UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-K

 

 

Commission File Number 000-51644

VOCUS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

4296 Forbes Boulevard

Lanham, Maryland 20706

(301) 459-2590

(Address including zip code, and telephone number, including area code, of principal executive offices)

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, par value $.01 per share

 

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

The aggregate market value of the common stock held by nonaffiliates of the registrant (17,789,104 shares) based on the $15.28 closing price of the registrant’s common stock as reported on the NASDAQ Global Market on June 30, 2010, was approximately $271,817,509. For purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.

 

As of March 11, 2011, there were 19,307,331 outstanding shares of the registrant’s common stock.

 

Documents Incorporated by Reference

 

Portions of the registrant’s definitive proxy statement for the 2011 Annual Meeting of Stockholders, to be filed within 120 days after the end of the fiscal year covered by this Form 10-K, are incorporated by reference into Part III of this Form 10-K.

 

 

TABLE OF CONTENTS

 

CAUTIONARY NOTES REGARDING FORWARD-LOOKING STATEMENTS

 

This report on Form 10-K contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to:

 

 

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,” “potential” and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in greater detail under the heading “Risk Factors” in Item 1A. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we assume no obligation to update any forward-looking statements after the date of this report.

 

This report also contains estimates made by independent parties and by us relating to market size and growth and other industry data. These estimates involve a number of assumptions and limitations and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

 

Overview

 

We are a leading provider of cloud-based software for public relations management. In an age of real-time communication, with an increasing number of media outlets, a rapidly growing volume of news and the emergence of blogs and other social media, traditional approaches to public relations, or PR, are becoming outmoded. Our on-demand software suite helps organizations of all sizes to fundamentally change the way they communicate with both the media and the public, optimizing their public relations and increasing their ability to measure its impact.

 

With our foundation in PR and online news and content distribution, along with our recent expansion into social media, we are positioned to help organizations of all sizes reach and influence buyers across social networks, online and through the media.

 

Our cloud-based software addresses the critical functions of public relations including media relations, news distribution, news monitoring and social media. By automating and integrating essential elements of PR functions, our solutions help organizations communicate directly with key reporters and with the public, identify and analyze relevant news stories and manage relationships with the media and other key stakeholders.

 

As a part of our solutions, we provide a proprietary information database of approximately one million journalists, analysts, media outlets, publicity opportunities and other relevant data. Our database contains extensive information about the media, including in-depth journalist profiles, contact schedules, podcast interviews, pitching preferences and other relevant information compiled by our dedicated media research team. Our database is integrated with our suite of on-demand modules that together address the communications life-cycle from identifying key contacts, to distributing information, to closing the loop with digitized feedback and management analytics.

 

We deliver our solutions over the Internet using a secure, scalable application and system architecture, which allows our customers to eliminate expensive up-front hardware and software costs and to quickly deploy and adopt our software. We were an early pioneer in hosted, multi-tenant, on-demand software, launching our first version in 1999. Our on-demand solutions are used by over 30,000 organizations worldwide, including 8,574 active subscription customers as of December 31, 2010. Our solutions are currently available in seven languages.

 

Our Company

 

We were initially formed in 1988 as First Data Software Publishing, Inc., a Florida corporation, and in 1992 we began selling desktop software for government relations. In 1999, we reincorporated as a Delaware corporation.

 

Industry Background

 

Public Relations

 

The process of managing relationships and communications with journalists, analysts and the public is central to an organization’s reputation, profitability and, ultimately, shareholder value. As organizations recognize the growing importance of effective PR to their success, they increasingly rely on public relations to manage and analyze critical information and to deliver quick and consistent communications. Public relations professionals handle organizational functions such as media, government, consumer, industry and community relations. Every organization, large and small, engages in public relations, whether as an organized department, a single employee’s responsibility or simply a result of public interactions by its executives. Although the most basic elements of PR are practiced widely across organizations of all types, sizes and geographies, the specific objectives and complexity of a PR practice will often vary based on the size of an organization and its PR department.

 

For small organizations, traditional PR has often not been an option, as the cost of a single press release over a newswire is cost prohibitive. In addition, a small business owner often has no staff to focus on marketing or PR. For the most part, small businesses have historically relied on word-of-mouth to help grow their business and have often limited their marketing investment to more localized advertising channels such as phone directories or local

newspapers. With the advent of the internet and the wide adoption of search engines, small businesses are better positioned to leverage PR to increase their visibility and attract new customers.

 

For mid-sized organizations, traditional PR is often expensive and time consuming. These organizations are typically faced with a decision to either use external consulting agencies, or to commit internal staff and resources, both of which often exceed available budgets. In addition, PR responsibilities for these resources are often assigned to only one or two dedicated staff or, in many cases, shared across non-dedicated staff with other full-time responsibilities. The objective for mid-sized organizations is typically to leverage limited resources in order to deliver the PR capabilities commonly found in larger organizations.

 

Larger organizations are typically well staffed and have dedicated budgets and resources. These organizations are faced with the challenges of managing large amounts of information, delivering consistent and well-executed communications, collaborating among large or geographically-dispersed teams and analyzing and reporting on the effectiveness of their PR. The objective for large organizations is typically to maximize effectiveness and ensure consistency of message, while delivering measurable results and improved efficiency.

 

Trends in business communications and the media are directly impacting the practice of PR. Technologies including the Internet, the adoption of search engines and the emergence of social media are forcing dramatic changes in the way people consume and share information. In addition, these technologies are leading to a rapid expansion of media outlets, media channels and news sources including the rapid emergence of new social media channels such as blogs, Facebook and Twitter. As a result, organizations now face broader and more diverse audiences who are informed in real-time by these media, and also face a growing volume of critical business information that needs to be identified, analyzed and managed. An organization can no longer rely on a few relationships with key journalists to achieve the PR objectives of reaching and influencing buyers. As these trends continue, we believe that organizations will face greater challenges to provide a consistent corporate message, gain public support, respond to crisis situations and reach and influence buyers.

 

Outside of traditional PR agencies, the public relations market is generally underserved, with few solutions to address the PR business process in a comprehensive, integrated and cost effective manner. A number of vendors offer one or more software products that each address a single problem or process within PR, such as contact management, news monitoring, news distribution or analytics. Other than these discrete, stand-alone solutions, PR processes are generally performed by internal departments or designated staff either manually or with generic desktop software. In addition, while organizations may purchase a variety of these stand-alone products and services, the resulting combination is usually more expensive and less efficient than an integrated software suite that addresses the complete PR life-cycle.

 

Public Relations and the Cloud-Based Software Market

 

Information technology has created opportunities to deliver software applications directly to users over the Internet in a subscription-based, software-as-a-service business model. This model is made possible by the proliferation of high-speed, broadband Internet connectivity, open standards for application integration and advances in network availability and security. Cloud-based software is generally delivered over the Internet via a secure, multi-tenant, scalable application and system architecture, which allows the provider to concurrently serve a large number of customers and to efficiently distribute the workload across a network of servers. For the user, cloud-based software eliminates the need for expensive hardware, software and internal information technology, or IT, support. In addition, the hosted architecture helps ensure that the software and vendor-supplied content is kept current and secure without user involvement. Additional benefits include rapid deployment and training for new applications, resulting in faster product adoption and increased productivity. This typically results in a lower total cost of ownership and an increased return on investment. The cloud-based model also provides operational efficiencies for the software provider in the areas of development and customer support. Traditional enterprise software vendors must develop, maintain and support multiple versions of their software on multiple hardware, operating system and database platforms. Cloud-based software vendors, by contrast, generally support and maintain a single version of software across all customers that is developed, maintained and supported on a single technology platform. This typically results in lower development and support costs, and allows the vendor to more rapidly develop and release new versions of the software and more efficiently support existing customers.

The characteristics of the PR market make it well-suited for the cloud-based software business model. As news distribution and communication services continue to move from manual, paper-based systems to automated digital services, the Internet and the cloud-based software model provide an efficient and collaborative platform for PR professionals to access, manage and share information and resources. The simple user interface and rapid deployment of web-based software make it ideally suited for users with little or no technology background. Cloud-based software provides a dedicated, modern and sophisticated technology infrastructure to PR departments that would otherwise typically receive limited internal IT resources. Finally, in contrast to sensitive customer or financial data, organizations are generally comfortable with PR content residing on an external hosted platform. Currently, the customer-specific information we store includes PR collateral pieces, notes regarding customers’ contacts with journalists and media outlets, journalist contact information and similar data. We protect our customers’ information by requiring the use of user identifications and passwords to access our on-demand software.

 

Our Solutions

 

Our cloud-based software provides extensive features and broad functionality that address the critical functions of public relations including media relations, news distribution, news monitoring, and social media.

 

By automating and integrating essential elements of PR operations, our solutions allow our customers to improve effectiveness, reduce costs and measure results. We deliver our solutions to customers through a suite of on-demand applications that reduces the cost and risk associated with traditional enterprise software deployments. We believe, based upon our market research and analysis, that the use of cloud-based software helps customers reduce risk and increase the predictability of software management costs, as compared to traditional enterprise software.

 

As a part of our solution, we provide a proprietary information database of approximately one million journalists, analysts, media outlets, publicity opportunities and other relevant data. Our database contains extensive information about the media, including in-depth journalist profiles, contact schedules, podcast interviews, pitching preferences and other relevant information compiled by our dedicated media research team. Our database is integrated with our suite of on-demand software modules that together enable our customers to address the communications life-cycle, from identifying key contacts, to distributing information, to closing the loop with digitized feedback and management analytics. We have developed significant domain expertise and have designed on-demand software solutions and best practices tailored specifically for public relations. As a result, our on-demand offerings meet the PR needs of a broad range of organizations regardless of their size, geography, industry or type.

 

Our comprehensive suite of integrated, cloud-based software modules provides the following key benefits:

 

 

 

Our Strategy

 

Our objective is to be the global leader of cloud-based software for public relations management. Key elements of our strategy include:

 

 

Our Products

 

On-Demand Public Relations Management

 

Our integrated, on-demand software modules provide extensive features and broad functionality that address the critical functions of public relations. By automating and integrating essential elements of PR functions, our solutions help organizations manage large amounts of information, deliver consistent and well-executed communications, collaborate among large or geographically dispersed teams and analyze and report on the effectiveness of their public relations.

 

 

We deliver our solutions over the Internet using a secure, scalable application and system architecture, which allows our customers to eliminate expensive up-front hardware and software costs and to quickly deploy and adopt our cloud-based software.

 

As a part of our solutions, we provide a proprietary information database of approximately one million journalists, analysts, media outlets, publicity opportunities and other relevant data. Our database contains extensive information about the media, including in-depth journalist profiles, contact schedules, podcast interviews, pitching preferences and other relevant information compiled by our dedicated media research team. Our database is integrated with our suite of on-demand modules that together enable our customers to address the communications life-cycle, from identifying key contacts, to distributing information, to closing the loop with digitized feedback and management analytics. Our cloud-based software for public relations management includes the following key modules:

 

 

Due to our flexible architecture and modular design, we are able to easily combine these functional capabilities into pre-packaged editions with optional add-on modules, to meet the needs of a wide range of organizations, regardless of their size or specific PR management objectives. Currently we offer our on-demand software suite in the following pre-packaged editions:

 

 

Additional functional capabilities are offered through a variety of add-on modules which include online press releases, email campaigns, analytics & measurement, news monitoring and social media.

