As filed with the Securities and Exchange Commission on
October 20, 2009
Registration
No. 333-160986
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 3
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
ANCESTRY.COM INC.
(Exact name of registrant as
specified in its charter)
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DELAWARE
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7379
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26-1235962
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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360 West 4800 North
Provo, UT 84604
(801) 705-7000
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Timothy Sullivan
Chief Executive Officer
360 West 4800 North
Provo, UT 84604
(801) 705-7000
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Barbara L. Becker
Stewart L. McDowell
Gibson, Dunn & Crutcher LLP
200 Park Avenue
New York, NY 10166
Tel: (212) 351-4000
Fax: (212) 351-4035
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Jeffrey D. Saper
Robert G. Day
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304
Tel: (650) 493-9300
Fax: (650) 565-5147
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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 of 1933, check the
following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, 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
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o
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(Do not check if a smaller reporting company)
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CALCULATION
OF REGISTRATION FEE
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Title of Each Class of
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Amount to be
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Proposed Maximum
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Amount of
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Securities to be Registered
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Registered(1)
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Aggregate Offering Price(2)
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Registration Fee(3)
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Common Stock, $0.001 par value
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8,518,518
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$123,518,511
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$6,892.33
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(1) |
Includes 1,111,111 shares that the underwriters have the
option to purchase to cover overallotments, if any.
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(2) |
Estimated solely for the purpose of calculating the registration
fee in accordance with Rule 457(a) under the Securities Act
of 1933, as amended.
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(3) |
A filing fee of $4,185 was previously paid in connection with
the initial filing of this Registration Statement on
August 3, 2009. The aggregate filing fee of $6,892.33 is
being offset by the $4,185 previously paid.
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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 such Section 8(a) may determine.
The
information in this prospectus is not complete and may be
changed. We and the selling stockholders may not sell these
securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and we and the selling
stockholders are not soliciting offers to buy these securities
in any state where the offer or sale is not permitted.
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PROSPECTUS
(Subject to Completion)
Issued
October 20, 2009
7,407,407 Shares
COMMON STOCK
Ancestry.com Inc. is offering 4,074,074 shares of its
common stock and the selling stockholders are offering
3,333,333 shares of common stock. We will not receive any
proceeds from the sale of shares by the selling stockholders.
This is our initial public offering and no public market
currently exists for our shares. We anticipate that the initial
public offering price of our common stock will be between $12.50
and $14.50 per share.
We have applied to list our common stock on the Nasdaq
Global Select Market under the symbol ACOM.
Investing in the common stock involves risks. See
Risk Factors beginning on page 13.
PRICE $ A SHARE
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Underwriting
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Price to
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Discounts and
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Proceeds to
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Proceeds to Selling
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Public
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Commissions
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Company
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Stockholders
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Per Share
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$
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$
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$
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$
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Total
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$
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$
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$
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$
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Ancestry.com Inc. has granted the underwriters the right to
purchase up to an additional 611,112 shares of common stock
to cover over-allotments and the selling stockholders have
granted the underwriters the right to purchase up to an
additional 499,999 shares of common stock to cover
over-allotments.
The Securities and Exchange Commission and state securities
regulators have not approved or disapproved these securities, or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock
to purchasers on ,
2009.
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MORGAN
STANLEY |
BofA MERRILL LYNCH |
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JEFFERIES &
COMPANY |
PIPER JAFFRAY |
BMO CAPITAL MARKETS |
,
2009
87% of Americans have an interest in their family history.* Every month, millions turn to
Ancestry.com® for answers.** Ancestry.com is the worlds largest online collection of family
history resources including records, photos, stories, family trees and a collaborative community
of over a million subscribers worldwide. Our mission is to help everyone discover, preserve and
share their family history. * Based on a survey commissioned by Ancestry.com and conducted by
Harris Interactive July 15-17, 2009 via its QuickQuery online omnibus service interviewing a
nationwide sample of 2,066 U.S. adults aged 18+, of which 87% indicated that they were either very
interested (33%), interested (28%) or somewhat interested (26%) in learning about their
familys history. Results were weighted as needed for age, sex, race/ethnicity, education, region,
and household income. Propensity score weighting was also used to adjust for respondents
propensity to be online. ** comScore, 2009 ©2009 Ancestry.com |
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus or in any free-writing prospectus we may authorize to
be delivered or made available to you. We have not, the selling
stockholders have not and the underwriters have not authorized
anyone to provide you with additional or different information.
We and the selling stockholders are offering to sell, and
seeking offers to buy, shares of our common stock only in
jurisdictions where offers and sales are permitted. The
information in this prospectus or any free-writing prospectus is
accurate only as of its date, regardless of its time of delivery
or of any sale of shares of our common stock. Our business,
financial condition, results of operations and prospects may
have changed since that date.
Until ,
2009 (25 days after the commencement of this offering), all
dealers that buy, sell or trade shares of our 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.
For investors outside the United States: We have not, the
selling stockholders have not and the underwriters have not 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 common stock and the distribution of this prospectus outside
of the United States.
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PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus and does not contain all of the information that
you should consider in making your investment decision. Before
investing in our common stock, you should carefully read this
entire prospectus, including our consolidated financial
statements and the related notes and the information set forth
under the headings Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations, in each case included
elsewhere in this prospectus. All information in this prospectus
has been adjusted to give effect to a 1-for-2 reverse stock
split of our common stock that will be effective immediately
prior to the consummation of the offering.
ANCESTRY.COM
INC.
Mission
Ancestry.coms mission is to help everyone discover,
preserve and share their family history.
Overview
Ancestry.com is the worlds largest online resource for
family history, with more than one million paying subscribers
around the world as of September 30, 2009. We have been a
leader in the family history market for over 20 years and
have helped pioneer the market for online family history
research. We believe that most people have a fundamental desire
to understand who they are and from where they came, and that
anyone interested in discovering, preserving and sharing their
family history is a potential user of Ancestry.com. We strive to
make our service valuable to individuals ranging from the most
committed family historians to those taking their first steps
towards satisfying their curiosity about their family stories.
The foundation of our service is an extensive and unique
collection of billions of historical records that we have
digitized, indexed and put online over the past 12 years.
We have developed efficient and proprietary systems for
digitizing handwritten historical documents, and have
established relationships with national, state and local
government archives, historical societies, religious
institutions and private collectors of historical content around
the world. These digital records and documents, combined with
our proprietary online search technologies and tools, enable our
subscribers to research their family history, build their family
trees and make meaningful discoveries about the lives of their
ancestors.
We have built the worlds largest online community of
people interested in their family histories, and we believe that
this network is highly valuable to our subscribers. Our
community is a large and growing source of user-generated
content uniquely focused on family history. Over the past three
years, our registered users have created over 12 million
family trees containing more than 1.25 billion profiles.
They have uploaded and attached to their trees over
26 million photographs, scanned documents, written stories
and audio clips. This growing pool of user-generated content
adds color and context to the family histories assembled from
the digitized historical documents found on Ancestry.com. Our
subscribers also have attached to their trees over
333 million records from our company-acquired content
collection, a process that is helping further organize this
collection by associating specific records with people in family
trees.
In addition, we are deploying tools and technologies to
facilitate social networking and crowd sourcing, a means of
leveraging collaborative efforts. These tools and technologies
are intended to provide our subscribers with an expanding family
history collaboration network in which insights and discoveries
are shared by relatives, distant and close. Our service also
provides a platform from which our subscribers can share their
stories. Subscribers can invite family and friends to help build
their family trees, add personal memories and upload photographs
and stories of their own.
We provide ongoing value to our subscribers by regularly adding
new historical content, enhancing our websites with new tools
and features and enabling greater collaboration among our users
through the growth of our global community. Our plan to achieve
long-term and sustainable growth is to increase our subscriber
base in the United States and around the world by serving our
loyal base of existing subscribers and by attracting new
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subscribers. Our revenues have increased from
$122.6 million in 2004 to $197.6 million in 2008, a
compound annual growth rate of 12.7%.
Industry
Background
Societies around the world have historically documented the
names, dates and places associated with important events of
their citizenry. However, due to the vast, dispersed and
disorganized nature of these data collections, the process of
researching family history generally has been time consuming,
painstaking and expensive. The introduction of web-based
technologies greatly enhances opportunities to make family
history research easier, but businesses attempting to leverage
the Internet must tailor their products and services to address
the distinctive challenges of family history research.
The
Ancestry.com Solution
Through the design and development of a unique consumer Internet
application and underlying proprietary technologies, substantial
investment in content and the aggregation of network scale, we
are revolutionizing how people discover, preserve and share
their family history. Our solution includes:
Consumer
Benefits
Easy-to-use
website. Our technology platform makes family
history research and networking easier, more enjoyable and more
rewarding. We seek to make Ancestry.com relevant and easy to use
for both new and experienced subscribers, and we continue to
advance our online tools to help our subscribers efficiently
search our content, organize their research, collaborate with
others and share their stories.
Easy access to comprehensive data sources. We
have aggregated and organized a comprehensive collection of
historical records, with a particular emphasis on records from
the United States, the United Kingdom and Canada. Our
technologies allow subscribers to locate relevant family history
records quickly and easily, resulting in a rewarding experience
for new subscribers and experienced family historians alike.
Subscribers input information that they know about their
relatives, however limited, and can immediately view the vast
content sources available to populate their family trees. Our
proprietary record hinting technology suggests content to our
subscribers, alerting them through hints delivered
online and by email of potential matches to further populate
their trees from our company-acquired and user-generated content.
Valuable community. Our community of family
history enthusiasts is a significant component of our
subscription value proposition. Our subscribers can collaborate,
contribute content and assist each other with family history
research. The publicly available family trees created by our
registered users can provide new subscribers with a substantial
head start researching their families and the opportunity to
connect with relatives interested and engaged in the discovery
and preservation of a shared family lineage.
Competitive
Advantages
Proprietary technology platform provides robust search
capability and ease of use. We have built a
scalable, proprietary technology platform. Our search technology
is designed to deal with the inherent difficulties of searching
historical content. Our record hinting technology locates and
pushes relevant content to our registered users. Our
digitization and indexing processes streamline the complex and
time-consuming task of putting historical records online.
Extensive and accessible content
collection. We have digitized and indexed the
largest online collection of family history records in the
world, with collections from the United States, the United
Kingdom, Australia and Canada, as well as Germany, France,
Italy, Sweden and China. We have invested approximately
$80 million to date in making this content available to
subscribers and continue to invest a substantial amount of time
and money to acquire or license, digitize, index and publish
additional records for our subscribers. In total, our
collections represent over four billion records and an estimated
eight billion names.
Community of dedicated and highly engaged subscribers
enhances our value proposition. We have an active
and dedicated community of subscribers, approximately 43% of
whom have been subscribers for more
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than two years as of September 30, 2009. In the eight
months ended August 2009, visitors to our websites spent an
average of 18.8 minutes on our websites per usage day,
according to monthly data from comScore. We believe our online
community is highly valuable to our subscribers, because the
ever expanding pool of user-generated content and collaboration
and sharing opportunities can significantly enhance the family
history research process.
Growth
Strategy
Our goal is to remain the leading online resource for family
history and to grow our subscriber base in the United States and
around the world by offering a superior value proposition to
anyone interested in learning more about their family history.
We will focus on retaining our loyal base of existing
subscribers, on acquiring new subscribers and on expanding the
market to new consumers. In pursuit of these goals, we will
continue to focus on the following objectives:
Continue to build our premium brand and drive category
awareness. Over the past three years, we have
expanded and improved our consumer marketing activities in the
United States, which we believe has substantially increased our
brand awareness. We believe that continued investments in
consumer marketing and promotion will allow us to enhance our
premium brand, increase awareness of the family history category
and enhance our ability to acquire new subscribers.
Further improve our product and user
experience. We believe that investments in our
product platform can make family history research easier, more
enjoyable and more accessible. We continuously seek to advance
and improve our core search and hinting technologies, our
document image viewer, our family tree building and viewing
experience and our sharing and publishing capabilities. We
believe that we can leverage the latest web technologies to
further transform the way people discover family history online.
Regularly add new content. A vast universe of
historical records around the world is yet to be digitized, and
we intend to continue to expand our collection of digital
historical records. We will seek to maintain and extend our
existing relationships with archives and other holders of
content throughout the world and to find new sources of unique
family history content. We also plan to continue to promote the
growth of user-generated content by making the Ancestry.com
websites even better places to upload and share personal family
history documents and memories.
Enhance our collaboration technologies. With
more than one million subscribers around the world as of
September 30, 2009, we believe that we have the scale to
further expand our unique family history collaboration network
and to help relatives share insights and discoveries about
common ancestors. We believe that collaboration is a fundamental
part of family history research and that social networking
technologies applied to family history research can provide our
subscribers with even greater value. We intend to make family
history research more collaborative and appealing to a larger
market.
Grow our business internationally. We believe
that our business model of digitizing historical content and
making records available online has appeal in multiple markets
around the world, and we will seek to implement this model in
other international markets. In the third quarter of 2009, we
launched an initial version of Mundia.com, a lower-priced family
history networking product intended for markets where we do not
have a presence.
Risks
Associated with Our Business
Our business is subject to numerous risks and uncertainties, as
discussed more fully in the section entitled Risk
Factors immediately following this prospectus summary. We
generate substantially all of our revenues from subscriptions to
our products and services, and if our efforts to satisfy, retain
and attract subscribers are not successful, we may experience
higher rates of monthly subscriber churn and our revenues and
profitability could be adversely affected. We face competition
from a number of sources, some of which provide access to
records free of charge. Because of our dependence on family
history products and services for substantially all of our
revenues, factors such as changes in consumer preferences for
our products and challenges in acquiring and making available
online historical content may have a disproportionately greater
impact on us than if we offered multiple products
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and services. Our attempts to grow internationally may prove
difficult due to, among other things, legislation in various
jurisdictions, cultural impediments, and costs and difficulties
associated with acquiring relevant content. Additionally, our
recent revenue growth may not be sustainable.
The
Spectrum Investment
We operated as The Generations Network, Inc., which we refer to
as the predecessor, until December 5, 2007. On
December 5, 2007, Generations Holding, Inc., which we refer
to as the successor, acquired The Generations Network, Inc. in
connection with an investment by Spectrum Equity
Investors V, L.P. and certain of its affiliates, which we
refer to collectively as Spectrum. The successor was created for
the sole purpose of acquiring the predecessor and had no prior
operations.
The total purchase price for this transaction, which we refer to
as the Spectrum investment, was $354.8 million, at an
effective per share price of $5.40. The total purchase price
consisted of $249.1 million of cash, $95.7 million in
value of previously owned stock of predecessor,
$8.2 million of stock option fair value assumed by the
successor and $1.8 million of transaction related expenses.
The cash consisted of approximately $100 million invested
by Spectrum, $9.8 million invested by other shareholders
and $140 million of borrowings under the term loan portion
of our credit facility. Spectrum invested equity of our
predecessor with an aggregate value of $38.6 million.
Spectrum and certain of its affiliates currently hold
approximately 67% of the outstanding shares of our common stock.
The remaining approximately 33% of our currently outstanding
shares of common stock is primarily held by a variety of
corporate and individual investors and employees, including
affiliates of Crosslink Capital, Inc., W Capital Partners II,
L.P., the JLS Revocable Trust and Timothy Sullivan, our
president and chief executive officer, who obtained their shares
of our common stock in connection with the Spectrum investment
by contributing equity valued at an aggregate amount of
$57.1 million or investing cash in the aggregate amount of
$9.8 million. A small percentage of our outstanding common
stock is also held by current or former employees who exercised
stock options. See Related Party Transactions for
further information about the terms of the Spectrum investment.
As a result of the accounting for the Spectrum investment, our
fiscal year 2007 is divided into a predecessor period from
January 1, 2007 through December 5, 2007 and a
successor period from December 6, 2007 through
December 31, 2007.
Corporate
Information
Our principal executive offices are located at 360 West
4800 North, Provo, UT 84604, and our telephone number at that
address is
(801) 705-7000.
Our corporate website address is www.ancestry.com. We do
not incorporate the information contained on, or accessible
through, our corporate website into this prospectus, and you
should not consider it part of this prospectus. We were
originally incorporated in Utah in 1983 under the name Ancestry,
Inc. We changed our name to Ancestry.com, Inc. in July 1998 and
reincorporated in Delaware in November 1998. Our name was
subsequently changed to MyFamily.com, Inc. in November 1999, and
then to The Generations Network, Inc. in November 2006.
In July 2009, to better align our corporate identity with the
premier branding of Ancestry.com, we changed our name to
Ancestry.com Inc. References herein to Ancestry.com,
the company, we, our and
us refer to the operations of Ancestry.com Inc. and
its consolidated subsidiaries in both the predecessor and
successor periods, unless otherwise specified. We are a holding
company, and substantially all of our operations are conducted
by our wholly-owned subsidiary Ancestry.com Operations Inc.,
which we refer to as the operating company, and its
subsidiaries. Our operations consist primarily of our flagship
website Ancestry.com, which is a part of a global family of
websites that includes Ancestry.co.uk, Ancestry.com.au,
Ancestry.ca, Ancestry.de, Ancestry.fr, Ancestry.it and
Ancestry.se. We refer to these websites collectively as the
Ancestry.com websites.
4
Terminology
In this prospectus we use the terms subscriber, registered user,
record, database and title.
A subscriber is an individual who pays for renewable access to
one of our Ancestry.com websites, and a registered user is a
person who has registered on one of our Ancestry.com websites,
including subscribers.
We use the term record in different ways depending
on the content source. When referring to a number of records in
certain of our company-acquired content collections, such as a
census record, we mean information about each specific person.
For example, a draft card will typically be counted as one
record, as will each line in a census, because each contains
information about a specific individual. When referring to
unstructured data, such as a newspaper, we define each page in
those data sources as a record. When referring to a number of
databases, we mean groups of records we have distinguished as
unique sets based on one or more common characteristics shared
by the records in each set, such as a common time period, place
or subject matter. When referring to a number of titles, we mean
an individual book, directory or newspaper title. For example,
The New York Times counts as a single title, regardless
of the number of editions we have online.
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THE
OFFERING
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Common stock offered by Ancestry.com
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4,074,074 shares
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Common stock offered by the selling stockholders
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3,333,333 shares
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Total common stock offered
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7,407,407 shares
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Total common stock to be outstanding after this offering
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42,402,916 shares
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Use of proceeds
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We expect to use the net proceeds from this offering as follows:
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approximately $12.1 million to
repay a portion of our credit facility; and
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the remainder for working capital and
other general corporate purposes, which may include the
acquisition of other businesses, products or technologies;
however, we do not have commitments for any acquisitions at this
time.
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We will not receive any proceeds from the sale of shares by the
selling stockholders. See Use of Proceeds.
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Risk Factors
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See Risk Factors for a discussion of factors that
you should consider carefully before deciding whether to
purchase shares of our common stock.
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Nasdaq Global Select Market symbol
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ACOM
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Except as otherwise indicated, all information in this
prospectus:
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assumes a reverse stock split of 1-for-2 of our shares of common
stock effective immediately prior to the consummation of this
offering;
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assumes that the underwriters will not exercise their option to
purchase 611,112 additional shares from us and 499,999
additional shares from the selling stockholders;
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excludes 10,326,588 shares issuable upon the exercise of
options outstanding as of September 30, 2009 with a
weighted average exercise price of $5.21 per share; and
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excludes an estimated 2,120,146 shares reserved for issuance
pursuant to future grants of awards under our 2009 Stock
Incentive Plan as of the date of this prospectus.
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6
SUMMARY
CONSOLIDATED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL
DATA
The following tables summarize the consolidated historical and
unaudited pro forma financial and operating data for the periods
indicated. The summary consolidated statements of operations
data presented below for the year ended December 31, 2006,
the predecessor period from January 1, 2007 through
December 5, 2007, the successor period from
December 6, 2007 through December 31, 2007 and the
year ended December 31, 2008 have been derived from our
consolidated financial statements which have been audited by
Ernst & Young LLP, an independent registered public
accounting firm and included elsewhere in this prospectus. The
summary consolidated statements of operations data for the nine
month periods ended September 30, 2008 and 2009 and the
balance sheet data at September 30, 2009 are derived from
our unaudited interim consolidated financial statements included
elsewhere in this prospectus and include all adjustments,
consisting of normal and recurring adjustments, that we consider
necessary for a fair presentation of the financial position and
results of operations as of and for such periods. Operating
results for the nine months ended September 30, 2009 are
not necessarily indicative of the results that may be expected
for the full 2009 fiscal year. The unaudited consolidated pro
forma financial data for the fiscal year ended December 31,
2007 has been prepared to give effect to the Spectrum investment
in the manner described under Unaudited Consolidated Pro
Forma Financial Data and the notes thereto. The pro forma
adjustments are based upon available information and certain
assumptions that we believe are reasonable. The unaudited
consolidated pro forma financial data are for informational
purposes only and do not purport to represent what our results
of operations actually would have been if the Spectrum
investment had occurred on January 1, 2007, and such data
do not purport to project the results of operations for any
future period. See Risk Factors and the notes to our
consolidated financial statements included elsewhere in this
prospectus. You should read the summary data presented below in
conjunction with our consolidated financial statements, the
notes to our consolidated financial statements, Unaudited
Consolidated Pro Forma Financial Data on page 38 of
this prospectus and Managements Discussion and
Analysis of Financial Condition and Results of Operations
included elsewhere in this prospectus.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
Pro Forma
|
|
|
Successor
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Jan. 1, 2007
|
|
|
|
Dec. 6, 2007
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
through
|
|
|
|
through
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
Dec. 5, 2007
|
|
|
|
Dec. 31, 2007
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands, except per share data)
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues
|
|
$
|
137,643
|
|
|
$
|
141,141
|
|
|
|
$
|
11,692
|
|
|
$
|
152,833
|
|
|
$
|
181,391
|
|
|
$
|
133,616
|
|
|
$
|
152,506
|
|
Product and other revenues
|
|
|
12,909
|
|
|
|
12,269
|
|
|
|
|
1,278
|
|
|
|
13,547
|
|
|
|
16,200
|
|
|
|
11,542
|
|
|
|
12,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
150,552
|
|
|
|
153,410
|
|
|
|
|
12,970
|
|
|
|
166,380
|
|
|
|
197,591
|
|
|
|
145,158
|
|
|
|
164,793
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription revenues
|
|
|
27,344
|
|
|
|
33,590
|
|
|
|
|
2,462
|
|
|
|
36,212
|
|
|
|
38,187
|
|
|
|
27,699
|
|
|
|
29,755
|
|
Cost of product and other revenues
|
|
|
3,695
|
|
|
|
2,552
|
|
|
|
|
500
|
|
|
|
3,052
|
|
|
|
5,427
|
|
|
|
3,292
|
|
|
|
4,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
31,039
|
|
|
|
36,142
|
|
|
|
|
2,962
|
|
|
|
39,264
|
|
|
|
43,614
|
|
|
|
30,991
|
|
|
|
33,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
119,513
|
|
|
|
117,268
|
|
|
|
|
10,008
|
|
|
|
127,116
|
|
|
|
153,977
|
|
|
|
114,167
|
|
|
|
130,825
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and development
|
|
|
28,280
|
|
|
|
31,255
|
|
|
|
|
3,517
|
|
|
|
33,754
|
|
|
|
33,206
|
|
|
|
23,705
|
|
|
|
26,690
|
|
Marketing and advertising
|
|
|
51,421
|
|
|
|
42,400
|
|
|
|
|
3,157
|
|
|
|
45,607
|
|
|
|
52,341
|
|
|
|
36,634
|
|
|
|
44,226
|
|
General and administrative
|
|
|
26,978
|
|
|
|
20,723
|
|
|
|
|
2,142
|
|
|
|
22,964
|
|
|
|
28,931
|
|
|
|
21,035
|
|
|
|
24,569
|
|
Amortization of acquired intangible assets
|
|
|
2,216
|
|
|
|
2,132
|
|
|
|
|
1,542
|
|
|
|
24,061
|
|
|
|
23,779
|
|
|
|
17,832
|
|
|
|
12,165
|
|
Transaction related expenses
|
|
|
|
|
|
|
9,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
108,895
|
|
|
|
106,040
|
|
|
|
|
10,358
|
|
|
|
126,386
|
|
|
|
138,257
|
|
|
|
99,206
|
|
|
|
107,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
Pro Forma
|
|
|
Successor
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Jan. 1, 2007
|
|
|
|
Dec. 6, 2007
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
through
|
|
|
|
through
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
Dec. 5, 2007
|
|
|
|
Dec. 31, 2007
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands, except per share data)
|
|
Income (loss) from operations
|
|
|
10,618
|
|
|
|
11,228
|
|
|
|
|
(350
|
)
|
|
|
730
|
|
|
|
15,720
|
|
|
|
14,961
|
|
|
|
23,175
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(946
|
)
|
|
|
(756
|
)
|
|
|
|
(1,146
|
)
|
|
|
(12,841
|
)
|
|
|
(12,355
|
)
|
|
|
(9,327
|
)
|
|
|
(4,784
|
)
|
Interest income
|
|
|
2,238
|
|
|
|
2,051
|
|
|
|
|
289
|
|
|
|
348
|
|
|
|
872
|
|
|
|
632
|
|
|
|
746
|
|
Other income (expense), net
|
|
|
834
|
|
|
|
266
|
|
|
|
|
7
|
|
|
|
273
|
|
|
|
(8
|
)
|
|
|
(18
|
)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
12,744
|
|
|
|
12,789
|
|
|
|
|
(1,200
|
)
|
|
|
(11,490
|
)
|
|
|
4,229
|
|
|
|
6,248
|
|
|
|
19,151
|
|
Income tax (expense) benefit
|
|
|
(4,595
|
)
|
|
|
(5,018
|
)
|
|
|
|
(103
|
)
|
|
|
4,251
|
|
|
|
(1,845
|
)
|
|
|
(2,748
|
)
|
|
|
(6,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,149
|
|
|
$
|
7,771
|
|
|
|
$
|
(1,303
|
)
|
|
$
|
(7,239
|
)
|
|
$
|
2,384
|
|
|
$
|
3,500
|
|
|
$
|
12,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.06
|
|
|
$
|
0.09
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.06
|
|
|
$
|
0.09
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
In connection with the Spectrum
investment, we were recapitalized. As a result, the capital
structure of our predecessor is not comparable to that of the
successor. Accordingly, net income per common share is not
comparable or meaningful for periods prior to 2008 and has not
been presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Jan. 1, 2007
|
|
|
|
Dec. 6, 2007
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
through
|
|
|
|
through
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
Dec. 5, 2007
|
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA(1)
|
|
$
|
30,455
|
|
|
$
|
39,344
|
|
|
|
$
|
3,755
|
|
|
$
|
62,645
|
|
|
$
|
49,062
|
|
|
$
|
52,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash
flow(1)
|
|
|
4,212
|
|
|
|
14,025
|
|
|
|
|
1,774
|
|
|
|
31,712
|
|
|
|
28,018
|
|
|
|
23,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription revenues
|
|
$
|
31
|
|
|
$
|
73
|
|
|
|
$
|
3
|
|
|
$
|
80
|
|
|
$
|
60
|
|
|
$
|
78
|
|
Technology and development
|
|
|
224
|
|
|
|
260
|
|
|
|
|
23
|
|
|
|
1,132
|
|
|
|
791
|
|
|
|
1,223
|
|
Marketing and advertising
|
|
|
196
|
|
|
|
279
|
|
|
|
|
27
|
|
|
|
254
|
|
|
|
180
|
|
|
|
273
|
|
General and administrative
|
|
|
3,338
|
|
|
|
286
|
|
|
|
|
24
|
|
|
|
3,206
|
|
|
|
2,478
|
|
|
|
2,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
3,789
|
|
|
$
|
898
|
|
|
|
$
|
77
|
|
|
$
|
4,672
|
|
|
$
|
3,509
|
|
|
$
|
4,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Income from operations and net
income, and therefore adjusted EBITDA and free cash flow,
include an expense related to a settlement in the third quarter
of 2009 of a claim regarding the timeliness and accuracy of a
content index we created. The settlement resulted in an expense
of approximately $2.3 million in 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended December 31,
|
|
September 30,
|
|
|
2006
|
|
2007
|
|
2008
|
|
2008
|
|
2009
|
|
Other
Data:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
subscribers(2)
|
|
|
734,386
|
|
|
|
832,193
|
|
|
|
913,683
|
|
|
|
893,882
|
|
|
|
1,028,180
|
|
Subscriber additions
|
|
|
569,851
|
|
|
|
479,663
|
|
|
|
556,045
|
|
|
|
412,276
|
|
|
|
508,750
|
|
Monthly
churn(3)
|
|
|
|
|
|
|
3.5
|
%
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
|
|
3.9
|
%
|
Subscriber acquisition
cost(4)
|
|
$
|
49.29
|
|
|
$
|
70.96
|
|
|
$
|
71.99
|
|
|
$
|
69.46
|
|
|
$
|
68.32
|
|
Average monthly revenue per
subscriber(4)
|
|
$
|
14.52
|
|
|
$
|
14.83
|
|
|
$
|
16.09
|
|
|
$
|
15.95
|
|
|
$
|
16.50
|
|
|
|
|
(1)
|
|
The terms total subscribers,
monthly churn, subscriber acquisition cost and average monthly
revenue per subscriber are defined in the
Managements Discussion and Analysis of Financial
Condition and Results of Operation Key Business
Metrics section.
|
(2)
|
|
Total subscribers were 600,411 and
681,632 for the years ended December 31, 2004 and 2005,
respectively.
|
(3)
|
|
Monthly churn is the average
monthly churn for the quarters included in the periods shown.
Monthly churn is not comparable for the year ended
December 31, 2006 due to a change in the packaging of our
products and services, and accordingly, has not been presented.
|
(4)
|
|
Based on pro forma expenses and
revenues for 2007. See Unaudited Consolidated Pro Forma
Financial Data on page 38 of this prospectus.
|
8
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
|
Actual
|
|
|
As adjusted
|
|
|
|
(in thousands)
|
|
|
Balance Sheet
Data:(1)
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
60,593
|
|
|
$
|
96,893
|
|
Total assets
|
|
|
476,296
|
|
|
|
512,596
|
|
Deferred revenues
|
|
|
69,850
|
|
|
|
69,850
|
|
Long-term debt (including current portion)
|
|
|
114,669
|
|
|
|
102,569
|
|
Total liabilities
|
|
|
239,482
|
|
|
|
227,382
|
|
Total stockholders equity
|
|
|
236,814
|
|
|
|
285,214
|
|
|
|
|
(1)
|
|
We have presented this summary
balance sheet (i) on an actual basis and (ii) on an as
adjusted basis to reflect our sale of 4,074,074 shares of
our common stock in this offering at an assumed initial public
offering price of $13.50 per share, which is the midpoint
of the range set forth on the cover page of this prospectus,
after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by us and the
application of the net proceeds of this offering as set forth
herein. Each $1.00 increase or decrease in the assumed initial
public price of $13.50 per share, the midpoint of the range set
forth on the cover page of this prospectus, would increase or
decrease the amount of cash and cash equivalents by
approximately $2.8 million, total stockholders equity
by approximately $3.8 million, and long term debt
(including current portion) by approximately $1.0 million,
assuming the number of shares offered by us as set forth on the
cover page of this prospectus remains the same and after
deducting the estimated underwriting discounts and commissions
and estimated expenses payable by us. The as adjusted
information presented is illustrative only and will change based
on the actual initial public offering price and other terms of
this offering determined at pricing.
|
Definitions
of Other Financial Data
Adjusted EBITDA. We define adjusted EBITDA as net
income (loss) plus net interest (income) expense; income tax
expense; non-cash charges including depreciation, amortization,
impairment of intangible assets and stock-based compensation
expense; other (income) expense and expenses associated with the
Spectrum investment, such as in-process research and development
and transaction expenses.
Free cash flow. We define free cash flow as net
income (loss) plus net interest (income) expense; income tax
expense; non-cash charges including depreciation, amortization,
impairment of intangible assets and stock-based compensation
expense; other (income) expense and expenses associated with the
Spectrum investment, such as in-process research and development
and transaction expenses, and minus capitalization of content
database costs, capital expenditures and cash paid for income
taxes and interest expense.
Discussion
of other financial data
Adjusted EBITDA and free cash flow are financial data that are
not calculated in accordance with GAAP. The table below provides
a reconciliation of these non-GAAP financial measures to net
income (loss), the most directly comparable financial measure
calculated and presented in accordance with GAAP. Adjusted
EBITDA and free cash flow should not be considered as an
alternative to net income, income from operations or any other
measure of financial performance calculated and presented in
accordance with GAAP. Our adjusted EBITDA or free cash flow may
not be comparable to similarly titled measures of other
companies because other companies may not calculate adjusted
EBITDA or free cash flow or similarly titled measures in the
same manner as we do. We prepare adjusted EBITDA and free cash
flow to eliminate the impact of items that we do not consider
indicative of our core operating performance. We encourage you
to evaluate these adjustments and the reasons we consider them
appropriate, as well as the material limitations of non-GAAP
measures and the manner in which we compensate for those
limitations.
Our management uses adjusted EBITDA and is increasingly using
free cash flow:
|
|
|
|
|
as measures of operating performance;
|
|
|
|
as factors when determining managements incentive
compensation;
|
|
|
|
for planning purposes, including the preparation of our annual
operating budget;
|
9
|
|
|
|
|
to allocate resources to enhance the financial performance of
our business;
|
|
|
|
to evaluate the effectiveness of our business
strategies; and
|
|
|
|
in communications with our board of directors concerning our
financial performance.
|
Management also uses adjusted EBITDA to evaluate compliance with
the debt covenants in our credit facility, which include an
EBITDA covenant that is substantially similar to adjusted
EBITDA. The definition of EBITDA under our credit facility
differs from our definition of adjusted EBITDA in this
prospectus primarily because the definition in the credit
facility does not exclude interest income (though it does
exclude interest expense) and other income (expense). See
Managements Discussion and Analysis of Financial
Condition Liquidity and Capital
Resources for a description of our credit facility.
Management believes that the use of adjusted EBITDA and free
cash flow provides consistency and comparability with our past
financial performance, facilitates period to period comparisons
of operations, and also facilitates comparisons with other peer
companies, many of which use similar non-GAAP financial measures
to supplement their GAAP results. Management believes that it is
useful to exclude non-cash charges such as depreciation,
amortization, impairment of intangible assets and stock-based
compensation from adjusted EBITDA and free cash flow because (i)
the amount of such non-cash expenses in any specific period may
not directly correlate to the underlying performance of our
business operations and (ii) such expenses can vary
significantly between periods as a result of new acquisitions,
full amortization of previously acquired tangible and intangible
assets or the timing of new stock-based awards, as the case may
be.
More specifically, we believe it is appropriate to exclude
stock-based compensation expense from adjusted EBITDA and free
cash flow because non-cash equity grants made at a certain price
and point in time do not reflect how our business is performing
at any particular time. While we believe that stockholders
should have information about any dilutive effect of outstanding
options and the cost of that compensation, we also believe that
stockholders should have the ability to view the
non-GAAP
financial measures that exclude these costs that management uses
to evaluate our business. The determination of stock-based
compensation expense is based on many subjective inputs at a
point in time and many of these inputs are not necessarily
directly related to the performance of our business. Therefore,
excluding this cost gives us a clearer view of the operating
performance of our business. Because of varying available
valuation methodologies, subjective assumptions and the variety
of award types that companies may use under Statement of
Financial Accounting Standards No. 123(R), which governs
the accounting treatment for
stock-based
compensation, as well as the impact of non-operational factors
such as our share price, on the magnitude of this expense,
management believes that providing
non-GAAP
financial measures that exclude this stock-based compensation
expense allows investors and analysts to make meaningful
comparisons between our operating results with those of other
companies. Stock-based compensation has been a significant
non-cash recurring expense in our business and has been used as
a key incentive offered to our employees. We believe such
compensation contributed to the revenues earned during the
periods presented and also believe it will contribute to the
generation of future period revenues. Stock-based compensation
expense will recur in future periods for GAAP purposes. There
are material limitations to our exclusion of stock-based
compensation from adjusted EBITDA and free cash flow, primarily
that these expenses reduce our GAAP net income. See below for a
further discussion of these limitations on our use of adjusted
EBITDA and free cash flow as an analytical tool, as well as the
manner in which management compensates for these limitations.
We believe it is appropriate to exclude depreciation and
amortization from adjusted EBITDA and free cash flow because
depreciation is a function of our capital expenditures which are
included in our cash flow measure, while amortization reflects
other asset acquisitions made at a point in time and their
associated costs. In analyzing the performance of our business
currently, management believes it is helpful also to consider
the business without taking into account costs or benefits
accruing from historical decisions on infrastructure and
capacity. While these matters do affect the overall financial
health of our company, they are separately evaluated and relate
to historic decisions that do not affect current operations of
our business on a cash flow basis. Further, depreciation and
amortization do not result in ongoing cash expenditures.
Investors should note that the use of assets being depreciated
or amortized contributed to revenues earned during the periods
presented and will continue to contribute to future period
revenues. This depreciation and amortization expense will recur
in future periods for GAAP purposes. There are material
limitations to our exclusion of depreciation and amortization
from adjusted
10
EBITDA and free cash flow, primarily that these expenses reduce
our GAAP net income and the assets being depreciated or
amortized will often have to be replaced in the future,
resulting in future cash requirements. See below for a further
discussion of these limitations on our use of adjusted EBITDA
and free cash flow as an analytical tool, as well as the manner
in which management compensates for these limitations.
We believe it is appropriate to exclude impairment of intangible
assets and acquired in-process research and development from
adjusted EBITDA and free cash flow because these charges relate
to specific past events. In analyzing the performance of our
business currently, management believes it is helpful also to
consider the business without taking into account costs or
benefits accruing from historical decisions or acquisitions.
Further, these charges do not result in ongoing cash
expenditures. There are material limitations to our exclusion of
impairment of intangible assets and in-process research and
design from adjusted EBITDA and free cash flow, primarily that
these expenses reduce our GAAP net income. See below for a
further discussion of these limitations on our use of adjusted
EBITDA and free cash flow as an analytical tool, as well as the
manner in which management compensates for these limitations.
Management believes that it is useful to exclude other income
(expense) from adjusted EBITDA and free cash flow because that
line item consists of items that do not correlate to the
underlying performance of our business, such as retirement and
disposal of non-operating assets and gain or loss on
non-operating investments. Management also believes that it is
useful to exclude transaction expenses and in-process research
and development expense associated with the Spectrum investment
because these expenses were incurred in connection with the
investment and therefore do not occur regularly. There are
material limitations to our exclusion of other income (expense)
from adjusted EBITDA and free cash flow, primarily that these
may include cash income or expense that increase or reduce our
GAAP net income. See below for a further discussion of these
limitations on our use of adjusted EBITDA and free cash flow as
an analytical tool, as well as the manner in which management
compensates for these limitations.
We believe adjusted EBITDA and free cash flow are useful to
investors in evaluating our operating performance because
securities analysts use adjusted EBITDA and free cash flow as
supplemental measures to evaluate the overall operating
performance of companies and we anticipate that our investor and
analyst presentations after we are public will include adjusted
EBITDA and free cash flow.
Material
limitations of non-GAAP measures
Although adjusted EBITDA and free cash flow are frequently used
by investors and securities analysts in their evaluations of
companies, adjusted EBITDA and free cash flow each have
limitations as an analytical tool, and you should not consider
them in isolation or as a substitute for analysis of our results
of operations as reported under GAAP.
Some of these limitations are:
|
|
|
|
|
adjusted EBITDA and free cash flow do not reflect our future
requirements for contractual commitments and adjusted EBITDA
does not reflect our cash expenditures or future requirements
for capital expenditures;
|
|
|
|
|
|
adjusted EBITDA and free cash flow do not reflect changes in, or
cash requirements for, our working capital;
|
|
|
|
adjusted EBITDA does not reflect interest income or interest
expense;
|
|
|
|
adjusted EBITDA does not reflect cash requirements for income
taxes;
|
|
|
|
adjusted EBITDA and free cash flow do not reflect the non-cash
component of employee compensation;
|
|
|
|
although depreciation, amortization and impairment of intangible
assets are non-cash charges, the assets being depreciated or
amortized will often have to be replaced in the future, and
adjusted EBITDA and free cash flow do not reflect any cash
requirements for these replacements;
|
|
|
|
adjusted EBITDA and free cash flow do not reflect acquired
in-process research and development charges; and
|
11
|
|
|
|
|
other companies in our industry may calculate adjusted EBITDA or
free cash flow or similarly titled measures differently than we
do, limiting their usefulness as comparative measures.
|
Management compensates for the inherent limitations associated
with using the adjusted EBITDA and free cash flow measures
through disclosure of such limitations, presentation of our
financial statements in accordance with GAAP and reconciliation
of adjusted EBITDA and free cash flow to the most directly
comparable GAAP measure, net income (loss). Further, management
also reviews GAAP measures, and evaluates individual measures
that are not included in adjusted EBITDA such as our level of
capital expenditures, equity issuance and interest expense,
among other measures.
The following table presents a reconciliation of adjusted EBITDA
and free cash flow to net income, the most comparable GAAP
measure, for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Jan. 1, 2007
|
|
|
|
Dec. 6, 2007
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
through
|
|
|
|
through
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
Dec. 5, 2007
|
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Reconciliation of adjusted EBITDA and free cash flow to net
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,149
|
|
|
$
|
7,771
|
|
|
|
$
|
(1,303
|
)
|
|
$
|
2,384
|
|
|
$
|
3,500
|
|
|
$
|
12,224
|
|
Interest (income) expense, net
|
|
|
(1,292
|
)
|
|
|
(1,295
|
)
|
|
|
|
857
|
|
|
|
11,483
|
|
|
|
8,695
|
|
|
|
4,038
|
|
Income tax expense
|
|
|
4,595
|
|
|
|
5,018
|
|
|
|
|
103
|
|
|
|
1,845
|
|
|
|
2,748
|
|
|
|
6,927
|
|
Depreciation expense
|
|
|
9,559
|
|
|
|
10,594
|
|
|
|
|
754
|
|
|
|
10,732
|
|
|
|
8,153
|
|
|
|
8,092
|
|
Amortization expense
|
|
|
6,489
|
|
|
|
7,094
|
|
|
|
|
1,974
|
|
|
|
30,046
|
|
|
|
22,439
|
|
|
|
17,346
|
|
Stock-based compensation
|
|
|
3,789
|
|
|
|
898
|
|
|
|
|
77
|
|
|
|
4,672
|
|
|
|
3,509
|
|
|
|
4,265
|
|
Other (income) expense, net
|
|
|
(834
|
)
|
|
|
(266
|
)
|
|
|
|
(7
|
)
|
|
|
8
|
|
|
|
18
|
|
|
|
(14
|
)
|
Impairment of intangible assets and acquired in-process research
and development
|
|
|
|
|
|
|
|
|
|
|
|
1,300
|
|
|
|
1,475
|
|
|
|
|
|
|
|
|
|
Transaction related expenses
|
|
|
|
|
|
|
9,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
30,455
|
|
|
$
|
39,344
|
|
|
|
$
|
3,755
|
|
|
$
|
62,645
|
|
|
$
|
49,062
|
|
|
$
|
52,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization of content database costs
|
|
$
|
(11,285
|
)
|
|
$
|
(10,591
|
)
|
|
|
$
|
(1,129
|
)
|
|
$
|
(8,965
|
)
|
|
$
|
(6,383
|
)
|
|
$
|
(5,855
|
)
|
Purchase of property and equipment
|
|
|
(10,127
|
)
|
|
|
(10,572
|
)
|
|
|
|
(852
|
)
|
|
|
(11,621
|
)
|
|
|
(7,358
|
)
|
|
|
(7,566
|
)
|
Cash paid for interest
|
|
|
(1,031
|
)
|
|
|
(756
|
)
|
|
|
|
|
|
|
|
(10,068
|
)
|
|
|
(7,206
|
)
|
|
|
(6,624
|
)
|
Cash paid for income taxes
|
|
|
(3,800
|
)
|
|
|
(3,400
|
)
|
|
|
|
|
|
|
|
(279
|
)
|
|
|
(97
|
)
|
|
|
(8,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
4,212
|
|
|
$
|
14,025
|
|
|
|
$
|
1,774
|
|
|
$
|
31,712
|
|
|
$
|
28,018
|
|
|
$
|
23,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
RISK
FACTORS
An investment in our common stock involves a high degree of
risk. You should carefully consider the risks described below
and all of the other information contained in this prospectus
before deciding whether to purchase our stock. Our business,
prospects, financial condition or operating results could be
materially adversely affected by any of these risks, as well as
other risks not currently known to us or that we currently
consider immaterial. The trading price of our common stock could
decline due to any of these risks, and you may lose all or part
of your investment. In assessing the risks described below, you
should also refer to the other information contained in the
prospectus, including our consolidated financial statements and
the related notes, before deciding to purchase any shares of our
common stock.
Risks
Related to Our Business
If our efforts to retain and attract subscribers are not
successful, our revenues will be adversely affected.
We generate substantially all of our revenue from subscriptions
to our products and services. We must continue to retain
existing and attract new subscribers. If our efforts to satisfy
our existing subscribers are not successful, we may not be able
to retain them, and as a result, our revenues would be adversely
affected. For example, if consumers do not perceive our products
and services to be reliable, valuable and of high quality, if we
fail to regularly introduce new and improved products and
services, or if we introduce new products or services that are
not favorably received by the market, we may not be able to
retain existing or attract new subscribers. We rely on our
marketing and advertising efforts, including online and offline
performance-based and fixed-cost programs, to retain existing
subscribers and attract new subscribers. If we are unable to
effectively retain existing subscribers and attract new
subscribers, our business, financial condition and results of
operations would be adversely affected.
The relative service levels, pricing and related features of
competitors to our products and services are some of the factors
that may adversely impact our ability to retain existing
subscribers and attract new subscribers. Some of our current
competitors provide genealogical records free of charge. Some
governments or private organizations may make historical records
available online at no cost to consumers and some commercial
entities could choose to make such records available on an
advertising-supported basis rather than a subscription basis. If
consumers are able to satisfy their family history research
needs at no or lower cost, they may not perceive value in our
products and services. If our efforts to satisfy and retain our
existing subscribers are not successful, we may not be able to
continue to attract new subscribers through
word-of-mouth
referrals. Further, subscriber growth may decrease as a result
of a decline in interest in family history research. Any of
these factors could cause our subscriber growth rate to fall,
which would adversely impact our business, financial condition
and results of operations.
Our
recent revenue growth rate may not be sustainable, which could
negatively affect our stock price or financial condition and
results of operations.
Our revenues have grown rapidly, increasing from
$122.6 million in 2004 to $197.6 million in 2008,
representing a compound annual growth rate of 12.7%. We may not
be able to sustain our recent growth rate in future periods and
you should not rely on the revenue growth of any prior quarterly
or annual periods as an indication of our future performance. If
our future growth fails to meet investor or analyst
expectations, it could have a negative effect on our stock
price. If our growth rate were to decline significantly or
become negative, it could adversely affect our financial
condition and results of operations.
If we
experience excessive rates of subscriber churn, our revenues and
business will be harmed.
We must continually add new subscribers both to replace
subscribers who choose not to renew their subscriptions and to
grow our business beyond our current subscriber base. We
describe the percentage of subscribers who elect not to renew
their subscriptions as subscriber churn. Subscribers
choose not to renew their subscriptions for many reasons,
including a desire to reduce discretionary spending or a
perception that they do not use the service sufficiently, the
service is a poor value, competitive services provide a better
value or experience, or subscriber service issues are not
satisfactorily resolved. Subscribers may choose not to renew
their subscription at any time prior to the renewal date. If we
are unable to attract new subscribers in numbers greater than
our subscriber
13
churn, our subscriber base will decrease and our business,
financial condition and results of operations will be adversely
affected.
If public interest in family history generally or in our
websites specifically were to increase as a result of a
successful marketing and advertising promotion, media focus (for
example, as a result of the potential introduction of the
television show Who Do You Think You Are? in the
United States in early 2010) or other reasons, we could
experience a spike in new subscriptions. We anticipate that this
in turn would result in an increase in our subscriber churn as
our subscriber base would begin to include people who have
varying degrees of interest in family history or limited
experience using online subscription services. For example, in
2006 we experienced an increase in new subscriptions in the
United Kingdom after the airing of Who Do You Think You
Are? on the BBC. If our subscriber churn increases, we may
be required to increase the rate at which we add new subscribers
in order to maintain and grow our revenues. If excessive numbers
of subscribers cancel our service, we may be required to incur
significantly higher marketing and advertising expenses than we
currently anticipate to replace these subscribers with new
subscribers. A significant increase in our subscriber churn
would have an adverse effect on our business, financial
condition and results of operations.
Because we recognize revenues from subscriptions to our
service over the term of the subscription, downturns or upturns
in subscription sales may not be immediately reflected in our
operating results and therefore could affect our operating
results in later periods.
We recognize revenues from subscribers ratably over the term of
their subscriptions. Given the mix of annual subscriptions, a
large portion of our revenues for each quarter reflects deferred
revenue from subscription agreements entered into during
previous quarters. Consequently, a decline in new or renewed
subscriptions in any one quarter will not necessarily be fully
reflected in the revenues in that quarter but will negatively
affect our revenues in future quarters. Accordingly, the effect
of significant downturns or upturns in subscription sales or
market acceptance of our service, or changes in subscriber
churn, may not fully impact our results of operations until
future periods.
Because we generate substantially all of our revenue from
online family history resources, particularly in the United
States and United Kingdom, a decline in demand for our products
or services or for online family history resources in general,
and particularly of the United States and United Kingdom, could
cause our revenue to decline.
We generate substantially all of our revenue from our online
family history products and services, and we expect that we will
continue to depend upon our online family history products and
services for substantially all of our revenue in the foreseeable
future. Because we are dependent on our online family history
products and services, factors such as changes in consumer
preferences for these products may have a disproportionately
greater impact on us than if we offered multiple products and
services. The market for online family history resources, and
for consumer products and services in general, is subject to
rapidly changing consumer demand and trends in preferences. If
consumer interest in our online family history products and
services declines, or if consumer interest in family history in
general declines, we would likely experience a significant loss
of revenue. Some of the potential factors that could affect
interest in and demand for online family history products and
services include:
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individuals interest in, and their willingness to spend
time and money, conducting family history research;
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availability of discretionary funds;
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awareness of our brand and the family history category;
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the appeal and reliability of our products and services;
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the price, performance and availability of competing family
history products and services;
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public concern regarding privacy and data security;
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our ability to maintain high levels of customer
satisfaction; and
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the rate of growth in online commerce generally.
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In addition, we recognize substantially all of our revenues from
subscribers in the United States, the United Kingdom, and
to a lesser extent, Australia and Canada. Consequently, a
decrease of interest in and demand for online family history
products and services in these countries could have a
disproportionately greater impact on us than if our geographic
mix of revenue was less concentrated.
A change in our mix of subscription durations could have a
significant impact on our revenue and churn.
A majority of our subscribers have annual subscriptions. At any
point in time, however, the majority of new subscribers
generally sign up for monthly subscriptions, and may or may not
choose to renew or convert to an annual subscription. We
generally experience higher rates of churn for monthly
subscribers than for annual subscribers. If the percentage of
overall subscribers that are monthly subscribers increases, an
increasing part of our revenue would become dependent on monthly
renewals, and we would likely have greater churn. A shift in mix
between annual and monthly subscriptions to more monthly
subscriptions as our subscriber base broadened has resulted in
higher revenue per subscriber over the last several periods.
This trend may not continue and may result in increased churn.
We continually evaluate the types of subscriptions that are most
appropriate for us and our subscribers. As we make these
evaluations, we may more aggressively market subscriptions that
are shorter than our annual subscriptions. Any material change
in our mix of subscription duration could have a significant
impact on our revenue and churn.
Challenges in acquiring historical content and making it
available online could adversely affect our ability to retain
and expand our subscriber base, and therefore adversely affect
our business, financial condition and results of
operations.
In order to retain and expand our subscriber base, both
domestically and internationally, we must continue to expend
significant resources to acquire significant amounts of
additional historical content, digitize it and make it available
to our subscribers online. We face legal, logistical and
cultural challenges in acquiring new historical content.
Relevant governmental records may be widely dispersed and held
at a national, state or local level. Religious and private
records are even more widely dispersed. These problems often
pose particular challenges in acquiring content internationally.
For example, content in Germany is highly dispersed, and
legislation in France is particularly stringent. Desirable
content may not be available to us on favorable terms, or at
all, due to competition for a particular collection, privacy
concerns relative to information contained in a given collection
or our lack of negotiating leverage with a certain content
provider. For example, some of our most popular databases
include so-called vital records content
namely, birth, marriage and death records made available by
certain governmental agencies. To help prevent identity theft,
or even terrorist activities, governments may attempt to
restrict the release of all or substantial portions of their
vital records content, and particularly birth records, to third
parties. If these efforts are successful, it may limit or
altogether prevent us from acquiring these types of vital record
content or continuing to make them available online. In many
cases, we will be the first commercial entity that may have
approached the keeper of the records, often a governmental body.
In some cases, we have to lobby for legislation to be changed to
enable government or other bodies to grant us access to records.
While we own most of the images in our database, we generally do
not own the underlying historical documents. If owners of
content have sold or licensed it for digitization purposes on an
exclusive basis to a third party, we would not be able to
acquire this content. The owners of such historical records
generally can allow one or more parties to digitize those
records. If owners of content have sold or licensed the rights
to digitize that content, even on a non-exclusive basis, they
often elect not to sell or license it for digitization purposes
to any other person. Therefore, if one of our competitors
acquires rights to digitize a set of content, even on a
non-exclusive basis, we may be unable to acquire rights to
digitize that content collection. In some cases, acquisition of
content involves competitive bidding, and we have in the past
and may in the future choose not to bid or not successfully bid
to acquire content rights. In addition, a number of governmental
bodies and other organizations are interested in making
historical content available for free and owners of historical
records may license or sell their records to such governmental
bodies and organizations in addition to or instead of licensing
or selling their content to us. Our inability to offer vital
records or other valuable content as part of our family history
research databases or the widespread availability of such
content elsewhere at lower cost or for free could result in our
subscription products and services becoming less valuable to
consumers, which could have an adverse impact on our number of
subscribers or subscriber churn, and therefore on our business,
financial condition and results of operations.
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We depend in part upon third party licenses for some of
our historical content, and a loss of those licenses, or
disputes regarding royalties under these licenses, could
adversely affect our ability to retain and expand our subscriber
base, and therefore adversely affect our revenues, financial
condition and results of operations.
Though we own most of the images in our databases, in some cases
on a non-exclusive basis, we acquire a portion of our content
pursuant to ongoing license agreements. Some of these agreements
have finite terms and we may not be able to renew the agreements
on terms that are advantageous to us or at all. For example, we
license a significant amount of our United Kingdom content from
the United Kingdom National Archives under several license
agreements that generally have ten year terms, with varying
automatic extension periods. These agreements with the United
Kingdom National Archive expire from 2012 to 2019. The
agreements are generally terminable by either party for breach
by the other party and by the United Kingdom National Archives
upon our insolvency or bankruptcy. Some of these agreements
permit the United Kingdom National Archives to terminate
these licenses if we undergo a change of control.
If a current or future license for a significant content
collection were to be terminated, we may not be able to obtain a
new license on terms advantageous to us or at all and we could
be required to remove the relevant content from our websites,
either immediately or after some period of time. If a content
provider were to license or sell us content in violation of that
content providers agreements with other parties, we could
be required to remove that content from our websites. If we were
required to remove a material amount of content from our
websites, as a result of the termination of one or more licenses
or otherwise, it could adversely affect our business and results
of operations. Some of these license agreements restrict the
manner in which we use the applicable content, which could limit
our ability to leverage that content for new uses as we expand
our business. We pay royalties under some of these license
agreements, and the other party to those royalty-bearing
agreements may have a right to audit the calculation of our
royalty payments. If there were to be a disagreement regarding
the calculation of royalty payments, we could be required to
make additional payments under those agreements. We also have
indemnification obligations under many of these agreements.
While we have not experienced any claims to date, we could
experience claims in the future which, if material, could have a
negative impact on our results of operations and financial
condition.
Digitizing and indexing new content can take a significant
amount of time and expense, and can expose us to risks
associated with the loss or damage of historical documents. Our
inability to maintain or acquire content or make new content
available online in a timely and cost-effective manner, or
liability for loss of historical documents, could have an
adverse effect on our business, financial condition and results
of operations.
Digitizing and indexing new historical content can take a
significant amount of time and expense and we generally incur
the expenses related to such content significantly in advance of
the time we can make it available to our subscribers. We have
invested approximately $80 million in content to date and
expect to continue to spend significant resources on content.
Increases in the cost or time required to digitize and index new
content could harm our financial results. In 2008, one of our
transcription vendors, Beijing Formax, performed a majority of
our data transcription as measured by cost. We do not have
long-term contracts with any of our transcription vendors. If we
were to replace that transcription vendor or any other
transcription vendor for any reason, we would be required to
provide extensive training to the new vendor, which could delay
our ability to make our new content available to our
subscribers, and our relationships with the new transcription
vendors may be on financial or other terms less favorable to us
than our existing arrangements. Our inability to maintain or
acquire content or to make new content available online in a
timely and cost-effective manner would have an adverse effect on
our business, financial condition and results of operations.
In addition, if we acquire content that ultimately generates
only minimal subscriber interest, the cost of acquiring and
processing that content may exceed the incremental revenues
produced by the content, which would adversely affect our
profitability. For example, we took an impairment charge with
respect to content acquired for our China-focused website after
we shifted our strategy for that market.
While we are digitizing borrowed content, we may be in
possession of valuable and irreplaceable original historical
documents. While we maintain insurance with respect to such
documents, any loss or damage to such
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documents, while in our possession, could cause us significant
expense and could have a material adverse effect on our
reputation and the potential willingness of content owners to
sell, license or lend their content to us.
We face competition from a number of different sources,
and our failure to compete effectively with current and future
competitors could adversely affect our ability to retain and
expand our subscriber base, and therefore adversely impact our
revenues, results of operations and financial condition.
We face competition in our business from a variety of online and
offline organizations, some of which provide genealogical
records free of charge. We expect competition to increase in the
future. We generally compete on the basis of content, price,
technology, ease of use, brand recognition, breadth of products,
service and support, and the number of network members with whom
other members can collaborate.
Ancestry.com and our similar international websites face
competition from:
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FamilySearch, and its website FamilySearch.org, a genealogy
organization that is part of The Church of Jesus Christ of
Latter-day
Saints. The Church of Jesus Christ of
Latter-day
Saints has, for over 100 years, actively gathered,
preserved and shared genealogical records worldwide.
FamilySearch has an extensive collection of paper and microfilm
records (more than 2.3 million rolls of microfilm and
180,000 sets of microfiche), which it maintains in a central
storage facility in Utah. FamilySearch has digitized a large
quantity of these records and has published them online at
FamilySearch.org, where it makes them available to the public
for free and through over 4,500 family history centers located
throughout the world. FamilySearch is a well funded organization
and has stated its intention to undertake a massive digitization
project to bring most of its collection online over the next few
years.
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Commercial entities, including online genealogical research
services, library content distributors, search engines and
portals, retailers of books and software related to genealogical
research and family tree creation and family history oriented
social networking websites.
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Other non-profit entities and organizations, genealogical
societies, governments and agencies that may make vital
statistics or other records available to the public for free.
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As we continue to diversify our breadth of products and services
and expand internationally, we expect our competition to expand
to include other Internet-based and offline businesses,
governments and other entities. Our current and future
competitors may have greater resources, more well-established
brand recognition or more sophisticated technologies, such as
search algorithms, than we do or may more easily obtain relevant
records in international markets. Additionally, our current and
future competitors may offer new categories of content, products
or services before us, or at lower prices, which may give them a
competitive advantage in attracting subscribers. Our current and
future competitors may make historical records available online
at no cost or on an advertising-supported basis rather than a
subscription basis. Our future competitors and their products
and services may be superior to any of our current competition.
There has recently been some consolidation in our industry, and
such consolidation could also increase competition in the
future, including competition with respect to acquisition of
content, exclusivity of content or pricing. To compete
effectively, we may need to expend significant resources on
content acquisition, technology or marketing and advertising. We
currently plan to distinguish ourselves from our competitors on
the basis of access to content, technological leadership and the
depth of our subscriber community. These efforts may be
expensive and could reduce our margins, which could have a
material adverse effect on our business, financial condition and
results of operations.
Competitive
pricing pressures could cause us to fail to retain existing or
attract new subscribers and harm our revenues and results of
operations.
Demand for our products and services is sensitive to price. Many
external factors, including our marketing, content acquisition
and technology costs and our current and future
competitors pricing and marketing strategies, can
significantly affect our pricing strategies, particularly in
markets outside the United States. Some of our competitors
provide genealogical records free of charge. If we fail to meet
our subscribers pricing expectations, we could fail to
retain existing or attract new subscribers, either of which
would harm our business and results of operations. Changes in
our pricing strategies could have a significant impact on our
revenues and net income.
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Our growth could strain our personnel, technology and
infrastructure resources, and if we are unable to implement
appropriate controls and procedures to manage our growth, we may
not be able to successfully implement our business plan.
Our growth in operations has placed a significant strain on our
management, administrative, technological, operational and
financial infrastructure. Anticipated future growth, including
growth related to the broadening of our product and service
offerings and our expansion into new geographic areas, will
continue to place similar strains on our personnel, technology
and infrastructure. A sudden increase in our number of
registered users could strain our capacity and result in website
performance issues. Our success will depend in part upon the
management ability of our officers with respect to growth
opportunities. To manage the expected growth of our operations,
we will need to continue to improve our operational, financial,
technological and management controls and our reporting systems
and procedures. Additional capital investments will increase our
cost base, which will make it more difficult for us to offset
any future revenue shortfalls by offsetting expense reductions
in the short term. If we fail to successfully manage our growth,
it could adversely affect our business, financial condition and
results of operations.
Any significant disruption in service on our websites or
in our computer systems, which are currently hosted primarily by
a single third-party, could damage our reputation and result in
a loss of subscribers, which would harm our business and
operating results.
Registered users access our service through our websites, where
our family history research databases are located, and our
internal billing software and operations are integrated with our
product and service offerings. Our brand, reputation and ability
to attract, retain and serve our subscribers is dependent upon
the reliable performance of our websites, network
infrastructure, content delivery processes and payment systems.
We have experienced interruptions in these systems in the past,
including server failures that temporarily slowed down our
websites performance and access to content, or made our
websites inaccessible, and we may experience interruptions in
the future. Interruptions in these systems, whether due to
system failures, computer viruses or physical or electronic
break-ins, could affect the security or availability of our
websites and prevent our registered users from accessing our
data and using our products and services. Problems with the
reliability or security of our systems may require disclosure to
our lenders and could harm our reputation, and damage to our
reputation and the cost of remedying these problems could
negatively affect our business, financial condition and results
of operations.
Substantially all of our communications, network and computer
hardware used to operate our websites are co-located in a
facility in Utah. We do not own or control the operation of this
facility. We are establishing a redundant system in Denver,
Colorado, and we expect to complete this project within the next
12 months. Our systems and operations are vulnerable to damage
or interruption from fire, flood, power loss, telecommunications
failure, terrorist attacks, acts of war, electronic and physical
break-ins, computer viruses, earthquakes and similar events. The
occurrence of any of the foregoing events could result in damage
to our systems and hardware or could cause them to fail
completely, and our insurance may not cover such events or may
be insufficient to compensate us for losses that may occur. Our
systems are not yet redundant, so a total failure of our system
could cause our websites to be inaccessible by our registered
users. Problems faced by our third-party web hosting provider,
with the telecommunications network providers with whom it
contracts or with the systems by which it allocates capacity
among its customers, including us, could adversely affect the
experience of our subscribers. Our third-party web hosting
provider could decide to close its facilities without adequate
notice. In addition, any financial difficulties, such as
bankruptcy reorganization, faced by our third-party web hosting
provider or any of the service providers with whom it contracts
may have negative effects on our business, the nature and extent
of which are difficult to predict. Additionally, if our
third-party web hosting provider is unable to keep up with our
growing needs for capacity, this could have an adverse effect on
our business. Any errors, defects, disruptions or other
performance problems with our services could harm our reputation
and have an adverse effect on our business, financial condition
and results of operations.
Our
operating results depend on numerous factors and may fluctuate
from quarter to quarter, which could make them difficult to
predict.
Our quarterly operating results are tied to certain financial
and operational metrics that have fluctuated in the past and may
fluctuate significantly in the future. As a result, you should
not rely upon our past quarterly operating
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results as indicators of future performance. Our operating
results depend on numerous factors, many of which are outside of
our control. In addition to the other risks described in this
Risk Factors section, the following risks could
cause our operating results to fluctuate:
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our ability to retain existing subscribers and attract new
subscribers;
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the mix of annual and monthly subscribers at any given time;
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timing and amount of costs of new and existing marketing and
advertising efforts;
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timing and amount of operating costs and capital expenditures
relating to expansion of our business, operations and
infrastructure, including content acquisition and international
expansion costs;
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the cost and timing of the development and introduction of new
product and service offerings by us or our competitors;
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downward pressure on the pricing of our subscriptions;
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system failures, security breaches or Internet downtime; and
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seasonal fluctuations in the usage of our websites.
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For these or other reasons, the results of any prior quarterly
or annual periods should not be relied upon as indications of
our future performance and our revenue and operating results in
future quarters may differ materially from the expectations of
management or investors.
