that affect the
marketplace for our services. If relevant technological
developments or changes in the market outpace our ability to
develop services demanded by current and prospective customers,
our existing services may be rendered obsolete, and we may be
forced to license or acquire software and other technology from
third parties, or we may lose existing customers and fail to
attract new customers. If we are forced to shift our strategy
toward licensing our core technology from third parties, it
could prove to be more costly than internal development and
adversely impact our operating results.
The development of services and other proprietary technology
involves significant technological and business risks and
requires substantial expenditures and lead-time. We may be
unable to use new technologies effectively or to adapt our
internally developed technologies and services to customer
requirements or emerging industry standards. In addition, as we
offer new services and functionality, we will need to ensure
that any new services and functionality are well integrated with
our current services, particularly as we offer an increasing
number of our services as part of bundled suites. To the extent
that any new services offered by us do not interoperate well
with our existing services, our ability to market and sell those
new services would be adversely affected and our revenue level
and ability to achieve and sustain profitability might be harmed.
Our business could be harmed if we are unable to sustain
or improve our current conversion rate level in future
periods.
A key component of our operating model is to maximize our
ability to convert visitors to our website into customers of our
services. To achieve this objective, we closely monitor and
analyze our conversion rate, or the ratio of domain names
registered through our websites and our customer care center to
the number of visits to our websites during that same period. A
number of factors could negatively impact our conversion rate,
including:
•
failure of our services to meet the needs of our customers
because of poor performance or otherwise;
•
system failures that cause our websites or services to be
unavailable;
•
security breaches or negative publicity that damage our brand
and cause potential customers to lose trust in us;
•
competition, particularly if our competitors offer pricing for
comparable services at lower rates than ours; or
•
deterioration in the perception of our general level of customer
care.
If any of these or other factors causes our conversion rate to
decline, our revenue growth could slow and our business could be
harmed. We may also be forced to reduce our prices to maintain
or increase our conversion rate, which would harm our margins
and could adversely affect our results of operations.
If customers fail to perceive our strong commitment to
customer care as sufficiently valuable, or if we fail to
maintain a consistently high level of customer service, then we
will not be able to realize a sufficient return on our
investment in customer care and support, and our operating
results would be harmed.
We believe our focus on customer care and support is critical to
retaining, expanding and further penetrating our customer base.
As a result, we have made significant investments in our
customer care center and our customer care organization. As of
March 31, 2006, our customer care center organization
consisted of 752 employees, or 67% of our total employees. If we
are unable to maintain a consistently high level of customer
service due to excessive turnover in our customer care personnel
or for other reasons, we may lose existing customers and find it
more difficult to attract new customers. In addition, regardless
of the performance of our customer care center, customers for
domain name registration, website hosting and other web-based
services base their purchasing decision on a number of factors,
including price, functionality of services, brand name and ease
of use. If our customers fail to perceive customer service and
support as among the more important criteria on which they base
their purchasing decisions, we may not be able to realize a
sufficient return on investment for our extensive customer care
organization, and our operating results would be harmed.
If we fail to develop and maintain proper and effective
internal controls, our ability to produce accurate financial
statements could be impaired, which could adversely affect our
operating results, our ability to conduct business and investor
confidence in our company.
We will be required, pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002, to furnish a report by management on
our internal control over financial reporting for the fiscal
year ending one year after the effective date of our initial
public offering. This report will contain, among other things,
an assessment of the effectiveness of our internal control over
financial reporting, including a statement regarding whether or
not our internal control over financial reporting is effective.
This assessment will need to include disclosure of any material
weaknesses identified by our management in our internal control
over financial reporting. This report will also need to contain
a statement that our auditors have issued an attestation report
on our management’s assessment of our internal controls.
We are just beginning the costly and challenging process of
compiling system and processing documentation before we perform
the evaluation needed to comply with Section 404. We may
not be able to complete our evaluation and testing and any
required remediation in a timely fashion. During the evaluation
and testing process, if we identify one or more material
weaknesses in our internal control over financial reporting, we
will be unable to assert that our internal control is effective.
If we are unable to assert that our internal control over
financial reporting is effective, or if our auditors are unable
to attest that our management’s report is fairly stated or
they are unable to express an opinion on the effectiveness of
our internal control, we could lose investor confidence in the
accuracy and completeness of our financial reports, which would
have a material adverse effect on the price of our Class A
common stock. Failure to comply with the new rules might make it
more difficult for us to obtain certain types of insurance,
including director and officer liability insurance, and we might
be forced to accept reduced policy limits and coverage and/or
incur substantially higher costs to obtain the same or similar
coverage. The impact of these events could also make it more
difficult for us to attract and retain qualified persons to
serve on our board of directors, on committees of our board of
directors, or as executive officers.
Our failure to register, maintain, secure, transfer or
renew the domain names that we process on behalf of our
customers or to provide our other services to our customers
without interruption could subject us to additional expenses,
claims of loss or negative publicity that have a material
adverse effect on our business.
Clerical errors and system and process failures made by us may
result in inaccurate and incomplete information in our database
of domain names and in our failure to properly register or to
maintain, secure,
transfer or renew the registration of domain names that we
process on behalf of our customers. In addition, any errors of
this type might result in the interruption in provision of our
other services. Our failure to properly register or to maintain,
secure, transfer or renew the registration of our
customers’ domain names or to provide our other services
without interruption, even if we are not at fault, might result
in our incurring significant expenses and might subject us to
claims of loss or to negative publicity, which could harm our
business.
We have recently completed implementation of a revised process
to meet new ICANN policies on how we transfer, and acknowledge
the transfer of, domain names. Pursuant to these new policies,
we are no longer be able to use certain safeguards that we had
in place to acknowledge transfer requests, which could increase
the risk of unauthorized or fraudulent transfers. These
transfers could increase claims of loss or subject us to
negative publicity, which could have a material adverse effect
on our business.
Competition for qualified personnel, particularly
management personnel, can be intense. To be successful, we must
attract and retain qualified personnel.
Our future success will depend on the ability of our management
to operate effectively, both individually and as a group. The
loss of any of our senior management — particularly
Bob Parsons, our founder, chairman and chief executive
officer — or other key development or sales and
marketing personnel could adversely affect our future operating
results. We believe that Mr. Parsons has been critical to
the development of our corporate culture and corporate image,
and has been instrumental in the growth of our business to date.
If we lost the services of Mr. Parsons, we could incur
serious damage to our corporate culture and marketing focus,
which, in turn, could adversely impact our ability to achieve
future growth.
We have commenced an executive search to identify an experienced
chief financial officer to succeed Michael J. Zimmerman, who is
serving as our chief accounting officer and acting chief
financial officer and as our principal financial officer during
the pendency of the search. Competition for qualified financial
executives is very intense, particularly for those candidates
who have experience as a public company chief financial officer
in the era of heightened compliance responsibilities resulting
from the Sarbanes-Oxley Act and other Securities and Exchange
Commission, or SEC, rulemaking. We may not be successful in
hiring a qualified executive to be our chief financial officer.
In addition, a significant portion of the stock options held by
several of our key executive officers are vested, which presents
the risk that these individuals may lack sufficient economic
motivation to continue their employment with us in future
periods. We also depend on our ability to retain and motivate
high caliber personnel. Competition for qualified management,
sales, technical and other personnel can be intense, and we may
not be successful in attracting, retaining and motivating these
personnel. We generally do not have employment contracts with
our employees. The loss of the services of any of our key
personnel, the inability to attract or retain qualified
personnel in the future or delays in hiring required personnel,
particularly senior management, sales personnel, and engineers
and other technical personnel, could negatively affect our
business.
Recently adopted regulations related to equity
compensation could adversely affect our operating results and
our ability to attract and retain key personnel.
In recent years, we have used stock options as an important
component of our employee compensation packages. We believe that
stock options are an essential tool to link the long-term
interests of our stockholders and our employees, especially
executive management, and serve to motivate management to make
decisions that will, in the long run, give the best returns to
stockholders. The Financial Accounting Standards Board has
announced changes to GAAP, effective for fiscal periods
beginning after June 15, 2005, that require us to record a
charge to earnings for employee stock option grants. These
changes will adversely impact our operating results and may
adversely affect our ability to attract and retain employees. In
addition, regulations implemented by The Nasdaq Stock Market
requiring stockholder approval for all stock option plans could
make it more difficult for us to grant options to employees in
the future. To the extent that these or other new regulations
make it more difficult or expensive to grant options to
employees, we may incur
increased compensation costs, change our equity compensation
strategy or find it difficult to attract, retain and motivate
employees, each of which could adversely affect our business.
If we do not maintain a low rate of payment card
chargebacks, we may be subject to financial penalties, which
would harm our operating results.
A substantial majority of our revenue originates from online
credit and debit card transactions. Under current payment card
industry practices, we are liable for fraudulent and disputed
payment card transactions because we do not obtain the
cardholder’s signature at the time of the transaction. If
we fail to maintain our chargeback rates at levels that are
acceptable to the payment card associations, we will face the
risk that one or more payment card associations may, at any
time, assess penalties against us or terminate our ability to
accept payment card payments from customers, which could harm
our business and operating results.
If we are not able to secure additional financing on
favorable terms, or at all, to meet our future capital needs, we
may be unable to respond to business challenges and our business
could be harmed.
We may require additional capital to respond to business
challenges, including the need to develop new or enhance
existing services or enhance our operating infrastructure, fund
expansion, respond to competitive pressures and acquire
complementary businesses, services and technologies. Absent
sufficient cash flows from operations, we may need to engage in
equity or debt financings to secure additional funds to meet our
operating and capital needs. We may not be able to secure
additional debt or equity financing on favorable terms, or at
all, at the time when we need that funding. In addition, even
though we may not need additional funds, we may still elect to
sell additional equity or debt securities or obtain credit
facilities for other reasons. If we raise additional funds
through further issuances of equity or convertible debt
securities, our existing stockholders could suffer significant
dilution in their percentage ownership of our company, and any
new equity securities we issue could have rights, preferences
and privileges senior to those of holders of our common stock,
including the shares of Class A common stock sold in this
offering. Any debt financing secured by us in the future could
involve restrictive covenants relating to our capital raising
activities and other financial and operational matters, which
might make it more difficult for us to obtain additional
capital, to pay dividends and to pursue business opportunities,
including potential acquisitions. In addition, if we decide to
raise funds through debt or convertible debt financings, we may
be unable to meet our interest or principal payments.
Risks Related to Our Industry
Governmental and regulatory policies or claims concerning
the domain name registration system, and industry reactions to
those policies or claims, may cause instability in the industry
and disrupt our domain name registration business.
ICANN Oversight of Domain Name Registration System
In November 1998, the U.S. Department of Commerce
authorized ICANN to oversee key aspects of the domain name
registration system. Since then, ICANN has been subject to
scrutiny by the U.S. government. For example, Congress has
held hearings to evaluate ICANN’s selection process for new
top-level domains. In addition, ICANN faces significant
questions regarding its financial viability and efficacy as a
private sector entity. ICANN may continue to alter both its
long-term structure and its mission to address perceived
shortcomings such as a lack of accountability to the public and
a failure to maintain a representation of diverse interests on
its board of directors. In May 2001, ICANN and VeriSign entered
into an agreement under which VeriSign would operate the .com
top-level domain registry until 2007, when the original
agreement expires. ICANN and VeriSign have recently proposed
renewal of this agreement through 2012, which, if given final
approval by the U.S. Department of Commerce, could lead to
VeriSign’s continuing to operate the .com top-level domain
under this agreement indefinitely. We continue to face the risks
that:
•
ICANN and, under their proposed new registry agreement, VeriSign
may impose increased fees received for each .com domain name
registration, which could put pressure on our operating results
and pricing strategy;
the U.S. or any other government may reassess its decision
to introduce competition into, or ICANN’s role in
overseeing, the domain name registration market;
•
the terms of the registrar accreditation process could change in
ways that are disadvantageous to us;
•
the Internet community or the U.S. Department of Commerce
or U.S. Congress may refuse to recognize ICANN’s
authority or support its policies, which could create
instability in the domain name registration system; and
•
international regulatory bodies, such as the International
Telecommunications Union, the United Nations or the European
Union, may gain increased influence over the management and
regulation of the domain name registration system, leading to
increased regulation in areas such as taxation and privacy.
If any of these events occurs, it could create instability in
the domain name registration system. These events could also
disrupt or cause suspension of portions of our domain name
registration business, which would result in dramatically
reduced revenue.
In addition, VeriSign may in the future decide to offer
additional services that compete with our domain name
registration services or other services. If VeriSign were to
become a competitor of ours in our core business areas, VeriSign
would likely enjoy a number of competitive advantages, including
its position as the largest registry, as well as their greater
financial and operational resources and customer awareness
within our industry.
Governmental Regulation Affecting the Internet
To date, government regulations have not materially restricted
use of the Internet in most parts of the world. The legal and
regulatory environment pertaining to the Internet, however, is
uncertain and may change. New laws may be passed, existing laws
may be deemed to apply to the Internet, or existing legal safe
harbors may be narrowed, both by U.S. federal or state
governments and by governments of foreign jurisdictions. These
changes could affect:
•
liability of online service providers for actions by customers,
including fraud, illegal content, spam, phishing, libel and
defamation, infringement of third-party intellectual property
and other abusive conduct;
•
other claims based on the nature and content of Internet
materials, such as pornography;
•
user privacy and security issues;
•
consumer protection;
•
sales and other taxes, including the value-added tax of the
European Union member states;
•
characteristics and quality of services; and
•
cross-border commerce.
The adoption of any new laws or regulations, or the application
or interpretation of existing laws or regulations to the
Internet, could hinder growth in use of the Internet and online
services generally, and decrease acceptance of the Internet and
online services as a means of communications, commerce and
advertising. In addition, it could increase our costs of doing
business, subject our business to increased liability or prevent
us from delivering our services over the Internet, thereby
harming our business and results of operations.
The relevant domain name registry and the ICANN regulatory
body impose a charge upon each registrar for the administration
of each domain name registration. If these fees increase, it
would have a significant impact upon our operating
results.
The relevant domain name registry and ICANN impose a fee for the
registration of each domain name. For example, at present,
VeriSign charges a $6.00 fee for names in the .com TLD, and
ICANN charges a $0.25 fee for each domain name registered in the
TLDs it oversees. We, in turn, currently charge our customers
$8.95 for the registration of a .com domain name for a one-year
term, plus the $0.25 ICANN fee, and this price includes basic
advertising-supported shared website hosting, free blog service
and a single email account. We have no control over registries
or ICANN and generally cannot predict when they may increase
their respective fees. If the U.S. Department of Commerce
approves the new registry agreement that VeriSign and ICANN
recently proposed, VeriSign would continue as the exclusive
registry for the .com TLD and would be entitled to increase the
fee it receives for each .com domain name registration by 7%
annually in four of the six years through 2012, and potentially
beyond that date. Any increase in registry or ICANN fees would
need to be imposed as a surcharge, otherwise factored into the
prices we charge our customers or absorbed by us. If we absorb
these cost increases, or if these surcharges act as a deterrent
generally to the growth in domain name registrations, we might
find that our operating results are adversely impacted by these
third-party fees.
As the number of available domain names diminishes over
time, our domain name registration revenue and our overall
business could be adversely impacted.
As the number of available domain names diminishes over time,
and if it is perceived that the most desirable domain names are
generally unavailable, fewer Internet users might register
domain names with us. There are a number of practices in the
domain name marketplace, including domain name
“tasting” and domain name “monetizing,” that
result in desirable domain names rapidly becoming unavailable.
Domain name tasting involves the registration by registrars of
large numbers of domain names, with the intent of using the
five-day grace period after initial registration to decide which
domain names are most valuable, and then dropping the
registration of the vast majority of those domain names that
prove to be less valuable prior to the end of the
five-day grace period.
Domain name monetizing involves the use by website operators of
domain names to generate paid, click-through advertising revenue
from one-page websites, rather than building an active website.
If domain name tasting and monetizing or other market practices
that could develop significantly diminish the number of
available domain names that are perceived as valuable, it could
have an adverse effect on our domain name registration revenue
and our overall business.
Our business and financial condition could be harmed
materially if the administration and operation of the Internet
no longer were to rely upon the existing domain name
registration system.
The domain name registration market continues to develop and
adapt to changing technology. This development may include
changes in the administration or operation of the Internet,
including the creation and institution of alternate systems for
directing Internet traffic without using the existing domain
name registration system. Some of our competitors have begun
registering domain names with extensions that rely on these
alternate systems. These competitors are not subject to ICANN
accreditation requirements and restrictions. In particular,
competitors who develop workarounds to the existing domain name
registration system may be able to avoid paying fees to the
registry for domain names, which would give them a pricing
advantage over us. Other competitors have attempted to introduce
naming systems that use keywords rather than traditional domain
names. The widespread acceptance of any alternative system could
eliminate the need to register a domain name to establish an
online presence and could materially adversely affect our
business.
Also, since approximately 73% of our domain names under
management as of May 31, 2006 were in the .com TLD, we are
substantially dependent upon the continued viability of
VeriSign, which serves as the sole registry of the .com TLD. If
VeriSign were unable to continue to operate as a registry for
..com domain names in its current manner as a result of financial
difficulties, regulatory restrictions, litigation or otherwise,
our .com domain name registration revenue could decline, and we
could be subject to potential claims by our
..com domain name registration customers, either of which would
harm our financial condition and results of operations.
The introduction of tax laws targeting companies engaged
in electronic commerce could materially adversely affect our
business, financial condition and results of operations.
We file tax returns in those countries and states where existing
regulations applicable to traditional businesses require these
filings. However, one or more countries or states could seek to
impose additional income tax obligations or sales tax collection
obligations on
out-of-jurisdiction
companies, such as ours, that engage in or facilitate electronic
commerce. A number of proposals have been made at various
governmental levels that could impose taxes on the sale of
services through the Internet or on the income derived from
these sales. These proposals, if adopted, could substantially
impair the growth of electronic commerce and materially
adversely affect our business, financial condition and results
of operations.
On December 3, 2004, the President of the United States
signed into law an extension of a moratorium on certain state
and local taxation of online services and electronic commerce
until November 1, 2007. This legislation is not a permanent
ban, and any future imposition of these taxes could materially
adversely affect our business, financial condition and results
of operations.
In addition, on July 1, 2003, the European Union required
EU member states to implement a directive requiring non-EU
providers of electronically supplied services to private
individuals and non-business organizations in the EU to impose
value-added taxes, or VAT, on these services. We anticipate that
EU member states will be commencing their enforcement efforts in
this area in the near term. Many tax authorities of the member
states have yet to publish official guidance on the rules, but
we already know that, if we are required to comply with this
directive, we will have to implement system changes. These
systems changes may be significant, and it is not yet clear
which of our services, if any, would be subject to this
directive. If one or more of our services were determined to be
subject to this directive, we would not be in compliance with
this directive and, as a result, we might be subject to
enforcement proceedings relating to claims for VAT, plus
interest and/or penalties, which could harm our business. In
addition, imposition of VAT might also lead to some of the
services that we offer in EU member states becoming more
expensive relative to services rendered in those countries by EU
businesses, which would put us at a competitive disadvantage if
we were to pass along the VAT to our customers, or would reduce
our profit margin if we were to absorb the VAT as an additional
cost of our business.
We are responsible for charging end customers certain taxes in
numerous international jurisdictions. In the ordinary course of
our business, there are many transactions and calculations where
the ultimate tax determination is uncertain. In the future, we
may come under audit, which could result in changes to our tax
estimates. We believe that we maintain adequate tax reserves to
offset the potential liabilities that may arise upon audit.
Although we believe our tax estimates and associated reserves
are reasonable, the final determinations of tax audits and any
related litigation could be materially different than the
amounts that we have reserved for tax contingencies. To the
extent that these estimates ultimately prove to be inaccurate,
the associated reserves would be adjusted, resulting in our
recording a benefit or expense in the period a final
determination is made.
If Internet usage does not grow, or if the Internet does
not continue to expand as a medium for information,
communication and commerce, our business may suffer.
Our success depends upon continued development and acceptance of
the Internet as a medium for information, communication and
commerce. The use of the Internet may not continue to grow at a
pace similar to that of recent years, either within the
U.S. or in international markets as a result of a variety
of factors, including inadequate Internet infrastructure,
security problems or privacy concerns. Any of these and a
variety of other issues could slow the growth of the Internet,
which could have an adverse effect on our results of operations.
Risks Related to This Offering and Our Class A Common
Stock
The lower voting power of the Class A common stock
relative to our Class B common stock may negatively affect
the market value of our Class A common stock.
Upon completion of this offering, we will have two classes of
common stock: Class A common stock, which is the stock that
we and the selling stockholders are selling in this offering and
which will entitle holders to one vote per share, and
Class B common stock, all of which will be beneficially
owned by Bob Parsons and which will entitle him to two votes per
share. Except in certain limited circumstances required by
applicable law, holders of Class A common stock and
Class B common stock will vote together as a single class
on all matters to be voted on by our stockholders. Therefore,
after the closing of this offering
approximately %
of the total voting power of our outstanding shares will be held
by Mr. Parsons if the underwriters do not exercise their
over-allotment option in full, or
approximately %
if the underwriters exercise their over-allotment option in
full. The difference in the voting power of our Class A
common stock and Class B common stock could diminish the
market value of our Class A common stock if investors
attribute value to the superior voting rights of our
Class B common stock and the power those rights confer.
For the foreseeable future, Bob Parsons and his affiliates
will be able to control the selection of all members of our
board of directors, as well as virtually every other matter that
requires stockholder approval, which will severely limit the
ability of other stockholders to influence corporate
matters.
Upon completion of this offering, Bob Parsons will beneficially
own all of our Class B common stock. Pursuant to our
certificate of incorporation, the holder of our Class B
common stock may generally transfer these shares to family
members and their lineal descendents, without those shares
automatically converting into shares of Class A common
stock. Because of this dual-class capital structure and the
number of shares he beneficially owns, Bob Parsons, his
affiliates, and his family members and lineal descendents will
have significant influence over our management and affairs, and
will be able to control virtually all matters requiring
stockholder approval, including the election of directors and
significant corporate transactions such as mergers or other
sales of our company or assets, even if they come to own
considerably less than 50% of the total number of outstanding
shares of our Class A and Class B common stock.
Moreover, these persons may take actions in their own interests
that you or our other stockholders do not view as beneficial. So
long as Bob Parsons and his affiliates continue to control
shares of Class B common stock representing more than
one-third of the total number of outstanding shares of our
Class A and Class B common stock combined, they will
control a majority of the combined voting power of the
Class A and Class B common stock.
We will incur increased costs and demands upon management
as a result of complying with the laws and regulations affecting
public companies, which could 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,
including costs associated with public company reporting
requirements. We also have begun to incur and will incur
substantial costs associated with recently adopted corporate
governance requirements, including requirements under the
Sarbanes-Oxley Act and new rules implemented by the SEC and The
Nasdaq Stock Market. In addition, our management team will also
have to adapt to the requirements of being a public company, as
none of our senior executive officers has experience as an
executive in the public company environment since the adoption
of the Sarbanes-Oxley Act. The expenses incurred by public
companies generally for reporting and corporate governance
purposes have been increasing. We expect recent rules and
regulations to increase our legal and financial compliance costs
and to make some activities more time-consuming and costly,
although we are unable currently to estimate these costs with
any degree of certainty. We also expect these new rules and
regulations may 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 coverage the same as
or similar to coverage that used to be available. As a result,
it may be more difficult for us to attract and retain qualified
individuals to serve on our board of directors, on committees of
our board of directors or as our executive officers.
An active, liquid and orderly trading market for our
Class A common stock may not develop.
Prior to this offering, there has been no public market for any
shares of our common stock. We, the selling stockholders and the
representatives of the underwriters will determine the initial
public offering price of our Class A common stock through
negotiation. This price will not necessarily reflect the price
at which investors in the market will be willing to buy and sell
our shares following this offering. In addition, the trading
price of our Class A common stock following this offering
is likely to be highly volatile and could be subject to wide
fluctuations in response to various factors, some of which are
beyond our control. These factors include:
•
quarterly variations in our results of operations or those of
our competitors;
•
our ability to develop and market new and enhanced services on a
timely basis;
•
announcements by us or our competitors of significant
acquisitions, new services, contracts, commercial relationships
or capital commitments;
•
whether we are able to introduce new services successfully to
our customers;
•
the emergence of new markets that may affect our existing
business or in which we may not be able to compete effectively;
•
commencement of, our involvement in, or results of litigation;
•
changes in governmental regulations or in the status of our
ICANN accreditation or regulatory approvals;
•
changes in earnings estimates or recommendations by any public
market analysts who elect to follow our stock;
•
any major change in our board of directors or management;
•
general economic conditions and slow or negative growth of our
markets; and
•
political instability, natural disasters, war and/or events of
terrorism.
In addition, the stock market in general, and the market for
Internet companies’ stock in particular, have experienced
extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of
those companies. Broad market and industry factors may seriously
affect the market prices of companies’ stock, including
ours, regardless of their actual operating performance. These
fluctuations may be even more pronounced in the trading market
for our Class A common stock shortly following this
offering. In addition, in the past, following periods of
volatility in the overall market and the market prices of
particular companies’ securities, securities class action
litigation has often been instituted against these companies.
This type of litigation, if instituted against us, could result
in substantial costs and a diversion of our management’s
attention and resources.
Provisions in our certificate of incorporation and bylaws
and under Delaware law could discourage a takeover that
stockholders may consider favorable and enable our controlling
stockholder to resist changes of control of our company or other
transactions that might be favored by a substantial majority of
our other stockholders.
Provisions in our certificate of incorporation and bylaws may
have the effect of delaying or preventing a change of control or
changes in our management. These provisions include the
following:
•
Our certificate of incorporation provides for a dual-class
capital structure. As a result of this structure and the number
of shares he beneficially owns, Bob Parsons, his affiliates and
his family members and their lineal descendents will have
control over virtually all matters requiring stockholder
approval, including the election of directors and significant
corporate transactions, such as mergers or other sales of our
company or its assets. This concentrated control could
discourage others from initiating any
potential merger, takeover or other change of control
transaction that our other stockholders might view as beneficial.
•
Our stockholders may act by written consent so long as the
holders of our Class B common stock hold a majority of the
combined voting power of our Class A and Class B
common stock. As a result, a holder or holders of Class B
common stock would be able to act by written consent to delay or
prevent a change of control that might be favored by the holders
of Class A common stock.
•
When the holders of our Class B common stock no longer hold
a majority of the combined voting power of our outstanding
shares of Class A and Class B common stock, our
stockholders will no longer be able to act by written consent.
As a result, a holder or holders controlling a majority of the
combined voting power of our outstanding shares of Class A
and Class B common stock at that time would not be able to
take certain actions except at a stockholders’ meeting,
including approving a change of control of our company. The loss
of our stockholders’ ability to act by written consent
would therefore have an anti-takeover effect by increasing the
difficulty of obtaining approval of change of control
transactions.
•
Our board of directors has the sole right to elect a director to
fill a vacancy created by the expansion of the board of
directors or the resignation, death or removal of a director,
which prevents stockholders from being able to fill vacancies on
our board of directors.
•
Our certificate of incorporation prohibits cumulative voting in
the election of directors. This will limit the ability of
holders of Class A common stock and minority stockholders
to elect director candidates.
•
Our board of directors is classified so that only a portion of
our board will be elected each year. This could discourage proxy
contests, make it more difficult for our stockholders to elect a
new board of directors and discourage a change of control.
•
Stockholders must provide advance notice to nominate individuals
for election to the board of directors or to propose matters to
be acted upon at a stockholders’ meeting. These provisions
may discourage or deter a potential acquiror from conducting a
solicitation of proxies to elect the acquiror’s own slate
of directors or otherwise attempting to obtain control of our
company.
•
Our certificate of incorporation authorizes us to issue shares
of preferred stock with rights designated by our board of
directors, without further stockholder approval. While this
provides desirable flexibility in connection with possible
acquisitions and other corporate purposes, any issued preferred
stock could have the effect of delaying, discouraging or
preventing a change of control of our company.
As a Delaware corporation, we are also subject to certain
Delaware anti-takeover provisions. Under Delaware law, a
corporation may, in general, not engage in a business
combination with any holder of 15% or more of its capital stock
unless the holder has held the stock for three years or, among
other things, the corporation’s board of directors has
approved the transaction.
Purchasers in this offering will experience immediate and
substantial dilution in the book value of their
investment.
The initial public offering price of our Class A common
stock will be substantially higher than the net tangible book
value per share of our Class A common stock immediately
after this offering. Therefore, if you purchase our Class A
common stock in this offering, you will incur an immediate
dilution of
$ in
net tangible book value per share from the price you paid, based
on an assumed initial public offering price of
$ per
share.
Future sales of shares by our existing stockholder or
existing option holders could cause our stock price to
decline.
If our existing stockholder or any of our existing option
holders sells, or indicates an intention to sell, substantial
amounts of our Class A common stock in the public market
after the lock-up and
other legal restrictions on resale discussed in this prospectus
lapse, the trading price of our Class A common stock could
decline. Based on shares outstanding as of March 31, 2006,
upon the closing of this offering, we will have outstanding a
total
of shares
of Class A and Class B common stock. Of these shares,
only
the shares
of Class A common stock sold in this offering by us and the
selling stockholders will be freely tradable, without
restriction, in the public market. Lehman Brothers and Merrill
Lynch, however, may, in their sole discretion, permit our
existing stockholder or option holders, who are subject to
contractual lock-up
agreements, to sell shares prior to the expiration of the
lock-up agreement.
The lock-up agreements
pertaining to this offering will expire 180 days from the
date of this prospectus, subject to extension for up to an
additional 34 days under certain circumstances. After the
lock-up agreements
expire, up to an
additional shares
of Class A common stock that are issuable upon conversion
of shares of our Class B common stock beneficially owned by
Bob Parsons will be eligible for sale in the public market,
subject to volume limitations under Rule 144 under the
Securities Act of 1933, as amended, or the Securities Act. In
addition, upon expiration of the
lock-up agreements, up
to shares
of Class A common stock that were subject to options
outstanding as of March 31, 2006, other than shares subject
to options exercised by a selling stockholder in order to sell
shares in this offering, will become eligible for sale in the
public market to the extent vested under the provisions of
various option agreements. If these additional shares are sold,
or if it is perceived that they may be sold, in the public
market, the trading price of our Class A common stock could
decline.
Because management has broad discretion regarding the use
of the net proceeds from this offering, you may not agree with
how we use them, and these proceeds may not be invested
successfully.
Our management will have broad discretion with respect to the
net proceeds we receive from this offering. We currently intend
to use the net proceeds from the offering for the repayment of
currently outstanding indebtedness and for working capital and
other general corporate purposes. You will be relying on the
judgment of our management concerning these uses, and you will
not have the opportunity, as part of your investment decision,
to assess whether the proceeds will be used appropriately. The
failure of our management to apply these funds effectively could
result in unfavorable returns and uncertainty about our
prospects, either of which could cause the price of our
Class A common stock to decline.
This prospectus, particularly in the sections entitled
“Prospectus Summary,”“Risk Factors,”“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and
“Business,” contains forward-looking statements that
are subject to substantial risks and uncertainties. All
statements other than statements of historical facts contained
in this prospectus, including statements regarding our future
financial position, the statements under the caption “Our
Growth Strategy” in the “Prospectus Summary”
section, the statements under the caption “Our Growth
Strategy” in the “Business” section, other
statements regarding our strategies for growth, current
development initiatives and future service offerings, statements
regarding planned expenditures, including capital expenditures,
expansion of our research and development and customer care and
support organizations, and statements regarding other aspects of
our business strategy, and plans and objectives for future
operations, are forward-looking statements. In some cases, you
can identify forward-looking statements by terms such as
“believe,”“may,”“estimate,”“continue,”“anticipate,”“intend,”“should,”“plan,”“expect,”“predict” or
“potential,” the negative of these terms or other
similar expressions. We have based these forward-looking
statements largely on our current expectations and projections
about future events and financial trends that we believe may
affect our financial condition, results of operations, business
strategy and financial needs. These forward-looking statements
are subject to a number of risks, uncertainties and assumptions
described in the section entitled “Risk Factors” and
elsewhere in this prospectus. We qualify all of our
forward-looking statements by these cautionary statements.
