S-1/A 1 v52058a4sv1za.htm FORM S-1/A sv1za
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As filed with the Securities and Exchange Commission on October 19, 2009
Registration No. 333-148597
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Amendment No. 4
To
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
Intelius Inc.
(Exact Name of Registrant as Specified in its Charter)
 
         
Delaware   7374   81-0590432
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
500 108th Avenue NE, 25th Floor
Bellevue, Washington 98004
(425) 974-6100
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
 
Naveen K. Jain
Chief Executive Officer and President
500 108th Avenue NE, 25th Floor
Bellevue, Washington 98004
(425) 974-6100
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
Copies to:
 
     
Mike Liles, Jr., Esq.
Walter M. Maas III, Esq.
Karr Tuttle Campbell PS
1201 Third Avenue, Suite 2900
Seattle, Washington 98101
Telephone: (206) 223-1313
Facsimile: (206) 682-7100
  Horace L. Nash, Esq.
Laird H. Simons, III, Esq.
James D. Evans, Esq.
Fenwick & West LLP
801 California Street
Mountain View, California 94041
Telephone: (650) 988-8500
Facsimile: (650) 938-5200
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this Registration Statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
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.
 
             
Large accelerated filer o
  Accelerated filer o   Non-accelerated filer x   Smaller reporting company o
        (Do not check if a smaller
reporting company)
   
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.
 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
 
Subject to Completion, Dated October 19, 2009
 
Intelius Inc.
 
(INTELIUS LOGO)
 
           Shares
Common Stock
 
 
This is the initial public offering of Intelius Inc. We are offering           shares of our common stock. We anticipate that the initial public offering price will be between $      and $      per share. We intend to apply to list our common stock on the New York Stock Exchange under the symbol “II.
 
Investing in our common stock involves risk.  See “Risk Factors” beginning on page 11.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
                 
    Per Share     Total  
 
Public offering price
  $                $             
Underwriting discounts and commissions
  $       $    
Proceeds, before expenses, to Intelius Inc. 
  $       $  
 
 
We have granted the underwriters the right to purchase up to                additional shares of common stock to cover over-allotments.
 
Deutsche Bank Securities UBS Investment Bank
 
Needham & Company, LLC Pacific Crest Securities
 
The date of this prospectus is                     2009.


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Comprehensive insight on people, businesses and assets. The power to give you the information you need by scanning billions of records, then synchronizing and summarizing them in seconds. Using proprietary technology, Intelius makes sense of the information you need to make informed decisions. Intelius — pioneering information commerce. We’ll look in a billion different places to find exactly what you need. Welcome to the new world of i-commerce. Live in the know. Live Inteliusly. Comprehensive insight on people, businesses and assets. The power to give you the information you need by scanning billions of records, then synchronizing and summarizing them in seconds. Using proprietary technology, Intelius makes sense of the information you need to make informed decisions. Intelius — pioneering information commerce. We’ll look in a billion different places to find exactly what you need. Welcome to the new world of i-commerce. Live in the know. Live Inteliusly.


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()
Our proprietary technology provides comprehensive insight on people, businesses and assets. By scanning billions of records, then synchronizing and analyzing them in seconds, Intelius makes sense of the information our customers need to make decisions. Complex modeling Proprietary technology Predictive analysis Billions of structured and unstructured records from thousands of disparate sources... How do you make sense of this? We believe we’ve cracked the code. Actionable intelligence Our proprietary technology provides comprehensive insight on people, businesses and assets. By scanning billions of records, then synchronizing and analyzing them in seconds, Intelius makes sense of the information our customers need to make decisions. Complex modeling Proprietary technology Predictive analysis Billions of structured and unstructured records from thousands of disparate sources... How do you make sense of this? We believe we’ve cracked the code. Actionable intelligence Intelius — pioneering information commerce. Who are your kids talking to on the Web? Anyone could be hiding behind a screen name. With People Search, you can look for that person’s real name, age, address and criminal history, and help keep your children safe. Met someone new; can you trust them? Background Check and Date Check let you check out real facts such as age, address, criminal history, living situation, bankruptcy and more. Is your identity safe? Identity Protect can help you preserve your credit and good name. It monitors your SSN, credit/debit cards, bank accounts and public records, and alerts you to possible fraud. Who’s calling or emailing me? Find out. Reverse Phone Lookup and Email Lookup give details about the person who’s calling; see if it’s a friend, a stranger or a telemarketer. www.intelius.com Hiring someone? Employment Screening and Tenant Screening let you perform a comprehensive background check on prospective employees and renters in compliance with applicable regulations. Live in the know. Live Inteliusly.