We require a significant amount of cash to service our
indebtedness, which reduces the cash available to finance our
organic growth and strategic acquisitions, alliances and
collaborations. If we fail to grow as a result of limitations on
available cash, it could harm our financial condition and stock
price.
We have a significant amount of indebtedness, as described in
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources. Our indebtedness could:
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make us more vulnerable to unfavorable economic conditions;
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make it more difficult to obtain additional financing in the
future for working capital, capital expenditures or other
general corporate purposes;
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limit our flexibility in planning for, or reacting to, changes
in our business and the markets in which we operate;
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require us to dedicate or reserve a large portion of our cash
flow from operations for making payments on our indebtedness,
which would prevent us from using it for other purposes;
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make us susceptible to fluctuations in market interest rates
that affect the cost of our borrowings to the extent that our
variable rate debt is not covered by interest rate derivative
agreements; and
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make it more difficult to pursue strategic acquisitions,
alliances and collaborations.
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Our existing credit facility contains a number of financial and
operating covenants which could limit our flexibility in
operating our business. For example, our credit facility limits
our capital expenditures, which limits the amount we can spend
on content acquisition, and it limits the amount we can pay when
acquiring companies. These restrictions and covenants, among
other things, limit our ability to: incur additional
indebtedness; make investments; pay dividends or make
distributions to our stockholders; grant liens on our assets;
sell assets; enter into a new or different line of business;
enter into transactions with our affiliates; acquire, merge or
consolidate with other entities or transfer all or substantially
all of our assets; and enter into sale and leaseback
transactions. Our failure to comply with any covenant could
result in a default under the credit facility. Our ability to
service our indebtedness and comply with the covenants will
depend on our future performance, which will be affected by
prevailing economic conditions and financial, business,
regulatory and other factors. Some of these factors are beyond
our control. We believe that, based upon current levels of
operations, we will be able to comply with the covenants in our
credit facility and meet our debt service obligations when due.
Significant assumptions underlie this belief
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including, among other things, that we will continue to be
successful in implementing our business strategy and that there
will be no material adverse developments in our business,
liquidity or capital requirements. If we cannot generate
sufficient cash flow from operations to service our indebtedness
and to meet our other obligations and commitments, we might be
required to refinance our debt or to dispose of assets to obtain
funds for such purpose. We cannot assure you that refinancings
or asset dispositions could be effected on a timely basis or on
satisfactory terms, if at all, or would be permitted by the
terms of our debt instruments.
Our obligations under the existing credit facility are secured
by collateral, which includes substantially all of our assets,
including our intellectual property. If we are not able to
satisfy our obligations under the credit facility, the creditors
could exercise their rights under the credit facility, which
include taking control of the collateral, including our
intellectual property, which would have a material adverse
effect on our business.
Upon consummation of the offering and the application of the net
proceeds as set forth under Use of Proceeds, we
expect our borrowings under our credit facility to be
$102.6 million.
We may need additional capital, and we cannot be certain
that additional financing will be available. If we fail to
obtain additional financing if needed, it could harm our growth
and our ability to respond to business challenges.
We have funded our operations and capital expenditures primarily
from cash flow from operations during the last five years. In
connection with the Spectrum investment, we incurred a
significant amount of indebtedness. Although we currently
anticipate that our available funds and cash flow from
operations will be sufficient to meet our cash needs for at
least the next 12 months, we may require additional
financing in the future. Our ability to obtain financing will
depend, among other things, on our development efforts, business
plans, operating performance and condition of the capital
markets at the time we seek financing. Additional financing may
not be available to us on favorable terms, or at all, when
required. The ongoing financial stress affecting the banking
system and financial markets and the going concern threats to
financial institutions could make it more difficult for us to
obtain additional financing if we should require it. CIT Lending
Services Corporation, one of the lenders in the lending
syndicate for the revolving portion of our credit facility, has
recently suffered financial difficulties, according to media
reports, and its parent company, CIT Group Inc., has recently
launched a restructuring plan, according to public filings. If
it or any other of the financial institutions that are in the
syndicate for the revolving portion of our credit facility were
to suffer financial difficulties or enter bankruptcy, it could
affect our ability to draw down on that facility. If we raise
additional funds through the issuance of equity, equity-linked
or debt securities, those securities may have rights,
preferences or privileges senior to the rights of our common
stock, and our stockholders may experience dilution. If we are
unable to obtain adequate financing or financing on terms
satisfactory to us when we require it, our ability to service
our outstanding indebtedness, to continue to support our
business growth and to respond to business challenges could be
significantly limited.
If our marketing and advertising efforts fail to generate
additional revenues on a cost-effective basis, or if we are
unable to manage our marketing and advertising expenses, it
could harm our results of operations and growth.
Our future growth and profitability, as well as the maintenance
and enhancement of our brands, will depend in large part on the
effectiveness and efficiency of our marketing and advertising
expenditures. We use a diverse mix of online and offline
performance-based and fixed-cost marketing and advertising
programs to promote our products and services and we
periodically adjust our mix of marketing and advertising
programs. Significant increases in the pricing of one or more of
our marketing and advertising channels would increase our
marketing and advertising expense or cause us to choose less
expensive but less effective marketing and advertising channels.
As we implement new marketing and advertising strategies and
phase out older strategies, we may need to expand into marketing
and advertising channels with significantly higher costs than
our current channels, which could adversely affect our
profitability. Further, we may over time become
disproportionately reliant on one channel or partner, which
would limit our marketing and advertising flexibility and could
increase our operating expenses. We may incur marketing and
advertising expenses significantly in advance of the time we
anticipate recognizing revenue associated with such expenses,
and our marketing and advertising expenditures may not result in
increased revenue or generate sufficient levels of brand
awareness. For example, we have purchased product integration in
the television show Who Do You Think You Are? in the
United States, but we may only at a later date, or never,
experience an increase in revenue or brand awareness as a result
of such expenditures. If we are unable to maintain
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our marketing and advertising channels on cost-effective terms
or replace existing marketing and advertising channels with
similarly effective channels, our marketing and advertising
expenses could increase substantially, our subscriber levels
could be affected adversely, and our business, financial
condition and results of operations may suffer.
We anticipate that as we market our products and services to a
broader market, including people who may not be Internet-savvy
or may be new to family history research, we may be required to
develop new, more costly online and offline advertising
channels, such as television advertising. Such expanded efforts
may yield fewer new subscriptions per marketing and other
greater advertising expenditures than our strategies to date. We
may decide to expand our international marketing and advertising
efforts, which will lead to a significant increase in our
marketing and advertising expenses. Any of these additional
expenses may not result in sufficient customer growth to offset
cost, which would have an adverse effect on our business,
financial condition and results of operations.
If we are unable to improve market recognition of and
loyalty to our brands, or if our reputation were to be harmed,
we could lose subscribers or fail to increase the number of
subscribers, which could harm our revenues, results of
operations and financial condition.
We believe that maintaining and enhancing our Ancestry.com and
other brands is critical to our success. We believe that the
importance of brand recognition and loyalty will only increase
in light of increasing competition in our markets. We plan to
continue to promote our brands, both domestically and
internationally, but there is no guarantee that our selected
strategies will increase the favorable recognition of our
brands. Some of our existing and potential competitors,
including search engines, media companies and government and
religious institutions have well-established brands with greater
brand recognition than we have. Additionally, from time to time,
our subscribers express dissatisfaction with our service,
including, among other things, dissatisfaction with our
auto-renewal and other billing policies, our handling of
personal data and the way our services operate. To the extent
that dissatisfaction with our service is widespread or not
adequately addressed, our brand may be adversely impacted. If
our efforts to promote and maintain our brand are not
successful, our operating results and our ability to attract and
retain subscribers may be adversely affected. In addition, even
if our brand recognition and loyalty increases, this may not
result in increased use of our products and services or higher
revenues. Many of our subscribers are passionate about family
history research, and many of these subscribers participate in
blogs on this topic both on our websites and elsewhere. If
actions we take or changes we make to our products upset these
subscribers, their blogging could negatively affect our brand
and reputation. We have a limited operating history, and you
should not rely upon our historic growth rates as an indicator
of future growth.
Online family history research is a relatively new industry and
our operational history in the online family history research
industry is also relatively limited. Consequently, it is
difficult to predict the ultimate size of the industry and the
acceptance by the market of our products and services. Our
business strategy and projections rely on a number of
assumptions, some or all of which may be incorrect. For example,
we believe that consumers will be willing to pay for
subscriptions to our online family history resources,
notwithstanding the fact that some of our current and future
competitors provide such resources free of charge. We cannot
accurately predict whether our products and services will
achieve significant acceptance by potential users in
significantly larger numbers than at present. You should
therefore not rely on our historic growth rates as an indication
of future growth.
Our business could be adversely affected if our
subscribers are not satisfied with our products and services. If
we lose subscribers or fail to increase the number of
subscribers due to dissatisfaction with our products and
services, it could harm our revenues, results of operations and
financial condition.
Our business depends on our ability to satisfy our subscribers.
Our subscribers satisfaction may be negatively impacted by
factors that are actual or perceived by them, such as
limitations in our technologies, changes in our products and
services, interruptions or slowness in online capacity of our
websites, privacy and data security concerns, speed of search of
our online content and relevance of search results, as well as
perceived ease of search, and our automatic subscription renewal
by credit card policy, including any perceptions of credit card
fraud. If we do not handle subscriber complaints effectively,
our brand and reputation may suffer, we may lose our
subscribers confidence, and they may choose not to renew
their subscriptions. Complaints or negative publicity about our
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products, services or billing practices could adversely impact
our business, financial condition and results of operations.
Our promotional offerings and our introduction of new
products may have unintended effects on the demand for our
products and services, which could negatively affect our total
number of subscribers and adversely affect our revenues over
time.
Many of our promotional offerings involve temporary free access
to our data. By granting temporary free access to many of our
records, and permanent free access to a smaller set of our
records, we may provide sufficient access to some registered
users who are not subscribers to satisfy their family history
needs, and may therefore fail to generate additional revenues as
intended. Additionally, alternative subscriptions with terms of
less than one year, such as monthly subscriptions and
pay-per-view
offerings, may result in fewer annual subscriptions from both
new and existing subscribers and lower revenues per subscriber
over time. If any of these products or offerings has the effect
of reducing our long-term subscriber base or total number of
subscriptions, our revenues may decrease over time and our
business may suffer.
We face many risks associated with our plans to continue
to expand our international offerings and marketing and
advertising efforts, which could harm our business, financial
condition and results of operations.
In addition to our United States and United Kingdom websites,
since 2006, we have launched websites directed at Australia,
Canada, Germany, France, Italy, Sweden and China and launched an
initial version of our global Mundia.com website in the third
quarter of 2009. For the nine months ended September 30,
2009, approximately 34% of subscribers to our Ancestry.com
websites, and approximately 25% of our revenues from
subscribers, were from locations outside the United States. We
anticipate that our continuing international expansion will
entail the marketing and advertising of our products, services
and brands, and the development of localized websites. We may
not succeed in these efforts and achieve our subscriber
acquisition or other goals. For some international markets,
customer preferences and buying behaviors may be different, and
we may use business models that are different from our
traditional subscription model that provides company-acquired
content to subscribers. Our revenues from new foreign markets
may not exceed the costs of establishing, marketing and
maintaining our international offerings, and therefore may not
be profitable on a sustained basis. We will be subject to risks
of doing business internationally, including the following:
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difficulties in developing and marketing our offerings and
brands as a result of distance, language and cultural
differences;
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foreign currency exchange rate fluctuations;
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more stringent consumer and data protection laws;
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local socio-economic and political conditions;
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technical difficulties and costs associated with the
localization of our service offerings;
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strong local competitors;
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lack of experience in certain geographical markets;
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different and conflicting legal and regulatory regimes;
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changes in governmental regulations;
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different and conflicting intellectual property laws;
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difficulties in staffing and managing international
operations; and
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risk of business or user fraud.
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One or more of these factors could harm our business, financial
condition and results of operations.
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If we are unable to continually enhance our products and
services and adapt them to technological changes and subscriber
needs, we may not remain competitive and our business may fail
to grow or decline.
Our business is rapidly changing. To remain competitive, we must
continue to provide relevant content and enhance and improve the
functionality and features of our products and services. If
competitors introduce new solutions embodying new technologies,
our existing products and services may become obsolete. Our
future success will depend, among other things, on our ability
to:
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anticipate demand for new products and services;
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enhance our existing solutions; and
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respond to technological advances on a cost-effective and timely
basis.
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Developing the technologies in our products entails significant
technical and business risks. We may use new technologies
ineffectively, or we may fail to adapt our products and services
to the demands of our subscribers. If we face material delays in
introducing new or enhanced solutions, our subscribers may
forego the use of our solutions in favor of those of our
competitors.
Undetected product or service errors or defects could
result in the loss of revenues, delayed market acceptance of our
products or services or claims against us.
We offer a variety of Internet-based products and a software
product, Family Tree Maker, all of which are complex and
frequently upgraded. Our Internet-based products and software
product may contain undetected errors, defects, failures or
viruses, especially when first introduced or when new versions
or enhancements are released. Despite product testing, our
products, or third party products that we incorporate into ours,
may contain undetected errors, defects or viruses that could,
among other things:
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require us to make extensive changes to our subscription
products and services or software product, which would increase
our expenses;
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expose us to claims for damages;
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require us to incur additional technical support costs;
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cause a negative registered user reaction that could reduce
future sales;
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generate negative publicity regarding us and our subscription
products and software product; or
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result in subscribers delaying their subscription or software
purchase or electing not to renew their subscriptions.
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Any of these occurrences could have a material adverse effect
upon our business, financial condition and results of operations.
Privacy
concerns could require us to incur significant expense and
modify our operations in a manner that could result in
restrictions and prohibitions on our use of certain information,
and therefore harm our business.
As part of our business, we make biographical and historical
data available through our websites, we use registered
users personal data for internal purposes and we host
websites and message boards, among other things, that contain
content supplied by third parties. In addition, in connection
with our Ancestry.com | DNA product, we obtain biological
DNA samples used for genetic testing. For privacy or security
reasons, privacy groups, governmental agencies and individuals
may seek to restrict or prevent our use or publication of
certain biological or historical information pertaining to
individuals, particularly living persons. We will also face
additional privacy issues as we expand into other international
markets, as many nations have privacy protections more stringent
than those in the United States. We have incurred, and will
continue to incur, expenses to comply with privacy and security
standards and protocols imposed by law, regulation, industry
standards or contractual obligations. Increased domestic or
international regulation of data utilization and distribution
practices, including self-
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regulation, could require us to modify our operations and incur
significant expense, which could have an adverse effect on our
business, financial condition and results of operations.
Our possession and use of personal information presents
risks and expenses that could harm our business. Unauthorized
disclosure or manipulation of such data, whether through breach
of our network security or otherwise, could expose us to costly
litigation and damage our reputation.
Maintaining our network security is of critical importance
because our online systems store confidential registered user,
employee and other sensitive data, such as names, addresses,
credit card numbers and other personal information. In
particular, a substantial majority of our subscribers use credit
and debit cards to purchase our products and services. If we or
our processing vendors were to have problems with our billing
software, it could have an adverse effect on our subscriber
satisfaction and could cause one or more of the major credit
companies to disallow our continued use of their payment
products. In addition, if our billing software fails to work
properly and, as a result, we do not automatically charge our
subscribers credit cards on a timely basis or at all, our
business, financial condition and results of operations could be
adversely affected.
In addition, our online systems store the content that our
registered users upload onto our websites, such as family
records and photos. This content is often personally meaningful,
and our registered users may rely on our online system to store
digital copies of such content. If we were to lose such content,
if our users private content were to be publicly available
or if third parties were able to access and manipulate such
content, we may face liability and harm to our brand and
reputation.
We and our vendors use commercially available encryption
technology to transmit personal information when taking orders.
We use security and business controls to limit access and use of
personal information, including registered users uploaded
content. However, third parties may be able to circumvent these
security and business measures by developing and deploying
viruses, worms and other malicious software programs that are
designed to attack or attempt to infiltrate our systems and
networks. In addition, employee error, malfeasance or other
errors in the storage, use or transmission of personal
information could result in a breach of registered user or
employee privacy.
If third parties improperly obtain and use the personal
information of our registered users or employees, we may be
required to expend significant resources to resolve these
problems. A major breach of our network security and systems
could have serious negative consequences for our businesses,
including possible fines, penalties and damages, reduced demand
for our products and services, an unwillingness of subscribers
to provide us with their credit card or payment information, an
unwillingness of registered users to upload family records or
photos onto our websites, harm to our reputation and brand and
loss of our ability to accept and process subscriber credit card
orders. Similarly, if a well-publicized breach of data security
at any other major consumer website were to occur, there could
be a general public loss of confidence in the use of the
Internet for commercial transactions. Any of these events could
have material adverse effects on our business, financial
condition and results of operations.
Any
claims related to activities of registered users and the content
they upload could result in expenses that could harm our results
of operations and financial condition.
Our registered users often upload their own content onto our
websites. The terms of use of such content are set forth in the
terms and conditions of our websites and a submission agreement
that registered users agree to when they upload their content.
Disputes or negative publicity about the use of such content
could make members more reluctant to upload personal content or
harm our reputation. We do not review or monitor content
uploaded by our registered users, and could face claims arising
from or liability for making any such content available on our
websites. In addition, our collaboration tools and other
features of our site allow registered users to contact each
other. While registered users can choose to remain anonymous in
such communications, registered users may choose to engage with
one another without anonymity. If any such contact were to lead
to fraud or other harm, we may face claims against us and
negative publicity. Litigation to defend these claims or efforts
to counter any negative publicity could be costly and any other
liabilities we incur in connection with any such claims may harm
our business, financial condition and results of operations.
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Increases in credit card processing fees would increase
our operating expenses and adversely affect our results of
operations, and the termination of our relationship with any
major credit card company would have a severe, negative impact
on our ability to collect revenues from subscribers.
The substantial majority of our subscribers pay for our products
and services using credit cards. From time to time, the major
credit card companies or the issuing banks may increase the fees
that they charge for each transaction using their cards. An
increase in those fees would require us to either increase the
prices we charge for our products, or suffer a negative impact
on our profitability, either of which could adversely affect our
business, financial condition and results of operations.
In addition, our credit card fees may be increased by credit
card companies if our chargeback rate, or the rate of payment
refunds, exceeds certain minimum thresholds. If we are unable to
maintain our chargeback rate at acceptable levels, our credit
card fees for chargeback transactions, or for all credit card
transactions, may be further increased, and, if the problem
significantly worsens, credit card companies may increase our
fees or terminate their relationship with us. Any increases in
our credit card fees could adversely affect our results of
operations, particularly if we elect not to raise our
subscription rates to offset the increase. The termination of
our ability to process payments on any major credit or debit
card would significantly impair our ability to operate our
business.
If government regulation of the Internet or other areas of
our business changes or if consumer attitudes toward use of the
Internet change, we may need to change the manner in which we
conduct our business in a manner that is less profitable or
incur greater operating expenses, which could harm our results
of operations.
The adoption, modification or interpretation of laws or
regulations relating to the Internet or other areas of our
business could adversely affect the manner in which we conduct
our business or the overall popularity or growth in use of the
Internet. Such laws and regulations may cover automatic
subscription renewal, credit card processing procedures, sales
and other procedures, tariffs, user privacy, data protection,
pricing, content, copyrights, distribution, electronic
contracts, consumer protection, broadband residential Internet
access and the characteristics and quality of services. In
foreign countries, such as countries in Europe, such laws may be
more restrictive than in the United States. It is not clear how
existing laws governing issues such as property ownership, sales
and other taxes, libel and personal privacy apply to the
Internet. If we are required to comply with new regulations or
legislation or new interpretations of existing regulations or
legislation, this compliance could cause us to incur additional
expenses, make it more difficult to renew subscriptions
automatically, make it more difficult to attract new subscribers
or otherwise alter our business model. Any of these outcomes
could have a material adverse effect on our business, financial
condition or results of operations.
Our revenues may be adversely affected if we are required
to charge sales taxes in additional jurisdictions and/or other
taxes for our products and services.
We collect or have imposed upon us sales or other taxes related
to the products and services we sell in certain states and other
jurisdictions. Additional states or one or more countries or
other jurisdictions may seek to impose sales or other tax
collection obligations on us in the future. A successful
assertion by any country, state or other jurisdiction in which
we do business that we should be collecting sales or other taxes
on the sale of our products and services could, among other
things, create significant administrative burdens for us, result
in substantial tax liabilities for past sales, discourage
registered users from purchasing from us or otherwise
substantially harm our business and results of operations.
We
face risk associated with currency exchange rate fluctuations,
which could adversely affect our operating
results.
For the nine months ended September 30, 2009, approximately
20% of our total revenues were received, and approximately 10%
of our total expenses were paid, in currencies other than the
United States dollar, such as the British pound sterling, the
Canadian dollar and the Australian dollar. As a result, we are
at risk for exchange rate fluctuations between such foreign
currencies and the United States dollar, which could affect our
results of operations. We attempt to limit our exposure by
paying our operating expenses incurred in foreign jurisdictions
with revenues received in the applicable currency, but if we do
not have enough local currency to pay all our expenses in
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that currency, we are exposed to currency exchange rate risk
with respect to those expenses. We are also exposed to exchange
rate risk with respect to our profits earned in foreign
currency. Even if we were to implement hedging strategies to
mitigate foreign currency risk, these strategies might not
eliminate our exposure to foreign exchange rate fluctuations and
would involve costs and risks of their own, such as ongoing
management time and expertise, external costs to implement the
strategies and potential accounting implications.
If we acquire any businesses or technologies in the
future, they could prove difficult to integrate, disrupt our
ongoing business, dilute stockholder value or have an adverse
effect on our results of operations.
As part of our business strategy, we may engage in acquisitions
of businesses or technologies to augment our organic or internal
growth. While we have engaged in some acquisitions in the past,
we do not have extensive experience with integrating and
managing acquired businesses or assets. Acquisitions involve
challenges and risks in negotiation, execution, valuation and
integration. Moreover, we may not be able to find suitable
acquisition opportunities on terms that are acceptable to us.
Even if successfully negotiated, closed and integrated, certain
acquisitions may not advance our business strategy, may fall
short of expected
return-on-investment
targets or may fail. Any future acquisition could involve
numerous risks including:
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potential disruption of our ongoing business and distraction of
management;
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difficulty integrating the operations and products of the
acquired business;
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use of cash to fund the acquisition or for unanticipated
expenses;
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limited market experience in new businesses;
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exposure to unknown liabilities, including litigation against
the companies we may acquire;
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additional costs due to differences in culture, geographic
locations and duplication of key talent;
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acquisition-related accounting charges affecting our balance
sheet and operations;
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dilution to our current stockholders from the issuance of equity
securities; and
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potential loss of key employees or customers of the acquired
company.
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In the event we enter into any acquisition agreements, closing
of the transactions could be delayed or prevented by regulatory
approval requirements, including antitrust review, or other
conditions. We may not be successful in addressing these risks
or any other problems encountered in connection with any
attempted acquisitions, and we could assume the economic risks
of such failed or unsuccessful acquisitions.
Our
business may be significantly impacted by a change in the
economy, including any resulting effect on consumer
spending.
Our business may be affected by changes in the economy
generally, including any resulting effect on consumer spending
specifically. Our products and services are discretionary
purchases, and consumers may reduce their discretionary spending
on our products and services during an economic downturn such as
the present economic downturn. Although we have not yet
experienced a material increase in subscription cancellations or
a material reduction in subscription renewals, we may yet
experience such an increase or reduction in the future,
especially in the event of a prolonged recessionary period.
Conversely, consumers may spend more time using the Internet
during an economic downturn and may have less time for our
products and services in a period of economic growth. In
addition, media prices may increase in a period of economic
growth, which could significantly increase our marketing and
advertising expenses. As a result, our business, financial
condition and results operations may be significantly affected
by changes in the economy generally.
The loss of one or more of our key personnel, or our
failure to attract, assimilate and retain other highly qualified
personnel in the future, could harm our business.
We depend on the continued service and performance of our key
personnel, including Timothy Sullivan, our President and Chief
Executive Officer. We do not maintain key man insurance on any
of our officers or key
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employees. We also do not have long-term employment agreements
with any of our officers or key employees. In addition, much of
our key technology and systems are custom-made for our business
by our personnel. The loss of key personnel, including key
members of our management team, as well as certain of our key
marketing, sales, product development or technology personnel,
could disrupt our operations and have an adverse effect on our
ability to grow our business.
Several of our key personnel have only recently been employed by
us, and we are still in the process of assimilating and
integrating these personnel into our operations. Our failure to
successfully integrate these key employees into our business
could adversely affect our business.
In addition, to execute our growth plan, we must attract and
retain highly qualified personnel. Competition for these
employees is intense, and we may not be successful in attracting
and retaining qualified personnel. We have from time to time in
the past experienced, and we expect to continue to experience in
the future, difficulty in hiring and retaining highly skilled
employees with appropriate qualifications. Many of the companies
with which we compete for experienced personnel have greater
resources than we have. In addition, in making employment
decisions, particularly in the Internet and high-technology
industries, job candidates often consider the value of the stock
options they are to receive in connection with their employment.
Accounting principles generally accepted in the United States
relating to the expensing of stock options may discourage us
from granting the size or type of stock option awards that job
candidates may require to join our company. If we fail to
attract new personnel, or fail to retain and motivate our
current personnel, our business and future growth prospects
could be severely harmed.
We will be subject to additional regulatory compliance
matters, including Section 404 of the Sarbanes-Oxley Act of
2002, as a result of becoming a public company and our
management has limited experience managing a public company.
Failure to comply with these regulatory matters could harm our
business.
We have never operated as a public company and will incur
significant legal, accounting and other expenses that we did not
incur as a private company. Our management team and other
personnel will need to devote a substantial amount of time to
new compliance initiatives and to meeting the obligations that
are associated with being a public company, and we may not
successfully or efficiently manage our transition into a public
company. We expect rules and regulations such as the
Sarbanes-Oxley Act of 2002 to increase our legal and finance
compliance costs and to make some activities more
time-consuming. We may need to hire a number of additional
employees with public accounting and disclosure experience in
order to meet our ongoing obligations as a public company. For
example, we have recently employed an outside consultant and
expect to hire an additional employee to assist us in preparing
our provision for income taxes in a timely manner as a public
company. Furthermore, Section 404 of the Sarbanes-Oxley Act
of 2002 requires that our management report on, and our
independent auditors to attest to, the effectiveness of our
internal control structure and procedures for financial
reporting in our annual report on
Form 10-K
for the fiscal year ending December 31, 2010.
Section 404 compliance may divert internal resources and
will take a significant amount of time and effort to complete.
We may not be able to successfully complete the procedures and
certification and attestation requirements of Section 404
by the time we will be required to do so. If we fail to do so,
or if in the future our chief executive officer, chief financial
officer or independent registered public accounting firm
determines that our internal controls over financial reporting
are not effective as defined under Section 404, we could be
subject to sanctions or investigations by the Nasdaq Stock
Market, the Securities and Exchange Commission, or SEC, or other
regulatory authorities. Furthermore, investor perceptions of our
company may suffer, and this could cause a decline in the market
price of our stock. Irrespective of compliance with
Section 404, any failure of our internal controls could
have a material adverse effect on our stated results of
operations and harm our reputation. If we are unable to
implement these changes effectively or efficiently, it could
harm our operations, financial reporting or financial results
and could result in an adverse opinion on internal controls from
our independent auditors. If we are unable to retain enough
independent directors to our board to meet the listing standards
of the Nasdaq Stock Market by the deadlines set by the exchange,
it could affect our continued listing on the exchange.
Our reported financial results may be adversely affected
by changes in accounting principles applicable to us.
Generally accepted accounting principles in the United States
are subject to interpretation by the Financial Accounting
Standards Board, or FASB, the American Institute of Certified
Public Accountants, the Securities and
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Exchange Commission and various bodies formed to promulgate and
interpret appropriate accounting principles. A change in these
principles or interpretations could have a significant effect on
our reported financial results, and could affect the reporting
of transactions completed before the announcement of a change.
In addition, the SEC has announced a multi-year plan that could
ultimately lead to the use of International Financial Reporting
Standards by United States issuers in their SEC filings. Any
such change could have a significant effect on our reported
financial results.
Any
expenses or liability resulting from litigation could adversely
affect our results of operations and financial
condition.
From time to time, we may be subject to claims or litigation.
Any such claims or litigation may be time-consuming and costly,
divert management resources, require us to change our products
and services, require us to accept returns of software products,
or have other adverse effects on our business. Any of the
foregoing could have a material adverse effect on our results of
operations and could require us to pay significant monetary
damages. For example, we have recently received a letter from
Shutterfly, Inc., alleging infringement by our MyCanvas.com
website. Based on our investigation to date, we believe that the
identified claims either are not valid or are not currently
infringed by us and we do not believe that the resolution of
these claims will have a material impact on our financial
condition. While MyCanvas.com revenues have represented a small
percentage of our total revenue, intellectual property
litigation is subject to inherent uncertainties, and there can
be no assurance that the expenses associated with defending any
litigation or the resolution of this dispute would not have a
material adverse impact on our results of operations or cash
flows. In addition, on September 16, 2009, we settled a
claim with respect to the timeliness and accuracy of a content
index we created. The settlement resulted in an expense of
approximately $2.3 million in 2009. See
Business Legal Proceedings.
Risks
Related to Intellectual Property
If our intellectual property and technologies are not
adequately protected to prevent use or appropriation by our
competitors, the value of our brand and other intangible assets
may be diminished, and our business may be adversely
affected.
Our future success and competitive position depend in part on
our ability to protect our proprietary technologies and
intellectual property. We rely and expect to continue to rely on
a combination of confidentiality and license agreements with our
employees, consultants and third parties with whom we have
relationships, as well as trademark, copyright, patent and trade
secret protection laws, to protect our proprietary technologies
and intellectual property. In the United States, we currently
have three patents issued, and we have a number of patents
pending relating to digitization, indexing, storage,
correlation, search and display of content. Ancestry.com,
myfamily.com and Family Tree Maker are among our registered
trademarks. In addition, in the United States, we have filed
various trademark applications for certain aspects of our
technologies, and we have also filed trademark applications in
certain foreign countries for the Ancestry and other website
names. Many of our trademarks contain words or terms having a
common usage and, as a result, may not be protectable under
applicable law. Because of this concern, we have elected not to
file applications with respect to certain of our trademarks, and
some of our trademarks for which we have filed applications may
not be protectable. We also possess intellectual property rights
in aspects of our digital content, search technology, software
products and digitization and indexing processes. However, our
digital content is not protected by any registered copyrights or
other registered intellectual property or statutory rights.
Rather, our digital content is protected by user agreements that
limit access to and use of our data, and by our proprietary
indexing and search technology that we apply to make our digital
content searchable. Compliance with use restrictions is
difficult to monitor, and our proprietary rights in our digital
content databases may be more difficult to enforce than other
forms of intellectual property rights.
There can be no assurance that the steps we take will be
adequate to protect our technologies and intellectual property,
that our patent and trademark applications will lead to issued
patents and registered trademarks, that others will not develop
or patent similar or superior technologies, products or
services, or that our patents, trademarks and other intellectual
property will not be challenged, invalidated or circumvented by
others. Furthermore, the intellectual property laws of other
countries at which our websites are or may be in the future be
directed may
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not protect our products and intellectual property rights to the
same extent as the laws of the United States. The legal
standards relating to the validity, enforceability and scope of
protection of intellectual property rights in Internet-related
industries are uncertain and still evolving, both in the United
States and in other countries. In addition, third parties may
knowingly or unknowingly infringe our patents, trademarks and
other intellectual property rights, and litigation may be
necessary to protect and enforce our intellectual property
rights. Any such litigation could be very costly and could
divert management attention and resources. If the protection of
our technologies and intellectual property is inadequate to
prevent use or appropriation by third parties, the value of our
brand and other intangible assets may be diminished and
competitors may be able to more effectively mimic our
subscription products and methods of operations. Any of these
events would have a material adverse effect on our business,
financial condition and results of operations.
We also expect that the more successful we are, the more likely
it will become that competitors will try to develop products
that are similar to ours, which may infringe on our proprietary
rights. It may also be more likely that competitors will claim
that our products infringe on their proprietary rights. If we
are unable to protect our proprietary rights or if third parties
independently develop or gain access to our or similar
technologies, our business, revenue, reputation and competitive
position could be harmed.
Confidentiality agreements with employees and others may
not adequately prevent disclosure of trade secrets and other
proprietary information. Failure to protect our proprietary
information could make it easier for third parties to compete
with our products and harm our business.
A substantial amount of our tools and technologies are protected
by trade secret laws. In order to protect our proprietary
technologies and processes, we rely in part on security
measures, as well as confidentiality agreements with our
employees, licensees, independent contractors and other
advisors. These measures and agreements may not effectively
prevent disclosure of confidential information, including trade
secrets, and may not provide an adequate remedy in the event of
unauthorized disclosure of confidential information. We could
potentially lose future trade secret protection if any
unauthorized disclosure of such information occurs. In addition,
others may independently discover our trade secrets and
proprietary information, and in such cases we could not assert
any trade secret rights against such parties. Laws regarding
trade secret rights in certain markets in which we operate may
afford little or no protection to our trade secrets. The loss of
trade secret protection could make it easier for third parties
to compete with our products by copying functionality. In
addition, any changes in, or unexpected interpretations of, the
trade secret and other intellectual property laws in any country
in which we operate may compromise our ability to enforce our
trade secret and intellectual property rights. Costly and
time-consuming litigation could be necessary to enforce and
determine the scope of our proprietary rights, and failure to
obtain or maintain trade secret protection could adversely
affect our business, revenue, reputation and competitive
position.
Intellectual property claims against us could be costly
and result in the loss of significant rights related to, among
other things, our websites and marketing and advertising
activities.
Trademark, copyright, patent and other intellectual property
rights are important to us and other companies. Our intellectual
property rights extend to our technologies, business processes
and the content on our websites. We use intellectual property
licensed from third parties in merchandising our products and
marketing and advertising our services. From time to time, third
parties may allege that we have violated their intellectual
property rights. See Business Legal
Proceedings. If there is a claim against us for
infringement, misappropriation, misuse or other violation of
third party intellectual property rights, and we are unable to
obtain sufficient rights or develop non-infringing intellectual
property or otherwise alter our business practices on a timely
basis, our business and competitive position may be adversely
affected. Many companies are devoting significant resources to
obtaining patents that could potentially affect many aspects of
our business. There are numerous patents that broadly claim
means and methods of conducting business on the Internet. We
have not exhaustively searched patents relevant to our
technologies and business. If we are forced to defend ourselves
against intellectual property infringement claims, whether they
are with or without merit or are determined in our favor, we may
face costly litigation, diversion of technical and management
personnel, limitations on our ability to use our current
websites or inability to market or provide our products or
services. As a result of any such dispute, we may have to
develop non-infringing technology, pay damages, enter into
royalty or licensing agreements, cease providing certain
products or
29
services, adjust our merchandizing or marketing and advertising
activities or take other actions to resolve the claims. These
actions, if required, may be costly or unavailable on terms
acceptable to us. In addition, many of our co-branding,
distribution and other partnering agreements require us to
indemnify our partners for third-party intellectual property
infringement claims, which could increase the cost to us of an
adverse ruling in such an action.
In addition, as a publisher of online content, we face potential
liability for negligence, copyright, patent or trademark
infringement or other claims based on the nature and content of
data and materials that we publish or distribute. These claims
could potentially arise with respect to both company-acquired
content and user-generated content. Litigation to defend these
claims could be costly and any other liabilities we incur in
connection with the claims may harm our business, financial
condition and results of operations.
If we are unable to protect our domain names, our
reputation and brand could be affected adversely, which would
adversely affect our subscriber base, and therefore adversely
affect our revenues.
We have registered domain names for website destinations that we
use in our business, such as Ancestry.com, Genealogy.com and
myfamily.com. However, if we are unable to maintain our rights
in these domain names, our competitors could capitalize on our
brand recognition by using these domain names for their own
benefit. In addition, our competitors could capitalize on our
brand recognition by using domain names similar to ours. Domain
names similar to ours have been registered in the United States
and elsewhere, and in many countries the top-level domain names
ancestry or genealogy are owned by other
parties. Though we own the ancestry.co.uk domain
name in the United Kingdom, we might not be able to, or may
choose not to, acquire or maintain other country-specific
versions of the ancestry and genealogy
domain names. Further, the relationship between regulations
governing domain names and laws protecting trademarks and
similar proprietary rights varies from jurisdiction to
jurisdiction and is unclear in some jurisdictions. We may be
unable to prevent third parties from acquiring and using domain
names that infringe on, are similar to, or otherwise decrease
the value of, our brand or our trademarks or service marks.
Protecting and enforcing our rights in our domain names and
determining the rights of others may require litigation, which
could result in substantial costs and divert management
attention. We may not prevail if any such litigation is
initiated.
Risks
Related to this Offering and our Common Stock
An active, liquid and orderly trading market for our
common stock may not develop, our share price may be volatile
and you may be unable to sell your shares at or above the
offering price.
Prior to this offering, there has not been a public market for
our common stock. We cannot predict the extent to which a
trading market will develop or how liquid that market might
become. The initial public offering price for our shares will be
determined by negotiations between us and representatives of the
underwriters and may not be indicative of prices that will
prevail in the trading market. The market price of shares of our
common stock could be subject to wide fluctuations in response
to many risk factors listed in this section and others beyond
our control, including:
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actual or anticipated fluctuations in our key operating metrics,
financial condition and operating results;
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a greater than expected loss of existing subscribers;
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a negative change in one or more of our key metrics;
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actual or anticipated changes in our growth rate;
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issuance of new or updated research or reports by securities
analysts;
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our announcement of actual results for a fiscal period that are
higher or lower than projected or expected results or our
announcement of revenue or earnings guidance that is higher or
lower than expected;
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fluctuations in the valuation of companies perceived by
investors to be comparable to us;
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share price and volume fluctuations attributable to inconsistent
trading volume levels of our shares;
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sales or expected sales of additional common stock;
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announcements from, or operating results of, our
competitors; or
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general economic and market conditions.
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Furthermore, the stock markets have experienced extreme price
and volume fluctuations that have affected and continue to
affect the market prices of equity securities of many companies.
These fluctuations often have been unrelated or disproportionate
to the operating performance of those companies. These broad
market and industry fluctuations, as well as general economic,
political and market conditions such as recessions, interest
rate changes or international currency fluctuations, may cause
the market price of shares of our common stock to decline. If
the market price of shares of our common stock after this
offering does not exceed the initial public offering price, you
may not realize any return on your investment in us and may lose
some or all of your investment. In the past, companies that have
experienced volatility in the market price of their stock have
been subject to securities class action litigation. We may be
the target of this type of litigation in the future. Securities
litigation against us could result in substantial costs and
divert our managements attention from other business
concerns, which could seriously harm our business.
If securities or industry analysts do not publish research
or reports about our business, or if they change their
recommendations regarding our stock adversely, our stock price
and trading volume could decline.
The trading market for our common stock will be influenced by
the research and reports that industry or securities analysts
publish about us or our business. We do not currently have any
and may never obtain research coverage by industry or financial
analysts. If no or few analysts commence coverage of us, the
trading price of our stock would likely decrease. Even if we do
obtain analyst coverage, if one or more of the analysts who
cover us downgrade our stock, our stock price would likely
decline. If one or more of these analysts cease coverage of our
company or fail to regularly publish reports on us, we could
lose visibility in the financial markets, which in turn could
cause our stock price or trading volume to decline.
Substantial future sales of our common stock in the public
market could cause our stock price to fall.
Additional sales of our common stock in the public market after
this offering, or the perception that these sales could occur,
could cause the market price of our common stock to decline.
Upon completion of this offering (assuming no exercise of the
underwriters over-allotment option), we will have
42,402,916 shares of common stock outstanding. The
7,407,407 shares sold in this offering, as well as any shares
disposed of upon exercise of the underwriters
over-allotment option, will be freely transferable without
restriction or additional registration under the Securities Act
of 1933, as amended (the Securities Act). The
remaining shares of common stock outstanding after this offering
will be available for sale as follows (assuming no exercise of
the underwriters over-allotment option):
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Date of Availability for
Sale
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Number of Shares
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180 days after the date of this prospectus (subject to
extension upon the occurrence of specified events) due to the
release of the
lock-up
agreement these stockholders have with the underwriters
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11,131,719
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180 days after the date of this prospectus (subject to
extension upon the occurrence of specified events) due to the
release of the lock-up agreement these stockholders have with
the underwriters that are held by affiliates and therefore
subject to volume restrictions under Rule 144
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23,566,030
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In addition, the approximately 12,446,734 million shares
underlying options that are either subject to the terms of our
equity compensation plans or reserved for future issuance under
our equity compensation plans as of the date of this prospectus
will become eligible for sale in the public market to the extent
permitted by the provisions of various option agreements, the
lock-up
agreements and Rules 144 and 701 under the Securities Act.
At any time and without public notice, any or all of the shares
subject to the
lock-up may
be released prior to expiration of the
180-day
lock-up
period at the discretion of Morgan Stanley & Co.
Incorporated and Merrill Lynch, Pierce, Fenner & Smith
Incorporated. As resale restrictions end, the market price of
our common stock could decline if the holders of those shares
sell them or are perceived by the market as intending to sell
them. In addition, after this offering (assuming no exercise of
the underwriters over-allotment option), the holders of
approximately 35 million shares of common stock will be
entitled to rights to cause us to register the sale of those
shares under the Securities Act but
31
cannot exercise any such registration rights during the
180-day
lock-up period. Registration of these shares under the
Securities Act would result in these shares becoming freely
tradable without restriction under the Securities Act
immediately upon the effectiveness of the registration.
Our
principal stockholder and its affiliates will likely control our
company after this offering and their interests may not always
coincide with the interests of the other holders of our common
stock.
As of September 30, 2009, Spectrum Equity Investors V,
L.P. and certain of its affiliates beneficially owned in the
aggregate shares representing approximately 67% of our
outstanding voting power. Two persons associated with Spectrum
Equity Investors V, L.P. currently serve on our board of
directors. After this offering, Spectrum Equity
Investors V, L.P. and certain of its affiliates will
beneficially own in the aggregate shares representing
approximately 54.8% of our outstanding voting power, or
approximately 53.2%, if the underwriters exercise their
over-allotment option in full. As a result, Spectrum Equity
Investors V, L.P. and certain of its affiliates could
control all matters presented to our stockholders for approval,
including election and removal of our directors and change of
control transactions. The interests of Spectrum Equity
Investors V, L.P. and certain of its affiliates may not
always coincide with the interests of the other holders of our
common stock.
As a
new investor, you will experience immediate and substantial
dilution.
Purchasers in this offering will immediately experience
substantial dilution in net tangible book value. Because our
common stock has in the past been sold at prices substantially
lower than the initial public offering price that you will pay,
you will suffer immediate dilution of $15.77 per share in net
tangible book value, based on an assumed initial offering price
of $13.50 per share of common stock. The exercise of
outstanding options, 5,976,194 of which are outstanding and
exercisable as of September 30, 2009, may result in further
dilution.
Management may apply our net proceeds from this offering
to uses that do not increase our market value or improve our
operating results.
We expect to use $12.1 million of the net proceeds we
receive to repay a portion of the amount outstanding under our
credit facility. We intend to use the remainder for general
corporate purposes, including as yet undetermined amounts
related to working capital and capital expenditures. Our
management will have considerable discretion in applying our net
proceeds and you will not have the opportunity, as part of your
investment decision, to assess whether we are using our net
proceeds appropriately. Until the net proceeds we receive are
used, they may be placed in investments that do not produce
income or that lose value. We may use our net proceeds for
purposes that do not result in any increase in our results of
operations, which could cause the price of our common stock to
decline.
Delaware law and our corporate charter and bylaws will
contain anti-takeover provisions that could delay or discourage
takeover attempts that stockholders may consider
favorable.
Provisions in our certificate of incorporation and bylaws that
we intend to adopt before the completion of this offering may
have the effect of delaying or preventing a change of control or
changes in our management. For example, our board of directors
will have the authority to issue up to
five million shares of preferred stock in one or more
series and to fix the powers, preferences and rights of each
series without stockholder approval. The ability to issue
preferred stock could discourage unsolicited acquisition
proposals or make it more difficult for a third party to gain
control of our company, or otherwise could adversely affect the
market price of our common stock. Our amended and restated
certificate of incorporation will require that any action to be
taken by stockholders must be taken at a duly called meeting of
stockholders, which may only be called by our board of
directors, the chairperson of our board of directors or the
chief executive officer with the concurrence of a majority of
our board of directors, and may not be taken by written consent.
Our amended and restated bylaws will require that any
stockholder proposals or nominations for election to our board
of directors must meet specific advance notice requirements and
procedures, which make it more difficult for our stockholders to
make proposals or director nominations. In addition, we will
have a classified board of directors with three-year staggered
terms, which could delay the ability of stockholders to change
membership of a majority of our board of directors. For
additional information, please see Description of Capital
Stock.
32
Furthermore, because we are incorporated in Delaware, we are
governed by the provisions of Section 203 of the Delaware
General Corporation Law. These provisions may prohibit or
restrict large stockholders, in particular those owning 15% or
more of our outstanding voting stock, from merging or combining
with us. These provisions in our certificate of incorporation
and bylaws and under Delaware law could discourage potential
takeover attempts and could reduce the price that investors
might be willing to pay for shares of our common stock in the
future and result in our market price being lower than it would
without these provisions.
We do not currently intend to pay dividends on our common
stock and, consequently, your ability to achieve a return on
your investment will depend on appreciation in the price of our
common stock.
We have never declared or paid any cash dividends on our common
stock and do not intend to do so for the foreseeable future. We
currently intend to invest our future earnings, if any, to fund
our growth. In addition, the provisions of our credit facility
prohibit us from paying cash dividends. Therefore, you are not
likely to receive any dividends on your common stock for the
foreseeable future and the success of an investment in shares of
our common stock will depend upon any future appreciation in
their value. There is no guarantee that shares of our common
stock will appreciate in value or even maintain the price at
which our stockholders have purchased their shares.
33
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled
Prospectus Summary, Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and
Business, contains forward-looking statements. We
may, in some cases, use words such as project,
believe, anticipate, plan,
expect, estimate, intend,
should, would, could,
potentially, will or may, or
other words that convey uncertainty of future events or outcomes
to identify these forward-looking statements. Forward-looking
statements in this prospectus include statements about:
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our future financial performance, including our revenues, cost
of revenues, operating expenses and ability to sustain
profitability;
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our rate of revenue growth;
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our ability to attract and retain subscribers;
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our ability to generate additional revenues on a cost-effective
basis;
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our ability to acquire content and make it available online;
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the success of our promotional programs and new products;
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disruptions in our services;
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our international expansion plans;
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success with respect to any future acquisitions;
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our ability to retain and hire necessary employees;
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our ability to adequately protect our intellectual property;
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the impact of claims or litigation;
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our liquidity and working capital requirements; and
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the effect of laws applying to our business.
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Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, level of activity, performance or achievements.
There are a number of important factors that could cause actual
results to differ materially from the results anticipated by
these forward-looking statements, which statements apply only as
of the date of this prospectus. These important factors include
those that we discuss in this prospectus under the caption
Risk Factors and elsewhere. You should read these
factors and the other cautionary statements made in this
prospectus as being applicable to all related forward-looking
statements wherever they appear in this prospectus. If one or
more of these factors materialize, or if any underlying
assumptions prove incorrect, our actual results, performance or
achievements may vary materially from any future results,
performance or achievements expressed or implied by these
forward-looking statements. We undertake no obligation to
publicly update any forward-looking statements, whether as a
result of new information, future events or otherwise, except as
required by law.
34
USE OF
PROCEEDS
We estimate that the net proceeds we receive from this offering
will be approximately $48.4 million based on the assumed
initial public offering price of $13.50 per share, which is
the midpoint of the range included on the cover page of this
prospectus after deducting the estimated underwriting discounts
and commissions and estimated offering expenses payable by us.
If the underwriters option to purchase additional shares
in this offering from us is exercised, our estimated net
proceeds will be approximately $56.1 million after
deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us. We will not
receive any proceeds from the sale of shares of our common stock
by the selling stockholders. A $1.00 increase or decrease in the
assumed initial public offering price of $13.50 per share
would increase or decrease the net proceeds we receive from this
offering by approximately $3.8 million, assuming the number
of shares offered by us as set forth on the cover page of this
prospectus remains the same and after deducting the estimated
underwriter discounts and commissions and estimated offering
expenses payable by us.
We expect to use $12.1 million of the net proceeds we
receive to repay a portion of the amount outstanding under our
credit and guarantee agreement with CIT Lending Services
Corporation, as Administrative Agent, and certain other
financial institutions. This credit facility has a maturity date
of December 5, 2012 and had an outstanding balance of
approximately $114.7 million and an interest rate of
approximately 4.0% as of September 30, 2009.
We expect to use the remainder of the net proceeds for working
capital and general corporate purposes. We may also use a
portion of the proceeds to expand our current business through
acquisitions or investments in other strategic businesses,
products or technologies. We have no commitments with respect to
any acquisitions at this time. We will have broad discretion in
the way we use the net proceeds.
We intend to invest the net proceeds in short- and
intermediate-term interest-bearing obligations, investment-grade
instruments, certificates of deposit or guaranteed obligations
of the United States government, pending their use as described
above.
The primary purposes of this offering are to raise additional
capital, create a public market for our common stock, allow us
easier and quicker access to the public markets should we need
more capital in the future, increase the profile and prestige of
our company with existing and possible future registered users,
vendors and strategic partners, and make our stock more valuable
and attractive to our employees and potential employees for
compensation purposes.
DIVIDEND
POLICY
We have never declared or paid any cash dividends on our capital
stock. Our credit facility prohibits us from paying cash
dividends. We currently expect to retain future earnings to
finance the growth and development of our business and do not
anticipate paying any cash dividends in the foreseeable future.
Any determination to pay dividends in the future will be at the
discretion of our board of directors and will be dependent on
then-existing conditions.
35
CAPITALIZATION
The following table sets forth our cash and cash equivalents,
our current portion of long-term debt and capitalization at
September 30, 2009 on:
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an actual basis (after giving effect to the 1-for-2 reverse
split of our common stock to be effective upon consummation of
this offering); and
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an as adjusted basis to give effect to (i) the sale by us
of 4,074,074 shares of common stock in this offering and
our receipt of the estimated net proceeds from that sale after
deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us, (ii) the filing of
our amended and restated certificate of incorporation upon
consummation of the offering and (iii) our use of
$12.1 million of the net proceeds to repay a portion of the
amount outstanding under our credit agreement.
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You should read this table in conjunction with the financial
statements and notes to the consolidated financial statements
included elsewhere in this prospectus.
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September 30, 2009
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Actual
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As adjusted
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(in thousands)
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Cash and cash equivalents
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$
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60,593
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$
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96,893
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Current portion of long-term debt
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$
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12,028
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$
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10,759
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Long-term debt
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$
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102,641
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$
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91,810
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Common stock, $0.001 par value; 100,000,000 and 175,000,000
shares authorized, actual and as adjusted, 38,328,842 issued and
outstanding, actual, and 42,402,916 issued and outstanding, as
adjusted
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38
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42
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Preferred stock, $0.001 par value; 1,000,000 and
5,000,000 shares authorized, zero and zero issued and
outstanding, actual and as adjusted
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Additional paid-in capital
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223,471
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271,867
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Accumulated other comprehensive income
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Retained earnings
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13,305
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13,305
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Total stockholders equity
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236,814
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285,214
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Total capitalization
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$
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339,455
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$
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377,024
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Each $1.00 increase or decrease in the assumed initial public
price of $13.50 per share, the midpoint of the range set forth
on the cover page of this prospectus, would increase or decrease
the amount of cash and cash equivalents by approximately
$2.8 million, total stockholders equity by
approximately $3.8 million, and long term debt (including
current portion) by approximately $1.0 million, assuming
the number of shares offered by us as set forth on the cover
page of this prospectus remains the same and after deducting the
estimated underwriting discounts and commissions and estimated
expenses payable by us.
36
DILUTION
If you invest in our common stock, you will be diluted to the
extent the initial public offering price per share of our common
stock exceeds the net tangible book value per share of our
common stock immediately after this offering. Our net tangible
book value as of September 30, 2009 was a deficit of
approximately $(144.6) million, or $(3.77) per share of
common stock. The net tangible book value per share represents
the amount of our tangible net worth, or total tangible assets
less total liabilities, divided by 38,328,842 shares of our
common stock outstanding as of that date.
After giving effect to the issuance and sale of
4,074,074 shares of our common stock sold by us in this
offering and our receipt of the estimated net proceeds from such
sale, based on an assumed public offering price of $13.50 per
share (the midpoint of the range set forth on the cover page of
this prospectus), and after deducting the estimated underwriting
discount and commission and the estimated expenses of the
offering, our as adjusted net tangible book value per share as
of September 30, 2009 would have been approximately $(2.27)
per share. This amount represents an immediate increase in net
tangible book value of $1.50 per share to existing stockholders
and an immediate dilution in net tangible book value of $15.77
per share to new investors purchasing shares of our common stock
in this offering. Dilution per share is determined by
subtracting the net tangible book value per share as adjusted
for this offering from the amount of cash paid by a new investor
for a share of our common stock. Net tangible book value is not
affected by the sale of shares of our common stock offered by
the selling stockholders. The following table illustrates the
per share dilution:
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Assumed initial public offering price per share
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$
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13.50
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Net tangible book value per share as of September 30, 2009
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$
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(3.77
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)
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Increase in net tangible book value per share attributable to
new investors
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$
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1.50
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Adjusted net tangible book value per share after this offering
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$
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(2.27
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)
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Dilution per share to new investors
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$
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15.77
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A $1.00 increase (decrease) in the assumed initial public
offering price of $13.50 per share would increase (decrease) our
net tangible book value by $3.8 million, the net tangible
book value per share after this offering by $0.09 and the
dilution per share to new investors by $0.91, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same, and after deducting the
estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
The following table summarizes as of September 30, 2009,
after giving effect to the offering:
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the total number of shares of common stock purchased from us;
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the total consideration paid to us before deducting estimated
underwriting discounts and commissions payable by us of
$3.9 million and estimated offering expenses of
approximately $2.8 million; and
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the average price per share paid by existing stockholders and by
new investors who purchase shares of common stock in this
offering at the assumed initial public offering price of $13.50
per share.
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|
|
|
Average
|
|
|
Shares Purchased
|
|
Total Consideration
|
|
Price per
|
|
|
Number
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Share
|
|
Existing stockholders
|
|
|
38,328,842
|
|
|
|
90
|
%
|
|
$
|
206,521
|
|
|
|
79
|
%
|
|
$
|
5.39
|
|
New investors
|
|
|
4,074,074
|
|
|
|
10
|
|
|
|
55,000
|
|
|
|
21
|
|
|
|
13.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
42,402,916
|
|
|
|
100
|
%
|
|
$
|
261,521
|
|
|
|
100
|
%
|
|
|
6.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The foregoing table does not reflect proceeds to be realized by
existing stockholders in connection with the sales by them in
this offering, options outstanding under our stock option plans
or stock options to be granted after the offering. As of
September 30, 2009, there were 10,326,588 options
outstanding with an average exercise price of $5.21 per
share.
37
UNAUDITED
CONSOLIDATED PRO FORMA FINANCIAL DATA
The following supplemental unaudited consolidated pro forma
statements of operations data have been developed by applying
pro forma adjustments to our historical consolidated statements
of operations. The Spectrum investment, which occurred on
December 5, 2007, has been accounted for as a business
combination. As a result of the Spectrum investment, we applied
purchase accounting standards which required a new basis of
accounting resulting in assets and liabilities being recorded at
their respective fair values at the investment date. Although
our operations did not change as a result of the Spectrum
investment, the accompanying unaudited consolidated pro forma
financial data is presented for the predecessor and
successor relating to the periods preceding and
succeeding the Spectrum investment, respectively. The unaudited
consolidated pro forma statement of operations for the year
ended December 31, 2007 gives effect to the Spectrum
investment as if it had occurred on January 1, 2007.
Assumptions underlying the pro forma adjustments are described
in the accompanying notes, which should be read in conjunction
with this unaudited consolidated pro forma financial data.
The unaudited pro forma adjustments are based upon available
information and certain assumptions that we believe are
reasonable. The unaudited consolidated pro forma financial data
is presented for supplemental informational purposes only. The
unaudited consolidated pro forma financial data does not purport
to represent what our results of operations would have been had
the Spectrum investment actually occurred on January 1,
2007, and they do not purport to project our results of
operations or financial condition for any future period. The
unaudited consolidated pro forma statements of operations should
be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of
Operations, as well as Selected Consolidated
Financial Data and our audited consolidated financial
statements and related notes thereto appearing elsewhere in this
prospectus. All pro forma adjustments and their underlying
assumptions are described more fully in the notes to our
unaudited consolidated pro forma statements of operations.
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
|
|
Pro Forma
|
|
|
|
Period from Jan. 1,
|
|
|
Period from Dec. 6,
|
|
|
|
|
|
Year Ended
|
|
|
|
2007 through Dec. 5,
|
|
|
2007 through Dec. 31,
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
Adjustments
|
|
|
2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues
|
|
$
|
141,141
|
|
|
$
|
11,692
|
|
|
$
|
|
|
|
$
|
152,833
|
|
Product and other revenues
|
|
|
12,269
|
|
|
|
1,278
|
|
|
|
|
|
|
|
13,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
153,410
|
|
|
|
12,970
|
|
|
|
|
|
|
|
166,380
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription revenues
|
|
|
33,590
|
|
|
|
2,462
|
|
|
|
160
|
(1)
|
|
|
36,212
|
|
Cost of product and other revenues
|
|
|
2,552
|
|
|
|
500
|
|
|
|
|
|
|
|
3,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
36,142
|
|
|
|
2,962
|
|
|
|
160
|
|
|
|
39,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
117,268
|
|
|
|
10,008
|
|
|
|
(160
|
)
|
|
|
127,116
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and development
|
|
|
31,255
|
|
|
|
3,517
|
|
|
|
(1,018
|
)(1)(2)
|
|
|
33,754
|
|
Marketing and advertising
|
|
|
42,400
|
|
|
|
3,157
|
|
|
|
50
|
(1)
|
|
|
45,607
|
|
General and administrative
|
|
|
20,723
|
|
|
|
2,142
|
|
|
|
99
|
(1)
|
|
|
22,964
|
|
Amortization of acquired intangible assets
|
|
|
2,132
|
|
|
|
1,542
|
|
|
|
20,387
|
(3)
|
|
|
24,061
|
|
Transaction related costs
|
|
|
9,530
|
|
|
|
|
|
|
|
(9,530
|
)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
106,040
|
|
|
|
10,358
|
|
|
|
9,988
|
|
|
|
126,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
11,228
|
|
|
|
(350
|
)
|
|
|
(10,148
|
)
|
|
|
730
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(756
|
)
|
|
|
(1,146
|
)
|
|
|
(10,939
|
)(5)
|
|
|
(12,841
|
)
|
Interest income
|
|
|
2,051
|
|
|
|
289
|
|
|
|
(1,992
|
)(6)
|
|
|
348
|
|
Other income (expense), net
|
|
|
266
|
|
|
|
7
|
|
|
|
|
|
|
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
12,789
|
|
|
|
(1,200
|
)
|
|
|
(23,079
|
)
|
|
|
(11,490
|
)
|
Income tax (expense) benefit
|
|
|
(5,018
|
)
|
|
|
(103
|
)
|
|
|
9,372
|
(7)
|
|
|
4,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
7,771
|
|
|
$
|
(1,303
|
)
|
|
$
|
(13,707
|
)
|
|
$
|
(7,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents an increase in rent
expense due to the elimination of a deferred gain on the
sale/leaseback of our corporate headquarter facility of
$0.6 million recorded in 2007, of which $0.3 million
is included in technology and development expenses.
|
|
(2) |
|
Represents the elimination of
in-process research and development charges of $1.3 million
as a result of the Spectrum investment.
|
|
(3) |
|
Represents the net increase in
amortization expense due to fair value adjustments related to
long-lived intangible assets with definite lives. Identifiable
long-lived intangible assets are amortized either on a
straight-line basis or on the rate of attrition of subscribers
used to calculate the fair value of the intangible asset
resulting from the Spectrum investment.
|
|
(4) |
|
Represents the elimination of
non-recurring transaction costs that were directly attributable
to the Spectrum investment.
|
|
(5) |
|
Reflects the net increase in
interest expense resulting from interest expense on the
long-term debt entered into in connection with the Spectrum
investment offset by actual interest expense incurred on
predecessor debt that was eliminated at the time of the Spectrum
investment.
|
|
(6) |
|
Reflects a reduction in interest
income resulting from the decrease in our cash and short-term
investment balances used in the Spectrum investment.
|
|
(7) |
|
Reflects the income tax effect of
the pro forma adjustments resulting in a pro forma effective tax
rate based on our combined federal and state statutory rate of
37%.
|
39
SELECTED
CONSOLIDATED FINANCIAL DATA
The tables on the following pages set forth the consolidated
financial and operating data as of and for the periods
indicated. The consolidated statements of operations data
presented below for the years ended December 31, 2004 and
2005 and the balance sheet data as of December 31, 2004,
2005 and 2006 have been derived from our consolidated financial
statements, which have been audited by Ernst & Young
LLP, an independent registered public accounting firm, and which
are not included in this prospectus. The consolidated statements
of operations data presented below for the year ended
December 31, 2006, the predecessor period from
January 1, 2007 through December 5, 2007, the
successor period from December 6, 2007 through
December 31, 2007 and the year ended December 31,
2008, and the balance sheet data as of December 31, 2007
and 2008 have been derived from our consolidated financial
statements, which have been audited by Ernst & Young
LLP and which are included in this prospectus. The consolidated
statements of operations data for the nine month periods ended
September 30, 2008 and 2009 and the balance sheet data at
September 30, 2009 are derived from our unaudited interim
consolidated financial statements and include all adjustments,
consisting of normal and recurring adjustments that we consider
necessary for a fair presentation of the financial position and
results of operations as of and for such periods. Operating
results for the nine months ended September 30, 2009 are
not necessarily indicative of the results that may be expected
for the full 2009 fiscal year. See Risk Factors and
the notes to our consolidated financial statements. You should
read the consolidated financial data presented on the following
pages in conjunction with our consolidated financial statements,
the notes to our consolidated financial statements and
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2007
|
|
|
|
Dec. 6, 2007
|
|
|
Ended
|
|
|
Nine Months Ended
|
|
|
|
Year Ended Dec. 31,
|
|
|
through
|
|
|
|
through
|
|
|
Dec. 31,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Dec. 5, 2007
|
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands, except per share data)
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues
|
|
$
|
107,127
|
|
|
$
|
126,031
|
|
|
$
|
137,643
|
|
|
$
|
141,141
|
|
|
|
$
|
11,692
|
|
|
$
|
181,391
|
|
|
$
|
133,616
|
|
|
$
|
152,506
|
|
Product and other revenues
|
|
|
15,513
|
|
|
|
14,228
|
|
|
|
12,909
|
|
|
|
12,269
|
|
|
|
|
1,278
|
|
|
|
16,200
|
|
|
|
11,542
|
|
|
|
12,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
122,640
|
|
|
|
140,259
|
|
|
|
150,552
|
|
|
|
153,410
|
|
|
|
|
12,970
|
|
|
|
197,591
|
|
|
|
145,158
|
|
|
|
164,793
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription revenues
|
|
|
22,190
|
|
|
|
25,205
|
|
|
|
27,344
|
|
|
|
33,590
|
|
|
|
|
2,462
|
|
|
|
38,187
|
|
|
|
27,699
|
|
|
|
29,755
|
|
Cost of product and other revenues
|
|
|
3,255
|
|
|
|
3,367
|
|
|
|
3,695
|
|
|
|
2,552
|
|
|
|
|
500
|
|
|
|
5,427
|
|
|
|
3,292
|
|
|
|
4,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
25,445
|
|
|
|
28,572
|
|
|
|
31,039
|
|
|
|
36,142
|
|
|
|
|
2,962
|
|
|
|
43,614
|
|
|
|
30,991
|
|
|
|
33,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
97,195
|
|
|
|
111,687
|
|
|
|
119,513
|
|
|
|
117,268
|
|
|
|
|
10,008
|
|
|
|
153,977
|
|
|
|
114,167
|
|
|
|
130,825
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and development
|
|
|
17,123
|
|
|
|
20,600
|
|
|
|
28,280
|
|
|
|
31,255
|
|
|
|
|
3,517
|
|
|
|
33,206
|
|
|
|
23,705
|
|
|
|
26,690
|
|
Marketing and advertising
|
|
|
56,913
|
|
|
|
60,821
|
|
|
|
51,421
|
|
|
|
42,400
|
|
|
|
|
3,157
|
|
|
|
52,341
|
|
|
|
36,634
|
|
|
|
44,226
|
|
General and administrative
|
|
|
12,435
|
|
|
|
16,608
|
|
|
|
26,978
|
|
|
|
20,723
|
|
|
|
|
2,142
|
|
|
|
28,931
|
|
|
|
21,035
|
|
|
|
24,569
|
|
Amortization of acquired intangible assets
|
|
|
1,482
|
|
|
|
1,166
|
|
|
|
2,216
|
|
|
|
2,132
|
|
|
|
|
1,542
|
|
|
|
23,779
|
|
|
|
17,832
|
|
|
|
12,165
|
|
Transaction related expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of intangibles
|
|
|
1,000
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
88,953
|
|
|
|
99,505
|
|
|
|
108,895
|
|
|
|
106,040
|
|
|
|
|
10,358
|
|
|
|
138,257
|
|
|
|
99,206
|
|
|
|
107,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
8,242
|
|
|
|
12,182
|
|
|
|
10,618
|
|
|
|
11,228
|
|
|
|
|
(350
|
)
|
|
|
15,720
|
|
|
|
14,961
|
|
|
|
23,175
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,444
|
)
|
|
|
(1,357
|
)
|
|
|
(946
|
)
|
|
|
(756
|
)
|
|
|
|
(1,146
|
)
|
|
|
(12,355
|
)
|
|
|
(9,327
|
)
|
|
|
(4,784
|
)
|
Interest income
|
|
|
423
|
|
|
|
1,146
|
|
|
|
2,238
|
|
|
|
2,051
|
|
|
|
|
289
|
|
|
|
872
|
|
|
|
632
|
|
|
|
746
|
|
Other income (expense), net
|
|
|
640
|
|
|
|
1,259
|
|
|
|
834
|
|
|
|
266
|
|
|
|
|
7
|
|
|
|
(8
|
)
|
|
|
(18
|
)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
7,861
|
|
|
|
13,230
|
|
|
|
12,744
|
|
|
|
12,789
|
|
|
|
|
(1,200
|
)
|
|
|
4,229
|
|
|
|
6,248
|
|
|
|
19,151
|
|
Income tax expense
|
|
|
(2,928
|
)
|
|
|
(5,086
|
)
|
|
|
(4,595
|
)
|
|
|
(5,018
|
)
|
|
|
|
(103
|
)
|
|
|
(1,845
|
)
|
|
|
(2,748
|
)
|
|
|
(6,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,933
|
|
|
$
|
8,144
|
|
|
$
|
8,149
|
|
|
$
|
7,771
|
|
|
|
$
|
(1,303
|
)
|
|
$
|
2,384
|
|
|
$
|
3,500
|
|
|
$
|
12,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.06
|
|
|
$
|
0.09
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.06
|
|
|
$
|
0.09
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
In connection with the Spectrum
investment, we were recapitalized. As a result, the capital
structure of our predecessor is not comparable to that of the
successor. Accordingly, net income per common share is not
comparable or meaningful for periods prior to 2008 and has not
been presented.