Moreover, we operate in a very competitive and rapidly changing
environment. New risks emerge from time to time. It is not
possible for our management to predict all risks, nor can we
assess the impact of all factors on our business or the extent
to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any
forward-looking statements we may make. Before investing in our
Class A common stock, investors should be aware that the
occurrence of the risks, uncertainties and events described in
the section entitled “Risk Factors” and elsewhere in
this prospectus could have a material adverse effect on our
business, results of operations and financial condition.
You should not rely upon forward-looking statements as
predictions of future events. Although we believe that the
expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee that the future results, levels
of activity, performance or events and circumstances reflected
in the forward-looking statements will be achieved or occur.
Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of the forward-looking
statements. We undertake no obligation to update publicly any
forward-looking statements for any reason after the date of this
prospectus to conform these statements to actual results or to
changes in our expectations.
This prospectus also contains statistical data and estimates,
including those relating to market size and growth rates of the
markets in which we participate, that we obtained from industry
publications and reports generated by Euromonitor International,
ICANN, IDC, Netcraft, the U.S. Census Bureau and Zooknic.
These publications generally indicate that they have obtained
their information from sources they believe to be reliable, but
do not guarantee the accuracy and completeness of their
information. Although we have assessed the information in the
publications and found it to be reasonable and believe the
publications are reliable, we have not independently verified
their data.
You should read this prospectus and the documents that we
reference in this prospectus and have filed with the SEC as
exhibits to the registration statement of which this prospectus
is a part with the understanding that our actual future results,
levels of activity, performance and events and circumstances may
be materially different from what we expect.
We estimate that we will receive net proceeds of
$ million
from our sale of
the shares
of Class A common stock offered by us in this offering,
based on an assumed initial public offering price of
$ per
share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us.
Members of our senior management are selling shares in this
offering — see “Principal and Selling
Stockholders.” We will not receive any of the net proceeds
from the sale of shares by the selling stockholders.
The principal purposes of this offering are to obtain additional
capital, to create a public market for our Class A common
stock and to facilitate our future access to the public equity
markets. We intend to use a portion of the net proceeds to repay
the entire outstanding balance under the loan from U.S. Bank
described below, which was approximately $7.0 million as of
March 31, 2006, as well as $0.2 million of additional
indebtedness. We also anticipate that we will use the net
proceeds received by us from this offering for working capital
and other general corporate purposes, including expansion of our
customer care and support and research and development
organizations, capital expenditures, including further
investment in the build-out of our data center and network
infrastructure to support our growth, and the further
development and expansion of our service offerings. In addition,
we may use a portion of the proceeds of this offering for
possible acquisitions of complementary businesses, technologies
or other assets. We have no current agreements or commitments
with respect to any acquisitions.
In October 2005, we obtained a $7.1 million loan from
U.S. Bank to finance the purchase of a building that we
intend to use as a data center. The loan bears interest at a
rate of 2.10% plus one-month LIBOR. We have entered into an
interest rate swap to fix the effective interest rate at 6.98%.
The amounts and timing of our actual expenditures will depend on
numerous factors, including the amount of cash used in or
generated by our operations, the status of our development
efforts, sales and marketing activities, technological advances
and competitive pressures. We therefore cannot estimate the
amount of the net proceeds to be used for any of the purposes
described above. We may find it necessary or advisable to use
our net proceeds for other purposes, and we will have broad
discretion in the application of our net proceeds. Pending the
uses described above, we intend to invest the net proceeds from
the sale of shares of our Class A common stock sold by us
in this offering in short-term, interest-bearing, investment
grade securities. We have implemented and maintain a prescribed
investment policy in regards to our cash investments.
DIVIDEND POLICY
Since our inception in 1997, we have operated as a subchapter
S corporation with a single stockholder. Since 2002, we
have made regular distributions to this stockholder based on our
funds available for distribution. In 2004, we made distributions
aggregating approximately $5.1 million to this stockholder.
In 2005, we made distributions aggregating approximately
$4.8 million to this stockholder. In the first quarter of
2006, we made distributions aggregating approximately
$0.8 million to this stockholder. In addition, since
March 31, 2006, we have made, and prior to our
reincorporation and our conversion to a subchapter C
corporation we expect to make, distributions aggregating
approximately $3.5 million to this stockholder.
Following our conversion to a subchapter C corporation and this
offering, we do not currently expect to pay any cash dividends
or other distributions. We expect to retain future earnings, if
any, to fund the development and growth of our business. Any
future determination to pay dividends on our common stock will
be at the discretion of our board of directors and will depend
upon, among other factors, our results of operations, financial
condition, capital requirements and contractual restrictions.
The following table sets forth our unaudited capitalization as
of March 31, 2006:
•
on an actual basis;
•
on a pro forma basis to give effect to aggregate distributions
of $3.5 million paid or to be paid to our sole stockholder
paid after March 31, 2006 and prior to our reincorporation,
our reincorporation and institution of a dual-class capital
structure, and the exercise of stock options to
purchase shares
of Class A common stock by a selling stockholder in order
to sell shares in this offering; and
•
on a pro forma as adjusted basis to give effect to the automatic
conversion of the shares being sold by a selling stockholder in
this offering from Class B common stock to Class A common stock,
our receipt of the net proceeds from the sale
of shares
of our Class A common stock offered by us at an assumed
initial public offering price of
$ per
share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us, and
our use of proceeds from this offering to repay approximately
$7.2 million of outstanding indebtedness.
You should read this table together with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and
related notes, each included elsewhere in this prospectus.
Preferred stock, $0.001 par value, no shares authorized,
issued or outstanding, actual; 10,000,000 shares
authorized, no shares issued and outstanding, pro forma or pro
forma as adjusted
—
—
—
Common stock, $0.01 par value, 50,000,000 shares
authorized, 36,601,656 shares issued and outstanding, actual; no
shares authorized, issued or outstanding, pro forma or pro forma
as adjusted
366
—
—
Class A common stock, $0.001 par value, no shares
authorized, issued or outstanding, actual;
200,000,000 shares
authorized, shares
issued and outstanding, pro forma; 200,000,000 shares
authorized, shares
issued and outstanding, pro forma as adjusted
—
Class B common stock, $0.001 par value, no shares
authorized, issued or outstanding, actual;
36,601,656 shares authorized, 36,601,656 shares issued and
outstanding, pro forma; 36,601,656 shares
authorized, shares
issued and outstanding, pro forma as adjusted
—
366
Additional paid-in capital
—
Accumulated deficit
(40,717
)
(44,217
)
(44,217
)
Accumulated other comprehensive loss
(138
)
(138
)
(138
)
Total stockholder’s equity (deficit)
(40,489
)
Total capitalization
$
(33,321
)
$
$
The actual column of the table above excludes
6,700,000 shares of Class A common stock reserved for
issuance under our 2002 stock option plan, of which
6,616,300 shares were subject to outstanding options, with
a weighted average exercise price of $2.24 per share, as of
March 31, 2006. Since March 31, 2006, the Company has
granted options to purchase an aggregate of
4,073,521 shares of Class A common stock with an
exercise price of $14.52 per share.
If you invest in our Class A common stock in this offering,
your interest will be diluted to the extent of the difference
between the initial public offering price per share of our
Class A common stock and the pro forma as adjusted net
tangible book value per share of our Class A common stock
after this offering. Net tangible book value per share
represents the amount of our total tangible assets less total
liabilities, divided by the total number of shares of
Class A and Class B common stock outstanding.
The pro forma net tangible book value of our Class A and
Class B common stock as of March 31, 2006 was
$(43.9) million, or $(1.20) per share of Class A
and Class B common stock outstanding. The pro forma net
tangible book value of our Class A and Class B common
stock gives effect to:
•
aggregate distributions of $3.5 million paid or to be paid
to our sole stockholder after March 31, 2006 and prior to
our reincorporation;
•
the reincorporation and institution of a dual-class capital
structure; and
•
the exercise of stock options to
purchase shares
of our Class A common stock by a selling stockholder in
order to sell shares in this offering.
Assuming the sale by us
of shares
of Class A common stock offered in this offering at an
initial public offering price of
$ per
share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us, and
after the application of offering proceeds to repay
$7.2 million in outstanding indebtedness, the pro forma as
adjusted net tangible book value of our Class A and
Class B common stock as of March 31, 2006 would have
been
$ ,
or
$ per
share. This represents an immediate increase of net tangible
book value of
$ per
share to our existing stockholders and an immediate dilution of
$ per
share to new investors purchasing shares in this offering. The
following table illustrates this per share dilution:
Assumed initial public offering price per share
$
Pro forma net tangible book value per share of common stock as
of March 31, 2006, before giving effect to this offering
$
(1.20
)
Increase per share attributable to investors purchasing shares
in this offering
Pro forma as adjusted net tangible book value per share after
giving effect to this offering
Dilution in pro forma as adjusted net tangible book value per
share to investors in this offering
$
The following table sets forth on the same pro forma as adjusted
basis, as of March 31, 2006, the number of shares of common
stock purchased or to be purchased from us, the total
consideration paid or to be paid and the average price per share
paid or to be paid by our existing stockholders and by the new
investors, before deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us:
Total
Shares Purchased
Consideration
Average Price
Number
Percent
Amount
Per Share
Existing stockholders
%
$
*
$
*
New public investors
Total
100
%
$
*
The amount of aggregate distributions to stockholders prior to
this offering exceeds the total consideration paid for such
shares.
If the underwriters exercise their over-allotment option in
full, our pro forma as adjusted net tangible book value per
share as of March 31, 2006 would be
$ ,
representing an immediate increase in pro forma net tangible
book value per share attributable to this offering of
$ to
our existing stockholders and an immediate dilution per share to
investors in this offering of
$ .
If the underwriters exercise their over-allotment option in
full, our existing stockholders would
own % and our new investors would
own % of the total combined number
of shares of our Class A and Class B common stock
outstanding upon the closing of this offering,
representing %
and % of the combined voting power
of these shares of Class A and Class B common stock,
respectively, as a result of our dual-class capital structure.
The above discussion and table assume no exercise, other than
the exercise of stock options by a selling stockholder described
above, of stock options to purchase 6,616,300 shares of
Class A common stock outstanding as of March 31, 2006,
with a weighted average exercise price of $2.24 per share.
If all of these options, as well as the underwriters’
over-allotment option, were exercised, then our existing
stockholders, including the holders of these options, would
own % and our new investors would
own % of the total combined number
of shares of our Class A and Class B common stock
outstanding upon the closing of this offering,
representing %
and % of the combined voting power
of these shares of Class A and Class B common stock,
respectively.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
We present below our selected consolidated financial and
operating data. The selected consolidated statement of
operations and statement of cash flows data for the years ended
December 31, 2003, 2004 and 2005 and the selected
consolidated balance sheet data as of December 31, 2004 and
2005 have been derived from our audited consolidated financial
statements included elsewhere in this prospectus. The selected
consolidated statement of operations data for the years ended
December 31, 2001 and 2002 and the selected consolidated
balance sheet data as of December 31, 2001, 2002 and 2003
have been derived from our audited consolidated financial
statements not included in this prospectus. The consolidated
statement of operations data for the three months ended
March 31, 2005 and 2006, the consolidated statement of cash
flows data for the three months ended March 31, 2006 and
the consolidated balance sheet data as of March 31, 2006
have been derived from our unaudited consolidated financial
statements included elsewhere in this prospectus. The unaudited
consolidated financial statements include, in the opinion of
management, all adjustments, which include only normal recurring
adjustments, that management considers necessary for the fair
presentation of the financial information set forth in those
statements.
You should read this information together with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated
financial statements and related notes, each included elsewhere
in this prospectus.
Our historical results are not necessarily indicative of the
results to be expected in any future period. Our results of
operations in the first quarters of 2005 and 2006 included
significant marketing and advertising expenditures that we
incurred in connection with our Super Bowl advertising campaign.
We do not expect similar levels of expenditures in later
quarters of 2006.
We are a subchapter S corporation and therefore we have not
reflected deferred taxes in our consolidated financial
statements. We are not required to pay federal and state
corporate income taxes until the revocation of our
subchapter S corporation status. The statements of
operations data do not include a pro forma adjustment for the
income taxes, calculated in accordance with SFAS No. 109,
Accounting for Income Taxes, that would have been
recorded if we were a subchapter C corporation, because we
would have provided a full valuation allowance on our net
deferred tax assets and thus no income tax provision would have
been recorded.
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with the consolidated financial statements and
related notes included elsewhere in this prospectus. This
discussion contains forward-looking statements reflecting our
current expectations that involve risks and uncertainties.
Actual results and the timing of events may differ materially
from those contained in these forward-looking statements due to
a number of factors, including those discussed in the section
entitled “Risk Factors” and elsewhere in this
prospectus.
Overview
We are a leading provider of services that enable individuals
and businesses to establish, maintain and evolve an online
presence. We derive our revenue primarily from domain name
registration, website hosting and on-demand and other services.
We are the world’s largest domain name registrar, with
approximately 14.6 million domain names under management as
of June 30, 2006, and North America’s largest shared
website hosting provider. We target the individual and small
business markets by seeking to provide a “one-stop
shop” for establishing and maintaining an online presence.
Our domain name registration services act as a gateway product
for our website hosting, on-demand and other services. We
increased total revenue from $4.3 million in 2001 to
$139.8 million in 2005.
Our company was founded in January 1997 as Jomax Technologies by
Bob Parsons, our chairman, chief executive officer and, prior to
this offering, sole stockholder. In 1998, we introduced our
first software application, which allowed customers to create
their own websites, and started offering shared website hosting
services. In 2000, we became an accredited domain name registrar
and began to offer domain name registration services. Since
2001, we have introduced many additional services, including
email, ecommerce tools, website analytics, SSL certificates and
on-demand website creation services, among others. We have
operated as a subchapter S corporation since inception, but
in connection with this offering we are converting Go Daddy into
a subchapter C corporation.
Our business model is characterized by non-refundable, up-front
payments, which lead to recurring revenue and positive operating
cash flow. We currently offer over 30 value-oriented services,
which can be purchased independently or as bundled suites
targeted to meet the specific needs of our customers. We offer
our services through our websites and our customer care center.
We also offer our services through our wholly-owned subsidiary,
Wild West Domains, which manages over 20,000 resellers of our
services.
Key Business Metrics
We monitor a number of key business metrics to help forecast
growth, establish budgets and measure the effectiveness of our
marketing efforts and operational strategies. These metrics
include:
Operating Cash Flow. Our goal is to generate long-term,
sustainable growth in operating cash flow. Customers register
domain names and purchase most of our other services by entering
into contracts that are paid up front, but for which we
typically recognize the associated revenue ratably over the
contractual term. Similarly, we pay an up-front fee to the
relevant registry for each domain name registration and we
recognize this expense ratably over the term of the domain name
registration contract. Because of our revenue and cost
recognition policies, changes in sales volume of our services
have an immediate impact on our operating cash flow, while the
revenue impact is typically distributed across several periods.
In addition, operating expenses, other than cost of revenue, are
typically expensed in the period in which they occurred. We
therefore closely monitor operating cash flow as an indicator of
our performance in a given period and of our ability to fund
future growth. If there is an upturn or downturn in our
conversion rate of website visitors, average order size or
renewal rates — some of the other key business metrics
we track — then we would expect our operating cash
flow to rise or fall correspondingly. Our operating cash flow
was $7.7 million in 2003, $15.5 million in 2004,
$30.6 million in 2005 and $9.7 million in the first
quarter of 2006.
Deferred Revenue. Because customers pay us for
substantially all of our services in advance of our recognizing
the related revenue, we typically have a significant deferred
revenue balance on our balance sheet. As we provide services
during the term of a customer contract, the deferred revenue
balance associated with that contract decreases on a ratable
basis. Accordingly, deferred revenue provides a measure of
predictability to our future revenue and cost of revenue. Our
deferred revenue balance at March 31, 2006 was
$156.2 million, of which $105.8 million was considered
short-term because it would be recognized within one year. Of
the amount of deferred revenue recorded at March 31, 2006,
the amount expected to be recognized as revenue in future
periods is as follows (in thousands):
Conversion Rate. Domain name registrations are the
primary driver of our overall business. Accordingly, we closely
monitor our conversion rate, which we measure as the ratio of
domain names registered through our websites and our customer
care center to the number of visits to our websites during the
same period. This metric provides insight into the effectiveness
of our websites, from which we derive a majority of total
revenue. Because we can measure conversion rate on a real-time
basis, we can quickly identify positive and negative changes in
customer behavior on our websites and respond to those changes
in a timely manner.
Total Number of Orders and Average Order Size. A key
component of our business model is offering customers other
services in addition to our domain name registration services.
We closely monitor total number of orders and average order size
as indicators of the frequency with which website hosting and
other services are purchased together with our core domain name
registration services. We focus on total number of orders and
average order size by point of purchase, including our website,
customer care center and automatic billing, and by type of
customer, including new and repeat customers. We have found that
customers typically place multiple additional orders within the
first year after their initial purchases from us. Our total
number of orders across all points of purchase and for all types
of customers was approximately 2.9 million in 2003,
approximately 5.1 million in 2004, approximately
7.7 million in 2005 and approximately 2.7 million in
the first quarter of 2006, and our average order size was $20.14
in 2003, $21.23 in 2004, $26.81 in 2005 and $29.37 in the first
quarter of 2006.
Renewal Rates. We closely monitor renewal rates for our
services and, in particular, the renewal rate for domain name
registration services, as these services comprise a majority of
total revenue. Many of our customers use our automatic renewal
option for their services. Our on-demand services are typically
purchased by customers who have purchased domain name
registration services from us. As a result, a change in the
renewal rate for expiring domain name registrations is often a
leading indicator of similar changes in revenue from our other
on-demand services. Our customer renewal rate for expiring
domain name registrations was approximately 61% in 2003, 62% in
2004, 62% in 2005 and 63% in the first quarter of 2006.
Sources of Revenue
We derive substantially all of our revenue from the sale of
domain name registration, website hosting and on-demand and
other services. A significant portion of total revenue comes
from customers purchasing bundled suites of multiple services.
As a result, we must allocate the total revenue recognized to
the different types of services that are bundled. Consequently,
revenue in each of the three categories below includes
revenue from the sale of stand-alone services as well as revenue
allocated from sales of bundled services. We sell our services
primarily through direct sales and, to a lesser extent, through
our network of resellers, which accounted for approximately 14%
total revenue in 2005 and 13% of total revenue in the first
quarter of 2006. No single customer accounted for more than 5%
of total revenue in 2003, 2004, 2005 or the first quarter of
2006.
Domain Name Registration. Domain name registration
revenue consists of domain name registrations, renewals and
transfers, domain name privacy, domain name application fees,
domain name back-orders and ICANN fee surcharges. We derived 60%
of total revenue in 2005 and 56% of total revenue in the first
quarter of 2006 from the sale of domain name registration
services. Our domain name registration contracts have terms of
between one and ten years, with a majority having a one-year
term. We currently sell our standard domain name registration
services for the .com TLD, together with basic
advertising-supported website hosting, free blog service and a
single email account, for $8.95 per year for a one-year
term. We offer discounts to purchasers of multiple domain names,
multi-year contracts and larger multi-service bundles. We defer
domain name registration revenue at the time of registration and
recognize it on a daily basis over the term of the contract.
We expect our domain name registration revenue to increase in
absolute dollars, but to continue to decrease as a percentage of
total revenue in future periods as we expect that our on-demand
services and other revenue will continue to increase at a more
rapid rate.
Website Hosting. We generate website hosting revenue
through the sale of website hosting services. Customers most
frequently purchase website hosting on an annual basis, but it
is also available on a monthly basis or for longer periods. The
fees we charge for website hosting services differ based on the
type of hosting plan purchased and the amount of data storage,
bandwidth and other services included. Our current hosting plan
pricing starts at $3.99 per month for shared hosting,
$34.99 per month for virtual dedicated hosting, and
$88.99 per month for dedicated hosting. Website hosting
fees are generally paid up front, but we defer the associated
revenue and recognize it on a daily basis over the term of the
contract.
We expect that our website hosting revenue will increase in
absolute dollars, but will not increase or decrease materially
as a percentage of total revenue in future periods.
On-Demand Services and Other Revenue. Our on-demand
services currently include our online shopping cart, our website
building service, email accounts, our search engine optimization
service, our email marketing service, and our fax thru email
service. We generally sell our on-demand services on either an
annual or a monthly basis, depending on the service. We defer
revenue from on-demand services and recognize it on a daily
basis over the term of the contract.
Our other revenue sources include SSL certificates for secure
online transacting, domain name appraisal and auction services,
enrollment fees paid to us by our resellers and advertising on
“parked pages.” Parked pages are domain names
registered with us that do not yet contain an active website. We
recognize revenue from these sources, other than enrollment
fees, immediately upon completion of the service, ratably over
the term of the service contract or, in the case of advertising,
on a per-click basis.
We anticipate that our on-demand services and other revenue will
continue to increase in absolute dollars and as a percentage of
total revenue in future periods as we continue to sell
additional on-demand services to our customer base, to develop
and offer new services and to increase our advertising revenue
from parked pages.
Costs and Expenses
Cost of Revenue. Cost of revenue consists principally of
domain name registry fees paid by us to the TLD registries and
ICANN and, to a lesser extent, costs associated with computer
hosting equipment, data center expenses related to our website
hosting services, payment card fees and payments made to
resellers. Cost of revenue does not include depreciation and
amortization expenses. Our cost of revenue for domain name
registrations differs depending on the TLD. We currently pay
domain name registry fees of $6.00 per year for each .com,
..org and .us domain name registration, $4.25 per year for
each .net domain name
registration, $5.30 per year for each .biz domain name
registration, and $5.75 per year for each .info domain name
registration. Approximately 73% of the domain names we had under
management as of May 31, 2006 were in the .com TLD. We also
pay a fee to ICANN of $0.25 per year for each domain name
registered in TLDs administered by ICANN. Registry and ICANN
fees represented approximately 82% of our total cost of revenue
in 2005 and 79% of our total cost of revenue in the first
quarter of 2006. We pay these fees in full at the time a
customer registers a domain name through us. We capitalize these
fees, include them on our balance sheet as prepaid domain name
registry fees and amortize them to cost of revenue over the term
of the related contract. Excluding the payment of registry and
ICANN fees, our costs to maintain a domain name registration are
negligible.
We expect that, as our domain name registration revenue
increases in absolute dollars in future periods, the dollar
amount of our cost of revenue will increase correspondingly. We
expect that our cost of revenue as a percentage of total revenue
will be adversely impacted if the U.S. Department of
Commerce approves the proposed new registry agreement between
ICANN and VeriSign relating to the management of the .com TLD.
This agreement would allow VeriSign to increase the fee it
charges registrars for each .com domain registration by 7%
annually in four of the six years through 2012, and potentially
beyond that date. We expect that domain name registry fees
relating to other TLDs, such as the .net TLD, may also increase
in future periods as a result of the renewal of agreements with
ICANN.
Our website hosting revenue and on-demand services and other
revenue generate substantially higher margins than our domain
name registration revenue and, as a result, our cost of revenue
as a percentage of total revenue depends on the mix of domain
name registration revenue and other types of revenue. We expect
our cost of revenue as a percentage of total revenue to decrease
in the future as on-demand services and other revenue becomes a
greater percentage of total revenue.
Research and Development. Research and development
expenses consist primarily of salaries and related expenses for
personnel involved in developing new services and maintaining
and enhancing our existing services. We expect research and
development expenses to increase in absolute dollars in the
future as we continue to invest additional resources to develop
new services and enhance our existing services.
Marketing and Advertising. Marketing and advertising
expenses consist primarily of online and offline advertising
costs and marketing personnel salaries and related expenses. In
2003 and 2004, advertising expenses primarily related to online
search engine advertising. In 2005 and in the first quarter of
2006, advertising expenses consisted of both online and offline
advertising, including a commercial in the 2005 Super Bowl and
subsequent cable television advertising. We expect marketing and
advertising expenses to fluctuate both in absolute dollars and
as a percentage of total revenue in the future depending on the
size and scope of our future marketing and advertising
campaigns. As a result of the expenses we incurred in connection
with our 2006 Super Bowl advertising campaign, we expect
marketing and advertising expenses to be higher in 2006 than in
2005. Should we choose to run television advertisements in
connection with future Super Bowls, we expect our marketing and
advertising expenses to increase significantly in the first
quarter of future years on a sequential quarterly basis,
consistent with the increase we experienced from the fourth
quarter of 2005 to the first quarter of 2006. In addition, we
expect our marketing and advertising expenses would increase if
we decide to expand our international presence, as we may in
such an event increase our marketing budget to grow our
international customer base.
Selling, General and Administrative. Selling, general and
administrative expenses consist primarily of salaries and
related expenses for personnel performing customer care and
support, executive, accounting, legal and information technology
functions, professional fees, rent expense, internal-use
software licenses, overhead and other corporate expenses. We
expect selling, general and administrative expenses to increase
in absolute dollars in the future as a result of further
investments in our customer care center, increased salary and
related expenses associated with increased headcount in our
finance and legal departments, increased executive- and
director-level compensation, and higher professional fees and
expenses associated with being a public reporting company. In
addition, we expect our selling, general and administrative
expenses would increase if we decide to expand our international
presence and, in particular, if we decide to establish physical
operations outside of the U.S.
Depreciation and Amortization. Depreciation and
amortization expenses consist of charges relating to the
depreciation and amortization of all of the property and
equipment used in our business. We expect depreciation and
amortization expenses to increase in absolute dollars in future
periods as a result of our purchase of a new data center
facility in 2005, and as we continue to make capital investments
in hardware and other equipment, particularly in support of the
further expansion of our website hosting services.
Share-Based Compensation. Our historical operating
expenses have not included share-based compensation expense
related to stock options issued to employees, since no
outstanding stock options are exercisable prior to the earlier
of a change of control of our company or our common stock being
listed and publicly traded on a U.S. stock exchange. All
outstanding vested stock options will become exercisable
following this offering. Since they are not yet exercisable, the
stock options granted prior to December 31, 2005 are
considered to be variable awards and the measurement date will
occur only when exercisability of the options becomes probable.
At March 31, 2006, the exercisability of our stock options
had not yet been deemed probable and as a result no compensation
expense was recorded. We expect to record a substantial charge
relating to share-based compensation in the quarter in which
this offering occurs and to record smaller charges thereafter as
these stock options vest further. Beginning in the first quarter
of 2006, Statement of Financial Accounting Standards, or
SFAS, No. 123R, requires us to compute the fair value
of stock awards as of the date of grant. The actual amount of
share-based compensation expense we record depends 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 volatility of our stock price over time.
Based on the fair value of our common stock of $13.53 at
March 31, 2006, the amount of unrecognized compensation
expense resulting from our outstanding stock options would be
approximately $76.3 million at March 31, 2006, of
which approximately $67.8 million would be related to
vested stock options. This compensation expense charge, when
taken, would be allocated among research and development
expenses, marketing and advertising expenses, and selling,
general and administrative expenses based on the job function of
the holders of the outstanding stock options. The fair value of
our common stock was determined by our board of directors based
in significant part upon a retrospective valuation analysis
performed by an independent third-party valuation firm, and is
inherently uncertain and highly subjective. The final
measurement date related to stock options granted prior to
January 1, 2006 will be the date on which an initial public
offering occurs. Although it is reasonable to expect that the
completion of the initial public offering will add value to the
shares underlying the stock options because they will have
increased liquidity and marketability, at this time we cannot
estimate the amount of additional value with precision or
certainty.
Based on the fair value of our common stock of $13.53 at
March 31, 2006, the compensation expense charge would have
been allocated as follows (in thousands):
Research and development expenses
$
8,666
Marketing and advertising expenses
24,395
Selling, general and administrative expenses
34,786
$
67,847
Based on an assumed initial public offering price of
$,
the amount of unrecognized compensation expense resulting from
our outstanding stock options would be approximately
$ million,
of which approximately
$ million
would relate to vested stock options. We expect to record this
latter amount as a charge to operations in the third quarter of
2006 and to allocate it as follows (in thousands):
The following table presents our selected consolidated statement
of operations data expressed as a percentage of total revenue
for the periods indicated:
Total revenue increased 89% from $25.9 million in the first
quarter of 2005 to $48.9 million in the first quarter of
2006.
Domain Name Registration. Domain name registration
revenue increased 65% from $16.5 million in the first
quarter of 2005 to $27.2 million in the first quarter of
2006. Domain name registration revenue declined from 64% of
total revenue in the first quarter of 2005 to 56% of total
revenue in the first quarter of 2006. This increase in absolute
dollars was attributable primarily to approximately
7.4 million new domain name registrations in the twelve
months ended March 31, 2006 that resulted from higher
traffic volume to our website and to increased rates of
conversion of that traffic into domain name registration
customers. The decrease in domain name registration revenue as a
percentage of total revenue from the first quarter of 2005 to
the first quarter of 2006 was due primarily to more rapid growth
in website hosting revenue and on-
demand services and other revenue. We had approximately
8.0 million domain names under management as of
March 31, 2005 and approximately 13.1 million domain
names under management as of March 31, 2006.
Website Hosting.Website hosting revenue increased 114%
from $5.4 million in the first quarter of 2005 to
$11.5 million in the first quarter of 2006. Website hosting
revenue increased from 21% of total revenue in the first quarter
of 2005 to 23% of total revenue in the first quarter of 2006.
This increase in absolute dollars was attributable primarily to
an increased volume of sales of website hosting services,
including sales of website hosting services as part of our
bundled service offerings, consistent with a corresponding
overall increase in new domain name registration customers.
On-Demand Services and Other Revenue. On-demand services
and other revenue increased 158% from $4.0 million in the
first quarter of 2005 to $10.3 million in the first quarter
of 2006. On-demand services and other revenue increased from 15%
of total revenue in the first quarter of 2005 to 21% of total
revenue in the first quarter of 2006. This increase in absolute
dollars was attributable primarily to an increase in new
customers purchasing domain name registrations and website
hosting services from us who also purchased on-demand and other
services. To a lesser extent, this increase was due to
$1.6 million from our delivery of third-party
advertisements on “parked pages,” which we initiated
in the second half of 2005.
Cost of revenue increased 76% from $14.1 million in the
first quarter of 2005 to $24.8 million in the first quarter
of 2006. Cost of revenue comprised 55% of total revenue in the
first quarter of 2005 and 51% of total revenue in the first
quarter of 2006. This increase in cost of revenue in absolute
dollars was due primarily to an increase of $8.0 million in
fees paid to registries and ICANN as a result of increases in
the volume of domain name registrations sold and renewed. To a
lesser extent, this increase was due to a $1.0 million
increase in payment card fees resulting from the increase in
overall sales volume, a $0.7 million increase in data
center expenses associated with the overall increase in website
hosting sales volume and a $0.8 million increase in amounts
paid to resellers resulting from increased reseller sales
volume. The decrease in cost of revenue as a percentage of total
revenue was attributable to more rapid growth in website hosting
revenue and on-demand services and other revenue as compared
with domain name registration revenue, which has a relatively
higher cost of revenue.
Research and development expenses increased 45% from
$2.4 million in the first quarter of 2005 to
$3.4 million in the first quarter of 2006. Research and
development expenses in absolute dollars comprised 9% of total
revenue in the first quarter of 2005 and 7% of total revenue in
the first quarter of 2006. This increase in research and
development expenses was due primarily to an increase in
employee headcount from 95 employees as of March 31, 2005
to 116 employees as of March 31, 2006 and related costs.