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PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus. You should read the following summary together with the more detailed information appearing elsewhere in this prospectus, including our consolidated financial statements and related notes, and the risk factors beginning on page 11, before deciding whether to purchase shares of our common stock. Unless the context otherwise requires, we use the terms “Intelius,” “we,” “us” and “our” in this prospectus to refer to Intelius Inc. and its subsidiaries.
 
Overview
 
Intelius is a leading online information commerce company that provides information services to consumers and enterprises. Our consumer information services include search services and monitoring services that help consumers find information about people, businesses and assets, and manage personal information security risks. Our enterprise information services principally include employment-related screening and management services. We generate revenues primarily from consumers who purchase our services on a pay-per-use or subscription basis, from companies that provide directory services to customers we have referred to them, and from online merchants that provide targeted advertising to our customers.
 
We have developed a proprietary service delivery platform that provides customers with actionable information by applying our sophisticated analytics technology to publicly and commercially available data. Our accurate, timely and useful information services allow customers to make decisions about people, businesses and assets that are important to their private, professional and social lives.
 
We sell information services through our network of owned and operated websites, including our primary website, www.Intelius.com. The Intelius network of websites was one of the top 100 most visited web properties in the United States for September 2009, according to comScore Media Metrix, a leading Internet audience measurement firm. We have established relationships with leading online portals and directories, including Yahoo! and AT&T, that market our services on their websites and direct visitors to our websites.
 
Since our inception in January 2003, we have sold our information services to over nine million customer accounts. Our business has grown rapidly – our revenues increased from $18.1 million in 2004, our first full year of operations, to $122.9 million in 2008, and from $63.9 million in the first six months of 2008 to $74.2 million in the first six months of 2009.
 
Industry Overview
 
The Internet has become an increasingly important medium for commerce and entertainment, and an important source of information about people and businesses. Consumers are increasingly using free and paid Internet services to contact acquaintances, gather information about people and businesses, and expand social and professional networks. The Internet also has a wealth of detailed information on commercial products and services, which has been a key contributor to the growth and penetration of the Internet as a retail commerce channel. As electronic commerce has grown and consumer media consumption has migrated online, advertisers have begun shifting a greater proportion of their marketing budgets to the Internet.
 
In today’s society, individuals and businesses often must make critical decisions based on limited or fragmentary information. Consumers and organizations are increasingly turning to the Internet for information services to make better-informed decisions about the people, businesses and assets with whom and with which they interact. Information services provide


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consumers and organizations with information to help them identify, monitor, interpret and respond to specific situations and their environment.
 
Sources of Information
 
A wealth of existing sources of information can be used to provide services that help identify and locate individuals and businesses, manage information security and mitigate personal safety risks. These sources fall into the following categories:
 
Public Records.  Public records consist of information that is maintained by government agencies and is generally available, such as property title and lien documents, birth and death certificates, business records and court records.
 
Publicly Available Information.  Publicly available information consists of online and offline information that is generally available but is not maintained by a government agency, such as names, addresses and telephone numbers of individuals and businesses, professional licensing and trade organization information, press releases and newspaper articles and content from blogs or social networking sites.
 
Commercial Records.  Commercial records consist of information that is maintained by enterprises and is available for purchase, such as mailing and telemarketing lists, phone connect and disconnect information, and business profile data.
 
The Intelius Solution
 
Key elements of our solution include:
 
Broad Portfolio of Information Services.  We offer over 100 information services that help consumers address potential safety and security concerns, manage and protect their personal information, and locate businesses, family, friends and colleagues.
 
Compelling Value and User Experience.  We provide a high-quality user experience by delivering valuable services, an intuitive user interface and dedicated customer service at affordable prices.
 
Useful Information About People, Businesses and Assets.  Our consumer information services are based on an extensive collection of information about people, businesses and assets that is dynamically accessed, managed, integrated, cleansed and validated in real time to provide accurate, timely and useful information.
 
Proprietary Technologies and Extensible Platform.  Our analytics technologies verify and augment multiple terabytes of data, usually in disparate formats and having varying degrees of accuracy and completeness, from a myriad of sources in order to make inferences and predictions based on this data.
 
Security and System Reliability.  By leveraging standards-based technologies, we have implemented industry-leading security measures and innovative security technologies to enhance customer confidence when they are using our services or providing information to us.
 