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2007
|
|
|
|
Dec. 6, 2007
|
|
|
Ended
|
|
|
Nine Months Ended
|
|
|
|
Year Ended Dec. 31,
|
|
|
through
|
|
|
|
through
|
|
|
Dec. 31,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Dec. 5, 2007
|
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA(1)
|
|
$
|
21,986
|
|
|
$
|
23,513
|
|
|
$
|
30,455
|
|
|
$
|
39,344
|
|
|
|
$
|
3,755
|
|
|
$
|
62,645
|
|
|
$
|
49,062
|
|
|
$
|
52,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash
flow(1)
|
|
|
(13,451
|
)
|
|
|
(3,586
|
)
|
|
|
4,212
|
|
|
|
14,025
|
|
|
|
|
1,774
|
|
|
|
31,712
|
|
|
|
28,018
|
|
|
|
23,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription revenues
|
|
$
|
15
|
|
|
$
|
(9
|
)
|
|
$
|
31
|
|
|
$
|
73
|
|
|
|
$
|
3
|
|
|
$
|
80
|
|
|
$
|
60
|
|
|
$
|
78
|
|
Technology and development
|
|
|
1,802
|
|
|
|
(1,082
|
)
|
|
|
224
|
|
|
|
260
|
|
|
|
|
23
|
|
|
|
1,132
|
|
|
|
791
|
|
|
|
1,223
|
|
Marketing and advertising
|
|
|
764
|
|
|
|
(176
|
)
|
|
|
196
|
|
|
|
279
|
|
|
|
|
27
|
|
|
|
254
|
|
|
|
180
|
|
|
|
273
|
|
General and administrative
|
|
|
632
|
|
|
|
(77
|
)
|
|
|
3,338
|
|
|
|
286
|
|
|
|
|
24
|
|
|
|
3,206
|
|
|
|
2,478
|
|
|
|
2,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
3,213
|
|
|
$
|
(1,344
|
)
|
|
$
|
3,789
|
|
|
$
|
898
|
|
|
|
$
|
77
|
|
|
$
|
4,672
|
|
|
$
|
3,509
|
|
|
$
|
4,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Income from operations and net
income, and therefore adjusted EBITDA and free cash flow,
include an expense related to a settlement in the third quarter
of 2009 of a claim regarding the timeliness and accuracy of a
content index we created. The settlement resulted in an expense
of approximately $2.3 million in 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
As of December 31,
|
|
As of September 30,
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
2007
|
|
2008
|
|
2009
|
|
|
(in thousands)
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
37,156
|
|
|
$
|
38,113
|
|
|
$
|
43,219
|
|
|
|
$
|
12,277
|
|
|
$
|
40,121
|
|
|
$
|
60,593
|
|
Total assets
|
|
|
123,598
|
|
|
|
140,126
|
|
|
|
140,640
|
|
|
|
|
476,212
|
|
|
|
477,975
|
|
|
|
476,296
|
|
Deferred revenues
|
|
|
53,470
|
|
|
|
56,714
|
|
|
|
52,307
|
|
|
|
|
56,730
|
|
|
|
61,178
|
|
|
|
69,850
|
|
Long-term debt (including current portion)
|
|
|
28,776
|
|
|
|
25,000
|
|
|
|
15,000
|
|
|
|
|
140,000
|
|
|
|
133,000
|
|
|
|
114,669
|
|
Total liabilities
|
|
|
100,239
|
|
|
|
102,229
|
|
|
|
95,129
|
|
|
|
|
263,830
|
|
|
|
258,187
|
|
|
|
239,482
|
|
Total stockholders equity
|
|
|
23,359
|
|
|
|
37,897
|
|
|
|
45,511
|
|
|
|
|
212,382
|
|
|
|
219,788
|
|
|
|
236,814
|
|
42
The following table presents a reconciliation of adjusted EBITDA
and free cash flow to net income (loss), the most comparable
GAAP measure, for each of the periods identified. For additional
information, please see the discussion of adjusted EBITDA and
free cash flow in Prospectus Summary.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2007
|
|
|
|
Dec. 6, 2007
|
|
|
Ended
|
|
|
Nine Months
|
|
|
|
Year Ended Dec. 31,
|
|
|
through
|
|
|
|
through
|
|
|
Dec. 31,
|
|
|
Ended September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Dec. 5, 2007
|
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Reconciliation of adjusted EBITDA and free cash flow to net
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,933
|
|
|
$
|
8,144
|
|
|
$
|
8,149
|
|
|
$
|
7,771
|
|
|
|
$
|
(1,303
|
)
|
|
$
|
2,384
|
|
|
$
|
3,500
|
|
|
$
|
12,224
|
|
Interest (income) expense, net
|
|
|
1,021
|
|
|
|
211
|
|
|
|
(1,292
|
)
|
|
|
(1,295
|
)
|
|
|
|
857
|
|
|
|
11,483
|
|
|
|
8,695
|
|
|
|
4,038
|
|
Income tax expense
|
|
|
2,928
|
|
|
|
5,086
|
|
|
|
4,595
|
|
|
|
5,018
|
|
|
|
|
103
|
|
|
|
1,845
|
|
|
|
2,748
|
|
|
|
6,927
|
|
Depreciation expense
|
|
|
5,147
|
|
|
|
7,598
|
|
|
|
9,559
|
|
|
|
10,594
|
|
|
|
|
754
|
|
|
|
10,732
|
|
|
|
8,153
|
|
|
|
8,092
|
|
Amortization expense
|
|
|
4,384
|
|
|
|
4,767
|
|
|
|
6,489
|
|
|
|
7,094
|
|
|
|
|
1,974
|
|
|
|
30,046
|
|
|
|
22,439
|
|
|
|
17,346
|
|
Stock-based compensation
|
|
|
3,213
|
|
|
|
(1,344
|
)
|
|
|
3,789
|
|
|
|
898
|
|
|
|
|
77
|
|
|
|
4,672
|
|
|
|
3,509
|
|
|
|
4,265
|
|
Other (income) expense, net
|
|
|
(640
|
)
|
|
|
(1,259
|
)
|
|
|
(834
|
)
|
|
|
(266
|
)
|
|
|
|
(7
|
)
|
|
|
8
|
|
|
|
18
|
|
|
|
(14
|
)
|
Impairment of intangible assets and acquired in-process research
and development
|
|
|
1,000
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
1,300
|
|
|
|
1,475
|
|
|
|
|
|
|
|
|
|
Transaction related expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
21,986
|
|
|
$
|
23,513
|
|
|
$
|
30,455
|
|
|
$
|
39,344
|
|
|
|
$
|
3,755
|
|
|
$
|
62,645
|
|
|
$
|
49,062
|
|
|
$
|
52,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization of content database costs
|
|
$
|
(7,579
|
)
|
|
$
|
(11,521
|
)
|
|
$
|
(11,285
|
)
|
|
$
|
(10,591
|
)
|
|
|
$
|
(1,129
|
)
|
|
$
|
(8,965
|
)
|
|
$
|
(6,383
|
)
|
|
$
|
(5,855
|
)
|
Purchase of property and equipment
|
|
|
(21,900
|
)
|
|
|
(11,873
|
)
|
|
|
(10,127
|
)
|
|
|
(10,572
|
)
|
|
|
|
(852
|
)
|
|
|
(11,621
|
)
|
|
|
(7,358
|
)
|
|
|
(7,566
|
)
|
Cash paid for interest
|
|
|
(1,246
|
)
|
|
|
(1,480
|
)
|
|
|
(1,031
|
)
|
|
|
(756
|
)
|
|
|
|
|
|
|
|
(10,068
|
)
|
|
|
(7,206
|
)
|
|
|
(6,624
|
)
|
Cash paid for income taxes
|
|
|
(4,712
|
)
|
|
|
(2,225
|
)
|
|
|
(3,800
|
)
|
|
|
(3,400
|
)
|
|
|
|
|
|
|
|
(279
|
)
|
|
|
(97
|
)
|
|
|
(8,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
(13,451
|
)
|
|
$
|
(3,586
|
)
|
|
$
|
4,212
|
|
|
$
|
14,025
|
|
|
|
$
|
1,774
|
|
|
$
|
31,712
|
|
|
$
|
28,018
|
|
|
$
|
23,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our
consolidated financial statements and the related notes included
elsewhere in this prospectus. This discussion contains
forward-looking statements about our business and operations.
Our actual results may differ materially from those we currently
anticipate as a result of many factors, including those we
describe under Risk Factors and elsewhere in this
prospectus. See Special Note Regarding Forward Looking
Statements.
Company
Overview
Ancestry.com is the worlds largest online resource for
family history, with more than one million paying
subscribers around the world as of September 30, 2009. Our
mission is to help everyone discover, preserve and share their
family history. Our subscribers use our proprietary online
platform, extensive digital historical record collection, and
easy-to-use technology to research their family histories, build
their family trees, collaborate with other subscribers, upload
their own records and publish and share their stories with their
families. We offer our service on a subscription basis,
typically annual or monthly. These subscribers are our primary
source of revenue. We charge each subscriber the full price for
their subscription at the commencement of their subscription
period and at each renewal date. The predominantly annual
commitments of our subscribers enhance managements
near-term visibility on our revenues and provide working capital
benefits, which we believe enable us to more effectively manage
the growth of our business.
We operated as The Generations Network, Inc., which we refer to
as the predecessor, until December 5, 2007. On
December 5, 2007, Generations Holding, Inc., which we refer
to as the successor, acquired The Generations Network, Inc. in
connection with an investment by Spectrum Equity
Investors V, L.P. and certain of its affiliates. The
successor was created for the sole purpose of acquiring The
Generations Network, Inc. and had no prior operations. As a
result of that transaction, which we refer to as the Spectrum
investment, Spectrum and certain of its affiliates currently
hold approximately 67% of the outstanding shares of our common
stock. As a result of the accounting for the Spectrum
investment, our fiscal year 2007 is divided into a predecessor
period from January 1, 2007 through December 5, 2007
and a successor period from December 6, 2007 through
December 31, 2007.
We have funded our operations primarily from cash flows from
operations during the last five years. Our revenues increased
from $122.6 million in 2004 to $197.6 million in 2008.
Our revenues were $145.2 million for the nine months ended
September 30, 2008, as compared to $164.8 million for
the nine months ended September 30, 2009. The number of
subscribers on the Ancestry.com websites has increased from
approximately 460,000 in January 2004 to more than one million
as of September 30, 2009. Our average monthly revenue per
subscriber was $16.09 in 2008.
We believe our previous investments in technology and content
have provided us a foundation for a scalable business model that
will help us to increase our margins over the long term and
effectively manage our costs as our business grows. However, we
expect to continue to devote substantial resources and funds to
improving our technologies and product offerings and acquiring
new and relevant content, and also to expanding awareness of our
brand and category through marketing, which may reduce our
margins in the near term.
Key
Business Metrics
Our management regularly reviews a number of financial and
operating metrics, including the following key operating metrics
to evaluate our business, determine the allocation of resources,
make decisions regarding corporate strategies and evaluate
forward-looking projections. The following key operating metrics
reflect data with respect to the Ancestry.com websites and
exclude our other subscription-based websites, such as
myfamily.com and Geneology.com.
|
|
|
|
|
Total subscribers. A subscriber is an
individual who pays for renewable access to one of our
Ancestry.com websites. Total subscribers is defined as the
number of subscribers at the end of the relevant period.
|
|
|
|
Monthly churn. Monthly churn is a measure
representing the number of subscribers that cancel in the
quarter divided by the sum of beginning subscribers and
subscriber additions during the quarter. To arrive at
|
44
|
|
|
|
|
monthly churn, we divide the result by three. Management uses
this measure to determine the health of our subscriber base.
|
|
|
|
|
|
Average monthly revenue per
subscriber. Average monthly revenue per
subscriber is total subscription revenues earned in the period
from subscriptions to one of the Ancestry.com websites divided
by the average number of subscribers in the period, divided by
the number of months in the period. The average number of
subscribers for the period is calculated by taking the average
of the beginning and ending number of subscribers for the period.
|
|
|
|
Subscriber acquisition cost. Subscriber
acquisition cost is external marketing and advertising expense,
divided by total subscriber additions in the period. Management
uses this metric to determine the efficiency of our marketing
and advertising programs in acquiring new subscribers.
|
A significant number of our renewals occur in the first quarter
of each year. Because we recognize subscription revenues ratably
over the subscription period, this trend generally has not
resulted in a material seasonal impact on our revenues, but may
result in a seasonal effect on one or more of the key business
metrics described above.
The following represents our performance highlights for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Nine Months Ended September 30,
|
|
|
2006
|
|
2007
|
|
2008
|
|
2008
|
|
2009
|
|
Total subscribers
|
|
|
734,386
|
|
|
|
832,193
|
|
|
|
913,683
|
|
|
|
893,882
|
|
|
|
1,028,180
|
|
Subscriber additions
|
|
|
569,851
|
|
|
|
479,663
|
|
|
|
556,045
|
|
|
|
412,276
|
|
|
|
508,750
|
|
Monthly
churn(1)
|
|
|
|
|
|
|
3.5
|
%
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
|
|
3.9
|
%
|
Subscriber acquisition
cost(2)
|
|
$
|
49.29
|
|
|
$
|
70.96
|
|
|
$
|
71.99
|
|
|
$
|
69.46
|
|
|
$
|
68.32
|
|
Average monthly revenue per
subscriber(2)
|
|
$
|
14.52
|
|
|
$
|
14.83
|
|
|
$
|
16.09
|
|
|
$
|
15.95
|
|
|
$
|
16.50
|
|
|
|
|
(1)
|
|
Monthly churn is the average
monthly churn for the quarters included in the periods shown.
Monthly churn is not comparable for the year ended
December 31, 2006 due to a change in the packaging of our
products and services, and accordingly, has not been presented.
|
|
(2)
|
|
Based on pro forma expenses and
revenues for 2007. See Unaudited Consolidated Pro Forma
Financial Data on page 38 of this prospectus.
|
Components
of Consolidated Statements of Operations
Revenues
Subscription revenues. We derive subscription
revenues primarily from providing access to our products and
services via our various Ancestry.com websites. Subscription
revenues are recognized ratably over the subscription period
which consists primarily of monthly and annual subscriptions,
net of estimated cancellations. We typically charge each
subscribers credit card for the full price for their
subscription at the commencement of their subscription period
and at each renewal date (whether annual or monthly), unless
they cancel their subscription before the renewal date. The
amount of unrecognized revenues is recorded in deferred revenue.
We generally record cancellations and returns as a reduction to
deferred revenues. When people sign up for trial subscriptions,
we automatically charge their credit card for a subscription at
the end of the trial period unless they cancel before the end of
the trial period. Registered users that accept the offer of a
14-day free
trial are not billed for services until after the
14-day trial
period. Revenue is recognized over the subscription period once
billed. No revenue is recognized or allocated to the
14-day free
trial period. Subscription revenues from our Ancestry.com
websites accounted for 94% of the total subscription revenues
for the year ended December 31, 2008. Subscription revenues
also include annual subscriptions to our myfamily.com website
and other subscription-based products and services.
A majority of our subscription revenues are derived from
subscribers in the United States. We attribute subscription
revenues by country based on the billing address of the
subscriber, regardless of which of our websites the person
subscribes. Revenues from subscribers in the United States, the
United Kingdom and other countries collectively were 82%, 14%
and 4% of our subscription revenues, respectively, in 2006
compared to 75%, 19% and 6%, respectively, in the period from
January 1, 2007 through December 5, 2007, 74%, 20% and
6%, respectively, in the period from December 6, 2007
through December 31, 2007 and 74%, 18% and 8%,
respectively, in 2008.
45
Revenues from subscribers in the United States, the United
Kingdom and other countries collectively were 74%, 18% and 8% of
our subscription revenues, respectively, in the nine months
ended September 30, 2008 compared to 75%, 17% and 8%,
respectively, in the nine months ended September 30, 2009.
Product and other revenues. Product and other
revenues consist of sales of desktop software (Family Tree
Maker), DNA testing (Ancestry.com | DNA), books,
periodicals, certificates, our self-publishing products
(MyCanvas.com), advertising services and access to our family
history content on a
pay-per-view
basis, which is available on our United Kingdom and certain
other internationally directed websites. Revenues related to
these products are recognized upon shipment, delivery of genetic
results, shipment of magazine or delivery of online ad
impressions or granting of
pay-per-view
access, as applicable.
Cost
of Revenues
Cost of subscription revenues. Cost of
subscription revenues consist of amortization of our database
content costs, depreciation expense on web servers and
equipment, credit card processing fees, web hosting costs,
royalty costs on certain content licensed from others,
personnel-related costs for database content support and call
center personnel. Since January 1, 2007, our call center
has primarily functioned as a subscriber service organization. A
majority of the costs associated with our call center since
January 1, 2007 have been recorded in cost of subscription
revenues. We expect database content amortization and web
hosting costs to continue to increase in 2009 as we continue to
add database content and develop a redundant hosting location.
Cost of product and other revenues. Cost of
product and other revenues consist of our direct costs to
purchase the products, shipping costs, credit card processing
fees, personnel-related costs of warehouse personnel, warehouse
storage costs and royalties on products licensed from others.
Gross profit. Gross profit is the result of
total revenues minus our total cost of revenues.
Personnel-related costs for each category of cost of revenues
and operating expenses include salaries, bonuses, stock-based
compensation and employee benefit costs.
Operating
Expenses
Technology and development. Technology and
development expenses consist of personnel-related costs incurred
in product development, maintenance and testing of our websites,
enhancing our record search and linking technologies, developing
solutions for new product lines, internal information systems
and infrastructure, third-party development, and other
internal-use software systems. Technology and development
expenses also include depreciation of computer hardware and
purchased software. Our development costs are primarily based in
the United States and are primarily devoted to providing content
and tools for individuals to do family history research. We
expect our investment in technology and development to increase
in absolute dollars in future periods.
Marketing and advertising. Marketing and
advertising expenses consist primarily of direct expenses
related to online, television and print advertising, retention
marketing expenses, payments made to affiliates to generate new
subscribers and personnel-related expenses. Prior to
January 1, 2007, our call center was principally a sales
organization. The majority of the costs associated with the call
center prior to January 1, 2007 were recorded in marketing
and advertising. Marketing and advertising costs are principally
incurred in the United States, but we do have marketing and
advertising offices in Europe, Australia and Canada. We expect
marketing expenses to increase in absolute dollars but to remain
relatively stable in the near future as a percentage of
revenues, except for an increase in marketing expenses primarily
in 2010 related to a one time payment we expect to make for
product integration on the U.S. version of the television
show Who Do You Think You Are? We do not control the
release of this television show and cannot be sure if or when it
will be released or if it will have any effect on our revenues
or results of operations. If our revenues increase as a result
of interest in Ancestry.com attributable to the airing of this
program, such increase may not be sustainable over time.
General and administrative. General and
administrative expenses consist principally of personnel-related
expenses for our executive, finance, legal, human resources and
other administrative personnel, as well as accounting and legal
professional fees and other general corporate expenses,
including settlement of legal claims. We expect our general and
administrative expenses to increase when we become a public
company as we expect our
46
accounting, legal and personnel-related expenses and directors
and officers insurance costs to increase as we institute and
monitor a more comprehensive compliance and board governance
function, maintain and review internal control over financial
reporting in accordance with Section 404 of the
Sarbanes-Oxley Act and prepare and distribute periodic reports.
Amortization of acquired intangible
assets. Amortization of acquired intangible
assets is the amortization expense associated with subscriber
relationships and contracts, core technologies, and intangible
assets, including trademarks and tradenames, resulting from the
Spectrum investment.
Transaction related expenses. Transaction
related expenses consist of one-time costs of our predecessor
company associated with the Spectrum investment.
Other
Income (Expense)
Interest expense. Interest expense includes
the interest expense associated with our long-term debt and
amortization of debt-issuance costs.
Interest income. Interest income includes
interest earned on cash and cash equivalents and short-term
investments.
Income tax expense. Income tax expense
consists of federal and state income taxes in the United States
and taxes in certain foreign jurisdictions.
Critical
Accounting Estimates
Our consolidated financial statements are prepared in accordance
with United States generally accepted accounting principles, or
GAAP. The preparation of these consolidated financial statements
requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, costs and
expenses, and related disclosures. These estimates and
assumptions are often based on judgments that we believe to be
reasonable under the circumstances at the time made, but all
such estimates and assumptions are inherently uncertain and
unpredictable. Actual results may differ from those estimates
and assumptions, and it is possible that other professionals,
applying their own judgment to the same facts and circumstances,
could develop and support alternative estimates and assumptions
that would result in material changes to our operating results
and financial condition. 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.
We consider the assumptions and estimates associated with
recoverability of intangible assets, the period of amortization
of our database content costs, stock-based compensation and
income taxes to be our critical accounting estimates. For
further information on our significant accounting policies, see
Note 1 of the accompanying notes to our consolidated
financial statements.
Recoverability
of Intangible Assets, Including Goodwill
Intangible assets consist of acquisition costs related to
database costs, subscriber relationships and contracts,
technologies, trade names and trademarks, and other intangible
assets. Intangible assets acquired in a business combination are
measured at fair value at the date of acquisition. We amortize
all intangible assets, except for acquired subscriber
relationships, on a straight line basis over their expected
lives in accordance with Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets (SFAS 142). Acquired subscriber relationships
were amortized on a straight-line basis prior to the acquisition
of our predecessor and, subsequent to the acquisition, are
amortized based on the rate of attrition of subscribers used to
calculate the fair value of the intangible asset in the
acquisition and purchase price allocation. As of
December 31, 2007 and 2008, respectively, we had
approximately $285.0 million and approximately
$285.5 million of goodwill and approximately $127.5 and
approximately $104.9 million of intangible assets with
estimable useful lives on our consolidated balance sheets.
We review our indefinite-lived intangible assets for impairment
at least annually or as indicators of impairment exist based on
comparing the fair value of the asset to the carrying value of
the asset in accordance with SFAS 142. Goodwill is
currently our only indefinite-lived intangible asset. We perform
our annual goodwill impairment test in
47
the fourth quarter. Our goodwill impairment test requires the
use of fair-value techniques, which are inherently subjective.
Fair value was estimated in October 2008 using an equal
weighting of the income and market value approaches for our
company, which we account for as a single reporting unit. The
equal weighting of these two approaches reflects our view that
both these valuation methods provided a reasonable estimate of
fair value and were equally reliable methods.
Under the income approach, we calculated the fair value of our
reporting unit based on the present value of estimated future
cash flows. Under the market approach, we estimated the fair
value based on market multiples of revenue and earnings for
comparable publicly traded companies. The estimates and
assumptions used in our calculations included revenue growth
rates, expense growth rates, expected capital expenditures to
determine projected cash flows, expected tax rates, and an
estimated discount rate to determine present value of expected
cash flows. These estimates are based on historical experience,
our projections of future operating activity, and our weighed
average cost of capital based on returns on interest bearing
debt and common stock.
The valuation of goodwill could be affected if actual results
differ substantially from our estimates. Circumstances that
could affect the valuation of goodwill include, among other
things, a significant change in our business climate and buying
habits of our subscriber base along with increased costs to
provide systems and technologies required to support our content
and search capabilities. Based on our analysis in the fourth
quarter of 2008, no impairment of goodwill was indicated. We
have determined that a 10% change in our cash flow assumptions
or a marginal change in our discount rate as of the date of our
most recent goodwill impairment test would not have changed the
outcome of the test.
We evaluate the recoverability of our long-lived assets in
accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets (SFAS 144).
SFAS 144 requires recognition of impairment of long-lived
assets in the event that the net book value of such assets
exceeds the future undiscounted net cash flows attributable to
such assets. In accordance with SFAS 144, we recognize
impairment, if any, in the period of identification to the
extent the carrying amount of an asset exceeds the fair value of
such asset. Based on our analysis, we recorded an impairment of
approximately $1.5 million for the year ended
December 31, 2008 related to a database content set we were
developing for release in China. The impairment was expensed to
cost of subscription revenues for the year ended
December 31, 2008. No impairment was indicated as of
December 31, 2007.
Period
of Amortization of Our Database Costs
Our database consists of historical information that has been
digitized and indexed to allow subscribers to search and view
our content online. Database costs include the costs to acquire
or license the historical data, costs incurred by our employees
or by third parties to scan the content, and costs to have the
content keyed and indexed in order to be searchable. Among the
most utilized content in our databases is the United States and
United Kingdom census records which are released by government
entities every ten years. We amortize our database costs on a
straight-line basis over ten years after the content is released
for viewing on our websites.
Stock-Based
Compensation
We account for stock-based compensation in accordance with SFAS
No. 123(R), Share-Based Payment (SFAS 123(R)).
Under the provisions of SFAS 123(R), stock-based
compensation cost for each award is estimated at the grant date
based on the awards fair value as calculated by the
Black-Scholes option-pricing model and is recognized as expense
over the requisite service period. The Black-Scholes model
requires various highly judgmental assumptions including fair
value of the underlying stock, volatility and expected option
life. If any of the assumptions used in the Black-Scholes model
change significantly, stock-based compensation expense is
adjusted accordingly and stock-based compensation expense may
differ materially in the future from that recorded in the
current period.
We adopted SFAS 123(R) prospectively as of January 1,
2006 and therefore have applied the valuation provisions of
SFAS 123(R) to all new options and to options that were
outstanding prior to the effective date that were subsequently
modified. For the year ended December 31, 2006, we had
variable stock options which
48
accounted for a de minimus amount of compensation expense. No
other periods were affected by variable stock options. We also
recorded non-cash compensation expense for the repurchase of
common stock within six months of the exercise of employee stock
options of approximately $3.0 million for the year ended
December 31, 2006.
In January 2006, we modified the terms of then-outstanding stock
options with exercise prices above $4.60, reducing the exercise
price of the options to $4.60. As a result of the modification
we recorded incremental compensation expense of
$0.4 million and $0.1 million for the year ended
December 31, 2006 and the period from January 1, 2007
through December 5, 2007, respectively, and a de minimus
amount for the period from December 6, 2007 through
December 31, 2007 and for the year ended December 31,
2008.
As of December 31, 2007 and 2008 and September 30,
2009 there was approximately $2.1 million,
$8.6 million and $9.4 million, respectively, of
unrecognized stock-based compensation expense related to
non-vested stock option awards that we expect to be recognized
over a weighted average period of 3.1, 2.6 and 2.8 years,
respectively.
The following tables set forth the total non-cash compensation
expense included in the related financial statement line items,
which total non-cash compensation expense includes
SFAS 123(R) stock-based compensation expense, variable
stock options expense and compensation expense associated with
the repurchase of common stock described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
|
December 6,
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
through
|
|
|
|
through
|
|
|
Year Ended
|
|
|
Nine Months
|
|
|
|
December 31,
|
|
|
|
December 5,
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Ended September 30,
|
|
|
|
2006
|
|
|
|
2007
|
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Cost of subscription
revenues
|
|
$
|
31
|
|
|
|
$
|
73
|
|
|
|
$
|
3
|
|
|
$
|
80
|
|
|
$
|
60
|
|
|
$
|
78
|
|
Technology and development
|
|
|
224
|
|
|
|
|
260
|
|
|
|
|
23
|
|
|
|
1,132
|
|
|
|
791
|
|
|
|
1,223
|
|
Marketing and advertising
|
|
|
196
|
|
|
|
|
279
|
|
|
|
|
27
|
|
|
|
254
|
|
|
|
180
|
|
|
|
273
|
|
General and administrative
|
|
|
3,338
|
|
|
|
|
286
|
|
|
|
|
24
|
|
|
|
3,206
|
|
|
|
2,478
|
|
|
|
2,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,789
|
|
|
|
$
|
898
|
|
|
|
$
|
77
|
|
|
$
|
4,672
|
|
|
$
|
3,509
|
|
|
$
|
4,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We estimated the fair value of each option granted using the
Black-Scholes option-pricing method using the following
assumptions for the periods presented in the table below. We
have not set forth any assumptions for the successor period from
December 6, 2007 through December 31, 2007 because we
did not grant any options during that period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
January 1, 2007
|
|
|
|
|
|
|
|
|
Year Ended
|
|
through
|
|
Year Ended
|
|
Nine Months
|
|
|
December 31,
|
|
December 5,
|
|
December 31,
|
|
Ended September 30,
|
|
|
2006
|
|
2007
|
|
2008
|
|
2008
|
|
2009
|
|
Expected stock price volatility
|
|
|
65
|
%
|
|
|
65
|
%
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
50
|
%
|
Expected life of options
|
|
|
4 years
|
|
|
|
4 years
|
|
|
|
4 years
|
|
|
|
4 years
|
|
|
|
4.2 years
|
|
Expected dividend yield
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Risk-free interest rate
|
|
|
4.6-5.0
|
%
|
|
|
4.6-4.9
|
%
|
|
|
1.4-3.1
|
%
|
|
|
2.2-3.1
|
%
|
|
|
1.5-3.7
|
%
|
As of each stock option grant date, we considered the fair value
of the underlying common stock, determined as described below,
in order to establish the option exercise price. As of each
stock option grant date, we reviewed an average of the disclosed
year-end volatility of a group of companies that we considered
peers based on a number of factors including, but not limited
to, similarity to us with respect to industry, business model,
stage of growth, financial risk or other factors, along with
considering the future plans of our company to determine the
appropriate volatility. The expected life was based on our
historical stock option activity. The risk-free interest rate
was determined by reference to the United States Treasury rates
with the remaining term approximating the expected life assumed
at the date of grant. In addition, we are required to estimate
the expected forfeiture rate and only recognize expense for
those options expected to vest. We estimate the forfeiture rate
based on our historical
49
experience. Further, to the extent our actual forfeiture rate is
different from our estimate, stock-based compensation expense is
adjusted accordingly.
The following table sets forth all stock option grants since
January 1, 2006 through the date of this prospectus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic
|
|
|
|
|
|
|
Common Stock
|
|
Value per
|
|
|
Number of
|
|
|
|
Fair Value per
|
|
Share at
|
Grant Date
|
|
Options Granted
|
|
Exercise Price
|
|
Share at Grant Date
|
|
Grant Date
|
|
February 14, 2006
|
|
|
147,500
|
|
|
$
|
4.60
|
|
|
$
|
4.60
|
|
|
$
|
|
|
March 30, 2006
|
|
|
280,000
|
|
|
|
4.60
|
|
|
|
4.60
|
|
|
|
|
|
May 25, 2006
|
|
|
215,250
|
|
|
|
4.60
|
|
|
|
4.60
|
|
|
|
|
|
July 27, 2006
|
|
|
335,000
|
|
|
|
4.60
|
|
|
|
4.60
|
|
|
|
|
|
September 21, 2006
|
|
|
136,500
|
|
|
|
4.60
|
|
|
|
4.60
|
|
|
|
|
|
November 17, 2006
|
|
|
97,500
|
|
|
|
4.60
|
|
|
|
4.60
|
|
|
|
|
|
January 31, 2007
|
|
|
91,750
|
|
|
|
4.70
|
|
|
|
4.70
|
|
|
|
|
|
May 1, 2007
|
|
|
180,000
|
|
|
|
4.70
|
|
|
|
4.70
|
|
|
|
|
|
July 19, 2007
|
|
|
81,000
|
|
|
|
4.70
|
|
|
|
4.70
|
|
|
|
|
|
March 27, 2008
|
|
|
3,489,121
|
|
|
|
5.40
|
|
|
|
5.40
|
|
|
|
|
|
April 29, 2008
|
|
|
86,250
|
|
|
|
5.40
|
|
|
|
5.40
|
|
|
|
|
|
July 30, 2008
|
|
|
240,750
|
|
|
|
5.40
|
|
|
|
5.40
|
|
|
|
|
|
November 3, 2008
|
|
|
361,500
|
|
|
|
5.50
|
|
|
|
5.50
|
|
|
|
|
|
December 5, 2008
|
|
|
10,500
|
|
|
|
5.50
|
|
|
|
5.50
|
|
|
|
|
|
February 11, 2009
|
|
|
568,000
|
|
|
|
5.50
|
|
|
|
5.50
|
|
|
|
|
|
March 13, 2009
|
|
|
212,168
|
|
|
|
5.50
|
|
|
|
7.36
|
|
|
|
1.86
|
|
May 27, 2009
|
|
|
646,000
|
|
|
|
7.36
|
|
|
|
7.36
|
|
|
|
|
|
July 20, 2009
|
|
|
362,000
|
|
|
|
8.54
|
|
|
|
8.54
|
|
|
|
|
|
September 1, 2009
|
|
|
10,000
|
|
|
|
8.54
|
|
|
|
13.50
|
|
|
|
4.96
|
|
October 14, 2009
|
|
|
100,750
|
|
|
|
13.50
|
|
|
|
13.50
|
|
|
|
|
|
These estimates of the fair value of our common stock were made
based on information from the following valuation dates:
|
|
|
|
|
|
|
Fair Value
|
Valuation Date
|
|
per Share
|
|
November 11, 2005
|
|
$
|
4.60
|
|
December 31, 2006
|
|
|
4.70
|
|
October 27, 2008
|
|
|
5.50
|
|
March 31, 2009
|
|
|
7.36
|
|
June 30, 2009
|
|
|
8.54
|
|
Since our common stock is not publicly traded, we considered
numerous objective and subjective factors in valuing our common
stock at each valuation date in accordance with the guidance in
the American Institute of Certified Public Accountants Practice
Aid Valuation of Privately-Held-Company Equity Securities
Issued as Compensation, or Practice Aid. These objective and
subjective factors included, but were not limited to:
|
|
|
|
|
arms-length sales of our common stock in privately
negotiated transactions;
|
|
|
|
valuations of our common stock;
|
|
|
|
our stage of development and financial position; and
|
|
|
|
our future financial projections.
|
On December 5, 2007, we acquired our predecessor for a
common stock price of $5.40 per share in connection with the
Spectrum investment. The Practice Aid indicates that a
third-party transaction between a willing buyer and a willing
seller is the best indication of the fair value of an
enterprise. At each grant date subsequent to the Spectrum
50
investment, our board of directors considered the objective and
subjective factors and determined that the $5.40 value was a
reasonable approximation of fair value until a new valuation was
performed in October 2008.
In the contemporaneous common stock valuations performed on
October 27, 2008, March 31, 2009 and June 30,
2009, the fair value of our common stock was determined by
taking the average value calculated under two different
valuation approaches, the income approach and market approach,
with each method weighted equally. The equal weighting of these
two approaches reflects our view that both these valuation
methods provide a reasonable estimate of fair value, are equally
reliable and resulted in similar values.
|
|
|
|
|
The income approach quantified the present value of the future
cash flows that management expected to achieve. These future
cash flows were discounted to their present values using a rate
corresponding to our estimated weighted average cost of capital.
The discount rate reflects the risks inherent in the cash flows
and the market rates of return available from alternative
investments of similar type and quality as of the valuation
date. Our weighted average cost of capital was calculated by
weighting the required returns on interest-bearing debt and
common equity capital in proportion to their estimated
percentages in our capital structure. The weighted average cost
of capital used in the common stock valuations on
October 27, 2008, March 31, 2009 and June 30,
2009 was 14.0%, 15.0% and 14.5%, respectively.
|
|
|
|
|
|
The market approach considered multiples of financial metrics
based on acquisition
and/or
trading multiples of a peer group of companies. These multiples
were then applied to our financial metrics to derive an
indication of value. The valuation on October 27, 2008
applied a weighting of 50% of the trailing twelve month (TTM)
earnings before interest, taxes, depreciation, and amortization
(EBITDA) and 50% of the forward twelve month (FTM) EBITDA to
indicate the value of invested capital. The multiples used in
the October 27, 2008 valuation for TTM EBITDA and FTM
EBITDA were 7.7x and 5.5x. The valuations on March 31, 2009
and June 30, 2009 applied a weighting of 10%, 40%, 10% and
40% to the TTM of revenue, TTM of EBITDA, next full year (NFY)
revenue, NFY EBITDA, respectively. These multiples were:
|
|
|
|
|
|
|
|
|
|
Date of Valuation
|
|
TTM Revenue
|
|
TTM EBITDA
|
|
NFY Revenue
|
|
NFY EBITDA
|
|
March 31, 2009
|
|
2.0x
|
|
7.5x
|
|
1.9x
|
|
7.0x
|
June 30, 2009
|
|
2.2x
|
|
7.5x
|
|
2.0x
|
|
7.0x
|
The resulting fair value obtained by averaging the values
calculated under the income approach and the market approach was
then discounted for the lack of marketability of the common
stock for being a private company. The marketability discount
was 34%, 10% and 10%, respectively, for the valuations on
October 27, 2008, March 31, 2009 and June 30,
2009.
At each grant date from November 3, 2008 through
March 13, 2009, our board of directors considered objective
and subjective factors including the most recent contemporaneous
valuation of our common stock on October 27, 2008.
For the grants on May 27, 2009, our board of directors
considered objective and subjective factors including the most
recent contemporaneous valuation of our common stock on
March 31, 2009. The March 31, 2009 valuation was
higher than the October 27, 2008 valuation principally due
to the application of a much lower discount for marketability.
At the times of the prior valuation in October 2008 and grants
made from November 2008 through February 2009, our board of
directors believed that the likelihood of an initial public
offering in the near term was low, particularly given the
turmoil in the debt and equity capital markets and the
challenging economic environment during that period. While the
income factors used in our valuations did not change materially
between the October 2008 valuation and the March 2009
valuation, the discount for marketability in the March 2009
valuation was lowered to 10% compared to 34% in the
October 2008 valuation as a result of various initial
public filings being favorably received, indicating a
significant improvement in the market, and our board of
directors increased interest in pursuing a public offering of
our common stock in the nearer term.
Due to the proximity of the grant on March 13, 2009 to the
March 31, 2009 valuation and because in March 2009 our
board of directors became more optimistic that we could consider
an initial public offering in the nearer term, we decided to use
the March 31, 2009 common stock valuation as fair value in
our SFAS 123(R) calculation of stock compensation expense
for the March 13, 2009 grants. We determined, however, that the
February 11, 2009 option grant was properly granted at an
exercise price equal to the fair value determined as of
51
October 27, 2008, because at the time of grant the board of
directors believed the prospect of an initial public offering in
the near term was comparable to that at the time of the October
2008 valuation and that the decreased discount for marketability
used in the March 31, 2009 valuation was therefore not
appropriate to apply retrospectively to the February 11,
2009 grant.
For the grants on July 20 and September 1, 2009, our
board of directors considered objective and subjective factors
including the most recent contemporaneous valuation of our
common stock on June 30, 2009. The June 30, 2009
valuation was higher than the March 31, 2009 valuation
principally due to an increase in business enterprise value due
to continued improvements in the equity markets, and to a lesser
extent the company experiencing strong growth and cash flow.
For the grants on October 14, 2009, our board of directors
considered objective and subjective factors including the
midpoint of the proposed price range of the common stock in the
offering, developed in consultation with the underwriters. Due
to the proximity of the September 1, 2009 grants with the
expected initial public offering, we decided to use the
mid-point of
the range for the common stock in the offering as the fair value
for our SFAS 123(R) calculation of stock compensation
expense.
Assuming an initial public offering price of $13.50 per share,
the midpoint of the price range set forth on the cover page of
this prospectus, the intrinsic value of the options outstanding
at September 30, 2009, was $85.6 million, of which
$52.7 million related to the options that were vested and
$32.9 million related to the options that were not vested.
Income
taxes
We are subject to income taxes in the United States and several
foreign jurisdictions. Significant judgment is required in
evaluating our uncertain tax positions and determining our
provision for income taxes. Financial Interpretation
No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48) contains a two-step approach to
recognizing and measuring uncertain tax positions accounted for
in accordance with SFAS 109, Accounting for Income
Taxes. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will
be sustained on audit, including resolution of related appeals
or litigation processes, if any. The second step is to measure
the tax benefit as the largest amount that is more than 50%
likely of being realized upon settlement.
Although we believe we have adequately reserved for our
uncertain tax positions, no assurance can be given that the
final tax outcome of these matters will not be different. We
adjust these reserves in light of changing facts and
circumstances, such as the closing of a tax audit, the
refinement of an estimate or changes in tax laws. To the extent
that the final tax outcome of these matters is different than
the amounts recorded, such differences will impact the provision
for income taxes in the period in which such determination is
made. The provision for income taxes includes the impact of
reserve provisions and changes to reserves that are considered
appropriate, as well as the related net interest.
In evaluating our ability to recover our deferred tax assets, in
full or in part, we consider all available positive and negative
evidence, including our past operating results, our forecast of
future market growth, forecasted earnings, future taxable income
and prudent and feasible tax planning strategies. The
assumptions utilized in determining future taxable income
require significant judgment and are consistent with the plans
and estimates we are using to manage the underlying businesses.
We believe it is more likely than not that the deferred tax
assets recorded on our balance sheet will ultimately be
realized. In the event we were to determine that we would not be
able to realize all or part of our net deferred tax assets in
the future, an adjustment to the deferred tax assets would be
charged to earnings in the period in which we make such
determination.
Our effective tax rates have differed from the statutory tax
rate primarily due to the tax impact of foreign operations,
certain impairment charges, state taxes, and certain benefits
realized related to stock option activity. The effective tax
rates were 36.1%, 39.2% and 43.6% for the year ended
December 31, 2006, the period from January 1, 2007
through December 5, 2007 and the year ended
December 31, 2008, respectively. Our future effective tax
rates could be adversely affected by changes in the valuation of
our deferred tax assets or liabilities, or changes in tax laws,
regulations, accounting principles or interpretations thereof.
In addition, we are subject to the continuous examination of our
income tax returns by the Internal Revenue Service and other tax
authorities. We regularly
52
assess the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for
income taxes.
Results
of Operations
The following table sets forth, for the periods presented, our
consolidated statements of operations. In the table below and
throughout this Managements Discussion and Analysis
of Financial Condition and Results of Operations:
consolidated statements of operations data for the year ended
December 31, 2006, the predecessor period from
January 1, 2007 through December 5, 2007, the
successor period from December 6, 2007 through
December 31, 2007 and the year ended December 31, 2008
have been derived from our audited consolidated financial
statements; the consolidated statement of operations data for
the nine month periods ended September 30, 2008 and 2009
have been derived from our unaudited interim consolidated
financial statements; and our unaudited consolidated pro forma
financial data for the year ended December 31, 2007 have
been derived from our Unaudited Consolidated Pro Forma
Financial Data, each of which are included elsewhere in
this prospectus. The information contained in the table below
should be read in conjunction with our consolidated financial
statements and the related notes and Unaudited
Consolidated Pro Forma Financial Data on page 38 of
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
Pro Forma
|
|
|
Successor
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
|
December 6,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
through
|
|
|
|
through
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 5,
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(in thousands, except per share data)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues
|
|
$
|
137,643
|
|
|
$
|
141,141
|
|
|
|
$
|
11,692
|
|
|
$
|
152,833
|
|
|
$
|
181,391
|
|
|
$
|
133,616
|
|
|
$
|
152,506
|
|
Product and other revenues
|
|
|
12,909
|
|
|
|
12,269
|
|
|
|
|
1,278
|
|
|
|
13,547
|
|
|
|
16,200
|
|
|
|
11,542
|
|
|
|
12,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
150,552
|
|
|
|
153,410
|
|
|
|
|
12,970
|
|
|
|
166,380
|
|
|
|
197,591
|
|
|
|
145,158
|
|
|
|
164,793
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription revenues
|
|
|
27,344
|
|
|
|
33,590
|
|
|
|
|
2,462
|
|
|
|
36,212
|
|
|
|
38,187
|
|
|
|
27,699
|
|
|
|
29,755
|
|
Cost of product and other revenues
|
|
|
3,695
|
|
|
|
2,552
|
|
|
|
|
500
|
|
|
|
3,052
|
|
|
|
5,427
|
|
|
|
3,292
|
|
|
|
4,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
31,039
|
|
|
|
36,142
|
|
|
|
|
2,962
|
|
|
|
39,264
|
|
|
|
43,614
|
|
|
|
30,991
|
|
|
|
33,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
119,513
|
|
|
|
117,268
|
|
|
|
|
10,008
|
|
|
|
127,116
|
|
|
|
153,977
|
|
|
|
114,167
|
|
|
|
130,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and development
|
|
|
28,280
|
|
|
|
31,255
|
|
|
|
|
3,517
|
|
|
|
33,754
|
|
|
|
33,206
|
|
|
|
23,705
|
|
|
|
26,690
|
|
Marketing and advertising
|
|
|
51,421
|
|
|
|
42,400
|
|
|
|
|
3,157
|
|
|
|
45,607
|
|
|
|
52,341
|
|
|
|
36,634
|
|
|
|
44,226
|
|
General and administrative
|
|
|
26,978
|
|
|
|
20,723
|
|
|
|
|
2,142
|
|
|
|
22,964
|
|
|
|
28,931
|
|
|
|
21,035
|
|
|
|
24,569
|
|
Amortization of acquired intangible assets
|
|
|
2,216
|
|
|
|
2,132
|
|
|
|
|
1,542
|
|
|
|
24,061
|
|
|
|
23,779
|
|
|
|
17,832
|
|
|
|
12,165
|
|
Transaction related expenses
|
|
|
|
|
|
|
9,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
108,895
|
|
|
|
106,040
|
|
|
|
|
10,358
|
|
|
|
126,386
|
|
|
|
138,257
|
|
|
|
99,206
|
|
|
|
107,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
10,618
|
|
|
|
11,228
|
|
|
|
|
(350
|
)
|
|
|
730
|
|
|
|
15,720
|
|
|
|
14,961
|
|
|
|
23,175
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(946
|
)
|
|
|
(756
|
)
|
|
|
|
(1,146
|
)
|
|
|
(12,841
|
)
|
|
|
(12,355
|
)
|
|
|
(9,327
|
)
|
|
|
(4,784
|
)
|
Interest income
|
|
|
2,238
|
|
|
|
2,051
|
|
|
|
|
289
|
|
|
|
348
|
|
|
|
872
|
|
|
|
632
|
|
|
|
746
|
|
Other income (expense), net
|
|
|
834
|
|
|
|
266
|
|
|
|
|
7
|
|
|
|
273
|
|
|
|
(8
|
)
|
|
|
(18
|
)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
12,744
|
|
|
|
12,789
|
|
|
|
|
(1,200
|
)
|
|
|
(11,490
|
)
|
|
|
4,229
|
|
|
|
6,248
|
|
|
|
19,151
|
|
Income tax (expense) benefit
|
|
|
(4,595
|
)
|
|
|
(5,018
|
)
|
|
|
|
(103
|
)
|
|
|
4,251
|
|
|
|
(1,845
|
)
|
|
|
(2,748
|
)
|
|
|
(6,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,149
|
|
|
$
|
7,771
|
|
|
|
$
|
(1,303
|
)
|
|
$
|
(7,239
|
)
|
|
$
|
2,384
|
|
|
$
|
3,500
|
|
|
$
|
12,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share:(1)
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.06
|
|
|
$
|
0.09
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.06
|
|
|
$
|
0.09
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
In connection with the Spectrum
investment, we were recapitalized. As a result, the capital
structure of our predecessor is not comparable to that of the
successor. Accordingly, net income per common share is not
comparable or meaningful for periods prior to 2008 and has not
been presented.
|
53
The following table sets forth, for the periods presented, our
consolidated statements of operations as a percentage of total
revenues. The information contained in the table below should be
read in conjunction with the consolidated financial statements
and the related notes and Unaudited Consolidated Pro Forma
Financial Data on page 38 of this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
Pro Forma
|
|
|
Successor
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
|
December 6,
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Year Ended
|
|
|
through
|
|
|
|
through
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 5,
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues
|
|
|
91.4
|
%
|
|
|
92.0
|
%
|
|
|
|
90.1
|
%
|
|
|
91.9
|
%
|
|
|
91.8
|
%
|
|
|
92.0
|
%
|
|
|
92.5
|
%
|
Product and other revenues
|
|
|
8.6
|
|
|
|
8.0
|
|
|
|
|
9.9
|
|
|
|
8.1
|
|
|
|
8.2
|
|
|
|
8.0
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription revenues
|
|
|
18.2
|
|
|
|
21.9
|
|
|
|
|
19.0
|
|
|
|
21.8
|
|
|
|
19.3
|
|
|
|
19.1
|
|
|
|
18.0
|
|
Cost of product and other revenues
|
|
|
2.4
|
|
|
|
1.7
|
|
|
|
|
3.8
|
|
|
|
1.8
|
|
|
|
2.8
|
|
|
|
2.2
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
20.6
|
|
|
|
23.6
|
|
|
|
|
22.8
|
|
|
|
23.6
|
|
|
|
22.1
|
|
|
|
21.3
|
|
|
|
20.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
79.4
|
|
|
|
76.4
|
|
|
|
|
77.2
|
|
|
|
76.4
|
|
|
|
77.9
|
|
|
|
78.7
|
|
|
|
79.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and development
|
|
|
18.8
|
|
|
|
20.4
|
|
|
|
|
27.1
|
|
|
|
20.3
|
|
|
|
16.8
|
|
|
|
16.3
|
|
|
|
16.2
|
|
Marketing and advertising
|
|
|
34.1
|
|
|
|
27.6
|
|
|
|
|
24.4
|
|
|
|
27.4
|
|
|
|
26.5
|
|
|
|
25.2
|
|
|
|
26.8
|
|
General and administrative
|
|
|
17.9
|
|
|
|
13.5
|
|
|
|
|
16.5
|
|
|
|
13.8
|
|
|
|
14.7
|
|
|
|
14.5
|
|
|
|
14.9
|
|
Amortization of acquired intangible assets
|
|
|
1.5
|
|
|
|
1.4
|
|
|
|
|
11.9
|
|
|
|
14.5
|
|
|
|
12.0
|
|
|
|
12.3
|
|
|
|
7.4
|
|
Transaction related expenses
|
|
|
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
72.3
|
|
|
|
69.1
|
|
|
|
|
79.9
|
|
|
|
76.0
|
|
|
|
70.0
|
|
|
|
68.3
|
|
|
|
65.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
7.1
|
|
|
|
7.3
|
|
|
|
|
(2.7
|
)
|
|
|
0.4
|
|
|
|
7.9
|
|
|
|
10.3
|
|
|
|
14.1
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(0.6
|
)
|
|
|
(0.5
|
)
|
|
|
|
(8.8
|
)
|
|
|
(7.7
|
)
|
|
|
(6.2
|
)
|
|
|
(6.4
|
)
|
|
|
(2.9
|
)
|
Interest income
|
|
|
1.5
|
|
|
|
1.3
|
|
|
|
|
2.2
|
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
0.4
|
|
Other income (expense), net
|
|
|
0.5
|
|
|
|
0.2
|
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
(0.0
|
)
|
|
|
(0.0
|
)
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
8.5
|
|
|
|
8.3
|
|
|
|
|
(9.2
|
)
|
|
|
(6.9
|
)
|
|
|
2.1
|
|
|
|
4.3
|
|
|
|
11.6
|
|
Income tax (expense) benefit
|
|
|
(3.1
|
)
|
|
|
(3.2
|
)
|
|
|
|
(0.8
|
)
|
|
|
2.5
|
|
|
|
(0.9
|
)
|
|
|
(1.9
|
)
|
|
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
5.4
|
|
|
|
5.1
|
|
|
|
|
(10.0
|
)
|
|
|
(4.4
|
)
|
|
|
1.2
|
|
|
|
2.4
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2008 and 2009
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
% Change
|
|
|
|
2008
|
|
|
2009
|
|
|
2009 Over 2008
|
|
|
|
(in thousands)
|
|
|
|
|
|
Subscription revenues
|
|
$
|
133,616
|
|
|
$
|
152,506
|
|
|
|
14.1
|
%
|
Product and other revenues
|
|
|
11,542
|
|
|
|
12,287
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
145,158
|
|
|
$
|
164,793
|
|
|
|
13.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues. The increase in our
subscription revenues of $18.9 million in the nine months
ended September 30, 2009 as compared to the nine months
ended September 30, 2008 was primarily the result of an
increase in the number of total subscribers and to some extent
an increase in higher monthly revenue per subscriber. A shift in
mix between annual and monthly subscriptions to more monthly
subscriptions as our subscriber base
54
broadened resulted in higher revenue per subscriber in the nine
months ended September 30, 2009 compared to the nine months
ended September 30, 2008. However, we do not believe that
this trend was the result of specific marketing or advertising
campaigns targeted to increasing monthly subscriptions versus
annual subscriptions. During the nine months ended
September 30, 2009, changes in foreign currency exchange
rates had an unfavorable impact on subscription revenues. Had
average exchange rates remained the same in the nine months
ended September 30, 2009 as average exchange rates in
effect in the nine months ended September 30, 2008, our
reported revenues in the nine months ended September 30,
2009 would have been approximately 4.5% higher.
Product and other revenues. The increase in
product and other revenues of $0.7 million in the nine
months ended September 30, 2009 as compared to the nine
months ended September 30, 2008 was primarily due to an
increase in revenues associated with a new release in August
2009 of our Family Tree Maker desktop software of
$1.5 million, the growth of our vital records products,
introduced in the United Kingdom during August 2008, of
$1.0 million, and a $0.2 million increase in shipping
revenue, primarily resulting from increased sales of Family Tree
Maker and vital records products. These increases were offset by
decreases in our royalty revenue of $1.1 million and
advertising revenue of $0.9 million.
Cost
of Revenues and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
% Change
|
|
|
2008
|
|
2009
|
|
2009 Over 2008
|
|
|
(in thousands)
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues
|
|
$
|
133,616
|
|
|
$
|
152,506
|
|
|
|
14.1
|
%
|
Product and other revenues
|
|
|
11,542
|
|
|
|
12,287
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
145,158
|
|
|
|
164,793
|
|
|
|
13.5
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription revenues
|
|
|
27,699
|
|
|
|
29,755
|
|
|
|
7.4
|
|
Cost of product and other revenues
|
|
|
3,292
|
|
|
|
4,213
|
|
|
|
28.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
30,991
|
|
|
|
33,968
|
|
|
|
9.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
114,167
|
|
|
$
|
130,825
|
|
|
|
14.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage
|
|
|
78.7
|
%
|
|
|
79.4
|
%
|
|
|
|
|
Cost of subscription revenues. The increase in
our cost of subscription revenues of $2.1 million in the
nine months ended September 30, 2009 as compared to the
nine months ended September 30, 2008 was primarily due to a
$1.0 million increase in our web hosting costs, an increase
in amortization of content costs of $0.6 million and an
increase in equipment maintenance related costs of
$0.4 million.
Cost of product revenues. The increase in our
cost of product revenues of $0.9 million in the nine months
ended September 30, 2009 as compared to the nine months
ended September 30, 2008 was primarily due to a
$0.4 million increase as a result of the introduction of
our vital records products in the United Kingdom and a
$0.4 million increase in shipping costs.
55
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
% Change
|
|
|
2008
|
|
2009
|
|
2009 Over 2008
|
|
|
(in thousands)
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and development
|
|
$
|
23,705
|
|
|
$
|
26,690
|
|
|
|
12.6
|
%
|
Marketing and advertising
|
|
|
36,634
|
|
|
|
44,226
|
|
|
|
20.7
|
|
General and administrative
|
|
|
21,035
|
|
|
|
24,569
|
|
|
|
16.8
|
|
Amortization of acquired intangible assets
|
|
|
17,832
|
|
|
|
12,165
|
|
|
|
(31.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
99,206
|
|
|
$
|
107,650
|
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and development. The increase in
technology and development expenses of $3.0 million in the
nine months ended September 30, 2009 as compared to the
nine months ended September 30, 2008 was primarily the
result of an increase in personnel-related expenses resulting
from an increase in the number of technology and development
personnel at September 30, 2009 as compared to
September 30, 2008.
Marketing and advertising. The increase in
marketing and advertising expenses of $7.6 million in the
nine months ended September 30, 2009 as compared to the
nine months ended September 30, 2008 was primarily
attributable to a $5.9 million increase in television and
online advertising, as well as a $1.2 million increase in
personnel-related expenses resulting from an increase in the
number of marketing and advertising personnel at
September 30, 2009 as compared to September 30, 2008.
General and administrative. The increase in
general and administrative expenses of $3.5 million in the
nine months ended September 30, 2009 as compared to the
nine months ended September 30, 2008 is primarily the
result of a settlement of a claim related to a content index,
which resulted in an expense of $2.3 million, and to
increased personnel-related costs of $1.6 million due to an
increase in the number of general and administrative personnel.
These increases were offset by a change in foreign currency
gains and losses of $0.9 million from a loss of
$0.5 million in the nine months ended September 30,
2008 to a gain of $0.4 million in the nine month period
ended September 30, 2009.
Amortization of acquired intangible
assets. The decrease in amortization of acquired
intangible assets of $5.7 million in the nine months ended
September 30, 2009 as compared to the nine months ended
September 30, 2008 was due to the amortization of our
subscriber relationship intangible asset, which is amortized on
an accelerated basis. Subscriber relationships and contracts are
amortized based on an annual turnover rate, or rate of
attrition, of the subscribers that approximates our monthly
churn, resulting in an accelerated basis of amortization. This
is the same rate of attrition that was used to determine the
fair value of the intangible asset at the acquisition date. We
believe that recognizing amortization expense in this pattern
better matches the amortization expense with the revenue
generated from these subscribers. The subscriber relationship
asset was recorded in connection with the Spectrum investment.
Other
Income (Expense) and Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
% Change
|
|
|
2008
|
|
2009
|
|
2009 Over 2008
|
|
|
(in thousands)
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(9,327
|
)
|
|
$
|
(4,784
|
)
|
|
|
(48.7
|
)%
|
Interest income
|
|
|
632
|
|
|
|
746
|
|
|
|
18.0
|
|
Other income, net
|
|
|
(18
|
)
|
|
|
14
|
|
|
|
n/m
|
|
Income tax expense
|
|
|
(2,748
|
)
|
|
|
(6,927
|
)
|
|
|
152.1
|
|
Other data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
44.0
|
%
|
|
|
36.2
|
%
|
|
|
|
|
56
Interest expense. The decrease in interest
expense of $4.5 million in the nine months ended
September 30, 2009 as compared to the nine months ended
September 30, 2008 was due to a decrease in our effective
interest rate from 8.2% as of September 30, 2008 to 4.0% as
of September 30, 2009. In addition, we had a lower debt
balance during the nine months ended September 30, 2009 due
to principal payments made during that period.
Income
tax expense
Income tax expense for the nine months ended September 30,
2009 was $6.9 million. Our effective tax rate of 36.2%
differed from the federal statutory rate of 35% principally due
to state income taxes of 1.8%, to changes in the state tax
apportionment factors resulting from enacted legislation of
(5.5)%, to foreign income taxes of 1.4% and to other items of
3.5%. We may in the future evaluate whether there are strategies
that would increase our tax efficiency.
Income tax expense for the nine months ended September 30,
2008 was $2.7 million. Our effective tax rate of 44.0%
differed from the federal statutory rate of 35% principally due
to state income taxes of 7.8%, to foreign income taxes of 5.8%
as a result of net operating losses in foreign jurisdictions for
which no income tax benefit has been recognized, to
non-deductible expenses of (11.6)% associated with the Spectrum
investment as reflected in our federal income tax return to
provision
true-up, to
non-deductible stock-based compensation expenses of 8.1% and to
other items of (1.1)%.
Years
Ended December 31, 2006, 2007 and 2008
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
Pro Forma
|
|
|
Successor
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
|
December 6,
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
through
|
|
|
|
through
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 5,
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues
|
|
$
|
137,643
|
|
|
$
|
141,141
|
|
|
|
$
|
11,692
|
|
|
$
|
152,833
|
|
|
$
|
181,391
|
|
Product and other revenues
|
|
|
12,909
|
|
|
|
12,269
|
|
|
|
|
1,278
|
|
|
|
13,547
|
|
|
|
16,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
150,552
|
|
|
$
|
153,410
|
|
|
|
|
12,970
|
|
|
$
|
166,380
|
|
|
$
|
197,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription
revenues
2007 compared to 2008. Subscription revenues
were $181.4 million in 2008, compared to
$141.1 million for the predecessor period from
January 1, 2007 through December 5, 2007 and
$11.7 million for the successor period from
December 6, 2007 through December 31, 2007, and pro
forma subscription revenues of $152.8 million for 2007. The
increase was primarily the result of an increase in the number
of total subscribers and also to an increase in monthly revenue
per subscriber. A shift in mix between annual and monthly
subscriptions to more monthly subscriptions as our subscriber
base broadened has resulted in higher revenue per subscriber in
the last three years. However, we do not believe that this trend
was the result of specific marketing or advertising campaigns
targeted to increasing monthly subscriptions versus annual
subscriptions. Foreign currency exchange rates did not have a
material impact on revenues in 2008 compared to pro forma
revenues in 2007.
2006 compared to 2007. Subscription revenues
were $141.1 million for the predecessor period from
January 1, 2007 through December 5, 2007 and
$11.7 million for the successor period from
December 6, 2007 through December 31, 2007, compared
to $137.6 million for 2006. The increase was primarily the
result of an increase in the number of total subscribers.
Foreign currency exchange rates had a nominal beneficial effect
on our revenues in 2007 compared to 2006.
Product
and other revenues
2007 compared to 2008. Product and other
revenues were $16.2 million in 2008, compared to
$12.3 million for the predecessor period from
January 1, 2007 through December 5, 2007 and
$1.3 million for the successor
57
period from December 6, 2007 through December 31,
2007, and pro forma product and other revenues of
$13.5 million for 2007. The increase in our product and
other revenues was due to, among other things, a
$2.4 million increase in our DNA product revenues, a
$1.3 million increase in our advertising services and a
$0.7 million increase in sales of our MyCanvas.com
products. This increase was offset by a $1.6 million
decrease in sales of our legacy products (e.g., CD ROMs, books,
posters). Our DNA product was released in the fourth quarter of
2007.
2006 compared to 2007. Product and other
revenues were $12.3 million for the predecessor period from
January 1, 2007 through December 5, 2007 and
$1.3 million for the successor period from December 6,
2007 through December 31, 2007, compared to product and
other revenues of $12.9 million for 2006. The change was
primarily due to $0.9 million from the expansion of our
advertising services, $0.4 million from the launch of our
DNA product and $0.6 million from a new release of our
Family Tree Maker software, offset by a decrease in sales of our
legacy products of $1.4 million.