Marketing and advertising expenses increased 86% from
$5.5 million in the first quarter of 2005 to
$10.2 million in the first quarter of 2006. Marketing and
advertising expenses comprised 21% of total revenue in the first
quarter of each of 2005 and 2006. This increase in marketing and
advertising expenses in absolute dollars was due primarily to a
$3.5 million increase in our television advertising during
the NFL Playoff games and the Super Bowl in 2006. To a lesser
extent, this increase was attributable to a $1.0 million
increase in spending on online advertisements, primarily
comprised of keywords purchased on major search engines, and to
increased marketing headcount and related costs.
Selling, general and administrative expenses increased 79% from
$10.2 million in the first quarter of 2005 to
$18.2 million in the first quarter of 2006. Selling,
general and administrative expenses comprised 39% of total
revenue in the first quarter of 2005 and 37% of total revenue in
the first quarter of 2006. This increase in selling, general and
administrative expenses in absolute dollars was due primarily to
a $6.6 million increase in salaries and related expenses
for newly hired personnel in our customer care center and other
areas of our business. To a lesser extent, this increase was due
to an increase of $0.9 million in non-capitalizable
equipment and software expense and an increase of
$0.3 million in rent expense associated with two new
facilities and expansions of our two other facilities.
Depreciation and amortization expenses increased 129% from
$1.4 million in the first quarter of 2005 to
$3.2 million in the first quarter of 2006. Depreciation and
amortization expenses comprised 5% of total revenue in the first
quarter of 2005 and 7% of total revenue in the first quarter of
2006. This increase in depreciation and amortization expenses in
absolute dollars was due primarily to a $1.6 million
increase in depreciation expense relating to computer hardware
purchases. To a lesser extent, this increase was due to a
$0.2 million increase related to leasehold improvements in
connection with expansion of facilities, including our new data
center.
Interest and Other Income, Net
Interest and other income, net was $2.0 million in the
first quarter of 2005 compared with $1.4 million in the
first quarter of 2006. Interest and other income, net in the
first quarter of 2005 was comprised of $2.0 million
received by us in settlement of a legal dispute involving breach
of contract by a third party, and
in the first quarter of 2006 was comprised primarily of
$1.3 million received by us for a hosting promotion for a
third party. We expect other income from this website hosting
promotion to increase in the second quarter of 2006, and to
decline in future periods thereafter.
Comparison of the Results of Operations for 2003, 2004 and
2005
Total revenue increased 86% from $39.3 million in 2003 to
$73.0 million in 2004 and an additional 92% to
$139.8 million in 2005. Our number of customers under
contract increased from approximately 1.0 million as of
December 31, 2003 to approximately 1.5 million as of
December 31, 2004, and to approximately 2.4 million as
of December 31, 2005. Our average order size across all
points of purchase and for all customers increased from $20.14
in 2003 to $21.23 in 2004 and to $26.81 in 2005.
Domain Name Registration. Domain name registration
revenue increased 79% from $26.8 million in 2003 to
$48.0 million in 2004 and an additional 76% to
$84.5 million in 2005. Domain name registration revenue
declined from 68% of total revenue in 2003, to 66% of total
revenue in 2004 and 60% of total revenue in 2005.
The increase in domain name registration revenue from 2003 to
2005 in absolute dollars was attributable primarily to
approximately 9.8 million new domain name registrations
over the two years ended December 31, 2005 that resulted
from higher traffic volume to our websites and to increased
rates of conversion of that traffic into domain name
registration customers. We believe this increase in traffic
levels was due to overall industry growth and to increased
consumer awareness of our brand. The decrease in domain name
registration revenue as a percentage of total revenue from 2003
to 2005 was due primarily to more rapid growth in on-demand
services and other revenue.
Website Hosting.Website hosting revenue increased 74%
from $8.6 million in 2003 to $14.9 million in 2004 and
an additional 105% to $30.6 million in 2005. Website
hosting revenue comprised 22% of total revenue in 2003, 20% of
total revenue in 2004, and 22% of total revenue in 2005.
The increase in website hosting revenue from 2003 to 2005 in
absolute dollars was attributable primarily to an increased
volume of sales of website hosting services, including sales of
website hosting services as part of our bundled service
offerings, consistent with a corresponding overall increase in
new domain name registration customers. To a lesser extent, this
increase in website hosting revenue was due to an increase in
the number of customers renewing website hosting services
initially purchased in prior periods. In addition, a portion of
the increase from 2004 to 2005 was attributable to our
introduction of dedicated website hosting and virtual dedicated
website hosting services during 2005.
On-Demand Services and Other Revenue. On-demand services
and other revenue increased 156% from $3.9 million in 2003
to $10.0 million in 2004 and an additional 146% to
$24.7 million in 2005. On-demand services and other revenue
represented an increasing percentage of total revenue, growing
from 10% of total revenue in 2003, to 14% of total revenue in
2004, and 18% of total revenue in 2005. The increase in on-
demand services and other revenue as a percentage of total
revenue from 2003 to 2005 was due primarily to more rapid growth
in on-demand services and other revenue than in our other
primary sources of revenue.
The increase in on-demand services and other revenue from 2003
to 2005 in absolute dollars was attributable primarily to an
increase in new customers purchasing domain name registrations
and website hosting services from us who also purchased
on-demand and other services. This increase was also due to the
increasing purchase of additional services by existing customers.
The increase in on-demand services and other revenue from 2003
to 2004 in absolute dollars was also due to a number of other
factors, including $3.4 million from the introduction in
2004 of SSL certificates and various on-demand services such as
Online File Folder, Express Email Marketing, Quick Shopping Cart
and Fax Thru Email, and from increased sales in 2004 resulting
from a full year of revenue from services introduced in 2003,
including Traffic Blazer and Website Tonight.
The increase in on-demand services and other revenue from 2004
to 2005 in absolute dollars was also due to $9.1 million
from a full year of revenue from services we introduced in 2004
and revenue from services introduced in 2005, such as domain
name auctions, and $1.6 million in revenue from our
initiation of the delivery of third-party advertisements on
“parked pages.”
Operating Expenses
Cost of Revenue
Year Ended December 31,
% Change
2003
2004
2005
2003 vs. 2004
2004 vs. 2005
(In thousands)
Cost of revenue
$
19,855
$
38,596
$
70,540
94
%
83
%
Cost of revenue increased 94% from $19.9 million in 2003 to
$38.6 million in 2004 and an additional 83% to
$70.5 million in 2005. Cost of revenue comprised 50% of
total revenue in 2003, 53% of total revenue in 2004 and 50% of
total revenue in 2005.
The increase in cost of revenue from 2003 to 2005 in absolute
dollars was due primarily to a $41.8 million increase in
fees paid to registries and ICANN as a result of increases in
the volume of domain name registrations sold and renewed. To a
lesser extent, this increase was due to a $3.9 million
increase in payment card fees resulting from the increase in
overall sales volume, a $2.4 million increase in data
center expenses associated with the overall increase in website
hosting sales volume, and a $2.1 million increase in
amounts paid to resellers resulting from increased reseller
sales volume. The increase from 2003 to 2004 in cost of revenue
as a percentage of total revenue was due primarily to changes in
our domain name registration pricing in 2004. The decrease in
cost of revenue as a percentage of total revenue from 2004 to
2005 was due primarily to more rapid growth in on-demand
services and other revenue, which has substantially higher
margins than our other sources of revenue.
Research and Development Expenses
Year Ended December 31,
% Change
2003
2004
2005
2003 vs. 2004
2004 vs. 2005
(In thousands)
Research and development
$
3,513
$
5,348
$
9,705
52
%
81
%
Research and development expenses increased 52% from
$3.5 million in 2003 to $5.3 million in 2004 and an
additional 81% to $9.7 million in 2005. Research and
development expenses comprised 9% of total revenue in 2003, 7%
of total revenue in 2004 and 7% of total revenue in 2005.
The increase in research and development expenses from 2003 to
2005 in absolute dollars was attributable primarily to an
increase in employee headcount from 50 employees as of
December 31, 2003 to 106 employees as of December 31,2005 and related costs.
Marketing and advertising expenses increased 102% from
$2.1 million in 2003 to $4.3 million in 2004 and an
additional 255% to $15.2 million in 2005. Marketing and
advertising expenses comprised approximately 5% of total revenue
in 2003, 6% of total revenue in 2004 and 11% of total revenue in
2005.
The increase in marketing and advertising expenses from 2003 to
2004 in absolute dollars was due primarily to $2.1 million
in increased spending on online advertisements, including
keywords purchased on major search engines, email marketing and
email and branded display advertising, and to increased
marketing headcount and related costs.
The increase in marketing and advertising expenses from 2004 to
2005 in absolute dollars was due primarily to a
$7.3 million increase in spending on offline advertising
campaigns including television, radio and print advertising,
with a majority of this amount related to our television
advertising campaign for the 2005 Super Bowl. To a lesser
extent, this increase in marketing and advertising expenses was
attributable to a $2.8 million increase in spending on
online advertisements, primarily comprised of keywords purchased
on major search engines, and to increased marketing headcount
and related costs.
Selling, General and Administrative Expenses
Year Ended December 31,
% Change
2003
2004
2005
2003 vs. 2004
2004 vs. 2005
(In thousands)
Selling, general and administrative
$
13,232
$
25,743
$
50,373
95
%
96
%
Selling, general and administrative expenses increased 95% from
$13.2 million in 2003 to $25.7 million in 2004 and an
additional 96% to $50.4 million in 2005. Selling, general
and administrative expenses comprised 34% of total revenue in
2003, 35% of total revenue in 2004 and 36% of total revenue in
2005.
The increase in selling, general and administrative expenses in
absolute dollars from 2003 to 2004 was attributable primarily to
a $8.8 million increase in salaries and related expenses
for newly hired personnel in our customer care center and other
areas of our business. To a lesser extent, this increase was due
to a $1.0 million increase in non-capitalizable hardware
equipment and software purchases and a $0.7 million
increase in insurance costs.
The increase in selling, general and administrative expenses
from 2004 to 2005 in absolute dollars was due primarily to a
$15.6 million increase in salaries and related expenses for
newly hired personnel in our customer care center and other
areas of our business. To a lesser extent, this increase was due
to a $3.2 million increase in non-capitalizable hardware
equipment and software purchases, a $1.8 million increase
in insurance costs, a $1.6 million increase in corporate
telecommunications costs, a $0.9 million increase in
professional fees associated with audits for payment card
industry compliance, SSL certification compliance and
information technology compliance conducted in preparation for
becoming a public reporting company, and a $0.6 million
increase in rent expense associated with two new facilities and
expansions of our two other principal facilities.
Depreciation and amortization expenses increased 101% from
$1.4 million in 2003 to $2.8 million in 2004 and an
additional 180% to $7.8 million in 2005. Depreciation and
amortization expenses represented 4% of total revenue in 2003,
4% of total revenue in 2004 and 6% of total revenue in 2005.
The increase in depreciation and amortization expenses from 2003
to 2004 in absolute dollars was due primarily to
$7.3 million in additional spending on computer hardware
necessary to accommodate the overall growth in our business. To
a lesser extent, the increase was due to the cost of
infrastructure associated with the opening of one additional
facility, the implementation of a new internal
telecommunications system, and the placement into service of an
SSL root certificate that was purchased in 2003, and which
enabled us to begin the sale of SSL certificates during 2004.
The increase in depreciation and amortization expenses from 2004
to 2005 in absolute dollars was due primarily to
$19.5 million in additional spending on computer hardware
necessary to accommodate the overall growth in our business.
These purchases included additional computer servers required by
growth in our sales of website hosting services, additional
hardware in anticipation of increased traffic levels on our
website resulting from our 2005 Super Bowl television
advertising campaign, and additional hardware associated with
our achieving compliance with new industry requirements for
accepting credit cards.
Interest and Other Income, Net
Interest and other income, net was $54,000 in 2003, compared
with $112,000 in 2004 and $2.3 million in 2005. Interest
and other income, net in 2005 was comprised primarily of
$2.0 million received by us in settlement of a legal
dispute involving breach of contract by a third party.
The following tables set forth selected unaudited consolidated
statement of operations data for each of the fiscal quarters
indicated, as well as the percentage that each line item
represents of total revenue. The information for each of these
quarters has been prepared on the same basis as the audited
consolidated financial statements included elsewhere in this
prospectus and, in the opinion of management, includes all
adjustments necessary for the fair presentation of the results
of operations for these periods. You should read this
information together with the consolidated financial statements
and related notes included elsewhere in this prospectus. These
quarterly operating results are not necessarily indicative of
our operating results for any future period.
Excluding depreciation and amortization, which is shown
separately.
Total revenue and each category of revenue increased
sequentially in each quarter presented. These increases were due
primarily to increases in number of customers and sales of new
service offerings. Historically, we have experienced a
significant increase in revenue from the fourth quarter of one
year to the first quarter of the next year. We believe this is
largely attributable to the increase in consumer purchases of
new personal computers during the holiday season in the fourth
quarter of each year and a resulting desire to establish an
online presence. In the first quarter of 2005, total revenue
increased by 20% from the fourth quarter of 2004. This increase
and the larger than usual increases in total revenue during the
second and third quarters of 2005 were due to a significant
increase in overall traffic levels on our website following our
2005 Super Bowl advertising campaign and its related publicity.
The 274% increase in marketing and advertising expenses from the
fourth quarter of 2004 to the first quarter of 2005, and the
207% increase from the fourth quarter of 2005 to the first
quarter of 2006, in each case reflected increased spending by us
on television advertising during that year’s Super Bowl,
related online advertising and the launch of our offline
national advertising campaign. The continuation of our offline
national advertising campaign resulted in marketing and
advertising expenses in the remaining quarters of 2005 being
significantly higher than marketing and advertising expenses in
the comparable quarters of 2004.
Net cash provided by (used in) financing activities
(605
)
(5,114
)
2,239
(455
)
(633
)
Since our inception, we have funded our operations and met our
capital expenditure requirements primarily from cash flows from
operations. During 2005, we also entered into financing
arrangements in connection with the purchase of a building. We
had cash, cash equivalents and investments of $16.0 million
as of March 31, 2006, and $13.6 million as of
December 31, 2005. In addition, as of March 31, 2006,
we had $5.3 million in registry deposits and
$1.7 million in accounts receivable. Our accounts
receivable consist primarily of amounts due from our credit card
processor related to float from recently completed credit card
transactions. Registry deposits consist of required deposits we
pay to various domain name registries. These deposits fund the
registry fees we must pay as a result of ongoing sales of domain
name registrations to our customers.
Operating Activities. Our financial focus is on
sustaining and increasing growth in operating cash flow. Net
cash provided by operating activities increased 102% from
$7.7 million in 2003 to $15.5 million in 2004 and an
additional 98% to $30.6 million in 2005, despite an
increase in net loss each year. Net cash provided by operating
activities increased from $5.4 million in the first quarter
of 2005 to $9.7 million in the first quarter of 2006, again
despite an increase in net loss. These increases were primarily
due to the fact that we are paid up front for substantially all
of our services, although we typically defer revenue and cost of
revenue and recognize these balances over the term of the
service provided. Meanwhile, as sales have increased, we have
incurred increasing operating expenses, which, other than cost
of revenue, are typically recognized as incurred. Therefore, as
we have increased sales each year from 2003 to 2005, the growth
in our deferred revenue has increased each year, from an
increase of $18.6 million in 2003, to an increase of
$33.9 million in 2004 and an increase of $58.6 million
in 2005, in each case offset by increasing growth in prepaid
domain name registry fees, from an increase of
$11.3 million in 2003, to an increase of $16.8 million
in 2004 and an increase of $23.0 million in 2005. The
growth in net loss over this period has also been partially
mitigated by growth in depreciation and amortization from
$1.4 million in 2003, to $2.8 million in 2004 and
$7.8 million in 2005. Similarly, the growth in sales and
operations from the first quarter of 2005 to the first quarter
of 2006 led to an increase in the quarterly change in deferred
revenue of $8.8 million, partially offset by an increase in
the quarterly change in prepaid domain name registry fees of
$7.0 million, and to an increase in depreciation and
amortization of $1.8 million.
Investing Activities. Net cash used in investing
activities increased 48% from $5.4 million in 2003 to
$8.0 million in 2004 and an additional 251% to
$28.0 million in 2005. Net cash in investing activities
increased 119% from $3.1 million in the first quarter of
2005 to $6.7 million in the first quarter of 2006. The
increase from 2003 to 2004 was due to an increase in purchases
of property and equipment related to our overall growth and in
net purchases of securities available for sale. The increase
from 2004 to 2005 was due primarily to an increase in purchases
of property and equipment from $5.9 million in 2004 to
$28.1 million in 2005. The increase in property and
equipment expenditures from 2004 to 2005 was due primarily to
the purchase of a building for $9.5 million, our efforts to
build redundancy and additional storage capacity in our systems
and software applications, the purchase of infrastructure
associated with our compliance with payment card industry
requirements, and the purchase of additional hardware and
general computer equipment requirements to support our growth.
The increase in investing activities from the first quarter of
2005 to the first quarter of 2006 was due to an increase of
$3.7 million in purchases of property and equipment. Due to
the timing of expenditures relating to the build-out of our new
data center, we expect that our capital
expenditures on property and equipment in the second quarter of
2006 will be approximately $14 million. We do not expect
similar levels of expenditure in later quarters of 2006.
Financing Activities. Net cash provided by (used in)
financing activities was $(0.6) million in 2003,
$(5.1) million in 2004, $2.2 million in 2005 and
$(0.6) million in the first quarter of 2006. We made
distributions to our sole stockholder of $0.6 million in
2003, $5.1 million in 2004, $4.8 million in 2005 and
$0.8 million in the first quarter of 2006. In 2005, we
obtained a $7.1 million loan from a bank to finance the
purchase of a building.
Future Needs. We believe the net proceeds we will receive
from this offering, together with our existing cash, cash
equivalents and investments and any operating cash flow, will be
sufficient to meet our projected operating and capital
expenditure requirements for at least the next 12 months.
However, our ability to generate cash is subject to our
performance, general economic conditions, industry trends and
other factors. To the extent that funds from this offering,
together with existing cash, cash equivalents and investments,
are insufficient to fund our future activities, we may need to
raise additional funds through public or private equity or debt
financing. If additional funds are obtained by issuing equity
securities, substantial dilution to existing stockholders may
result. We may be unable to secure additional funds on terms
favorable to us or at all.
Indebtedness. In October 2005, we obtained a
$7.1 million loan from U.S. Bank to finance the
purchase of a building that we intend to use as a data center.
The loan bears interest at a rate of 2.10% plus one-month LIBOR.
We have entered into an interest rate swap in order to fix the
effective interest rate at 6.98%. In October 2005, we also
entered into a $1.5 million credit facility with
U.S. Bank for the purchase of data center equipment. Any
borrowing under the credit facility would bear interest at the
prime rate announced by U.S. Bank until July 31, 2006
and at the rate of 2.10% plus one-month LIBOR thereafter. As of
March 31, 2006, there were no balances outstanding under
this facility. Under the loan agreement with U.S. Bank, we are
subject to restrictive covenants, including the requirements
that we maintain a ratio of cash flow before debt service to
total fixed charges of at least 2.25 to 1.0 and have a loan
amount no greater than 85% of the value of the property. We have
received a waiver from the bank for failure to comply with the
requirement that we deliver financial statements audited by a
certified public accountant within 120 days after our
fiscal year end. All other covenants have been satisfied to
date. We anticipate repaying all outstanding indebtedness to
U.S. Bank with a portion of the proceeds of this offering.
Interest expense in 2005 was approximately $0.2 million. In
May 2005, we amended one of our lease agreements allowing us to
finance leasehold improvements through the lessor. During the
three months ended March 31, 2006, we recorded
$0.2 million of long-term debt related to this amendment.
These borrowings accrue interest at 8% per year and the
principal and interest payments are required to be made over
48 months.
Off-Balance Sheet Arrangements
We do not have, and have never had, any relationships with
unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes.
Contractual Obligations and Commitments
The following table presents a summary of our contractual
obligations and commitments as of December 31, 2005.
Payments Due by Period
Less than
More than
Total
1 Year
1-3 Years
3-5 Years
5 Years
(In thousands)
Operating lease obligations
$
10,551
$
4,002
$
5,013
$
1,514
$
22
Long-term debt
obligations(1)
9,330
610
1,261
7,459
—
Other contractual commitments
2,473
1,132
1,341
—
—
(1) Includes
aggregate principal payments plus interest.
Operating lease obligations consisted of obligations under
leases for office space and vehicles. Long-term debt obligations
consisted of indebtedness to U.S. Bank in connection with
our purchase of a new data center facility. Other contractual
commitments consisted of payments due under equipment
maintenance agreements. We intend to use a portion of the
proceeds from this offering to repay in full all outstanding
long-term debt and accrued interest. The expected timing of
payments included in this table is estimated based on current
information. Timing of payments and actual amounts paid may be
different depending on the timing of receipts of goods or
services and changes to agreed upon amounts.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with GAAP.
The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue, costs and expenses, and related
disclosures. We evaluate our estimates and assumptions on an
ongoing basis. Our estimates are based on historical experience
and various other assumptions that we believe to be reasonable
under the circumstances. Our significant accounting policies
that require significant estimates and judgments, which we call
our critical accounting policies, are as follows:
Revenue Recognition. We recognize revenue in accordance
with applicable revenue recognition guidance and
interpretations, including the requirements of Emerging Issues
Task Force, or EITF, Issue
No. 99-19
Reporting Revenue Gross as a Principal versus Net as an
Agent, EITF
No. 00-21,
Revenue Arrangements with Multiple Deliverables,
Statement of Position 97-2, Software Revenue Recognition,
and SEC Staff Accounting Bulletin No. 104,
Revenue Recognition.
We record revenue when all four of the following criteria are
met: (1) there is persuasive evidence that an arrangement
exists; (2) delivery of the services has occurred;
(3) the selling price is fixed or determinable, and
(4) collectibility is reasonably assured. We record cash
received in advance of revenue recognition as deferred revenue.
Domain name registration contracts we enter into with our
customers have terms ranging from one to ten years. Except for
one large enterprise customer with which we have negotiated an
alternative arrangement, all of our customers pay for domain
name registrations in full at the time of registration. Domain
name registration fees are non-refundable, and we record them as
deferred revenue in our consolidated balance sheets. We then
recognize revenue ratably on a daily basis over the term of the
registration. We record website hosting and on-demand services
fees as deferred revenue and recognize revenue ratably on a
daily basis as the services are provided.
Our agreements do not contain general rights of return. We
reserve for payment card chargebacks and certain other refunds
based on our historical experience. We record reserves as a
reduction to revenue.
We evaluate revenue arrangements with multiple deliverables,
including the sale of our bundled suites of multiple services,
to determine if the deliverable items can be divided into more
than one unit of accounting. An item is generally considered a
separate unit of accounting if all of the following criteria are
met:
•
the delivered item has value to the customer on a stand-alone
basis;
•
there is objective and reliable evidence of the fair value of
the undelivered item; and
•
if the arrangement includes a general right of return relative
to the delivered item, delivery or performance of the
undelivered item is considered probable and substantially in our
control.
Items that do not meet these criteria are combined into a single
unit of accounting. If there is objective and reliable evidence
of fair value for all units of accounting, we allocate the
arrangement consideration to the separate units of accounting
based on their relative fair values. We record revenue from
these units in the appropriate revenue line item. In cases where
the arrangement consideration allocated to an individual unit is
less than our cost of the unit, we immediately record a loss for
the amount by which the cost exceeds the revenue allocated to
the unit. In the event objective and reliable evidence of the
fair value(s) of the
undelivered item(s) did not exist, we would defer all revenue
for the arrangement and recognize it over the period until the
last item is delivered.
Pursuant to EITF
No. 99-19, we
record revenue associated with sales through our network of
resellers on a gross basis, and expense the commission amount
paid to our resellers as a cost of revenue. We record enrollment
fees paid by the resellers over the one-year term of the
reseller contract.
Taxes. As a subchapter S corporation for all periods
from inception through March 31, 2006, we were not subject
to federal income taxes directly. Rather, our stockholder was
subject to federal income taxation based on our net taxable
income or loss. Upon our reincorporation in Delaware as a
subchapter C corporation, we will need to make estimates and
judgments in determining our income tax expense and in
calculating our tax assets and liabilities. This approach will
require the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary
differences between the financial statement carrying amounts and
the tax bases of assets and liabilities. We will record a
valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. Judgment
will be required to determine whether an increase or decrease of
the valuation allowance is warranted. We have had substantial
tax losses over the years and a net loss in every year since
inception. Therefore, we expect to record a full valuation
allowance against our tax assets.
Our corporate tax rate will be a combination of the tax rates of
the jurisdictions where we conduct business. We are an
Arizona-based company and do not currently have operations in
foreign jurisdictions.
We are responsible for charging end customers certain taxes in
numerous international jurisdictions. In the ordinary course of
business, there are many transactions and calculations where the
ultimate tax determination is uncertain. In the future, we may
come under audit, which could result in changes to our tax
estimates. We believe that we maintain adequate tax reserves to
offset the potential liabilities that may arise upon audit.
Although we believe our tax estimates and associated reserves
are reasonable, the final determinations of tax audits and any
related litigation could be materially different than the
amounts that we have reserved for tax contingencies. To the
extent that these estimates ultimately prove to be inaccurate,
the associated reserves would be adjusted, resulting in our
recording a benefit or expense in the period in which a final
determination is made.
Share-Based Compensation. Prior to January 1, 2006,
we accounted for employee stock options pursuant to Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, or APB 25, and related interpretations,
and adopted the disclosure-only alternative of
SFAS No. 123, Accounting for Stock-Based
Compensation, and SFAS No. 148, Accounting for
Stock-Based Compensation — Transition and
Disclosure. Stock options granted prior to December 31,2005 have exercise prices equal to the value of the underlying
stock as determined by our board of directors on the date the
stock option was granted. Our board of directors determined the
value of the underlying stock by considering a number of
factors, including operating cash flows, the risks we faced at
the time and the lack of liquidity of our common stock. The
stock options vest 25% per year beginning one year after the
grant date, and expire ten years from the date of grant;
however, the options are not exercisable prior to the sale of
our company or our common stock being listed and publicly traded
on a U.S. stock exchange. As a result of the lack of
exercisability, the stock options outstanding at January 1,2006, are considered to be variable awards and the measurement
date will only occur when exercise of the stock options becomes
probable.
As of January 1, 2006, we have adopted
SFAS No. 123R. We are required to adopt
SFAS No. 123R under the prospective method, in which
nonpublic entities that previously applied
SFAS No. 123 using the minimum-value method, whether
for financial statement recognition or pro forma disclosure
purposes, would continue to account for unvested stock options
outstanding at the date of adoption of SFAS No. 123R
in the same manner as they had been accounted for prior to the
adoption of SFAS No. 123R. That is, since we have been
accounting for stock options using the intrinsic-value method
under APB 25, we will continue to apply APB 25 in future periods
to stock options outstanding at January 1, 2006.
SFAS No. 123R requires measurement of all employee
share-based compensation awards using a fair-value method. The
grant date fair value was determined using the
Black-Scholes-Merton pricing model and a single option award
approach. The weighted-average expected term for stock options
granted was calculated using the simplified method in
accordance with the provisions of Staff Accounting
Bulletin No. 107, Share-Based Payment. The
simplified method defines the expected term as the average of
the contractual term and the vesting period of the stock option.
We have estimated the volatility and forfeiture rates used as
inputs to the model based on an analysis of the most similar
public companies for which we have data. We have used judgment
in selecting these companies, as well as in evaluating the
available historical volatility and forfeiture data for these
companies. We will continue to use judgment in evaluating the
expected term, volatility and forfeiture rate related to our own
stock-based awards on a prospective basis, and in incorporating
these factors into the model.
In connection with the preparation of the consolidated financial
statements as of and for the three months ended March 31,2006 and our adoption of SFAS No. 123R, we have
reassessed the fair value of our employee stock options granted
since January 1, 2006. Given the absence of an active
market for our common stock, our board of directors, the members
of which we believe had extensive business, finance and venture
capital experience, considered the guidance provided in American
Institute of Certified Public Accountants Technical Practice
Aid, Valuation of Privately-Held Company Equity Securities
Issued as Compensation. The board of directors based its
reassessment in significant part on the results of the valuation
performed by an independent, third-party valuation firm.
We valued the company using a weighted combination of the income
and market approaches (specifically, the guideline company and
similar transactions methods), to estimate the aggregate
enterprise value at the valuation dates. The income approach
involves applying appropriate risk-adjusted discount rates to
estimated debt-free cash flows, based on forecasted revenues and
costs. The projections used in connection with this valuation
were based on our expected operating performance outlook over
the forecast period. The market approach uses direct comparisons
to other enterprises and their equity securities to estimate the
fair value of the common shares of privately issued securities.
This approach relies on and uses data generated by actual market
transactions and bases the fair value measurement on what other
similar enterprises or comparable transactions indicate the
value to be. The companies used for comparison under the market
approach were selected based on a number of factors, including,
but not limited to, similarity of their industry, financial
risk, company size and number of employees. Based on the results
of the income and market approaches, we applied an 80% weighting
to the income approach and a 20% weighting to the market
approach. We weighted the income approach more heavily because
this approach relies on data specific to the entity being valued
and tends to be more reliable since we provide our own
assumptions. In addition, because with the income approach we
are able to closely predict revenues, cash flows and other
operating performance criteria, the income approach is typically
more reliable than the market comparables method which is based
on publicly available information from entities less similar to
us due to industry, financial risk, and company size. In the
end, the income approach resulted in a greater enterprise value
and we applied a greater weighting to this approach.
In addition, our board of directors assessed the reasonableness
of the changes in the estimated fair value of our common stock
for the period from December 31, 2005 to March 31,2006. In evaluating the increase in fair value of our common
stock from December 31, 2005 to March 31, 2006, we
considered the following contributing factors: (i) overall
growth in the business during the first quarter of 2006,
measured by growth of revenues of approximately 9% and the
increase in our domain names under management and customers
under contract of approximately 15% and 13%, respectively; and
(ii) the selection of our managing underwriting syndicate
and the occurrence of an all-hands meeting on March 21,2006 to our initial public offering. In addition, our board of
directors assumed a sequential increase in estimated enterprise
value subsequent to March 31, 2006, consistent with the
sequential revenue growth, and as a result a sequential increase
in fair value of our common stock for all options granted
subsequent to March 31, 2006.
Determining the fair value of our common stock required our
board of directors and management to make complex and subjective
judgments, assumptions and estimates, which involved inherent
uncertainty. Had our board of directors and management used
different assumptions and estimates, the resulting fair value of
our common stock could have been materially different.
At March 31, 2006, the exercisability of our stock options
had not yet been deemed probable and as a result no compensation
expense has been recorded. We will record a substantial
compensation expense charge
in connection with these grants in the quarter in which this
offering occurs, currently anticipated to be the third quarter
of 2006. Although it is reasonable to expect that the completion
of the initial public offering will add value to the shares
underlying the stock options because they will have increased
liquidity and marketability, at this time we cannot estimate the
amount of additional value with precision or certainty.