 

Technology, Development and Operations

 

Technology

 

We were an early pioneer in hosted, multi-tenant, on-demand software, launching our first version in 1999. Our on-demand software solutions are each built on a single code base that leverages a highly scalable, multi-tenant application written primarily in Visual Basic and C# for the .NET framework. We use commercially available hardware and a combination of proprietary, open source and commercially available software, including Microsoft SQL Server, Microsoft Windows, MySQL and Linux. We have developed proprietary core services such as user session management and full text indexing that are tuned to our specific architecture and environment, allowing us to continually scale our service. We have a seamless environment, in which a user is not bound to a single server but can be routed in the most optimal way to any number of servers.

 

Our cloud-based software manages all customers as logically separate tenants in central applications and databases. As a result, we are able to spread the cost of delivering our service across our user base. In addition, because we do not have to manage thousands of distinct applications with their own business logic and database schemas, we believe that we can scale our business faster than traditional software vendors, even those that have modified their products to be accessible over the Internet.

 

Every page of our cloud-based software is dynamically rendered for each specific user, including a choice of seven languages. Our customers access our solutions through any web browser without installing any software or downloading Java applets, Microsoft ActiveX, or .NET controls. Performance, functional depth and usability of our solutions drive our technology decisions and product direction.

 

Development

 

Our research and development efforts are focused on improving and enhancing our existing solutions as well as developing new features and functionality. Because of our common, multi-tenant architecture, we are able to provide all of our customers with a single version of our solutions, which allows us to maintain relatively low research and development expenses, as compared to traditional enterprise software business models which support multiple versions.

Site Operations

 

We serve all of our customers from third-party data center facilities in the United States and Europe. These facilities provide a combination of security personnel, photo ID/access cards, biometric hand scanners and sophisticated fire systems. The overall security of each data center (inside and outside) and network operations center are monitored by digital video surveillance cameras 24 hours a day, seven days a week. Additionally, redundant electrical generators and environmental control devices are used to keep servers up and running. We own or lease and operate all of the hardware on which our applications run in the third-party data center facilities.

 

We continuously monitor the performance of our software-as-a-service. Our site operations team provides system management, maintenance, monitoring and back-up. We use custom, proprietary tools as well as commercially available tools to monitor our solutions. We run tests to ensure adequate response from of our sites. We also monitor site availability and latency from various geographic points around the world.

 

To facilitate loss recovery, we operate a multi-tiered system configuration with load balanced web server pools, standby database servers and fault tolerant storage devices. Databases are backed up frequently to standby databases and servers, which are designed to provide near real-time fail-over service in the event of a malfunction with a primary database or server. Backups of databases take place nightly and are archived to tape. These tapes are rotated off-site to a separate third-party managed facility. We also maintain a redundant site for our U.S. facility, which would serve as our primary site in the event that a disaster was to render one of the third-party sites inoperable.

 

Customer Support

 

We believe that superior customer support is critical to retaining and expanding our customer base. Our customer support group is responsible for new customer implementations and general help desk services, including identifying, analyzing and solving any problems or issues. Support services are available to customers on-site, by telephone, via email and via live chat over the Internet. We also offer basic and advanced training classes either on-site or via the Internet through live or pre-recorded web-based classes. Customer support is available during standard business hours to customers that subscribe to our cloud-based software. We also offer 24/7 support to subscription customers at an additional charge. We have support personnel in Europe to handle support requests from our international customers. Such support is available during standard international business hours.

 

In addition, we offer 24/7 editorial support to users of our news distribution services. We also offer, for an additional charge, premium editorial services, such as editing and rewriting of press releases to help optimize distribution.

 

Sales and Marketing

 

We sell our on-demand solutions through our direct sales organization, indirect sales channels and the Internet. Our direct sales organization is separated into new customer and existing customer base sales groups. In our new customer sales group, we employ telesales personnel to make initial calls to potential customers and to qualify customer leads. We employ inside sales and field sales personnel to close sales with customers. Our existing customer base sales group focuses on renewing customer relationships and expanding those relationships by selling additional users and modules to our customers. We currently have sales offices in the United States, including Maryland and Virginia, and in Europe and Asia.

 

We also have indirect channel distributors, including resellers, in certain countries in Europe, Asia and Australia. Revenue from our indirect channels was approximately 3% of our total revenue in 2010.

 

We also use the Internet, partnerships and referral programs as channels to sell our news distribution services. Through our website and our partners’ websites, we attract potential customers and convert them to ongoing paying customers. These services consist of individual press releases submitted primarily by small and mid-size

organizations located in the United States. We may create additional websites or enter into additional partnerships to sell similar services to organizations in other countries.

 

Our marketing strategy is to generate qualified sales leads, build our brand and create market awareness of our cloud-based software for public relations management. Our marketing programs include search engine marketing, email campaigns, direct mail, issuing press releases on a regular basis, using our website to provide product and company information and launching events to publicize our solutions to existing customers and prospects. We also conduct seminars, participate in trade shows and industry conferences, host an annual user conference, publish white papers relating to PR issues and develop customer reference programs, such as customer case studies.

 

Our Customers

 

As of December 31, 2010, we had 8,574 active subscription customers in a wide variety of industries, as well as government agencies, not-for-profit organizations and educational institutions. No single end-user customer accounted for more than 1% of our revenue in 2010.

 

The typical term of our subscription agreements is one year; however, our customers may purchase subscriptions with multi-year terms. We invoice our customers in advance of their annual subscription, with payment terms that require our customers to pay us generally within 30 days of invoice. We had approximately $11.4 million and $10.8 million of these unbilled amounts at December 31, 2009 and 2010, respectively. These amounts may fluctuate from year-to-year depending on varying billing cycles for our subscription agreements, including seasonality in our sales cycle, the timing of renewal agreements and the amount of multi-year subscription agreements. Such fluctuations may not be indicative of our future revenue.

 

Competition

 

The public relations market is fragmented, competitive and rapidly evolving, and there are limited barriers to entry to some segments of this market. Within this segmentation, vendors are offering solutions through either on-demand or traditional on-premise delivery methods. We expect to encounter new and evolving competition as this market consolidates and matures and as organizations become more aware of the advantages and efficiencies that can be attained from the use of specialized software and other technology solutions. Currently, we primarily face competition from the following sources:

 

 

We compete with generic desktop software tools such as Microsoft Office or ACT, as well as other commercially available software solutions not specifically designed for PR. While these solutions have some application to PR, they typically lack the specialized content and specific workflow necessary to meet the complex needs of the PR market.

 

We compete with PR solution providers such as Cision, Meltwater, Dow Jones/Factiva and Radian6. These vendors typically provide one or more products that each address a single problem or process within PR. We believe we are able to compete successfully with these vendors due to our comprehensive and integrated offerings and our secure, scalable application and system architecture. In particular, we believe PR departments can, in general, more readily automate and integrate many manual, paper-based and discrete business activities with our cloud-based software than with our competitors’ offerings, thereby improving effectiveness, increasing productivity and lowering total cost of ownership.

 

We also compete to a lesser extent with providers of outsourced PR services, including PR agencies and other outsourced service providers. While some customers consider outsourcing services and in-house software to be

competing alternatives, many customers view these as being complementary options and will often use both. In those cases where customers wish to select a single option, we believe we compete successfully against outsourced service providers by providing an in-house, automated solution that offers customers a more cost-effective and timely approach to managing their PR efforts.

 

We compete with custom-developed solutions created either internally by the organization or outside vendors. However, building a custom solution often requires extensive financial and technical resources that may not be available or cost-effective for the public relations department. In addition, in many cases the customer’s legacy database and software system were not designed to support the increasingly complex and dynamic needs of today’s PR department.

 

We compete with news distribution providers such as Business Wire and PR Newswire. These providers offer solutions that are generally more expensive and focused on distributing news to traditional media, such as journalists and reporters. In contrast, our online press release distribution services are less expensive and are focused on distributing news directly to consumers through the Internet. These providers may offer solutions that will compete directly with our news distribution services by expanding their online distribution services.

 

We believe the principal factors that generally determine a company’s competitive advantage in the public relations market include the following:

 

 

Intellectual Property and Proprietary Content

 

We rely on a combination of trademark, copyright and trade secret laws in the United States and other jurisdictions as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brand. We have registered, and applied for the registration of, U.S. and international trademarks, service marks and domain names. Additionally, we have filed U.S. patent applications covering certain of our proprietary technology. We also enter into confidentiality and proprietary rights agreements with our employees, consultants and other third parties and control access to software, documentation and other proprietary information.

 

We currently license content included in our cloud-based software from several providers pursuant to data reseller, data distribution and license agreements with these providers. These agreements provide us with content such as news coverage from print and Internet news sites, as well as contact information for journalists, analysts, public officials, media outlets and publicity opportunities. The licenses for this content are non-exclusive. The agreements vary in length, and generally renew automatically subject to certain cancellation provisions available to the parties. Fees for the content provided are generally either fixed amounts per subscriber or based upon the number of concurrent users at a subscriber. Such fees are generally paid quarterly or monthly. During 2005, we developed our own United States content which replaced a significant portion of our acquired third-party content and began providing our internally-developed content to our customers. In 2008, we developed and began providing to our customers our own content for the United Kingdom and Ireland. In 2010, we acquired a media database through our acquisition of Data Presse SAS and began providing this

content to our customers in France. We do not believe that any of our content providers are single source suppliers, the loss of whom would substantially affect our business.

 

If a claim is asserted that we have infringed the intellectual property of a third-party, we may be required to seek licenses to that technology. In addition, we license third-party technologies that are incorporated into some elements of our services. Licenses from third parties may not continue to be available to us at a reasonable cost, or at all. Additionally, the steps we have taken to protect our intellectual property rights may not be adequate. Third parties may infringe or misappropriate our proprietary rights. Competitors may also independently develop technologies that are substantially equivalent or superior to the technologies we employ in our services.

 

Employees

 

As of December 31, 2010, we had 687 full-time and part-time employees. Our employees are not covered under any collective bargaining agreement, and we have never experienced a work stoppage. We believe we have good relations with our employees.

 

Executive Officers and Key Employees

 

Our executive officers and key employees and their respective ages and positions as of March 1, 2011 are as follows:

 

 

 

 

Richard Rudman co-founded Vocus and has served as our Chief Executive Officer, President and Chairman since 1992. From 1986 through 1992, Mr. Rudman served as a senior executive at Dataway Corporation, a software development company. From 1984 through 1986, Mr. Rudman served as an accountant and systems analyst at Barlow Corporation, a privately held real estate development and management company. From 1979 through 1983, Mr. Rudman served in the United States Air Force. Mr. Rudman serves on the board of directors of the Baltimore Symphony Orchestra, a non-profit organization. Mr. Rudman holds a B.S. degree in accounting from the University of Maryland and is a Certified Public Accountant.