Cost
of Revenues and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
Pro Forma
|
|
|
Successor
|
|
|
|
|
|
|
Period From
|
|
|
|
Period From
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
|
December 6,
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Through
|
|
|
|
Through
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 5,
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues
|
|
$
|
137,643
|
|
|
$
|
141,141
|
|
|
|
$
|
11,692
|
|
|
$
|
152,833
|
|
|
$
|
181,391
|
|
Product and other revenues
|
|
|
12,909
|
|
|
|
12,269
|
|
|
|
|
1,278
|
|
|
|
13,547
|
|
|
|
16,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
150,552
|
|
|
|
153,410
|
|
|
|
|
12,970
|
|
|
|
166,380
|
|
|
|
197,591
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription revenues
|
|
|
27,344
|
|
|
|
33,590
|
|
|
|
|
2,462
|
|
|
|
36,212
|
|
|
|
38,187
|
|
Cost of product and other revenues
|
|
|
3,695
|
|
|
|
2,552
|
|
|
|
|
500
|
|
|
|
3,052
|
|
|
|
5,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
31,039
|
|
|
|
36,142
|
|
|
|
|
2,962
|
|
|
|
39,264
|
|
|
|
43,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
119,513
|
|
|
$
|
117,268
|
|
|
|
$
|
10,008
|
|
|
$
|
127,116
|
|
|
$
|
153,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage
|
|
|
79.4
|
%
|
|
|
76.4
|
%
|
|
|
|
77.2
|
%
|
|
|
76.4
|
%
|
|
|
77.9
|
%
|
Cost of
subscription revenues
2007 compared to 2008. Cost of subscription
revenues was $38.2 million in 2008, compared to
$33.6 million for the predecessor period from
January 1, 2007 through December 5, 2007 and
$2.5 million for the successor period from December 6,
2007 through December 31, 2007, and pro forma cost of
subscription revenues of $36.2 million for 2007. Cost of
subscription revenues increased primarily due to the impairment
of database content costs of $1.5 million in 2008 and an
increase in database content amortization, merchant fees and web
hosting costs of $2.1 million, partially offset by
decreases in personnel-related costs of $0.9 million and
royalty expenses of $0.6 million. The impairment of
database content costs was a result of a change in our strategy
for our Chinese content.
2006 compared to 2007. Cost of subscription
revenues was $33.6 million for the predecessor period from
January 1, 2007 through December 5, 2007 and
$2.5 million for the successor period from December 6,
2007 through December 31, 2007, compared to
$27.3 million for 2006. The increase was primarily due to
the change in the operations of our call center from a sales
based organization to a subscriber support organization
beginning January 1, 2007. The majority of the costs
associated with the call center prior to January 1, 2007
were recorded in marketing and advertising expense and the
majority of the costs associated with the call center subsequent
to January 1, 2007 were recorded in cost of subscription
revenues. This change resulted in an increase in cost of
subscription revenues of $5.7 million, although call center
costs in total decreased by $7.7 million. Additionally,
database hosting and support costs increased $3.9 million
due to increased database content amortization and web
58
hosting support costs associated with adding new database
content, and merchant fees of $0.6 million. These increases
were offset by a $2.8 million decrease in royalty expenses
due to the termination of a royalty agreement in 2006.
Cost of
product and other revenues
2007 compared to 2008. Cost of product and
other revenues was $5.4 million in 2008, compared to
$2.6 million for the predecessor period from
January 1, 2007 through December 5, 2007 and
$0.5 million for the successor period from December 6,
2007 through December 31, 2007, and pro forma cost of
product and other revenues of $3.1 million for 2007. Cost
of product and other revenues increased primarily due to
$2.2 million related to the introduction of our DNA product
and $0.3 million related to the introduction of our
MyCanvas.com products. Cost of product and other revenues as a
percentage of total revenue increased due to our decision to
sell our DNA product at a reduced price.
2006 compared to 2007. Cost of product and
other revenues was $2.6 million for the predecessor period
from January 1, 2007 through December 5, 2007 and
$0.5 million for the successor period from December 6,
2007 through December 31, 2007, compared to
$3.7 million for 2006. The decrease was primarily due to a
$0.8 million decrease related to the discontinuation of our
full service genealogy product in the fourth quarter of 2006, a
$0.5 million decrease in revenues and related cost of
revenues from our legacy products offset by increases of
$0.3 million from to the introduction of our DNA product
and $0.3 million due to the introduction of our
MyCanvas.com products.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
Pro Forma
|
|
|
Successor
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
|
December 6,
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
through
|
|
|
|
through
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 5,
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and development
|
|
$
|
28,280
|
|
|
$
|
31,255
|
|
|
|
$
|
3,517
|
|
|
$
|
33,754
|
|
|
$
|
33,206
|
|
Marketing and advertising
|
|
|
51,421
|
|
|
|
42,400
|
|
|
|
|
3,157
|
|
|
|
45,607
|
|
|
|
52,341
|
|
General and administrative
|
|
|
26,978
|
|
|
|
20,723
|
|
|
|
|
2,142
|
|
|
|
22,964
|
|
|
|
28,931
|
|
Amortization of acquired intangible assets
|
|
|
2,216
|
|
|
|
2,132
|
|
|
|
|
1,542
|
|
|
|
24,061
|
|
|
|
23,779
|
|
Transaction expenses
|
|
|
|
|
|
|
9,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
108,895
|
|
|
$
|
106,040
|
|
|
|
$
|
10,358
|
|
|
|
126,386
|
|
|
$
|
138,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
and development
2007 compared to 2008. Technology and
development expenses were $33.2 million in 2008, compared
to $31.3 million for the predecessor period from
January 1, 2007 through December 5, 2007 and
$3.5 million for the successor period from December 6,
2007 through December 31, 2007, and pro forma technology
and development expenses of $33.8 million for 2007. The
change in technology and development expenses was primarily the
result of a one-time charge for in-process research and
development of $1.3 million in 2007 related to the Spectrum
investment as well as a decrease in personnel-related costs of
$1.8 million due to a decrease in development headcount,
partially offset by increases in third-party development expense
of $0.9 million to compensate for the decrease in
development headcount and stock-based compensation of
$0.8 million.
2006 compared to 2007. Technology and
development expenses were $31.3 million for the predecessor
period from January 1, 2007 through December 5, 2007
and $3.5 million for the successor period from
December 6, 2007 through December 31, 2007, compared
to $28.3 million in 2006. The increase was primarily the
result of an increase in personnel-related costs of
$2.5 million due to growth in headcount, increases in third
party development
59
expense of $1.6 million due to our efforts to enhance our
Ancestry.com and myfamily.com websites and a one-time charge for
in-process research and development of $1.3 million related
to the Spectrum investment.
Marketing
and advertising
2007 compared to 2008. Marketing and
advertising expenses were $52.3 million in 2008, compared
to $42.4 million for the predecessor period from
January 1, 2007 through December 5, 2007 and
$3.2 million for the successor period from December 6,
2007 through December 31, 2007, and pro forma marketing and
advertising expenses of $45.6 million for 2007. The
increase was primarily driven by an increase in television and
online advertising in both domestic and international markets.
2006 compared to 2007. Marketing and
advertising expenses were $42.4 million for the predecessor
period from January 1, 2007 through December 5, 2007
and $3.2 million for the successor period from
December 6, 2007 through December 31, 2007, compared
to $51.4 million in 2006. The decrease resulted primarily
from the change of our call center from a sales organization to
a subscriber support organization. The majority of the costs
associated with the call center prior to January 1, 2007
were recorded in marketing and advertising expense; and the
majority of the costs associated with the call center subsequent
to January 1, 2007 were recorded in cost of subscription
revenues. This change resulted in a decrease in marketing and
advertising expense of $12.3 million in 2007 as expenses
related to our call center were shifted to cost of subscription
revenues. In the aggregate, the costs related to our call center
decreased $7.7 million in 2007 as headcount in the call
center was decreased substantially. The overall
$12.3 million decrease in marketing and advertising
expenses was partially offset by an increase in external
marketing and advertising spending of $5.9 million in 2007
compared to 2006, primarily due to our television marketing
spend in the United States. Our subscriber additions were
569,851 in 2006, principally driven by the airing of Who
Do You Think You Are? in the United Kingdom, and
479,663 in 2007. The result of the higher external spend in the
United States related to the launch of a television-based brand
campaign, combined with fewer subscriber additions in the
United Kingdom, caused subscriber acquisition cost to
increase from $49.29 in 2006 to $70.96 in 2007.
General
and administrative
2007 compared to 2008. General and
administrative expenses were $28.9 million in 2008,
compared to $20.7 million for the predecessor period from
January 1, 2007 through December 5, 2007 and
$2.1 million for the successor period from December 6,
2007 through December 31, 2007, and pro forma general and
administrative expenses of $23.0 million for 2007. The
increase was the result of an increase in stock-based
compensation of $2.9 million, driven primarily from new
stock option grants in 2008, an increase in personnel-related
costs of $2.5 million, due to additional administrative
personnel, and increased professional fees of $0.9 million.
2006 compared to 2007. General and
administrative expenses were $20.7 million for the
predecessor period from January 1, 2007 through
December 5, 2007 and $2.1 million for the successor
period from December 6, 2007 through December 31,
2007, compared to $27.0 million in 2006. The decrease
resulted from a one-time expense related to a royalty
termination payment in 2006 of $3.3 million and a decrease
in stock-based compensation of $3.0 million. This decrease
was partially offset by an increase in rent expense of
$0.9 million due to the closure of our former call center
facility and a full year of rent expense related to our
headquarters facility after the sale and leaseback of our
headquarters facility in 2006, and an increase in professional
fees of $0.8 million.
Amortization
of acquired intangible assets
2007 compared to 2008. Amortization of
acquired intangibles assets was $23.8 million in 2008,
compared to $2.1 million for the predecessor period from
January 1, 2007 through December 5, 2007 and
$1.5 million for the successor period from December 6,
2007 through December 31, 2007, and pro forma amortization
of acquired intangible assets of $24.1 million for 2007.
The change in amortization of acquired intangible assets is the
result of $83.0 million of amortizable intangible assets
from the Spectrum investment in December 2007 being amortized
for a full year in 2008 versus the prior amortizable intangible
assets of $8.2 million being amortized in 2007 along with
one month of amortization of the acquired intangible assets from
the Spectrum investment.
60
2006 compared to 2007. Amortization of
acquired intangible assets was $2.1 million for the
predecessor period from January 1, 2007 through
December 5, 2007 and $1.5 million for the successor
period from December 6, 2007 through December 31,
2007, compared to $2.2 million for 2006. The amount of
amortization of acquired intangible assets for the successor
period from December 6, 2007 through December 31, 2007
represents one month of amortization on the acquired intangible
assets that resulted from the Spectrum investment in December
2007.
Transaction related expenses. In the
predecessor period from January 1, 2007 through
December 5, 2007, we recorded $9.5 million of legal,
accounting and other expenses related to the Spectrum investment.
Other
Income (Expense) and Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
Pro Forma
|
|
Successor
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
December 6,
|
|
|
|
|
|
|
Year Ended
|
|
through
|
|
|
through
|
|
Year Ended
|
|
Year Ended
|
|
|
December 31,
|
|
December 5,
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
2006
|
|
2007
|
|
|
2007
|
|
2007
|
|
2008
|
|
|
(in thousands)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(946
|
)
|
|
$
|
(756
|
)
|
|
|
$
|
(1,146
|
)
|
|
$
|
(12,841
|
)
|
|
$
|
(12,355
|
)
|
Interest income
|
|
|
2,238
|
|
|
|
2,051
|
|
|
|
|
289
|
|
|
|
348
|
|
|
|
872
|
|
Other income (expenses), net
|
|
|
834
|
|
|
|
266
|
|
|
|
|
7
|
|
|
|
273
|
|
|
|
(8
|
)
|
Income tax (expense) benefit
|
|
|
(4,595
|
)
|
|
|
(5,018
|
)
|
|
|
|
(103
|
)
|
|
|
4,251
|
|
|
|
(1,845
|
)
|
Other data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
36.1
|
%
|
|
|
39.2
|
%
|
|
|
|
n/m
|
|
|
|
37.0
|
%
|
|
|
43.6
|
%
|
Interest
expense
2007 compared to 2008. Interest expense was
$12.3 million in 2008, compared to $0.8 million for
the predecessor period from January 1, 2007 through
December 5, 2007 and $1.1 million for the successor
period from December 6, 2007 through December 31,
2007, and pro forma interest expense of $12.8 million for
2007. The change was a result of an increased level of long-term
debt. In December 2007, in connection with the Spectrum
investment, we entered into a credit facility with a syndicate
of lenders that included a term loan of $140 million. Prior
to this arrangement we had $15 million in long-term debt.
2006 compared to 2007. Interest expense was
$0.8 million for the predecessor period from
January 1, 2007 through December 5, 2007 and
$1.1 million for the successor period from December 6,
2007 through December 31, 2007, compared to
$0.9 million in 2006. The change was a result of an
increased level of long-term debt. In December 2007, in
connection with the Spectrum investment, we entered into a
credit facility with a syndicate of lenders that included a term
loan of $140 million. Prior to this arrangement we had
$15 million in long-term debt. The increase represents one
month of interest at the increased debt level.
Interest
income
2007 compared to 2008. Interest income was
$0.9 million in 2008, compared to $2.1 million for the
predecessor period from January 1, 2007 through
December 5, 2007 and $0.3 million for the successor
period from December 6, 2007 through December 31,
2007, and pro forma interest income of $0.3 million for
2007. The change was due to a change in the cash balance in 2008.
2006 compared to 2007. Interest income was
$2.1 million for the predecessor period from
January 1, 2007 through December 5, 2007 and
$0.3 million for the successor period from December 6,
2007 through December 31, 2007, compared to
$2.2 million in 2006. Interest income was essentially flat
in 2007 compared to 2006 as our cash balance remained relatively
consistent.
61
Other
income (expense), net
2007 compared to 2008. Other income in the
predecessor period from January 1, 2007 through
December 5, 2007 primarily relates to the sale of our
self-publishing subsidiary at a gain. We did not have any
similar events in 2008.
2006 compared to 2007. Other income in 2006
and the predecessor period from January 1, 2007 through
December 5, 2007 primarily relates to gains realized from
the sale of a
wholly-owned
subsidiary in 2006 and gains realized from the sale of our
self-publishing
subsidiary in the predecessor period from January 1, 2007
through December 5, 2007.
Income
tax expense
Income tax expense for the year ended December 31, 2008 was
$1.8 million. Our effective tax rate of 43.6% differed from
the federal statutory rate of 35% principally due to state
income taxes of 4.7%, to foreign income taxes of 10.7% as a
result of net operating losses in foreign jurisdictions for
which no income tax benefit has been recognized, to deductible
expenses of (17.1)% associated with the Spectrum investment as
reflected in our federal income tax provision true-up, to
non-deductible stock-based compensation expenses of 13.7% and to
other items of (3.4)%.
Income tax expense was $5.0 million for the predecessor
period from January 1, 2007 through December 5, 2007
and $0.1 million for the successor period from
December 6, 2007 through December 31, 2007, and there
was a pro forma income tax benefit of $4.3 million for
2007. Our effective tax rate was 39.2% for the predecessor
period from January 1, 2007 through December 5, 2007,
and not meaningful for the successor period from
December 6, 2007 through December 31, 2007. In the
predecessor period from January 1, 2007 through
December 5, 2007, our effective tax rate differed from the
federal statutory rate of 35% principally due to state income
taxes of 2.1%, to non deductible expenses associated with the
Spectrum investment of 8.0%, to tax exempt municipal interest of
(3.2)% and to other items of (2.7)%.
Income tax expense for the year ended December 31, 2006 was
$4.6 million. In 2006 our effective tax rate of 36.1%
differed from the federal statutory rate of 35% principally due
to state income taxes of 1.6% and to other items of (0.5)%.
62
Unaudited
Quarterly Results of Operations
The following table presents our unaudited quarterly
consolidated results of operations for the seven quarters ended
September 30, 2009. This unaudited quarterly consolidated
information has been prepared on the same basis as our audited
consolidated financial statements, and, in the opinion of
management, the statement of operations data includes all
adjustments, consisting of normal recurring adjustments,
necessary for the fair presentation of the results of operations
for these periods. You should read this table in conjunction
with our financial statements and the related notes located
elsewhere in this prospectus. The results of operations for any
quarter are not necessarily indicative of the results of
operations for any future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues
|
|
$
|
42,807
|
|
|
$
|
44,612
|
|
|
$
|
46,197
|
|
|
$
|
47,775
|
|
|
$
|
49,184
|
|
|
$
|
50,719
|
|
|
$
|
52,603
|
|
Product and other revenues
|
|
|
4,234
|
|
|
|
3,431
|
|
|
|
3,877
|
|
|
|
4,658
|
|
|
|
4,049
|
|
|
|
3,854
|
|
|
|
4,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
47,041
|
|
|
|
48,043
|
|
|
|
50,074
|
|
|
|
52,433
|
|
|
|
53,233
|
|
|
|
54,573
|
|
|
|
56,987
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription revenues
|
|
|
9,429
|
|
|
|
9,392
|
|
|
|
8,878
|
|
|
|
10,488
|
|
|
|
9,756
|
|
|
|
9,966
|
|
|
|
10,033
|
|
Cost of product and other revenues
|
|
|
940
|
|
|
|
947
|
|
|
|
1,405
|
|
|
|
2,135
|
|
|
|
1,514
|
|
|
|
1,310
|
|
|
|
1,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
10,369
|
|
|
|
10,339
|
|
|
|
10,283
|
|
|
|
12,623
|
|
|
|
11,270
|
|
|
|
11,276
|
|
|
|
11,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
36,672
|
|
|
|
37,704
|
|
|
|
39,791
|
|
|
|
39,810
|
|
|
|
41,963
|
|
|
|
43,297
|
|
|
|
45,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and development
|
|
|
7,736
|
|
|
|
7,909
|
|
|
|
8,060
|
|
|
|
9,501
|
|
|
|
8,856
|
|
|
|
8,692
|
|
|
|
9,142
|
|
Marketing and advertising
|
|
|
11,254
|
|
|
|
13,317
|
|
|
|
12,063
|
|
|
|
15,707
|
|
|
|
14,921
|
|
|
|
15,065
|
|
|
|
14,240
|
|
General and administrative
|
|
|
6,999
|
|
|
|
6,865
|
|
|
|
7,171
|
|
|
|
7,896
|
|
|
|
7,563
|
|
|
|
6,777
|
|
|
|
10,229
|
|
Amortization of acquired intangible assets
|
|
|
5,941
|
|
|
|
5,945
|
|
|
|
5,946
|
|
|
|
5,947
|
|
|
|
4,058
|
|
|
|
4,055
|
|
|
|
4,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
31,930
|
|
|
|
34,036
|
|
|
|
33,240
|
|
|
|
39,051
|
|
|
|
35,398
|
|
|
|
34,589
|
|
|
|
37,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
4,742
|
|
|
|
3,668
|
|
|
|
6,551
|
|
|
|
759
|
|
|
|
6,565
|
|
|
|
8,708
|
|
|
|
7,902
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3,331
|
)
|
|
|
(2,873
|
)
|
|
|
(3,123
|
)
|
|
|
(3,028
|
)
|
|
|
(1,841
|
)
|
|
|
(1,515
|
)
|
|
|
(1,428
|
)
|
Interest income
|
|
|
157
|
|
|
|
274
|
|
|
|
201
|
|
|
|
240
|
|
|
|
131
|
|
|
|
567
|
|
|
|
48
|
|
Other income (expense), net
|
|
|
3
|
|
|
|
(2
|
)
|
|
|
(19
|
)
|
|
|
10
|
|
|
|
8
|
|
|
|
2
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
1,571
|
|
|
|
1,067
|
|
|
|
3,610
|
|
|
|
(2,019
|
)
|
|
|
4,863
|
|
|
|
7,762
|
|
|
|
6,526
|
|
Income tax benefit (expense)
|
|
|
(609
|
)
|
|
|
(790
|
)
|
|
|
(1,349
|
)
|
|
|
903
|
|
|
|
(1,360
|
)
|
|
|
(3,082
|
)
|
|
|
(2,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
962
|
|
|
$
|
277
|
|
|
$
|
2,261
|
|
|
$
|
(1,116
|
)
|
|
$
|
3,503
|
|
|
$
|
4,680
|
|
|
$
|
4,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
The following table presents our unaudited quarterly
consolidated results of operations for the seven quarters ended
September 30, 2009 as a percentage of revenues. You should
read this table in conjunction with our consolidated financial
statements and the related notes located elsewhere in this
prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues
|
|
|
91.0
|
%
|
|
|
92.9
|
%
|
|
|
92.3
|
%
|
|
|
91.1
|
%
|
|
|
92.4
|
%
|
|
|
92.9
|
%
|
|
|
92.3
|
%
|
Product and other revenues
|
|
|
9.0
|
|
|
|
7.1
|
|
|
|
7.7
|
|
|
|
8.9
|
|
|
|
7.6
|
|
|
|
7.1
|
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription revenues
|
|
|
20.0
|
|
|
|
19.5
|
|
|
|
17.7
|
|
|
|
20.0
|
|
|
|
18.3
|
|
|
|
18.3
|
|
|
|
17.6
|
|
Cost of product and other revenues
|
|
|
2.0
|
|
|
|
2.0
|
|
|
|
2.8
|
|
|
|
4.1
|
|
|
|
2.9
|
|
|
|
2.4
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
22.0
|
|
|
|
21.5
|
|
|
|
20.5
|
|
|
|
24.1
|
|
|
|
21.2
|
|
|
|
20.7
|
|
|
|
20.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
78.0
|
|
|
|
78.5
|
|
|
|
79.5
|
|
|
|
75.9
|
|
|
|
78.8
|
|
|
|
79.3
|
|
|
|
80.0
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and development
|
|
|
16.5
|
|
|
|
16.5
|
|
|
|
16.1
|
|
|
|
18.1
|
|
|
|
16.7
|
|
|
|
15.9
|
|
|
|
16.0
|
|
Marketing and advertising
|
|
|
23.9
|
|
|
|
27.7
|
|
|
|
24.1
|
|
|
|
30.0
|
|
|
|
28.0
|
|
|
|
27.6
|
|
|
|
25.0
|
|
General and administrative
|
|
|
14.9
|
|
|
|
14.3
|
|
|
|
14.3
|
|
|
|
15.1
|
|
|
|
14.2
|
|
|
|
12.4
|
|
|
|
18.0
|
|
Amortization of acquired intangible assets
|
|
|
12.6
|
|
|
|
12.4
|
|
|
|
11.9
|
|
|
|
11.3
|
|
|
|
7.6
|
|
|
|
7.4
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
67.9
|
|
|
|
70.9
|
|
|
|
66.4
|
|
|
|
74.5
|
|
|
|
66.5
|
|
|
|
63.3
|
|
|
|
66.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
10.1
|
|
|
|
7.6
|
|
|
|
13.1
|
|
|
|
1.4
|
|
|
|
12.3
|
|
|
|
16.0
|
|
|
|
13.9
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(7.1
|
)
|
|
|
(6.0
|
)
|
|
|
(6.3
|
)
|
|
|
(5.7
|
)
|
|
|
(3.5
|
)
|
|
|
(2.8
|
)
|
|
|
(2.5
|
)
|
Interest income
|
|
|
0.3
|
|
|
|
0.6
|
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
1.0
|
|
|
|
0.1
|
|
Other income (expense), net
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
3.3
|
|
|
|
2.2
|
|
|
|
7.2
|
|
|
|
(3.8
|
)
|
|
|
9.1
|
|
|
|
14.2
|
|
|
|
11.5
|
|
Income tax benefit (expense)
|
|
|
(1.3
|
)
|
|
|
(1.6
|
)
|
|
|
(2.7
|
)
|
|
|
1.7
|
|
|
|
(2.5
|
)
|
|
|
(5.6
|
)
|
|
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
2.0
|
|
|
|
0.6
|
|
|
|
4.5
|
|
|
|
(2.1
|
)
|
|
|
6.6
|
|
|
|
8.6
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues have increased sequentially over all quarters
presented primarily due to increases in our subscription
revenues from increases in the number of total subscribers.
Total cost of revenues remained relatively consistent as a
percentage of revenues in each of the quarters presented except
in the fourth quarter of 2008. The decrease in margin in that
quarter was primarily the result of an impairment charge in cost
of subscription revenues as a result of a change in our strategy
for our Chinese content.
Total operating expenses remained relatively consistent as a
percentage of revenue in each of the quarters presented, except
for the fourth quarter of 2008. Increases in that quarter were
primarily the result of increases in personnel-related costs and
increases in television and online advertising.
Our net income (loss) fluctuated over the quarters presented for
the reasons discussed above, as well as changes in our effective
tax rate.
64
The following table presents certain unaudited other data and
other financial data for the seven quarters ended
September 30, 2009. For additional information, please see
the discussion of adjusted EBITDA and free cash flow in the
Prospectus Summary.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
(dollars in thousands, except subscriber acquisition cost
|
|
|
|
and average monthly revenue per subscriber)
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
16,138
|
|
|
$
|
15,036
|
|
|
$
|
17,888
|
|
|
$
|
13,583
|
|
|
$
|
16,504
|
|
|
$
|
18,443
|
|
|
$
|
17,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
|
10,119
|
|
|
|
7,736
|
|
|
|
10,163
|
|
|
|
3,694
|
|
|
|
8,048
|
|
|
|
6,704
|
|
|
|
9,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription revenues
|
|
$
|
18
|
|
|
$
|
22
|
|
|
$
|
20
|
|
|
$
|
20
|
|
|
$
|
29
|
|
|
$
|
32
|
|
|
$
|
17
|
|
Technology and development
|
|
|
187
|
|
|
|
317
|
|
|
|
287
|
|
|
|
341
|
|
|
|
475
|
|
|
|
360
|
|
|
|
388
|
|
Marketing and advertising
|
|
|
33
|
|
|
|
73
|
|
|
|
74
|
|
|
|
74
|
|
|
|
88
|
|
|
|
81
|
|
|
|
104
|
|
General and administrative
|
|
|
1,051
|
|
|
|
707
|
|
|
|
720
|
|
|
|
728
|
|
|
|
934
|
|
|
|
804
|
|
|
|
953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
1,289
|
|
|
$
|
1,119
|
|
|
$
|
1,101
|
|
|
$
|
1,163
|
|
|
$
|
1,526
|
|
|
$
|
1,277
|
|
|
$
|
1,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subscribers
|
|
|
845,697
|
|
|
|
861,235
|
|
|
|
893,882
|
|
|
|
913,683
|
|
|
|
959,411
|
|
|
|
990,959
|
|
|
|
1,028,180
|
|
Subscriber additions
|
|
|
145,755
|
|
|
|
127,035
|
|
|
|
139,486
|
|
|
|
143,769
|
|
|
|
188,561
|
|
|
|
160,394
|
|
|
|
159,795
|
|
Monthly churn
|
|
|
4.5
|
%
|
|
|
3.8
|
%
|
|
|
3.6
|
%
|
|
|
4.0
|
%
|
|
|
4.3
|
%
|
|
|
3.8
|
%
|
|
|
3.6
|
%
|
Subscriber acquisition cost
|
|
$
|
59.95
|
|
|
$
|
83.91
|
|
|
$
|
66.22
|
|
|
$
|
79.26
|
|
|
$
|
62.23
|
|
|
$
|
73.27
|
|
|
$
|
70.55
|
|
Average monthly revenue per subscriber
|
|
$
|
15.68
|
|
|
$
|
16.19
|
|
|
$
|
16.33
|
|
|
$
|
16.45
|
|
|
$
|
16.46
|
|
|
$
|
16.42
|
|
|
$
|
16.48
|
|
The following table presents a reconciliation of adjusted EBITDA
and free cash flows to net income (loss), the most comparable
GAAP measure, for each of the quarters indicated. For additional
information, please see the discussion of adjusted EBITDA and
free cash flow in the Prospectus Summary.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Reconciliation of adjusted EBITDA and free cash flow to net
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
962
|
|
|
$
|
277
|
|
|
$
|
2,261
|
|
|
$
|
(1,116
|
)
|
|
$
|
3,503
|
|
|
$
|
4,680
|
|
|
$
|
4,041
|
|
Interest expense, net
|
|
|
3,174
|
|
|
|
2,599
|
|
|
|
2,922
|
|
|
|
2,788
|
|
|
|
1,710
|
|
|
|
948
|
|
|
|
1,380
|
|
Income tax (benefit) expense
|
|
|
609
|
|
|
|
790
|
|
|
|
1,349
|
|
|
|
(903
|
)
|
|
|
1,360
|
|
|
|
3,082
|
|
|
|
2,485
|
|
Depreciation expense
|
|
|
2,708
|
|
|
|
2,712
|
|
|
|
2,733
|
|
|
|
2,579
|
|
|
|
2,643
|
|
|
|
2,687
|
|
|
|
2,762
|
|
Amortization expense
|
|
|
7,399
|
|
|
|
7,537
|
|
|
|
7,503
|
|
|
|
7,607
|
|
|
|
5,770
|
|
|
|
5,771
|
|
|
|
5,805
|
|
Stock-based compensation
|
|
|
1,289
|
|
|
|
1,119
|
|
|
|
1,101
|
|
|
|
1,163
|
|
|
|
1,526
|
|
|
|
1,277
|
|
|
|
1,462
|
|
Other (income) expense, net
|
|
|
(3
|
)
|
|
|
2
|
|
|
|
19
|
|
|
|
(10
|
)
|
|
|
(8
|
)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
Impairment of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
16,138
|
|
|
$
|
15,036
|
|
|
$
|
17,888
|
|
|
$
|
13,583
|
|
|
$
|
16,504
|
|
|
$
|
18,443
|
|
|
$
|
17,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization of content database costs
|
|
|
(1,690
|
)
|
|
|
(1,960
|
)
|
|
|
(2,733
|
)
|
|
|
(2,582
|
)
|
|
|
(1,786
|
)
|
|
|
(1,886
|
)
|
|
|
(2,183
|
)
|
Purchase of property and equipment
|
|
|
(2,324
|
)
|
|
|
(2,961
|
)
|
|
|
(2,073
|
)
|
|
|
(4,263
|
)
|
|
|
(2,605
|
)
|
|
|
(3,546
|
)
|
|
|
(1,415
|
)
|
Cash paid for interest
|
|
|
(1,995
|
)
|
|
|
(2,377
|
)
|
|
|
(2,834
|
)
|
|
|
(2,862
|
)
|
|
|
(4,028
|
)
|
|
|
(1,388
|
)
|
|
|
(1,208
|
)
|
Cash paid for income taxes
|
|
|
(10
|
)
|
|
|
(2
|
)
|
|
|
(85
|
)
|
|
|
(182
|
)
|
|
|
(37
|
)
|
|
|
(4,919
|
)
|
|
|
(4,029
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
10,119
|
|
|
$
|
7,736
|
|
|
$
|
10,163
|
|
|
$
|
3,694
|
|
|
$
|
8,048
|
|
|
$
|
6,704
|
|
|
$
|
9,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
Liquidity
and Capital Resources
We have funded our operations primarily from cash flows from
operations during the last five years. In December 2007, we
entered into a credit facility that included a $140 million
term loan to finance the purchase price of our predecessor in
connection with the Spectrum investment. Our primary uses of
cash include operating costs such as personnel-related expenses,
marketing and advertising, payments related to our long-term
debt, capital and database content acquisition and web hosting
costs.
As of September 30, 2009, we had $70.5 million of
total liquidity, comprised of $60.6 million in cash and
cash equivalents and the ability to borrow $9.9 million
under our revolving credit facility. As of December 31,
2008, our cash and cash equivalents increased by
$28.2 million compared to December 31, 2007. As of
September 30, 2009, our borrowings under the term loan
portion of our credit facility were $114.7 million. Upon
consummation of the offering and the application of the net
proceeds as set forth under Use of Proceeds, we
expect our borrowings under the term loan portion of our credit
facility to be $102.6 million.
Our future capital requirements may vary materially from those
now planned and will depend on many factors, including
|
|
|
|
|
development of new products;
|
|
|
|
market acceptance of our products;
|
|
|
|
the levels of advertising and promotion required to retain and
acquire subscribers;
|
|
|
|
the launch of additional products and improvement of our
competitive position in the marketplace;
|
|
|
|
the expansion of our support and marketing organizations;
|
|
|
|
the establishment of additional offices in the United States and
worldwide and the building of infrastructure necessary to
support our growth; and
|
|
|
|
our relationships with suppliers and clients.
|
We have experienced increases in our expenditures in connection
with the growth in our operations and personnel, and we
anticipate that our expenditures will continue to increase in
the future. We expect cash on hand, internally generated cash
flow, and available credit from financing agreements will
provide adequate funds for operating and recurring cash needs
(e.g., working capital, capital expenditures, and debt
repayments) for at least the next 12 months.
Summary cash flow information for the year ended
December 31, 2006, the period from January 1, 2007
through December 5, 2007, the period from December 6,
2007 through December 31, 2007, the year ended
December 31, 2008, the nine months ended September 30,
2008 and the nine months ended September 30, 2009 is set
forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
|
December 6,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
through
|
|
|
|
through
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
December 31,
|
|
|
December 5,
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
27,022
|
|
|
$
|
31,311
|
|
|
|
$
|
6,222
|
|
|
$
|
55,244
|
|
|
$
|
48,608
|
|
|
$
|
51,765
|
|
|
|
|
|
Investing activities
|
|
|
(22,037
|
)
|
|
|
9,822
|
|
|
|
|
(281,505
|
)
|
|
|
(20,223
|
)
|
|
|
(13,379
|
)
|
|
|
(13,421
|
)
|
|
|
|
|
Financing activities
|
|
|
(16,532
|
)
|
|
|
(11,615
|
)
|
|
|
|
245,831
|
|
|
|
(6,814
|
)
|
|
|
(5,290
|
)
|
|
|
(17,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
$
|
(11,547
|
)
|
|
$
|
29,518
|
|
|
|
$
|
(29,452
|
)
|
|
$
|
28,207
|
|
|
$
|
29,939
|
|
|
$
|
20,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
Cash
Flow Analysis
Sources
and uses of cash
Cash and cash equivalents increased by $20.5 million to
$60.6 million in the nine months ended September 30,
2009 as compared to an increase of $29.9 million to
$41.9 million in the nine months ended September 30,
2008. Cash and cash equivalents were $40.1 million at
December 31, 2008 compared to $11.9 million at
December 31, 2007 and $11.9 million at
December 31, 2006. Cash and cash equivalents increased
$28.2 million in the year ended December 31, 2008;
cash and cash equivalents increased $29.5 million in the
predecessor period from January 1, 2007 through
December 5, 2007 and decreased $29.5 million in the
successor period from December 6, 2007 through
December 31, 2007; cash and cash equivalents decreased
$11.5 million in the year ended December 31, 2006.
During the three-year and nine month periods, net cash provided
by operating activities was used for debt repayments,
investments in capital, content database costs and the Spectrum
investment.
Net cash
provided by operating activities
For the nine months ended September 30, 2009, net cash provided
by operating activities was $51.8 million. Net cash
provided by operating activities consists of net income as
adjusted for non-cash expenses and an increase in our deferred
revenue balance. Net income was $12.2 million for the nine
months ended September 30, 2009. Non-cash expenses,
including depreciation, amortization of content databases,
amortization of acquired intangible assets, stock-based
compensation and amortization of deferred financing costs,
totaled $30.3 million. Additionally, an increase in
deferred revenue of $8.7 million for cash received from
subscribers, but not yet recognized in revenue contributed to
the cash provided by operating activities. Net cash provided by
operating activities increased $3.2 million in the nine
months ended September 30, 2009 as compared to the nine
months ended September 30, 2008. The increase in cash
provided by operating activities was due primarily to an
increase in net income.
For the year ended December 31, 2008, net cash provided by
operating activities was $55.2 million. Net income was
$2.4 million for the year ended December 31, 2008.
Non-cash expenses, including depreciation, amortization of
database content, amortization of acquired intangible assets,
stock-based compensation, impairment of database content and
amortization of deferred financing costs, totaled
$47.8 million. Additionally, an increase in deferred
revenue of $4.4 million for cash received from subscribers,
but not yet recognized in revenue, contributed to the cash
provided by operating activities. The increase in cash provided
by operating activities in 2008 was due primarily to an increase
in non-cash amortization of $21.0 million which had the
effect of reducing net income, without reducing cash.
For the predecessor period from January 1, 2007 through
December 5, 2007 and the successor period from
December 6, 2007 through December 31, 2007, net cash
provided by operating activities was $31.3 million and
$6.2 million, respectively. Net cash provided by operating
activities was primarily generated by net income of
$6.5 million adjusted for non-cash adjustments of
$22.1 million. Additionally, an increase in deferred
revenue and accrued expenses totaling $9.6 million
contributed to the cash provided by operating activities. The
increase in net cash provided by operating activities in 2007
was primarily due to an increase in deferred revenue of
$7.5 million related to growth of the subscriber base.
Net cash
used in investing activities
For the nine months ended September 30, 2009, net cash used
in investing activities totaled $13.4 million and consisted
of investments in capital equipment and content database costs.
Net cash used in investing activities remained relatively
constant in the nine months ended September 30, 2009 as
compared to the nine months ended September 30, 2008.
For the year ended December 31, 2008, net cash used in
investing activities totaled $20.2 million and consisted of
investments in capital equipment and database content.
Acquisition of capital equipment remained relatively constant
and the investment in database content modestly declined between
2008 and 2007. The successor period from December 6, 2007
through December 31, 2007 included $279.5 million of
cash outflows related to the Spectrum investment. In 2007, we
also received net proceeds from the sale and maturity of
short-term investments of $31.0 million.
67
For the predecessor period from January 1, 2007 through
December 5, 2007, net cash provided by investing activities
was $9.8 million and for the successor period from
December 6, 2007 through December 31, 2007, net cash
used in investing activities was $281.5 million, and
consisted primarily of the Spectrum investment, investments in
capital equipment and database content and the purchases, sales
and maturities of short-term investments. Acquisition of capital
equipment increased modestly and investment in database content
remained constant between 2007 and 2006. The successor period
from December 6, 2007 through December 31, 2007
included $279.5 million of cash outflows related to the
acquisition of our predecessor. The year ended December 31,
2006 includes investing activities related to the net purchase
of short-term investments of $16.7 million, offset by
proceeds related to the sale of our corporate headquarters in
Provo, Utah of $18.1 million.
Net cash
used in financing activities
For the nine months ended September 30, 2009, net cash used
in financing activities totaled $17.9 million and consisted
primarily of principal payments on long-term debt, and to a
lesser extent stock option exercises and repurchases of common
stock. Net cash used in financing activities increased
$12.6 million in the nine months ended September 30,
2009 as compared to the nine months ended September 30,
2008. The increase was due to increased debt principal payments,
primarily driven by a $10.9 million excess cash flow
payment that was made in May 2009.
For the year ended December 31, 2008, net cash used in
financing activities totaled $6.8 million and consisted
primarily of principal payments on long-term debt, and to a
lesser extent of stock option exercises and repurchases of
common stock. The successor period from December 5, 2007
through December 31, 2007 includes cash inflows of
$136.1 million of proceeds from the issuance of long-term
debt and $109.8 million of proceeds from the issuance of
common stock in connection with the Spectrum investment. Between
2008 and 2007, principal payments on long-term debt decreased
$8 million.
For the predecessor period from January 1, 2007 through
December 5, 2007, net cash used in financing activities was
$11.6 million and consisted of principal payments on
long-term debt of $15 million, offset by cash proceeds from
the issuance of common stock related to the exercise of stock
options. For the successor period from December 6, 2007
through December 31, 2007, net cash provided by financing
activities was $245.8 million, and consisted primarily of
cash inflows of $136.1 million of proceeds from the
issuance of long-term debt and $109.8 million of proceeds
from the issuance of common stock in connection with the
Spectrum investment.
Contractual
obligations
The following table summarizes our principal contractual
obligations as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
4-5
|
|
|
After
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(in thousands)
|
|
|
Long-term debt
|
|
$
|
133,000
|
|
|
$
|
21,457
|
|
|
$
|
31,500
|
|
|
$
|
80,043
|
|
|
$
|
|
|
Debt
interest(1)
|
|
|
16,434
|
|
|
|
5,075
|
|
|
|
8,236
|
|
|
|
3,123
|
|
|
|
|
|
Content service
agreement(2)
|
|
|
500
|
|
|
|
100
|
|
|
|
200
|
|
|
|
200
|
|
|
|
|
|
Operating leases
|
|
|
13,377
|
|
|
|
2,155
|
|
|
|
4,097
|
|
|
|
3,291
|
|
|
|
3,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash
obligations(3)
|
|
$
|
163,311
|
|
|
$
|
28,787
|
|
|
$
|
44,033
|
|
|
$
|
86,657
|
|
|
$
|
3,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Debt interest represents estimated
quarterly interest payments assuming that all debt is
outstanding until its due dates. As our long-term debt has
variable interest rates (for example, the interest rate was 7.4%
at December 31, 2008 but was 4.0% as of September 30,
2009), actual payments may vary due to changes in LIBOR and
prime. See Note 6 to our consolidated financial statements
for further details.
|
|
|
|
(2)
|
|
Represents contractual payments to
a service provider under a content acquisition agreement.
|
|
|
|
(3)
|
|
Amounts exclude FIN 48
liability of $0.5 million, for which timing of payments are
not determinable.
|
68
Outstanding purchase orders, which represent authorizations to
purchase goods and services but are not legally binding, are not
included in purchase obligations. We believe current cash
balances, cash generated by future operating activities, and
cash available under current credit facility will be sufficient
to meet our contractual cash obligations and other operating
cash requirements for the next 12 months.
Long-term
debt
On December 5, 2007, in connection with the Spectrum
investment, the operating company entered into a credit facility
with a syndicate of lenders consisting of a $140.0 million
term loan and $10.0 million revolving commitment with a
syndicate of lenders. At December 31, 2008 and
September 30, 2009, long-term debt outstanding under our
credit facility totaled $133.0 million and
$114.7 million, respectively. Of the amount outstanding at
September 30, 2009, $12.0 million is due in the next
12 months, which we expect to repay with cash from
operations and cash on hand, including the proceeds from the
offering. We expect to use $12.1 million of the net
proceeds we receive to repay a portion of the amount outstanding
under our credit facility. Upon consummation of the offering and
the application of the net proceeds as set forth in the
Use of Proceeds section elsewhere in this
prospectus, we expect our borrowings under the term loan portion
of our credit facility to be $102.6 million.
The debt is repayable in quarterly installments ranging from
$2.4 million to $4.8 million that are due from
December 2009 to September 2012, with a balloon payment of
$69.0 million due in December 2012. Interest on the debt is
variable based on LIBOR, in the case of a Eurodollar rate loan,
or prime, in the case of a base rate loan, plus a margin based
on our consolidated total leverage ratio. The weighted average
effective interest rate for the debt was 4.0% at
September 30, 2009. Additionally, the debt is subject to
various mandatory prepayment terms including an excess cash flow
calculation performed on an annual basis. Included in the
current portion of long-term debt on the balance sheet as of
December 31, 2008 is approximately $10.9 million that
was paid in May 2009 as an excess cash flow payment.
The credit facility is secured by all of the present and future
tangible and intangible assets of the operating company and
approximately two-thirds of the stock in some of our wholly
owned foreign subsidiaries. In connection with the debt, the
operating company must maintain certain financial ratio
covenants as discussed in the table below.
Our credit facility includes financial covenants, and failure to
comply with any such covenants could result in the debt becoming
payable on demand. A summary of the most significant financial
covenants and their status at September 30, 2009, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Required at
|
|
Actual at
|
|
|
September 30,
2009
|
|
September 30,
2009
|
|
|
(dollars in thousands)
|
|
Consolidated Total Leverage
|
|
|
Less than 2.25
|
x
|
|
|
1.70
|
x
|
Consolidated
EBITDA(1)
|
|
$
|
46,300
|
|
|
|
$ 67,471
|
|
Consolidated Fixed Charge Coverage Ratio
|
|
|
1.05
|
x
|
|
|
1.48
|
x
|
Consolidated Interest Coverage
|
|
|
4.00
|
x
|
|
|
9.79
|
x
|
Capital Expenditures and Capitalized
Content(2)
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
(1)
|
|
EBITDA for the prior four quarters,
as defined in our credit facility, is substantially similar to
our measure of adjusted EBITDA set forth under Prospectus
Summary Summary Consolidated Financial Data.
|
(2)
|
|
This test is done on an annual
basis and therefore interim periods were not tested.
|
We were in compliance with these and all other debt covenants at
December 31, 2008 and September 30, 2009.
The credit facility includes a revolving commitment of up to
$10.0 million, of which $9.9 million was available for
borrowing at September 30, 2009 and $0.1 million of
which was used under this facility for an outstanding letter of
credit. The revolving commitment of the credit facility expires
in December of 2012. One of the lenders in the revolving portion
of our credit facility has recently suffered financial
difficulties, according to media reports, and its parent
company, CIT Group Inc., has recently launched a restructuring
plan, according to
69
public filings. If it or any other of the financial
institutions that are in the syndicate of the revolving portion
of our credit facility were to suffer financial difficulties or
enter bankruptcy, it could affect our ability to draw down on
the facility.
Interest
rate cap contracts
We currently use an interest rate cap to limit the floating rate
of our credit facility at 6% plus the applicable margin. The cap
has a notional amount of $90.0 million and was purchased in
order to mitigate a portion of our exposure to higher interest
rates. The fair value of the interest rate cap was negligible at
December 31, 2008 and September 30, 2009. If we fail
to maintain an interest rate cap due to counterparty failure or
otherwise, it would be an event of default under our credit
facility.
Off-balance
sheet arrangements
We do not engage in transactions that generate relationships
with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, as part of our ongoing business. Accordingly,
our operating results, financial condition and cash flows are
not subject to off-balance sheet risks.
Indemnifications
In the ordinary course of business, we enter into contractual
arrangements under which we agree to provide indemnification of
varying scope and terms to business partners and other parties
with respect to certain matters, including, but not limited to,
losses arising out of our breach of such agreements and out of
intellectual property infringement claims made by third parties.
In these circumstances, payment may be conditional on the other
party making a claim pursuant to the procedures specified in the
particular contract. Further, our obligations under these
agreements may be limited in terms of time
and/or
amount, and in some instances, we may have recourse against
third parties for certain payments. In addition, we have
approved indemnification agreements with our directors and our
executive officers that will require us, among other things, to
indemnify them against certain liabilities that may arise by
reason of their status or service as directors or officers. The
terms of such obligations may vary.
Quantitative
and Qualitative Disclosures about Market Risk
We are exposed to market risks in the ordinary course of our
business. These risks include primarily interest rate and
foreign exchange risks.
Our most significant market risk relates to changing interest
rates. As of September 30, 2009, we had outstanding
floating-rate term loan debt under our credit facility of
$114.7 million, $12.0 of which is current. Under our credit
facility, we were required to maintain one or more interest rate
swap or cap agreements for the aggregate amount of
$90.0 million through December 2010. Accordingly, we are
party to an interest rate cap agreement that effectively fixes
the LIBOR rate on $90.0 million of principal value of our
outstanding term loans at 6%. As of September 30, 2009, the
fair value of the interest rate cap was insignificant. This
agreement expires on December 31, 2010. For further
information on the interest rate cap, see Note 6 to our
consolidated financial statements included in this prospectus.
A hypothetical interest rate change of 1% on our credit facility
would have changed interest incurred for the year ended
December 31, 2008 and the nine months ended
September 30, 2009 by $1.4 million and
$1.0 million, respectively. A hypothetical interest rate
change of 1% on our interest rate cap agreement would not have
materially changed the fair value of the interest rate cap at
September 30, 2009.
We have foreign currency risks related to our revenues and
operating expenses denominated in currencies other than the
United States dollar. We pay the majority of our non United
States dollar expenses from revenues earned in the relevant
currency. Our profits earned in foreign currencies may therefore
be subject to currency risk. The volatility of exchange rate is
dependent on many factors that we cannot forecast with reliable
accuracy. In the event our foreign sales and expenses increase,
our operating results may be more greatly affected by
fluctuations in the exchange rates of the currencies in which we
do business. At this time we do not, but we may in the future,
enter into
70
derivatives or other financial instruments in an attempt to
hedge our foreign currency exchange risk. It is difficult to
predict the impact hedging activities would have on our results
of operations.
Recent
Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48).
FIN 48 prescribes a recognition threshold and measurement
process for recording in the financial statements uncertain tax
positions taken or expected to be taken in a tax return.
Additionally, FIN 48 provides guidance on classifications,
accounting in interim periods and disclosure requirements for
uncertain tax positions. The company adopted FIN 48 on
January 1, 2007, and the adoption did not have a material
impact on its results of operations or financial position.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157). SFAS 157
establishes a framework for measuring the fair value of assets
and liabilities. This framework is intended to provide increased
consistency in how fair value determinations are made under
various existing accounting standards which permit, or in some
cases require, estimates of fair market value. SFAS 157 was
effective for fiscal years beginning after November 15,
2007. In February 2008, the FASB issued FSP
No. 157-2,
which delays the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis. FSP
No. 157-2
defers the effective date of SFAS 157 to fiscal years
beginning after November 15, 2008 for items within the
scope of
FSP 157-2.
Effective January 1, 2008, we adopted SFAS 157 for
financial assets and liabilities recognized at fair value on a
recurring basis. The partial adoption of SFAS 157 for
financial assets and liabilities did not have a material impact
on our consolidated financial position, results of operations or
cash flows. The adoption of SFAS 157 for nonfinancial
assets and nonfinancial liabilities has also not had a material
effect on our financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS No. 141R). SFAS No. 141R expands the
definition of a business combination and requires the fair value
of the purchase price of an acquisition, including the issuance
of equity securities, to be determined on the acquisition date.
SFAS No. 141R also requires that all assets,
liabilities, contingent considerations and contingencies of an
acquired business be recorded at fair value at the acquisition
date. In addition, SFAS No. 141R requires that
acquisition costs generally be expensed as incurred,
restructuring costs generally be expensed in periods subsequent
to the acquisition date, changes in accounting for deferred tax
asset valuation allowances be expensed after the measurement
period and acquired income tax uncertainties be expensed after
the measurement period. SFAS No. 141R is effective for
years beginning after December 15, 2008, with early
adoption prohibited. We expect the adoption of this standard may
affect any future acquisitions we consummate.
In April 2008, the FASB issued FASB Staff Position (FSP)
No. 142-3,
Determination of the Useful Life of Intangible Assets
(FSP 142-3).
FSP 142-3
amends the factors an entity should consider in developing
renewal or extension assumptions used in determining the useful
life of recognized intangible assets under FASB Statement
No. 142, Goodwill and Other Intangible Assets. This
new guidance applies prospectively to intangible assets that are
acquired individually or with a group of other assets in
business combinations and asset acquisitions.
FSP 142-3
is effective for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008. We
evaluated the effects that
FSP 142-3
has on the presentation and classification of our affected
assets in our financial statements and determined it was not
material.
In June 2009, the FASB issued Statement No. 168, The
FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles -a replacement of FASB
Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles (SFAS 168). The objective of this
Statement is to replace Statement 162 and to establish the FASB
Accounting Standards Codification as the source of authoritative
accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial
statements in conformity with GAAP. Rules and interpretive
releases of the SEC under authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants.
SFAS 168 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009.
71
BUSINESS
Mission
Ancestry.coms mission is to help everyone discover,
preserve and share their family history.
Overview
Ancestry.com is the worlds largest online resource for
family history, with more than one million paying subscribers
around the world as of September 30, 2009. We have been a
leader in the family history market for over 20 years and
have helped pioneer the market for online family history
research. We believe that most people have a fundamental desire
to understand who they are and from where they came, and that
anyone interested in discovering, preserving and sharing their
family history is a potential user of Ancestry.com. We strive to
make our service valuable to individuals ranging from the most
committed family historians to those taking their first steps
towards satisfying their curiosity about their family stories.
The foundation of our service is an extensive and unique
collection of billions of historical records that we have
digitized, indexed and put online over the past 12 years.
We have developed efficient and proprietary systems for
digitizing handwritten historical documents, and have
established relationships with national, state and local
government archives, historical societies, religious
institutions and private collectors of historical content around
the world. These digital records and documents, combined with
our proprietary online search technologies and tools, enable our
subscribers to research their family history, build their family
trees and make meaningful discoveries about the lives of their
ancestors.
We have built the worlds largest online community of
people interested in their family histories, and we believe that
this network is highly valuable to our subscribers. Our
community is a large and growing source of user-generated
content uniquely focused on family history. Over the past three
years, our registered users have created over 12 million
family trees containing more than 1.25 billion profiles.
They have uploaded and attached to their trees over
26 million photographs, scanned documents, written stories
and audio clips. This growing pool of user-generated content
adds color and context to the family histories assembled from
the digitized historical documents found on Ancestry.com. Our
subscribers also have attached to their trees over
333 million records from our company-acquired content
collection, a process that is helping further organize this
collection by associating specific records with people in family
trees.
In addition, we are deploying tools and technologies to
facilitate social networking and crowd sourcing, a means of
leveraging collaborative efforts. These tools and technologies
are intended to provide our subscribers with an expanding family
history collaboration network in which insights and discoveries
are shared by relatives, distant and close. Our service also
provides a platform from which our subscribers can share their
stories. Subscribers can invite family and friends to help build
their family trees, add personal memories and upload photographs
and stories of their own.
We provide ongoing value to our subscribers by regularly adding
new historical content, enhancing our websites with new tools
and features and enabling greater collaboration among our users
through the growth of our global community. Our plan to achieve
long-term and sustainable growth is to increase our subscriber
base in the United States and around the world by serving our
loyal base of existing subscribers and by attracting new
subscribers. Our revenues have increased from
$122.6 million in 2004 to $197.6 million in 2008, a
compound annual growth rate of 12.7%.
Industry
Background
Societies around the world have historically documented the
names, dates and places associated with important events of
their citizenry. For example, parish records in the United
Kingdom date back to the early sixteenth century. Civil and
religious bodies have recorded census, birth, marriage and death
data. Our societies have documented immigration and
international travel, preserved the war records of our veterans
and recorded data regarding business and real property
transactions. Newspapers and private organizations have
documented the daily lives of our ancestors. Throughout the
world, in archives maintained by national, regional and local
governments,
72
religious institutions and historical societies, there are
massive quantities of records and documents that tell us about
the lives of our ancestors. Beyond these institutional sources
of content, there is a tremendous amount of rich family and
historical content stored in personal archives and collections.
While many document archives are open to the public, the vast,
dispersed and disorganized nature of these data collections has
made researching family history a time consuming, painstaking
and expensive endeavor. Therefore, it has been difficult for
individuals to fulfill their desire to learn about their family
history. Records relevant to researchers have been kept
primarily in paper and microfilm form and have been dispersed
among government bodies, private collections and individuals.
Furthermore, these records have often been poorly indexed,
requiring a researcher to sift through unknown quantities of
data to identify the few key pieces of information relevant to
his or her family tree. Only the most passionate of family
historians has had the time, resources and will to engage
substantively in such research. Even more challenging for family
historians in nations with substantial growth resulting from
immigration, such as the United States, Canada and Australia,
gaining access to information about ancestors more than a few
generations back has often required searching for records in
other countries and in other languages. As a result, a
researcher can spend years piecing together information about a
single individual in a family tree.
Despite these challenges, many people have been interested in
pursuing family history research. Over the years, various
businesses were established to serve this community of family
history enthusiasts. These businesses were generally limited to
offering specialized family history products or services such as
research guides, reference works, vanity press publications or
professional genealogist research services. Until recently, the
industry was highly fragmented and not readily accessible to the
large universe of people interested in discovering their family
history.
The introduction of web-based technologies greatly enhances
opportunities for engaging in family history research by
enabling new ways of searching and organizing family data, as
well as significantly easier communication and networking. The
aggregation of data online substantially reduces the need for
researchers to travel in search of discrete records, thereby
reducing the significant time and expense of family history
research. Moreover, the ability to search digitized content,
when properly categorized and indexed, allows researchers to
access data more efficiently than browsing paper documents and
microfilm offline. Collaboration through the Internet further
enriches family history research, as researchers can more easily
share their findings, consult with one another and engage in
debates as new evidence continuously unfolds. All of this makes
family history research more accessible to a broader group of
people.
According to a summer 2009 @Plan survey, approximately
14 million people researched their family history online in
the prior 30 days. In addition, the growth of social
networks and online communities on the Internet has demonstrated
the strong desire of people to connect and share information
with each other. The number of people in the United States
engaged in social networking online has grown rapidly from
approximately 51 million in 2006 to approximately
74 million in 2008. By 2012, approximately 111 million
people in the United States are expected to use the Internet for
online communities, representing approximately 40% of the online
population, according to IDCs June 2009 Digital
Marketplace Model and Forecast.
Family history research has historically been a pursuit of the
over-45 population, people who generally have been more willing
to devote time and resources to preserving and sharing family
histories. This population is growing and becoming more
Internet-savvy. The United States Census Bureau projects that
the over-45 population in the United States will grow from
approximately 121 million in 2010 to approximately
156 million over the next 20 years, a growth rate of
1.3% per year. The over-65 population will grow at an even
faster rate, with an average annual growth rate of 3.0%.
eMarketer predicts that the percentage of people born between
1946 and 1954 (ages 55 to 63 in 2009) who are Internet users
will grow from 65.8% in 2008 to 72.5% in 2013, and that the
percentage of people born between 1955 and 1964 (ages 45 to 54
in 2009) who are Internet users will grow from 79.1% in 2008 to
83.1% in 2013.
73
Despite the opportunities offered by the Internet, there are
numerous obstacles that inhibit companies from successfully
leveraging web-based technologies for family history research.
These obstacles include:
Consumer
Challenges
Consumers are often not aware of family history research data
availability. Though most people have an interest
in their family history, many are not aware that relevant data
about their own ancestors may be available and easily
discoverable online.
Family history research is perceived to be a daunting task,
and consumers need assistance. Consumers
typically feel they do not know enough about their ancestors to
begin the research process or do not know what resources are
available to begin researching their family history. Consumers
need guidance with their family history research.
Consumers want a comprehensive
easy-to-use
solution. We believe that simply providing
records online does not present a sufficiently compelling value
proposition for consumers. Consumers want an easy-to-use
interface to perform searches that provide quick and relevant
results. They also want to be able to preserve their family
histories and organize them into cohesive narratives, which can
include hundreds of individuals and thousands of records.
Moreover, consumers want to easily share their data with others.
Family history collaboration has been
difficult. Consumers greatly benefit from
leveraging the ongoing searches and discoveries of other people.
However, most offline and online family history research tools
are tailored towards individual-based searches for specific
records. The very nature of a family tree means that everyone is
connected to dozens, hundreds or even thousands of relatives by
just a single ancestor, depending on how many generations
separate us from that ancestor. Connecting to and communicating
with these relatives can greatly aid family history research.
Business
Challenges
Content digitization and indexing is difficult, requiring a
significant investment of time, money and technology to
scale. Historical records typically exist in
physical formats such as paper and microfilm. Digitizing such
records requires identifying, securing rights to and then
acquiring the physical materials in order to scan them. Records
are often handwritten, making them difficult to scan and index
accurately using automated optical character recognition
scanning technologies. Because of these difficulties, it is
often necessary to use special scanning techniques to obtain a
clear image and to manually transcribe records to create a
searchable index.
Digital search for family records is challenging and
complicated. Most search engines are not designed
to deal with the specific challenges of searching digital
records for family history purposes. Delivering optimal search
results requires advanced search technology designed to deal
with incomplete information, record errors and cultural,
phonetic and other variances in names, dates and places. An
effective family history search engine must be able to search
both structured data, like census rolls and military records, as
well as unstructured data, such as newspapers and other free
form text.
Network scale is needed for collaboration and
community. Websites without a critical mass of
users generally lack the scale to create the network effect that
is beneficial to a rewarding user experience. Network and
community scale allows users to connect with one another,
collaborate and leverage the communitys collective
research efforts.
The
Ancestry.com Solution
Ancestry.com is the recognized leader in the family history
market and an innovator in the development of web-based
solutions to aid family history research. Through the design and
development of a unique consumer Internet application and
underlying proprietary technologies, substantial investment in
content and the aggregation of network scale, we are
revolutionizing how people discover, preserve and share their
family history. Our solution includes:
74
Consumer Benefits
Easy-to-use
website. Our technology platform makes family
history research and networking easier, more enjoyable and more
rewarding. We seek to make Ancestry.com relevant and easy to use
for both new and experienced subscribers, and we continue to
advance our online tools to help our subscribers efficiently
search our content, organize their research, collaborate with
others and share their stories.
Easy access to comprehensive data sources. We
have aggregated and organized a comprehensive collection of
historical records, with particular emphasis on records from the
United States, the United Kingdom and Canada. Our technologies
allow subscribers to locate relevant family history records
quickly and easily, resulting in a rewarding experience for new
subscribers and experienced family historians alike. Subscribers
input information that they know about their relatives, however
limited, and can immediately view the vast content sources
available to populate their family trees. Our proprietary record
hinting technology suggests content to our subscribers, alerting
them through hints delivered online and by email of
potential matches to further populate their trees from our
company-acquired and user-generated content. We believe that
these personalized hints can substantially advance our
subscribers research quickly and effectively, thereby
making their experience more rewarding.
Valuable community. Our community of family
history enthusiasts is a significant component of our
subscription value proposition. Our subscribers can collaborate,
contribute content and assist each other with family history
research. The publicly available family trees created by our
registered users can provide new subscribers with a substantial
head start researching their families and the opportunity to
connect with relatives interested and engaged in the discovery
and preservation of a shared family lineage.
Competitive Advantages
Proprietary technology platform provides robust search
capability and ease of use. We have built a
scalable, proprietary technology platform. Our search technology
is designed to deal with the inherent difficulties of searching
historical content. Our record hinting technology uses a
real-time algorithmic analysis to locate and push relevant
content to our registered users. Our digitization and indexing
processes streamline the complex and time-consuming task of
putting historical records online. Our website technology makes
it easy for registered users to upload their own records to
their family trees, thereby making those records searchable by
others.
Extensive and accessible content
collection. We have digitized and indexed the
largest online collection of family history records in the
world, with collections from the United States, the United
Kingdom, Australia and Canada, as well as Germany, France,
Italy, Sweden and China. We have invested approximately
$80 million to date in making this content available to our
subscribers and continue to invest a substantial amount of time
and money to acquire or license, digitize, index and publish
additional records for our subscribers. In total, our
collections represent over four billion records and an estimated
eight billion names. Over the last 12 years, we have put
online approximately 3,000 databases and 25,000 titles. We have
amassed a large collection of national, state, local and private
historical records, including census, birth, marriage, death,
immigration, naturalization, court, probate, land and military
records, as well as directories and member lists, historic maps,
slave narratives, family and local histories and newspapers and
periodicals.
Community of dedicated and highly engaged subscribers
enhances our value proposition. We have an active
and dedicated community of subscribers, approximately 43% of
whom have been subscribers for more than two years as of
September 30, 2009. In the eight months ended August 2009,
visitors to our websites spent an average of 18.8 minutes
on our websites per usage day, according to monthly data from
comScore. We believe our online community is highly valuable to
our subscribers, because the ever expanding pool of
user-generated content and collaboration and sharing
opportunities can significantly enhance the family history
research process. Over the past three years, our registered
users have created over 12 million family trees containing
more than 1.25 billion profiles. They have uploaded and
attached to their trees over 26 million photographs,
scanned documents, written stories and audio clips. Users have
made over 85% of the trees on our websites public, along with
associated user-generated content, making these trees searchable
and viewable by the full Ancestry.com subscriber community. In
addition, as of September 30, 2009, our subscribers have
attached over 333 million records to their family trees
from our company-acquired content collection, a process that is
helping further organize this collection by associating specific
records with people in family trees. We recently launched our
Ancestry.com Member Connect service, a collaboration network
that allows our subscribers to more easily connect,
75
communicate and collaborate with distant relatives who are
researching common ancestors. We believe that as our network of
registered users grows, and more registered users submit content
and connect with each other to share their findings, our value
proposition to our subscribers will increase.
Growth
Strategy
Our goal is to remain the leading online resource for family
history and to grow our subscriber base in the United States and
around the world by offering a superior value proposition to
anyone interested in learning more about their family history.
We will focus on retaining our loyal base of existing
subscribers, on acquiring new subscribers and on expanding the
market to new consumers. In pursuit of these goals, we will
continue to focus on the following objectives:
Continue to build our premium brand and drive category
awareness. Over the past three years, we have
expanded and improved our consumer marketing activities in the
United States, which we believe has substantially increased our
brand awareness. We believe that continued investments in
consumer marketing and promotion will allow us to enhance our
premium brand, increase awareness of the family history
category, and enhance our ability to acquire new subscribers.
Further improve our product and user
experience. We believe that investments in our
product platform can make family history research easier, more
enjoyable and more accessible. We continuously seek to advance
and improve our core search and hinting technologies, our
document image viewer, our family tree building and viewing
experience and our sharing and publishing capabilities. We
believe that we can leverage the latest web technologies to
further transform the way people discover family history online.
Regularly add new content. A vast universe of
historical records around the world is yet to be digitized, and
we intend to continue to expand our collection of digital
historical records. We will seek to maintain and extend our
existing relationships with archives and other holders of
content throughout the world and to find new sources of unique
family history content. We also plan to continue to promote the
growth of user-generated content by making the Ancestry.com
websites even better places to upload and share personal family
history documents and memories.
Enhance our collaboration technologies. With
more than one million subscribers around the world as of
September 30, 2009, we believe that we have the scale to
further expand our unique family history collaboration network
and to help relatives share insights and discoveries about
common ancestors. We believe that collaboration is a fundamental
part of family history research and that social networking
technologies applied to family history research can provide our
subscribers with even greater value. We intend to make family
history research more collaborative and appealing to a larger
market.
Grow our business internationally. We have
well-established and growing businesses in the
United States, the United Kingdom, Canada and Australia. We
believe that our business model of digitizing historical content
and making records available online has appeal in multiple
markets around the world, and we will seek to implement this
model in other international markets. In the third quarter of
2009, we launched an initial version of Mundia.com, a product
intended for markets where we do not have a presence. Mundia.com
will leverage our existing technologies and user-generated
content to power a lower-priced family history networking web
experience. We will also continue to pursue a China strategy
with our Jiapu.com website.