Based on the fair value of our common stock of $13.53 at
March 31, 2006, the amount of unrecognized compensation
expense resulting from our outstanding stock options would be
approximately $76.3 million at March 31, 2006, of
which approximately $67.8 million would be related to
vested stock options. This compensation expense charge, when
taken, would be allocated among research and development
expenses, marketing and advertising expenses, and selling,
general and administrative expenses based on the job function of
the holders of the outstanding stock options. The compensation
expense charge would be allocated as follows (in thousands):
Research and development expenses
$
8,666
Marketing and advertising expenses
24,395
Selling, general and administrative expenses
34,786
$
67,847
Based on an assumed initial public offering price of
$ ,
the amount of unrecognized compensation expense resulting from
our outstanding stock options would be approximately
$ million,
of which approximately
$ million
would relate to vested stock options. We expect to record this
latter amount as a charge to operations in the third quarter of
2006 and to allocate it as follows (in thousands):
Research and development expenses
$
Marketing and advertising expenses
Selling, general and administrative expenses
$
In May 2006, we granted options to purchase approximately
4,074,000 shares of our common stock to employees and
non-employee directors under the 2006 Equity Incentive Plan, at
an exercise price of $14.52, the deemed fair-value of our shares
of common stock as determined by our board of directors based in
significant part upon a valuation analysis performed by an
independent, third-party valuation firm. The weighted average
fair value of these options at the time of grant was $10.47.
These options vest over a period of four years, with 25% of the
options vesting on the one-year anniversary of the grant date.
Options to purchase approximately 1,144,000 shares of our
common stock were granted to our four executive officers,
options to purchase approximately 200,000 shares of our
common stock were granted to our non-employee directors and
options to purchase approximately 2,730,000 shares of our
common stock were granted to other employees. These options do
not contain restrictions on exercisability; however, these
option grants expire if an initial public offering or
liquidation event does not occur before a specified date prior
to the one-year anniversary of the grant date. As such, no
expense will be recognized until an offering or liquidation
event occurs. Based on the weighted average fair value of these
options at date of grant, assuming an expected forfeiture rate
of 4%, a compensation expense charge related to these options
would be allocated as follows (in thousands):
Research and development expenses
$
5,079
Marketing and advertising expenses
6,981
Selling, general and administrative expenses
28,884
$
40,944
If an initial public offering or other liquidation event occurs
in 2006, the expected compensation expense charge in each year
related to the 2006 Equity Incentive Plan option grants would be
as follows (in thousands): 2006 — $13,459;
2007 — $15,019; 2008 — $7,887;
2009 — $3,749; and 2010 — $830.
Contingencies. We record contingent liabilities resulting
from asserted and unasserted claims against us, when it is
probable that a liability has been incurred and the amount of
the loss is reasonably estimable. We disclose contingent
liabilities, when there is a reasonable possibility that the
ultimate loss will exceed the recorded liability. Estimating
probable losses requires analysis of multiple factors, in some
cases including judgments about the potential actions of
third-party claimants and courts. Therefore, actual losses in any
future period are inherently uncertain. We currently are
involved in legal proceedings in the normal course of business.
We do not believe these proceedings will have a material adverse
effect on our consolidated results of operations or financial
position.
Quantitative and Qualitative Disclosures about Market Risk
Our investment portfolio, consisting of fixed income securities,
was $3.0 million as of March 31, 2006. These
securities, like all fixed income instruments, are subject to
interest rate risk and will decline in value if market interest
rates increase. If market rates were to increase immediately and
uniformly by 10% from the levels of March 31, 2006, the
decline in the fair value of our investment portfolio would not
be material given that our investments typically have interest
rate reset features that regularly adjust to current market
rates. Additionally, we have the ability to hold our fixed
income investments until maturity and, therefore, we would not
expect to recognize any material adverse impact in income or
cash flows.
At March 31, 2006, we had $7.2 million in debt
obligations. Changes in interest rates do not affect interest
expense incurred on our long-term debt as we have fixed the
interest rate using an interest rate swap. At present, we have
no borrowings under our line of credit facility.
We do not purchase or hold any derivative financial instruments
for the purpose of speculation or arbitrage.
We have no operations outside of the U.S. and, accordingly, we
are not susceptible to significant risk from changes in foreign
currencies.
During the normal course of business we could be subjected to a
variety of market risks, as we discussed above. We continuously
assess these risks and have established policies and procedures
to protect against the adverse effects of these and other
potential exposures. Although we do not anticipate any material
losses in these risk areas, no assurance can be made that
material losses will not be incurred in these areas in the
future.
Recent Accounting Pronouncements
In March 2005, the SEC issued Staff Accounting Bulletin, or SAB,
No. 107,
Share-Based
Payment. SAB No. 107 provides guidance regarding
the interaction between SFAS No. 123R and certain SEC rules and
regulations, including guidance related to valuation methods,
classification of compensation expense,
non-GAAP financial
measures, accounting for income tax effects of
share-based payment
arrangements, disclosures in management’s discussion and
analysis of financial condition and results of operations
subsequent to adoption of SFAS No. 123R and
modifications of options prior to the adoption of
SFAS No. 123R.
In May 2005, the Financial Accounting Standards Board, or FASB,
issued SFAS No. 154, Accounting Changes and Error
Corrections — A Replacement of APB Opinion No. 20
and FASB Statement No. 3. SFAS No. 154
requires the retrospective application to prior periods’
financial statements of changes in accounting principle, unless
it is impractical to determine either the period-specific
effects or the cumulative effect of the accounting change.
SFAS No. 154 also requires that a change in
depreciation, amortization or depletion method for long-lived
non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle.
SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005 and we will adopt this provision, as
applicable, during 2006.
In November 2005, the FASB issued Staff Position FAS 115-1
and FAS 124-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments, or
FAS 115-1, which
provides guidance on determining when investments in certain
debt and equity securities are considered impaired, determining
whether that impairment is other than temporary, and on
measuring such impairment loss. FSP 115-1 also includes
accounting considerations subsequent to the recognition of
other-than temporary impairment and requires certain disclosures
about unrealized losses that have not been recognized as
other-than-temporary impairments.
FSP 115-1 is
required to be applied to reporting periods beginning after
December 15, 2005. We adopted
FSP 115-1 on
January 1, 2006 and, at March 31, 2006, we evaluated
our investment portfolio and noted unrealized losses of
$0.1 million were due to fluctuations in interest rates. We
do not believe any of the unrealized losses represents an
other-than-temporary impairment based on our evaluation of
available evidence as of March 31, 2006. Our intent is to
hold these investments to such time as these assets are no
longer impaired. For those investments not scheduled to mature
until after March 31, 2007, such recovery is not
anticipated to occur in the next year, and these investments
have been classified as long-term investments. At March 31,2006, $1.9 million of available-for-sale securities were
classified as long-term investments.
Go Daddy is a leading provider of services that enable
individuals and businesses to establish, maintain and evolve an
online presence. We provide a variety of domain name
registration and website hosting services as well as a broad
array of on-demand and other services. We are the world’s
largest domain name registrar, with approximately
14.6 million domain names under management as of
June 30, 2006, and North America’s largest shared
website hosting provider. During the final six months of 2005,
we registered approximately
one-third of all domain
names registered in the top five gTLDs — .com, .net,
..org, .biz and .info. Our domain name registration services act
as a gateway product for our other services, which include
website hosting and creation tools, ecommerce and security
solutions and productivity and marketing tools, and we market
these other services both at the initial time of purchase and
throughout the customer lifecycle. Our services can be purchased
independently or as bundled suites of offerings targeted to meet
the specific needs of our customers. We have developed
substantially all of our service offerings internally and
believe our suite of services is
best-of-breed in the
industry in terms of comprehensiveness, performance,
functionality and ease of use. We seek to strengthen customer
relationships by providing what we believe are the highest
levels of customer care and support in the industry. We generate
revenue from sales made directly to customers through our
primary website, www.GoDaddy.com, and our customer care
center, as well as indirectly through our large network of
resellers.
Industry Overview
The Growth of the Internet
The Internet is a global medium for information, communication
and commerce and an integral part of everyday life for hundreds
of millions of people worldwide. According to Euromonitor
International, an industry research firm, the number of Internet
users worldwide was an estimated 1.2 billion in 2005 and is
estimated to grow to approximately 2.2 billion in 2010,
representing an annual growth rate of approximately 13%. Due to
a number of factors, including the rapid rate of adoption of
broadband services, these Internet users are also spending more
time online. According to the U.S. Census Bureau, the
average amount of time spent online by a person in the U.S.
nearly doubled between 2000 and 2005. This growth in Internet
users and usage is being driven by the ever-increasing variety
of content, commerce and applications available online. Many
individuals now use the Internet as a primary means to access
news and information, communicate and socialize, and purchase
goods and services.
The global reach, interactive nature and transactional
efficiency of the Internet enable businesses to capitalize on
new revenue opportunities by building websites that support
ecommerce and other commercial activities. While most large
corporations are already operating online, many small and
home-based businesses have yet to establish a presence online.
According to IDC, a leading research firm for information
technology markets, there were 8.1 million businesses in
the U.S. with fewer than 100 employees (not including
home-based businesses) in 2005, of which only 4.8 million,
or less than 60%, had a website. Additionally, IDC estimates
that there were 14.7 million home-based businesses in 2005,
of which less than 30% had a website. Even smaller percentages
of these small and home-based businesses actually use their
websites to transact business with their customers online.
The growth in Internet users and usage provides many
opportunities to individuals and businesses that establish and
maintain an online presence, or an electronic
“address” on the Internet. In order to take advantage
of these opportunities, individuals and businesses must first
register a domain name and then create and maintain a website.
Services integral to establishing and maintaining a meaningful
online presence include website creation and development,
website hosting, email, ecommerce and online security.
Registering a Domain Name
Registering a domain name is the first step in establishing an
online presence. A domain name, such as GoDaddy.com, represents
a unique Internet Protocol, or IP, address that serves as an
identifier for a computer
or device on the Internet. Substantially all domain names
include the domain suffix of either a gTLD or a country code
top-level domain, or ccTLD. gTLDs include domain suffixes such
as .com, .net and .org, while ccTLDs include domain suffixes
such as .us, .ca and .de. As the Internet continues to evolve,
the universe of TLDs continues to expand. For example, the .eu
suffix was introduced in early 2006 to denote domain names
associated with the European Union. According to Zooknic, an
Internet research firm, as of December 31, 2005, there were
approximately 94 million registered domain names worldwide,
and this number is expected to increase to approximately
240 million in 2010, representing an annual growth rate of
21%.
The domain name registration system consists of two principal
types of entities — registries and
registrars — both of which are overseen by the
Internet Corporation for Assigned Names and Numbers, or ICANN, a
non-profit corporation established by the U.S. Department
of Commerce to manage the domain name registration system. ICANN
contracts with registry companies, such as VeriSign and NeuStar,
Inc., to administer the master databases of domain names and
their corresponding IP addresses for one or more TLDs. ICANN
accredits registrar companies, such as Go Daddy, to facilitate
registration of domain names with the relevant registry.
Customers typically purchase from registrars the right to
utilize specific domain names for periods of one to ten years,
with full payment due at the time of purchase. Registrars, in
turn, pay fees to the relevant registry, as well as to ICANN for
the TLDs administered by ICANN, for each domain name registered,
and then handle ongoing billing, customer service and technical
management related to the domain name.
Establishing and Maintaining an Online
Presence
After registering a domain name, an individual or a business
seeking to create an online presence may use a variety of
products or services such as the following:
Website hosting. A website’s content is composed of
data that must be hosted on a server which can be accessed by
Internet users. Hosting refers to the housing, serving and
maintaining of data for one or more websites on servers that are
operated and maintained by the website owner or a third-party
hosting provider. In addition to basic website storage and
electronic access, many website hosting service providers offer
their customers additional benefits, including increased
connectivity speed and bandwidth, redundancy, backup, security
and technical support. According to IDC, total shared and basic
dedicated website hosting services revenue in the U.S. was
approximately $1.9 billion in 2005 and is expected to grow
to $2.9 billion in 2010.
Ecommerce services. The increase in Internet users and
usage is causing rapid growth in ecommerce volume. Many
consumers and businesses use the Internet as a convenient
resource for researching and purchasing goods and services.
According to IDC, global ecommerce is expected to grow from $3.8
trillion in 2005 to $8.5 trillion in 2009, representing an
annual growth rate of 22%. In order to establish ecommerce
capabilities, website owners often utilize various products and
services, including website creation tools, online shopping
carts, payment processing, and security tools such as SSL
certificates.
Electronic communications. Electronic communication has
proliferated for both personal and professional use. In
particular, email has become an essential means of
communication, and having an email address that serves as a
personalized or branded identifier has become increasingly
important for individuals and businesses. In order to have
a personalized or branded email address, such as
you@YourPersonalDomainName.com, the email address owner must
also register the associated domain name, or
YourPersonalDomainName.com in this example. As a result,
individuals and businesses are increasingly registering domain
names in order to obtain a personalized or branded email
address. Additionally, service providers are increasingly
offering electronic communications features such as mobility,
collaboration, fax through email and email marketing services.
Customer Challenges
The dynamic nature of the Internet, including the proliferation
of content, ecommerce and applications online, as well as the
continued advancement of its related technologies, creates a
number of challenges for
individuals and businesses seeking to establish, maintain and
evolve an online presence. Some of these challenges include:
Establishing a meaningful online presence. To establish a
meaningful online presence, individuals and businesses must
identify, purchase and register a domain name, and then design
and build a website incorporating the appropriate features and
functionality. Many individuals and small businesses lack the
technical knowledge and skills necessary to complete this
process, and attempting to do so is frequently time-consuming
and expensive. These individuals and businesses often must
consult numerous online and offline resources or procure the
services of outside consultants to assist them. Additionally,
the need to obtain software and services from a variety of
vendors often adds complexity and increases the risk that these
solutions will not integrate or operate properly with each other.
Maintaining and evolving a website. Having created a
website, individuals and businesses must store the
website’s content on their own server or utilize a
third-party hosting provider. Over time, individuals and
businesses may also want to incorporate additional features and
functionality that address their evolving needs. For example,
some businesses may want to incorporate ecommerce functionality,
productivity tools and marketing capabilities into their
websites, while some individuals may want to create weblogs, or
blogs, podcasts and online forums on their websites. As the
Internet grows and new technology is developed, individuals and
businesses are continuously challenged to keep pace by upgrading
the functionality and performance of their websites and the
server capacity necessary to store increasing volumes of content.
Ensuring website availability and security.Websites are
constantly exposed to the risk of slow performance or network
downtime, which can result in lost revenue, customer
dissatisfaction and reputational damage for businesses and lost
content, increased cost and inconvenience for individuals. In
addition, website operators face an array of increasingly
sophisticated security threats, such as computer hacking, denial
of service attacks, domain name and online data theft, and other
online fraud. Protecting a website from potential system
failures and security threats often requires the use of a
variety of solutions or providers, which can lead to high system
costs, significant upgrade expenses and interoperability
challenges.
Accessing technical support.Website owners may
experience problems relating to their websites and thus need
access to dedicated support personnel who can resolve these
technical challenges. Over time, they may also want to consult
with experts who are familiar with their needs and can advise
them about additional features or services that could enhance
their website’s performance, functionality or user traffic
levels. Since websites are “always on” and problems
can arise at any time, many customers want access to technical
support and consultation 24 hours per day, 7 days per
week, using the telephone, email or the Internet.
We believe that individuals and businesses prefer to address
these challenges by utilizing a single provider that can offer
them the comprehensive set of services and resources they need
to establish, maintain and evolve an online presence quickly and
easily.
Our Solution
We are a leading provider of services that enable individuals
and businesses to establish, maintain and evolve an online
presence quickly and easily. Key elements of our solution
include:
“One-stop shop” for establishing and maintaining an
online presence. We provide customers a single location
where they can register domain names, purchase the services and
functionality necessary to establish, maintain and update an
online presence, and access comprehensive technical support. We
offer our services either independently or as bundled suites of
integrated services targeted to meet the specific needs of
customers. We also address the evolving needs of customers whose
websites increase in content and sophistication over time by
offering additional value-added services including more advanced
website hosting and ecommerce, productivity and marketing tools.
Value-oriented services, features and functionality focused
on customer needs. Our corporate philosophy is to offer our
customers competitively priced, value-oriented services that
directly address their evolving needs. We actively monitor
trends in customer usage and market demand in order to develop
services that anticipate and respond to these customer needs. We
believe our customer-focused approach enhances our
customers’ satisfaction with us and engenders a high degree
of loyalty within our customer base. We have developed
substantially all of our service offerings internally and
believe our suite of services is
best-of-breed in the
industry in terms of comprehensiveness, performance,
functionality and ease of use.
Focus on customer care and advice. We strive to
consistently provide the highest levels of customer care and
support in the industry. We have over 750 professionally trained
customer care representatives who provide technical assistance
and also operate as “business consultants,” advising
customers of additional services that best suit their individual
needs. These customer care representatives are available for
consultation 24 hours per day, 7 days per week to
provide expert assistance and advice across the broad spectrum
of our services. In addition, our
easy-to-use website
contains extensive educational content designed to demystify the
process of establishing an online presence and to assist
customers in choosing the services that best meet their needs.
High level of system reliability and security. Our
technology infrastructure incorporates hardware, software and
services from leading suppliers and is designed to handle large
and expanding volumes of domain name registrations, website
hosting accounts and traffic on our own and our customers’
websites in an efficient, scalable and fault-tolerant manner.
Our hosting technology platform is designed to maximize the
performance and uptime of customers’ websites and to
protect customer data from security breaches.
Our Competitive Strengths
Our competitive strengths include the following:
Market leadership position. We are the world’s
largest domain name registrar, with approximately
14.6 million domain names under management as of
June 30, 2006. Moreover, during the final six months of
2005, we registered approximately one-third of all domain names
registered in the top five gTLDs — .com, .net, .org,
..biz and .info — according to the various registry
reports available through ICANN. We are also the website hosting
provider with the largest number of active sites in
North America in April 2006, according to Netcraft. Our
leading market positions in total domain names under management,
new domain name registrations, and shared website hosting
provide us with a number of competitive advantages. We benefit
from increased revenue opportunities through sales of additional
value-added services to our existing customer base and from
reduced customer acquisition costs as a result of the large
number of referrals we receive from our customers. In addition,
we benefit from economies of scale and are able to allocate
research and development, advertising and various other costs
across a large customer base.
Active customer relationship management and lifecycle
marketing. We actively manage customer relationships to
identify opportunities to market additional services. Our
website and customer relationship management systems promote our
services and target customer needs as they establish, maintain
and evolve their online presence. Our website is designed, and
our customer care center personnel are trained and encouraged,
to cross-sell our services. We actively market additional
services both at the time of a customer’s initial purchase
and throughout the customer lifecycle through our email,
telephone, direct mail and other targeted marketing campaigns.
Our high level of customer service affords us many opportunities
to sell customers additional higher-margin services and enhances
our customer retention rates. We have found that customers
typically place multiple additional orders with us within the
first year after their initial purchases from us.
Strong brand recognition. We have established Go Daddy as
one of the leading brands in our industry. As a result of our
strong brand recognition, we attract a large number of potential
customers directly to our website, thus reducing our customer
acquisition costs and enhancing revenue growth. We have launched
a number of online and offline marketing initiatives to further
enhance awareness of our brand. These initiatives, including our
television advertisements during the two most recent Super
Bowls, often use humor to enhance the visibility and recognition
of the Go Daddy brand name. Our broad base of registered domain
name customers serves as an effective marketing channel for our
services, providing us with follow-on sales opportunities and
new sales through
word-of-mouth
referrals. In addition, we have expanded our marketing efforts
into other channels such as package inserts, podcasting, radio
and direct mail.
Leading proprietary technology. We have invested
significant resources in the internal development of services we
offer to our customers. The active relationships we maintain
with our customers help us to monitor trends in the market and
develop services that meet their evolving needs. In-house
development of our technology enables flexibility in marketing
and pricing and reduces our licensing costs, thereby improving
our margins. Our internal development also enables us to offer a
set of services that are fully integrated and easy to use and
support. In addition, because of the familiarity we have with
the technology underlying our services, we are able to offer
superior care to customers requiring technical assistance.
Our Growth Strategy
We believe there is significant growth potential in our current
and future markets as a result of the continued growth in
Internet users and usage, the increasing benefits to individuals
and businesses from establishing an online presence, and the
relatively small percentage of Internet users who have
registered a domain name. The number of Internet users worldwide
was estimated to be 1.2 billion in 2005, and is estimated
to grow to approximately 2.2 billion in 2010, while only
approximately 94 million domain names were registered
worldwide as of December 31, 2005. We intend to achieve
further growth by pursuing the following key strategies:
Continue to grow our customer base. We plan to leverage
our market leadership positions and enhance awareness of our
brand in order to continue to expand our customer base. We
intend to expand our customer base further through our online
and offline marketing initiatives, with the goal of driving
increased traffic to our website, and converting a larger
percentage of our website visitors into customers. We plan to
continue to utilize website optimization tools and a variety of
promotional activities to increase our visitor conversion rates.
We also plan to continue to leverage our large base of satisfied
customers to generate a significant number of potential new
customers through word-of-mouth referrals.
Sell additional services to customers. We seek to
increase our average order size and revenue per customer by
serving as a “one-stop shop” for customers, thereby
creating opportunities to sell additional services both at the
initial time of purchase and throughout the customer lifecycle.
We utilize proprietary business intelligence technologies to
identify the additional services most likely to be purchased by
particular customers to maximize the revenue we generate from
each customer. We believe we can continue to provide significant
added value to customers as they establish and evolve their
online presence by selling them additional higher-margin
services.
Continue to expand and enhance our service offerings. We
plan to continue to introduce new services to meet the evolving
needs of customers, and to enhance our existing service
offerings. Our research and development department is organized
into over 30 specialized teams, and is currently developing new
services in the areas of mobilization, personalized content
development and enhanced website security, among others. Our
large customer base affords us significant opportunities to
realize revenue gains from each additional service we develop.
Strengthen our customer relationships. Ongoing customer
satisfaction is critical to our continued success and future
growth. We have established and continue to develop a brand
based on trust, service, value and technical expertise. As
Internet usage further penetrates the mainstream population, we
expect that the technical sophistication of the average user
will decrease, underscoring the vital role that investment in
world-class customer care will play in our future growth. By
further investing in our customer care operations and by growing
and evolving our suite of services in response to customer
demand, we aim to continue to generate a high degree of loyalty
within our customer base and to further improve our customer
acquisition and retention rates.
Pursue acquisitions and international expansion
opportunities. We plan to evaluate potential acquisitions of
complementary technologies or services, as well as opportunities
to expand geographically both organically and through
acquisitions. Euromonitor International estimates that
non-U.S. Internet
users will account for approximately 91% of the estimated
2.2 billion worldwide Internet users in 2010. Accordingly,
we believe there are significant growth opportunities in
international markets, including Asia,
Europe and Latin America. We expect that in future periods we
will expand our capabilities outside of the U.S.
Go Daddy Services
We have designed and developed an extensive set of on-demand
services that enable individuals and businesses to establish,
maintain and evolve an online presence quickly and easily. We
offer our services either independently or as bundled suites of
integrated services designed for specific activities. Examples
of our bundled service offerings include our “eCommerce
Sites” package, which allows a business to augment its
website with ecommerce functionality, such as an integrated
shopping cart, SSL certificates and payment processing
solutions, or our “Family Hosting” package, which
allows an individual to register a domain name, build and host a
website, and share his or her family content online.
Our domain name registration services allow us to establish
customer relationships and act as a gateway product for our
website hosting and on-demand and other services. Of our
1.5 million, 2.4 million and 2.75 million
customers under contract as of December 31, 2004 and 2005
and March 31, 2006, approximately 50%, 55% and 58% of our
standard domain name registration customers had purchased
additional services, including website hosting, on-demand
services or other services. We believe the website hosting and
on-demand and other services described below increase our
revenue and margin levels, improve domain name registration
renewal rates and add significantly to our value proposition to
customers. Our services include the following:
Domain Name Registration Services
We had approximately 14.6 million domain names under
management as of June 30, 2006 and registered approximately
one-third of all domain names in the top five gTLDs —
..com, .net, .org, .biz and .info — in the last six
months of 2005. Developing a large and growing base of domain
names under management allows us to capture customers at the
entry point of their website development efforts. Sales of
domain name registrations accounted for approximately 68% of
total revenue in 2003, 66% of total revenue in 2004, 60% of
total revenue in 2005 and 56% of total revenue in the first
quarter of 2006. Our customer renewal rate for expiring domain
name registrations was approximately 62% in 2005 and 63% in the
first quarter of 2006.
Standard Domain Name Registration. Using our website,
potential customers can search for, establish the availability
of, and, if it is available, register a particular domain name.
If a domain name is not available, our website automatically
recommends similar names and other TLDs that are available, and
allows customers to back-order a domain name registered by
another registrant. We currently sell our standard domain name
registration for the .com TLD, together with basic
advertising-supported website hosting, free blog service and a
single email account, for $8.95 per year for a one-year
term. We offer discounts to purchasers of multiple domain names,
multi-year contracts and larger multi-service bundles.
Domain Name Privacy. Our domain name privacy service
allows customers to register a domain name through us on an
“unlisted” basis, protecting them from privacy
intrusions based on exposure of their personal or corporate
information. This privacy service also enables businesses to
secure a name confidentially for an unannounced product, service
or idea.
Deluxe Registration. Our deluxe domain name registration
service provides business customers with a differentiated
advertising opportunity in the public WhoIs database, which is
searched by Internet users millions of times per day. This
service enables customers to include in this database specific
details about their business that would not typically be found
in the database and provides information similar to a Yellow
Pages directory listing. These business details might include
the business’ hours of operation, a map to the location of
the business, a custom description of the business, and custom
images and links for displaying awards or special offers.
Platinum Registration. Our platinum domain name
registration service provides customers with the same features
as our domain name privacy and deluxe registration services, and
also incorporates additional key features, including protection
against the expiration of a domain name due to credit card
expiration or
loss or our inability to contact the domain name registrant,
protection from the unauthorized transfer of the domain name to
another registrar, and reporting features that provide important
domain name protection data to the registrant.
Domain Name Transfer. We offer customers the ability to
transfer the registration of a single domain name or multiple
domain names to us from other registrars using our automated
domain name transfer service. We also provide customers a
concierge service to assist them in the domain name transfer
process.
We operate, maintain and support website hosting in our own
facilities using either Linux or Windows operating systems.
Sales of website hosting services accounted for approximately
22% of total revenue in 2003, 20% of total revenue in 2004, 22%
of total revenue in 2005 and 23% of total revenue in the first
quarter of 2006. Our current hosting plan pricing starts at
$3.99 per month for shared hosting, $34.99 per month
for virtual dedicated hosting and $88.99 per month for
dedicated hosting.
Website Hosting on Shared Hosting Servers. The term
“shared hosting” refers to the housing of multiple
websites on the same server. We currently offer three tiers of
shared website hosting plans bundled with a variety of
applications and services such as web analytics and SSL
certificates.
Website Hosting on Virtual Dedicated Servers. The term
“virtual dedicated hosting” refers to the use of
software to partition a single physical server so that it
functions as multiple servers. A virtual dedicated server
provides the customer with full control and electronic access,
additional disk space and bandwidth, and up to three dedicated
IP addresses. Our website hosting on virtual dedicated servers
expands our basic shared hosting service to meet the needs of
most of our individual and business customers.
Website Hosting on Dedicated Servers. The term
“dedicated hosting” refers to the housing of a website
on a single server dedicated solely to that customer. We offer
three fixed-price plans, depending on the customer’s
desired hardware, performance and control features. In addition,
customers may choose to configure their own plan and choice of
options. This service includes electronic customer access to the
server, comprehensive customer support and network monitoring.
On-Demand and Other Services
We offer a variety of on-demand and other services that enable
customers to enhance and optimize their online presence,
including website creation, ecommerce, productivity and website
marketing solutions. On-demand services and other revenue
comprised 10% of total revenue in 2003, 14% of total revenue in
2004, 18% of total revenue in 2005 and 21% of total revenue in
the first quarter of 2006, with a small portion of this revenue
derived from enrollment fees paid to us by resellers and, in
2005 and the first quarter of 2006, the sale of advertising on
parked pages registered with us.
Website Tonight. Our Website Tonight service is a tool
that enables customers to build their own websites. We offer
customers three fixed-price plans depending on their desired
number of website pages, level of required storage, amount of
required bandwidth and number of email accounts. With each of
these plans, customers have access to over 100 professionally
designed templates, which can be personalized by adding photos,
graphics or text, as well as several theme-based categories with
specialty content for small businesses, organizations, families,
athletic teams, weddings, reunions and other categories.
Quick Blog. Our Quick Blog service enables users to
create blogs for posting personalized content on the Internet
and sharing these postings with others. This service includes
access by multiple authors to multiple blogs, 50 customizable
templates, image and audio file uploading, survey capabilities,
site statistics, email updates, spam protection and tools to
manage the blog according to customer preferences.
SSL Certificates. SSL certification allows Internet users
to verify the identity of other users as a means of increasing
the security of online transactions and communications. We offer
SSL certificates in 128-bit or 256-bit encryption, depending on
customer security requirements, and for time periods ranging
from one to ten years.
Quick Shopping Cart. Our Quick Shopping Cart service
allows customers to create their own stand-alone store or add
one to an existing website. Quick Shopping Cart also allows
customers to post their product catalogs, integrate online sales
information with Intuit’s QuickBooks product, list products
for auction on eBay, streamline shipping logistics, accept
credit card and PayPal payments on their websites, and market
their websites through Google services.
Merchant Accounts. Our merchant account service provides
customers with tools to process credit card payments online for
goods and services sold on their websites. Proceeds from the
sale of goods and services, net of credit card fees, are
electronically deposited in the customer’s bank account.
Productivity Tools
Email Accounts. We offer email accounts under three
fixed-price plans, with pricing dependent on the customer’s
desired level of storage and number of email addresses. Our
standard email account is a core component of many of our suites
of bundled services. All of our email accounts are
advertising-free and incorporate protection from spam, viruses
and other forms of online fraud such as phishing.
Online File Folder. Our Online File Folder service allows
customers to store, access, transfer, encrypt and share files,
such as presentations, spreadsheets, reports, music, photos and
video clips, online from any Internet-connected computer.
Fax Thru Email. Our Fax Thru Email service allows
customers to send and receive faxes from any Internet-connected
computer. We offer three monthly plans for this service, with
pricing dependent on the customer’s volume of usage.
Online Group Calendar. Our Online Group Calendar service
is an organizational tool that keeps track of group activities,
events and important dates, and can be used to send email
reminders automatically. This password-protected tool enables
customers to search their group’s calendar to schedule
events for the group, manage tasks and upload files to share
with other group members.
Marketing Tools
Traffic Blazer. Our Traffic Blazer service is designed to
attract traffic to customers’ websites by helping them
prepare and optimize web pages for, and submit them to, leading
Internet and blog search engines and directories. It is designed
to facilitate successful Internet marketing for individuals and
businesses that recognize the increasing importance and reach of
search engines.
Traffic Facts. Our Traffic Facts service offers customers
web analytics to gather, manipulate and graphically report
statistical data affecting their websites’ success,
including information about visitors to their website, entry and
exit pages, referring domain names and search engines, the
number of sessions and pages viewed, and the volume of bandwidth
used.
Express Email Marketing. Our Express Email Marketing
service enables customers to market their businesses online
through email and, at the same time, manage customer
information, design email advertising campaigns, conduct
surveys, and prepare marketing and user reports.
Other Services
Domain Name Auctions. We offer domain name registrants a
series of online auction services through our websitewww.TheDomainNameAfterMarket.com, or www.tdnam.com. These
after-market services allow domain name registrants to sell
their domain names through a traditional online auction, an
offer/counteroffer
auction, an expired name auction or a “buy now”
auction. We receive a percentage of the sales price for each
domain sold in an auction.
Domain Name Appraisals. Domain name appraisals give
individuals seeking to purchase or sell domain names an estimate
of the value of those names based on a number of key criteria,
including commercial use value, name length and brand
recognition. The results of this appraisal are available to the
customer within two hours and can be shared with third parties
or kept confidential. A customer can also have us certify an
appraisal so that prospective after-market purchasers of a
domain name can view the appraisal and valuation criteria.