Large Audience and Attractive Customer Base.  In September 2009, the Intelius network of websites drew over 11.7 million unique visitors in the United States according to comScore Media Metrix. We believe that our customers and visitors to our websites appeal to advertisers because they have attractive demographic characteristics and have demonstrated the ability and willingness to purchase goods and services online.


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Our Strategy
 
Our objective is to be the leading provider of information services. Our strategy for achieving this goal includes the following initiatives:
 
Expand Our Customer Base.  We intend to grow our customer base and reach a broader consumer audience by developing our existing distribution relationships with leading Internet companies, establishing new distribution relationships, and adding new websites to our website network that attract consumers of information services.
 
Expand Our Portfolio of Service Offerings.  We plan to continue to innovate, add new data sources and leverage our advanced technologies to develop new information service offerings for consumers. We also intend to optimize the way we offer these services, including through subscription offerings.
 
Increase Revenue Per Customer.  We seek to maximize our revenue per customer by up-selling, cross-selling and advertising.
 
Increase Repeat Purchase Activity.  We believe repeat customers are more likely to access our websites directly than are new customers, resulting in more profitable transactions. We intend to increase repeat purchase activity and customer loyalty by extending the breadth and quality of our service offerings and actively promoting our subscription service offerings.
 
Enhance Our Brand.  We intend to enhance our brand through advertising and marketing initiatives, including online advertising, print and outdoor advertising, trade shows, viral marketing and word-of-mouth. We also intend to continue to enhance our brand through quality of service initiatives, maintaining industry best practices and improving customer interfaces on our websites.
 
Expand Through Strategic Acquisitions.  We intend to pursue acquisitions of relevant domain names, as well as acquisitions of companies with complementary customers, technology and services, in order to augment our customer base, increase traffic to our websites, enhance awareness of our brand, add new services and provide new sources of revenues.
 
Risk Factors
 
We are subject to many risks and uncertainties that could materially harm our business or inhibit our strategic plans. Before investing in our common stock, you should carefully consider the following risks, which are described in greater detail in the section titled “Risk Factors” starting on page 11, and other information provided throughout this prospectus:
 
  •  Our quarterly operating results have fluctuated in the past and are likely to fluctuate in the future, and if we fail to meet or exceed the expectations of investors or any securities analysts, the trading price of our common stock may decline suddenly and substantially.
 
  •  Our limited operating history and occasional changes in our business strategy make it difficult to evaluate our business trends.
 
  •  Our operating results depend significantly on advertising revenues that we generate from a single advertising relationship. Losing this relationship could harm our operating results.
 
  •  Because we are a consumer-oriented company, customer complaints and occasional adverse publicity are an inherent aspect of our business. If we fail to manage customer complaints properly, or incur substantial adverse publicity, our revenues and operating results may be harmed and our stock price may decline.


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  •  Our operating results depend significantly on our ability to acquire and use customers’ billing information. If the rules are changed to make it more difficult to acquire and use customers’ billing information provided for one transaction in another transaction for the same consumer, our operating results could be harmed.
 
  •  We are the subject of a Washington State Attorney General investigation regarding third-party subscription services advertised on our websites and our own identity protection subscription services, and we do not know what the outcome of the investigation may be.
 
  •  We are the subject of a Federal Trade Commission investigation regarding our compliance with the Fair Credit Reporting Act, and we do not know what the outcome of the investigation may be.
 
  •  Changes in the laws and regulations governing access to public information and the collection or sale of publicly available information could make it more difficult for us to conduct business.
 
  •  Our corporate image might be impaired as a result of negative publicity about our use of personal information in our service offerings, which could cause a corresponding drop in our stock price.
 
• We cannot assure you that any securities analysts will follow our company.
 
Corporate Information
 
We were incorporated in the state of Delaware in January 2003. Our principal executive offices are located at 500 108th Avenue NE, 25th Floor, Bellevue, Washington 98004 and our telephone number is (425) 974-6100. Our primary website address is www.Intelius.com. The information on, or that can be accessed through, our primary website or our other websites is not part of this prospectus.
 
Intelius and the Intelius logo are our registered trademarks. This prospectus also includes trademarks that belong to third parties.


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The Offering
 
Common stock offered by Intelius           shares
 
Common stock to be outstanding after this offering           shares
 
Use of proceeds We intend to use the net proceeds from this offering for working capital and other general corporate purposes. We may also use a portion of the net proceeds for acquisitions, but we do not have any agreements or commitments for material acquisitions at this time.
 
Proposed New York Stock Exchange symbol II
 
The number of shares of our common stock to be outstanding after this offering is based on 23,897,252 shares of our common stock outstanding as of September 30, 2009.
 