Ancestry.com
Websites
Ancestry.com. On Ancestry.com, subscribers can
efficiently search through birth, marriage and death records,
census records, immigration documents, photographs, maps,
military records, personal narratives and newspapers. Our
collection includes the digitized United States Federal Census
available from 1790 to 1930 and passenger lists containing over
120 million names from ships arriving at more than 100
United States ports from 1820 to 1960, including Ellis Island.
Our subscribers can also access records from specialized
databases, such as the 100 million names contained in
military records dating from the seventeenth century to the end
of the Vietnam War, our
African-American
records collection, including slave narratives, our Jewish
history collection, including Holocaust survivor lists, and our
Native American collection, including applications for
enrollment in the Five Civilized Tribes. In addition,
subscribers to Ancestry.com have access to a global collection
of records from the United Kingdom, Australia and Canada,
including United Kingdom and Canadian census collections and
baptism,
76
marriage, death and burial records from the London Metropolitan
Archives, as well as records from Germany, France, Italy, Sweden
and China.
Registered users can create family trees and attach their own
records to those trees. Subscribers can search company-acquired
and user-generated content and attach relevant records from our
content collections to individuals in their family trees. Users
have made over 85% of the trees on Ancestry.com public, along
with associated user generated content, offering many
subscribers a substantial head start in their family history
research by allowing them to populate their own trees with
information collected by registered users with common ancestry.
Our users attach an average of four million records per week to
their trees and accept an average of over four million hints per
week as of September 2009.
Our recently launched Member Connect service is a family history
collaboration network that connects subscribers who share common
ancestors. This collaboration network facilitates the sharing of
insights and discoveries among distant and close relatives and
creates a social component to the Ancestry.com subscriber
experience. Subscribers and registered users can also share
their family trees and research with friends and relatives.
Users can invite others to help build their trees and upload
user-generated content of their own. In addition, our users have
access to an online learning center, technical support,
educational webinars and community message boards.
We offer two subscription packages on Ancestry.com,
U.S. Deluxe and World Deluxe, and subscribers primarily
choose annual or monthly subscription periods. Registered users
who are not subscribers can create free family trees online, can
upload family photos, stories and documents to their tree, and
will receive hints to relevant records from our content
collections. Subscribers to our U.S. Deluxe package gain
unlimited access to the complete United States collection of
records, including the ability to view images of original
records. They also can communicate and collaborate with other
members of the subscriber network. Our World Deluxe plan
includes all the content from our U.S. Deluxe plan plus
unlimited access to our global collection of records.
We offer registered users a
14-day free
trial. We charge a subscriber the full period subscription
amount at the beginning of each subscription period. All
subscriptions renew automatically unless cancelled, which can be
done easily online or by telephone. Our primary United States
pricing plans are:
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U.S. Deluxe
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$19.95/month
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$155.40/year
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World Deluxe
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$29.95/month
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$299.40/year
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International Ancestry.com
websites. Generally, our international
Ancestry.com websites are modeled on our United States
Ancestry.com website and offer similar products in the local
market language, including family tree creation, collections of
digitized historical records obtained from local market archival
sources, as well as user-generated content. We currently operate
country-specific Ancestry.com websites for seven countries, in
addition to the United States the United Kingdom,
Australia, Canada, Germany, France, Italy and Sweden. We offer
country-specific subscriptions, tailored to the local market,
and World Deluxe subscriptions on each of our international
Ancestry.com websites.
Other
Products and Websites
Family Tree Maker. Family Tree Maker is the
leading family history desktop software on the market, with over
1.4 million units distributed since 2004. Most Family Tree
Maker versions include a limited subscription to the
Ancestry.com website. Family Tree Maker is sold through retail
stores and on our websites.
Ancestry.com | DNA. We sell DNA
testing kits that help people learn more about their family
history and ancient ancestry. The Paternal Lineage Test
(Y-chromosome) matches a test-taker with genetic relatives who
share a common paternal ancestor. The Maternal Lineage Test
(mitochondrial DNA) provides information about maternal ancient
origins.
Ancestry.com | Expert
Connect. Our recently launched Expert Connect
product is designed to be a genealogist marketplace that
connects people with professional genealogists around the world
who can provide custom family history research. Services
available range from the simple lookup of a specific record in a
far-away courthouse to fully customized family histories
prepared by a professional genealogist. Through a competitive
bid
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and brokered offer process, people can engage experts across the
globe to conduct personalized research. We earn a commission on
each engagement.
Mundia.com. Mundia.com is our global,
multi-language
family history networking product intended for markets in which
we do not have a local presence. Mundia.com is designed to
enable customers to efficiently collaborate and share family
history content with others having common family histories and
interests. While we expect membership to be free initially, we
may initiate a lower-priced fee-based membership structure in
the future.
Jiapu.com. We are investing in the further
development of Jiapu.com, our China website focused on family
networking and ancestral family history.
MyCanvas.com. MyCanvas.com is a digital
publishing platform that allows people to design and order
high-quality customized photo books, calendars and posters using
discoveries made on Ancestry.com. We earn revenues through the
sale of the professionally printed products.
myfamily.com. myfamily.com is a family
networking product that provides families with a safe and secure
home on the web where they can share photos, videos,
stories, news, calendars and family history insights. It
generates revenues primarily through paid subscriptions.
Other sites. RootsWeb.com is a free genealogy
community on the Internet that generates revenue through
advertising. Genealogy.com is a legacy product that offers a
collection of family and local histories, vital records content
and military records, most of which are also available on
Ancestry.com.
Subscribers
Our subscribers range from the most committed family historians
to those taking their first steps towards satisfying a simple
curiosity about their family story, and we seek to make our
service valuable to both groups. Discovering ones family
history can be an emotional and meaningful journey. The
following are a few examples of discoveries made on Ancestry.com:
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Sam M. found a 1930 census record of his grandfather and
great-grandparents in less than an hour after becoming a
subscriber on Ancestry.com. Within a week, he had used data from
other subscribers family trees to populate nine
generations of his family tree and had found and attached
records to his tree, including census records, ship passenger
lists, Civil War military records and even some photographs
uploaded by other registered users.
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Marilynn G., who was adopted, found her birth mothers name
in the 1930 United States census and in a relatives
obituary on Ancestry.com. Using that information, she was able
to locate her birth mother, then living in Budapest, and has
remained in regular contact with her.
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Jim L.s grandmother died when his father was a baby and no
one in the family knew anything about her. Jim found his
grandmothers name in the 1920 United States census on
Ancestry.com and through that link was able to connect with his
living relatives who provided him letters and photos of his
grandmother, allowing his father to see a picture of his mother
for the first time.
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Annabel P. made several meaningful discoveries upon joining
Ancestry.co.uk. First, she found that she was related to one of
Britains most famous cricketers. She became so enthralled
by her family history that she took time off work to further
study the census and parish records, from which she discovered a
link to one of King Henry VIIIs wives.
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Jess D. of Tours of Peace, a non-profit group that reunites
family members with dog tags found in Vietnam, uses Ancestry.com
to locate the closest surviving family member, enabling Tours of
Peace to return the dog tags and provide those people with a
meaningful reminder of a lost family member.
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As of September 30, 2009, we had more than one million
subscribers, approximately two-thirds of whom reside in the
United States. In the eight months ended August 2009, we had an
average of 7.1 million unique visitors to our websites per
month, according to monthly data from comScore.
78
Marketing
and Advertising
Our marketing efforts are focused on three primary goals:
retention of existing subscribers; conversion of registered
users to subscribers; and acquisition of new subscribers and
promoting our brand.
Retention marketing. Our retention marketing
is focused on establishing and maintaining long-term and
personalized relationships with our subscribers through
on-site
messaging and email, and through our subscriber support center.
We seek to maximize retention and encourage subscribers to
upgrade to premium packages by delivering a superior customer
experience and value. We monitor subscription package mix and
durations, payment processing, cancellation reasons, and overall
subscriber satisfaction.
Conversion marketing. Our conversion marketing
efforts are focused on converting registered users to paying
subscribers through
on-site
messaging, email, targeted offers and compelling product
features like record hinting.
Subscriber acquisition and brand marketing. We
pursue a multi-channel subscriber acquisition and brand
marketing program that includes television advertising, online
display advertising, paid search, search-engine optimization, a
broad affiliate network and public relations. Through our
advertising, we seek to increase brand and category awareness
and to attract new subscribers. We actively manage our media mix
in order to maximize the efficiency of our marketing investment.
As part of our marketing efforts, we have purchased product
integration in a United States version of the successful BBC
series Who Do You Think You Are? that will feature
American celebrities. This program is currently scheduled to be
released on network television in the United States in early
2010. We believe that the program, if released, could help
increase awareness of the family history category and our brand,
but we do not exercise any control with respect to when or if it
will be released. We can provide no assurance that the show will
not be delayed or cancelled.
Search,
Family Tree and Collaboration Technologies
We have applied substantial resources to develop and maintain
proprietary technologies designed to provide a rewarding
experience and compelling value proposition to our subscribers.
Our technology platform allows our subscribers to access our
content collections, build family trees, collaborate with other
members of our community and share their discoveries with
friends and relatives. We believe our technologies provide us
with a significant competitive advantage and we intend to
continue developing and enhancing these proprietary technologies.
Vertical search engine. Historical documents
can be difficult to search effectively using traditional search
engines because of variations in names, changes in geopolitical
boundaries and other factors. Our proprietary vertical search
engine provides an innovative, technology-driven solution to the
challenges created by the inherent difficulty of searching
historical content. For example, with our search engine, a
subscribers search for Catharine Lawson, born in
1920 and residing in Boston would not only return exact
matches of the search terms, but would also return near-matches
that exhibit name and spelling variances (e.g., Kate
Lawson), date variances (e.g., born in 1878 or
1882) and geographical variances (e.g., living in
Lowell, Mass., 30 miles away), with search results ranked
in order of probability of match. The technology of our vertical
search engine allows our subscribers to successfully search our
many collections for content that they otherwise might not have
located.
Record hinting. Our proprietary record hinting
technology performs a real-time algorithmic analysis of a
users family tree and then suggests new records and other
family trees that might match the users. We believe that
these personalized hints can accelerate our subscribers
research, thereby making their experience more rewarding. This
technology uses not only the information available to us about a
particular individual in a tree, but also information available
about the persons close relatives, to perform a more
detailed and advanced search of our content than would be
practical to create manually. These dynamic search results are
pushed to registered users as hints using a shaky
leaf icon that subscribers can review to add relevant
content to their family trees. We also notify registered users
of new hints by email.
Subscriber collaboration. As our subscriber
base grows, we believe our subscribers will benefit from
enhanced collaboration opportunities driven by a growing network
effect and new product features. A major focus
79
of our current technology investment is the further advancement
of these collaboration features, including our recently launched
Member Connect service. We view collaboration and family history
networking as a key addition to the value proposition that we
deliver to our subscribers.
Content
Process and Technologies
Company content acquisition. We have spent
approximately $80 million to acquire, digitize and index
hundreds of millions of documents. In 2008, we undertook
projects producing approximately 100 million images and
150 million records. We own most of the images in our
databases, in some cases on a non-exclusive basis, though we
generally do not own the underlying original historical
documents. We also obtain a portion of our content pursuant to
ongoing licensing agreements, primarily in the United Kingdom,
some of which have finite terms. We license a significant amount
of our United Kingdom content from the United Kingdom National
Archives under several license agreements that generally have
ten year terms, with varying automatic extension periods. These
agreements with the United Kingdom National Archive expire from
2012 to 2019. The agreements are generally terminable by either
party for breach by the other party and by the United Kingdom
National Archives upon our insolvency or bankruptcy. Some of
these agreements permit the United Kingdom National Archives to
terminate these licenses if we undergo a change of control.
We plan to continue to acquire new content on an ongoing basis
to offer our subscribers additional historical records for their
research. We analyze the most frequently used databases to help
us determine what types of records are most valuable to our
subscribers. On our Ancestry.com websites in the United States,
the United Kingdom, Canada and Australia, where we already have
a critical mass of historical records in our databases, we seek
to add sufficient content each year to keep our subscribers
engaged.
We believe that we offer governments and other record keepers a
significant service when we acquire or license their content.
Because we digitize and index the records, we often preserve
information contained in fragile records from damage or
destruction. In addition, the process of digitizing billions of
records and indexing billions of names is an expensive
proposition. While some governmental or non-profit entities have
an interest in digitizing and indexing such records, funding
such projects is often a challenge. Our service allows the
owners of historical records to preserve such records and make
them available to people around the world in an efficient and
cost effective manner. We have built long-term relationships
with archival partners, such as United States National Archives
and Records Administration, The National Archives of the United
Kingdom and the Library and Archives Canada. We also have
relationships with historical societies, religious institutions,
such as The Church of Jesus Christ of Latter-day Saints, and
private collectors of historical content.
Digitization. Working with historical
documents is challenging because many source documents are
handwritten or damaged, and many microfilm images are of poor
quality. We have developed proprietary technologies and
processes that have allowed us to efficiently handle and
digitize hundreds of millions of records that vary materially in
format and quality. We digitize content in our headquarters in
Provo, Utah, in the Washington, D.C. area, in London,
England and in 20 distributed locations around the world.
Indexing. We have invested significant
resources in the indexing of records to make our content
collection much more accessible and searchable for our
subscribers. We outsource a significant portion of our indexing
projects to vendors that use our proprietary tools to transcribe
handwritten documents to create indexes. We own the indexes that
our vendors create. In addition, we have recently launched the
Ancestry.com World Archives Project, an effort which lets our
registered users contribute their time to index images of
historical records online through our proprietary transcription
tool and user interface. In return for the efforts of our
contributors, we make indexes created through the World Archives
Project available for free to all registered users.
User-generated content. Our registered users
are a meaningful source of content on our websites. Individuals
often have significant family records, information, photographs
and stories that are of interest to others with common family
history. Even close family members might not be aware that other
family members hold such records. With the introduction of
inexpensive consumer scanners and readily available scanning
technology, registered users can upload their information to
their family trees. Uploading these records not only preserves
them from damage or destruction, but also makes them sharable
and accessible globally to other Ancestry.com subscribers. We
encourage our registered users to make their family trees
visible and searchable by other
80
subscribers. The publicly-shared family trees on our website
offer many subscribers a substantial head start in their family
history research.
Operations
Websites and technology operations. Our
websites are hosted on hardware and software co-located at a
third-party facility in Salt Lake City, Utah. We are
establishing a redundant system located at a third-party
facility in Denver, Colorado, and we expect to complete this
project within the next 12 months. We have designed our
websites to be highly available, secure and cost-effective using
a variety of proprietary software, freely available and
commercially supported tools. We can scale to accommodate
increasing numbers of subscribers by adding relatively
inexpensive industry-standard hardware. We use encryption
technologies and certificates for secure transmission of
personal information between subscribers and our website.
Maintaining the integrity and security of our websites is
critical and we have a dedicated security team that promotes
industry best practices and drives compliance with data security
standards.
We devote a substantial portion of our resources to developing
new technologies and features and improving core technologies.
As of September 30, 2009, we employed approximately 100
engineers who are focused on the design and development of new
features and products, maintenance of our websites and
development and maintenance of our internal operations systems.
Subscriber services. Our subscriber services
team seeks to ensure that our existing subscribers enjoy a high
degree of satisfaction from our Ancestry.com websites, and that
registered users find the support they need to become
subscribers. Subscriber services representatives make
welcome calls to Ancestry.com trial subscribers,
provide telephone and email support, answer questions about the
websites, and help subscribers with their research. We operate
subscriber services from our Provo, Utah headquarters to ensure
that our representatives are integrated with to the business and
our programs. In 2008, our subscriber service team fielded over
1.2 million contacts, primarily by telephone and email.
Competition
We face competition in our business from a variety of online and
offline organizations, some of which provide genealogical
records free of charge. We expect competition to increase in the
future. We generally compete on the basis of content, price,
ease of use, technology, brand recognition, breadth of products,
service and support, and the number of network members with whom
other subscribers can collaborate. We believe that we compete
favorably with respect to these factors, and that none of our
competitors offers as broad an array of products and services or
as compelling a value proposition to consumers interested in
online family history research.
Ancestry.com and our similar international websites face
competition from:
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FamilySearch, and its website FamilySearch.org, a genealogy
organization that is part of The Church of Jesus Christ of
Latter-day
Saints. The Church of Jesus Christ of
Latter-day
Saints has, for over 100 years, actively gathered,
preserved and shared genealogical records worldwide.
FamilySearch has an extensive collection of paper and microfilm
records (more than 2.3 million rolls of microfilm and
180,000 sets of microfiche), which it maintains in a central
storage facility in Utah. FamilySearch has digitized a large
quantity of these records and has published them online at
FamilySearch.org, where it makes them available to the public
for free and through over 4,500 family history centers located
throughout the world. FamilySearch is a well funded organization
and has stated its intention to undertake a massive digitization
project to bring most of its collection online over the next few
years.
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Commercial entities, including online genealogical research
services, library content distributors, search engines and
portals, retailers of books and software related to genealogical
research and family tree creation and family history oriented
social networking websites.
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Other non-profit entities and organizations, genealogical
societies, governments and agencies that may make vital
statistics or other records available to the public for free.
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As we continue to diversify our breadth of products and services
and expand internationally, we expect our competition to expand
to include other Internet-based and offline businesses,
governments and other entities. Our current and future
competitors may have greater resources, more well-established
brand recognition or more sophisticated technologies, such as
search algorithms, than we do, or may more easily obtain
relevant records in international markets. Additionally, our
current and future competitors may make historical records
available online at no cost or on an advertising-supported basis
rather than a subscription basis. Our future competitors and
their products and services may be superior to any of our
current competition. There has recently been some consolidation
in our industry, and such consolidation could also increase
competition in the future, including competition with respect to
acquisition of content, exclusivity of content or pricing. To
compete effectively, we may need to expend significant resources
on content acquisition, technology or marketing and advertising.
We currently plan to distinguish ourselves from our competitors
on the basis of access to content, technological leadership and
the depth of our subscriber community.
Intellectual
Property
To protect our proprietary content and intellectual property, we
rely on trademark, copyright, patent and trade secret protection
laws and on contractual agreements with third parties.
Ancestry.com, myfamily.com and Family Tree Maker are among our
registered trademarks. In the United States, we have filed
various trademark applications and patent applications for
certain aspects of our technologies, and we have also filed
trademark applications in certain foreign countries for the
Ancestry.com and other website names. Many of our trademarks
contain words or terms having a common usage and, as a result,
may not be protectable under applicable law. Because of this
concern, we have elected not to file applications with respect
to certain of our trademarks, and some of our trademarks for
which we have filed applications may not be protectable. In the
United States, we currently have three patents issued, and
we have a number of patents pending relating to digitization,
indexing, storage, correlation, search and display of content.
We intend to pursue patent coverage in additional countries to
the extent we believe such coverage is appropriate and
cost-efficient. We cannot be certain that any of our pending or
future applications will be granted. We rely primarily on trade
secret and similar intellectual property laws to protect our
search technology, software products and digitization and
indexing processes. Protection of trade secret and other
intellectual property rights can be uncertain, particularly
outside the United States.
We also possess intellectual property rights in aspects of our
digital content databases. However, our digital content
databases are not protected by any registered copyrights or
other registered intellectual property or statutory rights. Our
digital content databases are protected by user agreements that
limit access to and use of our data, and by our proprietary
indexing and search technology that we apply to make our content
searchable. Compliance with use restrictions is difficult to
monitor, and our proprietary rights in our digital content
databases may be more difficult to enforce than other forms of
intellectual property rights.
Our employees, contractors and other third parties with which we
work and who have access to our proprietary content and
confidential information sign agreements that prohibit the
unauthorized disclosure of our proprietary rights, information
and technologies.
Employees
As of September 30, 2009, we had approximately
600 full-time employees and approximately
100 part-time and contingent employees. None of our
employees is covered by a collective bargaining agreement. We
have not experienced employment-related work stoppages and we
consider our employee relations to be good.
Facilities
Our corporate headquarters are located in Provo, Utah, where we
lease approximately 120,000 square feet of space. The term
of this lease runs through April 2016, and we have the right to
extend the lease for an additional five years. We also lease
office space in San Francisco, California, under a lease
that expires in September 2012, in Bellevue, Washington under a
lease that expires in April 2011, and in the United Kingdom
under a lease that expires in April 2012. We maintain small
offices in Canada, Australia, France, Germany and China,
primarily for marketing and product development purposes, under
leases that expire at varying times from 2010 to 2012. We
believe that our current facilities are sufficient to meet our
needs for the foreseeable future.
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Legal
Proceedings
In August 2009, we received a letter from counsel to Shutterfly,
Inc., alleging infringement of certain of its patents by our
operation of our MyCanvas.com website. Based on our
investigation to date, we believe that the identified claims
either are not valid or are not currently infringed by us and we
do not believe that the resolution of these claims will have a
material impact on our financial condition. If litigation were
to commence, we believe that we have substantive and meritorious
defenses to these claims and would contest any claim vigorously.
While MyCanvas.com revenues have represented a small percentage
of our total revenue, intellectual property litigation is
subject to inherent uncertainties, and there can be no assurance
that the expenses associated with defending any litigation or
the resolution of this dispute would not have a material adverse
impact on our results of operations or cash flows.
In addition, on September 16, 2009, we settled a claim with
respect to the timeliness and accuracy of a content index we
created. The settlement resulted in an expense of approximately
$2.3 million in 2009.
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MANAGEMENT
Directors
and Executive Officers
Set forth below is certain information regarding our directors
and executive officers, including their ages as of
October 14, 2009.
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Timothy Sullivan
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President, Chief Executive Officer and Director
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Howard Hochhauser
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Chief Financial Officer
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Joshua Hanna
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Senior Vice President and General Manager of International
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David Rinn
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Senior Vice President of Strategy and Corporate Development
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William Stern
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General Counsel and Corporate Secretary
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Christopher Tracy
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Senior Vice President of Operations
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Andrew Wait
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Senior Vice President and General Manager, Family History
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Michael Wolfgramm
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Senior Vice President and Chief Technology Officer
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Charles M. Boesenberg
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Director
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David Goldberg
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Director
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Thomas Layton
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Director
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Elizabeth Nelson
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Director
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Victor Parker
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Director
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Benjamin Spero
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Director
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Timothy Sullivan has served as our President and Chief
Executive Officer and as a director since September 2005. Prior
to joining us, Mr. Sullivan was Chief Operating Officer and
then President and CEO of Match.com from January 2001 to
September 2004. From May 1999 to January 2001, Mr. Sullivan
served as Vice President of
E-commerce
for Ticketmaster Online-Citysearch, Inc. From June 1991 to May
1999, Mr. Sullivan held multiple positions at The Walt
Disney Company, including Vice President and Managing Director
of Buena Vista Home Entertainment Asia Pacific from July 1997 to
May 1999. Mr. Sullivan holds an M.B.A. from Harvard
Business School and was a Morehead Scholar at the University of
North Carolina at Chapel Hill.
Howard Hochhauser has served as our Chief Financial
Officer since January 2009. From May 2000 to December 2008,
Mr. Hochhauser held multiple positions at Martha Stewart
Living Omnimedia, Inc., most recently serving as Chief Financial
Officer from March 2006 to December 2008. He held multiple
positions at Bear Stearns & Co. Inc. from September
1996 to May 2000, serving most recently as Vice President Equity
Research Analyst. Prior to joining Bear Stearns & Co.
Inc., he worked at First Boston and he was a Staff Accountant at
KPMG Peat Marwick. Mr. Hochhauser is a Certified Public
Accountant and holds an M.B.A. from Columbia University and a
B.S. from Boston University.
Joshua Hanna has served as our Senior Vice President and
General Manager of International since July 2006. Mr. Hanna
held multiple positions with us from November 2001 until July
2006, including Vice President of International Business,
Director of International Business, Director of Product
Management, Senior Product Manager, and Business Manager. Prior
to joining us, he held several marketing and business
development roles with Netcentives, Inc. and Cyrk, Inc.
Mr. Hanna holds an M.B.A. from Harvard Business School and
a B.A. from Dartmouth College.
David Rinn has served as our Senior Vice President of
Strategy and Corporate Development since January 2009. Prior to
serving in this role, he served as our Chief Financial Officer
from June 2004 to January 2009. Prior to joining us in June
2004, Mr. Rinn spent 12 years at Microsoft
Corporation, most recently as Chief Financial Officer of the
Mobile and Embedded Devices Division. At Microsoft Corporation,
he also served as General Manager of Finance and Administration,
General Manager, Chief Financial Officer and as a member of the
board of directors of
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HomeAdvisor Technologies (a majority-owned subsidiary of
Microsoft Corporation). Other roles at Microsoft Corporation
included Senior Director of Product Group Finance and senior
director of Corporate Development. Prior to joining Microsoft,
he held various positions at Morgan Stanley. Mr. Rinn holds
an M.B.A. from the Anderson Graduate School of Management at the
University of California, Los Angeles and a B.A. from Vassar
College.
William Stern has served as our General Counsel and
Corporate Secretary since July 2009. From October 2005 to July
2009, Mr. Stern held multiple positions at Martha Stewart
Living Omnimedia, Inc., most recently serving as the General
Counsel and Secretary from September 2008 to July 2009. From
October 2002 to September 2005, Mr. Stern was a Principal
at Fish & Richardson, PC. Prior to joining
Fish & Richardson, PC, he was a Partner at
Morrison & Foerster, LLP. Mr. Stern holds an
M.B.A. and a J.D. from the University of Chicago and an A.B.
from Brown University.
Christopher Tracy has served as our Senior Vice President
of Operations since January 2008. Prior to serving in this role,
Mr. Tracy served as our Vice President of Member Services
from November 2004 to December 2007. From June 2002 to October
2004, Mr. Tracy was a Vice President and General Manager at
Time Warner Inc. From April 1999 to January 2002, Mr. Tracy
held various leadership positions at Nextcard, Inc.
Mr. Tracy holds an M.B.A. from Harvard Business School and
a B.S. from California Polytechnic State University.
Andrew Wait has served as our Senior Vice President and
General Manager, Family History since March 2006. Prior to
joining us, Mr. Wait served as Senior Director of Marketing
at Kodak Gallery from October 2003 to January 2006. From January
2000 to October 2003, he was the Senior Director of Marketing
for EarthLink, Inc.s PeoplePC Brand. Prior to joining
Earthlink, he held various marketing positions with Pacific Bell
Telephone Company/SBC Communications Inc., Bank of America
Corporation and Hilton Hotels Corporation. Mr. Wait holds
an M.I.B.A. (Master of International Business Administration)
from Saint Marys College and a B.A. from the University of
California, Berkeley.
Michael Wolfgramm has served as our Senior Vice President
and Chief Technology Officer since February 2009.
Mr. Wolfgramm held multiple positions with us from June
1999 until February 2009, including Senior Vice President of
Technology, Vice President of Development and Senior Director of
Development. Prior to joining us, from March 1997 to June 1999,
Mr. Wolfgramm served as Senior Director of Development and
Senior Architect at Open Market Inc. Mr. Wolfgramm holds a
B.S. in Computer Science from Brigham Young University.
Charles M. Boesenberg has served as one of our directors
since July 2006. From January 2002 to June 2006,
Mr. Boesenberg served as the President and Chief Executive
Officer at NetIQ Corporation and he also served as the Chairman
of the board of directors at NetIQ Corporation from August 2002
to June 2006. From March 2000 to December 2001,
Mr. Boesenberg served as the President of Post PC Ventures,
a management and investment group. Mr. Boesenberg serves on
the board of directors of Silicon Graphics International Corp.,
Keynote Systems, Inc. and Callidus Software. Mr. Boesenberg
holds an M.S. in Business Administration from Boston University
and a B.S. from Rose Hulman Institute of Technology.
David Goldberg has served as one of our directors since
February 2008. Since April 2009, Mr. Goldberg has served as
the Chief Executive Officer of SurveyMonkey.com LLC. From May
2007 to April 2009, Mr. Goldberg was an Entrepreneur in
Residence with Benchmark Capital. From August 2001 to May 2007,
Mr. Goldberg was the head of global music operations at
Yahoo! Inc. From February 1994 to August 2001, Mr. Goldberg
was Chairman and Chief Executive Officer of Launch Media Inc.
Mr. Goldberg holds an A.B. from Harvard University.
Thomas Layton has served as one of our directors since
October 2009. Since June 2007, Mr. Layton has served as the
Chief Executive Officer of Metaweb Technologies, Inc., an
Internet technology company. Mr. Layton served as the Chief
Executive Officer of OpenTable, Inc. from September 2001 to June
2007, and has served on its board of directors since May 1999.
From November 1995 to June 1999, Mr. Layton served as
President and Chief Operating Officer and was co-founder of
CitySearch, Inc., which later merged with Ticketmaster, Inc.
Prior to his experience at CitySearch, Mr. Layton served as
Chief Financial Officer of Score Learning Corporation, an
educational services company, from April 1994 to October 1995,
and as President and Chief Operating Officer from March 1995 to
October 1995. Mr. Layton is also a member of the board of
directors of oDesk Corporation and a co-founder and
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member of the board of directors of MAPLight.org, a non-profit
organization. Mr. Layton holds an M.B.A. from Stanford
Graduate School of Business and a B.S. from the University of
North Carolina at Chapel Hill.
Elizabeth Nelson has served as one of our directors since
July 2009. From July 1996 to December 2005, Ms. Nelson
served as the Executive Vice President and Chief Financial
Officer at Macromedia Inc. Currently, Ms. Nelson serves on
the board of directors of Autodesk, Inc., SuccessFactors, Inc.
and Greenbox Technology, Inc. Ms. Nelson holds an M.B.A. in
Finance with distinction from the Wharton School at the
University of Pennsylvania and a B.S. from Georgetown University.
Victor Parker has served as one of our directors since
2003. Mr. Parker is a Managing Director of Spectrum Equity
Investors and joined the firm in September 1998. He was
previously at ONYX Software and was an associate at Summit
Partners from October 1992 to June 1996. Mr. Parker serves
on the board of directors of Demand Media, Inc., NetQuote, Inc.
and SurveyMonkey, LLC. He holds an M.B.A. from Stanford Graduate
School of Business and a B.A. from Dartmouth College.
Benjamin Spero has served as one of our directors since
December 2007. Mr. Spero joined Spectrum Equity Investors
(a majority stockholder in the company) in January 2001 and
currently is a Principal. Prior to joining Spectrum Equity
Investors, Mr. Spero was the co-founder of TouchPak, Inc.
Before joining TouchPak, Inc., Mr. Spero was a strategy
consultant at Bain & Company. Mr. Spero serves on
the board of directors of SurveyMonkey, LLC, iPay Technologies,
LLC, NetQuote Inc., and Mortgagebot, LLC. Mr. Spero holds a
B.A. from Duke University.
Structure
of the Board of Directors
Our board of directors currently consists of seven members.
In accordance with the amended and restated certificate of
incorporation and the amended and restated bylaws that will
become effective upon consummation of the offering, our board of
directors will be divided into three classes with staggered
three-year terms. At each annual general meeting of
stockholders, the successors to directors whose terms then
expire will be elected to serve from the time of election and
qualification until the third annual meeting following election.
The authorized number of directors may be changed by resolution
of the board of directors. Vacancies on the board of directors
can be filled by resolution of the board of directors. Victor
Parker serves as the chairperson of our board of directors. We
believe that four of our directors are independent as required
by the rules of the Nasdaq Stock Market: Charles M. Boesenberg,
our lead independent director, David Goldberg, Thomas Layton and
Elizabeth Nelson.
The division of our board of directors into three classes with
staggered three-year terms may delay or prevent a change of our
management or a change of control. Mr. Boesenberg and Mr. Spero
are the Class I directors and their terms will expire in
2010. Mr. Goldberg and Mr. Parker are the Class II
directors and their terms will expire in 2011. Mr. Layton, Ms.
Nelson and Mr. Sullivan are the Class III directors and
their terms will expire in 2012.
Corporate
Governance
We expect that our board of directors will fully implement our
corporate governance initiatives at or prior to the time of this
offering. We believe these initiatives comply with the
Sarbanes-Oxley Act of 2002 and the rules and regulations of the
SEC adopted thereunder. In addition, we believe our corporate
governance initiatives comply with the rules of the Nasdaq Stock
Market. After this offering, our board of directors will
continue to evaluate, and improve upon as appropriate, our
corporate governance principles and policies.
We expect our board of directors to adopt a code of business
conduct, effective upon consummation of the offering, that
applies to each of our directors, officers and employees. The
code addresses various topics, including:
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compliance with laws, rules and regulations;
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conflicts of interest;
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insider trading;
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corporate opportunities;
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competition and fair dealing;
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fair employment practices;
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record keeping;
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confidentiality;
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protection and proper use of company assets; and
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payments to government personnel.
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Board
Committees
We have established an audit committee, a compensation committee
and a nominating and corporate governance committee. We believe
that the composition of these committees will meet the criteria
for independence under, and the functioning of these committees
comply with the requirements of, the Sarbanes-Oxley Act of 2002,
the rules of the Nasdaq Stock Market and SEC rules and
regulations that will become applicable to us upon consummation
of the offering. We intend to comply with the requirements of
the Nasdaq Stock Market with respect to committee composition of
independent directors as they become applicable to us. Each
committee has the composition and responsibilities described
below.
Audit
Committee
The audit committee provides assistance to the board of
directors in fulfilling its oversight responsibilities regarding
the integrity of financial statements, our compliance with
applicable legal and regulatory requirements, the integrity of
our financial reporting processes including its systems of
internal accounting and financial controls, the performance of
our internal audit function and independent auditor and our
financial policy matters by approving the services performed by
our independent accountants and reviewing their reports
regarding our accounting practices and systems of internal
accounting controls. The audit committee also oversees the audit
efforts of our independent accountants and take those actions as
it deems necessary to satisfy itself that the accountants are
independent of management.
The members of this committee are Charles M. Boesenberg,
Elizabeth Nelson and Benjamin Spero, with Ms. Nelson
serving as the chairperson of the committee. We believe that
Mr. Boesenberg and Ms. Nelson are independent
directors, as defined under the rules of the Nasdaq Stock Market
and
Rule 10A-3
of the Exchange Act. We believe that each member of our audit
committee meets the requirements for financial literacy.
Mr. Boesenberg and Ms. Nelson are our audit committee
financial experts, as defined under applicable SEC rules.
Effective upon consummation of the offering, the audit committee
will operate under a written charter that satisfies the
applicable standards of the SEC and the Nasdaq Stock Market.
Compensation
Committee
The compensation committee oversees our overall compensation
structure, policies and programs, and assesses whether our
compensation structure establishes appropriate incentives for
officers and employees. The compensation committee reviews and
approves corporate goals and objectives relevant to compensation
of our chief executive officer and other executive officers,
evaluates the performance of these officers in light of those
goals and objectives, sets the compensation of these officers
based on such evaluations and reviews and recommends to the
board of directors any employment-related agreements, any
proposed severance arrangements or change of control or similar
agreements with these officers. The compensation committee also
administers the issuance of stock options and other awards under
our stock plans. The compensation committee will review and
evaluate, at least annually, the performance of the compensation
committee and its members and the adequacy of the charter of the
compensation committee. The compensation committee will also
prepare a report on executive compensation, as required by the
SEC rules, to be included in our annual report and annual proxy
statement.
The members of our compensation committee are Charles M.
Boesenberg, Thomas Layton, Elizabeth Nelson and Victor Parker,
with Mr. Boesenberg serving as the chairperson of the
committee. We believe that Mr. Boesenberg, Mr. Layton
and Ms. Nelson are independent directors under the
applicable rules and regulations
87
of the SEC, the Nasdaq Stock Market and the Internal Revenue
Code. Effective upon the consummation of the offering, the
compensation committee will operate under a written charter that
satisfies the applicable standards of the Nasdaq Stock Market.
Compensation
Committee Interlocks and Insider Participation
Prior to June 2009, our compensation committee consisted of
Charles M. Boesenberg, David Goldberg and Victor Parker. None of
the members of our compensation committee is an officer or
employee of the company. 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 compensation committee. Mr. Parker may be
deemed to have an interest in the following transactions
requiring disclosure under Item 404 of
Regulation S-K
under the Securities Act:
Contribution agreement. As part of the
Spectrum investment, we entered into a Contribution Agreement
with Spectrum Equity Investors V, L.P. and certain of its
affiliates, affiliates of Crosslink Capital, Inc., Timothy
Sullivan, W Capital Partners II, L.P. and the JLS Revocable
Trust, among other individuals and entities (collectively, the
Contributors). Pursuant to this agreement, the
Contributors transferred and assigned to the company certain
shares of the predecessors capital stock and certain
amounts of cash and, in exchange, the company issued certain
amounts of shares of the companys common stock to the
Contributors. With respect to the exchange of certain shares of
the predecessors capital stock, the transaction qualified
as an exchange of property for equity interests pursuant to
Section 351 of the Internal Revenue Code. Spectrum,
affiliates of Crosslink Capital, Inc., W Capital Partners II,
L.P. and the JLS Revocable Trust are our related persons because
each of them, in some cases together with its respective
affiliates, owns more than 5% of our outstanding shares.
Mr. Sullivan is a related person because he is a director
and executive officer of the company. Our directors Victor
Parker and Benjamin Spero are associated with Spectrum and may
therefore be deemed to have an interest in the agreements
described below that we have entered into with Spectrum. The
total value of the cash and shares contributed pursuant to the
Contribution Agreement was $205.5 million. Spectrum and its
affiliates contributed cash and equity with an aggregate value
of $138.6 million.
Merger agreement. As part of the Spectrum
investment, we entered into an Agreement and Plan of Merger with
Generations Holding, Inc. (now Ancestry.com Inc.), Haley
Acquisition Corporation, The Generations Network, Inc., and
David C. Moon. Pursuant to the agreement, at the effective time
of the merger, The Generations Network, Inc. (now Ancestry.com
Operations Inc.) became a wholly-owned subsidiary of Generations
Holding, Inc. As a result of the Spectrum investment, Spectrum
Equity Investors V, L.P. and certain of its affiliates,
collectively, acquired 25,667,540 shares of our common
stock, which represent approximately 67% of the outstanding
common stock of the company as of September 30, 2009. The
total purchase price for the acquisition was
$354.8 million. The dollar value of Spectrums
interests in the Merger Agreement are the same as the dollar
value of their interests in the Contribution Agreement as
described above.
Stockholders agreement. As part of the
Spectrum investment, we entered into a Stockholders Agreement
with Spectrum Equity Investors V, L.P. and certain of its
affiliates, affiliates of Crosslink Capital, Inc., Timothy
Sullivan, W Capital Partners II, L.P. and the JLS Revocable
Trust, among other individuals and entities. The agreement
establishes the composition of the companys board of
directors and contains certain rights and restrictions with
respect to the transfer of shares of our capital stock. Prior to
the completion of this offering, Spectrum Equity
Investors V, L.P. and certain of its affiliates had the
right to appoint or nominate three of our directors. This right
terminates upon completion of this offering. All three of these
appointees will remain on our board following this offering, but
we are under no contractual obligation to retain them.
Registration rights. As part of the Spectrum
investment, Spectrum Equity Investors V, L.P. and certain
of its affiliates, affiliates of Crosslink Capital, Inc., the
JLS Revocable Trust, W Capital Partners II, L.P., Timothy
Sullivan and certain other holders of our stock have
registration rights with respect to shares of capital stock that
they hold.
Demand registration rights. At any time, the
holders of a majority of the registrable securities held by
Spectrum Equity Investors V, L.P. and certain of its affiliates,
collectively (the Spectrum registrable securities),
may request registration under the Securities Act of all or part
of their registrable securities
88
on a Registration Statement on
Form S-l
or any similar long-form registration statement or. if
available, on a Registration Statement on
Form S-3
or any similar short-form registration statement. The holders of
a majority of the Spectrum registrable securities will be
entitled to request three long-form registrations in which the
company will pay all registration expenses. In addition, the
holders of a majority of the Spectrum registrable securities
will be entitled to request an unlimited number of short-form
registrations in which the company will pay all registration
expenses. However, the aggregate offering value of the
registrable securities requested to be registered by Spectrum
Equity Investors V, L.P. and certain of its affiliates in
any short-form registration must equal at least $1,500,000 in
the aggregate.
The company will not be obligated to effect any demand
registration within three months after the effective date of a
previous demand registration. Moreover, the company may postpone
for up to three months the filing of a registration statement
for a demand registration if the companys board of
directors determines in its reasonable good faith judgment and
the holders of at least a majority of the Spectrum registrable
securities agree that such demand registration would reasonably
be expected to have a material adverse effect on any proposal by
the company to engage in a merger, consolidation or similar
transaction. The company may delay a demand registration in this
manner only once in every
12-month
period.
Piggyback registration rights. If we register
any securities for public sale after this offering, our
stockholders with piggyback registration rights under our
Registration Rights Agreement have the right to include their
shares in the registration, subject to certain exceptions. For
example, if the piggyback registration is an underwritten
primary offering and the managing underwriters advise the
company that, in their opinion, the number of securities
requested to be included in the offering exceeds the number
which can be sold in such offering without adversely affecting
the marketability of such offering, the company is required to
include in the offering (i) first, the securities the
company proposes to sell, (ii) second, the registrable
securities requested to be included in such registration, pro
rata among the holders of such registrable securities on the
basis of the number of registrable securities owned by each such
holder and (iii) third, any other securities requested to be
included in such registration pro rata among those holders on
the basis of the number of such securities owned by each such
holder. The registration expenses of the holders of registrable
securities will be paid by us in all piggyback registrations,
regardless of whether such registration is consummated.
Nominating
and Corporate Governance Committee
The nominating and corporate governance committee was
established in July 2009 and is responsible for developing
and recommending to the board of directors criteria for
identifying and evaluating candidates for directorships and
making recommendations to the board of directors regarding
candidates for election or reelection to the board of directors
at each annual stockholders meeting. In addition, the
nominating and corporate governance committee is responsible for
overseeing our corporate governance guidelines and reporting and
making recommendations to the board of directors concerning
corporate governance matters. The nominating and corporate
governance committee will be also responsible for making
recommendations to the board of directors concerning the
structure, composition and function of the board of directors
and its committees.
The members of our nominating and corporate governance committee
are Charles M. Boesenberg, David Goldberg and Victor
Parker, with Mr. Boesenberg serving as chairperson of the
committee. We believe that Mr. Boesenberg and
Mr. Goldberg are independent directors under the applicable
rules and regulations of the Nasdaq Stock Market. Effective upon
the consummation of the offering, the nominating and corporate
governance committee will operate under a written charter that
satisfies the applicable standards of the Nasdaq Stock Market.
Compensation
of the Board of Directors
We do not currently provide any cash compensation generally to
our non-employee directors, except that we have entered into a
letter agreement with Charles M. Boesenberg dated June 5,
2006, pursuant to which Mr. Boesenberg is entitled to
receive an annual cash retainer in the amount of $15,000 for
service as a member of the board of directors and an additional
annual cash retainer in the amount of $10,000 for service as
chairperson of the audit committee of the board of directors.
From time to time, we have granted stock options to our
non-employee directors as compensation for their services, but
in the past have not had a formal policy in place with
89
respect to such awards. Effective July 2009, our non-employee
directors are entitled to receive a $30,000 annual fee. The
audit committee chairperson will receive an annual fee of
$13,000 and members of the audit committee will receive an
annual fee of $5,000. The compensation committee chairperson
will receive a $10,000 annual fee and members of the
compensation committee will receive a $4,000 annual fee. The
chairperson of the nominating and corporate governance committee
will receive a $5,000 annual fee and members of the nominating
and corporate governance committee will receive a $2,000 annual
fee. New directors will generally receive a grant of 87,500
options vesting over four years. Options held by non-employee
directors generally vest upon a change of control as
defined in the applicable option agreement or option plan. There
are currently no equity ownership requirements or guidelines
that any of our non-employee directors must meet or maintain.
The following table provides information concerning the
compensation paid by us to each of our non-employee directors
for the year ended December 31, 2008. Mr. Sullivan is
compensated for his service as an employee and does not receive
any additional compensation for his service on our board.
Director
Compensation for Year 2008
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Fees Earned or
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Option
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Name
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Paid in Cash
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Awards(1)(2)
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Total
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Charles M.
Boesenberg(3)
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$
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25,000
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$
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72,959
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$
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97,959
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David
Goldberg(4)
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39,438
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39,438
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Thomas
Layton(5)
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Elizabeth
Nelson(6)
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Victor Parker
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Benjamin Spero
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(1)
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The amounts included in the
Option Awards column do not reflect compensation
actually received by the director but represent the compensation
cost that was recognized by us in the year ended
December 31, 2008, determined in accordance with
SFAS No. 123(R), but excluding any estimate of future
forfeitures related to service-based vesting conditions and
reflecting the effect of any actual forfeitures. The valuation
assumptions used in determining such amounts are described in
Note 8 to our consolidated financial statements and the
related notes included elsewhere in this prospectus.
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(2)
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The valuation assumptions used in
determining the grant date estimated fair values for the options
granted to Mr. Boesenberg and Mr. Goldberg are
described in Note 8 to our consolidated financial
statements and the related notes included elsewhere in this
prospectus.
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(3)
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On March 27, 2008, we granted
Mr. Boesenberg an option to purchase 161,871 shares of
our common stock having an exercise price per share equal to
$5.40 and a grant date fair value of $358,543. As of
December 31, 2008, Mr. Boesenberg held options to
acquire 249,371 shares of our common stock.
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(4)
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On March 27, 2008, we granted
Mr. Goldberg an option to purchase 87,500 shares of
our common stock having an exercise price per share equal to
$5.40 and a grant date fair value of $193,813. As of
December 31, 2008, Mr. Goldberg held options to
acquire 87,500 shares of our common stock.
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(5)
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On October 14, 2009, we
granted Mr. Layton an option to purchase 87,500 shares of
common stock having an exercise price per share equal to $13.50
per share.
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(6)
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On July 20, 2009, we granted
Ms. Nelson an option to purchase 87,500 shares of
common stock having an exercise price per share equal to $8.54
per share.
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90
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
This section explains how our executive compensation programs
are designed and operate with respect to our named executive
officers listed in the Summary Compensation Table below. Our
named executive officers in 2008 were Timothy Sullivan,
President and Chief Executive Officer; Andrew Wait, Senior Vice
President and General Manager, Family History; Joshua Hanna,
Senior Vice President and General Manager of International;
David Rinn, Senior Vice President of Strategy and Corporate
Development (during 2008, Mr. Rinn served as our Chief
Financial Officer); and Michael Wolfgramm, Senior Vice President
and Chief Technology Officer. Our current Chief Financial
Officer is Howard Hochhauser, who joined us on January 12,
2009.
Executive
Summary
Our compensation strategy focuses on providing a total
compensation package that will not only attract and retain
high-caliber executive officers and employees, but will also be
utilized as a tool to communicate and align employee
contributions with our objectives and stockholder interests. We
intend to provide a competitive total compensation package and
will share our success with our named executive officers, as
well as our other employees, when our objectives are met.
Compensation for our named executive officers consists of the
elements identified in the following table.
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Compensation Element
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Objective
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Base salary
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To recognize ongoing performance of job responsibilities and as
a necessary tool in attracting and retaining employees.
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Annual performance-based cash compensation
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To re-emphasize corporate objectives and provide additional
reward opportunities for our named executive officers (and
employees generally) when key business objectives are met.
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Long-term equity incentive compensation
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To reward increases in stockholder value and to emphasize and
reinforce our focus on team success.
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Severance and change of control benefits
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To provide income protection in the event of involuntary loss of
employment and to focus named executive officers on stockholder
interests when considering strategic alternatives.
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Retirement savings (401(k)) plan
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To provide retirement savings in a tax-efficient manner.
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Health and welfare benefits
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To provide a basic level of protection from health, dental,
life, and disability risks.
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Each of the elements of our executive compensation program is
discussed in more detail below. Our compensation programs are
designed to be flexible and complementary and to collectively
serve the compensation objectives described above. We have not
adopted any formal or informal policies or guidelines for
allocating compensation between long-term and short-term
compensation, between cash and non-cash compensation or among
different forms of cash and non-cash compensation.
Determining
Executive Compensation
Mr. Sullivan, our President and Chief Executive Officer,
has historically reviewed the performance of each named
executive officer other than himself, and based on this review
and the factors described below, made recommendations to the
board of directors with respect to each named executive
officers total compensation package. Historically, the
board of directors has made the final determination with regard
to the total compensation package for our named executive
officers, including Mr. Sullivan. Upon consummation of this
offering, we anticipate that the compensation committee, rather
than the full board of directors, will take on the
responsibility for this annual review and decision-making
process.
91
In determining base salary and target annual performance-based
cash compensation, we use each named executive officers
current level of compensation as the starting point. We base any
adjustments to those levels primarily on the experience of the
members of our board of directors in our industry and their
review of anonymous private company compensation surveys, the
individuals performance and internal pay equity
considerations. In reviewing individual performance, we consider
our financial results, including departmental results as
applicable, as compared to our internal operating plan for the
year as well as a subjective, qualitative review of each named
executive officers contribution to the success of the
business. We do not assign a specific weight to any single
factor in evaluating individual performance and historically
have not established annual performance objectives by which to
measure individual performance. We have not historically
benchmarked compensation (either on an aggregate or
element-by-element
basis) to specific levels relative to peer companies or external
market compensation data. We anticipate that, in the future, we
will target the base salary range at the 50th percentile
relative to available survey data in establishing base salary
ranges for specific positions. In addition, we have not
historically targeted a specific mix between fixed and variable
compensation, cash and equity incentive awards, or long-term and
short-term compensation. Our mix of compensation elements is
simply designed to reward recent results and motivate long-term
performance through a combination of short-term cash and
long-term equity incentive awards.
In connection with this offering, our board of directors engaged
Compensia, Inc., an independent compensation consultant, to
review our compensation program for our named executive
officers. Based on Compensias review of severance and
change of control practices at similarly-sized publicly-traded
technology companies, we entered into amended and restated
employment letters with each of our executive officers as
described in more detail below under Elements of
Compensation Severance and Change of Control
Arrangements.
Elements
of Compensation
Base salaries. In general, base salaries for
our named executive officers were initially established through
arms-length negotiations at the time the individual was
hired, taking into account anonymous private company
compensation surveys and internal pay equity considerations, as
well as the individuals qualifications and experience.
Base salaries of our named executive officers are reviewed and
approved annually by our board of directors during the first
quarter of each year, and adjustments to base salaries are based
on his or her performance, as well as anonymous private company
compensation surveys and internal pay equity considerations. In
addition, with respect to Mr. Waits base salary adjustment
in 2008 we took into account the magnitude of his
responsibilities relative to the company as a whole and his
performance, as well as Mr. Waits base salary level
as compared to that of peer executives at the company. In making
decisions regarding salary adjustments, we also draw upon the
experience that members of our board of directors have within
our industry. We do not assign a specific weight to any single
factor in making decisions regarding base salary adjustments.
Based on these factors, in 2008 the base salaries for our named
executive officers were increased as follows:
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Named Executive
Officer
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Base Salary Increase
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Timothy Sullivan
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Andrew Wait
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$
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25,500
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Joshua Hanna
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$
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6,000
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David Rinn
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$
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11,750
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Michael Wolfgramm
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$
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5,000
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In addition to the adjustments described above, as part of his
expatriate arrangement (described in more detail below under
Other Compensation Practices and
Polices Perquisites and Personal Benefits),
Mr. Hanna received a 5% increase in his base salary for the
term of his expatriate assignment in recognition of the
differential in the costs of goods and services in the United
Kingdom.
Annual performance-based cash
compensation. The named executive officers, as
well as other executives and key employees, participate in our
annual Performance Incentive Program, which provides an
opportunity to earn a cash bonus upon achievement of performance
objectives approved by our board of directors. This program was
established to further align individual goals with corporate and
business unit goals and to increase focus on executing key
business deliverables.
92
Target bonuses. As with base salaries, the
target annual incentive compensation opportunities (generally
expressed as a percentage of base salary) for our named
executive officers were initially established through
arms-length negotiations at the time the individual was
hired, taking into account anonymous private company
compensation surveys and internal pay equity considerations, as
well as the individuals qualifications and experience.
Along with base salaries, annual incentive compensation targets
are reviewed and approved annually by the board of directors
during the first quarter of each year. Adjustments to annual
incentive compensation targets are based on individual
performance, as well as anonymous private company compensation
surveys and internal pay equity considerations. In making
decisions regarding adjustments to annual incentive compensation
targets, we also draw upon the experience that members of our
board of directors have within our industry. We do not assign a
specific weight to any single factor in making decisions
regarding adjustments to annual incentive compensation targets.
For 2008, the annual incentive compensation targets for our
named executive officers under the Performance Incentive Program
were as follows:
|
|
|
Named Executive
Officer
|
|
Target Bonus (% of base
salary)
|
|
Timothy Sullivan
|
|
85.7% + an additional $50,000
|
Andrew Wait
|
|
40% + an additional $50,000
|
Joshua Hanna
|
|
50%
|
David Rinn
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|
50%
|
Michael Wolfgramm
|
|
40%
|
None of our named executive officers received an increase in
target annual incentive compensation for 2008. However, as noted
in the table above, for 2008, Mr. Sullivan and
Mr. Wait were eligible to receive an additional bonus under
the Performance Incentive Program with the target for that
additional bonus set at $50,000. The additional incentive
opportunity was afforded to Mr. Sullivan and Mr. Wait
due to their strong performance in 2007, internal pay equity
considerations and to create an additional incentive to achieve
increased performance objectives in 2008. For fiscal 2009, our
board adjusted the target bonus for certain named executive
officers. See Narrative Disclosure to Summary
Compensation Table for the Year ended December 31, 2008 and
Grants of Plan-Based Awards in Year 2008 Table.
Bonus determinations. Under the Performance
Incentive Program, each year (generally during the first
quarter) the board of directors establishes company-wide
financial performance objectives, which serve as the basis for
determining the amount of bonuses to be paid under the program.
For 2008, the board of directors established three such
performance objectives tied to our billings, revenues and
adjusted EBITDA. The board of directors determines target levels
for each of these goals in consultation with management and
taking into account our performance for the immediately
preceding year. The target levels for each of these goals
established by the board of directors for 2008 each represented
a significant increase over our actual performance in 2007.
Beginning in 2009, the board of directors established
performance objectives tied to revenues, adjusted EBITDA and
free cash flow.
After the end of each year, the board of directors reviews our
performance with respect to the performance objectives and
determines the amount of bonuses to be paid under the program as
a whole. We must achieve at least 90% of the target level for
each objective for bonuses to be paid under the program;
performance at the 90% level with respect to each objective
would result in bonus payouts to the named executive officers at
no more than 70% of the named executive officers
individual target bonus opportunity. The maximum bonus payout to
a named executive officer under the program is 130% of the named
executive officers individual target bonus opportunity,
which could only occur if we achieved at least 110% of target
with respect to each objective. We expect the criteria for
bonuses in 2009 to be generally consistent with 2008.
After determining the overall amount of bonuses to be paid under
the Performance Incentive Program for the year, the board of
directors determines the actual bonus payouts to each named
executive officer based on its subjective determinations of each
individuals overall performance and contribution during
the year (taking into account applicable financial results as
compared to our internal operating plan for the year as well as
a subjective, qualitative review of each named executive
officers contribution to the success of the business),
internal pay equity considerations, and, with respect to each
named executive officer other than Mr. Sullivan, the
recommendations of our President and Chief Executive Officer.
93
Based on our strong performance in 2008 and the individual
contributions of each of our named executive officers, the board
of directors awarded the named executive officers bonuses for
2008 in the amounts disclosed in Summary Compensation
Table For Year Ended December 31, 2008. In December
2008, we also paid a bonus equal to 2% of salary to a majority
of our employees, including the named executive officers other
than Mr. Sullivan.
Long-term equity incentive compensation. Our
named executive officers are eligible to receive long-term
equity-based incentive awards, which are intended to align the
interests of our named executive officers with the interests of
our stockholders and to emphasize and reinforce our focus on
team success. Historically, our long-term equity-based incentive
compensation awards have been made solely in the form of stock
options subject to vesting based on continued employment. We
believe that stock options are an effective tool for meeting our
compensation goal of increasing long-term stockholder value by
tying the value of the stock options to our future performance.
Because employees are able to profit from stock options only if
our stock price increases relative to the stock options
exercise price, we believe stock options provide meaningful
incentives to employees to achieve increases in the value of our
stock over time.
All stock option awards are approved by the board of directors.
In determining the size of a stock option grant, the board of
directors takes into account individual performance (generally
consisting of financial performance as compared to our internal
operating plan for the year as well as a subjective, qualitative
review of each named executive officers contribution to
the success of the business), internal pay equity considerations
and the value of existing long-term incentive awards. Each named
executive officer received an initial grant of stock options in
connection with the commencement of his employment. Our named
executive officers and other employees are also eligible to
receive additional or refresher grants from time to
time. We do not have a set program for the award of refresher
grants, and our board of directors retains discretion to make
stock option awards to employees at any time.
The exercise price of each stock option grant is generally the
estimated fair value of our common stock on the grant date.
Historically, the determination of the appropriate estimated
fair value was made by the board of directors based on its
consideration of numerous objective and subjective factors,
including but not limited to arms-length sales of our
common stock in privately negotiated transactions, valuations of
our common stock, our stage of development and financial
position and our future financial projections.
Stock option awards to our named executive officers typically
vest over a four-year period as follows: 25% of the shares
underlying the option vest on the first anniversary of the date
of grant, and the remainder of the shares underlying the option
vest in equal monthly installments of 1/48th of the number
of shares underlying the option over 36 months thereafter.
We believe this vesting schedule appropriately encourages
long-term employment with our company, while allowing our
executives to realize compensation in line with the value they
have created for our stockholders.
Based on these factors, in 2008 the board of directors granted
stock options to the named executive officers as set forth below
in Grants of Plan-Based Awards for Year 2008.
Severance and change of control
arrangements. Pursuant to employment letters
entered into at the time of their initial hire, each of our
named executive officers is eligible for severance benefits
consisting of base salary continuation and paid COBRA coverage
for a specified period of time (ranging from three to six
months) if his employment is terminated by us without cause or
if the executive resigns for good reason. We provide these
benefits to promote retention and ease the consequences to the
executive of an unexpected termination of employment.
The employment letters with each of our named executive officers
also provide for accelerated vesting of a portion of the
executives then outstanding stock options in the event the
executive is terminated by us without cause or resigns for good
reason, in each case, within 12 months following a change
of control. These arrangements are intended to preserve morale
and productivity and encourage retention in the face of the
disruptive impact of a change of control and to allow them to
focus on the value of strategic alternatives to stockholders
without concern for the impact on their continued employment, as
each of their offices is at heightened risk of turnover in the
event of a change of control.
As noted above, effective as of July 20, 2009, we entered
into amended and restated employment letters with each of the
named executive officers. Based on Compensias review of
severance and change of control practices at
94
similarly-sized publicly-traded technology companies, the board
of directors approved the following changes to the severance and
change of control benefits provided to the named executive
officers under the employment letters:
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|
|
|
The period during which the executive would be entitled to base
salary continuation and paid COBRA coverage was increased to six
months for all of the named executive officers whose employment
letters previously provided for a shorter severance period.
|
|
|
|
In addition to base salary continuation and paid COBRA coverage,
upon a termination without cause or resignation for good reason
each executive will also be entitled to an additional severance
payment equal to 80% of the executives average annual
bonus payment over the preceding two years, prorated based on
the number of months the executive was employed by us in the
year of termination.
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|
In the event of a termination without cause or resignation for
good reason within three months before or 12 months after a
change of control, the portion of the executives then
unvested options that will accelerate was increased to 50% for
each of the executives other than (i) Mr. Sullivan,
for whom the percentage was increased to 100%, and
(ii) Mr. Rinn, whose previous and new employment
letters provide for 75% vesting acceleration upon such a
termination of employment.
|
Please refer to the discussion below under
Potential Payments upon Termination or Change of Control
for a more detailed discussion of our severance and change of
control arrangements.
Employee benefits. Our named executive
officers are eligible for the same benefits available to our
employees generally. These include participation in a
tax-qualified 401(k) plan and group life, health, dental, and
disability insurance plans. The type and extent of benefits
offered are intended to be competitive within our industry.
Other
Compensation Practices and Policies
Perquisites and personal benefits. As noted
above, our named executive officers are eligible to participate
in the same benefits as those offered to all full time employees
and, except for requirements unique to Mr. Hannas
expatriate assignment and relocation benefits provided to
certain new hires, we do not have any programs for providing
material personal benefits or executive perquisites to our named
executive officers.
We have entered into an expatriate agreement with Mr. Hanna
as a result of arms-length negotiation at the time he
agreed to relocate to London in January 2005. The benefits
provided under this arrangement are designed to cover the cost
of relocation, family travel, housing, and the differential in
the cost of goods, services and education in the United Kingdom.
We also provide tax equalization to ensure that Mr. Hanna
pays no more or less tax on his base salary and annual cash
incentive compensation than he would have paid had he remained
in the United States. In addition, we reimburse Mr. Hanna
for the cost of tax preparation due to the nature of his
expatriate assignment. Under the July 20, 2009 amendment
and restatement of Mr. Hannas employment letter, in
lieu of certain allowances previously paid and expenses
previously reimbursed by the company, Mr. Hanna is instead
entitled to an annual expatriate allowance of £125,000,
along with the tax equalization benefits and tax preparation
assistance described herein, as well as travel reimbursement for
emergency leave due to serious illness or death in the immediate
family.
Stock ownership guidelines. There are
currently no equity ownership requirements or guidelines that
any of our named executive officers or other employees must meet
or maintain.
Policy regarding the timing of equity
awards. As a privately owned company, there has
been no market for our common stock. Accordingly, in 2008, we
had no program, plan or practice pertaining to the timing of
stock option grants to executive officers coinciding with the
release of material non-public information. We do not, as of
yet, have any plans to implement such a program, plan or
practice after becoming a public company.
Policy regarding restatements. We do not
currently have a formal policy requiring a fixed course of
action with respect to compensation adjustments following later
restatements of financial results. Under those circumstances,
the board of directors or compensation committee thereof would
evaluate whether compensation adjustments were appropriate based
upon the facts and circumstances surrounding the restatement.
95
Tax deductibility. Our board of directors has
considered the potential future effects of Section 162(m)
of the Internal Revenue Code on the compensation paid to our
named executive officers. Section 162(m) places a limit of
$1 million on the amount of compensation that a publicly
held corporation may deduct in any one year with respect to its
chief executive officer and each of the next three most highly
compensated executive officers (other than its chief financial
officer). In general, certain performance-based compensation
approved by stockholders is not subject to this deduction limit.
As we are not currently publicly-traded, our board of directors
has not previously taken the deductibility limit imposed by
Section 162(m) into consideration in making compensation
decisions. We expect that following this offering, the
compensation committee of our board of directors will adopt a
policy that, where reasonably practicable, we will seek to
qualify the variable compensation paid to our named executive
officers for an exemption from the deductibility limitations of
Section 162(m). However, we may authorize compensation
payments that do not comply with the exemptions in
Section 162(m) when we believe that such payments are
appropriate to attract and retain executive talent.
Tabular
Disclosure Regarding Executive Compensation
The following tables provide information regarding the
compensation awarded to or earned during our fiscal year ended
December 31, 2008 by our chief executive officer, chief
financial officer and the three other most highly compensated
executive officers (collectively referred to herein as the
named executive officers).
Summary
Compensation Table For Year Ended December 31,
2008
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Non-Equity
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|
Option
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|
Incentive Plan
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All Other
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Name and Principal
Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Awards(1)
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|
Compensation(2)
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|
Compensation(3)
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Total
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Timothy Sullivan
President and Chief Executive Officer
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|
2008
|
|
|
$
|
350,000
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|
|
$
|
|
|
|
$
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1,486,665
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|
|
$
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402,500
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|
$
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3,317
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|
$
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2,242,482
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Andrew Wait
Senior Vice President and General Manager, Family History
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2008
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245,000
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4,900
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328,429
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197,225
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3,317
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778,871
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Joshua Hanna
Senior Vice President and General Manager of International
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2008
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211,050
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(4)
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4,020
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179,547
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115,575
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709,698
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(5)
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1,219,890
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David Rinn
Senior Vice President of Strategy and Corporate Development;
former Chief Financial
Officer(6)
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2008
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246,960
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4,939
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223,705
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142,000
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3,321
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620,925
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Michael Wolfgramm
Senior Vice President and Chief Technology Officer
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2008
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205,000
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4,100
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165,787
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95,000
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3,288
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473,175
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(1)
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The amounts included in the
Option Awards column do not reflect compensation
actually received by the named executive officer but represent
the compensation cost that was recognized by us in the year
ended December 31, 2008, determined in accordance with
SFAS No. 123(R), but excluding any estimate of future
forfeitures related to service-based vesting conditions and
reflecting the effect of any actual forfeitures. The valuation
assumptions used in determining such amounts are described in
Note 8 to our consolidated financial statements included in
this prospectus.
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(2)
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The amounts included in the
Non-Equity Incentive Plan Compensation column
reflect cash bonuses paid pursuant to our Performance Incentive
Program for 2008, as described in Executive
Compensation Compensation Discussion and
Analysis Elements of Compensation Annual
Performance-Based Cash Compensation above. For more
information, see Grants of Plan-Based Awards for
2008 below.
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(3)
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Other than with respect to
Mr. Hanna, these amounts consist solely of matching
contributions under our 401(k) plan and life insurance premiums
paid by us.
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(4)
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A portion of Mr. Hannas
base salary was paid in British pounds rather than United States
dollars.