 

Stephen Vintz has served as our Chief Financial Officer and Treasurer since January 2001 and in October 2010 was also named as an Executive Vice President. From November 1996 to January 2001, Mr. Vintz was Vice President of Strategic Planning and Analysis at Snyder Communications, Inc., a marketing services company. Prior to November 1996, Mr. Vintz was a manager at Ernst & Young LLP. Mr. Vintz holds a B.B.A. degree in accounting from Loyola University of Maryland and is a Certified Public Accountant.

 

William Wagner has served as our Chief Operating Officer and Executive Vice President since October 2010. From July 2006 until September 2010, Mr. Wagner was our Chief Marketing Officer. From January 2000 to June

2006, Mr. Wagner served as Chief Marketing Officer at Fiberlink Communications, a global provider of security and mobility software. From 1989 to 2000, Mr. Wagner held various sales and marketing positions at AT&T. Mr. Wagner serves on the board of directors of M5 Networks, a privately held technology company. Mr. Wagner holds a B.A. degree in history from Lafayette College and an M.B.A. degree from the University of Pennsylvania’s Wharton School of Business.

 

Norman Weissberg has served as our Senior Vice President, North American Sales since June 2006. From August 1998 until June 2006, Mr. Weissberg was our Vice President, Account Sales. From March 1997 to August 1998, Mr. Weissberg was a Major Accounts Manager at Xerox Corporation. Mr. Weissberg holds a B.S. degree in business from the University of Maryland.

 

Darren Stewart has served as our Senior Vice President, Customer Services since February 1996. From January 1994 through February 1996, Mr. Stewart worked for Information Systems Group, a software consulting company. From September 1992 through January 1994, Mr. Stewart was Manager of Customer Service for Job Files Corporation, a privately held HR software and services company. Mr. Stewart holds a B.S. degree in business administration and finance from the University of Colorado.

 

Mark Heys has served as our Chief Technology Officer since February 2008. From December 1998 to until February 2008, Mr. Heys was our Vice President, Development. From February 1996 through November 1998, Mr. Heys served as Development Manager at T4G Limited, a privately held company. Prior to T4G, Mr. Heys was the founder and CEO of Definitive Ideas, a software company focused on Point-of-Sale applications.

 

James Bruno has served as our Senior Vice President, Corporate Development since May 2010. From June 2009 to May 2010, Mr. Bruno served as Vice President, Sales for Remedi SeniorCare, a provider of institutional pharmacy services. From January 2009 to May 2009, Mr. Bruno worked as an independent consultant. From August 2008 to December 2008, Mr. Bruno served as Senior Vice President, Commercial Operations, North America, for Arpida, a pharmaceutical company. From November 2007 to July 2008, Mr. Bruno worked as an independent consultant. Mr. Bruno served as Vice President, Sales at MiddleBrook Pharmaceuticals from December 2003 to October 2007. From February 2003 to November 2003, Mr. Bruno worked as an Account Manager for Thompson West. From April 2000 to July 2002, Mr. Bruno served as Vice President, International Marketing at MedImmune, a biotechnology company. Mr. Bruno holds a B.S. degree in Marketing from St. Joseph’s University and an M.B.A. degree from Drexel University.

 

You Mon Tsang has served as our Senior Vice President, Products since December 2010. From March 2006 to December 2010, Mr. Tsang served as Chief Executive Officer of Boxxet, Inc., a content aggregation company, and founded Engine140, a social marketing company, in January 2010. From January 2000 to March 2010, Mr. Tsang served in various positions including as the Chief Executive Officer, Chief Marketing Officer and Chairman, of Biz360, a marketing and communications performance monitoring company. From January 1988 to December 1999, Mr. Tsang held various product management and executive positions at Brio Technology, Milktruck, Traveling Software and Xerox. Mr. Tsang holds a B.A. degree in Urban Studies from Yale University and an M.B.A. degree from the University of California, Berkeley’s Walter A. Haas School of Business.

 

Available Information

 

We make available free of charge on or through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission, or SEC. Our website address is www.vocus.com.

 

 

We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This discussion highlights some of the risks which may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties not presently known to us, that we currently deem immaterial or which are similar to those faced by other companies in our

industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer.

 

Risks Related to Our Business and Industry

 

Our quarterly results of operations may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of investors or securities analysts which could cause our stock price to decline.

 

Our quarterly revenue and results of operations may fluctuate as a result of a variety of factors, many of which are outside of our control. If our quarterly revenue or results of operations fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Fluctuations in our results of operations may be due to a number of factors, including, but not limited to, those listed below and identified throughout this “Risk Factors” section:

 

 

Most of our expenses, such as salaries and third-party hosting co-location costs, are relatively fixed in the short-term, and our expense levels are based in part on our expectations regarding future revenue levels. As a result, if revenue for a particular quarter is below our expectations, we may not be able to proportionally reduce operating expenses for that quarter, causing a disproportionate effect on our expected results of operations for that quarter.

 

Due to the foregoing factors, and the other risks discussed in this report, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance.

 

The markets for our cloud-based software and solutions are emerging, which makes it difficult to evaluate our business and future prospects and may increase the risk of your investment.

 

The market for software specifically designed for public relations is relatively new and emerging, making our business and future prospects difficult to evaluate. Many companies have invested substantial personnel and financial resources in their PR departments, and may be reluctant or unwilling to migrate to cloud-based software and services specifically designed to address the public relations market. Our success will depend to a substantial extent on the willingness of companies to increase their use of on-demand solutions in general and for on-demand

public relations software and services in particular. You must consider our business and future prospects in light of the challenges, risks and difficulties we encounter in the new and rapidly evolving market of on-demand public relations management solutions. These challenges, risks and difficulties include the following:

 

 

We may not be able to successfully address any of these challenges, risks and difficulties, including the other risks related to our business and industry described below. Further, if businesses do not perceive the benefits of our on-demand solutions, then the market may not develop further, or it may develop more slowly than we expect, either of which would adversely affect our business, financial condition and results of operations.

 

A majority of our on-demand solutions are sold pursuant to subscription agreements, and if our existing subscription customers elect either not to renew these agreements or renew these agreements for fewer modules or users, our business, financial condition and results of operations will be adversely affected.

 

A majority of our on-demand solutions are sold pursuant to annual subscription agreements and our customers have no obligation to renew these agreements. As a result, we may not be able to consistently and accurately predict future renewal rates. Our subscription customers’ renewal rates may decline or fluctuate or our subscription customers may renew for fewer modules or users as a result of a number of factors, including their level of satisfaction with our solutions, budgetary or other concerns, and the availability and pricing of competing products. Additionally, we may lose our subscription customers due to the high turnover rate in the PR departments of small and mid-sized organizations. If large numbers of existing subscription customers do not renew these agreements, or renew these agreements on terms less favorable to us, and if we cannot replace or supplement those non-renewals with new subscription agreements generating the same or greater level of revenue, our business, financial condition and results of operations will be adversely affected.

 

Because we recognize subscription revenue over the term of the applicable subscription agreement, the lack of subscription renewals or new subscription agreements may not be immediately reflected in our operating results.

 

We recognize revenue from our subscription customers over the terms of their subscription agreements. The majority of our quarterly revenue usually represents deferred revenue from subscription agreements entered into during previous quarters. As a result, a decline in new or renewed subscription agreements in any one quarter will not necessarily be fully reflected in the revenue for the corresponding quarter but will negatively affect our revenue in future quarters. Additionally, the effect of significant downturns in sales and market acceptance of our solutions may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.

 

We might not generate increased business from our current customers, which could limit our revenue in the future.

 

The success of our strategy is dependent, in part, on the success of our efforts to sell additional modules and services to our existing customers and to increase the number of users per subscription customer. These customers might choose not to expand their use of or make additional purchases of our solutions. If we fail to generate additional business from our current customers, our revenue could grow at a slower rate or decrease.

Our business model continues to evolve, which may cause our results of operations to fluctuate or decline.

 

Our business continues to evolve, expanding into new markets and new service areas, and is therefore subject to additional risk and uncertainty. For example, in 2008 we began offering solutions specifically for small businesses, and in June 2010, we began providing social media monitoring services to our customers. We anticipate that our future financial performance and revenue growth will depend, in part, upon the growth of these services and expansion beyond public relations automation into broader marketing solutions.

 

As more of our sales efforts are targeted at small business customers that are more substantively affected by economic conditions than the large and medium-size business sectors, economic downturns may cause potential and existing small business customers to fail to purchase our solutions, which could limit our revenue in the future.

 

We have increased sales of our services to small organizations, including small businesses, associations and non-profits that frequently have limited budgets and may be more likely to be significantly affected by economic downturns than their larger, more established counterparts. Small organizations may choose to spend the limited funds that they have on items other than our services. Additionally, if small organizations experience economic hardship, they may be unwilling or unable to expend resources on marketing or public relations, which would negatively affect demand for our solutions, increase customer attrition and adversely affect our business, financial condition and results of operations.

 

We depend on search engines to attract new customers, and if those search engines change their listings or our relationship with them deteriorates or terminates, we may be unable to attract new customers and our business may be harmed.

 

We rely on search engines to attract new customers, and many of our customers locate our websites by clicking through on search results displayed by search engines such as Google and Yahoo!. Search engines typically provide two types of search results, algorithmic and purchased listings. Algorithmic search results are determined and organized solely by automated criteria set by the search engine and a ranking level cannot be purchased. Advertisers can also pay search engines to place listings more prominently in search results in order to attract users to advertisers’ websites. We rely on both algorithmic and purchased listings to attract customers to our websites. Search engines revise their algorithms from time to time in an attempt to optimize their search result listings. If search engines on which we rely for algorithmic listings modify their algorithms, then our websites may not appear at all or may appear less prominently in search results which could result in fewer customers clicking through to our websites, requiring us to resort to other potentially costly resources to advertise and market our services. If one or more search engines on which we rely for purchased listings modifies or terminates its relationship with us, our expenses could rise, or our revenue could decline and our business may suffer. Additionally, the cost of purchased search listing advertising is rapidly increasing as demand for these channels grows, and further increases could greatly increase our expenses.

 

Failure to effectively develop and expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our solutions.

 

Increasing our customer base and achieving broader market acceptance of our solutions will depend to a significant extent on our ability to expand our sales and marketing operations. We plan to continue to expand our direct sales force, both domestically and internationally. This expansion will require us to invest significant financial and other resources. Our business will be seriously harmed if our efforts do not generate a corresponding significant increase in revenue. We may not achieve anticipated revenue growth from expanding our direct sales force if we are unable to hire and develop talented direct sales personnel, if our new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time or if we are unable to retain our existing direct sales personnel. We also may not achieve anticipated revenue growth from our existing third-party channel partners if we are unable to maintain or renew such relationships, if any existing third-party channel partners fail to successfully market, resell, implement or support our solutions for their customers, or if they represent multiple providers and devote greater resources to market, resell, implement and support competing products and services.

If we fail to develop our brands, our business may suffer.

 

We believe that developing and maintaining awareness of our brands is critical to achieving widespread acceptance of our existing and future services and is an important element in attracting new customers. Successful promotion of our brands will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful solutions. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brands. If we fail to successfully promote and maintain our brands, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brands, we may fail to attract new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business could suffer.