The number of shares of our common stock outstanding at September 30, 2009 does not include:
 
  •  4,103,612 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $5.30 per share;
 
  •  1,324,544 unvested and outstanding restricted stock units; and
 
  •  4,069,102 shares that remain available for issuance pursuant to future awards under our 2005 Stock Incentive Plan.
 
The number of shares of our common stock outstanding as of September 30, 2009, and all other outstanding share amounts throughout this prospectus (unless otherwise indicated), reflect the conversion of all outstanding shares of our preferred stock into 1,667,500 shares of our common stock upon the completion of this offering.
 
Unless otherwise indicated, this prospectus reflects and assumes:
 
  •  no exercise by the underwriters of their over-allotment option to purchase up to an additional           shares of common stock; and
 
  •  the filing of our amended and restated certificate of incorporation in Delaware in connection with the completion of this offering.


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Summary Consolidated Financial Data
 
The following tables summarize the consolidated financial data for our business. The consolidated statements of operations data for the years ended December 31, 2006, 2007 and 2008 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2004 and 2005 have been derived from our audited consolidated financial statements not included in this prospectus. The consolidated statements of operations data for the six months ended June 30, 2008 and 2009, and the consolidated balance sheet data as of June 30, 2009, have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements include, in the opinion of management, all adjustments, which include only normal recurring adjustments that management considers necessary for the fair presentation of the financial information set forth in those consolidated financial statements. You should read this summary consolidated financial data in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements, related notes and other financial information included elsewhere in this prospectus. The consolidated financial data in this section is not intended to replace the consolidated financial statements and is qualified in its entirety by the consolidated financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of results to be expected in the future.
 
Consolidated Statements of Operations Data
(in thousands)
 
                                                         
          Six Months Ended
 
    Year Ended December 31,     June 30,  
    2004     2005     2006     2007     2008     2008     2009  
                                  (unaudited)  
 
Consolidated Statements of Operations Data:
                                                       
Revenues
  $ 18,122     $ 44,040     $ 54,720     $ 88,529     $ 122,949     $ 63,898     $ 74,184  
                                                         
Costs and expenses:
                                                       
Content and support
    3,162       5,262       6,752       13,895       18,235       8,285       11,246  
Sales and marketing
    11,015       26,415       35,545       48,194       68,497       31,714       43,741  
Product development
    825       1,064       1,490       3,328       5,713       2,604       4,436  
General and administrative
    1,433       1,831       3,916       6,210       10,105       4,660       14,580 (1)
                                                         
Total costs and expenses
    16,435       34,572       47,703       71,627       102,550       47,263       74,003  
                                                         
Operating income
    1,687       9,468       7,017       16,902       20,399       16,635       181  
Interest and other expenses
                      (108 )     (7 )     (4 )     (17 )
Write-off of initial public offering costs
                            (1,217 )            
Interest income
    9       39       147       215       287       186       5  
                                                         
Income before income taxes
    1,696       9,507       7,164       17,009       19,462       16,817       169  
Provision for income taxes
    556       3,223       2,647       5,885       7,265       5,902       2,730  
                                                         
Net income (loss)
  $ 1,140     $ 6,284     $ 4,517     $ 11,124     $ 12,197     $ 10,915     $ (2,561 )
                                                         
 
(1) General and administrative expenses include a $7.0 million settlement of litigation and a $1.3 million reserve for vendor deposit.


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Consolidated Statements of Operations Data
(in thousands, except per share data)
 
                                                         
          Six Months Ended
 
    Year Ended December 31,     June 30,  
    2004     2005     2006     2007     2008     2008     2009  
                                  (unaudited)  
 
Net income (loss) per share(1):
                                                       
Basic:
                                                       
Class A common stock and common stock
  $ 0.06     $ 0.31     $ 0.22     $ (0.14 )   $ 0.56     $ 0.50     $ (0.12 )
Class B common stock, giving effect to distributed earnings to Class B common stockholders
  $ 0.06     $ 0.31     $ 0.22     $ 1.75 (2)   $     $     $  
Diluted:
                                                       
Class A common stock and common stock
  $ 0.05     $ 0.28     $ 0.20     $ (0.14 )   $ 0.49     $ 0.43     $ (0.12 )
Class B common stock, giving effect to distributed earnings to Class B common stockholders
  $ 0.05     $ 0.28     $ 0.20     $ 1.75 (2)   $     $     $  
Shares used in calculation of net income (loss) per share:
                                                       