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(5)
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This amount includes a cost of
living allowance of $41,500, tax equalization payments of
$495,673, a housing allowance of $90,119, a car allowance,
reimbursement of household maintenance expenses of $25,440,
spousal travel, reimbursement of educational expenses, and
reimbursement for tax preparation expenses, all provided in
connection with Mr. Hannas expatriate assignment in
London along with matching contributions under our 401(k) plan
and life insurance premiums paid by us. The value of
reimbursements paid in British pounds rather than United States
dollars were converted to United States dollars based upon the
exchange rates at the time of reimbursement.
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(6)
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Mr. Rinn served as our Chief
Financial Officer until January 12, 2009.
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96
Grants of
Plan-Based Awards for Year 2008
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All Other
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Stock
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Exercise
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Awards:
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or Base
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Grant Date
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Estimated Future Payouts
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Number of
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Price of
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Fair Value of
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Under Non-Equity
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Securities
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Options
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Stock and
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Grant
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Incentive Plan
Awards(1)
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Underlying
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Awards,
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Option
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Name
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Date
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Threshold
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Target
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Maximum
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Options(2)
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per share
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Awards(3)
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Timothy Sullivan
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$
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245,000
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$
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350,000
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|
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$
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455,000
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|
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$
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|
$
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3/27/2008
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375,000
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5.40
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830,625
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Andrew Wait
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103,600
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148,000
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192,400
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3/27/2008
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250,000
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5.40
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553,750
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Joshua Hanna
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70,350
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100,500
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130,650
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3/27/2008
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250,000
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5.40
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553,750
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David Rinn
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86,436
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123,480
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160,524
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3/27/2008
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50,000
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5.40
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110,750
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7/30/2008
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75,000
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5.40
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170,685
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Michael Wolfgramm
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57,400
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82,000
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106,600
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3/27/2008
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350,000
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5.40
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|
|
|
775,250
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|
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(1)
|
|
Amounts reported represent the
potential performance-based incentive cash payments each
executive could earn pursuant to the Performance Incentive
Program for 2008, as described in Executive
Compensation Compensation Discussion and
Analysis Elements of Compensation Annual
Performance-Based Cash Compensation above. At the time of
grant, the incentive payments could range from the threshold
amounts to the maximum amounts indicated. The actual amounts
earned for 2008 are set forth in the Non-Equity Incentive
Plan Compensation column in the Summary Compensation Table
above.
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(2)
|
|
Reflects shares of common stock
underlying option awards granted in 2008 under the Generations
Holding, Inc. 2008 Stock Purchase and Option Plan. The options
vest over a four-year period as follows: 25% of the shares
underlying the option vest on the first anniversary of the date
of grant, and the remainder of the shares underlying the option
vest in equal monthly installments over 36 months
thereafter.
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(3)
|
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The grant date fair value of option
awards is determined in accordance with
SFAS No. 123(R), but excluding any estimate of future
forfeitures related to service-based vesting conditions and
reflecting the effect of any actual forfeitures. This grant date
fair value is expensed over the vesting period of the awards in
accordance with SFAS No. 123(R) and is reflected in
the Summary Compensation Table in the year it is expensed. The
valuation assumptions used in determining such amounts are
described in Note 8 to our consolidated financial
statements included in this prospectus. These amounts do not
correspond to the actual value that will be recognized by the
named executive officers.
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Narrative
Disclosure to Summary Compensation Table for Year Ended
December 31, 2008 and Grants of Plan-Based Awards in Year
2008 Table
Certain elements of compensation set forth in the Summary
Compensation Table for Year Ended December 31, 2008 and
Grants of Plan-Based Awards for Year 2008 table reflect the
terms of employment letter agreements between us and each of the
named executive officers.
Timothy Sullivan. We are a party to an
employment letter agreement with Mr. Sullivan. The
agreement, as amended and restated as of July 20, 2009,
provides for a base salary of $350,000 per year, and for
Mr. Sullivans participation in our annual Performance
Incentive Program at an annual target bonus of at least 100% of
his base salary (which target bonus, in 2008, was 85.7% of his
base salary plus an additional $50,000).
Andrew Wait. We are a party to an employment
letter agreement with Mr. Wait. The agreement, as amended
and restated as of July 20, 2009, provides for a base
salary of $245,000 per year, and for Mr. Waits
participation in our annual Performance Incentive Program at an
annual target bonus of at least 60% of his base salary (which
target bonus, under the terms of his prior letter agreement, was
40% of his base salary and increased by an additional $50,000
for 2008).
Joshua Hanna. We are a party to an employment
letter agreement with Mr. Hanna. The agreement, as amended
and restated as of July 20, 2009, provides for a base
salary of $220,000 per year (which base salary is payable 70% in
US dollars and 30% in British pounds during the term of his
expatriate assignment in London, United Kingdom), and for
Mr. Hannas participation in our annual Performance
Incentive Program at an annual
97
target bonus of at least 60% of his base salary. In addition,
the letter agreement, prior to the July 2009 amendment and
restatement, provided Mr. Hanna with certain expatriate
benefits described in more detail in the Compensation Discussion
and Analysis above. As described in more detail in the
Compensation Discussion and Analysis above, other than tax
equalization benefits, tax preparation assistance, and emergency
leave, these benefits have been replaced in
Mr. Hannas amended and restated letter agreement with
an annual expatriate allowance of £125,000.
Mr. Hannas letter agreement further provides that at
the conclusion of Mr. Hannas expatriate assignment we
will pay or reimburse Mr. Hanna for relocation costs
incurred in his repatriation to the United States.
David Rinn. We are a party to an employment
letter agreement with Mr. Rinn. The agreement, as amended
and restated as of July 20, 2009, provides for a base
salary of $246,960 per year, and for Mr. Rinns
participation in our annual Performance Incentive Program at an
annual target bonus of at least 50% of his base salary.
Michael Wolfgramm. We are a party to an
employment letter agreement with Mr. Wolfgramm. The
agreement, as amended and restated as of July 20, 2009,
provides for a base salary of $220,000 per year, and for
Mr. Wolfgramms participation in our annual
Performance Incentive Program at an annual target bonus of at
least 40% of his base salary.
Howard Hochhauser. In addition to the above
described employment letters with our named executive officers,
we have also entered into, as of July 20, 2009, a
substantially similar letter agreement with Howard Hochhauser,
our current Chief Financial Officer. Mr. Hochhauser was not
a named executive officer in 2008, as he commenced employment
with us on January 12, 2009. The employment letter
agreement with Mr. Hochhauser provides for a base salary of
$275,000 and for Mr. Hochhausers participation in our
annual Performance Incentive Program at an annual target bonus
of at least 75% of his base salary. The employment letter
agreement with Mr. Hochhauser provides that we will
reimburse him (on an after tax basis) for reasonable expenses
incurred in connection with his relocation to Utah. In
connection with his commencement of employment
Mr. Hochhauser was awarded a sign on bonus of $280,000 and
granted options to acquire 500,000 shares of our common
stock at an exercise price equal to the estimated fair value of
the shares on the date of grant, which options vest in
accordance with the standard vesting schedule described above.
98
Outstanding
Equity Awards at Year-End 2008
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|
|
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|
|
|
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Option
Awards(1)
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Number of
|
|
Number of
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|
|
|
|
|
|
Securities
|
|
Securities
|
|
|
|
|
|
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Underlying
|
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Underlying
|
|
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|
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Unexercised
|
|
Unexercised
|
|
Option
|
|
Option
|
|
|
Options
|
|
Options
|
|
Exercise
|
|
Expiration
|
Name
|
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Exercisable
|
|
Unexercisable
|
|
Price
|
|
Date
|
|
Timothy Sullivan
|
|
|
1,625,036
|
|
|
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374,964
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|
|
$
|
4.60
|
|
|
|
11/15/2015
|
|
|
|
|
|
|
|
|
375,000
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|
|
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5.40
|
|
|
|
3/27/2018
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Andrew Wait
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|
|
137,503
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|
|
|
62,498
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|
|
|
4.60
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|
|
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3/30/2016
|
|
|
|
|
75,522
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|
|
|
49,478
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|
|
|
4.60
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|
|
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7/27/2016
|
|
|
|
|
|
|
|
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250,000
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|
|
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5.40
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|
|
|
3/27/2018
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Joshua Hanna
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|
|
10,000
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|
|
|
|
|
|
|
4.60
|
|
|
|
12/2/2014
|
|
|
|
|
18,230
|
|
|
|
6,771
|
|
|
|
4.60
|
|
|
|
2/14/2016
|
|
|
|
|
45,313
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|
|
|
29,687
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|
|
|
4.60
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|
|
|
7/27/2016
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|
|
|
|
|
|
|
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250,000
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|
|
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5.40
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|
|
|
3/27/2018
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David Rinn
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|
|
154,170
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|
|
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45,830
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|
|
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4.60
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|
|
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11/15/2015
|
|
|
|
|
500,000
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|
|
|
|
|
|
|
4.60
|
|
|
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6/18/2012
|
|
|
|
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46,876
|
|
|
|
3,124
|
|
|
|
4.60
|
|
|
|
3/15/2013
|
|
|
|
|
|
|
|
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50,000
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|
|
|
5.40
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|
|
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3/27/2018
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|
|
|
|
|
|
|
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75,000
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|
|
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5.40
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|
|
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7/30/2018
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Michael Wolfgramm
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|
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2,607
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|
|
|
|
|
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0.70
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|
|
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3/11/2013
|
|
|
|
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18,750
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|
|
|
1,250
|
|
|
|
4.60
|
|
|
|
3/15/2013
|
|
|
|
|
|
|
|
|
350,000
|
|
|
|
5.40
|
|
|
|
3/27/2018
|
|
|
|
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(1)
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Unless otherwise indicated, these
stock options were granted on the date ten years prior to the
expiration date and become vested over a four-year period
following the grant date with 25% of the shares underlying the
option becoming vested on the first anniversary of the date of
grant, and the remainder of the shares underlying the option
becoming vested in equal monthly installments over the
36 months thereafter.
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(2)
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These stock options were all fully
vested as of December 31, 2008.
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Potential
Payments upon Termination or Change of Control
The information below describes certain compensation that would
have become payable under existing plans and contractual
arrangements assuming a termination of employment
and/or
change of control had occurred on December 31, 2008 based
upon the estimated fair value of our common stock on that date
of $5.50, given the named executive officers compensation
and service levels as of such date. There can be no assurance
that an actual triggering event would produce the same or
similar results as those estimated if such event occurs on any
other date or at any other price, of if any other assumption
used to estimate potential payments and benefits is not correct.
Due to the number of factors that affect the nature and amount
of any potential payments or benefits, any actual payments and
benefits may be different.
Employment letters. As of December 31,
2008, we had entered into employment letters with each of the
named executive officers. Each of these employment letters
provided that if we terminated the executives employment
without Cause, and in certain cases if the executive terminated
his employment for Good Reason, the executive would be entitled
to receive severance benefits consisting of base salary
continuation and, except for Mr. Hanna, paid COBRA coverage
for a period of either three months (in the case of
Mr. Wait and Mr. Wolfgramm) or six months (in the case
of Mr. Sullivan and Mr. Rinn). The employment letters
with Mr. Sullivan and Mr. Rinn each provided that if
we terminated the executives employment without Cause or
the executive resigned for Good Reason within 12 months
following a Change of Control, each such executive would be
entitled to accelerated vesting of 75% of the executives
then unvested stock options. The employment letter with
Mr. Wait provided that if we terminated the
executives employment without Cause within 12 months
following a Change of Control, the executive would be entitled
to accelerated vesting of 50% of the executives then
unvested stock options. In
99
addition, the employment letter with Mr. Hanna also
provided for certain relocation benefits and additional three
months of base salary continuation upon return to the United
States.
The table below sets forth the estimated value of the potential
payments to each of the named executive officers, assuming the
executives employment had terminated on December 31,
2008 and/or
that a Change of Control had also occurred on that date. These
figures are based on the employment letters in effect on
December 31, 2008 and do not reflect the additional
severance and change of control benefits provided under the
amended and restated employment letters entered into with the
named executive officers as of July 20, 2009 and described
below.
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|
|
|
|
|
|
|
|
|
|
Termination without Cause or
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|
Termination without Cause or
|
|
|
with Good Reason (Not in
|
|
with Good Reason in
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Name
|
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Connection With a Change of
Control)
|
|
Connection With a Change of
Control
|
|
Timothy Sullivan
|
|
|
|
|
|
|
|
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Severance(1)
|
|
$
|
175,000
|
|
|
$
|
175,000
|
|
Option
Acceleration(2)
|
|
|
|
|
|
|
281,226
|
|
COBRA
Coverage(3)
|
|
|
7,200
|
|
|
|
7,200
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|
Andrew Wait
|
|
|
|
|
|
|
|
|
Severance(1)
|
|
|
61,250
|
|
|
|
61,250
|
|
Option
Acceleration(2)
|
|
|
|
|
|
|
62,889
|
|
COBRA
Coverage(3)
|
|
|
3,600
|
|
|
|
3,600
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|
Joshua Hanna
|
|
|
|
|
|
|
|
|
Severance(1)
|
|
|
150,750
|
|
|
|
150,750
|
|
Option
Acceleration(2)
|
|
|
|
|
|
|
|
|
COBRA
Coverage(3)
|
|
|
7,200
|
|
|
|
7,200
|
|
Relocation
Benefits(4)
|
|
|
30,000
|
|
|
|
30,000
|
|
David Rinn
|
|
|
|
|
|
|
|
|
Severance(1)
|
|
|
123,480
|
|
|
|
123,480
|
|
Option
Acceleration(2)
|
|
|
|
|
|
|
42,419
|
|
COBRA
Coverage(3)
|
|
|
7,200
|
|
|
|
7,200
|
|
Michael Wolfgramm
|
|
|
|
|
|
|
|
|
Severance(1)
|
|
|
51,250
|
|
|
|
51,250
|
|
Option
Acceleration(2)
|
|
|
|
|
|
|
|
|
COBRA
Coverage(3)
|
|
|
3,600
|
|
|
|
3,600
|
|
|
|
|
(1)
|
|
Based on 2008 salary.
|
|
|
|
(2)
|
|
Accelerated vesting of stock
options for the applicable named executive officers is based on
the difference between the estimated fair value of our common
stock on December 31, 2008 of $5.50 and the exercise or
price of the award.
|
|
|
|
(3)
|
|
Estimated based on the cost for
such coverage during 2008.
|
(4)
|
|
Estimated based on the cost for
such benefits during 2008.
|
As described above in the Compensation Discussion and Analysis,
as of July 20, 2009 we entered into amended and restated
employment letters with each named executive officer and
Mr. Hochhauser. As described above, under each of the
amended and restated letters (including the employment letter
with Mr. Hochhauser) if we terminate the executives
employment without Cause, or if the executive terminates his
employment for Good Reason, the executive will be entitled to
receive severance benefits consisting of base salary
continuation and paid COBRA coverage for a period of six months,
plus an additional severance payment equal to 80% of the
executives average annual bonus payment over the preceding
two years, prorated based on the number of months the executive
was employed by us in the year of termination. However,
(i) Mr. Sullivan will only be entitled to the salary
continuation payments if termination occurs within three months
before or twelve months following a Change of Control and
(ii) if termination occurs within the first 12 months
of employment, Mr. Hochhausers severance payments
will be equal to 18 months salary less any months
worked. In addition, each of the amended and restated employment
letters provided that if we terminate the executives
employment without Cause or the executive resigns for Good
Reason within three months before or 12 months following a
Change of Control, each executive
100
will be entitled to accelerated vesting of 50% of the
executives then unvested stock options (100% for
Mr. Sullivan and Mr. Hochhauser and 75% for
Mr. Rinn) and the period during which the executive will
receive paid COBRA coverage will increase to 12 months. In
addition, the amended and restated employment letter with
Mr. Hanna also provides for certain relocation benefits and
additional three months of base salary continuation upon return
to the United States.
The severance benefits described above are contingent upon the
executive agreeing to a general release of claims against us
following termination of employment.
Definitions. For the purposes of the
employment letter, the following terms have the following
definitions:
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|
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|
|
Cause means gross negligence or any breach of
fiduciary duties to us, conviction of, or plea of guilty or no
contest to any felony, any act of fraud or embezzlement,
material violation of a corporate policy or any unauthorized use
or disclosure of confidential information or trade secrets of us
or our affiliates or failure to cooperate in any company
investigation. Neither bad judgment nor mere negligence nor an
act of omission reasonably believed by the executive to have
been in, or not opposed to, the interests of the company, shall
constitute examples of gross negligence.
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|
|
|
An executive may resign for Good Reason within
90 days after the occurrence of any of the following:
without the executives consent (i) a material
reduction of his or her base compensation or (ii) the
executive is relocated to a facility or location more than one
hundred miles from the location as in effect on the date upon
which the employment letter was entered into, unless the move is
part of a relocation of our main corporate offices.
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|
|
|
An executive may resign for Good Reason within 12
months following a change of control and within 90 days
after the occurrence of any of the following without the
executives consent: a material reduction of the
executives compensation, duties, title, authority or
responsibilities, relative to the executives compensation,
duties, titles, authority or responsibilities or the assignment
to the executive of such reduced duties, title, authority or
responsibilities prior to the change.
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|
|
|
A Change of Control occurs when: (i) any person
or entity who is not a controlling stockholder of the company as
of the date of the execution of the employment letter becomes
the beneficial owner, directly or indirectly, of securities of
the company representing 50% or more of the total voting power
of all of the companys then outstanding voting securities,
(ii) a merger or consolidation of the company in which the
companys voting securities immediately prior to the merger
or consolidation do not represent, or are not converted into
securities that represent, a majority of the voting power of all
voting securities of the surviving entity immediately after the
merger or consolidation, or (iii) a sale of all or
substantially all of the assets of the company or a liquidation
or dissolution of the company. The consummation of this offering
will not be considered a Change of Control and will
not trigger the Change of Control benefits described above.
|
Stock
Incentive Plans
2009
Stock Incentive Plan
The following is a summary of the material terms of our 2009
Stock Incentive Plan, which we refer to as the 2009 Stock Plan.
This description is not complete. For more information, we refer
you to the full text of the 2009 Stock Plan, which has been
filed as an exhibit to the registration statement of which this
prospectus forms a part. We adopted the 2009 Stock Plan
effective prior to the date of this prospectus, effective upon
consummation of the offering.
The 2009 Stock Plan authorizes the grant of
non-qualified stock options, incentive stock
options, stock appreciation rights (SARs),
restricted stock, restricted stock units (RSU) and
incentive bonuses to employees, officers, non-employee directors
and other service providers to us and our subsidiaries. The
number of shares of common stock issuable pursuant to all awards
granted under the 2009 Stock Plan shall not exceed the sum of
(i) 5% of the number of shares of common stock outstanding
immediately after the consummation of the offering, which we
estimate to be 2,120,146 shares, as increased each fiscal year
beginning in calendar year 2010 and thereafter by a number of
shares of common stock equal to 4% of the number of outstanding
shares of common stock on the last day of the immediately
preceding fiscal year, plus (ii) any shares of common stock
subject to outstanding awards under
101
the companys other stock incentive plans that on or after
the effective date of the 2009 Stock Plan cease to be subject to
such awards. The number of shares issued or reserved pursuant to
the 2009 Stock Plan (or pursuant to outstanding awards) is
subject to adjustment as a result of mergers, consolidations,
reorganizations, stock splits, stock dividends and other changes
in our common stock. Shares subject to awards that have been
canceled, expired, forfeited or otherwise not issued under an
award and shares subject to awards settled in cash do no count
as shares issued under the 2009 Stock Plan. In addition,
(i) shares that were subject to a stock-settled SAR and
were not issued upon the net settlement or net exercise of such
SAR, (ii) shares used to pay the exercise price of a stock
option, (iii) shares delivered to or withheld by us to pay
the withholding taxes related to an award, and (iv) shares
repurchased on the open market with the proceeds of an option
exercise do not count as shares issued under the 2009 Stock Plan.
Administration. The 2009 Stock Plan is
administered by our compensation committee. The committee has
the discretion to determine the individuals to whom awards may
be granted under the 2009 Stock Plan, the manner in which such
awards will vest and the other conditions applicable to awards.
Options, SARs, restricted stock, RSUs and incentive bonuses may
be granted by the committee to employees, officers, non-employee
directors and other service providers in such numbers and at
such times during the term of the 2009 Stock Plan as the
committee shall determine. The committee is authorized to
interpret the 2009 Stock Plan, to establish, amend and rescind
any rules and regulations relating to the 2009 Stock Plan and to
make any other determinations that it deems necessary or
desirable for the administration of the 2009 Stock Plan. All
decisions, determinations and interpretations by the committee,
and any rules and regulations under the 2009 Stock Plan and the
terms and conditions of or operation of any award, are final and
binding on all participants, beneficiaries, heirs, assigns or
other persons holding or claiming rights under the 2009 Stock
Plan or any award.
Options. The committee will determine the
exercise price and other terms for each option and whether the
options are non-qualified stock options or incentive stock
options. Incentive stock options may be granted only to
employees and are subject to certain other restrictions. To the
extent an option intended to be an incentive stock option does
not so qualify, it will be treated as a non-qualified option. A
participant may exercise an option by written notice and payment
of the exercise price in shares, cash or a combination thereof,
as determined by the committee, including an irrevocable
commitment by a broker to pay over such amount from a sale of
the shares issuable under an option, the delivery of previously
owned shares and withholding of shares deliverable upon exercise.
Stock appreciation rights. The compensation
committee may grant SARs independent of or in connection with an
option. The exercise price per share of a SAR will be an amount
determined by the committee, and the committee will determine
the other terms applicable to SARs. Generally, each SAR will
entitle a participant upon exercise to an amount equal to:
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|
|
|
|
the excess of the fair market value on the exercise date of one
share of common stock over the exercise price, multiplied by
|
|
|
|
the number of shares of common stock covered by the SAR.
|
Payment shall be made in common stock or in cash, or partly in
common stock and partly in cash, all as shall be determined by
the committee.
Restricted stock and restricted stock
units. The compensation committee may award
restricted common stock and RSUs. Restricted stock awards
consist of shares of stock that are transferred to the
participant subject to restrictions that may result in
forfeiture if specified conditions are not satisfied. RSUs
result in the transfer of shares of cash or stock to the
participant only after specified conditions are satisfied. The
committee will determine the restrictions and conditions
applicable to each award of restricted stock or RSUs, which may
include performance vesting conditions.
Incentive bonuses. An incentive bonus is an
opportunity for a participant to earn a future payment tied to
the level of achievement with respect to one or more performance
criteria established for a performance period set by the
committee. The terms of any incentive bonus will be set forth in
an award agreement that will include provisions regarding
(i) the target and maximum amount payable to the
participant, (ii) the performance criteria and level of
102
achievement versus these criteria that shall determine the
amount of such payment, (iii) the term of the performance
period as to which performance shall be measured for determining
the amount of any payment, (iv) the timing of any payment
earned by virtue of performance, (v) restrictions on the
alienation or transfer of the incentive bonus prior to actual
payment, (vi) forfeiture provisions and (vii) such
further terms and conditions as determined by the committee.
Payment of the amount due under an incentive bonus may be made
in cash or in shares, as determined by the committee. Incentive
bonuses may be payable pursuant to a subplan, which for 2009 is
our 2009 Annual Performance Incentive Program.
Performance criteria. Vesting of awards
granted under the 2009 Stock Plan may be subject to the
satisfaction of one or more performance goals established by the
committee. The performance goals may vary from participant to
participant, group to group, and period to period.
Transferability. Unless otherwise determined
by the compensation committee, awards granted under the 2009
Stock Plan are not transferable other than by will or by the
laws of descent and distribution.
Change of control. The compensation committee
may provide, either at the time an award is granted or
thereafter, that a change of control (as defined in the 2009
Stock Plan) that occurs after the offering shall have such
effect as specified by the committee, or no effect, as the
committee in its sole discretion may provide.
Effectiveness of the 2009 Stock Plan; amendment and
termination. The 2009 Stock Plan will become
effective upon consummation of this offering. ISOs may be
granted under the 2009 Stock Plan only during the ten years
following the effective date of the 2009 Stock Plan. The board
of directors may amend, alter or discontinue the 2009 Stock Plan
in any respect at any time, but no amendment may diminish any of
the rights of a participant under any awards previously granted,
without his or her consent. In addition, stockholder approval is
required for any amendment that would increase the maximum
number of shares available for awards, reduce the price at which
options may be granted, change the class of eligible
participants, or otherwise when stockholder approval is required
by law or under stock exchange listing requirements.
Generations
Holding, Inc. 2008 Stock Purchase and Option Plan
Our board of directors adopted, and our stockholders
subsequently approved, the Generations Holding, Inc. 2008 Stock
Purchase and Option Plan, which we refer to as the 2008 Stock
Plan, in March 2008. An aggregate of 6,162,500 shares of
our common stock may be issued pursuant to awards granted under
the 2008 Stock Plan. Upon effectiveness of the 2009 Stock Plan,
we will not issue any further awards under the 2008 Stock Plan
and all shares reserved for new grants under the 2008 Stock Plan
shall be released and no longer subject to such reservation. The
2008 Stock Plan provides for the grant to our executives,
directors, consultants, advisors and key employees of incentive
and nonqualified stock options to purchase our common stock. The
2008 Plan further authorizes the direct sale of shares of our
common stock to plan participants. As of September 30,
2009, options to purchase 5,686,605 shares of our common
stock were outstanding under the 2008 Stock Plan with a weighted
average exercise price per share of $5.85, and
475,895 shares remained available for future issuance
pursuant to options to be granted under the 2008 Stock Plan. To
date, no awards other than stock options have been granted under
the 2008 Stock Plan.
The 2008 Stock Plan is administered either by our board of
directors or a committee thereof that has been designated by the
board of directors to administer the 2008 Stock Plan. Currently,
the 2008 Stock Plan is administered by our board of directors.
Options granted under the 2008 Stock Plan are evidenced by stock
option agreements containing such provisions as the plan
administrator deems advisable. All options granted under the
2008 Stock Plan expire not more than 10 years after the
date of grant and have an exercise price that is determined by
the plan administrator, but in no event is less than the fair
market value of our common stock on the date of grant. Options
issued under the 2008 Stock Plan generally vest ratably over
four years (25% on the first anniversary of the grant date and
at a rate of
1/48 per
month thereafter), but may be subject to certain acceleration
provisions. Full payment for shares of common stock purchased on
the exercise of an option must be made at the time of such
exercise in a manner approved by the plan administrator.
103
Upon a participants termination of service for any reason,
we may, but are not obligated to, purchase any of the shares of
common stock issued under the 2008 Stock Plan then owned by the
participant within one year after the termination of service.
Shares of our common stock acquired under the 2008 Stock Plan
may not be transferred by the participant other than pursuant to
the laws of descent and distribution or to certain family
members or trusts established solely for the benefit thereof.
These repurchase rights and transfer restrictions will terminate
upon the consummation of this offering.
Our board of directors may amend or terminate the 2008 Stock
Plan at any time, subject to certain restrictions. Outstanding
awards may be amended, however, only with the consent of the
holder.
MyFamily.com,
Inc. 2004 Stock Plan
The board of directors of our predecessor corporation adopted,
and its stockholders subsequently approved, the MyFamily.com,
Inc. 2004 Stock Plan, which we refer to as the 2004 Stock Plan,
in December 2004. In conjunction with the acquisition of our
predecessor, we issued replacement options to acquire our common
stock in exchange for all issued and outstanding options of our
predecessor with the same option grant prices and terms
including all terms outlined in the 2004 Stock Plan.
Options awarded under the terms of the 2004 Stock Plan are
administered either by our board of directors or one or more
committees thereof appointed by the board of directors to
administer the 2004 Stock Plan. Currently, such options are
administered by our board of directors.
Options granted under the 2004 Stock Plan are evidenced by stock
option agreements containing such provisions as the plan
administrator deems advisable. All options granted under the
2004 Stock Plan expire not more than 10 years after the
date of grant and have an exercise price that is determined by
the plan administrator, but shall not be less than 100% of the
fair market value of our common stock on the date of grant.
Options issued under the 2004 Stock Plan generally vest ratably
over four years (25% one year after the grant date and at a rate
of
1/48
per month thereafter). Full payment for shares of common stock
purchased on the exercise of an option must be made at the time
of such exercise in a manner approved by the plan administrator.
Shares issued under options granted under the 2004 Stock Plan
are generally subject to a right of first refusal in favor of
us. This right of first refusal will terminate upon the
consummation of this offering.
Our board of directors may amend or terminate the 2004 Stock
Plan at any time. Stockholder approval for an amendment is
generally not obtained unless required by applicable law or
deemed necessary or advisable by our board of directors.
Outstanding awards may be amended, however, only with the
consent of the holder.
MyFamily.com,
Inc. Executive Stock Plan
The board of directors of our predecessor corporation adopted,
and its stockholders subsequently approved, the MyFamily.com,
Inc. Executive Stock Plan, which we refer to as the Executive
Stock Plan, in June 2004. In conjunction with the acquisition of
our predecessor, we issued replacement options to acquire our
common stock in exchange for all issued and outstanding options
of our predecessor with the same option grant prices and terms
including all terms outlined in the Executive Stock Plan.
Options awarded under the terms of the Executive Stock Plan are
administered either by our board of directors or a committee
thereof appointed by the board of directors to administer the
Executive Stock Plan. Currently, such options are administered
by our board of directors.
Options granted under the Executive Stock Plan are evidenced by
stock option agreements containing such provisions as the plan
administrator deems advisable. All options granted under the
Executive Stock Plan expire not more than 10 years after
the date of grant and have an exercise price that is determined
by the plan administrator, but shall not be less than 100% of
the fair market value of our common stock on the date of grant.
Options issued under the Executive Stock Plan generally vest
ratably over four years (25% one year after the grant date and
at a rate of
1/48
per month thereafter). Full payment for shares of common stock
purchased on the exercise of an option must be made at the time
of such exercise in a manner approved by the plan administrator.
104
Shares issued under options granted under the Executive Stock
Plan are generally subject to a right of first refusal in favor
of us. This right of first refusal will terminate upon the
consummation of this offering.
Our board of directors may amend or terminate the Executive
Stock Plan at any time. Stockholder approval for an amendment is
generally not obtained unless required by applicable law or
deemed necessary or advisable by our board of directors.
Outstanding awards may be amended, however, only with the
consent of the holder.
MyFamily.com,
Inc. 1998 Stock Plan
The board of directors of our predecessor corporation adopted,
and its stockholders subsequently approved, the MyFamily.com,
Inc. 1998 Stock Plan, which we refer to as the 1998 Stock Plan,
in 1998, which 1998 Stock Plan was amended and restated in 2001
and further amended in June 2002. In conjunction with the
acquisition of our predecessor, we issued replacement options to
acquire our common stock in exchange for all issued and
outstanding options of our predecessor with the same option
grant prices and terms including all terms outlined in the 1998
Stock Plan, as amended.
Options awarded under the terms of the 1998 Stock Plan are
administered either by our board of directors or a committee
thereof appointed by the board of directors to administer the
1998 Stock Plan. Currently, such options are administered by our
board of directors.
Options granted under the 1998 Stock Plan are evidenced by stock
option agreements containing such provisions as the plan
administrator deems advisable. All options granted under the
1998 Stock Plan expire not more than 10 years after the
date of grant and have an exercise price that is determined by
the plan administrator, but shall not be less than 100% of the
fair market value of our common stock on the date of grant.
Options issued under the 1998 Stock Plan generally vest ratably
over four years (25% one year after the grant date and at a rate
of
1/48
per month thereafter). Full payment for shares of common stock
purchased on the exercise of an option must be made at the time
of such exercise in a manner approved by the plan administrator.
Shares issued under options granted under the 1998 Stock Plan
are generally subject to a right of first refusal in favor of
us. This right of first refusal will terminate upon the
consummation of this offering.
Our board of directors may amend or terminate the 1998 Stock
Plan at any time. Stockholder approval for an amendment is
generally not obtained unless required by applicable law or
deemed necessary or advisable by our board of directors.
Outstanding awards may be amended, however, only with the
consent of the holder.
As of September 30, 2009, options to purchase an aggregate
of 4,639,983 shares of our common stock were outstanding
under the 2004 Stock Plan, Executive Stock Plan and 1998 Stock
Plan with a weighted average exercise price per share of $4.43.
No awards other than stock options have been granted under the
terms of the 2004 Stock Plan, Executive Stock Plan and 1998
Stock Plan and we have no current intentions to issue any
additional awards (in the form of stock options or otherwise)
under the 2004 Stock Plan, Executive Stock Plan and 1998 Stock
Plan.
105
RELATED
PARTY TRANSACTIONS
Related
Party Transactions
The following is a description of transactions since
January 1, 2006 to which we have been a party, in which the
amount involved in the transaction exceeded or will exceed
$120,000, and in which any of our directors, executive officers
or beneficial holders of more than 5% of our capital stock had
or will have a direct or indirect material interest.
Contribution agreement. As part of the
Spectrum investment, we entered into a Contribution Agreement
with Spectrum Equity Investors V, L.P. and certain of its
affiliates, affiliates of Crosslink Capital, Inc., Timothy
Sullivan, W Capital Partners II, L.P. and the JLS Revocable
Trust, among other individuals and entities (collectively, the
Contributors). Pursuant to this agreement, the
Contributors transferred and assigned to the company certain
shares of the predecessors capital stock and certain
amounts of cash and, in exchange, the company issued certain
amounts of shares of the companys common stock to the
Contributors. With respect to the exchange of certain shares of
the capital stock, the transaction qualified as an exchange of
property for equity interests pursuant to Section 351 of
the Internal Revenue Code. Spectrum, affiliates of Crosslink
Capital, Inc., W Capital Partners II, L.P. and the JLS Revocable
Trust are our related persons because each of them, in some
cases together with its respective affiliates, owns more than 5%
of our outstanding shares. Mr. Sullivan is a related person
because he is a director and executive officer of the company.
Our directors Victor Parker and Benjamin Spero are associated
with Spectrum and may therefore be deemed to have an interest in
the agreements described below that we have entered into with
Spectrum. The total value of the cash and shares contributed
pursuant to the Contribution Agreement was $205.5 million.
Spectrum and its affiliates contributed cash and equity with an
aggregate value of $138.6 million. Affiliates of Crosslink
Capital, Inc. contributed equity with an aggregate value of
$12.8 million. W Capital contributed equity with an
aggregate value of $12.1 million. The JLS Revocable Trust
and its affiliated entities and individuals contributed equity
with an aggregate value of $12.2 million. Mr. Sullivan
contributed cash with an aggregate value of $1.8 million.
Merger agreement. As part of the Spectrum
investment, we entered into an Agreement and Plan of Merger with
Generations Holding, Inc. (now Ancestry.com Inc.), Haley
Acquisition Corporation, The Generations Network, Inc., and
David C. Moon. Pursuant to the agreement, at the effective time
of the merger, The Generations Network, Inc. (now Ancestry.com
Operations Inc.) became a wholly-owned subsidiary of Generations
Holding, Inc. As a result of the Spectrum investment, Spectrum
Equity Investors V, L.P. and certain of its affiliates,
collectively, acquired 25,667,540 shares of our common
stock, representing approximately 67% of the outstanding common
stock of the Company as of September 30, 2009. As a result
of the Spectrum investment, affiliates of Crosslink Capital,
Inc., W Capital Partners II, L.P., the JLS Revocable Trust
and Mr. Sullivan acquired 2,378,572, 2,243,284, 2,251,232
and 324,074 shares of our common stock, respectively. The
total purchase price for the acquisition was
$354.8 million. The dollar value of our related
persons interests in the Merger Agreement are the same as
the dollar value of their interests in the Contribution
Agreement as described above. Each of these related
persons number of shares of our common stock and
percentage interest of our outstanding common stock as of
September 30, 2009 is set forth in this prospectus under
Principal and Selling Stockholders.
Stockholders agreement. As part of the
Spectrum investment, we entered into a Stockholders Agreement
with Spectrum Equity Investors V, L.P. and certain of its
affiliates, affiliates of Crosslink Capital, Inc., Timothy
Sullivan, W Capital Partners II, L.P. and the JLS Revocable
Trust, among other individuals and entities. The agreement
establishes the composition of the companys board of
directors and contains certain rights and restrictions with
respect to the transfer of shares of our capital stock. Prior to
the completion of this offering, Spectrum Equity
Investors V, L.P. and certain of its affiliates had the
right to appoint or nominate three of our directors. This right
terminates upon completion of this offering. All three of these
appointees will remain on our board following this offering, but
we are under no contractual obligation to retain them.
Registration rights. As part of the Spectrum
investment Spectrum Equity Investors V, L.P. and certain of
its affiliates, affiliates of Crosslink Capital, Inc., the JLS
Revocable Trust, W Capital Partners II, L.P., Timothy Sullivan
and certain other holders of our stock have registration rights
with respect to shares of capital stock that they hold. For a
description of these registration rights see Description
of Capital Stock-Registration Rights.
106
Exclusive service agreement. We entered into
an Exclusive Service Agreement dated May 22, 2007 with Sorenson
Genomics, LLC, an affiliate of the JLS Revocable Trust, which,
together with its affiliates, owns, in the aggregate, 5.9% of
our common stock as of September 30, 2009. Pursuant to the
agreement, Sorenson Genomics, LLC agreed to provide certain
DNA-testing and specimen storage services to us at negotiated
prices. We paid approximately $3.8 million to Sorenson
Genomics LLC under this agreement from January 1, 2006
through September 30, 2009. This agreement is not material
to us because our DNA services do not represent a material
amount of our revenues.
Procedures
for Approval of Related Party Transactions
We do not currently have a formal, written policy or procedure
for the review and approval of related party transactions.
However, all related party transactions are currently reviewed
and approved by a disinterested majority of our board of
directors.
Our board of directors has adopted a written related person
transaction policy, effective upon the completion of this
offering, which sets forth the policies and procedures for the
review and approval or ratification of related person
transactions. This policy will be administrated by our audit
committee. These policies provide that, in determining whether
or not to recommend the initial approval or ratification of a
related person transaction, the relevant facts and circumstances
available shall be considered, including, among other factors it
deems appropriate, whether the interested transaction is on
terms no less favorable than terms generally available to an
unaffiliated third-party under the same or similar circumstances
and the extent of the related persons interest in the
transaction.
107
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of
September 30, 2009 with respect to:
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each person known by us to beneficially own 5% or more of the
outstanding shares of our common stock;
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each member of our board of directors and each named executive
officer;
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the members of our board of directors and our named executive
officers as a group; and
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the selling stockholders.
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Unless otherwise noted below, the address of each beneficial
owner listed in the table below is
c/o Ancestry.com
Inc., 360 West 4800 North, Provo, UT 84604.
We have determined beneficial ownership in accordance with the
rules of the SEC. Except as indicated by the footnotes below, we
believe, based on the information furnished to us, that the
persons and entities named in the table below have sole voting
and investment power with respect to all shares of common stock
that he or she beneficially owns, subject to applicable
community property laws.
Applicable percentage ownership is based on
38,328,842 shares of common stock outstanding on
September 30, 2009. For purposes of the table below, we
have assumed that 42,402,916 shares of common stock will be
outstanding upon completion of the offering. In computing the
number of shares of common stock beneficially owned by a person
and the percentage ownership of that person, we deemed
outstanding shares of common stock subject to options held by
that person that are currently exercisable or exercisable within
60 days of September 30, 2009. We did not deem these
shares outstanding, however, for the purpose of computing the
percentage ownership of any other person.
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Number of Shares Beneficially Owned
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Percentage of Shares Outstanding
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After Offering
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After Offering
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After Offering
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After Offering
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Shares
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Assuming No
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Assuming Full
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Assuming No
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Assuming Full
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Being
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Exercise of
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Exercise of
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Exercise of
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Exercise of
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Shares
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Offered
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Over-
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Over-
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Over-
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Over-
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Before
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Being
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in Over-
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Allotment
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Allotment
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Before
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Allotment
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Allotment
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Name and Address of Beneficial Owner
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Offering
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Offered
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Allotment
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Option
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Option
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Offering
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Option
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Option
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5% Stockholders:
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Affiliates of Spectrum Equity Investors V,
L.P.(1)
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25,688,322
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2,446,366
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366,954
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23,241,956
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22,875,002
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67.0
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%
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54.8
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%
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53.2
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%
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Entities affiliated with Crosslink Capital,
Inc.(2)
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2,378,572
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2,378,572
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2,378,572
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6.2
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5.6
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5.5
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W Capital Partners II,
L.P.(3)
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2,319,793
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222,491
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33,374
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2,097,302
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2,063,928
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6.1
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4.9
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4.8
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Affiliates of the JLS Revocable
Trust(4)
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2,251,231
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214,703
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32,206
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2,036,528
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2,004,322
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5.9
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4.8
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4.7
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Directors and Named Executive Officers:
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Timothy
Sullivan(5)
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2,495,952
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2,495,952
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2,495,952
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6.2
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5.6
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5.5
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Joshua
Hanna(6)
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211,045
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211,045
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211,045
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*
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*
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*
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David
Rinn(7)
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797,917
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797,917
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797,917
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2.0
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1.8
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1.8
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Andrew
Wait(8)
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402,092
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402,092
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402,092
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1.0
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*
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*
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Michael
Wolfgramm(9)
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183,026
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183,026
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183,026
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*
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*
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*
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Charles M.
Boesenberg(10)
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161,692
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161,692
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161,692
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*
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*
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*
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David
Goldberg(11)
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40,105
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40,105
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40,105
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*
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*
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*
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Thomas Layton
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Elizabeth Nelson
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Victor
Parker(12)
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25,206,114
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22,805,669
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22,445,603
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65.8
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53.8
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52.2
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Benjamin
Spero(13)
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18,518,518
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16,754,952
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16,490,418
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48.3
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39.5
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38.3
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All directors and executive officers as a group (14
individuals)(14)
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4,387,660
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4,387,660
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4,387,660
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11.4
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9.5
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9.3
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108
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Number of Shares Beneficially Owned
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Percentage of Shares Outstanding
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After Offering
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After Offering
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After Offering
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After Offering
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Shares
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Assuming No
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Assuming Full
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Assuming No
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Assuming Full
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Being
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Exercise of
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Exercise of
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Exercise of
|
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Exercise of
|
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Shares
|
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Offered
|
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Over-
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Over-
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Over-
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Over-
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Before
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Being
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in Over-
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Allotment
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Allotment
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Before
|
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Allotment
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Allotment
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Name and Address of Beneficial Owner
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Offering
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Offered
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Allotment
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Option
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Option
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Offering
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Option
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Option
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Other Selling Stockholders:
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Affiliates of Industry Ventures Fund IV,
L.P.(15)
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1,881,504
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180,455
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27,068
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1,701,049
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1,673,981
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4.9
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4.0
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3.9
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Affiliates of Adams Street 2007 Direct Fund,
L.P.(16)
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1,296,296
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124,328
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18,649
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1,171,968
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1,153,319
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3.4
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2.8
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2.7
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CSFB Strategic Partners III VC Holdings,
L.P.(17)
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553,789
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53,114
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7,967
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500,675
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492,708
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1.4
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1.2
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1.1
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Zions SBIC,
LLC(18)
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277,778
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26,642
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3,996
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251,136
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247,140
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*
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*
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*
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Amberbrook IV
LLC(19)
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230,302
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22,089
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3,314
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208,213
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204,899
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*
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*
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*
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Hercules Technology Growth Capital,
Inc.(20)
|
|
|
92,593
|
|
|
|
8,881
|
|
|
|
1,332
|
|
|
|
83,712
|
|
|
|
82,380
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Rand D. Folkman
|
|
|
70,834
|
|
|
|
6,794
|
|
|
|
1,019
|
|
|
|
64,040
|
|
|
|
63,021
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Daren Thayne
|
|
|
50,000
|
|
|
|
22,187
|
|
|
|
3,328
|
|
|
|
27,813
|
|
|
|
24,485
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Jon Callaghan
|
|
|
31,219
|
|
|
|
2,995
|
|
|
|
449
|
|
|
|
28,224
|
|
|
|
27,775
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Drew Izzo
|
|
|
21,094
|
|
|
|
2,024
|
|
|
|
303
|
|
|
|
19,070
|
|
|
|
18,767
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Matthew Wright
|
|
|
2,758
|
|
|
|
264
|
|
|
|
40
|
|
|
|
2,494
|
|
|
|
2,454
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
*
|
|
Indicates ownership of less than
one percent. |
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(1)
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Consists of 18,431,481 shares
of our common stock held by Spectrum Equity Investors V,
L.P. (SEI V), over which Brion B.
Applegate, William P. Collatos, Kevin J. Maroni,
Randy J. Henderson, Michael J. Kennealy,
Victor E. Parker, Benjamin M. Couglin and
Christopher T. Mitchell exercise voting and dispositive
power; 87,037 shares of our common stock held by
Spectrum V Investment Managers Fund, L.P.
(IMF V), over which Brion B. Applegate,
William P. Collatos, Kevin J. Maroni, Randy J.
Henderson, Michael J. Kennealy, Victor E. Parker,
Benjamin M. Couglin and Christopher T. Mitchell
exercise voting and dispositive power; 6,577,071 shares of
our common stock held by Spectrum Equity Investors III,
L.P. (SEI III), over which Brion B.
Applegate, William P. Collatos, Kevin J. Maroni and
Randy J. Henderson exercise voting and dispositive power;
461,426 shares of our common stock held by SEI III
Entrepreneurs Fund, L.P.
(Entrepreneurs III), over which
Brion B. Applegate, William P. Collatos, Kevin J.
Maroni and Randy J. Henderson exercise voting and
dispositive power; 110,524 shares held by Spectrum III
Investment Managers Fund, L.P. (IMF III,
and together with SEI V, IMF V, SEI III and
Entrepreneurs III, the Spectrum Funds),
over which Brion B. Applegate, William P. Collatos,
Kevin J. Maroni and Randy J. Henderson exercise voting
and dispositive power, 12,793 shares of our common stock held by
Brion B. Applegate, 6,391 shares of our common stock held by
William P. Collatos and 1,599 shares of our common stock held by
Randy J. Henderson. Each of the controlling entities, individual
general partners and managing directors of the Spectrum Funds,
as the case may be, including Mr. Parker who is a managing
director of the general partner of the general partner of
SEI V and a managing director of the general partner of
IMF V, and serves on our board of directors, Brion B.
Applegate, William P. Collatos, Kevin J. Maroni,
Randy J. Henderson, Michael J. Kennealy,
Victor E. Parker, Benjamin M. Couglin and
Christopher T. Mitchell disclaims beneficial ownership of
these shares except to the extent of any pecuniary interest
therein. The principal business address of each of the Spectrum
Funds is 333 Middlefield Road, Suite 200, Menlo Park, CA 94025.
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(2)
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Consists of 1,158,048 shares
of our common stock held by Crosslink Ventures IV, L.P.,
48,447 shares of our common stock held by Crosslink
Ventures IV GmbH & Co. KG, 372,813 shares of
our common stock held by Offshore Crosslink Ventures IV,
91,813 shares of our common stock held by Omega
Bayview IV, L.L.C. and 707,452 shares of our common
stock held by Crosslink Crossover Fund IV, LP. All of the
foregoing entities are investment advisory clients of Crosslink
Capital, Inc., a Delaware corporation and investment adviser
registered with the Securities and Exchange Commission.
Michael J. Stark is the President of Crosslink Capital,
Inc. and in that capacity has voting and investment control over
such securities. Mr. Stark disclaims beneficial ownership
of such securities except to the extent of his pecuniary
interest therein. The principal business address of Crosslink
Capital, Inc. is Two Embarcadero Center, Suite 2200, San
Francisco, CA 94111.
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(3)
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The sole general partner of W
Capital Partners II, L.P. is WCP GP II, L.P. and the sole
general partner of WCP GP II, L.P. is WCP GP II, LLC. The
managing members of WCP GP II, LLC exercise voting and
investment power over securities held by W Capital Partners II,
L.P. The managing members of WCP GP II, LLC are Stephen
Wertheimer, David Wachter and Robert Migliorino, each of whom
disclaims beneficial ownership of the securities held by W
Capital Partners II, L.P., except to the extent of any pecuniary
interest therein. The principal business address of W Capital
Partners II, L.P. is 1 East 52nd Street, Fifth Floor, New York,
NY 10022.
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(4)
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Consists of 1,306,533 shares
of our common stock held by the JLS Revocable Trust dated
August 16, 2007, as amended, 932,052 shares of our
common stock held by James Lee Sorenson and 12,646 shares
of our common stock held by Sorenson Media, Inc. The members of
the board of directors of Sorenson Media, Inc., Peter Csathy,
Jim Larson and James Sorenson, may be deemed to exercise joint
voting and dispositive power over the shares of our common stock
owned by Sorenson Media, Inc. Each of these individuals
disclaims beneficial ownership of such shares, except to the
extent of his pecuniary interest therein. The principal business
address of the Sorenson entities is 4179 Riverboat Road,
Suite 208, Salt Lake City, UT 84123.
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(5)
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Includes options to purchase
2,171,878 shares of our common stock exercisable within
60 days.
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109
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(6)
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Consists of options to purchase
211,045 shares of our common stock exercisable within
60 days.
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(7)
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Consists of options to purchase
797,917 shares of our common stock exercisable within
60 days.
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(8)
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Consists of options to purchase
402,092 shares of our common stock exercisable within
60 days.
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(9)
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Consists of options to purchase
183,026 shares of our common stock exercisable within
60 days.
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(10)
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Consists of options to purchase
161,692 shares of our common stock exercisable within
60 days.
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(11)
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Consists of options to purchase
40,105 shares of our common stock exercisable within
60 days.
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(12)
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Consists of an aggregate of
25,206,114 shares held by SEI V, IMF V, SEI III
and IMF III. Mr. Parker is a managing director of the
general partner of the general partner of SEI V and a managing
director of the general partner of IMF V. Mr. Parker is
also a limited partner of the general partner of SEI V, a
limited partner of IMF V, a limited partner of the general
partner of SEI III and a limited partner of IMF III.
Mr. Parker disclaims beneficial ownership of these shares.
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(13)
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Consists of an aggregate of
18,518,518 shares held by SEI V and IMF V. Mr. Spero
is a limited partner of the general partner of SEI V and a
limited partner of IMF V. Mr. Spero disclaims beneficial
ownership of these shares.
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(14)
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Includes shares described in
footnotes 5 through 11 above and excludes shares of Spectrum
Equity Investors V, L.P. and its affiliates, of which
Mr. Parker and Mr. Spero disclaim beneficial ownership.
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(15)
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Consists of 1,100,601 shares
of our common stock held by Industry Ventures Fund IV,
L.P., over which Hans Swindlens, Mike Gridley and Justin Burden
exercise voting and dispositive power, 538,301 shares of
our common stock held by Industry Ventures Digital, LLC, over
which Hans Swindlens, Mike Gridley and Justin Burden exercise
voting and dispositive control, and 242,602 shares of our
common stock held by Industry Ventures Acquisition Fund, L.P.,
over which Hans Swindlens, Mike Gridley and Justin Burden
exercise voting and dispositive control. Each of Hans Swindlens,
Mike Gridley and Justin Burden disclaims beneficial ownership of
these shares except to the extent of any pecuniary interest
therein. The principal business address of each of these
entities is 750 Battery Street, Floor 7, San Francisco, CA
94111.
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(16)
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Consists of 687,499 shares of
our common stock held by Adams Street 2007 Direct Fund, L.P.,
over which Adams Street Partners, LLC, as its general partner,
exercise voting and investment power and 608,797 shares of
our common stock held by Adams Street 2006 Direct Fund, L.P.,
over which Adams Street Partners, LLC, as its general partner,
exercise voting and investment power. The principal business
address of these entities is One North Wacker Drive,
Suite 2200, Chicago, IL 60606.
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(17)
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The indirect general partner of
CSFB Strategic Partners III VC Holdings, L.P. is DGL MB
Advisors Inc., a registered Investment Advisor. The principal
business address of CSFB Strategic Partners III VC
Holdings, L.P. is 11 Madison Ave., Floor 16, New York, New York
10010.
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(18)
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Nick Efstratis and Kent Madsen
exercise voting and investment power over the securities held by
Zions SBIC, LLC, each of whom disclaims beneficial ownership of
the securities held by Zions SBIC, LLC, except to the extent of
any pecuniary interest therein. The principal business address
of Zions SBIC, LLC is One South Main Street, Floor 8, Salt Lake
City, UT 84111.
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(19)
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Jerrold Newman, Luisa Mannewell,
James OMara and Michael Bego exercise voting and
investment power over the securities held by Amberbrook IV, LLC.
Each of Jerrold Newman, Luisa Mannewell, James OMara and
Michael Bego disclaims beneficial ownership of these shares
except to the extent of any pecuniary interest therein. The
principal business address of each of these entities is 25 East
86th Street, New York, New York 10028.
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(20)
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Manuel Henriquez, Scott Harvey and
Dave Lund, each as officers of Hercules Technology Growth
Capital, Inc., exercise voting and investment power of the
securities held by Hercules Technology Growth Capital, Inc. Each
of Manuel Henriquez, Scott Harvey and Dave Lund disclaim
beneficial ownership of these shares except to the extent of any
pecuniary interest therein. The principal business address of
Hercules Technology Growth Capital, Inc. is 400 Hamilton Ave.,
Suite 310, Palo Alto, CA 94301.
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110
DESCRIPTION
OF CAPITAL STOCK
General
The following is a summary of our capital stock and provisions
of our amended and restated certificate of incorporation and
amended and restated bylaws, as each will be in effect upon the
closing of this offering, and certain provisions of Delaware
law. This summary does not purport to be complete and is
qualified in its entirety by the provisions of our amended and
restated certificate of incorporation and amended and restated
bylaws, copies of which have been or will be filed with the SEC
as exhibits to this registration statement. References in this
section to the company, we,
us and our refer to Ancestry.com Inc.
and not to any of its subsidiaries.
Following the closing of this offering, we expect that our
authorized capital stock will consist of 175,000,000 shares
of common stock, $0.001 par value per share, and
5,000,000 shares of undesignated preferred stock,
$0.001 par value per share.
Common
Stock
As of September 30, 2009, there were 38,328,842 shares
of common stock outstanding held by 58 stockholders of record.
Pursuant to our amended and restated certificate of
incorporation, holders of our common stock will be entitled to
one vote on all matters submitted to a vote of stockholders;
provided, however, that, except as otherwise required by law,
holders of common stock, as such, shall not be entitled to vote
on any amendment to our amended and restated certificate of
incorporation that relates solely to the terms of one or more
outstanding series of preferred stock if the holders of such
affected series are entitled, either separately or together with
the holders of one or more other such series, to vote thereon
pursuant to our amended and restated certificate of
incorporation. Pursuant to our amended and restated certificate
of incorporation, common stockholders will not be entitled to
cumulative voting in the election of directors. This means that
the holders of a majority of the voting shares will be able to
elect all of the directors then standing for election. Subject
to the rights, if any, of the holders of any outstanding series
of preferred stock, holders of our common stock shall be
entitled to receive dividends out of any of our funds legally
available when, as and if declared by the board of directors.
Upon the dissolution, liquidation or winding up of the company,
subject to the rights, if any, of the holders of our preferred
stock, the holders of shares of our common stock shall be
entitled to receive the assets of the company available for
distribution to its stockholders ratably in proportion to the
number of shares held by them. Holders of common stock will not
have preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions
applicable to our common stock. All outstanding shares of common
stock are fully paid and nonassessable, and the shares of common
stock to be issued in this offering, when paid for, will also be
fully paid and nonassessable.
Preferred
Stock
As of September 30, 2009, no shares of preferred stock were
outstanding.
Following the closing of this offering, our board of directors
will be authorized to issue not more than an aggregate of
5,000,000 shares of preferred stock in one or more series,
without stockholder approval. Our board of directors will be
authorized to establish, from time to time, the number of shares
to be included in each series of preferred stock, and to fix the
designation, powers, privileges, preferences, and relative
participating, optional or other rights, if any, of the shares
of each series of preferred stock, and any of its
qualifications, limitations or restrictions. Our board of
directors also will be able to increase or decrease the number
of shares of any series of preferred stock, but not below the
number of shares of that series of preferred stock then
outstanding, without any further vote or action by the
stockholders, without any vote or action by stockholders.
In the future, our board of directors may authorize the issuance
of preferred stock with voting or conversion rights that could
harm the voting power or other rights of the holders of our
common stock, or that could decrease the amount of earnings and
assets available for distribution to the holders of our common
stock. The issuance of our preferred stock, while providing
flexibility in connection with possible acquisitions and other
corporate purposes, could, among other consequences, have the
effect of delaying, deferring or preventing a change in our
control and
111
might harm the market price of our common stock and the voting
and other rights of the holders of common stock. We have no
current plans to issue any shares of preferred stock.
Registration
Rights
Pursuant to the terms of a Registration Rights Agreement between
us and certain holders of our stock, including Spectrum Equity
Investors V, L.P. and certain of its affiliates, certain
holders of our stock are entitled to demand and piggyback
rights. The stockholders who are a party to the Registration
Rights Agreement will hold an aggregate of approximately
34,820,257 shares, or approximately 82%, of our common
stock outstanding upon completion of this offering (assuming no
exercise of the underwriters over-allotment option).
Demand registration rights. At any time, the
holders of a majority of the registrable securities held by
Spectrum Equity Investors V, L.P. and certain of its
affiliates, collectively (the Spectrum registrable
securities), may request registration under the Securities
Act of all or part of their registrable securities on a
Registration Statement on
Form S-1
or any similar long-form registration statement or, if
available, on a Registration Statement on
Form S-3
or any similar short-form registration statement. The holders of
a majority of the Spectrum registrable securities will be
entitled to request three long-form registrations in which the
company will pay all registration expenses. In addition, the
holders of a majority of the Spectrum registrable securities
will be entitled to request an unlimited number of short-form
registrations in which the company will pay all registration
expenses. However, the aggregate offering value of the
registrable securities requested to be registered by Spectrum
Equity Investors V, L.P. and certain of its affiliates in
any short-form registration must equal at least $1,500,000
in the aggregate.
The company will not be obligated to effect any demand
registration within three months after the effective date of a
previous demand registration. Moreover, the company may postpone
for up to three months the filing of a registration statement
for a demand registration if the companys board of
directors determines in its reasonable good faith judgment and
the holders of at least a majority of the Spectrum registrable
securities agree that such demand registration would reasonably
be expected to have a material adverse effect on any proposal by
the company to engage in a merger, consolidation or similar
transaction. The company may delay a demand registration in this
manner only once in every
12-month
period.
Piggyback registration rights. If we register
any securities for public sale after this offering, our
stockholders with piggyback registration rights under our
Registration Rights Agreement have the right to include their
shares in the registration, subject to certain exceptions. For
example, if the piggyback registration is an underwritten
primary offering and the managing underwriters advise the
company that, in their opinion, the number of securities
requested to be included in the offering exceeds the number
which can be sold in such offering without adversely affecting
the marketability of such offering, the company is required to
include in the offering (i) first, the securities the
company proposes to sell, (ii) second, the registrable
securities requested to be included in such registration, pro
rata among the holders of such registrable securities on the
basis of the number of registrable securities owned by each such
holder and (iii) third, any other securities requested to
be included in such registration pro rata among those holders on
the basis of the number of such securities owned by each such
holder. The registration expenses of the holders of registrable
securities will be paid by us in all piggyback registrations,
regardless of whether such registration is consummated.
Anti-Takeover
Effects of Delaware Law, Our Amended and Restated Certificate of
Incorporation and Our Amended and Restated Bylaws
Certain provisions of Delaware law and our amended and restated
certificate of incorporation and amended and restated bylaws
that will be effective upon consummation of the offering could
make the acquisition of the company more difficult. These
provisions of the Delaware General Corporation Law could
prohibit or delay mergers or other takeover or change of control
attempts and, accordingly, may discourage attempts to acquire us.
These provisions, summarized below, are expected to discourage
certain types of coercive takeover practices and inadequate
takeover bids, and are designed to encourage persons seeking to
acquire control of us to negotiate with our board of directors.
112
Delaware anti-takeover law. We are subject to
Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a
business combination with an interested
stockholder for a period of three years following the date
the person became an interested stockholder, unless the
business combination or the transaction in which the
person became an interested stockholder is approved by our board
of directors in a prescribed manner. Generally, a business
combination includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the
interested stockholder. Generally, 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 corporations voting stock. The applicability of
this provision may have an anti-takeover effect with respect to
transactions not approved in advance by the board of directors,
including discouraging attempts that might result in a premium
over the market price for the shares of common stock held by
stockholders.
Stockholder meetings. Under our amended and
restated certificate of incorporation, only the board of
directors, or the chairperson of the board of directors or the
Chief Executive Officer with the concurrence of a majority of
the board of directors may call special meetings of stockholders.
Requirements for advance notification of stockholder
nominations and proposals. Our amended and
restated bylaws establish advance notice procedures with respect
to stockholder proposals and the nomination of candidates for
election as directors.
Elimination of stockholder action by written
consent. Our amended and restated certificate of
incorporation eliminates the right of stockholders to act by
written consent without a meeting. This provision will make it
more difficult for stockholders to take action opposed by the
board of directors.
Election and removal of directors. Our board
of directors will be divided into three classes, each serving
staggered three-year terms. As a result, only a portion of our
board of directors will be elected each year. The board of
directors will have the exclusive right to increase or decrease
the size of the board and to fill vacancies on the board. This
system of electing 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. Additionally, directors may be removed for cause only
with the approval of the holders of a majority of our
outstanding common stock. Directors may be removed without cause
only with the approval of two-thirds of our outstanding voting
stock.
Undesignated preferred stock. The
authorization of undesignated preferred stock will make it
possible for the board of directors, without stockholder
approval, to issue preferred stock with voting or other rights
or preferences that could impede the success of any attempt to
obtain control of us. These and other provisions may have the
effect of deferring hostile takeovers or delaying changes in
control or management of the company.
Amendment of provisions in the certificate of
incorporation. Our amended and restated
certificate of incorporation will require the affirmative vote
of the holders of at least two-thirds of our outstanding voting
stock in order to amend any provision of our certificate of
incorporation concerning:
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the required vote to amend or repeal the section of the
certificate of incorporation providing for the right to amend or
repeal provisions of the certificate of incorporation;
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absence of the authority of stockholders to act by written
consent;
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authority to call a special meeting of stockholders;
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number of directors and structure of the board of directors;
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absence of the necessity of directors to be elected by written
ballot; and
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personal liability of directors to us and our stockholders.
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113
Amendment of provisions in the bylaws. Our
amended and restated bylaws will require the affirmative vote of
the holders of at least two-thirds of our outstanding voting
stock in order to amend any provision of our bylaws concerning:
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meetings of or actions taken by stockholders;
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number of directors and their term of office;
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election of directors;
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removal of directors and the filling of vacancies on the board
of directors;
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indemnification of our directors, officers, employees and
agents; and
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amendment to our bylaws.
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Transfer
Agent and Registrar
Mellon Investor Services LLC is the transfer agent and registrar
for our common stock.
Listing
We have applied to list our common stock on the Nasdaq Global
Select Market under the symbol ACOM.
114
MATERIAL
U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS
TO NON-U.S.
HOLDERS
The following discussion summarizes the material United States
federal income and estate tax consequences of the ownership and
disposition of our common stock by certain
non-United
States holders (as defined below). This discussion only applies
to
non-United
States holders who purchase and hold our common stock as a
capital asset for United States federal income tax purposes
(generally property held for investment). This discussion does
not describe all of the tax consequences that may be relevant to
a non-United
States holder in light of its particular circumstances.
For purposes of this discussion, a
non-United
States holder means a person (other than a partnership)
that is not for United States federal income tax purposes any of
the following:
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an individual citizen or resident of the United States;
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a corporation (or any other entity treated as a corporation for
United States federal income tax purposes) created or organized
in or under the laws of the United States, any state thereof or
the District of Columbia;
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an estate, the income of which is subject to United States
federal income taxation regardless of its source; or
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a trust, if it is subject to the primary supervision of a court
within the United States and one or more United States persons
have the authority to control all substantial decisions of the
trust, or it has a valid election in effect under applicable
Treasury regulations to be treated as a United States person.
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This discussion is based upon provisions of the Internal Revenue
Code of 1986, as amended, or the Code, and Treasury regulations,
administrative rulings and judicial decisions as of the date
hereof. These authorities may change, perhaps retroactively,
which could result in United States federal income and estate
tax consequences different from those summarized below. This
discussion does not address all aspects of United States federal
income and estate taxes and does not describe any
non-United
States, state, local or other tax considerations that may be
relevant to
non-United
States holders in light of their particular circumstances. In
addition, this discussion does not describe the United States
federal income and estate tax consequences applicable to a
non-United
States holder who is subject to special treatment under United
States federal income tax laws (including, without limitation,
certain former citizens and former long-term residents, a
controlled foreign corporation, a passive
foreign investment company, a corporation that accumulates
earnings to avoid United States federal income tax, a
pass-through entity or an investor in a pass-through entity, or
a tax-exempt organization or an insurance company). We cannot
assure you that a change in law will not significantly alter the
tax considerations that we describe in this discussion.
If a partnership (or any other entity treated as a partnership
for United States federal income tax purposes) holds our common
stock, the United States federal income tax treatment of a
partner of that partnership will generally depend upon the
status of the partner and the activities of the partnership. If
you are a partner of a partnership holding our common stock, you
should consult your tax advisors.