 

If our information databases do not maintain market acceptance, our business, financial condition and results of operations could be adversely affected.

 

We have developed our own content that is included in the information databases that we make available to our customers through our on-demand software. If our internally-developed content does not maintain market acceptance, current subscription customers may not continue to renew their subscription agreements with us, and it may be more difficult for us to acquire new subscription customers.

 

We rely on third-parties to provide certain content for our solutions, and if those third-parties discontinue providing their content, our business, financial condition and results of operations could be adversely affected.

 

We rely on third-parties to provide or make available certain data for our information databases, our news monitoring service and our social media monitoring service. These third-parties may not renew agreements to provide content to us or may increase the price they charge for their content. Additionally, the quality of the content provided to us may not be acceptable to us and we may need to enter into agreements with additional third-parties. In the event we are unable to use such third-party content or are unable to enter into agreement with third-parties, current subscription customers may not renew their subscription agreements with us, and it may be difficult to acquire new subscription customers.

 

We depend on search engines for the placement of our customers’ online news releases, and if those search engines change their listings or our relationship with them deteriorates or terminates, our reputation will be harmed and we may lose customers or be unable to attract new customers.

 

Our news distribution business depends upon the placement of our customers’ online press releases. If search engines on which we rely modify their algorithms or purposefully block our content, then information distributed via our news distribution service may not be displayed or may be displayed less prominently in search results, and as a result we could lose customers or fail to attract new customers and our results of operations could be adversely affected.

 

We have incurred operating losses in the past and may incur operating losses in the future.

 

We have incurred operating losses in the past and we may incur operating losses in the future. Our recent operating losses were $300,000 for 2008 and $3.6 million for 2010. Although we had operating income in 2009, we expect our operating expenses to increase as we expand our operations, and if our increased operating expenses exceed our revenue growth, we may not be able to generate operating income. You should not consider recent quarterly revenue growth as indicative of our future performance. In fact, in future quarters, we may not have any revenue growth or our revenue could decline.

 

Unanticipated changes in our effective tax rate could adversely affect our future results.

 

We are subject to income taxes in the United States and various foreign jurisdictions, and our domestic and international tax liabilities are subject to the allocation of expenses in differing jurisdictions.

Our effective tax rate could be adversely affected by changes in the mix of earnings and losses in jurisdictions with differing statutory tax rates, certain non-deductible expenses, the valuation of deferred tax assets and liabilities and changes in federal, state or international tax laws and accounting principles. Changes in our effective tax rate could materially affect our net results.

 

In addition, we are subject to income tax audits by certain tax jurisdictions throughout the world. Although we believe our income tax liabilities are reasonably estimated and accounted for in accordance with applicable laws and principles, an adverse resolution of one or more uncertain tax positions in any period could have a material impact on the results of operations for that period.

 

We face competition, and our failure to compete successfully could make it difficult for us to add and retain customers and could reduce or impede the growth of our business.

 

The public relations market is fragmented, competitive and rapidly evolving, and there are limited barriers to entry to some segments of this market. We expect the intensity of competition to increase in the future as existing competitors develop their capabilities and as new companies enter our market. Increased competition could result in pricing pressure, reduced sales, lower margins or the failure of our solutions to achieve or maintain broad market acceptance. If we are unable to compete effectively, it will be difficult for us to maintain our pricing rates and add and retain customers, and our business, financial condition and results of operations will be seriously harmed. We face competition from:

 

 

Many of our current and potential competitors have longer operating histories, a larger presence in the general PR market, access to larger customer bases and substantially greater financial, technical, sales and marketing, management, service, support and other resources than we have. As a result, our competitors may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or customer requirements or devote greater resources to the promotion and sale of their products and services than we can. To the extent our competitors have an existing relationship with a potential customer, that customer may be unwilling to switch vendors due to existing time and financial commitments with our competitors.

 

We also expect that new competitors, such as enterprise software vendors and cloud-based service providers that have traditionally focused on enterprise resource planning or back office applications, will enter the on-demand public relations management market with competing products as the on-demand public relations management market develops and matures. Many of these potential competitors have established or may establish business, financial or strategic relationships among themselves or with existing or potential customers, alliance partners or other third-parties or may combine and consolidate to become more formidable competitors with better resources. It is possible that these new competitors could rapidly acquire significant market share.

 

We expect that the traditional press release distribution providers will offer press release distribution services through the Internet. We had or continue to have partnerships with these providers to co-market and sell our press release distribution services. It is possible that these new competitors could rapidly acquire significant market share.

 

If we fail to respond to evolving industry standards, our on-demand solutions may become obsolete or less competitive.

 

The market for our on-demand solutions is characterized by changes in customer requirements, changes in protocols and evolving industry standards. If we are unable to enhance or develop new features for our existing solutions or develop acceptable new solutions that keep pace with these changes, our cloud-based software and services may become obsolete, less marketable and less competitive and our business will be harmed. The success

of any enhancements, new modules and cloud-based software and services depends on several factors, including timely completion, introduction and market acceptance of our solutions. Failure to produce acceptable new offerings and enhancements may significantly impair our revenue growth and reputation.

 

If there are interruptions or delays in providing our on-demand solutions due to third-party error, our own error or the occurrence of unforeseeable events, delivery of our solutions could become impaired, which could harm our relationships with customers and subject us to liability.

 

Our solutions reside on hardware that we own or lease and operate. Our hardware is currently located in various third-party data center facilities maintained and operated in the United States and Europe. Our third-party facility providers do not guarantee that our customers’ access to our solutions will be uninterrupted, error-free or secure. Our operations depend, in part, on our third-party facility providers’ ability to protect systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, criminal acts and similar events. In the event that our third-party facility arrangements are terminated, or there is a lapse of service or damage to such third-party facilities, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities and services.

 

Our disaster recovery computer hardware and systems which are located at a third-party data center facility, have not been tested under actual disaster conditions and may not have sufficient capacity to recover all data and services in the event of an outage occurring at our third-party facilities. Any or all of these events could cause our customers to lose access to our on-demand software. In addition, the failure by our third-party facilities to meet our capacity requirements could result in interruptions in such service or impede our ability to scale our operations.

 

We architect the system infrastructure and procure and own or lease the computer hardware used for our services. Design and mechanical errors, spikes in usage volume and failure to follow system protocols and procedures could cause our systems to fail, resulting in interruptions in our service. Any interruptions or delays in our service, whether as a result of third-party error, our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with customers and our reputation. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors in turn could reduce our revenue, subject us to liability, and cause us to issue credits or cause customers to fail to renew their subscriptions, any of which could adversely affect our business, financial condition and results of operations.

 

Acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and consume resources that are necessary to sustain our business.

 

One of our business strategies is to selectively acquire companies which either expand our solutions’ functionality, provide access to new customers or markets, or both. An acquisition may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the technologies, products, personnel or operations of the acquired organizations, particularly if the key personnel of the acquired company choose not to work for us, and we may have difficulty retaining the customers of any acquired business due to changes in management and ownership. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for ongoing development of our business. We also may experience lower rates of renewal from subscription customers obtained through acquisitions than our typical renewal rates. Moreover, we cannot provide assurance that the anticipated benefits of any acquisition, investment or business relationship would be realized or that we would not be exposed to unknown liabilities. In connection with one or more of these transactions, we may:

 

 

 

In 2010, we acquired substantially all of the assets of Two Cats and a Cup of Coffee LLC (dba HARO) and Boxxet, Inc. (dba Engine140).

 

Foreign acquisitions involve risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. In 2010, we acquired all of the outstanding shares of Data Presse SAS and substantially all of the assets of BDL Media Ltd.

 

We may be liable to our customers and may lose customers if we provide poor service, if our solutions do not comply with our agreements or if there is a loss of data.

 

The information in our databases may not be complete or may contain inaccuracies that our customers regard as significant. Our ability to collect and report data may be interrupted by a number of factors, including our inability to access the Internet, the failure of our network or software systems or failure by our third-party data center facilities to meet our capacity requirements. In addition, computer viruses and intentional or unintentional acts of our employees may harm our systems causing us to lose data we maintain and supply to our customers or data that our customers input and maintain on our systems, and the transmission of computer viruses could expose us to litigation. Our subscription agreements generally give our customers the right to terminate their agreements for cause if we materially breach our obligations. Any failures in the services that we supply or the loss of any of our customers’ data that we cannot rectify in a certain time period may give our customers the right to terminate their agreements with us and could subject us to liability. As a result, we may also be required to spend substantial amounts to defend lawsuits and pay any resulting damage awards. In addition to potential liability, if we supply inaccurate data or experience interruptions in our ability to supply data, our reputation could be harmed and we could lose customers.

 

Moreover, because our solutions are cloud-based, the amount of data that we store for our customers on our servers is ever-increasing. Any systems failure or compromise of our security that results in the release of our customers’ data could seriously limit the adoption of our solutions and harm our reputation causing our business to suffer.

 

Although we maintain general liability insurance, including coverage for errors and omissions, this coverage may be inadequate, or may not be available in the future on acceptable terms, or at all. In addition, we cannot provide assurance that this policy will cover any claim against us for loss of data or other indirect or consequential damages and defending a suit, regardless of its merit, could be costly and divert management’s attention.

 

If our solutions fail to perform properly or if they contain technical defects, our reputation will be harmed, our market share would decline and we could be subject to product liability claims.

 

Our cloud-based software may contain undetected errors or defects that may result in product failures or otherwise cause our solutions to fail to perform in accordance with customer expectations. Because our customers use our solutions for important aspects of their business, any errors or defects in, or other performance problems with, our solutions could hurt our reputation and may damage our customers’ businesses. If that occurs, we could lose future sales or our existing subscription customers could elect to not renew. Product performance problems could result in loss of market share, failure to achieve market acceptance and the diversion of development resources. If one or more of our solutions fail to perform or contain a technical defect, a customer may assert a claim against us for substantial damages, whether or not we are responsible for our solutions’ failure or defect. We do not currently maintain any warranty reserves.

 

Product liability claims could require us to spend significant time and money in litigation or arbitration/dispute resolution or to pay significant settlements or damages. Although we maintain general liability insurance, including coverage for errors and omissions, this coverage may not be sufficient to cover liabilities resulting from such product liability claims. Also, our insurer may disclaim coverage. Our liability insurance also may not continue to

be available to us on reasonable terms, in sufficient amounts, or at all. Any product liability claim successfully brought against us could cause our business to suffer.

 

Our news distribution service is a trusted information source. To the extent we were to distribute an inaccurate or fraudulent press release or our customers used our services to transmit negative messages or website links to harmful applications, our reputation could be harmed, even though we are not responsible for the content distributed via our services.

 

Privacy concerns and laws or other domestic or foreign regulations may reduce the effectiveness of our solution and adversely affect our business.

 

We provide contact information to our customers and our customers can use our service to store contact and other personal or identifying information regarding their marketing and public relations contacts. Federal, state and foreign government agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information obtained from individuals. Other proposed legislation could, if enacted, prohibit or limit the use of certain technologies that track individuals’ activities on web pages, in emails or on the Internet. In addition to government activity, privacy advocacy groups and the technology and marketing industries are considering various new, additional or different self-regulatory standards that may place additional burdens on us or our customers which could reduce demand for our solutions.