Cash Parking. Our Cash Parking service allows a domain
name registrant, in exchange for a monthly fee, to earn a
specified percentage of the advertising revenue generated on its
parked, or currently unused, website page. Once a domain name is
connected to our Cash Parking service, we arrange for
third-party advertisements to be served on the parked page.
Depending on the pricing tier chosen by the registrant for this
service, the registrant will receive 60% to 80% of the
revenue from advertisements generated by this service.
Sales and Marketing
We focus our sales and marketing efforts primarily on the online
needs of individuals and small businesses. We promote Go
Daddy as a “one-stop shop,” offering value-oriented
pricing and a strong commitment to customer care and support.
Sales. We sell our services primarily through our
websites and our customer care center. We also receive revenue
through automated billing for renewals of services previously
purchased. Additionally, we have a network of third parties that
refer customer prospects to us or resell our services. We pay
our resellers an amount based on the difference between the
pricing of their sale of the given service and the wholesale
rate upon which we agree. Through our wholly-owned subsidiary,
Wild West Domains, we have contractual relationships with over
20,000 resellers to sell our domain name registration and other
services under their own brands. For example, Dell acts as a
reseller of our services to its small business customer base.
Reseller enrollment fees and sales through our Wild West Domains
subsidiary accounted for 14% of total revenue in 2005 and 13% of
total revenue in the first quarter of 2006.
Marketing. Our marketing strategy uses brand marketing
initiatives to drive traffic to our website and to raise
awareness of Go Daddy as the leading provider of domain name
registration, website hosting and other on-demand services. We
supplement these initiatives with our direct marketing efforts
aimed at converting potential customers into actual customers,
promoting additional sales to our existing customer base, and
improving our renewal rates on previously sold services. Our
marketing programs include a variety of online and offline
advertising initiatives and public relations activities targeted
primarily at individuals and small businesses, which comprise
the core base of our customers.
Our principal marketing initiatives are:
•
Offline advertising — including advertising on
television and radio and in print media. We launched a
television advertising campaign during the 2005 Super Bowl, and
since then have conducted further television advertising that
featured cable television advertising and commercials aired
during the 2006 NFL Playoffs and the 2006 Super Bowl. In
addition, we have recently launched package insert campaigns
with market-leading third parties such as Dell and Amazon.com.
•
Online advertising — including search-based ads,
banner ads, targeted email campaigns, podcast advertising and
advertising on “parked pages.”
•
Customer retention and appreciation marketing
efforts — including direct mail and email campaigns,
as well as telesales
follow-up contacts. We
use these campaigns and contacts to market additional services
that we determine might be useful to customers based on their
prior purchases with us.
In addition to these marketing initiatives, we believe that the
breadth and quality of our service offerings and the high level
of customer care and support we provide, create significant
goodwill and result in positive
referrals from our customers. We believe this
word-of-mouth
advertising is an important complement to our marketing
initiatives.
Customers
Our customer base is comprised primarily of individuals and
small businesses, and, to a much lesser extent, of large
businesses and governmental agencies that purchase specific
services, such as domain name registrations and SSL
certificates. As of June 30, 2006, we had approximately
3.0 million customers under contract. No customer accounted
for more than 5% of total revenue in 2003, 2004, 2005 or the
first quarter of 2006.
Sales from transactions outside the U.S. accounted for 14%
of our total sales in 2003, 14% in 2004, 13% in 2005 and 13% in
the first quarter of 2006. We characterize transactions with
customers who have payment card billing addresses outside the
U.S. as being transactions outside the U.S. We currently have no
physical operations outside the U.S., and we make sales to
customers outside the U.S. through our website and U.S.-based
customer care center. We believe that sales to customers outside
the U.S. are likely to account for an increasing portion of
total sales in future periods as we grow our international
customer base and pursue opportunities to expand our
international presence.
Customer Care and Support
We believe our ability to establish and maintain long-term
relationships with our customers and to differentiate ourselves
from our competitors depends significantly on the strength of
our customer care and support operations. Moreover, we believe
that superior customer care and support are critical to
retaining, expanding and further penetrating our customer base.
We have tightly integrated our customer care center with our
development organization in order to identify rapidly and
respond precisely to our customers’ needs. As of
March 31, 2006, our customer care organization had 752
employees.
Our customers have access to our customer care center
24 hours per day, 365 days per year using the
telephone, email or the Internet. Customer care center employees
handle general customer inquiries, such as payment and product
feature queries and technical questions about customers’
existing services, as well as provide information about
additional services we offer. Many of our customer care
employees are technical support specialists extensively trained
in the use of our services. Our customer care center personnel
are trained and encouraged to act as “business
consultants” who cross-sell and up-sell a variety of
services that may be of value to particular customers, both in
response to inbound customer inquiries and as part of our
outbound customer retention and appreciation initiatives. As a
result of these “needs-based” selling efforts, the
average order size generated by our customer care personnel in
2005 was $65.00, compared to an overall average order size of
$26.81.
Technology and Development
Technology
We have built our services, systems and networks for
reliability, scalability, flexibility and security. We use
hardware and software from leading technology vendors such as
Cisco, Dell, Microsoft, Network Appliance and Red Hat. Our
systems rely on a modular approach to capacity both for server
environments and for storage.
We undertake annual audits as required by the payment card
industry to ensure all our card processing services meet PCI
standards. We also undertake an annual Webtrust for Certificate
Authorities audit to ensure that our infrastructure that
processes SSL certificates meets all Webtrust requirements.
Facilities. The systems supporting our own websites, our
website hosting and other services and our internal operations
are located at five facilities in the Phoenix, Arizona area. We
operate all of our facilities, and believe that they have ample
power, redundancy, fire suppression capabilities, bandwidth
capacity and backbone redundancy to support the current and
anticipated near-term growth of our business. We continuously
monitor these systems to improve various aspects of their
performance.
Reliability. Our technology platform is designed to
maximize reliability and system uptime. We use redundant
hardware components to ensure high levels of availability. We
achieve software and data reliability through a variety of
devices, processes and quality-assurance procedures. Depending
on the specific system, our standard procedures include daily
database backups, storage of critical information in multiple
formats and incremental backups of ongoing database
modifications.
Scalability and Flexibility. Our systems are designed to
handle large and expanding volumes of domain name registrations,
website hosting accounts, general website traffic and domain
name server queries in an efficient, scalable and fault-tolerant
manner. Our servers are clustered and use a highly available,
redundant shared file system that allows us to add additional
capacity without the need for costly system or technology
upgrades.
Security. Our technology incorporates a variety of access
controls and other security measures to protect domain name
registration and customer data, and to prevent unauthorized
access to our networks and systems. These include communications
using SSL, access control at network routers, and encryption and
authentication of user passwords. We have a team of security
operations personnel monitoring our systems 24 hours per
day, 7 days per week using multiple security devices,
providing forensic analysis, and gathering intelligence to
actively prevent security breaches.
Research and Development
Since our inception, we have chosen to develop substantially all
of our services internally, rather than licensing or acquiring
technology from third parties. Our internal research and
development capabilities allow us greater speed and flexibility
in developing new service offerings, minimize our licensing
costs and improve our ability to provide customer care and
support. We focus our research and development efforts on
enhancing our existing service offerings and developing new
services, both in response to our customers’ needs. Our
research and development department is organized into over 30
specialized development teams that totaled 116 employees as of
March 31, 2006. We believe that these solution-specific
teams ensure a more rapid and effective development effort. Our
research and development expenses were approximately
$3.5 million in 2003, $5.3 million in 2004,
$9.7 million in 2005 and $3.4 million in the first
quarter of 2006.
Competition
The markets for domain name registration and web-based services
are intensely competitive and rapidly evolving. We expect
competition to increase in the foreseeable future as new
competitors enter the market and as our existing competitors
expand their service offerings. Our current competitors include
domain name registrars, independent software companies, website
design firms, website hosting companies, Internet service
providers, Internet portals and search engine companies. Many of
these competitors, and in particular Google, Microsoft and
Yahoo!, have greater resources, brand recognition and consumer
awareness, and larger customer bases than we have.
Current principal competitors in our markets include:
•
companies that primarily focus on domain name registration,
including eNom (recently acquired by Demand Media), Melbourne
IT, Network Solutions, Register.com and Schlund (a division of
United Internet);
•
companies that compete with us primarily in the area of website
hosting services, including 1&1 Internet (a division of
United Internet) and Web.com (formerly known as Interland);
•
companies that compete with us primarily in the area of SSL
certification services, including GeoTrust (which has recently
announced an agreement to be acquired by VeriSign), Thawte and
VeriSign; and
•
diversified Internet companies, including Google, Microsoft and
Yahoo!, that currently offer, or may in the future offer, a
broad array of web-based products and services, including domain
name registration, website hosting and other products and
services targeted at helping individuals and small businesses
gain an online presence.
We believe the principal competitive factors in selling domain
name registrations, website hosting services and on-demand
services to individuals and businesses include the following:
•
flexibility, quality and functionality of service offerings;
•
brand name and reputation;
•
price;
•
quality and responsiveness of customer support and service;
•
ease of use, implementation and maintenance of service
offerings; and
•
reliability and security of service offerings.
We believe we have established a favorable competitive position
on all of these factors.
Intellectual Property
Our success and ability to compete are dependent in part on our
ability to develop and maintain proprietary technologies and to
operate without infringing on the intellectual property of
others. We rely on a combination of patent, trademark, service
mark, copyright and trade secret laws in the U.S. and other
jurisdictions to protect our intellectual property and our
brand. We have 61 U.S. patent applications pending. Our
patent applications relate generally to methods for registering
domain names, improved electronic communication systems and
versatile ecommerce tools, among other things. In addition, we
enter into confidentiality and invention assignment agreements
with our employees and consultants and vigorously control
distribution of and access to our proprietary information and
technology. We license technology from third parties that we use
in our website hosting business and in limited elements of a few
of our services. License agreements for third-party software
include provisions intended to protect our intellectual
property. None of our services is substantially dependent on any
third-party software.
While our patent applications, copyrights, trademarks and other
intellectual property rights are important, we believe that our
technical expertise and our ability to introduce new products
and features that meet the needs of our customers are more
important in maintaining our competitive position.
Administration of the Internet and Government Regulation
Administration
From January 1993 until April 1999, Network Solutions was the
sole entity authorized by the U.S. government to act as
either a registrar or a registry for domain names in the .com,
..net and .org TLDs. In November 1998, the U.S. Department
of Commerce authorized ICANN, through a Memorandum of
Understanding, to oversee key aspects of the domain name
registration system, including contracting with additional
registries and accrediting additional registrars. In 2000,
Network Solutions was acquired by VeriSign, which sold the
registrar portion of its business and the Network Solutions name
in November 2003. In May 2001, ICANN and VeriSign entered into a
registry agreement under which VeriSign would operate the .com
top-level domain registry until at least 2007, when the original
agreement expires. In February 2006, VeriSign negotiated a
renewal of this registry agreement with ICANN that, upon final
approval from the U.S. Department of Commerce, would result
in VeriSign’s continuing to operate the .com registry until
2012 and perhaps beyond that date. ICANN’s board of
directors has also named VeriSign as the designated .net
registry until 2011. Other registries include Public Interest
Registry for .org, Afilias for .info and NeuStar for .biz and
..us.
ICANN maintains contracts with member entities such as
registrars and registries through which it enforces compliance
with its consensus policies. While these policies do not
constitute law in the U.S. or elsewhere, they have a
significant influence on the operation and future of the domain
name registration system. ICANN from time to time may create new
policies, subject to review and approval by a consensus of the
applicable supporting organizations and adoption by the ICANN
board of directors. Examples of new
policies recently implemented by ICANN include policies
governing domain name transfers and the deletion of un-renewed
domain names.
Government Regulation
A combination of U.S. federal and state statutes and
foreign statutes regulate the liability of Internet service
providers, including domain name registrars. In addition, other
federal and state statutes that are not specific to Internet
regulation govern aspects of the domain name registration
business. These statutes include the following:
Communications Decency Act. The Communications Decency
Act of 1996, or CDA, regulates content of material on the
Internet, and provides immunity to Internet service providers
and providers of interactive computer services. The CDA and the
case law interpreting it provide that domain name registrars and
website hosting providers cannot be liable for defamatory or
obscene content posted by customers on websites unless they
participate in the conduct.
Digital Millennium Copyright Act. The Digital Millennium
Copyright Act of 1998, or DMCA, provides recourse for owners of
copyrighted material who believe that their rights under
U.S. copyright law have been infringed on the Internet. The
DMCA provides domain name registrars and website hosting
providers a safe harbor from liability for third-party copyright
infringement. However, to qualify for the safe harbor,
registrars and website hosting providers must satisfy a number
of requirements, including adopting a user policy that provides
for termination of service access of users who are repeat
infringers, informing users of this policy, and implementing the
policy in a reasonable manner. In addition, a registrar or a
website hosting provider must remove or disable access to
content upon receiving a proper notice from a copyright owner
alleging infringement of its protected works by domain names or
content on hosted web pages. A registrar or website hosting
provider that fails to comply with these safe harbor
requirements may be found contributorily or vicariously liable
for third-party infringement.
Lanham Act. The Lanham Act governs trademarks and
servicemarks, and case law interpreting the Lanham Act has
limited liability for search engine providers and domain name
registrars in a manner similar to the DMCA. No court to date has
found a domain name registrar liable for trademark infringement
or trademark dilution as a result of accepting registrations of
domain names that are identical or similar to trademarks or
service marks held by third parties, or holding auctions for
those domain names.
Anticybersquatting Consumer Protection Act. The
Anticybersquatting Consumer Protection Act, or ACPA, was enacted
to address piracy on the Internet by curtailing a practice known
as “cybersquatting,” or registering a domain name that
is identical or similar to another party’s trademark, or to
the name of another living person, in order to profit from that
domain name. The ACPA provides that registrars may not be held
liable for registration or maintenance of a domain name for
another person absent a showing of the registrar’s bad
faith intent to profit from the use of the domain name.
Registrars may be held liable, however, for failure to comply
with procedural steps set forth in the ACPA. For example, if
there is litigation involving a domain name, the registrar is
required to deposit with the court a certificate representing
the domain name registration, and cannot transfer or otherwise
modify the registration during the court action except by court
order.
Privacy and Data Protection. In the area of data
protection, the U.S. Federal Trade Commission and certain
state agencies have investigated various Internet
companies’ use of their customers’ personal
information, and the federal government has enacted legislation
protecting the privacy of consumers’ non-public personal
information. Other federal and state statutes regulate specific
aspects of privacy and data collection practices. Although we
believe that our information collection and disclosure policies
comply with existing laws, if challenged, we may not be able to
demonstrate adequate compliance with existing or future laws or
regulations. In addition, in the European Union member states
and certain other countries outside the U.S., data protection is
more highly regulated and rigidly enforced. To the extent that
we expand our business into these countries, we expect that
compliance with these regulatory schemes will be more burdensome
and costly for us.
ICANN has adopted the Uniform Domain-Name Dispute-Resolution
Policy, or UDRP, which establishes an administrative process for
resolving disputes over registration of domain names. In their
contracts with ICANN, registrars agree to comply with and to
implement this policy. This policy defines a limited role for
registrars in the dispute resolution process, as registrars are
not permitted to make any changes to a domain name without
specific direction from a court or arbitration panel. In the
event of a dispute over the registration of a domain name, the
registrar is required to lock the disputed domain name so that
it cannot be transferred or otherwise modified during the
pendency of the dispute. Likewise, when the registrar receives
an order or decision from a court or arbitration panel, the
disputed domain name must be updated accordingly.
ICANN also adopted the Transfer Dispute Resolution Policy, or
TDRP, which establishes a guideline for registrars to follow in
dealing with disputes over the transfer of a domain name from
one registrar to another. Under the TDRP, the gaining registrar
must provide to the losing registrar a Form of Authorization, or
FOA, to confirm that the registrant at the time of transfer
agreed to transfer the name. If the FOA does not confirm that
the registrant at the time of transfer confirmed the transfer,
the registrars may work together to reinstate the name to the
previous registrar. If an agreement cannot be reached between
the two registrars, the losing registrar may choose to lodge a
TDRP dispute through the relevant registry. If a dispute is
filed through the registry, the registry is responsible for
determining whether the domain name should be transferred back
to the losing registrar and ultimately reinstated to the
previous registrant.
Less frequently, domain name registration and transfer disputes
are resolved under the ACPA. The ACPA provides trademark and
service mark owners with legal remedies in these types of
disputes, including allowing a mark owner to bring an in
rem action to cancel registration of the disputed domain
name or to require the transfer of the domain name registration
to the mark owner. As discussed above, the ACPA provides that
domain name registrars may not be held liable for registering or
maintaining a domain name absent a showing of the
registrar’s bad faith intent to profit or its failure to
comply with procedural provisions.
These statutes do not eliminate tort liability for wrongful
conduct on the part of registrars in domain name or transfer
disputes. For a discussion of the leading case governing tort
liability in this area, please see “Risk
Factors — We may face liability or become involved in
disputes over registration of domain names and control over
websites.”
Employees
As of March 31, 2006, we had 1,119 employees. We have no
employees that are represented under a collective union
agreement. We consider our relationships with our employees to
be good.
Facilities
We currently conduct our operations primarily in seven separate
facilities. We lease approximately 46,000 square feet of
office space for our principal executive offices and a portion
of our customer care center in Scottsdale, Arizona, under a
lease agreement that expires in August 2008. In October 2005, we
acquired a 285,000 square foot building in Phoenix for
approximately $9.5 million. We anticipate utilizing this
building as our primary data center to support our website
hosting business and corporate infrastructure. We lease
approximately 50,000 square feet of office space in
Gilbert, Arizona, which houses a larger portion of our customer
care center and some research and development teams, under a
lease that expires in June 2011. We also lease space at three
other locations in the Phoenix area for additional data center
capacity and in one facility in Cedar Rapids, Iowa for marketing
and research and development personnel, under lease agreements
that expire between November 2006 and January 2011. If we
require additional space, we believe that we will be able to
obtain that space on commercially reasonable terms.
We are a party to a number of legal proceedings arising in the
ordinary course of business, including disputes arising over
domain name registration, network abuse such as email spam,
online “phishing” and other forms of Internet fraud,
and intellectual property rights. As of the date hereof, we are
not a party to or aware of any legal proceedings that
individually, or in the aggregate, will have a material adverse
effect on our business, financial position or results of
operations.
On June 19, 2006, Web.com, Inc. filed a lawsuit
against us in the United States District Court for the
Northern District of Georgia alleging, generally, that by
selling and offering “a web hosting system having a
remotely accessible control panel that allows a customer to
change certain operating parameters that define, at least in
part, the operation of the customer’s web site hosted by
Go Daddy,” we infringe U.S. Patent No. 6,789,103.
Web.com is seeking, among other things, injunctive relief and
unspecified damages. At this time, Web.com has not served us
with a copy of the complaint. Nevertheless, we have begun an
investigation into Web.com’s claims, and, based on the
information available to us at this time, we believe we have
meritorious defenses to Web.com’s suit. In the event we are
served with the complaint, we intend to defend this lawsuit
vigorously.
Executive Vice President and Chief Marketing Officer
Michael J. Zimmerman
35
Chief Accounting Officer and Acting Chief Financial Officer
Christine N. Jones
37
General Counsel and Corporate Secretary
Directors:
Michael D.
Gallagher(1)
42
Director
Thomas F.
Mendoza(2)
55
Director
Charles J.
Robel(1)(2)(3)
57
Director
Greg J.
Santora(1)(2)(3)
56
Director
Key Employees:
Robert T. Olson
41
Vice President of Business Operations
Theresa J. D’Hooge
38
Vice President of Marketing
Timothy J. Ruiz
51
Vice President of Corporate Development and Policy Planning
Patrick C. Pendleton
46
Chief Information Officer
Neil G. Warner
49
Chief Information Security Officer and President, Domains by
Proxy
(1)
Member of our audit committee.
(2)
Member of our leadership development and compensation committee.
(3)
Member of our nominating and governance committee.
Bob Parsonshas served as our Chairman and Chief
Executive Officer since he founded our company in 1997.
Mr. Parsons also served as our President from inception
until February 2006. Prior to founding Go Daddy,
Mr. Parsons founded Parsons Technology, Inc., a software
company that was acquired by Intuit Inc. in 1996.
Mr. Parsons served in the U.S. Marine Corps between
1968 and 1970 and is a recipient of the Purple Heart Medal and
Combat Action Ribbon. Mr. Parsons is a Certified Public
Accountant and holds a B.S. in Accounting from the University of
Baltimore.
Warren J. Adelman has served as our President since
February 2006, our Chief Operating Officer since October 2004,
and a director since May 2006. Mr. Adelman has also served
as our Vice President of Product and Strategic Development and
Chief of Staff from September 2003 to October 2004, and as our
Vice President of Strategic Development from January 2003 to
September 2003. Prior to joining us, Mr. Adelman served as
Vice President of Strategic Relations of Network Associates,
Inc., an enterprise security company, from February 2002 to
October 2002. From February 2001 to February 2002,
Mr. Adelman served as Chief Executive Officer and, from
January 1999 to February 2001, Mr. Adelman served as Vice
President of Business Development of NeoPlanet, Inc., a customer
interaction software company. Mr. Adelman holds a B.A. in
Political Science and History from the University of Toronto.
Barbara J. Rechterman has served as our Executive Vice
President and Chief Marketing Officer since July 1997. Prior to
joining us, Ms. Rechterman was employed from 1988 to June
1997 in various capacities
at Parsons Technology, Inc., including as Co-President, Vice
President and Controller. Ms. Rechterman is a Certified
Public Accountant and holds a B.A. in Accounting from the
University of Dubuque.
Michael J. Zimmerman has served as our Chief Accounting
Officer and Acting Chief Financial Officer since April 2006, and
served as our Chief Financial Officer from November 2003 to
April 2006 and between November 2001 and July 2002. From July
2002 to November 2003, Mr. Zimmerman served as Vice
President of our subsidiary, Wild West Domains, Inc. Prior to
joining us, Mr. Zimmerman served as Chief Financial Officer
of Mechanical Breakdown Administrators, Inc., an automobile
warranty company, from September 1999 to October 2001.
Mr. Zimmerman is a Certified Public Accountant and holds a
B.S. in Accounting from Lehigh University.
Christine N. Jones has served as our General Counsel and
Corporate Secretary since January 2002. Prior to joining us,
Ms. Jones practiced law at Beus Gilbert, PLLC, a private
law firm, between May 1997 and January 2002. Ms. Jones has
been a member of the American Bar Association and the State Bar
of Arizona since 1997. Ms. Jones is a Certified Public
Accountant and holds a J.D. from Whittier Law School and a B.S.
in Accounting from Auburn University.
Michael D. Gallagher has served as a director since May
2006. Mr. Gallagher has been a partner at Perkins Coie,
LLP, a private law firm, since February 2006. Prior to joining
Perkins Coie LLP, Mr. Gallagher served in various
capacities at the U.S. Department of Commerce, including as
Assistant Secretary of Commerce for Communication and
Information, and Director of the National Telecommunications and
Information Administration from August 2003 to January 2006, as
Deputy Chief of Staff for Policy and Counselor to Secretary
Donald L. Evans from April 2003 to November 2003, and as Deputy
Assistant Secretary, National Telecommunications and Information
Administration from November 2001 to March 2003. Prior to his
service at the U.S. Department of Commerce,
Mr. Gallagher worked in the private sector for Verizon
Wireless and Air Touch Communications, Inc. Mr. Gallagher
holds a J.D. from the University of California, Los Angeles and
a B.A. in Economics and Political Science from the University of
California, Berkeley.
Thomas F. Mendoza has served as a director since May
2006. Mr. Mendoza has been employed in various capacities
at Network Appliance, Inc., a data storage company, since 1994,
and has served as its President since 2000. Mr. Mendoza has
more than 31 years of experience as a high-technology
executive. Mr. Mendoza holds a B.A. in Economics from the
University of Notre Dame and is an alumnus of Stanford
University’s Executive Business Program.
Charles J. Robel has served as a director since May 2006.
From June 2000 to December 2005, Mr. Robel served as a
General Partner and Chief Operating Officer of Hummer Winblad
Venture Partners, a venture capital firm focused on software
companies. From 1985 until 2000, Mr. Robel was a partner
with PricewaterhouseCoopers LLP. Mr. Robel also serves as a
director of Adaptec, Inc., Borland Software Corporation,
Informatica Corporation and McAfee, Inc. Mr. Robel is a
Certified Public Accountant and holds a B.S. in Accounting from
Arizona State University.
Greg J. Santora has served as a director since May 2006.
From December 2003 to September 2005, Mr. Santora served as
Chief Financial Officer of Shopping.com Ltd., an online provider
of comparison shopping services that was acquired by eBay Inc.
in August 2005. From 1997 through February 2003,
Mr. Santora served as Senior Vice President and Chief
Financial Officer for Intuit, Inc., a provider of small business
and personal finance software. Prior to Intuit, Mr. Santora
spent nearly 13 years at Apple Computer in various senior
financial positions including Senior Finance Director of Apple
Americas and Senior Director of Internal Consulting and Audit.
Mr. Santora, who began his accounting career with Arthur
Andersen LLP, has been a Certified Public Accountant since 1974.
Mr. Santora also serves as a director of Align Technology
Inc. and Digital Insight Corporation. Mr. Santora holds an
M.B.A. from San Jose State University and a B.S. in
Accounting from the University of Illinois.
Robert T. Olson has served as our Vice President of
Business Operations since August 2004. Mr. Olson also
served as our Director of Business Operations from November 2003
to August 2004 and as our Director of Product Management from
June 2003 to November 2003. Prior to joining us, Mr. Olson
served as
Mountain Region Manager of FitLinxx, LLC, a fitness and wellness
technology company, from January 2003 to June 2003. From August
2002 to November 2002, Mr. Olson was an executive
consultant to ABS School Services, LLC, a private management
company of charter schools. Mr. Olson served from August
2001 to May 2002 as a Vice President of Sales and, from April
2002 to August 2002, as Director of Marketing of NeoPlanet,
Inc., a customer interaction software company. Mr. Olson
holds an M.B.A. from the University of Denver and a B.S. in
Accounting from Colorado State University.
Theresa J. D’Hooge has served as our Vice President
of Marketing since December 2004. Ms. D’Hooge also
served as our Director of Database Marketing from June 2004 to
December 2004 and as our Senior Advertising Manager from
February 2003 to June 2004. From October 2001 to February 2003,
Ms. D’Hooge was an independent consultant to
automotive and software companies. From February 2001 to October
2001, Ms. D’Hooge served as Vice President of
Operations and Marketing for Infinity Marketing Solutions. From
1992 to January 2001, Ms. D’Hooge held various
marketing management positions at Parsons Technology, Inc.
Ms. D’Hooge holds a B.B.A. in Accounting from Mount
Mercy College.
Timothy J. Ruiz has served as our Vice President of
Corporate Development and Policy Planning since February 2006.
Mr. Ruiz also served as our Vice President of Domains
Services from April 2003 to February 2006 and as our Director of
Business Development from April 2001 to April 2003.
Mr. Ruiz holds an A.S. in Computer Science from Iowa
Central Community College.
Patrick C. Pendleton has served as our Chief Information
Officer since March 2006. Prior to joining us,
Mr. Pendleton served as Vice President of Technical
Services of PetSmart, Inc., a retailer of specialty products and
services for pets, from March 2001 to March 2006.
Mr. Pendleton holds a B.S. in Business/ Management
Information Services from Elmhurst College.
Neil G. Warner has served as our Chief Information
Security Officer since May 2005 and as President of our Domains
by Proxy subsidiary since October 2004. Mr. Warner also
served as our Director of Security and Business Continuity
Planning from May 2004 to May 2005. Mr. Warner served as
Director of Security and Technology of NDCHealth, Inc. (now
Per-Se Technologies, Inc.) from October 1997 to May 2004.
Mr. Warner holds a B.S. in Management Studies from the
University of Maryland and an A.A.S. in Electronic Communication
from Georgia Military College.
There are no family relationships between any of our directors
or executive officers.
Board of Directors
Our board of directors currently consists of six members. Our
bylaws permit our board of directors to establish by resolution
the authorized number of directors, and six directors are
currently authorized.
As of the closing of this offering, our board of directors will
be divided into three classes of directors, serving staggered
three-year terms, as follows:
•
Class I will consist of Messrs. Mendoza and Adelman,
whose terms will expire at the annual meeting of stockholders to
be held in 2007;
•
Class II will consist of Messrs. Gallagher and
Santora, whose term will expire at the annual meeting of
stockholders to be held in 2008; and
•
Class III will consist of Messrs. Parsons and Robel,
whose terms will expire at the annual meeting of stockholders to
be held in 2009.
Directors for a class whose terms expire at a given annual
meeting will be up for re-election for three-year terms at that
meeting. Each director’s term will continue until the
election and qualification of his or her successor, or his or
her earlier death, resignation or removal. Any increase or
decrease in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. This classification
of our board of directors may have the effect of, among other
things, delaying or preventing a change of control of Go Daddy.
In May 2006, our board of directors undertook a review of the
independence of each director and considered whether any
director had a material relationship with us that could
compromise that director’s ability to exercise independent
judgment in carrying out that director’s responsibilities.
As a result of this review, our board of directors determined
that Messrs. Gallagher, Mendoza, Robel and Santora,
representing four of our six directors, were “independent
directors” as defined under the rules of The Nasdaq Stock
Market.
Committees of the Board of Directors
Our board of directors currently has three committees: an audit
committee, a leadership development and compensation committee
and a nominating and governance committee, each of which will
have the composition and responsibilities described below as of
the closing of this offering.
Audit Committee
Messrs. Gallagher, Robel and Santora, each of whom is a
non-employee member of our board of directors, comprise our
audit committee. Mr. Robel is the chairman of our audit
committee. Our board of directors has determined that each of
the members of our audit committee satisfies the requirements
for independence and financial literacy under the rules and
regulations of The Nasdaq Stock Market and the SEC. Our board of
directors has also determined that Mr. Robel is an
“audit committee financial expert” as defined in SEC
rules and satisfies the financial sophistication requirements of
The Nasdaq Stock Market. The audit committee is responsible for,
among other things:
•
selecting and hiring our independent auditors, and approving all
audit and pre-approving any non-audit services to be performed
by them;
•
evaluating the qualifications, performance and independence of
our independent auditors;
•
monitoring the integrity of our financial statements and our
compliance with legal and regulatory requirements as they relate
to financial statements or accounting matters;
•
reviewing the adequacy and effectiveness of our internal control
policies and procedures;
•
discussing the scope and results of the audit with the
independent auditors and reviewing with management and the
independent auditors our interim and year-end operating results;
•
acting as our qualified legal compliance committee; and
•
preparing the audit committee report that the SEC requires in
our annual proxy statement.
Leadership Development and Compensation
Committee
Messrs. Mendoza, Robel and Santora, each of whom is a
non-employee member of our board of directors, comprise our
leadership development and compensation committee.
Mr. Mendoza is the chairman of our leadership development
and compensation committee. Our board of directors has
determined that each member of our leadership development and
compensation committee meets the requirements for independence
under the rules of The Nasdaq Stock Market. The leadership
development and compensation committee is responsible for, among
other things:
•
reviewing and approving the following components of our chief
executive officer’s and other executive officers’
compensation, as applicable: annual base salary; annual
incentive bonus including the specific goals and amount; equity
compensation; employment agreements; severance arrangements and
change of control agreements; and any other benefits,
compensation or arrangements;
•
evaluating and recommending incentive compensation plans to our
board of directors;
reviewing the succession planning for our executive officers and
coordinating the evaluation of potential successors to executive
officers; and
•
preparing the compensation committee report that the SEC
requires in our annual proxy statement.