THIS DISCUSSION IS PROVIDED FOR GENERAL INFORMATION ONLY AND
DOES NOT CONSTITUTE LEGAL ADVICE TO ANY PROSPECTIVE PURCHASER OF
OUR COMMON STOCK. ADDITIONALLY, THIS DISCUSSION CANNOT BE USED
BY ANY HOLDER FOR THE PURPOSE OF AVOIDING TAX PENALTIES THAT MAY
BE IMPOSED ON SUCH HOLDER. IF YOU ARE CONSIDERING THE PURCHASE
OF OUR COMMON STOCK, YOU SHOULD CONSULT YOUR OWN TAX ADVISORS
CONCERNING THE UNITED STATES FEDERAL INCOME AND ESTATE TAX
CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR COMMON
STOCK IN LIGHT OF YOUR PARTICULAR CIRCUMSTANCES AND ANY
CONSEQUENCES ARISING UNDER THE LAWS OF APPLICABLE STATE, LOCAL
OR
NON-UNITED
STATES TAXING JURISDICTIONS. YOU SHOULD ALSO CONSULT WITH YOUR
TAX ADVISORS CONCERNING ANY POSSIBLE ENACTMENT OF LEGISLATION
THAT WOULD AFFECT YOUR INVESTMENT IN OUR COMMON STOCK IN YOUR
PARTICULAR CIRCUMSTANCES.
Distributions
on Common Stock
In general, if distributions are made with respect to our common
stock, such distributions will be treated as dividends to the
extent of our current and accumulated earnings and profits as
determined for United States federal
115
income tax purposes and will be subject to withholding as
discussed below. Any portion of a distribution that exceeds our
current and accumulated earnings and profits will first be
applied to reduce the
non-United
States holders basis in the common stock and, to the
extent such portion exceeds the
non-United
States holders basis, the excess will be treated as gain
from the disposition of the common stock, the tax treatment of
which is discussed below under Dispositions of Common
Stock.
Dividends paid to a
non-United
States holder of our common stock will generally be subject to
withholding of United States federal income tax at a 30% rate or
such lower rate as may be specified by an applicable income tax
treaty. But dividends that are effectively connected with the
conduct of a trade or business by the
non-United
States holder within the United States (and, where a tax treaty
applies, are attributable to a permanent establishment
maintained by the
non-United
States holder in the United States) are not subject to the
withholding tax, provided certain certification and disclosure
requirements are satisfied. Instead, such dividends are subject
to United States federal income tax on a net income basis in the
same manner as if the
non-United
States holder were a United States person as defined under the
Code. Any such effectively connected dividends received by a
foreign corporation may be subject to an additional branch
profits tax at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
A non-United
States holder of our common stock who wishes to claim the
benefit of an applicable treaty rate and avoid backup
withholding, as discussed below, for dividends will be required
to (a) complete Internal Revenue Service
Form W-8BEN
(or other applicable form) and certify under penalty of perjury
that such holder is not a United States person as defined under
the Code and is eligible for treaty benefits, or (b) if our
common stock is held through certain foreign intermediaries,
satisfy the relevant certification requirements of applicable
Treasury regulations. Special certification and other
requirements apply to certain
non-United
States holders that are pass-through entities rather than
corporations or individuals.
A non-United
States holder of our common stock eligible for a reduced rate of
United States withholding tax pursuant to an income tax treaty
may obtain a refund of any excess amounts withheld by filing an
appropriate claim for refund with the Internal Revenue Service.
Disposition
of Common Stock
Any gain realized by a
non-United
States holder on the disposition of our common stock will
generally not be subject to United States federal income or
withholding tax unless:
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the gain is effectively connected with a trade or business of
the
non-United
States holder in the United States (and, if required by an
applicable income tax treaty, is attributable to a permanent
establishment maintained by the
non-United
States holder in the United States);
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the
non-United
States holder is an individual who is present in the United
States for 183 days or more in the taxable year of that
disposition, and certain other conditions are met; or
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we are or have been a United States real property holding
corporation, or a USRPHC, for United States federal income tax
purposes, as such term is defined in Section 897(c) of the
Code during the shorter of the five-year period ending on the
date of disposition or your holding period of our common stock
as long as our common stock is regularly traded on an
established securities market, within the meaning of
Section 897(c)(3) of the Code, these rules will apply only
if you actually or constructively hold more than five percent of
such regularly traded common stock at any time during the
applicable period that is specified in the Code. We believe we
are not and do not expect to become a USRPHC.
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A non-United
States holder described in the first bullet point immediately
above will be subject to tax on the net gain derived from the
sale under regular graduated United States federal income tax
rates, and if it is a corporation, may be subject to the branch
profits tax equal to 30% of its effectively connected earnings
and profits or at such lower rate as may be specified by an
applicable income tax treaty. An individual
non-United
States holder described in the second bullet point immediately
above will be subject to a flat 30% tax on the gain derived from
the sale, which may be offset by United States source capital
losses, even though the individual is not considered a resident
of the United States. A
non-United
States holder described in the third bullet point above will be
subject to
116
United States federal income tax under regular graduated United
States federal income tax rates with respect to the gain
recognized.
United
States Federal Estate Tax
Our common stock beneficially owned by an individual who is not
a citizen or resident of the United States (as defined for
United States federal estate tax purposes) at the time of death
will generally be includable in the decedents gross estate
for United States federal estate tax purposes, unless an
applicable treaty provides otherwise.
Information
Reporting and Backup Withholding
We must report annually to the Internal Revenue Service and to
each
non-United
States holder the amount of dividends paid to such
non-United
States holder and the tax withheld with respect to such
dividends, regardless of whether withholding was required.
Copies of the information returns reporting such dividends and
withholding may also be made available to the tax authorities in
the country in which the
non-United
States holder resides under the provisions of an applicable
income tax treaty.
A non-United
States holder will be subject to backup withholding for
dividends paid to such
non-United
States holder unless such
non-United
States holder certifies under penalty of perjury that it is a
non-United
States holder (and the payor does not have actual knowledge or
reason to know that such
non-United
States holder is a United States person as defined under the
Code), or such
non-United
States holder otherwise establishes an exemption.
Information reporting and, depending on the circumstances,
backup withholding will apply to the proceeds of a sale of our
common stock within the United States or conducted through
certain United States-related financial intermediaries, unless
the beneficial owner certifies under penalty of perjury that it
is a
non-United
States holder (and the payor does not have actual knowledge or
reason to know that the beneficial owner is a United States
person as defined under the Code), and such owner otherwise
establishes an exemption.
Any amounts withheld under the backup withholding rules may be
allowed as a refund or a credit against a
non-United
States holders United States federal income tax liability
provided the required information is furnished to the Internal
Revenue Service.
THE PRECEDING DISCUSSION OF UNITED STATES FEDERAL TAX
CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY. IT IS NOT TAX
ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX
ADVISOR REGARDING THE PARTICULAR UNITED STATES FEDERAL, STATE
AND LOCAL AND THE
NON-U.S. TAX
CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF OUR COMMON
STOCK, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN
APPLICABLE LAWS.
117
SHARES ELIGIBLE
FOR FUTURE SALE
Before this offering, there has not been a public market for our
common stock. As described below, only a limited number of
shares currently outstanding will be available for sale
immediately after this offering due to contractual and legal
restrictions on resale. Nevertheless, future sales of
substantial amounts of our common stock, including shares issued
upon exercise of outstanding options, in the public market after
the restrictions lapse, or the possibility of such sales, could
cause the prevailing market price of our common stock to fall or
impair our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding
42,402,916 shares of our common stock, assuming that there
are no exercises of outstanding options after September 30,
2009. Of these shares, all of the 7,407,407 shares sold in
this offering (assuming no exercise of the underwriters
over-allotment option) will be freely tradable in the public
market without restriction or further registration under the
Securities Act, unless these shares are held by our affiliates,
as that term is defined in Rule 144 under the Securities
Act. Shares purchased by our affiliates may not be resold except
pursuant to an effective registration statement or an exemption
from registration, including the exemption under Rule 144
of the Securities Act described below.
After this offering, and assuming no exercise of the
underwriters over-allotment option, 34,995,509 shares
of our common stock held by existing stockholders will be
restricted securities, as that term is defined in Rule 144
under the Securities Act. These restricted securities may be
sold in the public market only if they are registered or if they
qualify for an exemption from registration under Rule 144
or 701 under the Securities Act, which exemptions are summarized
below. These restricted securities are subject to the
lock-up
agreements described below until 180 to 214 days after the
date of this prospectus.
Lock-Up
Agreements
In connection with this offering, officers, directors, employees
and stockholders, who together hold an aggregate of
approximately 99% of the outstanding shares of our common stock,
have agreed, subject to limited exceptions, not to directly or
indirectly sell or dispose of any shares of common stock or any
securities convertible into or exchangeable or exercisable for
shares of common stock for a period of 180 days after the date
of this prospectus, and in specific circumstances, up to an
additional 34 days, without the prior written consent of Morgan
Stanley & Co. Incorporated and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, as representatives of the
underwriters. For additional information, see
Underwriters.
Rule 144
In general, under Rule 144, beginning 90 days after
the date of this prospectus, a person who is not our affiliate
and has not been our affiliate at any time during the preceding
three months will be entitled to sell any shares of our common
stock that such person has beneficially owned for at least six
months, including the holding period of any prior owner other
than one of our affiliates, without regard to volume
limitations. Sales of our common stock by any such person would
be subject to the availability of current public information
about us if the shares to be sold were beneficially owned by
such person for less than one year.
In addition, under Rule 144, a person may sell shares of
our common stock acquired from us immediately upon the closing
of this offering, without regard to volume limitations or the
availability of public information about us, if:
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the person is not our affiliate and has not been our affiliate
at any time during the preceding three months; and
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the person has beneficially owned the shares to be sold for at
least one year, including the holding period of any prior owner
other than one of our affiliates.
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Beginning 90 days after the date of this prospectus, our
affiliates who have beneficially owned shares of our common
stock for at least six months, including the holding period of
any prior owner other than one of our
118
affiliates, would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
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1% of the number of shares of our common stock then-outstanding,
which will equal approximately 424,029 shares immediately
after this offering; and
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the average weekly trading volume in our common stock on the
Nasdaq Global Select Market during the four calendar weeks
preceding the date of filing of a Notice of Proposed Sale of
Securities Pursuant to Rule 144 with respect to the sale.
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Sales under Rule 144 by our affiliates are also subject to
manner of sale provisions and notice requirements and to the
availability of current public information about us.
Rule 701
Any of our employees, officers or directors who purchased shares
under a written compensatory plan or contract may be entitled to
sell them in reliance on Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period
requirements of Rule 144. Rule 701 further provides
that non-affiliates may sell these shares in reliance on
Rule 144 without complying with the holding period, public
information, volume limitation or notice provisions of
Rule 144. All holders of Rule 701 shares are
required to wait until 90 days after the date of this
prospectus before selling those shares. However, all shares
issued under Rule 701 are subject to
lock-up
agreements and will only become eligible for sale when the
180-day
lock-up
agreements expire.
Stock
Plans
We plan on filing a registration statement on
Form S-8
under the Securities Act covering the shares of our common stock
issuable upon exercise of outstanding options under our 1998
Stock Plan, 2004 Stock Plan, Executive Stock Plan, 2008 Stock
Plan and 2009 Stock Plan, and shares of our common stock
reserved for future issuance under our 2009 Stock Plan. We
expect to file this registration statement as soon as
practicable after this offering. However, no resale of these
registered shares shall occur until after the
180-day
lock-up
period.
Registration
Rights
At any time after 180 days following this offering, holders
of the Spectrum registrable securities may demand that we
register all or part of their registrable securities under the
Securities Act on a Registration Statement on
Form S-1
or any similar long-form registration statement or, if
available, on a Registration Statement on
Form S-3
or any similar short-form registration statement. Following a
demand for registration by the holders of Spectrum registrable
securities or if we file another registration statement under
the Securities Act (other than a
Form S-4
or
Form S-8),
subject to certain restrictions, holders of
approximately 82% of registrable securities (including the
Spectrum holders) may elect to include their shares in the
registration. If these shares are registered, they will be
freely tradable without restriction under the Securities Act.
For additional information, see Description of Capital
Stock Registration Rights.
We have agreed not to file any registration statements during
the 180-day
period after the date of this prospectus with respect to the
registration of any shares of common stock or any securities
convertible into or exercisable or exchangeable into common
stock except as part of an underwritten registration or pursuant
to registrations on
Form S-8
or any successor form.
119
UNDERWRITERS
Under the terms and subject to the conditions in an underwriting
agreement dated the date of this prospectus, the underwriters
named below, for whom Morgan Stanley & Co.
Incorporated and Merrill Lynch, Pierce, Fenner & Smith
Incorporated are acting as representatives, have severally
agreed to purchase, and we and the selling stockholders have
agreed to sell to them, severally, the number of shares
indicated below:
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Name
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Number of Shares
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Morgan Stanley & Co. Incorporated
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Merrill Lynch, Pierce, Fenner & Smith
Incorporated
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BMO Capital Markets Corp.
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Jefferies & Company, Inc.
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Piper Jaffray & Co.
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Total
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7,407,407
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The underwriters and the representatives are collectively
referred to as the underwriters and the
representatives, respectively. The underwriters are
offering the shares of common stock subject to their acceptance
of the shares from us and subject to prior sale. The
underwriting agreement provides that the obligations of the
several underwriters to pay for and accept delivery of the
shares of common stock offered by this prospectus are subject to
the approval of certain legal matters by their counsel and to
certain other conditions. The underwriters are obligated to take
and pay for all of the shares of common stock offered by this
prospectus if any such shares are taken. However, the
underwriters are not required to take or pay for the shares
covered by the underwriters over-allotment option,
described below. If an underwriter defaults, the underwriting
agreement provides that the purchase commitments of the
non-defaulting underwriters may be increased, or, in the case of
a default with respect to the shares covered by the
underwriters over-allotment described below, the
underwriting agreement may be terminated.
The underwriters initially propose to offer part of the shares
of common stock directly to the public at the offering price
listed on the cover page of this prospectus and part to certain
dealers at a price that represents a concession not in excess of
$ a share under the public
offering price. Any underwriter may allow, and such dealers may
reallow, a concession not in excess of
$ a share to other underwriters or
to certain dealers. After the initial offering of the shares of
common stock, the offering price and other selling terms may
from time to time be varied by the representatives.
We and the selling stockholders have granted to the underwriters
an option, exercisable for 30 days from the date of this
prospectus, to purchase up to 1,111,111 additional shares of
common stock at the public offering price listed on the cover
page of this prospectus, less underwriting discounts and
commissions. The underwriters may exercise this option solely
for the purpose of covering over-allotments, if any, made in
connection with the offering of the shares of common stock
offered by this prospectus. To the extent the option is
exercised, each underwriter will become obligated, subject to
certain conditions, to purchase the same percentage of the
additional shares of common stock as the number listed next to
the underwriters name in the preceding table bears to the
total number of shares of common stock listed next to the names
of all underwriters in the preceding table.
120
The following table shows the per share and total public
offering price, underwriting discounts and commissions, and
proceeds before expenses to us and the selling stockholders.
These amounts are shown assuming both no exercise and full
exercise of the underwriters option to purchase up to an
additional 1,111,111 shares of common stock from us and the
selling stockholders.
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Total
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Total
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Per Share
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No Exercise
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Full Exercise
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Public offering price
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$
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$
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$
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Underwriting discounts and commissions to be paid by:
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Ancestry.com
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$
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$
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$
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The selling stockholders
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$
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$
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$
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Proceeds, before expenses, to Ancestry.com
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$
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$
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$
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Proceeds, before expenses, to selling stockholders
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$
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$
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$
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The estimated offering expenses payable by us, exclusive of the
underwriting discounts and commissions, are approximately
$2.8 million.
The underwriters have informed us that they do not intend sales
to discretionary accounts to exceed 5% of the total number of
shares of common stock offered by them.
We have applied to list our common stock on the Nasdaq Global
Select Market under the trading symbol ACOM.
We and all directors and officers and the holders of
approximately 99% of our outstanding stock and stock options
have agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated and Merrill Lynch, Pierce,
Fenner & Smith Incorporated on behalf of the underwriters,
we and they will not, during the period ending 180 days after
the date of this prospectus:
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offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend or
otherwise transfer or dispose of directly or indirectly, any
shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock;
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enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences
of ownership of the common stock; or
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make any demand for, or exercise any right with respect to, the
registration of any shares of common stock or any security
convertible into or exercisable or exchangeable for common stock.
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In addition, we and the selling stockholders agree that, without
the prior written consent of Morgan Stanley & Co.
Incorporated and Merrill Lynch, Pierce, Fenner & Smith
Incorporated on behalf of the underwriters, we and they will
not, during the period ending 180 days after the date of this
prospectus, file any registration statement with the SEC
relating to the offering of any shares of common stock or any
securities convertible into or exercisable or exchangeable for
common stock, except for the filing of a registration statement
on
Form S-8
relating to the offering of securities in accordance with the
terms of a plan in effect on the date hereof.
The restrictions described in the immediately preceding
paragraphs do not apply to, among other things:
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the sale of shares to the underwriters;
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the issuance by us of shares of common stock upon the exercise
of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus of which the
underwriters have been advised in writing;
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transactions by any person other than us relating to shares of
common stock or other securities acquired in open market
transactions after the completion of the offering of the shares,
provided that no filing under the Exchange Act (other than a
filing on a Form 5, Schedule 13D or Schedule 13G
(or 13D/A or
13G/A) made
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after the expiration of the restricted period) shall be required
or shall be voluntarily made in connection with subsequent sales
of common stock or other securities acquired in such open market
transactions;
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transfers of shares of common stock or any security convertible
into common stock as a bona fide gift, to a trust, or to
affiliates of a stockholder, including limited partners,
members, or stockholders of the stockholder, provided that in
the case of any such transfer or distribution, the transferee
agrees to be bound in writing by the terms of the lock-up
agreement prior to such transfer and no filing under the
Exchange Act, reporting a reduction in beneficial ownership of
shares of common stock shall be required or shall be voluntarily
made in respect of the transfer or distribution during the
180 day restricted period; or
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the establishment of a trading plan pursuant to
Rule 10b5-1
under the Exchange Act, for the transfer of shares of common
stock, provided that such plan does not provide for the transfer
of common stock during the restricted period.
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The 180-day restricted period described in the preceding
paragraphs will be extended if:
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during the last 17 days of the
180-day
restricted period we issue an earnings release or material news
event relating to us occurs, or
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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,
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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
occurrence of the material news or material event.
In order to facilitate the offering of our common stock, the
underwriters may engage in transactions that stabilize, maintain
or otherwise affect the price of our common stock. Specifically,
the underwriters may sell more shares than they are obligated to
purchase, creating a short position in the common stock for
their own account. In addition, to cover over-allotments, the
underwriters may bid for, and purchase, shares of common stock
in the open market to stabilize the price of the common stock.
Finally, the underwriting syndicate may reclaim selling
concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering, if the syndicate
repurchases previously distribution common stock in transactions
to cover syndicate short positions, in stabilization
transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above
independent market levels or prevent or retard a decline in the
market price of the common stock. The underwriters are not
required to engage in these activities and may end any of these
activities at any time.
We, the selling stockholders and the underwriters have agreed to
indemnify each other against certain liabilities, including
liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make because of any
of these liabilities.
A prospectus in electronic format may be made available on
websites maintained by one or more underwriters, or selling
group members, if any, participating in this offering. The
representatives may agree to allocate a number of shares of
common stock to underwriters for sale to their online brokerage
account holders. Internet distributions will be allocated by the
representatives to underwriters that may make Internet
distributions on the same basis as other allocations.
Pricing
of the Offering
Prior to this offering, there has been no public market for our
common stock. The initial public offering price will be
determined by negotiations between us and the representatives.
Among the factors to be considered in determining the initial
public offering price will be the future prospects and those of
our industry in general, our sales, earnings and certain other
financial and operating information in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of
securities, and certain financial and operating information of
companies engaged in activities similar to ours. The estimated
initial public offering price range set forth on the cover page
of this preliminary prospectus is subject to change as a result
of market conditions and other factors. We cannot assure you,
that the prices at which the shares will sell in the public
market after this offering will not be lower than the initial
122
public offering price or that an active trading market in our
common stock will develop and continue after this offering.
European
Economic Area
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive, each underwriter
has represented and agreed that with effect from and including
the date on which the Prospectus Directive is implemented in
that Member State it has not made and will not make an offer of
shares of our common stock to the public in that Member State,
except that it may, with effect from and including such date,
make an offer of shares of our common stock to the public in
that Member State:
(a) at any time to legal entities which are authorized or
regulated to operate in the financial markets or, if not so
authorized or regulated, whose corporate purpose is solely to
invest in securities;
(b) at any time to any legal entity which has two or more
of (i) an average of at least 250 employees during the
last financial year; (ii) a total balance sheet of more
than 43,000,000 and (iii) an annual net turnover of
more than 50,000,000, as shown in its last annual or
consolidated accounts; or
(c) at any time in any other circumstances which do not
require the publication by us of a prospectus pursuant to
Article 3 of the Prospectus Directive.
For the purposes of the above, the expression an offer of
shares of our common stock to the public in relation to
any shares of our common stock in any Member State means the
communication in any form and by any means of sufficient
information on the terms of the offer and the shares of our
common stock to be offered so as to enable an investor to decide
to purchase or subscribe the shares of our common stock, as the
same may be varied in that Member State by any measure
implementing the Prospectus Directive in that Member State and
the expression Prospectus Directive means Directive 2003/71/EC
and includes any relevant implementing measure in that Member
State.
Dubai
International Financial Centre
This document relates to an exempt offer in accordance with the
Offered Securities Rules of the Dubai Financial Services
Authority. This document is intended for distribution only to
persons of a type specified in those rules. It must not be
delivered to, or relied on by, any other person. The Dubai
Financial Services Authority has no responsibility for reviewing
or verifying any documents in connection with exempt offers. The
Dubai Financial Services Authority has not approved this
document nor taken steps to verify the information set out in
it, and has no responsibility for it. The shares of our common
stock which are the subject of the offering contemplated by this
prospectus may be illiquid
and/or
subject to restrictions on their resale. Prospective purchasers
of the shares of our common stock offered should conduct their
own due diligence on the shares of our common stock. If you do
not understand the contents of this document you should consult
an authorized financial adviser.
Switzerland
This document as well as any other material relating to the
shares of our common stock which are the subject of the offering
contemplated by this prospectus do not constitute an issue
prospectus pursuant to Article 652a of the Swiss Code of
Obligations. The shares of our common stock will not be listed
on the SWX Swiss Exchange and, therefore, the documents relating
to the shares of our common stock, including but not limited to
this document, do not claim to comply with the disclosure
standards of the listing rules of SWX Swiss Exchange and
corresponding prospectus schemes annexed to the listing rules of
the SWX Swiss Exchange.
The shares of our common stock are being offered in Switzerland
by way of a private placement, i.e. to a small number of
selected investors only, without any public offer and only to
investors who do not purchase the shares of our common stock
with the intention to distribute them to the public. The
investors will be individually approached by us from time to
time.
This document as well as any other material relating to the
shares of our common stock is personal and confidential and do
not constitute an offer to any other person. This document may
only be used by those investors
123
to whom it has been handed out in connection with the offering
described herein and may neither directly nor indirectly be
distributed or made available to other persons without our
express consent. It may not be used in connection with any other
offer and shall in particular not be copied
and/or
distributed to the public in (or from) Switzerland.
United
Kingdom
Each underwriter has represented and agreed that it has only
communicated or caused to be communicated and will only
communicate or cause to be communicated an invitation or
inducement to engage in investment activity (within the meaning
of Section 21 of the Financial Services and Markets Act
2000) in connection with the issue or sale of the shares of
our common stock in circumstances in which Section 21(1) of
such Act does not apply to us, and it has complied and will
comply with all applicable provisions of such Act with respect
to anything done by it in relation to any shares of our common
stock in, from or otherwise involving the United Kingdom.
124
LEGAL
MATTERS
The validity of the shares of our common stock offered in the
offering will be passed upon for us by Gibson, Dunn &
Crutcher LLP, New York, New York. Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo
Alto, California is representing the underwriters in this
offering.
EXPERTS
The consolidated financial statements of Ancestry.com Inc.
(formerly Generations Holding, Inc.) and subsidiaries as of
December 31, 2007 and 2008, and for the year ended
December 31, 2006, the period from January 1, 2007
through December 5, 2007 (predecessor), the period from
December 6, 2007 through December 31, 2007 (successor)
and the year ended December 31, 2008, appearing in this
prospectus have been audited by Ernst & Young LLP,
independent registered public accounting firm, as set forth in
their report thereon appearing elsewhere herein, and are
included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
WHERE YOU
CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on
Form S-1,
including exhibits and schedules, under the Securities Act with
respect to the common stock to be sold in the offering. This
prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in
the registration statement or the exhibits and schedules that
are part of the registration statement. Any statements made in
this prospectus as to the contents of any contract, agreement or
other document are not necessarily complete. With respect to
each such contract, agreement or other document filed as an
exhibit to the registration statement, we refer you to the
exhibit for a more complete description of the matter involved,
and each statement in this prospectus shall be deemed qualified
in its entirety by this reference. You may read and copy all or
any portion of the registration statement or any reports,
statements or other information in the files at the following
public reference facilities of the SEC:
Public
Reference Room
100 F Street, NE
Washington, DC, 20549
You can request copies of these documents upon payment of a
duplicating fee by writing to the SEC. You may call the SEC at
1-800-SEC-0330
for further information on the operation of its public reference
rooms. Our filings, including the registration statement, will
also be available to you on the Internet website maintained by
the SEC at www.sec.gov.
125
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors of Ancestry.com Inc.
We have audited the accompanying consolidated balance sheets of
Ancestry.com Inc. (formerly Generations Holding, Inc.) and
subsidiaries as of December 31, 2007 and 2008, and the
related consolidated statements of operations,
stockholders equity, and cash flows for the year ended
December 31, 2006, the period from January 1, 2007
through December 5, 2007 (predecessor), the period from
December 6, 2007 through December 31, 2007 (successor)
and the year ended December 31, 2008. These financial
statements are the responsibility of the companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the companys 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 companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Ancestry.com Inc. (formerly Generations
Holding, Inc.) and subsidiaries as of December 31, 2007 and
2008, and the consolidated results of their operations and their
cash flows for the year ended December 31, 2006, the period
from January 1, 2007 through December 5, 2007
(predecessor), the period from December 6, 2007 through
December 31, 2007 (successor) and the year ended
December 31, 2008, in conformity with U.S. generally
accepted accounting principles.
Ernst & Young LLP
Salt Lake City, Utah
April 13, 2009, except for paragraph three of
Note 14, as to which the date is
November , 2009
The foregoing report is in the form that will be signed upon the
completion of the reverse stock split described in paragraph
three of Note 14 to the consolidated financial statements.
/s/ Ernst & Young LLP
Salt Lake City, Utah
October 19, 2009
F-2
ANCESTRY.COM
INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11,914
|
|
|
$
|
40,121
|
|
|
$
|
60,593
|
|
Restricted cash
|
|
|
19,115
|
|
|
|
6,572
|
|
|
|
1,762
|
|
Short-term investments
|
|
|
363
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net of allowances of $270, $394 and $433 at
December 31, 2007 and 2008 and September 30, 2009
(unaudited), respectively.
|
|
|
4,766
|
|
|
|
5,155
|
|
|
|
4,181
|
|
Income tax receivable
|
|
|
3,182
|
|
|
|
3,089
|
|
|
|
406
|
|
Deferred income taxes
|
|
|
1,066
|
|
|
|
7,582
|
|
|
|
4,237
|
|
Prepaid expenses and other current assets
|
|
|
3,196
|
|
|
|
3,674
|
|
|
|
6,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
43,602
|
|
|
|
66,193
|
|
|
|
77,883
|
|
Property and equipment, net
|
|
|
16,115
|
|
|
|
17,004
|
|
|
|
16,478
|
|
Content database costs, net
|
|
|
46,034
|
|
|
|
47,244
|
|
|
|
47,920
|
|
Intangible assets, net
|
|
|
81,458
|
|
|
|
57,701
|
|
|
|
45,537
|
|
Goodwill
|
|
|
285,019
|
|
|
|
285,466
|
|
|
|
285,466
|
|
Other assets
|
|
|
3,984
|
|
|
|
4,367
|
|
|
|
3,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
476,212
|
|
|
$
|
477,975
|
|
|
$
|
476,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,334
|
|
|
$
|
4,827
|
|
|
$
|
5,534
|
|
Accrued expenses
|
|
|
19,303
|
|
|
|
19,536
|
|
|
|
18,324
|
|
Escrow liability
|
|
|
15,277
|
|
|
|
5,682
|
|
|
|
1,760
|
|
Deferred revenues
|
|
|
56,730
|
|
|
|
61,178
|
|
|
|
69,850
|
|
Current portion of long-term debt
|
|
|
7,000
|
|
|
|
21,457
|
|
|
|
12,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
104,644
|
|
|
|
112,680
|
|
|
|
107,496
|
|
Long-term debt, less current portion
|
|
|
133,000
|
|
|
|
111,543
|
|
|
|
102,641
|
|
Other long-term liabilities
|
|
|
901
|
|
|
|
254
|
|
|
|
280
|
|
Deferred income taxes
|
|
|
25,285
|
|
|
|
33,710
|
|
|
|
29,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
263,830
|
|
|
|
258,187
|
|
|
|
239,482
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 100,000,000 shares
authorized; 38,045,312, 38,216,510 and 38,328,842 shares
issued and outstanding at December 31, 2007, 2008 and
September 30, 2009 (unaudited), respectively.
|
|
|
38
|
|
|
|
38
|
|
|
|
38
|
|
Additional paid-in capital
|
|
|
213,646
|
|
|
|
218,669
|
|
|
|
223,471
|
|
Accumulated other comprehensive income
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Retained earnings (accumulated deficit)
|
|
|
(1,303
|
)
|
|
|
1,081
|
|
|
|
13,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
212,382
|
|
|
|
219,788
|
|
|
|
236,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
476,212
|
|
|
$
|
477,975
|
|
|
$
|
476,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements
F-3
ANCESTRY.COM
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
|
December 6,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
2007 through
|
|
|
|
2007 through
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
|
December
|
|
|
|
December
|
|
|
|
December 31,
|
|
|
December
|
|
|
September 30,
|
|
|
|
|
31, 2006
|
|
|
|
5, 2007
|
|
|
|
2007
|
|
|
31, 2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues
|
|
|
$
|
137,643
|
|
|
|
$
|
141,141
|
|
|
|
$
|
11,692
|
|
|
$
|
181,391
|
|
|
$
|
133,616
|
|
|
$
|
152,506
|
|
Product and other revenues
|
|
|
|
12,909
|
|
|
|
|
12,269
|
|
|
|
|
1,278
|
|
|
|
16,200
|
|
|
|
11,542
|
|
|
|
12,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
150,552
|
|
|
|
|
153,410
|
|
|
|
|
12,970
|
|
|
|
197,591
|
|
|
|
145,158
|
|
|
|
164,793
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription revenues
|
|
|
|
27,344
|
|
|
|
|
33,590
|
|
|
|
|
2,462
|
|
|
|
38,187
|
|
|
|
27,699
|
|
|
|
29,755
|
|
Cost of product and other revenues
|
|
|
|
3,695
|
|
|
|
|
2,552
|
|
|
|
|
500
|
|
|
|
5,427
|
|
|
|
3,292
|
|
|
|
4,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
|
31,039
|
|
|
|
|
36,142
|
|
|
|
|
2,962
|
|
|
|
43,614
|
|
|
|
30,991
|
|
|
|
33,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
119,513
|
|
|
|
|
117,268
|
|
|
|
|
10,008
|
|
|
|
153,977
|
|
|
|
114,167
|
|
|
|
130,825
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and development
|
|
|
|
28,280
|
|
|
|
|
31,255
|
|
|
|
|
3,517
|
|
|
|
33,206
|
|
|
|
23,705
|
|
|
|
26,690
|
|
Marketing and advertising
|
|
|
|
51,421
|
|
|
|
|
42,400
|
|
|
|
|
3,157
|
|
|
|
52,341
|
|
|
|
36,634
|
|
|
|
44,226
|
|
General and administrative
|
|
|
|
26,978
|
|
|
|
|
20,723
|
|
|
|
|
2,142
|
|
|
|
28,931
|
|
|
|
21,035
|
|
|
|
24,569
|
|
Amortization of acquired intangible assets
|
|
|
|
2,216
|
|
|
|
|
2,132
|
|
|
|
|
1,542
|
|
|
|
23,779
|
|
|
|
17,832
|
|
|
|
12,165
|
|
Transaction related expenses
|
|
|
|
|
|
|
|
|
9,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
|
108,895
|
|
|
|
|
106,040
|
|
|
|
|
10,358
|
|
|
|
138,257
|
|
|
|
99,206
|
|
|
|
107,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
10,618
|
|
|
|
|
11,228
|
|
|
|
|
(350
|
)
|
|
|
15,720
|
|
|
|
14,961
|
|
|
|
23,175
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
(946
|
)
|
|
|
|
(756
|
)
|
|
|
|
(1,146
|
)
|
|
|
(12,355
|
)
|
|
|
(9,327
|
)
|
|
|
(4,784
|
)
|
Interest income
|
|
|
|
2,238
|
|
|
|
|
2,051
|
|
|
|
|
289
|
|
|
|
872
|
|
|
|
632
|
|
|
|
746
|
|
Other income (expense), net
|
|
|
|
834
|
|
|
|
|
266
|
|
|
|
|
7
|
|
|
|
(8
|
)
|
|
|
(18
|
)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
12,744
|
|
|
|
|
12,789
|
|
|
|
|
(1,200
|
)
|
|
|
4,229
|
|
|
|
6,248
|
|
|
|
19,151
|
|
Income tax expense
|
|
|
|
(4,595
|
)
|
|
|
|
(5,018
|
)
|
|
|
|
(103
|
)
|
|
|
(1,845
|
)
|
|
|
(2,748
|
)
|
|
|
(6,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$
|
8,149
|
|
|
|
$
|
7,771
|
|
|
|
$
|
(1,303
|
)
|
|
$
|
2,384
|
|
|
$
|
3,500
|
|
|
$
|
12,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.06
|
|
|
$
|
0.09
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.06
|
|
|
$
|
0.09
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,112,782
|
|
|
|
38,081,443
|
|
|
|
38,283,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,529,270
|
|
|
|
38,478,036
|
|
|
|
40,096,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements
F-4
ANCESTRY.COM
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands, except share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Retained
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Earnings
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
(Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Deficit)
|
|
|
Equity
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2006
|
|
|
62,406,411
|
|
|
$
|
62
|
|
|
|
31,718,594
|
|
|
$
|
32
|
|
|
$
|
131,367
|
|
|
$
|
(11
|
)
|
|
$
|
(9
|
)
|
|
$
|
(93,544
|
)
|
|
$
|
37,897
|
|
Exercise of stock options, net
|
|
|
|
|
|
|
|
|
|
|
2,439,852
|
|
|
|
2
|
|
|
|
967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
969
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Cancellation of deferred compensation on stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit from stock option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225
|
|
Compensation expense related to variable stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Compensation expense related to repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,035
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
738
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(1,928,452
|
)
|
|
|
(2
|
)
|
|
|
(7,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,726
|
)
|
Common stock issued to acquire business
|
|
|
|
|
|
|
|
|
|
|
478,261
|
|
|
|
1
|
|
|
|
2,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,200
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on short-term investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,149
|
|
|
|
8,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
62,406,411
|
|
|
$
|
62
|
|
|
|
32,708,255
|
|
|
$
|
33
|
|
|
$
|
130,818
|
|
|
$
|
|
|
|
$
|
(7
|
)
|
|
$
|
(85,395
|
)
|
|
$
|
45,511
|
|
Exercise of stock options, net
|
|
|
|
|
|
|
|
|
|
|
1,496,513
|
|
|
|
1
|
|
|
|
1,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,681
|
|
Exercise of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
135,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit from stock option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,704
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
901
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on short-term investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
(23
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,771
|
|
|
|
7,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 5, 2007
|
|
|
62,406,411
|
|
|
$
|
62
|
|
|
|
34,340,389
|
|
|
$
|
34
|
|
|
$
|
135,103
|
|
|
$
|
|
|
|
$
|
(30
|
)
|
|
$
|
(77,624
|
)
|
|
$
|
57,545
|
|
Successor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination of the predecessor equity structure
|
|
|
(62,406,411
|
)
|
|
|
(62
|
)
|
|
|
(34,340,389
|
)
|
|
|
(34
|
)
|
|
|
(135,103
|
)
|
|
|
|
|
|
|
30
|
|
|
|
77,624
|
|
|
|
(57,545
|
)
|
Investment in the predecessor
|
|
|
|
|
|
|
|
|
|
|
38,045,312
|
|
|
|
38
|
|
|
|
213,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
213,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 6, 2007
|
|
|
|
|
|
$
|
|
|
|
|
38,045,312
|
|
|
$
|
38
|
|
|
$
|
213,569
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
213,607
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on short-term investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,303
|
)
|
|
|
(1,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
38,045,312
|
|
|
$
|
38
|
|
|
$
|
213,646
|
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
(1,303
|
)
|
|
$
|
212,382
|
|
Exercise of stock options, net
|
|
|
|
|
|
|
|
|
|
|
194,948
|
|
|
|
|
|
|
|
654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
654
|
|
Write-off of deferred tax asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,634
|
|
Stock option adjustments affecting goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
239
|
|
Repurchase of common stock and stock awards
|
|
|
|
|
|
|
|
|
|
|
(23,750
|
)
|
|
|
|
|
|
|
(468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(468
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on short-term investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,384
|
|
|
|
2,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
|
|
|
$
|
|
|
|
|
38,216,510
|
|
|
$
|
38
|
|
|
$
|
218,669
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,081
|
|
|
$
|
219,788
|
|
Exercise of stock options, net (unaudited)
|
|
|
|
|
|
|
|
|
|
|
130,510
|
|
|
|
|
|
|
|
559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
559
|
|
Income tax benefit from stock option exercises (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
Stock-based compensation (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,314
|
|
Repurchase of common stock (unaudited)
|
|
|
|
|
|
|
|
|
|
|
(18,178
|
)
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,224
|
|
|
|
12,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2009 (unaudited)
|
|
|
|
|
|
$
|
|
|
|
|
38,328,842
|
|
|
$
|
38
|
|
|
$
|
223,471
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,305
|
|
|
$
|
236,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements
F-5
ANCESTRY.COM
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
|
December 6,
|
|
|
Year
|
|
|
Nine Months
|
|
|
|
|
Year Ended
|
|
|
|
2007 through
|
|
|
|
2007 through
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
December
|
|
|
|
December 5,
|
|
|
|
December 31,
|
|
|
December
|
|
|
September 30,
|
|
|
|
|
31, 2006
|
|
|
|
2007
|
|
|
|
2007
|
|
|
31, 2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$
|
8,149
|
|
|
|
$
|
7,771
|
|
|
|
$
|
(1,303
|
)
|
|
$
|
2,384
|
|
|
$
|
3,500
|
|
|
$
|
12,224
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
9,559
|
|
|
|
|
10,594
|
|
|
|
|
754
|
|
|
|
10,732
|
|
|
|
8,153
|
|
|
|
8,092
|
|
Amortization of content
|
|
|
|
4,287
|
|
|
|
|
4,973
|
|
|
|
|
432
|
|
|
|
6,267
|
|
|
|
4,607
|
|
|
|
5,182
|
|
Amortization of intangible assets
|
|
|
|
2,202
|
|
|
|
|
2,121
|
|
|
|
|
1,542
|
|
|
|
23,779
|
|
|
|
17,832
|
|
|
|
12,164
|
|
Amortization of deferred financing costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
871
|
|
|
|
565
|
|
|
|
613
|
|
Impairment of content databases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,475
|
|
|
|
|
|
|
|
|
|
Deferred gain on sale-leaseback
|
|
|
|
(394
|
)
|
|
|
|
(591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
449
|
|
|
|
|
336
|
|
|
|
1,653
|
|
|
|
2,692
|
|
|
|
(1,271
|
)
|
Stock-based compensation expense
|
|
|
|
3,789
|
|
|
|
|
898
|
|
|
|
|
77
|
|
|
|
4,672
|
|
|
|
3,509
|
|
|
|
4,265
|
|
Gain on the sale of subsidiary
|
|
|
|
(671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
|
(529
|
)
|
|
|
|
(325
|
)
|
|
|
|
(1,116
|
)
|
|
|
(389
|
)
|
|
|
367
|
|
|
|
974
|
|
Restricted cash
|
|
|
|
(234
|
)
|
|
|
|
(208
|
)
|
|
|
|
16
|
|
|
|
2,643
|
|
|
|
(416
|
)
|
|
|
888
|
|
Prepaid expenses and other assets
|
|
|
|
615
|
|
|
|
|
(310
|
)
|
|
|
|
(279
|
)
|
|
|
(1,732
|
)
|
|
|
(1,270
|
)
|
|
|
(2,288
|
)
|
Income tax receivable
|
|
|
|
1,325
|
|
|
|
|
(176
|
)
|
|
|
|
77
|
|
|
|
93
|
|
|
|
91
|
|
|
|
2,683
|
|
Accounts payable and accrued expenses
|
|
|
|
2,039
|
|
|
|
|
148
|
|
|
|
|
5,040
|
|
|
|
(1,004
|
)
|
|
|
1,253
|
|
|
|
(459
|
)
|
Deferred revenues
|
|
|
|
(3,115
|
)
|
|
|
|
5,849
|
|
|
|
|
(1,426
|
)
|
|
|
4,448
|
|
|
|
8,001
|
|
|
|
8,672
|
|
Other long-term liabilities
|
|
|
|
|
|
|
|
|
118
|
|
|
|
|
772
|
|
|
|
(647
|
)
|
|
|
(276
|
)
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
|
27,022
|
|
|
|
|
31,311
|
|
|
|
|
6,222
|
|
|
|
55,245
|
|
|
|
48,608
|
|
|
|
51,765
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization of content database costs
|
|
|
|
(11,285
|
)
|
|
|
|
(10,591
|
)
|
|
|
|
(1,129
|
)
|
|
|
(8,965
|
)
|
|
|
(6,383
|
)
|
|
|
(5,855
|
)
|
Purchases of property and equipment
|
|
|
|
(10,127
|
)
|
|
|
|
(10,572
|
)
|
|
|
|
(852
|
)
|
|
|
(11,621
|
)
|
|
|
(7,358
|
)
|
|
|
(7,566
|
)
|
Purchases of short-term investments
|
|
|
|
(59,945
|
)
|
|
|
|
(44,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
362
|
|
|
|
|
|
Proceeds from sale and maturity of short-term investments
|
|
|
|
43,294
|
|
|
|
|
75,980
|
|
|
|
|
|
|
|
|
362
|
|
|
|
|
|
|
|
|
|
Net cash paid in business acquisitions
|
|
|
|
(1,907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal of subsidiary
|
|
|
|
(215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of corporate building
|
|
|
|
18,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in acquisition of the predecessor, including
transaction costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(279,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
|
(22,037
|
)
|
|
|
|
9,822
|
|
|
|
|
(281,505
|
)
|
|
|
(20,224
|
)
|
|
|
(13,379
|
)
|
|
|
(13,421
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
|
969
|
|
|
|
|
1,681
|
|
|
|
|
|
|
|
|
654
|
|
|
|
318
|
|
|
|
559
|
|
Principal payments on debt
|
|
|
|
(10,000
|
)
|
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
(7,000
|
)
|
|
|
(5,250
|
)
|
|
|
(18,331
|
)
|
Proceeds from issuance of term notes, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock in connection with
acquisition of the predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
(7,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(468
|
)
|
|
|
(358
|
)
|
|
|
(100
|
)
|
Reduction in income taxes payable as a result of stock option
exercises
|
|
|
|
225
|
|
|
|
|
1,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
|
(16,532
|
)
|
|
|
|
(11,615
|
)
|
|
|
|
245,831
|
|
|
|
(6,814
|
)
|
|
|
(5,290
|
)
|
|
|
(17,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
|
(11,547
|
)
|
|
|
|
29,518
|
|
|
|
|
(29,452
|
)
|
|
|
28,207
|
|
|
|
29,939
|
|
|
|
20,472
|
|
Cash and cash equivalents at beginning of period
|
|
|
|
23,395
|
|
|
|
|
11,848
|
|
|
|
|
41,366
|
|
|
|
11,914
|
|
|
|
11,914
|
|
|
|
40,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
|
$
|
11,848
|
|
|
|
$
|
41,366
|
|
|
|
$
|
11,914
|
|
|
$
|
40,121
|
|
|
$
|
41,853
|
|
|
$
|
60,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements
F-6
ANCESTRY.COM
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
|
December 6,
|
|
|
Year
|
|
|
Nine Months
|
|
|
|
|
Year Ended
|
|
|
|
2007 through
|
|
|
|
2007 through
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
December
|
|
|
|
December 5,
|
|
|
|
December 31,
|
|
|
December
|
|
|
September 30,
|
|
|
|
|
31, 2006
|
|
|
|
2007
|
|
|
|
2007
|
|
|
31, 2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
|
$
|
1,031
|
|
|
|
$
|
756
|
|
|
|
$
|
|
|
|
$
|
10,068
|
|
|
$
|
7,206
|
|
|
$
|
6,624
|
|
Cash paid for income taxes
|
|
|
|
3,800
|
|
|
|
|
3,400
|
|
|
|
|
|
|
|
|
279
|
|
|
|
97
|
|
|
|
8,985
|
|
Supplemental disclosures of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash exchange of equity instruments in acquisition of the
predecessor
|
|
|
|
2,200
|
|
|
|
|
|
|
|
|
|
103,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction of deferred compensation due to cancellations of stock
option
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization of stock-based compensation
|
|
|
|
6
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
9
|
|
|
|
7
|
|
|
|
3
|
|
See accompanying notes to consolidated financial
statements
F-7
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The Generations Network, Inc. (the predecessor or
The Generations Network) was originally incorporated
in Utah in 1983 under the name Ancestry, Inc. The predecessor
changed its name to Ancestry.com, Inc. in July 1998 and was
reincorporated in Delaware in November 1998. The
predecessors name was changed to MyFamily.com, Inc. in
November 1999 and again in November 2006 to The Generations
Network, Inc. On December 5, 2007, the predecessor was acquired
by Generations Holding, Inc. (Generations Holding).
The company refers to operations of both the
predecessor and the successor periods. Generations Holding was
created for the sole purpose of acquiring The Generations
Network and had no prior operations. In July 2009, to better
align our corporate identity with the premiere branding of
Ancestry.com, Generations Holding changed its name to
Ancestry.com Inc. (Ancestry, our, or the
successor).
Ancestry is a holding company, and substantially all its
operations are conducted by its wholly-owned subsidiary,
Ancestry.com Operations Inc. and its subsidiaries. The company
derives subscription revenues from providing access to its
services via the companys various websites. The company
also offers other products including software, self-publishing
products and advertising services.
Basis
of Presentation
As a result of the acquisition of the predecessor, the recorded
assets, liabilities and stockholders equity reflected in
the financial statements prior to and subsequent to the
transaction date are not necessarily comparable. Periods prior
to December 5, 2007 reflect the accounts and activity of
the predecessor. Periods subsequent to December 6, 2007
reflect the accounts of the successor. The consolidated
statements of changes in stockholders equity reflect the
initial capitalization of Generations Holding, Inc. on the date
of the acquisition of the predecessor. The consolidated
financial statements include the accounts of the company and its
wholly owned subsidiaries and a variable interest entity
(VIE). All significant intercompany accounts and
transactions have been eliminated in consolidation. In
accordance with Financial Accounting Standards Board
(FASB) Interpretation
No. (FIN) 46R, Consolidation of
Variable Interest Entities, VIEs are generally entities that
lack sufficient equity to finance their activities without
additional financial support from other parties or whose equity
holders lack adequate decision making ability. VIEs with which
the company is involved must be evaluated to determine the
primary beneficiary of the risks and rewards of the VIE. The
primary beneficiary is required to consolidate the VIEs for
financial reporting purposes.
As part of the companys strategic efforts in China and in
order to comply with certain Peoples Republic of China
(PRC or China) laws relating to foreign
entities ownership of Internet content providers in the
PRC, a Hong Kong wholly-owned subsidiary of the company provided
PRC nationals funding to capitalize Beijing Generations Internet
Information Services Co., Ltd. (BGIIS) to provide
content into the PRC. The company has concluded that it is the
primary beneficiary of BGIIS. Under the requirements of
FIN 46R, the company consolidated the financial statements
of BGIIS as a VIE of the company.
Certain prior period amounts have been reclassified to conform
to current year presentation.
The company is organized in a single operating segment.
Unaudited
Interim Financial Information
The accompanying unaudited interim consolidated balance sheet as
of September 30, 2009, the consolidated statements of
operations and cash flows for the nine month periods ended
September 30, 2008 and 2009, and the consolidated statement
of stockholders equity for the nine months ended
September 30, 2009 are unaudited. These unaudited interim
consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles
(GAAP) on the same basis as the audited consolidated
financial statements and, in the opinion of management, reflect
all adjustments consisting of normal recurring accruals
considered necessary to present fairly the companys
financial position, results of its operations and cash flows for
the nine month periods
F-8
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ended September 30, 2008 and 2009. The results of
operations for the nine months ended September 30, 2009 are
not necessarily indicative of the results that may be expected
for the year ending December 31, 2009. These unaudited
interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements
and accompanying notes for the year ended December 31,
2006, the period from January 1, 2007 through
December 5, 2007, the period from December 6, 2007
through December 31, 2007 and the year ended
December 31, 2008.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the amounts reported and disclosed in
the financial statements and accompanying notes. Actual results
could differ materially from these estimates.
The company evaluates its estimates continually to determine
their appropriateness, including determination of the fair value
of acquired intangible assets and goodwill, the estimated useful
lives of the companys intangible assets, determination of
fair value of stock options, income taxes, and allowances for
sales returns, uncollectible accounts receivable and excess or
obsolete inventory. The company bases its estimates on
historical experience and on various assumptions that are
believed to be reasonable, the results of which form the basis
for the amounts recorded within the consolidated financial
statements.
Revenue
Recognition and Cost of Revenues
The company applies the provisions of Securities and Exchange
Commission (SEC) Staff Accounting Bulletin
(SAB) No. 104, Revenue Recognition in
Financial Statements. In general, the company recognizes
revenue related to subscriptions, product sales and advertising
when (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred or services have been rendered
to the customer, (iii) the fee is fixed or determinable,
and (iv) collectability is reasonably assured. Where
arrangements have multiple elements, the company applies the
guidance prescribed by Emerging Issues Task Force
(EITF)
00-21,
Revenue Arrangements with Multiple Deliverables. Revenue
is allocated to the elements based on a relative fair value
method and revenue is recognized based on the companys
policy for each respective element.
The company derives subscription revenues by providing access to
its online historical databases, its private family websites,
and its magazine. Subscription revenues are recognized ratably
over the subscription period, ranging from one month to one
year, net of estimated cancellations. Subscription fees are
collected primarily from credit cards through the companys
websites at the beginning of the subscription period. Deferred
revenues represent the amounts received in advance of the
subscription period.
Revenues are also generated from product sales of desktop
software, DNA testing, books, stand-alone magazines,
self-published products, other printed materials, advertising
sold to third parties for display in the companys
magazines and websites and access to our family history content
on a
pay-per-view
basis. Sales of desktop software revenue are recognized in
accordance with the American Institute of Certified Public
Accountants Statement of Position (SOP)
97-2,
Software Revenue Recognition, as modified by
SOP 98-9.
Product and other revenues are recognized upon shipment of the
product. Advertising revenues are recognized when the magazine
is shipped or based on the number of online impressions
delivered. Shipping fees billed to customers are included in
product and other revenues, and related shipping costs are
included in cost of product and other revenues.
Cost of subscription revenues consists of amortization of
capitalized content database costs, depreciation of web servers,
credit card processing fees, website hosting costs, royalty
costs on certain content licensed from others, personnel-related
payroll costs of content database support employees and customer
support employees since January 1, 2007.
F-9
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cost of product and other revenues consist of direct costs of
product goods sold, shipping costs, credit card processing fees,
personnel-related costs of product warehouse personnel,
warehouse storage costs and royalties on products licensed from
others.
The company has established an allowance for sales returns based
on historical subscription cancellations and product returns.
Actual customer subscription cancellations and product returns
are charged against the allowance or deferred revenue to the
extent that revenue has not yet been recognized. This reserve
has been reflected as a reduction of accounts receivable and
revenue. In various sales transactions, the company is required
to collect and remit sales taxes on certain of its sales. The
company accounts for sales tax on a net basis and such sales
taxes are not included in revenues on the consolidated
statements of operations.
The following table summarizes the combined activity for the
allowance for sales returns and the allowance for bad debt (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Period from January 1, 2007
|
|
Period from
|
|
Year Ended
|
|
|
December 31,
|
|
through December 5,
|
|
December 6, 2007 through
|
|
December 31,
|
|
|
2006
|
|
2007
|
|
December 31, 2007
|
|
2008
|
Balance at beginning of period
|
|
$
|
375
|
|
|
$
|
371
|
|
|
$
|
401
|
|
|
$
|
270
|
|
Provision
|
|
|
1,846
|
|
|
|
1,132
|
|
|
|
5
|
|
|
|
1,531
|
|
Write-offs
|
|
|
(1,850
|
)
|
|
|
(1,102
|
)
|
|
|
(136
|
)
|
|
|
(1,407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
371
|
|
|
$
|
401
|
|
|
$
|
270
|
|
|
$
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain
Risks and Concentrations
The companys revenues are principally derived from
subscriptions to its online databases. Revenues from subscribers
in the United States, the United Kingdom and all other countries
were 74%, 18% and 8%, respectively, in the year ended
December 31, 2008 and 75%, 17% and 8%, respectively, in the
nine months ended September 30, 2009 (unaudited).
Financial instruments that potentially subject the company to
credit risk consist principally of cash equivalents, short-term
investments and accounts receivable. Cash equivalents are
comprised of money market accounts and commercial paper.
Short-term investments at December 31, 2007 consisted of
one investment in a corporate note held by one financial
institution. Accounts receivable are unsecured and include
receivables from businesses and individual customers. No one
customer accounted for more than 10% of the companys
revenues during the year ended December 31, 2006, the
period from January 1, 2007 through December 5, 2007,
the period from December 6, 2007 through December 31,
2007, the year ended December 31, 2008, and the nine months
ended September 30, 2009 (unaudited). Three customers
accounted for 18%, 11% and 10% of accounts receivable at
December 31, 2007. One customer accounted for 19% of
accounts receivable at December 31, 2008. Two customers
accounted for 24% and 12% of accounts receivable at
September 30, 2009 (unaudited). The customers that account
for more than 10% of the companys accounts receivable
balances, which are not material as a percentage of revenues,
are businesses with extended payment terms that are responsible
for the resale of various company products and services.
The companys servers containing family history content and
customer data are located principally at one third-party data
center in the United States. The company does not control the
operations of that facility and is vulnerable to damage or
interruption in the event the data center fails.
Cash
and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments
with original maturities of three months or less.
Restricted
Cash
Restricted cash consists principally of cash held in an escrow
account as collateral for the companys credit card
processor and cash held in escrow from acquisitions.
F-10
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Short-Term
Investments
Short-term investments at December 31, 2007 consist of
corporate debt securities.
The company considers investments with remaining time to
maturity greater than one year to be short-term as the company
considers these investments as liquid resources available for
current operations when and if needed. It is not the
companys expectation or intent to hold these investments
for more than one year. The company determines the appropriate
classification of its investments at the time of purchase and
re-evaluates such designations as of each balance sheet date.
All investments and cash equivalents in the portfolio are
classified as
available-for-sale
and are stated at fair market value, with all the associated
unrealized gains and losses reported as a component of
accumulated other comprehensive income (loss). The amortized
cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization and
accretion are included in interest income. Realized gains and
losses are included in interest income. The cost of securities
sold is based on the specific identification method.
Accounts
Receivable
Accounts receivable are recorded at the invoiced amount and are
non-interest-bearing. Accounts receivable consists of credit
card charges authorized but not fully processed by the
companys credit card processors and receivables from
businesses resulting from the sale of product, advertising and
earned royalties or revenue share arrangements. The company
maintains an allowance for doubtful accounts to reserve for
potential uncollectible receivables. Allowances are made based
upon a specific review of all significant outstanding invoices.
For those invoices not specifically reserved, allowances are
provided based upon a percentage of aged outstanding invoices.
In determining these percentages, the company analyzes its
historical collection experience and current economic trends.
Property
and Equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method over the estimated
useful lives of the assets. The estimated useful lives are
three years for computer equipment, purchased software, and
furniture and fixtures. Leasehold improvements are amortized
over the shorter of the lease term or the estimated useful lives
of the assets, generally five years. Repairs and maintenance
costs are expensed as incurred. Major renewals and improvements
that extend the useful lives of existing assets are capitalized
and depreciated over their estimated useful lives.
Inventory
Net inventory was $0.2 million, $0.3 million and
$0.3 million at December 31, 2007, 2008 and
September 30, 2009 (unaudited), respectively. Inventory is
included in prepaid expenses and other current assets on the
consolidated balance sheets. Inventory consists primarily of
packaged software, books, DNA testing kits and other printed
materials. Inventory is classified as finished goods and is
stated at the lower of cost or market. Cost is determined using
the
first-in,
first-out method. The company maintains an allowance for excess
and obsolete inventory based on historical product sales and
current inventory levels.
Content
Database Costs
Content database costs include the costs to acquire or license
the historical data, costs incurred by our employees or by third
parties to scan the content, and costs to have the content keyed
and indexed in order to be searchable. Among the most utilized
content in the companys databases are the United States
and United Kingdom census records which are released by
government entities every ten years. The company amortizes
content database costs on a straight-line basis over ten years
after the content is released for viewing on the companys
websites.
F-11
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Software
Development Costs
Statement of Financial Accounting Standards (SFAS)
No. 86, Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed, requires the
capitalization of certain software development costs subsequent
to the establishment of technological feasibility. The company
considers technological feasibility to be established upon the
completion of a working model. Costs incurred by the company
between the completion of a working model and the point at which
the product is ready for general release have been
insignificant. Accordingly, the company has charged all such
costs to technology and development in the period incurred.
The company accounts for all internal use software development
costs in accordance with the provisions of Statement of Position
(SOP)
98-1,
Accounting for Costs of Computer Software Developed or
Obtained for Internal Use, and
EITF 00-2,
Accounting for Web Site Development Costs.
Long-Lived
Assets, Including Goodwill and Intangible Assets
The company reviews property and equipment and intangible
assets, excluding goodwill and indefinite lived intangible
assets, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amounts of an asset
or asset group to future undiscounted cash flows the asset or
asset group is expected to generate. If assets are determined to
be impaired, the impairment to be recognized equals the amount
by which the carrying value of the asset or group of assets
exceeds its fair market value. During 2008 as a result of a
change in the companys content strategy in China, the
company recorded an impairment charge of $1.5 million on
its capitalized Chinese content. The impairment is recorded in
cost of subscription revenues on the statement of operations.
There was no impairment loss recognized in the year ended
December 31, 2007 or the nine months ended
September 30, 2009 (unaudited).
The company applies the principles of SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS 142
requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for
impairment at least annually or sooner whenever events or
changes in circumstances indicate that they may be impaired. The
company evaluates its goodwill for impairment annually in the
fourth quarter. Impairment is recognized when the carrying value
of the asset or group of assets exceeds its fair market value.
The company performs impairment tests of goodwill on an annual
basis and whenever events or circumstances indicate that an
impairment may exist. The annual evaluation of the
companys goodwill resulted in no impairment loss for the
years ended December 31, 2007 and 2008. There have been no
indicators of impairment in the nine months ended
September 30, 2009 (unaudited).
SFAS 142 also requires that intangible assets with definite
lives be amortized over their estimated useful lives and
reviewed for impairment whenever events or changes in
circumstances indicate an assets carrying value may not be
recoverable in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. The company is currently amortizing its acquired
intangible assets with definite lives on a straight-line basis
over periods ranging from 1 to 10 years except subscriber
relationships and contracts which are amortized on an
accelerated basis from 6 to 8 years. Subscriber
relationships and contracts are amortized based on an annual
turnover rate, or rate of attrition, of the subscribers
resulting in an accelerated basis of amortization. This is the
same rate of attrition that was used to determine the fair value
of the intangible assets at the acquisition date.
Income
Taxes
The company uses the asset and liability method of accounting
for income taxes. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the
F-12
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
enactment date. A valuation allowance is provided when it is
more likely than not that some or all of the deferred tax assets
may not be realized.
Comprehensive
Income (Loss)
The company reports other comprehensive income (loss) in
accordance with SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for
reporting comprehensive income and its components in the
financial statements. For the year ended December 31, 2006,
the period from January 1, 2007 through December 5,
2007, the period from December 6, 2007 through
December 31, 2007, the year ended December 31, 2008,
and the nine months ended September 30, 2009 (unaudited)
accumulated other comprehensive income (loss) includes
unrealized gains and losses on short-term
available-for-sale
investments.
The companys results of operations and cash flows are
subject to fluctuations due to changes in foreign currency
exchange rates. The functional currency of the companys
international subsidiaries is the U.S. dollar. The financial
statements of these subsidiaries are translated into
U.S. dollars using period-end or historical rates of
exchange for assets and liabilities and average rates of
exchange for the period for revenues and expenses.
Net foreign currency transaction and translation gains and
(losses) are included in general and administrative expense in
the accompanying consolidated statements of operations and were
approximately $(0.8) million, $(0.5) million,
$0.1 million, and $(0.4) million for the year ended
December 31, 2006, the period from January 1, 2007
through December 5, 2007, the period from December 6,
2007 through December 31, 2007, and the year ended
December 31, 2008, respectively, and $(0.5) million
and $0.4 million for the nine month periods ended
September 30, 2008 and 2009 (unaudited), respectively.
Stock-Based
Compensation
The company grants stock options to its employees for a fixed
number of shares with an exercise price equal to the fair value
of the stock on the date of grant. Prior to January 1,
2006, as permitted under SFAS No. 123, Accounting
for Stock-Based Compensation, the company elected to follow
Accounting Principles Board Opinion (ABP)
No. 25, Accounting for Stock Issued to Employees,
and related interpretations in using the intrinsic value
method in accounting for stock awards to employees.
Effective January 1, 2006, the company adopted the
fair-value provisions of SFAS 123(R) Share Based
Payments. SFAS 123(R) requires the recognition of
compensation expense, using a fair-value based method for costs
related to all share-based payments. The company recognizes
stock-based compensation expense on a straight line basis over
the vesting term. SFAS 123(R) requires companies to
estimate the fair value of share-based payment awards on the
date of grant using an option-pricing model. The company adopted
the provisions of Statement 123(R) using the prospective
transition method, which requires that for nonpublic companies
that used the minimum value method for financial statement
recognition purposes, SFAS 123(R) shall be applied to all
new options granted and to options that were outstanding prior
to the effective date that were subsequently modified.
The company applies the provisions of SFAS 123(R) and
EITF 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, in accounting for stock-based
compensation arrangements with nonemployees. Fair value of the
stock-based compensation is measured using the stock price and
other assumptions as of the earlier of the date at which a
commitment for performance by the counterparty to earn the
equity instrument is reached or the counterpartys
performance is complete.
Advertising
Advertising costs are expensed as incurred. Total advertising
expenses for the year ended December 31, 2006, the period
from January 1, 2007 through December 5, 2007, the
period from December 6, 2007 through December 31,
2007, and the year ended December 31, 2008 were
approximately $17.9 million, $25.2 million,
F-13
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$1.4 million, and $34.0 million, respectively, and
$24.0 million and $30.8 million for the nine month
periods ended September 30, 2008 and 2009 (unaudited),
respectively.
Research
and Development
All expenditures for research and development are charged to
technology and development expense as incurred.
Net
Income Per Common Share
Basic net income per share is computed using the
weighted-average number of outstanding shares of common stock
during the period. Diluted net income per share is computed
using the weighted-average number of outstanding shares of
common stock and, when dilutive, potential common shares
outstanding during the period. Potential common shares consist
primarily of incremental shares issuable upon the assumed
exercise of stock options and warrants to purchase common stock
using the treasury stock method. A reconciliation of the
numerator and the denominator used in the calculation of basic
and diluted earnings per share is as follows (in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
December 31,
|
|
|
|
September 30,
|
|
|
|
|
2008
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Basic net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$
|
2,384
|
|
|
|
$
|
3,500
|
|
|
$
|
12,224
|
|
Shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
|
38,113
|
|
|
|
|
38,081
|
|
|
|
38,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
|
$
|
0.06
|
|
|
|
$
|
0.09
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$
|
2,384
|
|
|
|
$
|
3,500
|
|
|
$
|
12,224
|
|
Shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
|
38,113
|
|
|
|
|
38,081
|
|
|
|
38,283
|
|
Dilutive stock options
|
|
|
|
417
|
|
|
|
|
397
|
|
|
|
1,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of diluted common shares
|
|
|
|
38,530
|
|
|
|
|
38,478
|
|
|
|
40,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
|
|
$
|
0.06
|
|
|
|
$
|
0.09
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008 and the nine month
periods ended September 30, 2008 and 2009,
5.1 million, 6.7 million and 2.2 million of stock
options were excluded from the diluted calculation as their
inclusion would have been anti-dilutive. There were no
outstanding warrants for the year ended December 31, 2008
or the nine month periods ended September 30, 2008 and 2009.