 

The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to us and to the businesses of our customers may reduce demand for our solutions, or lead to significant fines, penalties or liabilities for any noncompliance with such privacy laws and could negatively impact our ability to effectively market our solutions. Even the perception of privacy concerns, whether or not valid, could cause our business to suffer.

 

Changes in laws and/or regulations related to the Internet or changes in the Internet infrastructure itself may cause our business to suffer.

 

The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium and the use of email and social media for marketing or other consumer communications. In addition, certain government agencies or private organizations have begun to impose taxes, fees or other charges for accessing the Internet or for sending commercial email. These laws or charges could limit the growth of Internet-related commerce or communications generally, result in a decline in the use of the Internet and the viability of Internet-based services such as ours and reduce the demand for our products.

 

The Internet has experienced, and is expected to continue to experience, significant user and traffic growth, which has, at times, caused user frustration with slow access and download times. If Internet activity grows faster than Internet infrastructure or if the Internet infrastructure is otherwise unable to support the demands placed on it, or if hosting capacity becomes scarce, our business growth may be adversely affected.

 

If we are unable to protect our proprietary technology and other intellectual property rights, it will reduce our ability to compete for business.

 

If we are unable to protect our intellectual property, our competitors could use our intellectual property to market products similar to our products, which could decrease demand for our solutions. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as licensing agreements, third-party nondisclosure agreements and other contractual provisions and technical measures, to protect our intellectual property rights. These protections may not be adequate to prevent our competitors from copying our solutions or otherwise infringing on our intellectual property rights. Existing laws afford only limited protection for our intellectual property rights and may not protect such rights in the event competitors independently develop solutions similar or superior to ours. In addition, the laws of some countries in which our solutions are or may be licensed do not protect our solutions and intellectual property rights to the same extent as do the laws of the United States.

To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. These agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information.

 

If a third-party asserts that we are infringing its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or expensive licenses, and our business may be harmed.

 

The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. Third-parties may assert patent and other intellectual property infringement claims against us in the form of lawsuits, letters, or other forms of communication. As currently pending patent applications are not publicly available, we cannot anticipate all such claims or know with certainty whether our technology infringes the intellectual property rights of third-parties. We expect that the number of infringement claims in our market will increase as the number of solutions and competitors in our industry grows. These claims, whether or not successful, could:

 

 

As a result, any third-party intellectual property claims against us could increase our expenses and adversely affect our business. In addition, many of our customer agreements require us to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us resulting from an adverse ruling in any such claim. Even if we have not infringed any third-parties’ intellectual property rights, we cannot be sure our legal defenses will be successful, and even if we are successful in defending against such claims, our legal defense could require significant financial resources and management’s time, which could adversely affect our business.

 

Our growth could strain our personnel 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.

 

Rapid growth in our headcount and operations may place a significant strain on our management, administrative, operational and financial infrastructure. Between January 1, 2005 and December 31, 2010, the number of our full-time equivalent employees increased from 146 to 655. We anticipate that additional growth will be required to address increases in our customer base, as well as expansion into new geographic areas.

 

Our success will depend in part upon the ability of our senior management to manage growth effectively. To do so, we must continue to hire, train and manage new employees as needed. To date, we have not experienced any significant problems as a result of the rapid growth in our headcount, other than occasional office space constraints. However, our anticipated future growth may place greater strains on our resources. For instance, if our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees as needed, or if we are not successful in retaining our existing employees, our business may be harmed. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. The additional headcount and capital investments we expect to add 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, we will be unable to execute our business plan.

We are dependent on our executive officers and other key personnel, and the loss of any of them may prevent us from implementing our business plan in a timely manner if at all.

 

Our success depends largely upon the continued services of our executive officers. We are also substantially dependent on the continued service of our existing development personnel because of the complexity of our service and technologies. We do not have employment agreements with any of our development personnel that require them to remain our employees nor do the employment agreements we have with our executive officers require them to remain our employees and, therefore, they could terminate their employment with us at any time without penalty. We do not currently maintain key man life insurance on any of our executives, and such insurance, if obtained in the future, may not be sufficient to cover the costs of recruiting and hiring a replacement or the loss of an executive’s services. The loss of one or more of our key employees could seriously harm our business.

 

We may not be able to attract and retain the highly skilled employees we need to support our planned growth.

 

To execute our business strategy, we must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for senior sales executives and engineers with high levels of experience in designing and developing software. 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 us. In addition, in making employment decisions, particularly in the Internet and high-technology industries, job candidates often consider the value of the stock options and awards they are to receive in connection with their employment. Significant volatility in the price of our stock may, therefore, adversely affect our ability to attract or retain key employees. 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.

 

Because we conduct operations in foreign jurisdictions, which accounted for approximately 11% of our 2010 revenues, and because our business strategy includes expanding our international operations, our business is susceptible to risks associated with international operations.

 

We have small but growing international operations and our business strategy includes expanding these operations. Conducting international operations subjects us to new risks that we have not generally faced in the United States. These include:

 

 

The occurrence of any one of these risks could negatively affect our international operations and, consequently, our results of operations generally.

 

We might require additional capital to support business growth, and this capital might not be available.

 

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new solutions or enhance our existing solutions, enhance our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in further equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more

difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.

 

Economic and market conditions may adversely affect our business, financial condition and results of operations.

 

Economic downturns, which have resulted in declines in corporate spending, decreases in consumer confidence and tightening in the credit markets, may adversely affect our financial condition and the financial condition and liquidity of our customers and suppliers. Among other things, these economic and market conditions may result in:

 

 

Any of these events, which are outside of our scope of control, would likely have an adverse effect on our business, financial condition, results of operations and cash flows.

 

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

 

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 SEC 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.

 

Compliance with new regulations governing public company corporate governance and reporting is uncertain and expensive.

 

Many new laws, regulations and standards have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices and have created uncertainty for public companies. These new laws, regulations and standards are subject to interpretations due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by varying regulatory bodies. This may cause continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Our implementation of these reforms and enhanced new disclosures may result in increased general and administrative expenses and a significant diversion of management’s time and attention from revenue-generating activities. Any unanticipated difficulties in implementing these reforms could result in material delays in complying with these new laws, regulations and standards or significantly increase our operating costs.

 

Risks Related to our Common Stock and the Securities Markets

 

If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.

 

The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. There are many large, well-established publicly traded companies active in our industry and market, which may mean it will be less likely that we receive

widespread analyst coverage. Furthermore, if one or more of the analysts who do cover us downgrade our stock, our stock price would likely decline rapidly. If one or more of these analysts cease coverage of us, we could lose visibility in the market, which in turn could cause our stock price to decline.

 

Volatility of our stock price could adversely affect stockholders.

 

The market price of our common stock could fluctuate significantly as a result of:

 

 

Provisions in our amended and restated certificate of incorporation and bylaws or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our stock.

 

Our amended and restated certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:

 

 

 

In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company.

 

Future sales, or the availability for sale, of our common stock may cause our stock price to decline.

 

Our directors and officers hold shares of our common stock that they generally are currently able to sell in the public market. We have also registered shares of our common stock that are subject to outstanding stock options, or reserved for issuance under our stock option plan, which shares can generally be freely sold in the public market upon issuance. Moreover, from time to time, our executive officers and directors have established trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, for the purpose of effecting sales of our common stock. Sales of substantial amounts of our common stock in the public market could adversely affect the market price of our common stock and could materially impair our future ability to raise capital through offerings of our common stock.

 

 

Not applicable.

 

 

Our corporate headquarters, including our principal administrative, marketing, sales, technical support and research and development facilities, are located in Lanham, Maryland, where we lease approximately 57,300 square feet under three agreements that expire in 2011 at which time we will relocate to a new location in Beltsville, Maryland, where we will lease approximately 93,000 square feet under an agreement that expires in 2023. Our content research division is located in College Park, Maryland where we lease approximately 7,300 square feet of space under an agreement that expires in 2020. We also currently occupy several domestic and international sales and service offices in Virginia, Washington, England, France, Morocco and China, where we lease an aggregate of approximately 37,431 square feet under multiple leases, which have terms that expire at various times through 2014.

 

We believe that our current facilities are suitable and adequate to meet our current needs, and that suitable additional or substitute space will be available as needed to accommodate expansion of our operations.

 

 

We are not currently subject to any material legal proceedings. From time to time, however, we are named as a defendant in legal actions arising from our normal business activities. Although we cannot accurately predict the amount of our liability, if any, that could arise with respect to legal actions currently pending against us; we do not expect that any such liability will have a material adverse effect on our financial condition, operating results or cash flows.

 

We believe that we have obtained adequate insurance coverage or rights to indemnification, or where appropriate, have established reserves in connection with these legal proceedings.

 

 

 

 

Market for Common Stock

 

Since December 7, 2005, our common stock has been listed on the NASDAQ Global Market under the symbol “VOCS.” Prior to such time, there was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low closing sale prices of our common stock as reported by NASDAQ, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.

 

 

As of March 1, 2011, there were approximately 67 holders of record of our common stock. This figure does not reflect persons or entities that hold their stock in nominee or “street” name through various brokerage firms.

 

Dividends

 

We have never declared or paid any cash dividends on our capital stock and do not expect to pay any cash dividends for the foreseeable future. We intend to retain any future earnings, if any, in the operation and expansion of our business. Any future determination to pay cash dividends will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors deems relevant. In addition, the terms of any future indebtedness that we may incur could preclude us from paying dividends.

 

Uses of Proceeds From Registered Securities

 

In connection with our initial public offering of our common stock, the SEC declared our Registration Statement on Form S-1 (No. 333-125834), filed under the Securities Act of 1933, effective on December 6, 2005. On December 12, 2005, we closed the sale of 5,000,000 shares of our common stock registered under the Registration Statement. On January 6, 2006, certain selling stockholders sold 750,000 shares of our common stock pursuant to the exercise in full of the underwriters’ over-allotment option. Thomas Weisel Partners LLC, RBC Capital Markets, Wachovia Securities and William Blair & Company served as the managing underwriters.

 

The initial public offering price was $9.00 per share. The aggregate sale price for all of the shares sold by us was $45.0 million, resulting in net proceeds to us of approximately $40.0 million after payment of underwriting discounts and commissions and legal, accounting and other fees incurred in connection with the offering of approximately $5.0 million. The aggregate sales price for all of the shares sold by the selling stockholders was approximately $6.8 million. We did not receive any of the proceeds from the sale of shares of common stock by the selling stockholders.

In December 2005, we used approximately $6.8 million from the net proceeds received from our initial public offering to repay certain indebtedness. In 2006, we used approximately $20.9 million of the offering proceeds for the acquisition of PRWeb International, Inc. In 2010, we used the remaining net proceeds towards the acquisitions of Datapresse, BDL Media, HARO and Engine140 for approximately $13.9 million.

 

Issuer Purchases of Equity Securities

 

We did not purchase any of our common stock during the fourth quarter of 2010. In November 2008, our Board of Directors authorized a stock repurchase program for up to $30,000,000 of our shares of common stock. The shares may be purchased from time to time in the open market, and there is no expiration date specified for the program. During the year ended December 31, 2010, we purchased an aggregate of 831,773 shares of our common stock for $12.2 million under the program. As of March 1, 2011, $6.8 million remained available for purchases under the program.