Nominating and Governance Committee
Messrs. Robel and Santora, each of whom is a non-employee
member of our board of directors, comprise our nominating and
governance committee. Mr. Santora is the chairman of our
nominating and governance committee. Our board has determined
that each member of our nominating and governance committee
meets the requirements for independence under the rules of The
Nasdaq Stock Market. The nominating and governance committee is
responsible for, among other things:
•
assisting our board of directors in identifying prospective
director nominees and recommending nominees for each annual
meeting of stockholders to the board of directors;
•
reviewing developments in corporate governance practices and
developing and recommending governance principles applicable to
our board of directors;
•
overseeing the evaluation of our board of directors and
management; and
•
recommending potential members for each board committee to our
board of directors.
Director Compensation
In May 2006, our board of directors adopted a compensation
program for outside directors. Pursuant to this program, each
non-employee director will receive the following compensation
for board services, as applicable:
•
an annual director retainer of $40,000;
•
compensation for attending board of director meetings of $1,500;
•
compensation for attending committee meetings of $750;
•
an annual stipend of $15,000 for the audit committee chair and a
$7,500 stipend for other committee chairs;
•
upon joining the board, an automatic initial grant of a stock
option to purchase 50,000 shares of Class A
common stock vesting as to one-quarter of the shares on the
one-year anniversary of the grant date and monthly thereafter so
that the award is fully vested four years after the grant
date; and
•
for each director whose term continues following an annual
meeting, and who has been a director for at least
six months, an automatic annual grant of a stock option for
the purchase of 7,500 shares of Class A common stock
vesting as to one-quarter of the shares on the one-year
anniversary of the grant date and monthly thereafter so that the
award is fully vested four years after the grant date.
We made the automatic initial stock option grants described
above to Messrs. Gallagher, Mendoza, Robel and Santora in May
2006, each at an exercise price of $14.52 per share,
representing the fair market value of our common stock on the
date of grant as determined by the board of directors.
Compensation Committee Interlocks and Insider
Participation
None of the members of our leadership development and
compensation committee is an officer or employee of Go Daddy.
None of our executive officers currently serves, or in the past
year has served, as a member of the board of directors or
compensation committee of any entity that has one or more
executive officers serving on our board of directors or
leadership development and compensation committee.
The following table provides information regarding the
compensation of our chief executive officer and our four other
most highly compensated executive officers during 2005. We refer
to these five executive officers as the named executive officers.
We generally pay a portion of our bonus compensation in the year
following the year in which they were earned. Bonus amounts
presented in the table above include amounts that were earned in
2005 and paid in 2006.
(2)
Consists of life insurance premiums.
(3)
Was also appointed President in February 2006.
(4)
Consists of life insurance premiums of $57 and matching 401(k)
contributions of $4,000.
(5)
Was appointed Chief Accounting Officer and Acting Chief
Financial Officer in April 2006.
The following table summarizes the stock options granted to each
named executive officer during 2005, including the potential
realizable value over the
10-year term of the
options, which is based on assumed rates of stock appreciation
of 5% and 10%, compounded annually, and subtracting from that
result the aggregate option exercise price. These assumed rates
of appreciation comply with the rules of the SEC and do not
represent our estimate of our future stock prices for our
Class A common stock. Actual gains, if any, on stock option
exercises will depend on the future performance of our
Class A common stock. The assumed 5% and 10% rates of stock
appreciation are applied to an assumed initial public offering
price of
$ per
share of our Class A common stock. The percentage of total
options granted to employees is based upon options to purchase
an aggregate of 829,400 shares of Class A common stock
we granted to employees during 2005.
Represents the fair market value of our Class A common
stock, as determined by our board of directors, on the date of
grant.
In March 2006, we granted Warren J. Adelman an option to
purchase 250,000 shares of our Class A common
stock at an exercise price of $9.10 per share, subsequently
repriced to $13.53 per share, which represented the fair
market value of our Class A common stock as determined by
our board of directors on the original date of grant. In May
2006, we granted Warren J. Adelman an option to purchase
608,046 shares of our Class A common stock, Barbara J.
Rechterman an option to purchase 194,900 shares of our
Class A common stock, Michael J. Zimmerman an option to
purchase 341,050 shares of our Class A common stock,
and Christine N. Jones an option to purchase 472,900 shares
of our Class A common stock, with each option having an
exercise price of $14.52 per share, which represented the fair
market value of our Class A common stock as determined by
our board of directors on the date of grant. The options granted
in May 2006 were all granted with an expiration date no later
than ten years from the date of grant, but earlier in case of
termination of employment, and all options granted under the
2006 Equity Incentive Plan prior to this offering will
automatically expire on the first anniversary of the date of
grant if either this offering or a change of control of Go Daddy
does not occur by that date.
Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values
None of our named executive officers exercised stock options
during 2005. The following table sets forth information
concerning the number and value of exercisable and unexercisable
options held by the named executive officers who held options as
of December 31, 2005. The value of unexercised
in-the-money options at
December 31, 2005 represents an amount equal to the
difference between an assumed initial public offering price of
$ per
share of Class A common stock and the option exercise
price, multiplied by the number of unexercised
in-the-money options.
An option is
in-the-money if the
fair market value of the underlying shares exceeds the exercise
price of the option.
All the options listed in this column were unexercisable as of
December 31, 2005 due to a restriction in our 2002 stock
option plan that prevents outstanding stock options from being
exercised prior to the earlier to occur of a change of control
involving Go Daddy or our common stock becoming listed and
publicly traded on a U.S. stock exchange. If this
restriction had not been in place, the following options would
have been exercisable as of December 31, 2005: Barbara J.
Rechterman as to 1,686,600 shares with a value of
$ ,
Warren J. Adelman as to 110,500 shares with a value of
$ ,
Michael J. Zimmerman as to 130,350 shares with a value of
$ ,
and Christine N. Jones as to 134,900 shares with a value of
$ .
Employee Benefit Plans
Prior to May 11, 2006, all options to purchase shares of
our common stock were granted under our Go Daddy 2002 Stock
Option Plan. In May 2006, we began granting options to purchase
shares of our Class A common stock under our 2006 Equity
Incentive Plan and ceased granting options under the
Go Daddy 2002 Stock Option Plan. During that month, we
granted options to purchase an aggregate of
4,073,521 shares of our common stock with an exercise price
of $14.52 per share.
2006 Equity Incentive Plan
Our board of directors adopted, and our sole stockholder at the
time approved, our 2006 Equity Incentive Plan in May 2006. Our
2006 Equity Incentive Plan provides for the grant of incentive
stock options, within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, or the Internal
Revenue 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 and performance shares to our employees,
directors and consultants and our parent and subsidiary
corporations’ employees and consultants.
Number of Shares Reserved. We have reserved
7,000,000 shares of our Class A common stock for
issuance under the 2006 Equity Incentive Plan. The number of
shares reserved for issuance under this plan will be increased
to include:
•
any shares of our Class A common stock reserved under our
Go Daddy 2002 Stock Option Plan that are not issued or subject
to outstanding grants on the date of this prospectus; and
•
any shares of our Class A common stock issuable upon
exercise of options granted under our Go Daddy 2002 Stock Option
Plan that expire or become unexercisable without having been
exercised in full.
In addition, our 2006 Equity Incentive Plan provides for annual
increases in the number of shares available for issuance
thereunder on the first day of each year, beginning with 2007,
equal to the lesser of:
•
2% of the combined total number of outstanding shares of our
Class A and Class B common stock on the last day of
the preceding year;
any lesser number determined by our board of directors.
Administration of the 2006 Equity Incentive Plan. Prior
to the closing of this offering, our board of directors is the
plan administrator responsible for administering our 2006 Equity
Incentive Plan. Our leadership development and compensation
committee will be the plan administrator responsible for
administering our 2006 Equity Incentive Plan upon the closing of
this offering. The plan administrator has the power to determine
the terms of the awards, including the exercise price, the
number of shares subject to the award, the exercisability of the
award and the form of consideration to pay the exercise price.
The plan administrator also has the authority to institute an
exchange program whereby the exercise prices of outstanding
awards may be reduced or outstanding awards may be surrendered
in exchange for awards with a lower exercise price.
Stock Options. The plan administrator will determine the
exercise price of options granted under our 2006 Equity
Incentive Plan, but with respect to nonstatutory stock options
intended to qualify as “performance based
compensation” within the meaning of Section 162(m) of
the Internal Revenue Code and all incentive stock options within
the meaning of Section 422 of the Internal Revenue Code the
exercise price must at least be equal to the fair market value
of our Class A common stock on the date of grant. The term
of an incentive stock option may not exceed ten years. With
respect to any participant who owns 10% or more 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 plan administrator determines the term 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 12 months. In all other cases, the
option will generally remain exercisable for three months.
However, an option may not be exercised later than its
expiration date.
Stock Appreciation Rights. We are authorized to grant
stock appreciation rights under our 2006 Equity Incentive Plan.
Stock appreciation rights allow the recipient to receive the
appreciation in the fair market value of our Class A common
stock between the exercise date and the date of grant. The plan
administrator determines the terms of stock appreciation rights,
including when these rights become exercisable and whether to
pay the increased appreciation in cash, with shares of our
Class A common stock, or with a combination thereof. Stock
appreciation rights expire under the same rules that apply to
stock options.
Restricted Stock Awards. We are authorized to grant
restricted stock awards under our 2006 Equity Incentive Plan.
Restricted stock awards are shares of our Class A common
stock that vest in accordance with terms and conditions
established by the plan administrator. The plan administrator
will determine the number of shares of restricted stock granted
to any employee. The plan administrator may impose whatever
conditions to vesting it determines to be appropriate. For
example, the plan 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. We are authorized to grant
restricted stock units under our 2006 Equity Incentive Plan.
Restricted stock units are awards of restricted stock,
performance shares or performance units that are paid out in
installments or on a deferred basis. The plan administrator will
determine the terms and conditions of restricted stock units,
including the vesting criteria and the form and timing of
payment.
Performance Shares. We are authorized to grant
performance shares under our 2006 Equity Incentive Plan.
Performance shares are awards that will result in a payment to a
participant only if performance goals established by the plan
administrator are achieved or the awards otherwise vest. The
plan 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 shares to be paid out to participants.
Performance shares will have an initial value equal to the fair
market value of our Class A common stock on the grant date.
Payment for performance shares will be made in shares of our
Class A common stock, as determined by the plan
administrator.
Transferability of Awards. Unless the plan administrator
provides otherwise, our 2006 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.
Automatic Grants to Non-Employee Directors. Our 2006
Equity Incentive Plan also provides for the automatic grant of
options to our non-employee directors. Each non-employee
director receives an initial option to
purchase 50,000 shares of Class A common stock
upon election or appointment to the board of directors. This
option will vest as to one-fourth of the shares subject to the
option on the first anniversary of the date of grant and monthly
thereafter, so as to be fully vested at the end of four years
subject to the director’s continued service on each
relevant vesting date. In addition, beginning in 2007,
non-employee directors who have been directors for at least six
months will receive a subsequent option to
purchase 7,500 shares of Class A common stock
immediately following each annual meeting of our stockholders.
This option will be subject to the same four year vesting
schedule applicable to the initial option described above, with
vesting to commence on the date that the option is granted and
be subject to the director’s continued service on each
vesting date. All awards granted under the automatic grant
provisions will have a term of ten years and an exercise price
equal to the fair market value of our Class A common stock
on the date of grant.
Adjustments upon Merger or Change of Control. Our 2006
Equity Incentive Plan provides that, in the event of our
“change in control,” if the successor corporation or
its parent or subsidiary does not assume, or substitute an
equivalent award for, each outstanding award, then each
participant will fully vest in and have the right to exercise
all of his or her outstanding options and other awards. The plan
administrator is required to provide notice to the recipient
that he or she has the right to exercise the option or stock
appreciation right as to all of the shares subject to the award.
The option or stock appreciation right will terminate upon the
expiration of the period of time the plan 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,
all performance goals or other vesting requirements for
performance shares will be deemed achieved, and all other terms
and conditions will be deemed met.
Amendment and Termination of 2006 Plan. Our 2006 Equity
Incentive Plan will automatically terminate in 2016, unless we
terminate it sooner. Our board of directors has the authority to
amend, suspend or terminate the 2006 Equity Incentive Plan
provided its action does not impair the rights of any particular
participant in a manner different than other participants. If
the board amends the plan, it does not need to seek stockholder
approval of the amendment unless applicable law requires it.
Go Daddy 2002 Stock Option Plan
In July 2002, our then sole director and sole stockholder
adopted our Go Daddy 2002 Stock Option Plan. Our 2002 Stock
Option Plan permits the grant of nonqualified options to our
employees and employees of our related entities.
Number of Shares Reserved. We have reserved
6,700,000 shares of our Class A common stock for
issuance under the 2002 Stock Option Plan. As of March 31,2006, options to purchase 6,616,300 shares of our
Class A common stock were outstanding and
83,700 shares were available for grants under the 2002
Stock Option Plan. As of May 2006, we are no longer granting
options under this plan.
Administration of the Go Daddy 2002 Stock Option Plan.
Prior to this offering, our board of directors served as the
administrator of our 2002 Stock Option Plan. After this
offering, our board of directors or our leadership development
and compensation committee will serve as the administrator of
this plan. The administrator has complete discretion to make all
decisions relating to our 2002 Stock Option Plan.
Stock Options. No options granted under our 2002 Stock
Option Plan are exercisable until (i) our Class A
common stock is listed and publicly traded on any U.S. stock
exchange or (ii) we are sold or reorganized. A sale or
reorganization for this purpose is when more than 80% of the
voting power of our outstanding stock or more than 80% of our
assets is transferred to a third party. Vesting of shares
subject to
each option begins on the grant date of that option. On each
anniversary of the grant date, 25% of the shares subject to that
option vest and become non-forfeitable. Subject to the
restrictions in the first sentence of this paragraph, after an
employee’s termination of employment for any reason,
including the death of the employee, he or she may exercise his
or her option with respect to the shares vested as of the date
of the termination of employment for a period of 30 days
after that termination. However, an option may not be exercised
later than its expiration date.
401(k) Plan
We offer a 401(k) plan to all employees who meet specified
eligibility requirements. Eligible employees may contribute up
to 15% of their respective compensation subject to limitations
established by the Internal Revenue Code. We may match 50% of
any participant’s contribution up to $4,000. Participants
are immediately vested in their contributions plus actual
earnings thereon. Participants become 20% vested in our
contributions plus earnings thereon after two years of service
and 20% each year thereafter, becoming 100% vested after six
years of service.
Limitation of Liability and Indemnification of Officers and
Directors
Upon the closing of this offering, we will adopt and file an
amended certificate of incorporation and will amend and restate
our bylaws. Our amended certificate of incorporation and amended
bylaws will provide that we will indemnify our directors and
officers to the fullest extent permitted by Delaware law, as it
now exists or may in the future be amended, against all expenses
and liabilities reasonably incurred in connection with their
service for or on our behalf. Our bylaws provide that we will
advance the expenses incurred by a director or officer in
advance of the final disposition of an 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 that capacity, regardless of whether
Delaware law would otherwise permit indemnification. In
addition, the new certificate of incorporation provides that our
directors will not be personally liable for monetary damages to
us for breaches of their fiduciary duty as directors, unless
they violated their duty of loyalty to us or our stockholders,
acted in bad faith, knowingly or intentionally violated the law,
authorized illegal dividends or redemptions or derived an
improper personal benefit from their action as directors.
We have entered into indemnification agreements with each of our
directors and executive officers. These agreements provide for
indemnification for related expenses including attorneys’
fees, judgments, fines and settlement amounts incurred by any of
these individuals in any action or proceeding, and obligate us
to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified. At present,
we are not aware of any pending or threatened litigation or
proceeding involving any of our directors, officers, employees
or agents in which indemnification would be required or
permitted. We believe provisions in our new amended and restated
certificate of incorporation and indemnification agreements are
necessary to attract and retain qualified persons as directors
and officers. In addition, we maintain liability insurance which
insures our directors and officers against certain losses under
certain circumstances.
The limitation of liability and indemnification provisions in
our certificate of incorporation and 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. Furthermore, 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. At
present, we are not aware of any pending litigation or
proceeding involving any of our directors, officers or employees
for which indemnification is sought, and we are not aware of any
threatened litigation that may result in claims for
indemnification.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We describe below transactions and series of similar
transactions, since January 1, 2003, to which we were a
party or will be a party, in which:
•
the amounts involved exceeded or will exceed $60,000; and
•
a director, executive officer, holder of more than 5% of any
class of our voting securities or any member of their immediate
family had or will have a direct or indirect material interest.
We also describe below certain other transactions with our
directors, executive officers and sole stockholder prior to this
offering.
Change of Control Agreements with Executive Officers
In October 2005 and May 2006, we entered into change of control
agreements with Warren J. Adelman, Barbara J. Rechterman,
Michael J. Zimmerman and Christine N. Jones, which in
combination provide for the following benefits:
•
accelerated vesting of 100% of the shares subject to stock
options granted to each of these executive officers prior to
May 11, 2006 upon a change of control of Go Daddy; and
•
accelerated vesting of 50% of the then-unvested shares subject
to stock options granted to each of these executive officers
prior to May 11, 2006 upon the closing of this offering.
In addition, if, within eighteen months of a change of control
of Go Daddy, the executive officer’s employment is
terminated without cause or the executive officer terminates his
or her employment for good reason, the change of control
agreements in combination provide the following benefits:
•
accelerated vesting of 50% of the shares subject to stock
options granted on or after May 11, 2006;
•
all earned but unpaid compensation;
•
an amount equal to the total of the executive officer’s
base salary and bonus for the twelve-month period ending on the
executive’s termination date;
•
a one-year continuation of benefits, or the cash equivalent
thereof;
•
an amount equal to 130% of the remaining lease and insurance
payments on any vehicle leased by us on his or her behalf; and
•
if necessary, a cash payment in an amount sufficient after
payment of taxes on that payment to pay any excise taxes due
under Internal Revenue Code Section 4999 with respect to
any change of control benefits.
Distributions to Sole Stockholder
We have made aggregate distributions to our sole stockholder of
approximately $0.6 million in 2003, approximately
$5.1 million in 2004, approximately $4.8 million in
2005 and approximately $0.8 million in the first quarter of
2006. In addition, we have made or expect to make aggregate
distributions to our sole stockholder of approximately
$3.5 million after March 31, 2006 and prior to our
reincorporation.
Equity Grants to Executive Officers and Directors
We have granted options to purchase shares of our Class A
common stock to our named executive officers and directors. See
“Management — Director Compensation,”
“Management — Stock Option Grants
in Last Fiscal Year,” and “Management —
Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values.”
Board Compensation
We pay our non-employee directors an annual cash retainer and
compensation for board meeting attendance, and we grant them
options to purchase shares of our Class A common stock. For
more information regarding these arrangements, see
“Management — Director Compensation.”
Indemnification Agreements
We have entered into indemnification agreements with each of our
directors and executive officers. For a description of these
agreements, see “Management — Limitation of
Liability and Indemnification of Officers and Directors.”
The following table sets forth information about the beneficial
ownership of our common stock as of March 31, 2006, and as
adjusted to reflect the sale of Class A common stock in
this offering, for:
•
each person known to us to be the beneficial owner of more than
5% of our common stock;
•
each of our named executive officers;
•
each of our directors;
•
all of our executive officers and directors as a group; and
•
the selling stockholders.
The address of each beneficial owner listed in the table is
c/o The Go Daddy Group, Inc., 14455 N. Hayden Road,
Suite 219, Scottsdale, Arizona85260. We have determined
beneficial ownership in accordance with the rules of the SEC. We
believe, based on the information furnished to us, that the
persons named in the table below have sole voting and investment
power with respect to all shares of Class A and
Class B common stock that they beneficially own, subject to
applicable community property laws.
In the table below, percentage ownership prior to this offering
is based on 36,601,656 shares of Class B common stock
outstanding. This figure reflects the number of shares of common
stock outstanding as of March 31, 2006, and gives effect to
our reincorporation and the institution of our dual-class
capital structure. This figure does not include shares subject
to outstanding stock options.
In the table below, percentage ownership after this offering is
based
on shares
of Class A common stock
and shares
of Class B common stock outstanding. These numbers reflect
the changes described above, the conversion of shares to be sold
in this offering by a selling stockholder from Class B
common stock to Class A common stock, and the exercise
by a selling stockholder of stock options to
purchase shares
of Class A common stock, all of which will be sold in the
offering. These figures do not include shares subject to
outstanding stock options.
In computing the number of shares of Class A common stock
beneficially owned by a person and the percentage ownership of
that person, we deemed outstanding shares of Class A common
stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of March 31,2006. We did not deem these shares outstanding, however, for the
purpose of computing the percentage ownership of any other
person. Beneficial ownership representing less than 1% is
denoted with an asterisk (*).
The percentage of total voting power disclosed below represents
voting power with respect to all shares of our Class A and
Class B common stock, voting together as a single class.
Each holder of Class A common stock is entitled to one vote
per share of Class A common stock and the holder of
Class B common
stock is entitled to two votes per share of Class B common
stock. The Class A common stock and Class B common
stock vote together as a single class on all matters submitted
to our stockholders for a vote.
Shares Beneficially Owned
Shares Beneficially Owned
Prior to This Offering
After This Offering
Class B
Class A
Percentage of
Total Common Stock
% of Total
Number of
Common Stock
Common Stock
Combined
% of Total
Voting
Shares Being
Common
Voting
Name of Beneficial Owner
Number
Percentage
Power
Offered
Number
Number
Classes
Power
Bob
Parsons(1)
36,601,656
100
%
100
%
—
%
%
Barbara J. Rechterman
—
—
—
(2)
—
(3)
Warren J. Adelman
—
—
—
—
—
403,675(3
)
Michael J. Zimmerman
—
—
—
—
—
225,125(3
)
*
*
Christine N. Jones
—
—
—
—
—
225,725(3
)
*
*
Michael D. Gallagher
—
—
—
—
—
—
—
—
Thomas F. Mendoza
—
—
—
—
—
—
—
—
Charles J. Robel
—
—
—
—
—
—
—
—
Greg J. Santora
—
—
—
—
—
—
—
—
All directors and executive officers as a group (9 persons)
36,601,656
100
%
100
%
(3
)
%
%
(1)
Comprised entirely of shares held by a family limited
partnership, of which Mr. Parsons is the sole beneficial
owner.
(2)
Comprised entirely of shares of Class A common stock
issuable upon exercise of options that will occur immediately
following the effective date of this offering. These options are
not exercisable before this offering due to a restriction in our
2002 Stock Option Plan that prevents them from being exercised
prior to the earlier to occur of a change of control involving
GoDaddy or our common stock becoming listed and publicly traded
on a U.S. stock exchange.
(3)
Comprised entirely of shares of Class A common stock
issuable upon exercise of options exercisable within
60 days after March 31, 2006, including options
granted prior to May 11, 2006 that will accelerate and
become exercisable upon the closing of this offering to the
extent of 50% of the then-unvested shares thereunder. These
options are not exercisable before this offering due to a
restriction in our 2002 Stock Option Plan that prevents them
from being exercised prior to the earlier to occur of a change
of control involving Go Daddy or our common stock becoming
listed and publicly traded on a U.S. stock exchange.
The following is a summary of the rights of our classes of
common stock and preferred stock and certain provisions of our
certificate of incorporation and bylaws. For more detailed
information, please see copies of our certificate of
incorporation and bylaws, which are filed as exhibits to the
registration statement of which this prospectus is a part.
Our certificate of incorporation authorizes two classes of
common stock: Class A common stock, which has one vote per
share, and Class B common stock, which has two votes per
share. Any holder of Class B common stock may convert his
or her shares at any time into shares of Class A common
stock on a share-for-share basis. The rights of the two classes
of common stock are identical except for the voting and
conversion right described in greater detail below. The
implementation of this dual-class capital structure was required
by Bob Parsons, our sole stockholder, as a condition of
undertaking an initial public offering of our common stock. The
terms of the dual-class capital structure were determined based
on negotiations between us and Bob Parsons. See
“Anti-Takeover Effects of Delaware Law and Our Certificate
of Incorporation and Bylaws — Dual-Class
Capital Structure.”
Immediately following the closing of this offering, our
authorized capital stock will consist of
246,601,656 shares, with a par value of $0.001 per
share, of which:
•
200,000,000 shares are designated as Class A common
stock;
•
36,601,656 shares are designated as Class B common
stock; and
•
10,000,000 shares are designated as preferred stock.
As of March 31, 2006, we had no outstanding shares of
Class A common stock, 36,601,656 outstanding shares of
Class B common stock, all of which were beneficially owned
by Bob Parsons, and no outstanding shares of preferred stock.
Common Stock
Voting Rights. Holders of our Class A and
Class B common stock have identical voting rights, except
that holders of our Class A common stock are entitled to
one vote per share and holders of our Class B common stock
are entitled to two votes per share. Holders of shares of
Class A common stock and Class B common stock will
vote together as a single class on all matters, including the
election of at-large directors, submitted to a vote of
stockholders, unless otherwise required by law. Delaware law
requires the holders of our Class A common stock or
Class B common stock to vote separately as a single class
if we amend our certificate of incorporation in a manner that
alters or changes the powers, preferences or special rights of
that class in a manner that affects them adversely or increases
or decreases the number of shares of that class.
Dividends. The holders of shares of Class A common
stock and Class B common stock will be entitled to share
equally in any dividends that our board of directors may
determine to issue from time to time out of funds legally
available therefor. In the event a dividend is paid in the form
of shares of common stock or rights to acquire shares of common
stock, the holders of Class A common stock will receive
shares of Class A common stock or rights to acquire shares
of Class A common stock, as the case may be, and the
holders of shares of Class B common stock will receive
shares of Class B common stock or rights to acquire shares
of Class B common stock, as the case may be.
Liquidation and Other Rights. Upon our liquidation,
dissolution or winding-up, the holders of shares of Class A
common stock and shares of Class B common stock will be
entitled to share equally on a per share basis in all assets
remaining after the payment of liabilities and the liquidation
preferences of any outstanding shares of preferred stock.
Holders of Class A and Class B common stock have no
preemptive or subscription rights. There are no redemption or
sinking fund provisions applicable to the Class A or
Class B common stock. All outstanding
shares of Class B common stock are, and all shares of
Class A common stock to be outstanding upon the closing of
this offering will be, fully paid and nonassessable.
Conversion Rights. Our shares of Class A common
stock are not convertible into any other shares of our capital
stock. Each share of Class B common stock is convertible
into one share of Class A common stock at any time at the
option of the holder.
All shares of Class B common stock will convert
automatically into shares of Class A common stock on a
one-for-one basis upon the first to occur of (1) such time
as the outstanding shares of Class B common stock represent
less than 15% of the aggregate number of outstanding shares of
Class B common stock and Class A common stock or
(2) upon the affirmative vote of the holders of a majority
of the shares of Class B common stock to convert their
shares.
In addition, each share of Class B common stock will
convert automatically into one share of Class A common
stock upon any transfer, whether or not for value, except for
certain transfers described in our certificate of incorporation,
which include transfers to:
•
The spouse or lineal descendants, or the spouses or domestic
partners of those lineal descendants, of the holder of shares of
Class B common stock outstanding, who we refer to as our
Class B holder;
•
The executor or administrator of the estate of the Class B
holder, his spouse or lineal descendants, or the spouses or
domestic partners of those lineal descendants;
•
A trust for the benefit of the Class B holder, his spouse
or lineal descendants, the spouses or domestic partners of those
lineal descendants, or the parents of the spouse or lineal
descendents of Class B holders or the spouses or domestic
partners of those lineal descendants;
•
A charitable organization established by the Class B
holder, his spouse or lineal descendants, or the spouses or
domestic partners of those lineal descendants; or
•
Any other entity controlled by the Class B holder, his
spouse or lineal descendants, or the spouses or domestic
partners of those lineal descendants, or one or more trusts for
their benefit, or one or more charitable organizations
established by them; provided, however, each share of
Class B common stock will automatically convert into one
share of Class A common stock in any transfer by the above
persons or entities in a brokerage transaction or transaction
with a market maker, or in any similar open market transaction
on any securities exchange, national quotation system or
over-the-counter market.
Following this offering, we may not issue or sell any shares of
Class B common stock, or any securities convertible into or
exercisable for shares of Class B common stock, except
pursuant to any stock splits, stock dividends, subdivisions,
combinations or recapitalizations with respect to our
Class B common stock.
Preferred Stock
Our board of directors will have the authority, without further
action by our stockholders, to issue from time to time up to
10,000,000 shares of preferred stock in one or more series.
Our board of directors may designate the rights, preferences,
privileges and restrictions of the preferred stock, including
dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preference, sinking fund terms, and
number of shares constituting any series or the designation of
any series. The issuance of preferred stock could have the
effect of restricting dividends on our common stock classes,
diluting the voting power of our common stock classes or
impairing the liquidation rights of our common stock classes.
This issuance could have the effect of decreasing the market
trading price of the Class A common stock. The issuance of
preferred stock or even the ability to issue preferred stock
could also have the effect of delaying, deterring or preventing
a change of control. Immediately after the closing of this
offering, no shares of preferred stock will be outstanding, and
we currently have no plan to issue any shares of preferred stock.
Anti-Takeover Effects of Delaware Law and Our Certificate of
Incorporation and Bylaws
Our certificate of incorporation and our bylaws contain certain
provisions that could have the effect of delaying, deferring,
discouraging or preventing another party from acquiring control
of us. These provisions and certain provisions of Delaware law,
which are summarized below, are expected to discourage coercive
takeover practices and inadequate takeover bids. These
provisions are also designed, in part, to encourage persons
seeking to acquire control of us to negotiate first with our
board of directors. We believe that the benefits of increased
protection of our potential ability to negotiate with an
unfriendly or unsolicited acquirer outweigh the disadvantages of
discouraging a proposal to acquire us because negotiation of
these proposals could result in an improvement of their terms.
Dual-Class Capital Structure. As discussed above, our
Class B common stock has two votes per share, while our
Class A common stock, which is the class of stock we are
selling in this offering and which will be the only class of
stock that is publicly traded and issued in the form of stock
options to our employees and service providers, has one vote per
share. After the offering, Bob Parsons and persons and entities
affiliated with him will beneficially own all of our
Class B common stock,
representing %
of the voting power of our outstanding capital stock. Pursuant
to our certificate of incorporation, the holder of shares of
Class B common stock may generally transfer these shares to
family members, including spouses and descendents or the spouses
or domestic partners of those descendents, without having the
shares automatically convert into shares of Class A common
stock.
Because of this dual-class capital structure and the number of
shares he owns, Bob Parsons, his affiliates, and his family
members and descendents are expected to retain significant
influence over our management and affairs, and will be able to
control all matters requiring stockholder approval, including
the election of directors and significant corporate transactions
such as mergers or other sales of our company or assets, even if
they come to own significantly less than 50% of the outstanding
shares of our common stock. So long as Bob Parsons and his
affiliates continue to control shares of Class B common
stock representing more than one-third of our total outstanding
common stock, they will control a majority of the voting power
of our common stock. This concentrated control will
significantly limit the ability of stockholders other than Bob
Parsons and his affiliates to influence corporate matters.
Moreover, Bob Parsons and his affiliates may take actions that
other stockholders do not view as beneficial.
Undesignated Preferred Stock. As discussed above, our
board of directors has the ability to issue preferred stock with
voting or other rights or preferences that could impede the
success of any attempt to change control of us. These and other
provisions may have the effect of deterring hostile takeovers or
delaying a change of control or management of our company.