As a result of the acquisition of the predecessor, the capital
structure of the predecessor is not comparable to that of the
successor. Accordingly net income per common share is not
comparable or meaningful and therefore is not presented.
Recent
Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes. FIN 48
prescribes a recognition threshold and measurement process for
recording in the financial statements uncertain tax
F-14
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
positions taken or expected to be taken in a tax return.
Additionally, FIN 48 provides guidance on classifications,
accounting in interim periods and disclosure requirements for
uncertain tax positions. The company adopted FIN 48 on
January 1, 2007, and the adoption did not have a material
impact on its results of operations or financial position.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS 157 establishes a
framework for measuring the fair value of assets and
liabilities. This framework is intended to provide increased
consistency in how fair value determinations are made under
various existing accounting standards which permit, or in some
cases require, estimates of fair market value. SFAS 157 was
effective for fiscal years beginning after November 15,
2007. In February 2008, the FASB issued FASB Staff Position
(FSP)
No. 157-2,
which delays the effective date of SFAS 157 for all
non-financial assets and liabilities, except those that are
recognized or disclosed at fair value in the financial
statements on a recurring basis. FSP
No. 157-2
defers the effective date of SFAS 157 to fiscal years
beginning after November 15, 2008 for items within the
scope of
FSP 157-2.
Effective January 1, 2008, the company adopted
SFAS 157 for financial assets and liabilities recognized at
fair value on a recurring basis. The adoption of SFAS 157
for financial assets and liabilities did not have a material
impact on our consolidated financial position, results of
operations or cash flows for the year ended December 31,
2008. The adoption of SFAS 157 for nonfinancial assets and
liabilities on January 1, 2009 did not have a material
effect on our financial position or results of operations for
the nine months ended September 30, 2009 (unaudited).
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations. SFAS 141R establishes
principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interest
in the acquiree and the goodwill acquired. SFAS 141R also
establishes disclosure requirements to enable the evaluation of
the nature and financial effects of the business combination.
SFAS 141R is effective for financial statements issued for
fiscal years beginning after December 15, 2008. The company
expects the adoption of SFAS 141R may have a material
impact on the companys consolidated financial statements
if and when the company completes a business acquisition after
the adoption date of this statement.
In April 2008, the FASB issued FSP
No. 142-3,
Determination of the Useful Life of Intangible Assets.
FSP 142-3
amends the factors an entity should consider in developing
renewal or extension assumptions used in determining the useful
life of recognized intangible assets under SFAS 142. This
new guidance applies prospectively to intangible assets that are
acquired individually or with a group of other assets in
business combinations and asset acquisitions.
FSP 142-3
is effective for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008.
Early adoption is prohibited. The adoption of this standard may
have a material effect on its financial position and results of
operations if and when the company completes an acquisition
after the effective date of
FSP 142-3.
In June 2009, the FASB issued Statement No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles - a replacement of FASB Statement
No. 162, The Hierarchy of Generally Accepted Accounting
Principles. The objective of this Statement is to replace
Statement 162 and to establish the FASB Accounting Standards
Codification as the source of authoritative accounting
principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial
statements in conformity with GAAP. Rules and interpretive
releases of the SEC under authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants.
SFAS 168 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009.
F-15
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
CASH,
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
|
Cash, cash equivalents and short-term investments consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Cash
|
|
$
|
8,936
|
|
|
$
|
26,616
|
|
|
$
|
9,987
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
2,978
|
|
|
|
13,505
|
|
|
|
50,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
11,914
|
|
|
$
|
40,121
|
|
|
$
|
60,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities
|
|
$
|
363
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized gains and losses on short-term investments were
not significant at December 31, 2007 and 2008 and
September 30, 2009 (unaudited). Gross realized gains and
losses were not significant for the year ended December 31,
2006, the period from January 1, 2007 through
December 5, 2007, the period from December 6, 2007
through December 31, 2007, the year ended December 31,
2008 and the nine month periods ended September 30, 2008
and 2009 (unaudited).
The following table summarizes the estimated fair value of the
companys investments in marketable securities designated
as
available-for-sale
and classified by the contractual maturity date of the security
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Matures within 1 year
|
|
$
|
363
|
|
|
$
|
|
|
|
$
|
|
|
Matures in 1 to 5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures in 5 to 10 years
|
|
|
|
|
|
|
|
|
|
|
|
|
Matures in 10 plus years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
363
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
ACQUISITIONS
AND DISPOSITIONS
|
In August 2001, the company disposed of a wholly owned
subsidiary in exchange for 1,453,371 shares of the former
subsidiarys common stock and a warrant to purchase an
additional 95,649 shares of the former subsidiarys
common stock. The unexercised warrant expired on August 31,
2007. The company has concluded that the investment has no value
based on the former subsidiarys financial condition and
lack of funding; therefore, there is no value recorded on the
companys financial statements for this investment at
December 31, 2007 and 2008. As of December 31, 2007
and 2008, the company owns less than five percent and accounts
for this investment on the cost basis.
In September 2005, the company purchased substantially all the
assets and assumed certain liabilities of a self-publishing
entity. The total purchase price was $0.8 million, which
included an initial cash payment of $0.7 million and a
second payment of up to $0.1 million to be paid one year
after the acquisition date, if certain warranties and covenants
were satisfied. Additionally, the company agreed to make future
royalty payments to the former owners based on 1% of net sales
of the acquired business. In August 2006, the company sold its
interest in this self-publishing entity, and recorded a gain of
$0.7 million. The terms of the sale released the company
from future obligations, including the $0.1 million future
payment under the original purchase agreement, and provided the
F-16
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
company a right to receive a royalty on future net sales of the
self-publishing entity and a promissory note with an issue
amount of approximately $0.4 million with an interest rate
of 5.3%. Principal and accumulated interest were due on the
earlier of December 31, 2008 or upon an event of default.
The company recorded an allowance against the note receivable
and related accumulated interest in 2006 and deferred
recognition of the gain associated with the note receivable and
related interest until collectibility was reasonably assured. In
July 2007 the company received $0.3 million for settlement
of the promissory note and all other obligations. A gain was
recorded for the amount not previously recorded as a receivable.
In February 2006, the company purchased substantially all of the
assets of a limited liability company for cash of
$0.1 million from the companys chief executive
officer. The purchase price was allocated to developed
technology and was amortized over one year. There were no
operations of the entity subsequent to the purchase.
To expand its myfamily.com product offering, in April 2006, the
company acquired a privately held company for cash of
$2.0 million and 478,261 shares of the companys
common stock for a total purchase price of $4.2 million.
Goodwill resulting from the acquisition is tax deductible. The
total purchase price was allocated to tangible assets and
intangible assets based on their estimated fair value. The
excess of the purchase price over the tangible and identifiable
intangible assets was recorded as goodwill. The purchase price
allocation was as follows (in thousands):
|
|
|
|
|
Net tangible assets acquired and liabilities assumed
|
|
$
|
(170
|
)
|
Intangible assets:
|
|
|
|
|
Developed technology (amortized over 18 months)
|
|
|
2,010
|
|
Goodwill
|
|
|
2,397
|
|
|
|
|
|
|
Total
|
|
$
|
4,237
|
|
|
|
|
|
|
As discussed in Note 1, Generations Holding acquired all
the outstanding stock of the predecessor in December 2007 for a
total purchase price of approximately $354.8 million. The
acquisition has been accounted for as a purchase of the
predecessors business in accordance with
SFAS No. 141, Business Combinations. The
purchase price consisted of the following (in thousands):
|
|
|
|
|
Cash paid (net of predecessor cash used of $28,712)
|
|
$
|
249,132
|
|
Fair value of successor common stock issued to predecessor
stockholders
|
|
|
95,695
|
|
Transaction costs
|
|
|
1,764
|
|
Fair value of stock options exchanged
|
|
|
8,163
|
|
|
|
|
|
|
Total
|
|
$
|
354,754
|
|
|
|
|
|
|
Cash of $15.3 million was placed in escrow for a period of
twelve months from the acquisition date to partially satisfy any
potential loss contingencies that existed at the acquisition
date, including a breach of any representations or warranties by
the predecessor. The escrow amount has been included in the
purchase price. The fair value of the stock options
(5,740,207 shares underlying the stock options) issued in
exchange for stock options in the predecessor was estimated
using the Black-Scholes option-pricing model utilizing the
following assumptions:
|
|
|
|
|
Risk-free interest rate
|
|
|
2.90
|
%
|
Expected term (in years)
|
|
|
2.0
|
|
Expected stock price volatility
|
|
|
65
|
%
|
Expected dividend yield
|
|
|
|
|
The total purchase price of $354.8 million was allocated to
the acquired tangible and identifiable intangible assets and
assumed liabilities based on their estimated fair values at the
acquisition date. The excess of the purchase price over the
allocated fair value for tangible and identifiable intangible
assets was recorded as goodwill. As a
F-17
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
result of this transaction, Spectrum Equity Investors V., L.P.
and certain of its affiliates acquired approximately 67% of the
companys outstanding shares. Spectrum and its
affiliates objective is to invest in and build leading
companies in the information services, media and related growth
sectors. Generations Holding acquired the predecessor at a
premium (i.e., goodwill) over the fair value of the net tangible
and identified intangible assets acquired because Spectrum and
its affiliates, together with the other investors in the
transaction, believed in the future growth and prospects of the
company and Spectrum believed that obtaining control of the
company would contribute toward the achievement of its objective
of investing in and building leading companies in the
information services, media and related growth sectors. The
allocation of the purchase price is as follows (in thousands):
|
|
|
|
|
Assets acquired:
|
|
|
|
|
Cash and cash equivalents, restricted cash and investments
|
|
$
|
19,338
|
|
Other current assets
|
|
|
10,483
|
|
Property and equipment
|
|
|
16,017
|
|
Other assets
|
|
|
213
|
|
Acquired intangible assets:
|
|
|
|
|
Capitalized content
|
|
|
45,337
|
|
Subscriber relationships and contracts
|
|
|
35,600
|
|
Core technology
|
|
|
21,700
|
|
Trade name and trademarks
|
|
|
25,700
|
|
In-process technology
|
|
|
1,300
|
|
Goodwill
|
|
|
285,019
|
|
|
|
|
|
|
Total assets
|
|
|
460,707
|
|
Liabilities assumed:
|
|
|
|
|
Deferred revenues
|
|
|
(58,156
|
)
|
Current liabilities
|
|
|
(22,816
|
)
|
Long-term liabilities
|
|
|
(24,981
|
)
|
|
|
|
|
|
Total net assets acquired
|
|
$
|
354,754
|
|
|
|
|
|
|
For tax purposes, the transaction was treated as a stock
acquisition. As a result, assets and liabilities were not
adjusted to fair value for tax purposes. Deductible goodwill of
$18.4 million consists of tax basis goodwill that existed
prior to the transaction, and has been carried over to the
successor.
The company allocated $1.3 million of the purchase price in
the transaction to an in-process research and development
(IPR&D) project that had not yet reached
technological feasibility and has no future alternative use. The
amount allocated to IPR&D has been recorded within
technology and development costs in the companys statement
of operations for the successor period from December 6,
2007 through December 31, 2007. The companys
IPR&D project focuses on search technologies. The valuation
of the project was based on an income approach which discounts
the future net cash flows attributable to the project to
determine the current value.
In June 2007 the company approved a management incentive plan to
provide bonus payments totaling $5.0 million to certain
company executives in the event of a change of control
transaction. Pursuant to the transaction in December 2007,
executives were paid all but approximately $0.3 million,
which was held in escrow to be paid out after the one year
escrow period. The company also incurred an additional
$4.5 million of seller costs associated with the
acquisition. The total costs of $9.5 million were expensed
as incurred. In 2008, the company adjusted goodwill by
$0.4 million due to actual expenses incurred being
different than estimates.
F-18
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2008 and September 30, 2009
(unaudited), the company has a liability of $5.7 million
and $1.7 million to be paid to former shareholders as
remaining escrow payments and to former shareholders who have
not submitted the documentation required for disbursement of
funds from the acquisition.
|
|
4.
|
PROPERTY
AND EQUIPMENT
|
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
Lives
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Computer equipment
|
|
|
3 years
|
|
|
$
|
12,003
|
|
|
$
|
21,234
|
|
|
$
|
24,653
|
|
Purchased and internal use software
|
|
|
3 years
|
|
|
|
3,499
|
|
|
|
5,623
|
|
|
|
8,572
|
|
Furniture and fixtures
|
|
|
3 years
|
|
|
|
900
|
|
|
|
1,023
|
|
|
|
1,083
|
|
Leasehold improvements
|
|
|
5 years
|
|
|
|
467
|
|
|
|
610
|
|
|
|
771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,869
|
|
|
|
28,490
|
|
|
|
35,079
|
|
Accumulated depreciation and amortization
|
|
|
|
|
|
|
(754
|
)
|
|
|
(11,486
|
)
|
|
|
(18,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,115
|
|
|
$
|
17,004
|
|
|
$
|
16,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
INTANGIBLE
ASSETS AND CONTENT DATABASE COSTS
|
The changes in the carrying amounts of goodwill during the year
ended December 31, 2008, were as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
285,019
|
|
Adjustments related to 2007 acquisition
|
|
|
447
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
285,466
|
|
|
|
|
|
|
F-19
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangible assets and content database costs consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
December 31,
|
|
|
September 30,
|
|
|
|
Lives
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Subscriber relationships and contracts
|
|
6-8 years
|
|
$
|
35,600
|
|
|
$
|
35,600
|
|
|
$
|
35,600
|
|
Core technology
|
|
4-5 years
|
|
|
21,700
|
|
|
|
21,700
|
|
|
|
21,700
|
|
Trademarks and trade names
|
|
6 years
|
|
|
25,700
|
|
|
|
25,700
|
|
|
|
25,700
|
|
Other intangible assets
|
|
1 year
|
|
|
|
|
|
|
22
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,000
|
|
|
|
83,022
|
|
|
|
83,023
|
|
Accumulated amortization
|
|
|
|
|
(1,542
|
)
|
|
|
(25,321
|
)
|
|
|
(37,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net intangible assets
|
|
|
|
$
|
81,458
|
|
|
$
|
57,701
|
|
|
$
|
45,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized content database costs
|
|
10 years
|
|
$
|
36,637
|
|
|
$
|
46,122
|
|
|
$
|
51,761
|
|
Capitalized content database costs not yet placed in service
|
|
|
|
|
9,829
|
|
|
|
7,793
|
|
|
|
7,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,466
|
|
|
|
53,915
|
|
|
|
59,755
|
|
Accumulated amortization
|
|
|
|
|
(432
|
)
|
|
|
(6,671
|
)
|
|
|
(11,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net content database costs
|
|
|
|
$
|
46,034
|
|
|
$
|
47,244
|
|
|
$
|
47,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core technology, trademarks and trade names, other intangible
assets and content database costs are amortized using the
straight-line method over their estimated period of benefit.
Subscriber relationships and contracts are amortized based on an
annual turnover rate, or rate of attrition, of the subscribers
resulting in an accelerated basis of amortization. The weighted
average amortization period for the definite-lived intangible
assets acquired was 6.6, 7.1 and 7.2 years for the years ended
December 31, 2007 and 2008 and the nine months ended
September 30, 2009 (unaudited), respectively. The
amortization expense associated with these intangible assets is
classified as amortization of acquired intangible assets in our
consolidated statements of operations.
As of December 31, 2008, amortization of intangible assets
and content database costs is expected to be $23.0 million,
$21.1 million, $19.1 million, $13.1 million, and
$11.1 million for the years ending December 31, 2009,
2010, 2011, 2012, and 2013, respectively.
On December 5, 2007, in connection with the acquisition of
predecessor, the company entered into a secured credit facility
with a number of financial institutions for borrowings up to
$150.0 million including a term loan commitment of
$140.0 million (the Term Loan) and revolving
commitment of up to $10.0 million which can be in the form
of a swingline loan, a revolving loan
and/or a
letter of credit (the Revolving Loans collectively
Term Loan and Revolving Loans are the Credit
Facility or Debt). The company borrowed
$140.0 million of the Term Loan to fund the acquisition. No
amounts were outstanding under the Revolving Loans as of
December 31, 2007, 2008 or September 30, 2009
(unaudited). A loan under the Credit Facility may be in the form
of a (1) base rate loan that bears interest at the higher
of (a) the Federal Funds Rate plus 1/2 of 1%, or
(b) the rate of interest in effect as publicly announced by
JPMorgan Chase Bank as its prime rate, plus a margin
of 2.75% or 3.50% based on the companys consolidated total
leverage ratio; or (2) Eurodollar rate loan that bears
interest based on LIBOR plus a margin of 3.75% to 4.50% based on
the companys consolidated total leverage ratio. The
effective interest rate of the Credit Facility at
December 31, 2008 and September 30, 2009 (unaudited)
was 7.4% and 4.0%, respectively.
F-20
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The company is obligated to make quarterly accrued interest and
principal payments on the Term Loan. The principal payments
escalate each fiscal year until the Term Loan matures on
December 5, 2012. The Revolving Loans are also due on
December 5, 2012. In addition to paying interest on the
Credit Facility, the company pays a commitment fee of 0.50% per
annum to the lenders under the Revolving Loans for the
unutilized commitment. The fee is calculated based on the daily
unutilized commitment and is due quarterly. The company can
terminate or reduce the Revolving Loan commitment at any time
without a termination fee.
The Credit Facility is subject to various mandatory prepayment
terms which include prepayments as a result of certain equity
issuances and prepayments due to an excess cash calculation
performed on an annual basis. Included in the current portion of
long-term debt on the balance sheet is $10.9 million due in
May 2009 as an excess cash payment. Mandatory prepayments are
applied to Revolving Loans prior to the outstanding principal on
the Term Loan. The Credit Facility is secured by all of the
present and future tangible and intangible assets of the company
and approximately 65% of the companys stock in certain of
its wholly owned foreign subsidiaries. Foreign subsidiaries do
not guarantee the outstanding Debt. In connection with the
Credit Facility, the company must maintain certain financial
ratio covenants, minimum earnings before interest, depreciation,
amortization, taxes and other specifically excluded costs and
maintain capital and content expenditures below set maximum
levels. As of December 31, 2008 and September 30, 2009
(unaudited) the company was in compliance with all Debt
covenants.
Debt financing costs of $3.9 million were incurred in
connection with the Credit Facility. These costs are deferred in
other long-term assets and are being amortized to interest
expense over the period of the Term Loan.
The company uses an interest rate cap agreement to cap the
floating (base) rate of its Credit Facility. In December 2007,
the company entered into an interest rate cap agreement with a
financial institution that participates in the Credit Facility.
The interest rate cap has a notional amount of
$90.0 million of the companys outstanding floating
rate debt of $140.0 million and was purchased in order to
mitigate a portion of the companys exposure to variable
rate interest payments. The company paid $0.1 million for a
6% interest rate cap which expires on December 31, 2010.
The interest rate cap does not qualify for hedge accounting
under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. As such, the fair value
of the interest rate cap is recorded as an asset in the
financial statements and changes in fair value are recorded in
interest expense. At December 31, 2007, the fair value of
the interest rate cap was approximately $0.1 million. At
December 31, 2008 and September 30, 2009 (unaudited)
the fair value of the interest rate cap was de minimus.
On November 1, 2006, the company renegotiated the terms of
its previous revolving line of credit with a financial
institution for up to $25 million, due upon maturity at
September 1, 2009; interest accrued monthly at percentages
above or below prime or LIBOR based on quarterly debt ratios;
interest was payable monthly for the prime portion and quarterly
for the LIBOR portion. The line was secured by all the assets of
the company and approximately 65% of the companys stock in
certain of its wholly owned foreign subsidiaries. On
December 5, 2007, in connection with the acquisition of
predecessor the revolving line of credit plus accrued interest
of approximately $0.1 million was paid in full and the
revolving line of credit was terminated.
As of December 31, 2008, the companys Credit Facility
had a tranche of $110.0 million outstanding in a
12-month
LIBOR at 3.93% plus a margin and a tranche of $23.0 million
outstanding in a
12-month
LIBOR at 2.51% plus a margin. The tranches and related interest
rates under the Credit Facility reset in January and March 2009,
respectively. As of September 30, 2009 (unaudited) the
companys Credit Facility had two tranches of
$85.0 million and $4.7 million outstanding in
3-month
LIBOR at 0.28% plus a margin and one tranche of
$25.0 million outstanding in
1-month
LIBOR at 0.25% plus a margin. Under the Credit Facility, the
3-month
LIBOR tranches and related interest rates reset in December 2009
and the 1-month LIBOR tranche and related interest rates reset
in October 2009.
F-21
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Components of long-term debt are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Term loan
|
|
$
|
140,000
|
|
|
$
|
133,000
|
|
|
$
|
114,669
|
|
Current portion of long-term debt
|
|
|
(7,000
|
)
|
|
|
(21,457
|
)
|
|
|
(12,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
133,000
|
|
|
$
|
111,543
|
|
|
$
|
102,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future contractual maturities of the long-term debt at
December 31, 2008 and September 30, 2009 (unaudited)
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(unaudited)
|
|
|
2009
|
|
$
|
21,457
|
|
|
$
|
2,406
|
|
2010
|
|
|
14,000
|
|
|
|
12,830
|
|
2011
|
|
|
17,500
|
|
|
|
16,038
|
|
2012
|
|
|
80,043
|
|
|
|
83,395
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
133,000
|
|
|
$
|
114,669
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
The company has authorized 1,000,000 shares of Preferred
Stock that is issuable in series. At December 31, 2008 and
September 30, 2009 (unaudited), the company has not issued
or designated any series or preferences associated with the
Preferred Stock.
Warrants
In connection with entering into an interactive service
agreement with an ISP in May 2002, the company issued a warrant
to purchase up to 3,583,507 shares of the companys
common stock at $1.4412 per share. The available shares
fluctuated based on the cumulative number of subscribers
generated through a customized web interface. Because the
warrant was performance based and the number of shares were not
determined, the company accounted for the warrant as variable
and recorded marketing expenses based on the cumulative number
of subscribers generated annually. In March of 2004, the warrant
was amended to provide for a purchase of 121,176 shares of
common stock (the number of shares earned as of the end of
February 2004) at an exercise price of $1.4412 per share.
The warrant was exercised in May 2007 in a cashless conversion
with 84,019 shares issued of common stock.
In connection with obtaining a term loan with a financial
institution in May 2003, the company issued a warrant to
purchase 57,157 shares of common stock at approximately
$0.5248 per share. The warrant was exercised in a cashless
conversion on December 5, 2007 with 51,602 shares
issued.
In conjunction with the acquisition of the predecessor, the
company issued replacement options to acquire common stock of
the successor in exchange for all issued and outstanding options
of the predecessor with the same option grant prices and terms
including all terms outlined in the 1998 Stock Option Plan as
amended in 2002 (the 1998 Plan), the Executive Stock
Plan (ESP) and the 2004 Stock Option Plan (the
2004 Plan). Holders of stock
F-22
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
options pursuant to the 1998 and the ESP Plans along with
various employees with change of control provisions in their
individual grants under the 2004 Plan received twelve months of
vesting acceleration upon the acquisition of predecessor. Under
these plans the company has reserved 4,805,655 and
4,639,983 shares of common stock for future issuance as of
December 31, 2008 and September 30, 2009 (unaudited),
respectively. The company has no intentions to issue additional
stock options under the 1998 Plan, ESP or 2004 Plans.
All options pursuant to the 1998 Plan, ESP, and the 2004 Plan
have a term not greater than ten years from the date of grant.
Options issued generally vest ratably over four years (25% one
year after the grant date and at a rate of 1/48 per month
thereafter). Options generally commence vesting upon the date of
hire or date of grant. The plans allow for the exercise of
options using shares of the companys common stock that
have been held for more than six months. The shares used to
satisfy option exercise prices were netted against option
exercises on the statements of stockholders equity. The
company retains a right of first refusal to purchase shares
obtained from the exercise of stock options under all stock
plans when presented with a bona fide offer to acquire the stock
from a third party. The company has exercised its right of first
refusal depending on cash availability and the price obtained
from the bona fide third party offer. In March 2008, the Board
of Directors of the company approved and adopted the Generations
Holding, Inc. Stock Purchase and Option Plan (the 2008
Plan). As of December 31, 2008 and September 30,
2009 (unaudited) the company reserved up to 4,862,500 and
6,162,500 shares of common stock for issuance under the
plan. All options pursuant to the 2008 Plan have a term not
greater than ten years from the date of grant. Options issued
generally vest ratably over four years (25% one year after the
grant date and at a rate of 1/48 per month thereafter). Options
generally commence vesting upon the date of hire or date of
grant.
All the plans provide for stock options to be granted to
employees, officers, consultants, and directors. A summary of
all the plans stock option activity for the years ended
December 31, 2006, 2007, and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2007
|
|
2008
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Outstanding at beginning of year
|
|
|
9,663,797
|
|
|
|
3.22
|
|
|
|
7,279,863
|
|
|
|
3.74
|
|
|
|
5,712,204
|
|
|
|
4.42
|
|
Granted
|
|
|
3,409,688
|
|
|
|
4.60
|
|
|
|
352,750
|
|
|
|
4.70
|
|
|
|
4,188,121
|
|
|
|
5.42
|
|
Exercised
|
|
|
(2,440,852
|
)
|
|
|
0.40
|
|
|
|
(1,496,513
|
)
|
|
|
1.12
|
|
|
|
(194,948
|
)
|
|
|
3.34
|
|
Canceled
|
|
|
(3,352,770
|
)
|
|
|
5.58
|
|
|
|
(423,896
|
)
|
|
|
4.66
|
|
|
|
(882,851
|
)
|
|
|
4.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
7,279,863
|
|
|
|
3.74
|
|
|
|
5,712,204
|
|
|
|
4.42
|
|
|
|
8,822,526
|
|
|
|
4.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
3,344,147
|
|
|
|
2.80
|
|
|
|
3,429,111
|
|
|
|
4.30
|
|
|
|
3,996,892
|
|
|
|
4.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
|
|
|
5,954,928
|
|
|
|
3.74
|
|
|
|
4,279,793
|
|
|
|
4.36
|
|
|
|
8,370,492
|
|
|
|
4.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summary of all the plans stock option activity for the
nine months ended September 30, 2009 (unaudited) is as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Exercise
|
|
|
Shares
|
|
Price
|
|
|
(unaudited)
|
|
Outstanding at beginning of period
|
|
|
8,822,526
|
|
|
$
|
4.88
|
|
Granted
|
|
|
1,798,167
|
|
|
|
6.80
|
|
Exercised
|
|
|
(130,510
|
)
|
|
|
4.28
|
|
Canceled
|
|
|
(163,595
|
)
|
|
|
5.28
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
10,326,588
|
|
|
|
5.21
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
5,976,194
|
|
|
|
4.67
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
|
|
|
10,098,940
|
|
|
|
5.19
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the stock options outstanding of
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
Average
|
|
|
|
Average
|
|
|
Number of
|
|
Exercise
|
|
Remaining Life
|
|
Number of
|
|
Exercise
|
Range of Exercise
Prices
|
|
Shares
|
|
Price
|
|
(Years)
|
|
Shares
|
|
Price
|
|
0.24-2.00
|
|
|
214,216
|
|
|
$
|
0.68
|
|
|
|
3.8
|
|
|
|
214,216
|
|
|
$
|
0.68
|
|
4.60-4.70
|
|
|
4,586,439
|
|
|
|
4.60
|
|
|
|
6.2
|
|
|
|
3,777,989
|
|
|
|
4.60
|
|
5.40-6.00
|
|
|
4,021,871
|
|
|
|
5.43
|
|
|
|
9.3
|
|
|
|
4,687
|
|
|
|
6.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,822,526
|
|
|
$
|
4.88
|
|
|
|
7.6
|
|
|
|
3,996,892
|
|
|
$
|
4.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the stock options outstanding of
September 30, 2009 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
Average
|
|
|
|
Average
|
|
|
Number of
|
|
Exercise
|
|
Remaining Life
|
|
Number of
|
|
Exercise
|
Range of Exercise
Prices
|
|
Shares
|
|
Price
|
|
(Years)
|
|
Shares
|
|
Price
|
|
$0.24-$2.00
|
|
|
204,216
|
|
|
$
|
0.69
|
|
|
|
3.0
|
|
|
|
204,216
|
|
|
$
|
0.69
|
|
$4.60-$4.70
|
|
|
4,430,768
|
|
|
|
4.60
|
|
|
|
5.5
|
|
|
|
4,251,695
|
|
|
|
4.60
|
|
$5.40-$6.00
|
|
|
4,675,604
|
|
|
|
5.42
|
|
|
|
8.7
|
|
|
|
1,520,283
|
|
|
|
5.41
|
|
$7.36-$8.54
|
|
|
1,016,000
|
|
|
|
7.79
|
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,326,588
|
|
|
$
|
5.21
|
|
|
|
7.3
|
|
|
|
5,976,194
|
|
|
$
|
4.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The company adopted SFAS 123(R) on January 1, 2006. In
accordance with SFAS 123(R) the company estimates the fair
value of each option on the date of grant using the
Black-Scholes option-pricing model. The Black-Scholes
option-pricing model requires several estimates including an
estimate of the fair value of common stock. The fair value of
common stock has been determined by the board of directors at
each grant date based on a variety of factors, including
arms-length sales of the companys common stock,
periodic valuations of the companys common stock, the
companys financial position, historical financial
performance, projected financial
F-24
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
performance, valuations of publicly traded peer companies and
the illiquid nature of the common stock. The weighted average
grant date fair value of options granted during the years ended
December, 2006, 2007 and 2008 and the nine month periods ended
September 30, 2008 and 2009 (unaudited) was $2.46, $2.50,
$2.22, $2.22 and $2.99, respectively. The expected term of the
options is based on historical analysis of the companys
option lives. The company calculated its expected volatility
based on the volatilities of a peer group of publicly traded
companies. The risk-free interest rate of the option is based on
the U.S. Constant Maturities rate for the expected term of
the option at the time of grant. The following weighted average
assumptions were used in the calculations for the years ended
December 31, 2006, 2007, 2008 and the nine month periods
ended September 30, 2008 and 2009 (unaudited).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Expected volatility
|
|
|
65
|
%
|
|
|
65
|
%
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
50
|
%
|
Expected term (in years)
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
4.2
|
|
Weighted average risk-free interest rate
|
|
|
4.8
|
%
|
|
|
4.7
|
%
|
|
|
2.3
|
%
|
|
|
2.3
|
%
|
|
|
1.9
|
%
|
Weighted average fair value of the underlying common stock
|
|
$
|
4.60
|
|
|
$
|
4.70
|
|
|
$
|
5.42
|
|
|
$
|
5.40
|
|
|
$
|
6.80
|
|
Expected dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2006, the period from
January 1, 2007 through December 5, 2007, the period
from December 6, 2007 through December 31, 2007, and
the year ended December 31, 2008, the company recorded
compensation expense related to stock option awards totaling
$0.3 million, $0.7 million, $0.1 million and
$4.7 million, respectively, and $3.5 million and
$4.3 million for the nine month periods ended
September 30, 2008 and 2009, respectively. At
December 31, 2008 and September 30, 2009 (unaudited),
the company had $8.6 million and $9.4 million,
respectively, of total unrecognized compensation expense under
SFAS 123(R), net of estimated forfeitures. This amount is
expected to be recognized over a weighted average period of 2.6
and 2.8 years, respectively. SFAS 123(R) requires
forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates. The company estimates forfeiture rates
based on its historical forfeitures of stock options. The total
intrinsic value of options outstanding as of December 31,
2007 and 2008 and September 30, 2009 (unaudited) was
$5.6 million, $5.5 million, and $85.6 million,
respectively. The total intrinsic value of options exercisable
as of December 31, 2007 and 2008 and September 30,
2009 (unaudited) was $3.8 million, $4.4 million and
$52.7 million, respectively.
In January 2006, the company modified the terms of its then
outstanding stock options with exercise prices above $4.60,
reducing the exercise price of the options to $4.60. As a result
of the modification, the company recorded incremental
compensation expense of $0.4 million and $0.1 million
for the year ended December 31, 2006 and the period from January
1, 2007 through December 5, 2007, respectively. Incremental
compensation expense was de minimus for the period from December
6, 2007 through December 31, 2007 and the year ended
December 31, 2008.
In December 2000 and April 2001, the company repriced stock
options outstanding to all option holders under the 1998 Plan
and the ESP. The April 2001 repricing reduced the exercise price
of all options issued prior to April 2001 to $0.24 per share.
Such options are being accounted for as variable in accordance
with FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation. As of
December 31, 2006 and 2007, the company had 144,649
and 5,099 variable options outstanding, respectively. As these
options were variable, compensation was recorded based on the
change in the estimated fair value of common stock. The expense
resulting from the variable options for the year ended
December 31, 2006 and for the period from January 1,
2007 through December 5, 2007 was de minimus and was
allocated to the operating expense line in which the
employees salary was expensed. As a result of replacing
these options in connection with the transaction in December
2007, these options are no longer variable. Stock-based
compensation recorded in the statements of operations includes
F-25
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
compensation expense from the adoption of SFAS 123(R) and
compensation expense relating to variable stock options.
Stock-based compensation is included in the following income
statement captions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
Successor
|
|
|
|
|
Period from
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
December 6,
|
|
|
|
|
|
|
|
|
Year Ended
|
|
2007 through
|
|
2007 through
|
|
Year Ended
|
|
Nine Months Ended
|
|
|
December 31,
|
|
December 5,
|
|
December 31,
|
|
December 31,
|
|
September 30,
|
|
|
2006
|
|
2007
|
|
2007
|
|
2008
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Cost of subscription revenues
|
|
$
|
31
|
|
|
$
|
73
|
|
|
$
|
3
|
|
|
$
|
80
|
|
|
$
|
60
|
|
|
$
|
78
|
|
Technology and development
|
|
|
224
|
|
|
|
260
|
|
|
|
23
|
|
|
|
1,132
|
|
|
|
791
|
|
|
|
1,223
|
|
Marketing and advertising
|
|
|
196
|
|
|
|
279
|
|
|
|
27
|
|
|
|
254
|
|
|
|
180
|
|
|
|
273
|
|
General and administrative
|
|
|
3,338
|
|
|
|
286
|
|
|
|
24
|
|
|
|
3,206
|
|
|
|
2,478
|
|
|
|
2,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based
compensation expense
|
|
$
|
3,789
|
|
|
$
|
898
|
|
|
$
|
77
|
|
|
$
|
4,672
|
|
|
$
|
3,509
|
|
|
$
|
4,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The company committed to issue fully vested stock options with
an exercise price equal to the fair value of the underlying
common stock at the date of grant for recruiting services
performed by a third party in 2008. The company recorded an
estimated $0.1 million of expense in 2008 based on the
Black-Scholes option-pricing model. The expense was classified
as technology and development expenses on the consolidated
statement of operations and as stock-based compensation on the
consolidated statement of cashflows. When the option was issued
in 2009, the company recorded the issuance in the consolidated
statement of stockholders equity.
|
|
9.
|
EMPLOYEE
BENEFIT PLANS
|
Effective January 1, 2003, the company offered a 401(k)
Savings Plan (the 401(k) Plan) that qualifies as a
deferred compensation plan under Section 401(k) of the
Internal Revenue Code. Under the 401(k) Plan, employees can
contribute a percentage of their compensation not to exceed
maximum annual federal limits, and it allows for discretionary
employer contributions. Effective January 1, 2008, the
company increased the employer matching contributions from 65%
to 70% of all employee contributions made, with a maximum annual
contribution of $2,100. The employees contributions are
fully vested, and the companys matching contributions vest
on an annual basis over a
48-month
period, beginning on the employees hire date. The
companys contributions were $0.6 million,
$0.6 million, de minimus, and $0.7 million for
the year ended December 31, 2006, the period from
January 1, 2007 through December 5, 2007, the period
from December 6, 2007 through December 31, 2007, and
the year ended December 31, 2008, respectively, and
$0.6 million for the nine months ended September 30,
2009 (unaudited).
The company has a medical and vision benefit plan covering
full-time employees of the company and their dependents. The
plan is a partially self-funded plan under which participant
claims are obligations of the plan. The plan is funded through
employer and employee contributions at a level sufficient to pay
for the benefits provided by the plan. The companys
contributions to the plan were $4.4 million,
$3.0 million, de minimus, and $2.6 million for
the year ended December 31, 2006, the period from
January 1, 2007 through December 5, 2007, the period
from December 6, 2007 through December 31, 2007, and
the year ended December 31, 2008, respectively, and
$2.6 million for the nine months ended September 30,
2009 (unaudited). The plan maintains individual and aggregate
stop loss insurance policies on the medical portion of the plan
of $0.2 million and approximately $4.5 million,
respectively, to mitigate losses. Balances for the incurred but
not yet reported claims, including reported but unpaid claims at
December 31, 2007 and 2008, were $0.6 million and
$0.6 million, respectively, and $0.5 million as of
September 30, 2009 (unaudited). The company estimates
claims incurred but not yet reported each month based on its
historical experience, and the company adjusts its accrual to
meet the estimated liability.
F-26
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
RELATED-PARTY
TRANSACTIONS
|
The company has an exclusive license and service agreement
related to its DNA product with an affiliated company of one of
its investors. The investors ownership is not material to
the overall equity of the company.
The income tax expense for the year ended December 31,
2006, the period from January 1, 2007 through
December 5, 2007, the period from December 6, 2007
through December 31, 2007, the year ended December 31,
2008 and the nine months ended September 30, 2009 is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from,
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
December 6,
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
2007 through
|
|
|
2007 through
|
|
|
Year Ended
|
|
|
Nine Months
|
|
|
|
December 31,
|
|
|
December 5,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Current income tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
6,681
|
|
|
$
|
4,210
|
|
|
$
|
441
|
|
|
$
|
|
|
|
$
|
7,821
|
|
State
|
|
|
95
|
|
|
|
(173
|
)
|
|
|
1
|
|
|
|
3
|
|
|
|
81
|
|
Foreign
|
|
|
40
|
|
|
|
180
|
|
|
|
16
|
|
|
|
414
|
|
|
|
325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,816
|
|
|
|
4,217
|
|
|
|
458
|
|
|
|
417
|
|
|
|
8,227
|
|
Deferred income tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,431
|
)
|
|
|
246
|
|
|
|
(355
|
)
|
|
|
1,238
|
|
|
|
(218
|
)
|
State
|
|
|
210
|
|
|
|
555
|
|
|
|
|
|
|
|
190
|
|
|
|
(1,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(2,221
|
)
|
|
|
801
|
|
|
|
(355
|
)
|
|
|
1,428
|
|
|
|
(1,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
4,595
|
|
|
$
|
5,018
|
|
|
$
|
103
|
|
|
$
|
1,845
|
|
|
$
|
6,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax differed from the amounts computed by applying the
U.S. federal income tax rate of 35% to income before income
tax expense as a result of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from,
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
December 6,
|
|
|
|
|
|
Nine Months
|
|
|
|
Year Ended
|
|
|
2007 through
|
|
|
2007 through
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 5,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Computed expected tax expense
|
|
$
|
4,461
|
|
|
$
|
4,476
|
|
|
$
|
(420
|
)
|
|
$
|
1,480
|
|
|
$
|
6,703
|
|
State income taxes, net of federal tax effect
|
|
|
198
|
|
|
|
266
|
|
|
|
189
|
|
|
|
199
|
|
|
|
349
|
|
Foreign income taxes
|
|
|
(34
|
)
|
|
|
(41
|
)
|
|
|
(7
|
)
|
|
|
452
|
|
|
|
262
|
|
Impact of state apportionment change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,044
|
)
|
Municipal interest
|
|
|
(163
|
)
|
|
|
(410
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
Acquisition costs
|
|
|
|
|
|
|
1,024
|
|
|
|
|
|
|
|
(725
|
)
|
|
|
|
|
Other
|
|
|
133
|
|
|
|
(297
|
)
|
|
|
372
|
|
|
|
439
|
|
|
|
657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
4,595
|
|
|
$
|
5,018
|
|
|
$
|
103
|
|
|
$
|
1,845
|
|
|
$
|
6,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities
at December 31, 2007 and 2008 and September 30, 2009
are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
September 30,
2009
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
$
|
235
|
|
|
$
|
925
|
|
|
$
|
1,853
|
|
Net operating loss carryforwards U.S.
|
|
|
911
|
|
|
|
4,943
|
|
|
|
1,047
|
|
Net operation loss carryforwards Foreign
|
|
|
|
|
|
|
201
|
|
|
|
418
|
|
Investment in subsidiary
|
|
|
498
|
|
|
|
498
|
|
|
|
482
|
|
Depreciation differences
|
|
|
1,126
|
|
|
|
|
|
|
|
|
|
Other accruals and reserves
|
|
|
831
|
|
|
|
1,378
|
|
|
|
1,530
|
|
Valuation allowance
|
|
|
|
|
|
|
(201
|
)
|
|
|
(418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
3,601
|
|
|
|
7,744
|
|
|
|
4,912
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(27,820
|
)
|
|
|
(31,394
|
)
|
|
|
(26,896
|
)
|
Content in process
|
|
|
|
|
|
|
(2,071
|
)
|
|
|
(2,133
|
)
|
Depreciation differences
|
|
|
|
|
|
|
(373
|
)
|
|
|
(490
|
)
|
Other accruals and reserves
|
|
|
|
|
|
|
(34
|
)
|
|
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
(27,820
|
)
|
|
|
(33,872
|
)
|
|
|
(29,740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(24,219
|
)
|
|
$
|
(26,128
|
)
|
|
$
|
(24,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized.
The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods
in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning
strategies in making this assessment. Based on the criteria set
forth in SFAS No. 109, management believes that it is
more likely than not the company will realize the benefits of
these deductible differences, except for the foreign net
operating losses and has determined that a valuation allowance
is necessary for the foreign net operation losses only.
At December 31, 2008, the company had federal net operating
loss carryforwards of approximately $134.0 million
available to offset future taxable income. The companys
ability to utilize $125.0 million of these net operating
losses are limited to approximately $0.3 million per year
due to previous statutory ownership changes (as
defined for purposes of Section 382 of the Internal Revenue
Code). The Section 382 limited net operating losses will
begin to expire in 2019 and will fully expire in 2022. The
Company anticipates the expiration of $120.5 million of
unused net operating losses and accordingly, that amount has not
been reflected as a deferred tax asset.
At December 31, 2008, the company had state net operating
loss carryforwards of approximately $38.0 million available
to offset future taxable income for state tax purposes, which
can be carried forward to reduce state income taxes in varying
amounts depending on the different state laws. State net
operating loss carryforwards expire at various dates beginning
in 2016.
At December 31, 2008, the company had foreign net operating
loss carryforwards of approximately $0.9 million available
to offset future taxable income for foreign tax purposes, which
can be carried forward to reduce foreign income taxes in varying
amounts depending on the different country laws. Foreign net
operating loss carryforwards expire at various dates beginning
in 2014.
In June 2006, the FASB issued Financial Interpretation
No. 48, Accounting for Uncertainty in Income Taxes,
which clarifies the accounting for uncertainty in income taxes
recognized in a companys financial statements in
F-28
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
accordance with SFAS 109. The interpretation prescribes a
recognition threshold and measurement attribute criteria for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The
interpretation also provides guidance on non-recognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition.
The company adopted the provisions of FIN 48 on
January 1, 2007. The adoption of FIN 48 did not impact
the consolidated balance sheets, statements of operations or
statements of cash flows. The total amount of gross unrecognized
tax benefits, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
Gross unrecognized tax benefits as of January 1,
|
|
$
|
434
|
|
|
$
|
543
|
|
Increases related to tax positions taken
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits at December 31,
|
|
$
|
543
|
|
|
$
|
543
|
|
|
|
|
|
|
|
|
|
|
If recognized, the unrecognized tax benefit would have no impact
on the companys effective tax rate. The company expects
the unrecognized tax benefits to decrease by $0.2 million
during the next 12 months.
The company and its subsidiaries file income tax returns in the
U.S. federal jurisdiction, and various state and foreign
jurisdictions. With few exceptions, the company is no longer
subject to U.S. federal, state and local, or
non-U.S. income
tax examinations by tax authorities for years prior to 1997. The
companys policy is to recognize interest and penalties
related to unrecognized tax benefits as income tax expense.
Accrued interest is de minimus and there are no penalties
accrued at December 31, 2007 or 2008. The company believes
that it has appropriate support for the income tax positions
taken and to be taken on its tax returns and that its accruals
for tax liabilities are adequate for all open years based on an
assessment of many factors including past experience and
interpretations of tax law applied to the facts of each matter.
|
|
12.
|
FAIR
VALUE MEASUREMENTS
|
The company adopted the provisions of SFAS No. 157,
Fair Value Measurements, as of January 1, 2008.
Under SFAS 157, fair value is based on the price that would
be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the
measurement date. In order to increase consistency and
comparability in fair value measurements, SFAS 157
establishes a fair value hierarchy that prioritizes observable
and unobservable inputs used to measure fair value into three
broad levels. These levels, in order of highest priority to
lowest priority, are described below:
Level 1: Quoted prices (unadjusted) in active
markets that are accessible at the measurement date for assets
or liabilities.
Level 2: Observable prices that are based on
inputs not quoted on active markets, but corroborated by market
data.
Level 3: Unobservable inputs are used when
little or no market data is available.
Our cash equivalents and interest rate cap are classified within
Level 1 and Level 2, respectively, due to readily
available market prices or alternative pricing sources utilizing
market observable inputs.
F-29
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the financial instruments of the
company subject to SFAS 157 and the valuation approach
applied to each class of security as of December 31, 2008
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting
|
|
|
|
|
|
|
Date Using
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
Balance at
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
13,505
|
|
|
$
|
13,505
|
|
|
$
|
|
|
|
$
|
|
|
Interest rate cap
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
13,507
|
|
|
$
|
13,505
|
|
|
$
|
2
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the financial instruments of the
company subject to SFAS 157 and the valuation approach
applied to each class of security as of September 30, 2009
(unaudited, in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting
|
|
|
|
|
|
|
Date Using
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
Balance at
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
September 30,
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
50,606
|
|
|
$
|
50,606
|
|
|
$
|
|
|
|
$
|
|
|
Interest rate cap
|
|
|
30
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
50,636
|
|
|
$
|
50,606
|
|
|
$
|
30
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying amounts reported in the consolidated financial
statements for accounts receivable and accounts payable
approximate their fair values because of the immediate or
short-term maturities of these financial instruments. The
carrying value of long-term debt approximates fair value based
on interest rates currently available to the company for debt
with similar terms, at December 31, 2007 and 2008 and
September 30, 2009 (unaudited).
|
|
13.
|
COMMITMENTS
AND CONTINGENCIES
|
The company has entered into noncancelable operating leases for
facilities and certain equipment. Rent expense for operating
leases with escalating lease payment terms is recognized on a
straight-line basis over the lives of the related leases.
F-30
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a schedule by year of future minimum lease
payments of noncancelable operating leases at December 31,
2008 (in thousands):
|
|
|
|
|
Years Ending December
31,
|
|
|
|
|
2009
|
|
$
|
2,155
|
|
2010
|
|
|
2,073
|
|
2011
|
|
|
2,024
|
|
2012
|
|
|
1,700
|
|
2013
|
|
|
1,591
|
|
Thereafter
|
|
|
3,834
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
13,377
|
|
|
|
|
|
|
Rental expense for operating leases was approximately
$1.4 million, $2.4 million, $0.2 million, and
$2.2 million for the year ended December 31, 2006, the
period from January 1, 2007 through December 5, 2007,
the period from December 6, 2007 through December 31,
2007, and the year ended December 31, 2008, respectively,
and $1.7 million and $1.8 million for the nine month
periods ended September 30, 2008 and 2009 (unaudited),
respectively. The company exited one of its leased facilities in
May 2007 and was not able to sublease the facilities and did not
believe it would have been able to sublease the facilities for
the remaining lease term. As a result, the company recorded
$0.6 million in the period from January 1, 2007
through December 5, 2007 as rent expense for the remaining
minimum payments required until the first option to terminate
the lease agreement plus an early termination fee. In October
2008, the company was able to exit the lease prior to the first
option date to terminate the lease as the lessor found a new
lessee, $0.1 million of remaining lease termination
liability was released at that time. The company leases a
portion of its facilities to third parties under noncancelable
lease arrangements. Lease payments received for the year ended
December 31, 2006, the period from January 1, 2007
through December 5, 2007, the period from December 6,
2007 through December 31, 2007, the year ended
December 31, 2008, and the nine month periods ended
September 30, 2008 and 2009 (unaudited) were de minimus.
The company has entered into agreements with certain vendors
requiring the company to make royalty payments based on
specified future product sales or relative online page views.
Products include certain books, proprietary genealogical
information, content databases, and a search engine placed on CD
ROMs. Royalty expenses were $5.4 million,
$2.0 million, $0.2 million, and $1.4 million for
the year ended December 31, 2006, the period from
January 1, 2007 through December 5, 2007, the period
from December 6, 2007 through December 31, 2007, and
the year ended December 31, 2008, respectively, and
$1.1 million and $1.0 million for the nine month
periods ended September 30, 2008 and 2009, respectively.
Royalty expenses are included as a cost of subscription revenues
and cost of product revenues in the accompanying statements of
operations.
As part of a prior acquisition, the company agreed to make
future royalty payments to the seller based on 1% of the
companys family history business and 11% of certain
product and licensing revenues. Payment obligations were
recorded as cost of revenues in the quarter the obligation was
incurred. In December 2006, as a result of disputes between the
parties over the payment obligations, the company made
arrangements to settle the dispute and terminate the agreement
for $3.3 million. The termination fee was recorded as a
general and administrative expense in the year ended
December 31, 2006.
On May 1, 2006 the company entered into a sale-leaseback
transaction with a third party in which the company sold its
corporate office building for $18.6 million. As a result of
the transaction the company would have recognized a gain on the
sale of the building of $5.9 million as a reduction of rent
expense over the term of the lease agreement. The unrecognized
amount was recorded as a deferred gain on sale-leaseback and was
stated as a liability on the consolidated balance sheet as of
December 31, 2006. The company entered into a
10-year
operating lease as part of the transaction with estimated annual
lease payments beginning at approximately $1.4 million and
increasing 2% per annum. As a result
F-31
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of the acquisition as discussed in Note 1, the deferred
gain was eliminated and is no longer being offset against
rent expense.
The company has outstanding a letter of credit with one of its
credit card processors in the amount of $0.1 million. The
company has a commitment to purchase excess inventory from its
retail software publisher at the end of the annual software
version sales. At December 31, 2008, the potential
liability was not estimable. The company has entered into a
commitment with a content service provider to purchase
$0.1 million of services per year expiring in 2013.
The company is involved in various legal proceedings that have
arisen in the normal course of business. While the ultimate
results of these matters cannot be predicted with certainty,
management does not expect them to have a material adverse
effect on the financial position and results of operations or
liquidity of the company.
In July 2009, the Credit Facility was amended to change the
terms on mandatory prepayments resulting from proceeds of equity
issuances and increase the maximum dollar level for annual
capital and content expenditures.
In addition, on September 16, 2009, we settled a claim with
respect to the timeliness and accuracy of a content index we
created. The settlement resulted in an expense of approximately
$2.3 million in 2009.
The Companys Board of Directors and stockholders have
approved a
1-for-2
reverse stock split of the Companys common stock to take
effect upon consummation of the planned initial public offering.
An amended and restated certificate of incorporation will be
filed prior to the closing of the planned initial public
offering effecting the anticipated
1-for-2
reverse stock split. All common share and per share amounts
retroactively reflect the reverse stock split.
We evaluated subsequent events through October 19, 2009 in
connection with Amendment No. 3 to the Registration
Statement (Form S-1) filed with the Securities and Exchange
Commission.
F-32
Our mission is to help everyone discover, preserve and share their family history. Ancestry.com has
spent more than a decade creating the worlds largest online family history resource.
_Fm\i(_d`cc`fe_nfic[n`[\_jlYjZi`Y\ij _+_Y`cc`fe___`jkfi`ZXc_i\Zfi[j
(%),_Y`cc`fe_gifOc\j_`e()_d`cc`fe_]Xd`cp_ki\\j ©2009 Ancestry.com |
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution
|
The estimated expenses in connection with the offering are as
follows:
|
|
|
|
|
Expenses
|
|
Amount
|
|
|
Securities and Exchange Commission registration fee
|
|
$
|
7,000
|
|
FINRA filing fee
|
|
|
13,000
|
|
Nasdaq listing fees
|
|
|
130,000
|
|
Printing expenses
|
|
|
325,000
|
|
Accounting fees and expenses
|
|
|
1,000,000
|
|
Legal fees and expenses
|
|
|
855,000
|
|
Blue Sky fees and expenses
|
|
|
10,000
|
|
Transfer agents fees and expenses
|
|
|
9,000
|
|
Miscellaneous
|
|
|
401,000
|
|
|
|
|
|
|
Total
|
|
$
|
2,750,000
|
|
|
|
|
|
|
|
|
Item 14.
|
Indemnification
of Directors and Officers
|
Section 145 of the Delaware General Corporation Law
authorizes a court to award, or a corporations board of
directors to grant, indemnity to directors and officers in terms
sufficiently broad to permit such indemnification under certain
circumstances for liabilities, including reimbursement for
expenses incurred, arising under the Securities Act of 1933, as
amended. Our amended and restated certificate of incorporation
to be in effect upon the completion of this offering provides
for indemnification of our directors, officers, employees and
other agents to the maximum extent permitted by the Delaware
General Corporation Law, and our amended and restated bylaws to
be in effect upon the completion of this offering provide for
indemnification of our directors, officers, employees and other
agents to the maximum extent permitted by the Delaware General
Corporation Law. In addition, we have approved entry into
indemnification agreements with our directors, officers and some
employees containing provisions which may be in some respects
broader than the specific indemnification provisions contained
in the Delaware General Corporation Law. The indemnification
agreements may require us, among other things, to indemnify our
directors against certain liabilities that may arise by reason
of their status or service as directors and to advance their
expenses incurred as a result of any proceeding against them as
to which they could be indemnified. Reference is also made to
Section 10 of the underwriting agreement to be filed as
Exhibit 1.1 hereto, which provides for indemnification by
the underwriter of our officers and directors against certain
liabilities.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities
|
Since our incorporation on September 27, 2007, we have made
the following sales of unregistered securities:
1. On December 5, 2007, in connection with the
purchase of The Generations Network, Inc., we issued an
aggregate of 38,045,312 shares of our common stock to new
and existing investors for aggregate consideration of
approximately $205 million.
2. Since December 5, 2007, holders of stock options
exercised options to purchase an aggregate of
325,458 shares of our common stock at exercise prices
ranging from $0.24 to $5.40 per share to employees, consultants
and directors under the 2008 Stock Plan, the 2004 Stock Plan,
the Executive Stock Plan and the 1998 Stock Plan.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance upon
Section 4(2) of the Securities Act, Regulation D or
Regulation S promulgated thereunder, or Rule 701
promulgated under Section 3(b) of the Securities Act as
transactions by an issuer not involving any public offering or
pursuant to benefit plans and contracts relating to compensation
as provided under Rule 701.
II-1
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules
|
(a) Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement.
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation to be
effective upon consummation of the offering.
|
|
3
|
.2
|
|
Amended and Restated Bylaws to be effective upon consummation of
the offering.
|
|
4
|
.1**
|
|
Form of Common Stock Certificate.
|
|
5
|
.1
|
|
Opinion of Gibson, Dunn & Crutcher LLP.
|
|
10
|
.1**
|
|
MyFamily.com, Inc. 1998 Stock Plan.
|
|
10
|
.2**
|
|
MyFamily.com, Inc. 2004 Stock Plan.
|
|
10
|
.3**
|
|
MyFamily.com, Inc. Executive Stock Plan.
|
|
10
|
.4**
|
|
Generations Holding, Inc. 2008 Stock Purchase and Option Plan.
|
|
10
|
.5**
|
|
Ancestry.com Inc. 2009 Stock Incentive Plan.
|
|
10
|
.6**
|
|
MyFamily.com, Inc. 1998 Stock Plan Stock Option Agreement.
|
|
10
|
.7**
|
|
MyFamily.com, Inc. 2004 Stock Plan Stock Option Agreement.
|
|
10
|
.8**
|
|
MyFamily.com, Inc. Executive Stock Plan Stock Option Agreement.
|
|
10
|
.9**
|
|
Generations Holding, Inc. 2008 Stock Purchase and Option Plan
Stock Option Agreement.
|
|
10
|
.10**
|
|
Generations Holding, Inc. 2008 Stock Purchase and Option Plan
Stock Option Agreement for
Non-U.S.
Employees.
|
|
10
|
.11**
|
|
Ancestry.com Inc. Form of Grant Notice for 2009 Stock Incentive
Plan Restricted Stock Units.
|
|
10
|
.12**
|
|
Ancestry.com Inc. Form of Grant Notice for 2009 Stock Incentive
Plan Nonqualified Stock Option.
|
|
10
|
.13**
|
|
Ancestry.com Inc. Form of Grant Notice for 2009 Stock Incentive
Plan Incentive Stock Options.
|
|
10
|
.14**
|
|
Registration Rights Agreement, by and among Generations Holding,
Inc., certain Spectrum Group Stockholders and certain Other
Stockholders, dated December 5, 2007.
|
|
10
|
.15**
|
|
Stockholders Agreement, by and among Generations Holding, Inc.,
certain Spectrum Group Stockholders and certain Other
Stockholders, dated December 5, 2007.
|
|
10
|
.16**
|
|
Credit and Guaranty Agreement, by and among The Generations
Network, Inc., certain guarantors and certain lending parties,
dated December 7, 2007.
|
|
10
|
.17**
|
|
First Amendment to Credit and Guaranty Agreement, dated
March 31, 2008.
|
|
10
|
.18**
|
|
Second Amendment to Credit and Guaranty Agreement, dated
July 16, 2009.
|
|
10
|
.19
|
|
Form of Indemnification Agreement to be entered into with each
director and executive officer.
|
|
10
|
.20**
|
|
Employment Letter by and between Timothy Sullivan and
Ancestry.com Inc., dated July 20, 2009.
|
|
10
|
.21**
|
|
Employment Letter by and between Howard Hochhauser and
Ancestry.com Inc., dated July 20, 2009.
|
|
10
|
.22**
|
|
Employment Letter by and between Joshua Hanna and Ancestry.com
Inc., dated July 20, 2009.
|
|
10
|
.23**
|
|
Employment Letter by and between David Rinn and Ancestry.com
Inc., dated July 20, 2009.
|
|
10
|
.24**
|
|
Employment Letter by and between William Stern and Ancestry.com
Inc., dated June 29, 2009.
|
|
10
|
.25**
|
|
Employment Letter by and between Christopher Tracy and
Ancestry.com Inc., dated July 20, 2009.
|
|
10
|
.26**
|
|
Employment Letter by and between Andrew Wait and Ancestry.com
Inc., dated July 20, 2009.
|
|
10
|
.27**
|
|
Employment Letter by and between Michael Wolfgramm and
Ancestry.com Inc., dated July 20, 2009.
|
|
21
|
.1**
|
|
Subsidiaries of the Registrant.
|
|
23
|
.1
|
|
Consent of Gibson, Dunn & Crutcher LLP (included in
Exhibit 5.1).
|
|
23
|
.2
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
24
|
.1**
|
|
Power of Attorney (see
page II-4
of the original filing).
|
|
24
|
.2
|
|
Power of Attorney of Thomas Layton.
|
|
99
|
.1
|
|
Welcome to Ancestry.com Letter.
|
|
|
|
*
|
|
To be filed by amendment.
|
|
**
|
|
Previously filed.
|
II-2
|
|
|
|
(b)
|
No financial statement schedules are provided because the
information called for is not required or is shown either in the
financial statements or the notes thereto.
|
(a) 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.
(b) 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.
(c) 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.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in Provo, Utah on October 19, 2009.
ANCESTRY.COM INC.
William Stern
General Counsel and Corporate Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
*
Timothy
Sullivan
|
|
President and Chief Executive
Officer and Director
(Principal Executive Officer)
|
|
October 19, 2009
|
|
|
|
|
|
*
Howard
Hochhauser
|
|
Chief Financial Officer
(Principal Financial Officer and
Accounting Officer)
|
|
October 19, 2009
|
|
|
|
|
|
*
Charles
M. Boesenberg
|
|
Director
|
|
October 19, 2009
|
|
|
|
|
|
*
David
Goldberg
|
|
Director
|
|
October 19, 2009
|
|
|
|
|
|
*
Thomas
Layton
|
|
Director
|
|
October 19, 2009
|
|
|
|
|
|
*
Elizabeth
Nelson
|
|
Director
|
|
October 19, 2009
|
|
|
|
|
|
*
Victor
Parker
|
|
Director
|
|
October 19, 2009
|
|
|
|
|
|
*
Benjamin
Spero
|
|
Director
|
|
October 19, 2009
|
|
|
|
|
|
|
|
*By:
|
|
/s/ William Stern
William
Stern
Attorney-in-Fact
|
|
|
|
|
II-4
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement.
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation to be
effective upon consummation of the offering.
|
|
3
|
.2
|
|
Amended and Restated Bylaws to be effective upon consummation of
the offering.
|
|
4
|
.1**
|
|
Form of Common Stock Certificate.
|
|
5
|
.1
|
|
Opinion of Gibson, Dunn & Crutcher LLP.
|
|
10
|
.1**
|
|
MyFamily.com, Inc. 1998 Stock Plan.
|
|
10
|
.2**
|
|
MyFamily.com, Inc. 2004 Stock Plan.
|
|
10
|
.3**
|
|
MyFamily.com, Inc. Executive Stock Plan.
|
|
10
|
.4**
|
|
Generations Holding, Inc. 2008 Stock Purchase and Option Plan.
|
|
10
|
.5**
|
|
Ancestry.com Inc. 2009 Stock Incentive Plan.
|
|
10
|
.6**
|
|
MyFamily.com, Inc. 1998 Stock Plan Stock Option Agreement.
|
|
10
|
.7**
|
|
MyFamily.com, Inc. 2004 Stock Plan Stock Option Agreement.
|
|
10
|
.8**
|
|
MyFamily.com, Inc. Executive Stock Plan Stock Option Agreement.
|
|
10
|
.9**
|
|
Generations Holding, Inc. 2008 Stock Purchase and Option Plan
Stock Option Agreement.
|
|
10
|
.10**
|
|
Generations Holding, Inc. 2008 Stock Purchase and Option Plan
Stock Option Agreement for
Non-U.S.
Employees.
|
|
10
|
.11**
|
|
Ancestry.com Inc. Form of Grant Notice for 2009 Stock Incentive
Plan Restricted Stock Units.
|
|
10
|
.12**
|
|
Ancestry.com Inc. Form of Grant Notice for 2009 Stock Incentive
Plan Nonqualified Stock Option.
|
|
10
|
.13**
|
|
Ancestry.com Inc. Form of Grant Notice for 2009 Stock Incentive
Plan Incentive Stock Options.
|
|
10
|
.14**
|
|
Registration Rights Agreement, by and among Generations Holding,
Inc., certain Spectrum Group Stockholders and certain Other
Stockholders, dated December 5, 2007.
|
|
10
|
.15**
|
|
Stockholders Agreement, by and among Generations Holding, Inc.,
certain Spectrum Group Stockholders and certain Other
Stockholders, dated December 5, 2007.
|
|
10
|
.16**
|
|
Credit and Guaranty Agreement, by and among The Generations
Network, Inc., certain guarantors and certain lending parties,
dated December 7, 2007.
|
|
10
|
.17**
|
|
First Amendment to Credit and Guaranty Agreement, dated
March 31, 2008.
|
|
10
|
.18**
|
|
Second Amendment to Credit and Guaranty Agreement, dated
July 16, 2009.
|
|
10
|
.19
|
|
Form of Indemnification Agreement to be entered into with each
director and executive officer.
|
|
10
|
.20**
|
|
Employment Letter by and between Timothy Sullivan and
Ancestry.com Inc., dated July 20, 2009.
|
|
10
|
.21**
|
|
Employment Letter by and between Howard Hochhauser and
Ancestry.com Inc., dated July 20, 2009.
|
|
10
|
.22**
|
|
Employment Letter by and between Joshua Hanna and Ancestry.com
Inc., dated July 20, 2009.
|
|
10
|
.23**
|
|
Employment Letter by and between David Rinn and Ancestry.com
Inc., dated July 20, 2009.
|
|
10
|
.24**
|
|
Employment Letter by and between William Stern and Ancestry.com
Inc., dated June 29, 2009.
|
|
10
|
.25**
|
|
Employment Letter by and between Christopher Tracy and
Ancestry.com Inc., dated July 20, 2009.
|
|
10
|
.26**
|
|
Employment Letter by and between Andrew Wait and Ancestry.com
Inc., dated July 20, 2009.
|
|
10
|
.27**
|
|
Employment Letter by and between Michael Wolfgramm and
Ancestry.com Inc., dated July 20, 2009.
|
|
21
|
.1**
|
|
Subsidiaries of the Registrant.
|
|
23
|
.1
|
|
Consent of Gibson, Dunn & Crutcher LLP (included in
Exhibit 5.1).
|
|
23
|
.2
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
24
|
.1**
|
|
Power of Attorney (see
page II-4
of the original filing).
|
|
24
|
.2
|
|
Power of Attorney of Thomas Layton.
|
|
99
|
.1
|
|
Welcome to Ancestry.com Letter.
|
|
|
|
*
|
|
To be filed by amendment.
|
|
**
|
|
Previously filed.
|