Performance Graph

 

The following line graph compares cumulative total stockholder returns for the period December 31, 2005 through December 31, 2010 for (1) our common stock; (2) the Nasdaq Market Index; and (3) the Nasdaq Computer & Data Processing Index. The graph assumes an investment of $100 on December 31, 2005. The calculations of cumulative stockholder return on the Nasdaq National Index and the Nasdaq Computer & Data Processing Index include reinvestment of dividends, but the calculation of cumulative stockholder return on our common stock does not include reinvestment of dividends because we did not pay dividends during the measurement period. The performance shown is not necessarily indicative of future performance.

 

 

 

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report. The consolidated statement of operations data for the years ended December 31, 2008, 2009 and 2010, and the consolidated balance sheet data at December 31, 2009 and 2010, are derived from audited consolidated financial statements included elsewhere in this report. The consolidated statement of operations data for the years ended December 31, 2006 and 2007, and the consolidated balance sheet data at December 31, 2006, 2007 and 2008 are derived from audited financial statements not included in this report. The historical results are not necessarily indicative of results to be expected in any future period.

 

 

 

 

 

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in “Risk Factors” in Item 1A.

 

Overview

 

We are a leading provider of cloud-based software for public relations management. Our cloud-based software suite helps organizations of all sizes fundamentally change the way they communicate with both the media and the public, optimizing their public relations and increasing their ability to measure its impact. Our cloud-based software addresses the critical functions of public relations including media relations, news distribution, news monitoring and social media. We deliver our solutions over the Internet using a secure, scalable application and system architecture, which allows our customers to eliminate expensive up-front hardware and software costs and to quickly deploy and adopt our cloud-based software.

 

We sell access to our cloud-based software primarily through our direct sales channel. As of December 31, 2010, we had 8,574 active subscription customers, including 1,900 customers obtained from our acquisition of Datapresse in April 2010, from a variety of industries, including financial and insurance, technology, healthcare and pharmaceutical and retail and consumer products, as well as government agencies, not-for-profit organizations and educational institutions. We define active subscription customers as unique customer accounts that have an active subscription and have not been suspended for non-payment.

 

We are also a provider of news distribution services. We enable our customers to achieve visibility on the Internet by distributing search engine optimized press releases directly to various news sites and the public. We offer on-demand solutions which allow our customers to widely distribute press releases containing important elements of content-rich media such as images, podcasts and video messages designed to drive Internet traffic to websites and increase brand awareness.

 

We plan to continue the expansion of our customer base by expanding our direct distribution channels, expanding our international market penetration, penetrating the small business market and selectively pursuing strategic acquisitions. As a result, we plan to hire additional personnel, particularly in sales and marketing, and expand our domestic and international selling and marketing activities, increase the number of locations where we conduct business and develop our operational and financial systems to manage a growing business. We also intend to seek to identify and acquire companies which would either expand our solution’s functionality, provide access to new customers or markets, or both.

 

Acquisitions

 

On April 16, 2010, we acquired all of the outstanding shares of Data Presse SAS (Datapresse), a privately-held provider of cloud-based public relations software in France which expands our presence in Europe. Datapresse’s cloud-based software complements our current suite of on-demand solutions. The purchase consideration consisted of approximately $9.7 million in cash paid at closing and $572,000 of contingent consideration for the achievement of certain financial metrics for the twelve month period ending April 30, 2011. We recorded $4.7 million of identifiable intangible assets and $5.9 million of goodwill. The operating results of Datapresse are included in the accompanying consolidated financial statements from the acquisition date.

 

On April 16, 2010, we acquired all of the outstanding shares of BDL Media Ltd, Hong Kong (BDL Media), a provider of on-demand public relations software and services in China, for approximately $557,000 in cash and $811,000 of contingent consideration for the achievement of revenue targets in 2010 and 2011. We recorded $275,000 of identifiable intangible assets and $2.4 million of goodwill. In connection with the acquisition, we identified an uncertain tax position, and as a result, we recorded $1.3 million in other liabilities in the consolidated

balance sheet at December 31, 2010. The operating results of BDL Media are included in the accompanying consolidated financial statements from the acquisition date. The fair value of the contingent consideration was adjusted as of December 31, 2010 based on actual performance and an updated assessment of future performance. The additional expense of $504,000 was included in general and administrative expenses in the consolidated statements of operations for the year ended December 31, 2010.

 

We completed acquisitions of Two Cats and a Cup of Coffee, LLC (dba HARO) in June 2010 and Boxxet, Inc. (dba Engine140) in December 2010. The additional acquisitions of HARO and Engine 140, each a privately-held entity, were not material, individually or in the aggregate. The purchase consideration consisted of approximately $2.5 million in cash paid at closing. We recorded approximately $1.2 million of identifiable intangible assets and $1.6 of goodwill. The operating results of each are included in the accompanying consolidated financial statements from the respective acquisition dates.

 

We incurred total acquisition related costs of approximately $1.1 million for all acquisitions for the year ended December 31, 2010, which are included in general and administrative expenses in the consolidated statements of operations.

 

In February 2011, we acquired substantially all of the assets and assumed certain liabilities of a division of North Venture Partners, LLC (North Social) for a purchase price of approximately $7.0 million cash paid at closing, plus up to an additional $18.0 million of contingent cash consideration based on the achievement of certain financial milestones within the following 24 months. North Social provides Facebook applications that enable businesses to create, manage and promote their business on Facebook which will broaden our social media solution. The fair value of the consideration paid for this acquisition will be allocated to the assets purchased and liabilities assumed based on their estimated fair values as of the acquisition date.

 

Sources of Revenues

 

We derive our revenues from subscription agreements and related services and from news distribution services. Our subscription agreements contain multiple service elements and deliverables, which generally include use of our cloud-based software, hosting services, content and content updates and customer support and may also include implementation and training services. The typical term of our subscription agreements is one year; however, our customers may purchase subscriptions with multi-year terms. We separately invoice our customers in advance of their annual subscription, with payment terms that require our customers to pay us generally within 30 days of invoice. Our subscription agreements typically are non-cancelable, though customers have the right to terminate their agreements for cause if we materially breach our obligations under the agreement. Our subscription agreements may include amounts that are not yet contractually billable to customers, and any such unbilled amounts are not recorded in deferred revenue until invoiced.

 

Additionally, we derive revenue on a per-transaction basis from our news distribution services. We generally receive payment in advance of the online distribution of the news release.

 

Professional services revenue consists primarily of data migration, custom development and training sold separately after the initial subscription agreement. Our professional service engagements are billed on a fixed fee basis with payment terms requiring our customers to pay us within 30 days of invoice. Revenues from professional services sold separately from subscription agreements have not been material to our business. During the year ended December 31, 2010, professional services sold separately accounted for less than 1% of our revenues.

 

Cost of Revenues and Operating Expenses

 

Cost of Revenues.  Cost of revenues consists primarily of compensation for training, editorial and support personnel, hosting infrastructure, press release distribution, acquisition, maintenance and amortization of the information database, amortization of purchased technology from business combinations, amortization of capitalized software development costs, depreciation associated with computer equipment and software and allocated overhead. We allocate overhead expenses such as employee benefits, computer and office supplies, management information systems and depreciation for computer equipment based on headcount. As a result, indirect overhead expenses are included in cost of revenues and each operating expense category.

We believe content is an integral part of our solution and provides our customers with access to broad, current and relevant information critical to their public relations efforts. We expect to continue to make investments in both our own content as well as content acquired from third-parties and to continue to enhance our proprietary information database and enhance our news monitoring and social media monitoring services. We expect in 2011, cost of revenues will increase in absolute dollars but will remain flat or decrease slightly as a percentage of revenues.

 

Sales and Marketing.  Sales and marketing expenses are our largest operating expense. Sales and marketing expenses consist primarily of compensation for our sales and marketing personnel, sales commissions and incentives, marketing programs, including lead generation, promotional events, webinars and other brand building expenses and allocated overhead. We expense our sales commissions at the time a subscription agreement is executed by the customer, and we recognize substantially all of our revenues ratably over the term of the corresponding subscription agreement. As a result, we incur sales expense before the recognition of the related revenues.

 

We plan to continue to invest in sales and marketing to add new customers, increase sales to our existing customers and increase sales of our online news release distribution services. Such investments will include adding sales personnel and expanding our marketing activities to build brand awareness and generate additional sales leads. We expect in 2011, sales and marketing expenses will increase in absolute dollars but will remain flat as a percentage of revenues.

 

Research and Development.  Research and development expenses consist primarily of compensation for our software application development personnel and allocated overhead. We have historically focused our research and development efforts on increasing the functionality and enhancing the ease of use of our cloud-based software. Because of our hosted, on-demand model, we are able to provide our customers with a single, shared version of our most recent application. As a result, we do not have to maintain legacy versions of our software, which enables us to have relatively low expenses as compared to traditional enterprise software business models. We expect that in 2011, research and development expenses will increase in absolute dollars but will remain flat or increase slightly as a percentage of revenues.

 

General and Administrative.  General and administrative expenses consist of compensation and related expenses for executive, finance, legal, human resources and administrative personnel, as well as fees for legal, accounting and other consulting services, including acquisition-related transaction costs, third-party payment processing and credit card fees, facilities rent, other corporate expenses and allocated overhead. We expect that in 2011, general and administrative expenses will increase in absolute dollars but will remain flat as a percentage of revenues.

 

Amortization of Intangible Assets.  Amortized intangible assets consist of customer relationships, trade names and agreements not-to-complete acquired in business combinations.

 

Critical Accounting Policies

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. 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. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

 

We believe that of our significant accounting policies, which are described in Note 2 to the consolidated financial statements, the following accounting policies involve a greater degree of judgment or complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

 

Revenue Recognition.  We recognize revenues when there is persuasive evidence of an arrangement, the service has been provided to the customer, the collection of the fee is probable and the amount of the fees to be paid by the customer is fixed or determinable. Our subscription agreements generally contain multiple service elements and deliverables. These elements include access to our cloud-based software, hosting services, content and content

updates and customer support and may also include implementation and training services. Our subscription agreements do not provide customers the right to take possession of the software at any time. All elements in our multiple element subscription agreements are considered a single unit of accounting, and accordingly, we recognize all associated fees over the subscription period, which is typically one year. We recognize our revenue over the subscription period because the access to our software is the last element delivered to the customer and the predominant element of our agreements. We determined that we do not have objective and reliable evidence of the fair value of the subscription to our cloud-based software. Professional services sold separately from a subscription arrangement are recognized as the services are performed.

 

We distribute press releases over the Internet which are indexed by major search engines and distributed directly to various news sites, journalists and other key constituents. We recognize revenue on a per-transaction basis when the press releases are made available to the public.

 

On January 1, 2011, we will adopt the updated authoritative guidance on multiple deliverable revenue arrangements. The new guidance revises the criteria for separating deliverables, measuring and allocating arrangement consideration to one or more units of accounting. This update also establishes a hierarchy for determining the best selling price of a deliverable and significantly enhances disclosure requirements for multiple deliverable revenue arrangements. We have evaluated the impact of the adoption of the new guidance and we do not expect the adoption will have a material impact on our consolidated financial condition or results of operations.