Stockholders’ Ability to Act by Written Consent. Our
stockholders may act by written consent so long as the holders
of our Class B common stock hold a majority of the combined
voting power of our Class A and Class B common stock.
As a result, a holder or holders of Class B common stock
would be able to act by written consent to delay or prevent a
change of control that might be favored by the holders of
Class A common stock.
Limits on Ability of Stockholders to Act by Written Consent
or Call a Special Meeting. Our certificate of incorporation
provides that, when the holders of our outstanding Class B
common stock cease to represent a majority of the voting power
of our company, our stockholders will no longer be able to act
by written consent. This limit on the ability of our
stockholders to act by written consent may lengthen the amount
of time required to take stockholder actions. As a result, a
holder controlling a majority of our capital stock would not be
able to amend our bylaws or remove directors without holding a
meeting of our stockholders called in accordance with our
bylaws. The loss of our stockholders’ ability to act by
written consent would also have an anti-takeover effect by
increasing the difficulty of obtaining approval of change of
control transactions.
In addition, our bylaws provide that special meetings of the
stockholders may be called only by the chairperson of the board,
the chief executive officer, our board of directors or one or
more stockholders that in the aggregate represent at least 30%
of the total votes entitled to be cast at the meeting. As a
result of the stock ownership of Mr. Parsons, other stockholders
may not be able to call a special meeting, which may delay the
ability of our stockholders to force consideration of a proposal
or for holders controlling a majority of our capital stock to
take any action, including the removal of directors.
Requirements for Advance Notification of Stockholder
Nominations and Proposals. Our bylaws establish advance
notice procedures with respect to stockholder proposals and the
nomination of candidates for election
as directors, other than nominations made by or at the direction
of our board of directors or a committee of our board of
directors. Thus, our bylaws may have the effect of precluding
the conduct of certain business at a meeting if the proper
procedures are not followed. These provisions may also
discourage or deter a potential acquirer from conducting a
solicitation of proxies to elect the acquirer’s own slate
of directors or otherwise attempting to obtain control of our
company.
Board Classification; Cumulative Voting; Director
Vacancies. Our board of directors is divided into three
classes. The directors in each class will serve for a three-year
term, one class being elected each year by our stockholders. For
more information on the classified board, see
“Management — Board of Directors.” This
system of electing and removing directors may tend to discourage
a third party from making a tender offer or otherwise attempting
to obtain control of us, because it generally makes it more
difficult for stockholders to replace a majority of the
directors. In addition, our certificate of incorporation
prohibits cumulative voting in the election of directors. This
will limit the ability of holders of Class A common stock
and minority stockholders to elect director candidates. Finally,
our board of directors has the sole right to elect a director to
fill a vacancy created by the expansion of the board of
directors or the resignation, death or removal of a director,
which prevents stockholders from being able to fill vacancies on
our board of directors.
Delaware Anti-Takeover Statute. We are subject to the
provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. In general,
Section 203 prohibits a publicly held Delaware corporation
from engaging, under certain circumstances, in a business
combination with an interested stockholder for a period of three
years following the date the person becomes an interested
stockholder unless:
•
prior to the date of the transaction, the corporation’s
board of directors approved either the business combination or
the transaction that resulted in the stockholder becoming an
interested stockholder;
•
upon completion of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
calculated as provided under Section 203; or
•
at or subsequent to the date of the transaction, the business
combination is approved by the corporation’s board of
directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative
vote of at least
662/3%
of the outstanding voting stock that is not owned by the
interested stockholder.
Generally, a business combination includes a merger, asset or
stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. An interested stockholder
is a person who, together with affiliates and associates, owns
or, within three years prior to the determination of interested
stockholder status, did own 15% or more of a corporation’s
outstanding voting stock. We expect the existence of this
provision to have an anti-takeover effect with respect to
transactions our board of directors does not approve in advance.
We also anticipate that Section 203 may also discourage
attempts that might result in a premium over the market price
for the shares of common stock held by stockholders.
The provisions of Delaware law and the provisions of our
certificate of incorporation and bylaws, as amended upon the
closing of this offering, could have the effect of discouraging
others from attempting hostile takeovers and, as a consequence,
they might also inhibit temporary fluctuations in the market
price of our Class A common stock that often result from
actual or rumored hostile takeover attempts. These provisions
might also have the effect of preventing changes in our
management. It is possible that these provisions could make it
more difficult to accomplish transactions that stockholders
might otherwise deem to be in their best interests.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is The
Bank of New York, located at 101 Barclay Street, 11E,
New York, New York10286.
Prior to this offering, there has been no public market for our
Class A common stock. Future sales of our Class A
common stock in the public market, or the availability of those
shares for sale in the public market, could adversely affect
market prices prevailing from time to time. As described below,
other than
the shares
being offered in this offering, all of our outstanding shares
will be prohibited from sale shortly after the offering due to
contractual and legal restrictions on resale. Nevertheless,
sales of our Class A common stock in the public market
after those restrictions lapse, or the perception that those
sales might occur, could adversely affect the prevailing market
price at that time and our ability to raise equity capital in
the future.
Upon the closing of this offering, we will have outstanding an
aggregate
of shares
of Class A common stock
and shares
of Class B common stock. All of the outstanding shares of
Class A common stock will have been sold by us and the
selling stockholders in this offering and will be freely
tradable without restriction or further registration under the
Securities Act, unless the shares are purchased or repurchased
by any of our “affiliates” as that term is defined in
Rule 144 of the Securities Act. All of the shares of
Class B common stock will be beneficially owned by Bob
Parsons, will be “restricted shares” as that term is
defined in Rule 144 under the Securities Act, and will
convert into shares of Class A common stock upon transfer,
except in certain limited circumstances that are more fully
described in the section of this prospectus entitled
“Description of Capital Stock — Common
Stock — Conversion Rights.” Restricted shares may
be sold in the public market only if registered or if they
qualify for exemption under Rule 144 or 144(k) under the
Securities Act, which are summarized below, or another exemption.
As a result of the
lock-up agreements
described below and the provisions of Rule 144 and
Rule 144(k) under the Securities Act, the shares of our
common stock, excluding the shares sold in this offering, that
will be available for sale in the public market are as follows:
Approximate
Number of
Date of Availability of Sale
Shares
As of the date of this prospectus
At various times beginning 180 days after the date of this
prospectus
*
*
Of these
shares, will
be subject to volume limitations under Rule 144 as more
fully described below.
In addition, as of March 31, 2006, options to purchase a
total of 6,616,300 shares of Class A common stock were
outstanding, of which options to
purchase shares
were vested and will become exercisable upon the completion of
this offering. Other than the options being exercised by one of
our selling stockholders for shares being sold in this offering,
substantially all of these options are restricted by the terms
of the lock-up
agreements described below.
Lock-up
Agreements
Our stockholder and substantially all of the holders of our
outstanding stock options that would be vested within
180 days after the expected date of this offering have
signed lock-up
agreements that prevents them from selling any shares of our
Class A common stock or any securities convertible into or
exercisable or exchangeable for shares of our Class A
common stock for a period of at least 180 days from the
date of this prospectus without the prior written consent of
Lehman Brothers and Merrill Lynch. This
180-day period may be
extended in the circumstances described below under
“Underwriting — Lock-Up Agreements.” When
determining whether or not to release shares from the
lock-up agreements,
Lehman Brothers and Merrill Lynch will consider, among other
factors, the stockholder’s or option holder’s reasons
for requesting the release, the number of shares for which the
release is being requested and market conditions at the time of
the request.
In general, under Rule 144 of the Securities Act, beginning
90 days after the date of this prospectus a person deemed
to be our “affiliate,” or a person holding restricted
shares who beneficially owns shares that were not acquired from
us or any of our “affiliates” within the previous
year, is entitled to sell within any three-month period a number
of shares that does not exceed the greater of 1% of the then
outstanding shares of our common stock, which will equal
approximately shares
immediately after this offering, assuming no exercise of
outstanding options, or the average weekly trading volume of our
Class A common stock on the Nasdaq Global Market during the
four calendar weeks preceding the filing with the SEC of a
notice on Form 144 with respect to that sale. Sales under
Rule 144 of the Securities Act are also subject to
prescribed requirements relating to manner of sale, notice and
availability of current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is deemed not to have been
one of our affiliates at any time during the 90 days
preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, including the
holding period of any prior owner other than an affiliate, is
entitled to sell the shares without complying with the manner of
sale, public information, volume limitation or notice provisions
of Rule 144. Beginning 180 days after the date of this
prospectus, shares
of our common stock will qualify as “Rule 144(k)”
shares.
Stock Option Plan Registration Statement
We intend to file a registration statement on
Form S-8 under the
Securities Act to register shares of our Class A common
stock issued or reserved for issuance under our stock option
plans. Accordingly, shares registered under that registration
statement will be available for sale in the open market, unless
such shares are subject to vesting restrictions with us or, to
the extent applicable, the
lock-up restrictions
described above.
Lehman Brothers Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated are acting as the
representatives of the underwriters and the joint book-running
managers of this offering. Under the terms of an underwriting
agreement, which will be filed as an exhibit to the registration
statement, each of the underwriters named below has severally
agreed to purchase from us and the selling stockholders the
number of shares of Class A common stock shown opposite its
name below:
Number
Underwriters
of Shares
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
UBS Securities LLC
Cowen and Company, LLC
Piper Jaffray & Co.
JMP Securities LLC
Total
The underwriting agreement provides that the underwriters’
obligation to purchase shares of Class A common stock
depends on the satisfaction of the conditions contained in the
underwriting agreement, including:
•
the representations and warranties made by us and the selling
stockholders to the underwriters are true;
•
there is no material change in our business or the financial
markets; and
•
we deliver customary closing documents to the underwriters.
Subject to the terms and provisions of the underwriting
agreement, the underwriters are obligated to purchase all of the
shares of Class A common stock offered hereby (other than
those shares of Class A common stock covered by their
option to purchase additional shares as described below), if any
of the shares are purchased.
Commissions and Expenses
The following table summarizes the underwriting discounts and
commissions we and the selling stockholders will pay to the
underwriters. These amounts are shown assuming both no exercise
and full exercise of the underwriters’ option to purchase
additional shares. The underwriting fee is the difference
between the public offering price on the cover of this
prospectus and the amount the underwriters pay to us and the
selling stockholders for the shares.
No
Full
Exercise
Exercise
Per share
$
$
Total
The representatives of the underwriters have advised us that the
underwriters propose to offer the shares of Class A common
stock directly to the public at the public offering price and to
selected dealers, which may include the underwriters, at such
offering price less a selling concession not in excess of
$ per
share. The underwriters may allow, and the selected dealers may
re-allow, a discount from the concession not in excess of
$ per
share to other dealers. After the offering, the representatives
may change the offering price and other selling terms.
The expenses of the offering that are payable by us are
estimated to be
$ ,
excluding underwriting discounts and commissions.
One of the selling stockholders, Bob Parsons, has granted the
underwriters an option exercisable for 30 days after the
date of the underwriting agreement to purchase, from time to
time, in whole or in part, up to an aggregate
of shares
of Class A common stock at the public offering price less
underwriting discounts and commissions. This option may be
exercised if the underwriters sell more
than shares
of Class A common stock in connection with this offering.
To the extent that this option is exercised, each underwriter
will be obligated, subject to certain conditions, to purchase
its pro rata portion of these additional shares based on the
underwriter’s underwriting commitment in the offering as
indicated in the table at the beginning of this
“Underwriting” section.
Lock-Up Agreements
We, all of our directors and executive officers, our
stockholder, and the holders of substantially all of our
outstanding stock options that would be vested within
180 days after the expected date of this offering have
agreed that, subject to certain exceptions negotiated between
the underwriters and us, without the prior written consent of
each of Lehman Brothers and Merrill Lynch, we and they will not,
directly or indirectly, (1) offer for sale, sell, contract
to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any options, right or warrant
to purchase, pledge or otherwise dispose of any shares of
Class A common stock or securities convertible into or
exercisable or exchangeable for Class A common stock
(including, without limitation, shares of Class A common
stock that may be deemed to be beneficially owned in accordance
with the rules and regulations of the SEC and shares of
Class A common stock that may be issued upon exercise of
any options or warrants), (2) enter into any swap or other
derivatives transaction that transfers to another, in whole or
in part, any of the economic consequences of ownership of the
Class A common stock, or (3) make any demand for or
exercise any right or cause to be filed a registration
statement, including any amendments thereto, with respect to the
registration of any shares of Class A common stock or
securities convertible into or exercisable or exchangeable for
Class A common stock or any of our other securities.
The 180-day restricted
period described in the preceding paragraph will be extended if:
•
during the last 17 days of the
180-day restricted
period, we issue an earnings release or material news or a
material event relating to us occurs; or
•
prior to the expiration of the
180-day restricted
period, we announce that we will release earnings results during
the 16-day period
beginning on the last day of the
180-day period,
in which case the restrictions described in the preceding
paragraph will continue to apply until the expiration of the
18-day period beginning
on the issuance of the earnings release or the announcement of
the material news or the occurrence of the material event.
Lehman Brothers and Merrill Lynch, jointly in their sole
discretion, may release the Class A common stock and other
securities subject to the
lock-up agreements
described above in whole or in part at any time with or without
notice. When determining whether or not to release Class A
common stock and other securities from
lock-up agreements,
Lehman Brothers and Merrill Lynch will consider, among other
factors, the holder’s reasons for requesting the release,
the number of shares of Class A common stock and other
securities for which the release is being requested and market
conditions at the time.
Offering Price Determination
Prior to this offering, there has been no public market for our
common stock. The initial public offering price will be
negotiated among the representatives, the selling stockholders
and us. Among the factors to be considered in determining the
initial public offering price will be:
•
the history and prospects for the industry in which we compete;
the ability of our management and our business potential and
earning prospects;
•
the prevailing securities markets at the time of this
offering; and
•
the recent market prices of, and the demand for, publicly traded
shares of generally comparable companies.
Indemnification
We and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act and liabilities incurred in connection
with the directed share program referred to below, and to
contribute to payments that the underwriters may be required to
make for these liabilities.
Directed Share Program
At our request, the underwriters have reserved for sale at the
initial public offering price up
to shares
offered hereby for officers, directors, employees and certain
other persons associated with us. The number of shares available
for sale to the general public will be reduced to the extent
these persons purchase these reserved shares. Any reserved
shares not so purchased will be offered by the underwriters to
the general public on the same basis as the other shares offered
hereby.
Stabilization, Short Positions and Penalty Bids
The representatives may engage in stabilizing transactions,
short sales and purchases to cover positions created by short
sales, and penalty bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Class A common
stock, in accordance with Regulation M under the Securities
Exchange Act of 1934:
•
Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
•
A short position involves a sale by the underwriters of shares
in excess of the number of shares the underwriters are obligated
to purchase in the offering, which creates the syndicate short
position. This short position may be either a covered short
position or a naked short position. In a covered short position,
the number of shares involved in the sales made by the
underwriters in excess of the number of shares they are
obligated to purchase is not greater than the number of shares
that they may purchase by exercising their option to purchase
additional shares. In a naked short position, the number of
shares involved is greater than the number of shares in their
option to purchase additional shares. The underwriters may close
out any short position by exercising their option to purchase
additional shares and/or purchasing shares in the open market.
In determining the source of shares to close out the short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through
their option to purchase additional shares. A naked short
position is more likely to be created if the underwriters are
concerned that there could be downward pressure on the price of
the shares in the open market after pricing that could adversely
affect investors who purchase in the offering.
•
Syndicate covering transactions involve purchases of the
Class A common stock in the open market after the
distribution has been completed in order to cover syndicate
short positions.
•
Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the Class A common
stock originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our Class A common stock or preventing
or retarding a decline in the market price of the Class A
common stock. As a result, the price of the Class A common
stock may be
higher than the price that might otherwise exist in the open
market. These transactions may be effected on The Nasdaq Stock
Market or otherwise and, if commenced, may be discontinued at
any time.
Neither we, the selling stockholders nor any of the underwriters
make any representation or prediction as to the direction or
magnitude of any effect that the transactions described above
may have on the price of the Class A common stock. In
addition, neither we, the selling stockholders nor any of the
underwriters make any representation that the representatives
will engage in these stabilizing transactions or that any
transaction, once commenced, will not be discontinued without
notice.
Electronic Distribution
A prospectus in electronic format may be made available on the
Internet sites or through other online services maintained by
one or more of the underwriters and/or selling group members
participating in this offering, or by their affiliates. In those
cases, prospective investors may view offering terms online and,
depending upon the particular underwriter or selling group
member, prospective investors may be allowed to place orders
online. The underwriters may agree with us to allocate a
specific number of shares for sale to online brokerage account
holders. Any such allocation for online distributions will be
made by the representatives on the same basis as other
allocations.
Other than the prospectus in electronic format, the information
on any underwriter’s or selling group member’s website
and any information contained in any other website maintained by
an underwriter or selling group member is not part of the
prospectus or the registration statement of which this
prospectus forms a part, has not been approved and/or endorsed
by us, the selling stockholders or any underwriter or selling
group member in its capacity as underwriter or selling group
member and should not be relied upon by investors.
Nasdaq Stock Market
We have applied to list our shares of Class A common stock
for quotation on the Nasdaq Global Market under the symbol
“DADY.”
Discretionary Sales
The underwriters have informed us that they do not intend to
confirm sales to discretionary accounts that exceed 5% of the
total number of shares offered by them.
Stamp Taxes
If you purchase shares of Class A common stock offered in
this prospectus, you may be required to pay stamp taxes and
other charges under the laws and practices of the country of
purchase, in addition to the offering price listed on the cover
page of this prospectus.
Relationships
The underwriters may in the future perform investment banking
and advisory services for us from time to time for which they
may in the future receive customary fees and expenses.
The validity of our Class A common stock offered by this
prospectus will be passed upon for us by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters in connection with this
offering will be passed upon for the underwriters by
Fenwick & West LLP, Mountain View, California.
EXPERTS
The consolidated financial statements of The Go Daddy Group,
Inc. at December 31, 2004 and 2005, and for each of the
three years in the period ended December 31, 2005,
appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, an independent
registered public accounting firm, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance
upon such report given on the authority of such firm as experts
in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on
Form S-1 under the
Securities Act with respect to the shares of our Class A
common stock offered hereby. This prospectus does not contain
all of the information set forth in the registration statement
and the exhibits thereto. Some items are omitted in accordance
with the rules and regulations of the SEC. For further
information with respect to us and the Class A common stock
offered hereby, we refer you to the registration statement and
the exhibits thereto. Statements contained in this prospectus as
to the contents of any contract, agreement or any other document
are summaries of the material terms of that contract, agreement
or other document. With respect to each of these contracts,
agreements or other documents filed as an exhibit to the
registration statement, we refer you to the exhibits for a more
complete description of the matter involved. A copy of the
registration statement, and the exhibits thereto, may be
inspected without charge at the public reference facilities
maintained by the SEC at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Copies of these materials may be
obtained from this office upon payment of the prescribed fees.
Please call the SEC at
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regarding issuers, like us, that file electronically with the
SEC. The address of the SEC’s website is www.sec.gov.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholder of
The Go Daddy Group, Inc.
We have audited the accompanying consolidated balance sheets of
The Go Daddy Group, Inc. (a subchapter S corporation) as of
December 31, 2004 and 2005 and the related consolidated
statements of operations, stockholder’s deficit, and cash
flows for each of the three years in the period ended
December 31, 2005. These consolidated financial statements
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated
financial statements based upon our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of The Go Daddy Group, Inc. at
December 31, 2004 and 2005, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2005, in conformity with
U.S. generally accepted accounting principles.
Prepaid domain name registry fees, net of current portion
12,863
21,300
24,781
24,781
Restricted cash
50
50
50
50
Other assets
220
261
360
360
Total assets
$
65,615
$
124,192
$
145,018
$
145,018
Liabilities and Stockholder’s Deficit
Current liabilities:
Accounts payable
$
2,688
$
6,998
$
7,599
$
7,599
Accrued expenses
4,769
9,223
13,272
13,272
Current portion of deferred revenue
51,395
89,076
105,789
105,789
Stockholder distributions payable
—
—
—
3,500
Current portion of long-term debt
—
123
197
197
Total current liabilities
58,852
105,420
126,857
130,357
Deferred rent
675
1,350
1,251
1,251
Deferred revenue, net of current portion
19,818
40,688
50,428
50,428
Long-term debt, net of current portion
—
6,920
6,971
6,971
Commitments and contingencies
Stockholder’s deficit:
Common stock, par value $0.01, 50,000,000 shares
authorized, 36,601,656 shares issued and outstanding at
December 31, 2004 and 2005 and March 31,2006 (unaudited)
The consolidated financial statements include the accounts and
operations of The Go Daddy Group, Inc. and its wholly owned
subsidiaries (the “Company”). The Company does not
have any subsidiaries in which it does not own 100% of the
outstanding stock. All significant intercompany accounts and
transactions have been eliminated in consolidation. The Company
provides a variety of domain name registration and website
hosting services as well as a broad array of on-demand and other
services.
2.
Summary of Significant Accounting Policies
Unaudited Financial Information
The accompanying unaudited interim consolidated balance sheet at
March 31, 2006, the consolidated statements of operations
and cash flows for the three months ended March 31, 2005
and 2006 and the consolidated statement of stockholder’s
deficit for the three months ended March 31, 2006 are
unaudited. These unaudited interim consolidated financial
statements have been prepared in accordance with U.S. generally
accepted accounting principles. In the opinion of the
Company’s management, the unaudited interim consolidated
financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all
adjustments, which include only normal recurring adjustments,
necessary for the fair presentation of the Company’s
statement of financial position at March 31, 2006 and its
results of operations and its cash flows for the three months
ended March 31, 2005 and 2006. The results for the three
months ended March 31, 2006 are not necessarily indicative
of the results to be expected for the year ending
December 31, 2006.
Cash and Cash Equivalents
The Company considers all investments purchased with a remaining
maturity of three months or less at the date of acquisition to
be cash equivalents. The Company had pledged $50 of its cash
equivalents as collateral against outstanding letters of credit
at December 31, 2004 and 2005 and March 31, 2006
(unaudited). These cash equivalents are shown as restricted cash
on the consolidated balance sheets.
Short-Term and Long-Term Investments
Investments consist of corporate and government agency debt
securities and bank time deposits. Management classifies the
Company’s investments as available-for-sale.
Available-for-sale securities are carried at fair value with the
unrealized gains and losses reported in stockholder’s
deficit. Realized gains and losses and declines in value judged
to be other than temporary, if any, are included in operations.
A decline in the market value of any available-for-sale security
below cost that is deemed other than temporary results in an
impairment of fair value. Any deemed impairment is charged to
earnings and a new cost basis for the security is established.
Premiums and discounts are amortized or accreted over the life
of the related available-for-sale security. Dividend and
interest income is recognized when earned. The cost of
securities sold is calculated using the specific identification
method.
Accounts Receivable
Accounts receivable are carried at the outstanding balances less
an allowance for doubtful accounts. The Company considers
accounts receivable to be fully collectible; therefore, the
allowance for doubtful accounts was zero at December 31,2004 and 2005 and March 31, 2006 (unaudited). In addition,
the Company does not record a reserve for credit card
chargebacks as such amounts are immaterial.
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
Registry Deposits
Registry deposits represent amounts paid by the Company to
registries for future domain name registrations.
Prepaid Domain Name Registry Fees
Prepaid domain name registry fees represent amounts paid by the
Company to registries for domain names registered by the
Company’s customers. The Company amortizes prepaid domain
name registry fees for initial registrations and renewals on a
straight-line basis over the term of the related registration
contract, which typically ranges from one to ten years. Under
certain circumstances, renewal registrations have a term of
between one and eleven months.
Property and
Equipment
Property and equipment are stated at cost. Depreciation and
amortization are charged to operations over the estimated useful
lives of the applicable assets, using the straight-line method.
The estimated useful lives are as follows:
Computer equipment
2-5 years
Building
25 years
Software
3 years
Furniture and fixtures
7-10 years
Other depreciable property
5-10 years
Leasehold improvements are amortized over the shorter of seven
years or the remaining life of the lease. Maintenance and
repairs are charged to expense as incurred; major renewals and
betterments are capitalized. When items of property or equipment
are sold or retired, the related cost and accumulated
depreciation are removed from the accounts and any gain or loss
is included in income. Depreciation and amortization expenses
for the years ended December 31, 2003, 2004 and 2005 and
the three months ended March 31, 2005 and 2006 were $1,384,
$2,780, $7,784, $1,401 (unaudited) and $3,204 (unaudited),
respectively.
Long-Lived Assets
The Company reviews its long-lived assets for impairment
annually and whenever events or circumstances indicate that the
carrying amount of an asset may not be fully recoverable. The
Company recognizes an impairment loss if the sum of the expected
long-term undiscounted cash flows that the long-lived asset is
expected to generate is less than the carrying amount of the
long-lived asset being evaluated. The Company treats any
write-downs as permanent reductions in the carrying amounts of
the assets. The Company believes the carrying amounts of its
assets at December 31, 2004 and 2005 and March 31,2006 (unaudited) are fully realizable.
Deferred Rent and Lease
Accounting
The Company leases office space in various locations. At the
inception of each lease, the Company evaluates the property to
determine whether the lease will be accounted for as an
operating or a capital lease. The term of the lease used for
this evaluation includes renewal option periods only in
instances where the exercise of the renewal option can be
reasonably assured and failure to exercise the option would
result in an economic penalty.
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
The Company records tenant improvement allowances granted under
the lease agreements as leasehold improvements within property
and equipment and within deferred rent.
For leases that contain rent escalation provisions, the Company
records the total rent payable during the lease term, as
determined above, on a straight-line basis over the term of the
lease (including any “rent holiday” period beginning
upon possession of the premises), and records any difference
between the actual rent paid and the straight-line rent recorded
as deferred rent.
Revenue Recognition
The Company’s revenue recognition policy is consistent with
applicable revenue recognition guidance and interpretations,
including the requirements of Staff Accounting
Bulletin No. 104, Revenue Recognition, Emerging
Issues Task Force Issue (“EITF”)
No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an
Agent,
EITF No. 00-21,
Revenue Arrangements with Multiple Deliverables, and
Statement of Position 97-2, Software Revenue Recognition.
The Company records revenue when all four of the following
criteria are met: (1) there is persuasive evidence that an
arrangement exists; (2) delivery of the services has
occurred; (3) the selling price is fixed or determinable;
and (4) collectibility is reasonably assured. The Company
records the cash received in advance of revenue recognition as
deferred revenue.
The Company’s agreements do not contain general rights of
return. The Company reserves for payment card chargebacks and
certain other refunds based on its historical experience. The
Company records reserves as a reduction to revenue.
The Company evaluates revenue arrangements with multiple
deliverables to determine if the deliverables (items) can
be divided into more than one unit of accounting. An item is
generally considered a separate unit of accounting if all of the
following criteria are met:
•
the delivered item has value to the customer on a stand-alone
basis;
•
there is objective and reliable evidence of the fair value of
the undelivered item; and
•
if the arrangement includes a general right of return relative
to the delivered item, delivery or performance of the
undelivered item is considered probable and substantially in the
control of the Company.
Items that do not meet these criteria are combined into a single
unit of accounting. If there is objective and reliable evidence
of fair value for all units of accounting, the Company allocates
the arrangement consideration to the separate units of
accounting based on their relative fair values. The Company
records revenue from these units in the appropriate revenue line
item in its consolidated statements of operations. In cases
where the arrangement consideration allocated to an individual
unit is less than the Company’s cost of the unit, the
Company immediately records a loss for the amount by which the
cost exceeds the revenue allocated to the unit recorded. In the
event objective and reliable evidence of the fair value(s) of
the undelivered item(s) did not exist, the Company would defer
all revenue for the arrangement and recognize it over the period
until the last item is delivered.
Pursuant to EITF
No. 99-19, the
Company records revenue associated with sales through its
network of resellers on a gross basis and expenses the
commission amount paid to resellers as a cost of revenue. The
Company records enrollment fees paid by resellers over the
one-year term of the reseller contract.
Domain Name Registration. Domain name registration
revenue consists of domain name registrations, renewals and
transfers, domain name privacy, domain name application fees,
domain name back-orders and fee surcharges paid to the Internet
Corporation for Assigned Names and Numbers (ICANN). The domain
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
name registration contractsthe Company enters into with
customers typically have terms between one and ten years, with a
majority having a one-year term. Under certain circumstances,
renewal registrations have a term of between one and eleven
months. Except for one large enterprise customer with which the
Company has negotiated an alternative arrangement, all of its
customers pay for registrations in full at the time a domain
name is registered. Domain name registration fees are
non-refundable, and the Company records them as deferred revenue
in the accompanying consolidated balance sheets (see
Note 7). The Company then recognizes revenue ratably on a
daily basis over the term of the contract.
Website Hosting.The Company generates website hosting
revenue through the sale of website hosting services. Website
hosting is most frequently purchased on an annual basis but is
also available on a monthly basis or for longer periods. The
fees the Company charges for website hosting services differ
based on the type of hosting plan purchased and the amount of
data storage, bandwidth and other services included. The Company
records website hosting fees as deferred revenue at the time of
sale and recognizes revenue ratably on a daily basis over the
term of the contract.
On-Demand Services and Other Revenue.The Company’s
on-demand services currently include an online shopping cart
service, hosted website building services, email accounts,
search engine optimization service, an email marketing service,
and a fax thru email service. The Company generally sells its
on-demand services on an annual or a monthly basis, depending on
the service. The Company records fees from on-demand services as
deferred revenue when paid and recognizes revenue ratably on a
daily basis over the term of the contract.
Other revenue sources include the sale of Secure Sockets Layer
(SSL) certificates for secure online transacting, domain name
appraisal and auction services, enrollment fees paid to the
Company by its resellers, and advertising on “parked
pages.” Parked pages are domain names registered with the
Company that do not yet contain an active website. The Company
recognizes revenues from these sources, other than enrollment
fees from resellers, immediately upon completion of the service,
ratably over the term of the service contract or, in the case of
advertising, on a per-click basis.
Research and Development and
Software Development Costs
The Company charges research and development costs, other than
certain software development costs, to expense as incurred.
Software development costs incurred subsequent to the
establishment of technological feasibility and prior to the
general release of a service to the public are capitalized and
amortized to cost of revenue over the estimated useful life of
the related service. There were no costs capitalized at
December 31, 2004 or 2005 or March 31, 2006
(unaudited) because the costs incurred from technological
feasibility to the general release were immaterial.
Share-Based
Compensation
Variable Stock Option Plan.The Company accounts for
employee stock options granted prior to December 31, 2005
pursuant to Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (“APB
25”), and related interpretations, and has adopted the
disclosure-only alternative of Statement of Financial Accounting
Standards (“SFAS”) No. 123, Accounting for
Stock-Based Compensation
(“SFAS No. 123”), and
SFAS No. 148, Accounting for Stock-Based
Compensation — Transition and Disclosure. The
Company grants stock options to employees with exercise prices
equal to the value of the underlying stock, as determined by its
board of directors on the date the option is granted. Its board
of directors determines the value of the underlying stock by
considering a number of factors, including operating cash flows,
the risks the Company faced at the time, and the lack of
liquidity of the Company’s common stock. The stock options
vest 25% per year beginning one year after the grant date, and
expire ten years from the date of grant; however, the options
are not exercisable prior to the occurrence of the sale of the
Company
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
or the common stock of the Company being listed and publicly
traded on a U.S. stock exchange. As a result of the lack of
exercisability, the stock options outstanding are considered to
be variable awards and the measurement date will only occur when
exercise of the options becomes probable. At December 31,2005 and March 31, 2006, the exercisability of the
Company’s stock options had not yet been deemed probable
and as a result no compensation expense was recorded.