 

Sales Commissions.  Sales commissions are expensed when we invoice a customer under their subscription agreement. As a result, we incur sales expense before the recognition of the related revenues.

 

Stock-Based Compensation.  We recognize compensation expense for equity awards based on the fair value of the award and on a straight-line basis over the requisite service period of the award based on the estimated portion of the award that is expected to vest. We apply estimated forfeiture rates based on analyses of historical data, including termination patterns and other factors. We use the quoted closing market price of our common stock on the grant date to measure the fair value of our restricted stock awards. We use the Black-Scholes option pricing model to measure the fair value of our option awards. We became a public entity in December 2005, and therefore have a limited history of volatility. Accordingly, the expected volatility is based on the historical volatilities of similar entities’ common stock over the most recent period commensurate with the estimated expected term of the awards. The historical volatilities of these entities have not differed significantly from our historical volatility. The expected term of an award is equal to the midpoint between the vesting date and the end of the contractual term of the award. The risk-free interest rate is based on the rate on U.S. Treasury securities with maturities consistent with the estimated expected term of the awards. We have not paid dividends and do not anticipate paying a cash dividend in the foreseeable future and, accordingly, use an expected dividend yield of zero.

 

Business Combinations.  We have completed acquisitions of businesses that have resulted in the recording of goodwill and identifiable definite-lived intangible assets. Definite-lived intangible assets consist of acquired customer relationships, trade names, agreements not-to-compete and purchased technology. Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives ranging from two to seven years. The Company recognizes all of the assets acquired, liabilities assumed and contingent consideration at their fair values on the acquisition date. Acquisition-related costs are recognized separately from the acquisition and expensed as incurred in general and administrative expenses in the consolidated statements of operations. Accounting for these acquisitions requires us to make determinations about the fair value of assets acquired, useful live lives for definite-lived tangible and intangible assets, and liabilities assumed that involve estimates and judgments.

 

Goodwill and Long-Lived Assets.  Goodwill is not amortized, but rather is assessed for impairment at least annually. Goodwill impairment is evaluated using a two step process. The first step is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment test is not necessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any. The second step compares the implied fair value of goodwill with the carrying amount of goodwill. If the implied fair value of goodwill exceeds the carrying amount,

then goodwill is not considered impaired. However, if the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess. We perform our annual impairment assessment on November 1, or whenever events or circumstances indicate impairment may have occurred. We operate under one reporting unit, and as a result, evaluate goodwill impairment based on the fair value of our Company as a whole.

 

We use an income approach based on discounted cash flows to determine the fair value of our reporting unit. Our cash flow assumptions consider historical and forecasted revenue, operating costs and other relevant factors which are consistent with the plans used to manage our operations. The results of our most recent annual assessment performed on November 1, 2010 did not indicate any impairment of goodwill, and as such, the second step of the impairment test was not required. We also review the carrying amount of our reporting unit to its fair value based on quoted market prices of our common stock, or market capitalization. The market capitalization of the Company exceeded its carrying amount by a substantial margin. No events or circumstances occurred from the date of the assessment through December 31, 2010 that would impact this conclusion.

 

We assess impairment of definite-lived intangible and other long-lived assets when events or changes in circumstances indicate that the carrying value of an asset may no longer be fully recoverable. We determine the impairment, if any, by comparing the carrying value of the assets to future undiscounted net cash flows expected to be generated by the related assets. An impairment charge is recognized to the extent the carrying value exceeds the estimated fair value of the assets. Impairment charges for long-lived assets for the year ended December 31, 2008 were not material. There were no impairment charges for long-lived assets for the years ended December 31, 2009 and 2010.

 

Income taxes.  We use the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax-credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amount of assets and liabilities and their tax bases. Deferred tax assets are reduced by the valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

Our estimates related to liabilities for uncertain tax positions require us to make judgments regarding the sustainability of each uncertain tax position based on its technical merits. If we determine it is more likely than not that a tax position will be sustained based on its technical merits, we record the impact of the position in our consolidated financial statements at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement. Our estimates are updated at each reporting date based on the facts, circumstances and information available. We are also required to assess at each reporting date whether it is reasonably possible that any significant increases or decreases to our unrecognized tax benefits will occur during the next twelve months. In connection with our acquisitions, we identified an uncertain tax position, and as a result, recorded $1.3 million in other liabilities in the consolidated balance sheet at December 31, 2010. We file income tax returns in the U.S. federal jurisdictions and various state and foreign jurisdictions and are subject to U.S. federal, state, and foreign tax examinations for years ranging from 2002 to 2009.

 

At December 31, 2009 and 2010, we had approximately $13.1 and $12.3 million in gross deferred tax assets, respectively. During 2008, we concluded that it is more likely than not that we will have future income sufficient to realize certain of our deferred tax assets and we reversed our valuation allowance against our U.S. deferred tax assets. As of December 31, 2009 and 2010, we maintained a full valuation against our foreign deferred tax assets.

Results of Operations

 

The following tables set forth selected consolidated statements of operations data for each of the periods indicated as a percentage of total revenues.

 

 

Years Ended December 31, 2010 and 2009

 

Revenues.  Revenues for 2010 were $96.8 million, an increase of $12.2 million, or 14%, over revenues of $84.6 million for 2009. The increase in revenues was primarily due to the increase in the number of total active subscription customers to 8,574 as of December 31, 2010, including 1,900 from our acquisition of Datapresse, from 4,438 as of December 31, 2009. Total revenue from acquired companies contributed $3.9 million of incremental revenue in 2010. The remaining increase in active subscription customers was the result of additional sales and marketing personnel focused on acquiring new customers and renewing existing customers. Revenue growth from the increase in active subscription customers, excluding revenue from acquired companies, was $8.1 million. Total deferred revenue as of December 31, 2010 was $56.6 million, representing an increase of $8.8 million, or 18%, over total deferred revenue of $47.8 million as of December 31, 2009.

 

Cost of Revenues.  Cost of revenues for 2010 was $18.9 million, an increase of $3.4 million, or 22%, over cost of revenues of $15.5 million for 2009. The increase in cost of revenues was due to an increase of $1.2 million in employee related costs from additional personnel, $305,000 in third-party license and royalty fees for content, $265,000 in hosting infrastructure costs, $342,000 in amortization and depreciation primarily related to the launch of our social media product and acquired technologies from business combinations and $137,000 in stock-based compensation. We had 208 full-time employee equivalents in our professional and other support services group at December 31, 2010 compared to 146 full-time employee equivalents at December 31, 2009. The increase in our headcount was partially due to our acquisitions in 2010.

 

Sales and Marketing Expenses.  Sales and marketing expenses for 2010 were $49.6 million, an increase of $8.5 million or 21%, over sales and marketing expenses of $41.1 million for 2009. The increase was primarily due to an increase of $4.1 million in employee related costs from additional personnel, $2.8 million in sales commissions and incentive compensation and $1.4 million in marketing program costs, offset by a decrease of $500,000 in stock-based compensation. We had 334 full-time sales and marketing employee equivalents as of December 31, 2010 compared to 257 full-time employee equivalents as of December 31, 2009. The increase in our headcount was partially due to our acquisitions in 2010.

Research and Development Expenses.  Research and development expenses for 2010 were $5.9 million, an increase of $1.2 million, or 26%, compared to research and development expenses of $4.7 million for 2009. The increase in research and development was primarily due to an increase of $487,000 in employee-related costs from additional personnel and $517,000 in stock-based compensation. For the year ended 2010 and 2009, we capitalized $511,000 and $160,000, respectively of employee-related costs for internally developed software. We had 46 full-time employee equivalents in research and development as of December 31, 2010 compared to 31 full-time employee equivalents at December 31, 2009. The increase in our headcount was partially due to our acquisitions in 2010.

 

General and Administrative Expenses.  General and administrative expenses for 2010 were $23.6 million, an increase of $2.6 million, or 12%, over general and administrative expenses of $21.0 million for 2009. The increase in general and administrative expenses was primarily due to an increase of $951,000 in employee related costs, $452,000 in incentive compensation, $1.2 million in professional fees primarily for acquisition costs, $548,000 of expense related to the fair value adjustment of contingent consideration for acquisitions, offset by a decrease of $244,000 in stock-based compensation. We had 67 full-time employee equivalents in our general and administrative group at December 31, 2010 compared to 51 full-time employee equivalents at December 31, 2009. The increase in our headcount was partially due to our acquisitions in 2010.

 

Amortization of Intangible Assets.  Amortization of intangible assets for 2010 was $2.3 million, an increase of $372,000, or 19%, compared to amortization of intangible assets of $1.9 million for 2009. The increase in amortization is primarily attributable to the intangible assets related to the acquisitions of businesses in 2010.

 

Other Income (Expense).  Other income for 2010 was $71,000, a decrease of $383,000, or 84% compared to $454,000 for 2009. The continued decline in interest rate yields for fixed income securities resulted in decreased interest income.

 

Provision (Benefit) for Income Taxes.  The provision for income taxes for 2010 was $178,000, a decrease of $2.7 million, or 94% compared to provision for income taxes of $2.9 million for 2009. Our effective tax rate for each period differs from the U.S. Federal statutory rates primarily due to certain non-deductible expenses, including stock-based compensation, operating losses in foreign jurisdictions for which no tax benefit is currently available and to a lesser extent, state income taxes.

 

Years Ended December 31, 2009 and 2008

 

Revenues.  Revenues for 2009 were $84.6 million, an increase of $7.1 million, or 9%, over revenues of $77.5 million for 2008. The increase in revenues was primarily due to the increase in the number of total active subscription customers to 4,438 as of December 31, 2009 from 3,379 as of December 31, 2008. The increase in active subscription customers was the result of additional sales personnel focused on acquiring new customers and renewing existing customers. Revenue growth from the increase in active subscription customers was $4.7 million. Revenue growth from transaction revenue was $2.4 million. Total deferred revenue as of December 31, 2009 was $47.8 million, representing an increase of $4.9 million, or 11%, over total deferred revenue of $42.9 million as of December 31, 2008.

 

Cost of Revenues.  Cost of revenues for 2009 was $15.5 million, an increase of $786,000, or 5%, over cost of revenues of $14.7 million for 2008. The increase in cost of revenues was due to an increase of $399,000 in employee related costs from additional personnel, $301,000 in third-party license and royalty fees, and $191,000 in stock-based compensation. We had 146 full-time employee equivalents in our professional and other support services group at December 31, 2009 compared to 149 full-time employee equivalents at December 31, 2008. Compensation costs for our content group in the United Kingdom were included in research and development prior to the launch of our United Kingdom and Ireland media database in September 2008. Subsequent to the launch, the compensation costs and related headcount are included in costs of revenues.

 

Sales and Marketing Expenses.  Sales and marketing expenses for 2009 were $41.1 million, an increase of $6.0 million, or 17%, over sales and marketing expenses of $35.1 million for 2008. The increase was primarily due to an increase of $3.0 million in employee related costs from additional personnel, $2.6 million in marketing program costs primarily to increase awareness and attract customers to our online press release services and

$541,000 in stock-based compensation, offset by a decrease of $558,000 in incentive compensation reflecting our relative sales performance against established incentive targets. Our sales and marketing headcount increased by 25% as we hired sales personnel to focus on acquiring new customers and increasing revenues from existing customers and marketing personnel to expand our marketing activities to build brand awareness. We had 257 full-time sales and marketing employee equivalents as of December 31, 2009 compared to 206 full-time employee equivalents as of December 31, 2008.

 

Research and Development Expenses.  Research and development expenses for 2009 were $4.7 million, a decrease of $323,000, or 6%, compared to research and development expenses of $5.0 million for 2008. The decrease in research and development was primarily due to decreases of $313,000 in employee-related costs and $109,000 in incentive compensation reflecting our relative performance against established incentive targets, offset by an increase of $220,000 in stock-based compensation. For the year ended 2009 and 2008, we capitalized $160,000 and $77,000, respectively of employee-related costs for internally developed software used in our on-demand software. We had 31 full-time research and development employee equivalents as of December 31, 2009 and December 31, 2008. Compensation costs for our content group in the United Kingdom were included in research and development prior to the launch of our United Kingdom and Ireland media database in September 2008. Subsequent to the launch, the compensation costs and related headcount are included in costs of revenues.

 

General and Administrative Expenses.  General and administrative expenses for 2009 were $21.0 million, an increase of $662,000, or 3%, over general and administrative expenses of $20.4 million for 2008. The increase in general and administrative expenses was primarily due to an increase of $248,000 in employee related costs from additional personnel, $210,000 in professional fees and travel, $251,000 in rents and facility costs relating to expansion of our offices and $768,000 in stock-based compensation, offset by a decrease of $661,000 in incentive compensation reflecting our relative performance against established incentive targets. We had 51 full-time employee equivalents in our general and administrative group at December 31, 2009 compared to 47 full-time employee equivalents at December 31, 2008.

 

Amortization of Intangible Assets.  Amortization of intangible assets for 2009 was $1.9 million, a decrease of $725,000, or 27%, compared to amortization of intangible assets of $2.7 million for 2008. Intangible assets acquired in the purchase of Gnossos Software, Inc. were fully amortized in October 2008 resulting in decreased amortization. Amortization expense for 2008 included $633,000 related to these assets.

 

Other Income (Expense).  Other income for 2009 was $454,000, a decrease of $1.7 million, or 78% compared to $2.1 million for 2008. The continued decline in interest rate yields in 2009 resulted in decreased interest income.

 

Provision (Benefit) for Income Taxes.  The provision for income taxes for 2009 was $2.9 million. For 2009, our effective tax rate differed from the U.S. Federal statutory rates primarily due to operating losses in foreign jurisdictions for which no tax benefit is currently available, non-deductible compensation, and to a lesser extent, state income taxes and certain other non-deductible expenses. The benefit for income taxes for 2008 of $5.1 million primarily relates to the reversal of the valuation allowance against our U.S. deferred tax assets. For 2008, our effective tax rate differed from the U.S. Federal statutory rates primarily due to the effect of reversing the valuation allowance related to our U.S. deferred tax assets and, to a lesser extent, operating losses in foreign jurisdictions for which no tax benefit is currently available, state income taxes and certain non-deductible expenses.

 

Liquidity and Capital Resources

 

As of December 31, 2010, our principal sources of liquidity were cash and cash equivalents totaling $94.9 million, investments totaling $5.5 million and net accounts receivable totaling $20.8 million. Our cash equivalents and investments primarily consisted of money market funds, commercial paper and government-sponsored agency debt securities.

 

Operating Activities.  Net cash provided by operating activities for the year ended December 31, 2010 was $17.7 million, reflecting a net loss of $3.7 million, non-cash charges for depreciation and amortization of $4.4 million, stock-based compensation of $12.8 million and a net change of $5.3 million in accounts receivable and deferred revenue due to our acquisitions and growth in our subscription agreements invoiced in 2010. Net cash

provided by operating activities is also impacted by changes in other working capital accounts in the ordinary course of business.

 

Investing Activities.  Net cash provided by investing activities for the year ended December 31, 2010 was $451,000, which primarily resulted from proceeds received from net maturities of investments of $13.3 million, offset by the acquisitions of businesses of $9.9 million and investments in property, equipment and software of $3.1 million, including the costs of internally developed software.

 

Financing Activities.  Net cash used in financing activities for the year ended December 31, 2010 was $8.8 million. In 2010, we purchased 918,681 shares of our common stock at an aggregate cost of $13.5 million and received proceeds from the exercise of stock option awards of $4.2 million.

 

In February 2011, we acquired substantially all of the assets and assumed certain liabilities of a division of North Ventures Partners LLC (North Social) for a purchase price of approximately $7.0 million cash paid at closing plus up to $18.0 million of contingent cash consideration based on the achievement of certain financial milestones within the following 24 months. See also Note 14 Subsequent Events of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

 

On March 30, 2010, we signed a twelve year lease for approximately 93,000 square feet of office space in Beltsville, Maryland. We will be relocating our corporate headquarters to the leased premises in the second quarter of 2011. The aggregate minimum lease commitment is approximately $21.5 million. In addition, under the terms of the lease, the landlord will reimburse us approximately $6.4 million for leasehold improvements, which will be recorded as a reduction to rent expense ratably over the term of the lease. In 2011, we anticipate capital expenditures of approximately $3.9 million, net of landlord contributions, specifically for the remaining construction, build-out and furnishing of our corporate headquarters.

 

As of December 31, 2010, we had a letter of credit outstanding in favor of the landlord of our current corporate headquarters in Lanham, Maryland. The letter of credit renewed annually and expires in April 2011. As of December 31, 2010, the letter of credit remained outstanding; however, no amounts had been drawn against it. The letter of credit is collateralized by a $270,000 certificate of deposit which is maintained at the granting financial institution and matures in May 2011.

 

In May 2010, we also established a letter of credit in favor of the landlord of the new corporate headquarters in Beltsville, Maryland. The irrevocable letter of credit is in the amount of $714,000. The letter of credit does not require a compensating balance, renews annually and is active through May 2023. In accordance with the terms of the lease agreement, we are permitted to reduce the letter of credit by approximately $119,000 annually for each of the first five years commencing on the first anniversary of the lease year. As of December 31, 2010, the letter of credit remained outstanding; however, no amounts had been drawn against it.

 

As of December 31, 2010, we had U.S. federal net operating loss carry-forwards of $3.5 million which may be available to offset potential payments of future income tax liabilities and which, if unused, will begin to expire in 2024.

 

As of December 31, 2010, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Other than our operating leases for office space and computer equipment, we do not engage in off-balance sheet financing arrangements. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

 

We intend to fund our operating expenses and capital expenditures primarily through cash flows from operations. We believe that our current cash, cash equivalents and investments together with our expected cash flows from operations will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for at least the next 12 months.

The following table summarizes our contractual obligations as of December 31, 2010 that requires us to make future cash payments.

 

 

The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum services to be used; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Obligations under agreements that we can cancel without a significant penalty are not included in the table above.

 

 

Foreign Currency Exchange Risk

 

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British pound sterling, euro, Hong Kong dollar and Chinese yuan. As a result, we are exposed to movements in the exchange rates of currencies against the U.S. Dollar. Revenues denominated in a foreign currency were approximately 7% of our total revenues in the year ended December 31, 2008, 6% of our total revenues in the year ended 2009 and 11% of our total revenues in the year ended 2010. Exchange rate fluctuations have not significantly impacted our results of operations and cash flows. Our future results of operations and cash flows may be affected by changes in foreign currency exchange rates. Historically, we have not utilized derivative financial instruments to hedge our foreign exchange exposure; however, we may choose to use such contracts in the future.

 

Interest Rate Sensitivity

 

Our cash equivalents and investments consist primarily of money market funds, corporate notes and bonds, government-sponsored agency securities and other debt securities. Our interest income is subject to interest rate risk. For the year ended December 31, 2010 a fluctuation in interest rates of 1 percentage point would change interest income by approximately $1 million.

 

Our variable rate debt consists of a note payable that bears interest at the Euribor rate plus 1.6%. As of December 31, 2010, outstanding borrowings were approximately $259,000 and therefore, fluctuations in interest rates would not have materially affected our interest expense.

 

 

Our consolidated financial statements and related notes required by this item are set forth as a separate section of this report. See Part IV, Item 15 of this Form 10-K.

 

 

None.

 

Evaluation of Disclosure Controls and Procedures

 

An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information required to be disclosed is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls

 

There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to further periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.

 

Under the supervision and with the participation of management, including its principal executive officer and principal financial officer, our management assessed the design and operating effectiveness of internal control over financial reporting as of December 31, 2010 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

Based on its evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2010. The effectiveness of our internal control over financial reporting as of December 31, 2010 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting

 

The Board of Directors and Shareholders of Vocus, Inc.,

 

We have audited Vocus, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Vocus Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

 

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Vocus, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Vocus, Inc. and subsidiaries as of December 31, 2009 and 2010 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2010 and our report dated March 16, 2011 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

 

McLean, VA

March 16, 2011

 

None.

 

 

 

A listing of our executive officers, key employees and their biographies are included under the caption “Executive Officers and Key Employees” under Item 1 of this Form 10-K. The remaining information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2011 Annual Meeting of Stockholders.

 

 

The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2011 Annual Meeting of Stockholders.

 

 

The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2011 Annual Meeting of Stockholders.

 

 

The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2011 Annual Meeting of Stockholders.

 

 

The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2011 Annual Meeting of Stockholders.

 

 

 

(a) Documents filed as part of this report:

 

1. Consolidated Financial Statements:

 

 

2. Consolidated Financial Statement Schedule:

 

 

All other financial schedules are not required under the related instructions or are inappropriate and therefore have been omitted.

 

(b) Exhibits

 

The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this report.

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

VOCUS, INC.

 

Richard Rudman

Chief Executive Officer, President and Chairman

 

Date: March 16, 2011

 

POWER OF ATTORNEY

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard Rudman and Stephen Vintz, jointly and severally, his attorney-in-fact, each with the full power of substitution, for such person, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might do or could do in person hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute, may do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

 

Vocus, Inc. and Subsidiaries

 

Index to Financial Statements

 

 

The Board of Directors and Shareholders of Vocus, Inc.,

 

We have audited the accompanying consolidated balance sheets of Vocus, Inc. and subsidiaries as of December 31, 2009 and 2010, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the financial statement schedule listed in the index at Item 15(a)2. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vocus, Inc. and subsidiaries at December 31, 2009 and 2010, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Vocus Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2011 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

 

McLean, VA

March 16, 2011

Vocus, Inc. and Subsidiaries

 

Consolidated Balance Sheets

 

 

See accompanying notes.

Vocus, Inc. and Subsidiaries

 

Consolidated Statements of Operations

 

 

See accompanying notes.

Vocus, Inc. and Subsidiaries

 

Consolidated Statements of Stockholders’ Equity

 

 

See accompanying notes.

Vocus, Inc. and Subsidiaries

 

Consolidated Statements of Cash Flows