Based on the determined fair value of the Company’s common
stock of $11.64 at December 31, 2005 and $13.53
(unaudited) at March 31, 2006, the amount of
unrecognized compensation expense resulting from the
Company’s outstanding stock options granted prior to
January 1, 2006 was approximately $61,568 and $73,386
(unaudited) at December 31, 2005 and March 31,2006, respectively, of which approximately $56,548 and $67,761
(unaudited) related to vested options. The fair value was
determined by our board of directors based in significant part
upon a retrospective third-party valuation analysis performed by
an independent, third-party valuation firm, and is inherently
uncertain and highly subjective. The final measurement date
related to stock options granted prior to January 1, 2006
will be the date in which an initial public offering occurs. On
that date, all unrecognized compensation expense related to
then-vested options will be charged to operations and allocated
among the line items on the Company’s statement of
operations based on the job functions of the holders of the
options. Although it is reasonable to expect that the completion
of the initial public offering will add value to the shares
underlying the options because they will have increased
liquidity and marketability, the amount of additional value can
not be estimated with precision or certainty.
SFAS No. 123. The information below has been
determined as if the Company had accounted for its outstanding
options granted prior to December 31, 2005 using the
fair-value method prescribed in SFAS No. 123. The fair
value of the Company’s options to purchase common stock was
estimated at the date of grant using the minimum-value pricing
model for 2003, 2004 and 2005 and the following weighted average
assumptions for December 31:
2003
2004
2005
Expected life of options (in years)
5
5
5
Weighted average risk-free interest rate
3.07%
3.45%
4.24
%
Expected stock volatility
—
—
—
Expected dividend yield
—
—
—
Using the minimum-value pricing model, the estimated weighted
average fair value of an option to purchase one share of common
stock granted during 2003, 2004 and 2005 was $0.37, $0.62 and
$2.35, respectively. As the Company’s options are not
exercisable prior to the occurrence of the sale of the Company
or the common stock of the Company being listed and publicly
traded on a U.S. stock exchange, there would have been no
compensation expense recognized until exercisability of the
Company’s stock options was deemed probable.
Based on the minimum value pricing model, the amount of pro
forma unrecognized compensation expense resulting from the
Company’s outstanding stock options at December 31,2005 would have been approximately $2,958. Pro forma disclosures
for the three months ended March 31, 2006 are not presented
because share-based awards were accounted for under
SFAS No. 123R’s fair-value method during this
period. For the purposes of pro forma disclosures, the estimated
fair value of stock options would have been amortized to expense
primarily over the vesting period using the accelerated expense
attribution method under Financial Accounting Standards Board
(“FASB”) Interpretation No. 28, Accounting for
Stock Appreciation Rights and Other Variable Stock Option Award
Plans.
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
Adoption of SFAS 123R (Unaudited). Effective
January 1, 2006, the Company adopted
SFAS No. 123R under the prospective method, in which
nonpublic entities that previously applied
SFAS No. 123 using the minimum-value method (whether
for financial statement recognition or pro forma disclosure
purposes) would continue to account for unvested stock options
outstanding at the date of adoption of SFAS No. 123R
in the same manner as they had been accounted for prior to the
adoption of SFAS No. 123R. That is, since the Company
been accounting for stock options using the intrinsic-value
method under APB 25, it will continue to apply APB 25 in future
periods to stock options outstanding at January 1, 2006.
SFAS No. 123R requires measurement of all employee
share-based compensation awards using a fair-value method. The
grant date fair value was determined using the
Black-Scholes-Merton pricing model and a single option award
approach.
Key assumptions used in the determination of the fair value of
stock options granted were as follows:
Expected Life of Options — The expected life
represents the period that stock-based awards are expected to be
outstanding. Due to limited historical experience with similar
awards, the expected life was estimated using the simplified
method in accordance with the provisions of
SAB No. 107, Share-Based Payment. The
simplified method defines the expected life as the average of
the contractual term and the vesting period of the stock option.
Expected Stock Volatility — The volatility
factor is based on the weighted average of the historical
volatilities of the most similar public companies for which the
Company has data.
Weighted Average Risk-Free Interest Rate — The
risk-free interest rate used in the Black-Scholes-Merton pricing
model is based on the yield curve of a zero-coupon U.S. Treasury
bond with a maturity equal to the expected term of the stock
option award on the date the stock option award is granted.
Estimated Forfeitures — The Company used
historical data to estimate the number of future stock option
forfeitures. As required by SFAS 123R, the Company will
adjust the estimated forfeiture rate based on actual experience.
The fair value of stock options granted to employees for the
three months ended March 31, 2006 was estimated using the
following weighted average assumptions:
During the three months ended March 31, 2006, the Company
granted stock options to purchase an aggregate of 290,000 shares
of common stock at a weighted-average exercise price of $9.10
and a weighted-average grant-date fair value of $9.97. At
March 31, 2006, there was approximately $2,892 of total
unrecognized compensation expense related to stock options
granted subsequent to the adoption of SFAS No. 123R.
The unrecognized compensation expense related to vested stock
options was approximately $87 at March 31, 2006. At
March 31, 2006, the exercisability of the Company’s
stock options had not yet been deemed probable and as a result
no compensation expense was recorded. The unrecognized
compensation expense related to vested stock options will be
charged to operations in the quarter in which an initial public
offering occurs. See further discussion in Note 12
regarding these stock options.
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
Derivative Financial
Instruments
The Company does not acquire, hold or issue derivative financial
instruments for trading purposes. It uses derivative financial
instruments only to manage interest rate risks that arise out of
the Company’s core business activities.
The Company has one derivative financial instrument in the form
of an interest rate swap to manage interest rate risk. The
Company recognizes all changes in the fair value of derivatives
in its consolidated statements of operations. The fair value of
derivative instruments is based on quotes from brokers using
market prices for those or similar instruments.
Income Taxes
The Company has elected to be taxed under the Internal Revenue
Code as a subchapter S corporation. Under those provisions,
the Company does not pay corporate income taxes on its taxable
income. Instead, its sole stockholder is liable for federal and
state income taxes on the taxable income of the Company.
Advertising Costs
Advertising costs other than for direct-response advertising are
expensed at the time the promotion first appears in the media.
The Company capitalizes the direct costs of producing and
distributing
direct-response
advertisements mailed by the Company or through third parties
and amortizes these costs over the period of the expected future
revenue stream, which is generally three months from the date
the advertisements are mailed. Capitalized direct-response
advertising costs of $244 and $320 (unaudited) at
December 31, 2005 and March 31, 2006, respectively,
are included in prepaid expenses in the consolidated balance
sheets. Advertising expenses were approximately $1,073, $2,533,
$12,534, $5,040 (unaudited) and $9,334 (unaudited) for the years
ended December 31, 2003, 2004 and 2005 and the three months
ended March 31, 2005 and 2006, respectively.
Fair Value of Financial
Instruments
The carrying amounts of cash and cash equivalents approximate
fair value due to the short maturity of those instruments. The
respective fair values of investments are determined based on
quoted market prices, which approximate fair values. The
carrying amounts of accounts receivable, accounts payable and
accrued liabilities reported in the consolidated balance sheets
approximate their respective fair values because of the
immediate or short-term maturity of these financial instruments.
Based on borrowing rates currently available to the Company for
loans with similar terms, the carrying value of the
Company’s long-term debt also approximates fair value. The
fair value of derivative instruments is based on quotes from
brokers using market prices for those or similar instruments.
Use of Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.
Concentrations of Credit
Risk
The majority of the Company’s accounts receivable at
December 31, 2004 and 2005 and March 31, 2006 are
comprised of amounts due from payment card processors and online
payment services. There were no amounts 90 days or more
past due. The Company has not experienced any losses on these
accounts and believes it is not exposed to any significant
credit risk on its accounts receivable balances.
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
Reclassifications
Certain prior year amounts have been reclassified to conform
with the current period presentation.
Recently Issued Accounting
Pronouncements
In March 2005, the SEC issued Staff Accounting Bulletin
No. 107,
Share-Based
Payment (“SAB No. 107”).
SAB No. 107 provides guidance regarding the
interaction between SFAS No. 123R and certain SEC
rules and regulations, including guidance related to valuation
methods, classification of compensation expense,
non-GAAP financial
measures, accounting for income tax effects of
share-based payment
arrangements, disclosures in management’s discussion and
analysis of financial condition and results of operations
subsequent to adoption of SFAS No. 123R and
modifications of options prior to the adoption of
SFAS No. 123R.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections — A
Replacement of APB Opinion No. 20 and FASB Statement
No. 3. SFAS No. 154 requires the
retrospective application to prior periods’ financial
statements of changes in accounting principle, unless it is
impractical to determine either the period-specific effects or
the cumulative effect of the accounting change.
SFAS No. 154 also requires that a change in
depreciation, amortization or depletion method for long-lived
non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle.
SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005, and the Company will adopt this
provision, as applicable, in 2006.
In November 2005, the FASB issued FASB Staff Position
FAS 115-1 and FAS 124-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments
(“FSP 115-1”),
which provides guidance on determining when investments in
certain debt and equity securities are considered impaired,
determining whether that impairment is other than temporary, and
measuring that impairment loss.
FSP 115-1 also
includes accounting considerations subsequent to the recognition
of other-than-temporary impairment and requires certain
disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. FSP 115-1 is
required to be applied to reporting periods beginning after
December 15, 2005. The Company adopted
FSP 115-1 on
January 1, 2006 and, at March 31, 2006, the Company
evaluated its investment portfolio and noted unrealized losses
of $138 (unaudited) were due to fluctuations in interest rates.
Management does not believe any of the unrealized losses
represent an other-than-temporary impairment based on its
evaluation of available evidence as of March 31, 2006. The
Company’s intent is to hold these investments to such time
as these assets are no longer impaired. For those investments
not scheduled to mature until after March 31, 2007, that
recovery is not anticipated to occur in the next year and these
investments have been classified as long-term investments. At
March 31, 2006, $1,862 (unaudited) of available-for-sale
securities have been classified as long-term investments.
3.
Investments
The Company’s investments are intended to establish a
high-quality portfolio that preserves principal, meets liquidity
needs, avoids inappropriate concentrations and delivers an
appropriate yield in relation to the Company’s investment
guidelines and market conditions. Investments consist of
government agency bonds,
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
municipal debt securities, other debt securities and bank time
deposits. The following is a summary of available-for-sale
securities at December 31, 2004:
Gross
Gross
Estimated
Adjusted
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Government agency bonds
$
2,000
$
—
$
(77
)
$
1,923
Municipal debt securities
325
—
—
325
Other debt securities
725
—
—
725
Bank time deposits
200
—
—
200
$
3,250
$
—
$
(77
)
$
3,173
The following is a summary of available-for-sale securities at
December 31, 2005:
Gross
Gross
Estimated
Adjusted
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Government agency bonds
$
2,000
$
—
$
(124
)
$
1,876
Municipal debt securities
425
—
—
425
Other debt securities
725
—
—
725
$
3,150
$
—
$
(124
)
$
3,026
The following is a summary of available-for-sale securities at
March 31, 2006:
Gross
Gross
Estimated
Adjusted
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
(Unaudited)
Government agency bonds
$
2,000
$
—
$
(138
)
$
1,862
Municipal debt securities
425
—
—
425
Other debt securities
725
—
—
725
$
3,150
$
—
$
(138
)
$
3,012
The Company’s unrealized losses of $124 at
December 31, 2005 and $138 (unaudited) at March 31,2006 were due to fluctuations in interest rates. Management does
not believe any of the unrealized losses represented an
other-than-temporary impairment based on its evaluation of
available evidence at December 31, 2005 and March 31,2006 (unaudited).
During the years ended December 31, 2003, 2004 and 2005 and
the three months ended March 31, 2006 (unaudited), the
Company did not have any realized gains or losses on sales of
available-for-sale securities.
The unamortized cost and estimated fair value of the
available-for-sale securities at December 31, 2005 and
March 31, 2006, by contractual maturity, are shown below.
Expected maturities can differ from contractual maturities
because the issuers of the securities may have the right to
prepay obligations without
In 2005, the Company acquired a building for approximately
$9,500. The Company plans to utilize this building as the
primary data center to support its website hosting activities
and corporate infrastructure. The building had not yet been
placed into service at March 31, 2006.
5.
Stockholder’s Equity
At December 31, 2002, the Company had authorized
50,000,000 shares of its $0.01 par value common stock,
18,300,828 shares of which were issued and outstanding. On
December 31, 2004, the Company announced a two-for-one
stock split in the form of a stock dividend. Under the terms of
the stock split, the Company’s stockholder of record on
that date received one share of common stock for every one share
of
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
common stock held on that date. The stock split was effected on
December 31, 2004 from authorized but unissued shares of
common stock of the Company. The number of shares of the
Company’s common stock, per share amounts and stock option
data have been retroactively restated for all periods presented
for the stock split discussed above.
Since the Company’s inception in 1997, the Company has
operated as a subchapter S corporation and income has been
taxed directly to the Company’s sole stockholder. Since
2002, the Company has made regular distributions to this
stockholder based on the funds available for distribution. In
2003, 2004 and 2005 the Company made distributions to this
stockholder aggregating approximately $605, $5,114 and $4,804.
During 2002, the Company’s Board of Directors and
stockholder approved the Go Daddy 2002 Stock Option Plan (the
“Plan”), which provides for the issuance of
nonqualified stock options to employees. The Company reserved
6,700,000 shares of the Company’s common stock for
grants under this Plan. The Plan is administered by a committee
appointed by the Board of Directors, which is authorized to,
among other things, select the employees who will receive grants
and determine the exercise price and vesting period for the
options.
Summary information related to the Plan is as follows:
The following tables summarize information about stock-based
employee compensation grants outstanding and vested at
December 31, 2004 and 2005 and March 31, 2006. The
options are not exercisable prior to the occurrence of the sale
of the Company or the common stock of the Company being listed
and publicly traded on a U.S. stock exchange. As a result
of the lack of exercisability, the stock options outstanding are
considered to be variable awards and the measurement date will
only occur when exercise of the options becomes probable. At
March 31, 2006, the exercisability of the Company’s
stock options had not yet become probable and as a result no
compensation expense had been recorded.
On October 20, 2005, the Company entered into change of
control agreements with certain officers of the Company that
modified their stock option agreements. The modification
provides that: (i) upon the occurrence of a change of
control transaction involving the Company, all unvested stock
options held by the officer will become 100% vested and
exercisable, and (ii) if the Company’s founder retains
at least a 50% interest in the Company as of the date of an
initial public offering, then 50% of the unvested shares
underlying options held by the officer will become vested and
exercisable on that date.
On May 11, 2006, the Company’s board of directors:
(i) adopted the 2006 Equity Incentive Plan and reserved
7,000,000 shares of Class A common stock for issuance
thereunder; and (ii) approved new change of control
agreements with certain officers of the Company providing for,
among other benefits, payment to each such officer of twelve
months of that officer’s base salary and bonus and
accelerated vesting of 50% of any stock options granted to each
officer on or after May 11, 2006, in each case upon the
termination of that officer’s employment without cause or
resignation from his or her office for good reason within
18 months following a change of control of the Company. On
May 11, 2006, the Company granted stock options to purchase
an aggregate of 2,615,196 shares of Class A common
stock, each having an exercise price of $14.52 per share.
In October 2005, the Company obtained a $7,100 loan from
U.S. Bank to finance the purchase of a building to be used
as a data center. The loan bears interest at a rate of 2.10%
plus one month LIBOR. The Company entered into an interest rate
swap agreement to fix the effective interest rate at 6.98%. The
interest rate swap agreement expires October 18, 2010. The
Company is exposed to credit loss in the event of
non-performance by the counterparty to the interest rate swap
agreement. However, the Company does not anticipate
nonperformance by the counterparty.
In October 2005, the Company also entered into a $1,500 credit
facility with U.S. Bank for the purchase of data center
equipment. Any borrowing under the credit facility would bear
interest until July 31, 2006 at the prime rate announced by
U.S. Bank and thereafter at the rate of 2.10% plus one
month LIBOR. As of March 31, 2006, there were no balances
outstanding under this facility.
In May 2005, the Company amended one of its lease Agreements
allowing it to finance certain leasehold improvements through
the lessor. During the three months ended March 31,2006, the Company recorded $172 of long-term debt related to
this Amendment. These borrowings accrue interest at 8% and the
principal and interest payments will be made over 48 months.
As of December 31, 2005 and March 31, 2006, the
Company was not in compliance with one of its covenants related
to its long-term debt
due to the issuance of financial statements after the date
required under the terms of the covenant. In May 2006, the bank
issued the Company a waiver related to this covenant.
The aggregate principal payments due on long-term debt are as
follows:
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
9.
Commitments and Contingencies
Leases
The Company leases office space and vehicles under operating
leases expiring at various dates through August 2008. Total rent
expense for the years ended December 31, 2003, 2004 and
2005 and the three months ended March 31, 2005 and 2006 was
$645, $1,421, $3,015, $728 (unaudited) and $1,470 (unaudited),
respectively.
Future minimum lease payments required under all operating lease
agreements are as follows:
The December 31, 2005 column reflects 2006 future minimum
lease payments anticipated for the full year 2006. The
March 31, 2006 column represents the 2006 future minimum
lease payments anticipated for the period April 1, 2006 to
December 31, 2006.
Maintenance Agreements
The Company has entered into long-term maintenance arrangements
with certain vendors to provide maintenance of equipment. Under
these arrangements, the Company is required to make monthly
payments totaling approximately $94 through December 2007 and
$42 through May 2008. Minimum payments under these agreements
total $1,132 in 2006, $1,132 in 2007 and $209 in 2008.
Litigation
The Company is subject to various legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary
course of business. While the outcome of these claims cannot be
predicted with certainty, management does not believe that the
outcome of any of these matters will have a material adverse
effect on the Company’s business, financial position,
results of operations or cash flows.
Legal Settlement
In 2005, the Company recorded other income of $2,000 from the
settlement of a legal dispute involving breach of contract by a
third party.
Indemnification
The Company has agreed to indemnify its directors and executive
officers for costs associated with any fees, expenses,
judgments, fines and settlement amounts incurred by them in any
action or proceeding to which any of them is, or is threatened
to be, made a party by reason of his service as a director or
officer, including any action by the Company, arising out of his
services as the Company’s director or officer or his
services provided to any other company or enterprise at the
Company’s request.
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
Other
The Company is responsible for charging end customers certain
taxes in numerous international jurisdictions. In the ordinary
course of its business, there are many transactions and
calculations where the ultimate tax determination is uncertain.
In the future, the Company may come under audit, which could
result in changes to its tax estimates. The Company believes
that it maintains adequate tax reserves to offset the potential
liabilities that may arise upon audit. Although the Company
believes its tax estimates and associated reserves are
reasonable, the final determination of tax audits and any
related litigation could be materially different than the
amounts established for tax contingencies. To the extent that
these estimates ultimately prove to be inaccurate, the
associated reserves would be adjusted, resulting in the
Company’s recording a benefit or expense in the period in
which a final determination is made.
10.
Benefit Plan
The Company has a defined contribution plan (401(k) plan)
covering all employees who meet certain eligibility
requirements. Eligible employees may contribute up to 15% of
their respective compensation subject to limitations established
by the Internal Revenue Code. The Company may match 50% of any
participant’s contribution up to $4. Participants are
immediately vested in their contributions plus actual earnings
thereon. Participants become 20% vested in the Company’s
contributions plus earnings thereon after two years of service
and 20% each year thereafter, becoming 100% vested after six
years of service. The Company’s contribution expense was
$105, $195, $329, $84 (unaudited) and $166 (unaudited) for the
years ended December 31, 2003, 2004 and 2005, and the three
months ended March 31, 2005 and 2006 respectively.
11.
Segment Reporting
The Company’s management approach includes evaluating each
of its over 30 products on which operating decisions are made
based on sales and profitability. Each of its operating
companies sells similar products and services. The Company does
not attempt to allocate marketing and advertising expenses,
general and administrative expenses, and depreciation and
amortization expenses at the product level. Discrete financial
data on each of its services are not available and it would be
impractical to collect and maintain financial data in such a
manner; therefore, reportable segment information is the same as
contained in the Company’s consolidated financial
statements.
12.
Subsequent Events (Unaudited)
In May 2006, our board of directors authorized the filing of a
registration statement with the U.S. Securities and
Exchange Commission that would permit the Company to sell
shares of common stock in connection with a proposed initial
public offering.
In May 2006, the Company granted options to purchase
approximately 4,074,000 shares of the Company’s common
stock to employees and non-employee directors under the 2006
Equity Incentive Plan, at an exercise price of $14.52, the
deemed fair-value of the shares of common stock as determined by
our board of directors based in significant part upon a
valuation analysis performed by an independent, third-party
valuation firm. The weighted average fair value of these options
at the time of grant was $10.47. These options vest over a
period of four years, with 25% of the options vesting on the
one-year anniversary of the grant date. Options to purchase
approximately 1,144,000 shares of the Company’s common
stock were granted to the Company’s four executive
officers, options to purchase approximately 200,000 shares
of the Company’s common stock were granted to the
non-employee directors of the Company and options to purchase
approximately 2,730,000 shares of the Company’s common
stock were granted to various other employees. These options do
not contain restrictions on exercisability; however, these
option grants expire if
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
an initial public offering or liquidation event does not occur
before a specified date prior to the one-year anniversary of the
grant date. As such, no expense will be recognized until such
time that an offering or liquidation event occurs.
On May 31, 2006, the Company modified all stock option
grants made in the first quarter of 2006 to reflect an exercise
price of $13.53 per share. The Company will not record any
additional compensation expense as there is no incremental value
associated with the modified stock options.
13.
Supplemental Cash Flow Information
At December 31, 2004 and 2005 and March 31, 2005 and
2006, the Company had recorded within accounts payable amounts
totaling $2,312, $2,971, $2,708 (unaudited) and $ 3,931
(unaudited), respectively, related to purchases of property and
equipment for which payment had not yet been made.
During 2004, certain of the amounts pledged as collateral
against the Company’s line of credit were released. The
amounts released included $200 of short-term investments.
During the years ended December 31, 2003, 2004 and 2005,
and the three months ended March 31, 2005 and 2006, the
Company capitalized $264, $211, $984, $0 (unaudited) and $0
(unaudited), respectively, of leasehold improvements, which are
included in property and equipment, through incentives included
in its lease agreements, and resulted in increased deferred rent.
14.
Pro Forma Information (Unaudited)
Income Taxes
Assuming completion of the proposed initial public offering
(described in Note 12), the Company will revoke its
subchapter S corporation status and thereafter will be
subject to federal and state corporate income taxes as a
subchapter C corporation. Because the Company is a
subchapter S corporation, deferred taxes have not been
reflected in the financial statements, and the Company will not
be responsible for reflecting these income taxes until the
revocation of the subchapter S corporation status. The
statements of operations do not include a pro forma adjustment,
calculated in accordance with SFAS No. 109,
Accounting for Income Taxes, for income taxes that would
have been recorded if the Company was a subchapter
C corporation because the Company would have provided a
full valuation allowance on its net deferred tax assets and thus
no tax provision would be recorded.
Distributions to Stockholder
The pro forma consolidated balance sheet as of March 31,2006 includes an adjustment to increase stockholder
distributions payable and accumulated deficit by $3,500 to show
the effect of the subchapter S corporation distributions
made and expected to be made after March 31, 2006 and prior
to the Company’s reincorporation and the closing of its
initial public offering.
The following table sets forth the fees and expenses, other than
underwriting discounts and commissions, payable in connection
with the registration of the Class A common stock
hereunder. All amounts are estimates except the SEC registration
fee, the NASD filing fee and the Nasdaq Global Market listing
fee.
Amount to
be Paid
SEC registration fee
$
21,400
NASD filing fee
20,500
Nasdaq Global Market listing fee
150,000
Legal fees and expenses
*
Accounting fees and expenses
*
Printing and engraving expenses
*
Blue sky fees and expenses
*
Transfer agent and registrar fees
*
Miscellaneous expenses
*
Total
$
*
*
To be completed by amendment.
Item 14.
Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits
a corporation to include in its charter documents, and in
agreements between the corporation and its directors and
officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Our amended and restated certificate of incorporation provides
for the indemnification of directors to the fullest extent
permissible under Delaware law.
Our amended and restated bylaws provide for the indemnification
of officers, directors and third parties acting on our behalf if
they acted in good faith and in a manner reasonably believed to
be in and not opposed to our best interest, and, with respect to
any criminal action or proceeding, they had no reason to believe
their conduct was unlawful.
We have entered into indemnification agreements with our
directors and executive officers, in addition to indemnification
provided for in our charter documents, and we intend to enter
into indemnification agreements with any new directors and
executive officers in the future.
The underwriting agreement (Exhibit 1.1 hereto) provides
for indemnification by the underwriters of us, our executive
officers and directors and the selling stockholders for certain
liabilities, including liabilities arising under the Securities
Act of 1933, as amended, in connection with matters specifically
provided in writing by the underwriters for inclusion in the
registration statement.
We intend to purchase and maintain insurance on behalf of any
person who is or was a director or officer against any loss
arising from any claim asserted against him or her and incurred
by him or her in that capacity, subject to certain exclusions
and limits of the amount of coverage.
During the last three years, we have issued unregistered
securities to a limited number of persons, as described below:
Since June 1, 2003, we have issued options to purchase an
aggregate of 2,278,300 shares of our Class A common
stock under our Go Daddy 2002 Stock Option Plan to
331 employees with exercise prices ranging from $2.46 to
$9.10 per share, and in May 2006 we issued options to
purchase an aggregate of 4,073,521 shares of our
Class A common stock under our 2006 Equity Incentive Plan
to 705 employees and directors, all with exercise prices of
$14.52 per share.
None of the foregoing transactions involved any underwriters,
underwriting discounts or commissions, or any public offering.
We believe the offers, sales and issuances of the securities
described above were exempt from registration under the
Securities Act in reliance on Rule 701 because the
transactions were pursuant to compensatory benefit plans or
contracts relating to compensation as provided under such rule
and/or in reliance on Section 4(2) of the Securities Act
because the issuance of securities to the recipients did not
involve a public offering. The recipients of securities under
compensatory benefit plans and contracts relating to
compensation were our employees or directors and received the
securities as compensation for services. Each of the recipients
of securities in these transactions had adequate access, through
employment, business or other relationships, to information
about us. The sales of these securities were made without
general solicitation or advertising.
Form of Stock Option Award Agreement under the 2006 Equity
Incentive Plan
10
.5B**
Form of Stock Option Award Agreement under the
2006 Equity Incentive Plan
10
.6A**
Form of Change of Control Agreement between the Registrant and
each of Barbara J. Rechterman, Warren J. Adelman,
Michael J. Zimmerman and Christine N. Jones, dated as
of October 20, 2005
10
.6B**
Form of Change in Control Protection Agreement between the
Registrant and each of Barbara J. Rechterman, Warren J. Adelman,
Michael J. Zimmerman and Christine N. Jones, dated as of
May 11, 2006
10
.7**
Registrar Accreditation Agreement between the Internet
Corporation for Assigned Names and Numbers and Go Daddy
Software, Inc., dated March 20, 2005
10
.8**
Registrar Accreditation Agreement between the Internet
Corporation for Assigned Names and Numbers and Wild West
Domains, Inc., dated February 1, 2002
10
.9**
.NET Registry Registrar Agreement between VeriSign, Inc. and Go
Daddy Software, Inc., dated November 14, 2005
.NET Registry Registrar Agreement between VeriSign, Inc. and
Wild West Domains, Inc., dated November 14, 2005
10
.11**
Amendment No. 1 to Registry-Registrar Agreement between
VeriSign, Inc. and Go Daddy Software, Inc., dated
November 2, 2004
10
.12**
Amendment No. 1 to Registry-Registrar Agreement between
VeriSign, Inc. and Wild West Domains, Inc., dated
November 2, 2004
10
.13**
Office Lease for Scottsdale Technology Center
(14455 N. Hayden Road) between Go Daddy Software, Inc.
and IDS Life Insurance Company, dated December 26, 2001 (as
amended)
10
.14**
Purchase and Sale Agreement between Go Daddy Software, Inc. and
Sterling Buckeye Network Exchange, LLC, dated October 25,2005
10
.15**
Loan Agreement between U.S. Bank National Association and
Go Daddy Software, Inc., dated October 18, 2005
10
.16**
Promissory Note Secured by Deed of Trust (Acquisition Loan)
between U.S. Bank and Go Daddy Software, dated
October 18, 2005
10
.17**
Promissory Note Secured By Deed of Trust (Equipment Loan)
between U.S. Bank and Go Daddy Software, dated
October 18, 2005
10
.18**
Office Lease between JL Bates, LLC and Go Daddy Software, Inc.
(2299 West Obispo Avenue, Gilbert, Arizona) dated
November 22, 2004 (as amended)
Replaces Exhibit of same description as filed with Amendment
No. 1 to the Registration Statement on
Form S-1, dated
June 16, 2006.
(b) Financial Statement Schedules
All schedules have been omitted because the information required
to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
Item 17.
Undertakings
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, The Go Daddy Group, Inc. has duly caused this Amendment
No. 2 to the Registration Statement on
Form S-1 to be
signed on its behalf by the undersigned, thereunto duly
authorized, in Scottsdale, Arizona on the
17th
day of July 2006.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 2 to the Registration Statement
on Form S-1 has
been signed by the following persons in the capacities and on
the dates indicated.
Form of Stock Option Award Agreement under the 2006 Equity
Incentive Plan
10
.5B**
Form of Stock Option Award Agreement under the 2006 Equity
Incentive Plan
10
.6A**
Form of Change of Control Agreement between the Registrant and
each of Barbara J. Rechterman, Warren J. Adelman,
Michael J. Zimmerman and Christine N. Jones, dated as
of October 20, 2005
10
.6B**
Form of Change in Control Protection Agreement between the
Registrant and each of Barbara J. Rechterman, Warren J. Adelman,
Michael J. Zimmerman and Christine N. Jones, dated as of
May 11, 2006
10
.7**
Registrar Accreditation Agreement between the Internet
Corporation for Assigned Names and Numbers and Go Daddy
Software, Inc., dated March 20, 2005
10
.8**
Registrar Accreditation Agreement between the Internet
Corporation for Assigned Names and Numbers and Wild West
Domains, Inc., dated February 1, 2002
10
.9**
.NET Registry Registrar Agreement between VeriSign, Inc. and Go
Daddy Software, Inc., dated November 14, 2005
10
.10**
.NET Registry Registrar Agreement between VeriSign, Inc. and
Wild West Domains, Inc., dated November 14, 2005
10
.11**
Amendment No. 1 to Registry-Registrar Agreement between
VeriSign, Inc. and Go Daddy Software, Inc., dated
November 2, 2004
10
.12**
Amendment No. 1 to Registry-Registrar Agreement between
VeriSign, Inc. and Wild West Domains, Inc., dated
November 2, 2004
10
.13**
Office Lease for Scottsdale Technology Center
(14455 N. Hayden Road) between Go Daddy Software, Inc.
and IDS Life Insurance Company, dated December 26, 2001 (as
amended)
10
.14**
Purchase and Sale Agreement between Go Daddy Software, Inc. and
Sterling Buckeye Network Exchange, LLC, dated
October 25, 2005
10
.15**
Loan Agreement between U.S. Bank National Association and
Go Daddy Software, Inc., dated October 18, 2005
10
.16**
Promissory Note Secured by Deed of Trust (Acquisition Loan)
between U.S. Bank and Go Daddy Software, dated
October 18, 2005
10
.17**
Promissory Note Secured By Deed of Trust (Equipment Loan)
between U.S. Bank and Go Daddy Software, dated
October 18, 2005
10
.18**
Office Lease between JL Bates, LLC and Go Daddy Software, Inc.
(2299 West Obispo Avenue, Gilbert, Arizona) dated
November 22, 2004 (as amended)