Basic:
                                                       
Class A common stock and common stock
    11,900       12,103       12,405       13,235       21,867       21,868       21,860  
Class B common stock
    8,100       8,100       8,100       7,425                    
Diluted:
                                                       
Class A common stock and common stock
    13,909       14,380       14,769       13,235       25,100       25,131       21,860  
Class B common stock
    8,100       8,100       8,100       7,425                    
 
Pro forma net income (loss) per share excluding the distribution to Class B common stockholders and assuming the conversion of Class B common stock into Class A common stock as of January 1, 2007 at the conversion rate of 1-to-1.15 (unaudited) (3):
Basic
  $ 0.06     $ 0.31     $ 0.22     $ 0.51     $ 0.56     $ 0.50     $ (0.12 )
Diluted
  $ 0.05     $ 0.28     $ 0.20     $ 0.45     $ 0.49     $ 0.43     $ (0.12 )
Shares used in calculation of pro forma net income (loss) per share:
                                                       
Basic
    20,000       20,203       20,505       21,772       21,867       21,868       21,860  
Diluted
    22,009       22,480       22,869       24,457       25,100       25,131       21,860  
 
 
(1) See Note 2 to our consolidated financial statements regarding the calculation of net income (loss) per share.
 
(2) Includes a $14.1 million distribution of earnings to Class B common stockholders, representing the fair value of additional shares of Class A common stock issued to the holders of Class B common stock in excess of shares issuable under the original conversion ratio.
 
(3) See “Selected Consolidated Financial Data—Pro Forma Net Income (Loss) per Share” on page 41 regarding pro forma net income (loss) per share.


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The following table presents our summary consolidated balance sheet data as of June 30, 2009:
 
  •  on an actual basis; and
 
  •  on a pro forma as adjusted basis to reflect the conversion of all outstanding shares of preferred stock into 1,667,500 shares of common stock upon the completion of this offering and to give effect to our receipt of the net proceeds from our sale of           shares of common stock at an assumed initial public offering price of $      per share, which is the midpoint of the range shown on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and our estimated offering expenses.
 
                 
    June 30, 2009  
          Pro Forma as
 
    Actual     Adjusted(1)  
    (in thousands)
 
    (unaudited)  
 
Consolidated Balance Sheet Data:
               
Cash and cash equivalents
  $ 19,149          
Working capital
    14,759          
Total assets
    73,521          
Total long-term liabilities
    2,360          
Total stockholders’ equity
    45,356          
 
 
(1) Each $1.00 increase or decrease in the assumed initial public offering price of $      per share would increase or decrease, respectively, our cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $      million, assuming the number of shares we offered, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.
 
Other Financial and Operating Data (unaudited)
 
Adjusted EBITDA
 
We define Adjusted EBITDA as net income (loss) plus the provision for income taxes, amortization of intangible assets, depreciation and amortization of property and equipment, stock-based compensation, write-off of initial public offering costs, reserve for vendor deposit, settlement of litigation, interest and other expenses, and interest income. Adjusted EBITDA is not a measure of liquidity calculated in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and should be viewed as a supplement to, not a substitute for, our operating results presented on the basis of U.S. GAAP. Adjusted EBITDA does not purport to represent cash flow provided by, or used in, operating activities as defined by U.S. GAAP. Our statements of cash flows included elsewhere in this prospectus present our cash flow activity in accordance with U.S. GAAP. Adjusted EBITDA is not necessarily comparable to similarly titled measures reported by other companies.
 
We prepare Adjusted EBITDA to eliminate the impact of items that we do not consider indicative of our core operating performance. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. Our presentation of Adjusted EBITDA should not be construed to imply that our future results will be unaffected by unusual or non-recurring items.


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We believe Adjusted EBITDA is useful to investors in evaluating our operating performance for the following reasons:
 
  •  Adjusted EBITDA is widely used by investors as a common basis for comparison of different companies’ operating performance because items such as interest expense, income taxes, depreciation and amortization, and stock-based compensation can vary substantially from company to company depending on accounting methods and book value of assets, capital structure and the method by which assets were acquired;
 
  •  in advising investors, securities analysts widely use Adjusted EBITDA as supplemental data to analyze the overall operating performance of companies in our industry;
 
  •  Adjusted EBITDA is an important indicator of our operational strength and the performance of our business because it provides insight into the relationship between profitability and operating cash flow in that it disregards the impact of certain operating-related balance sheet changes such as the timing of the collections of receivables and disbursements of payables; and
 
  •  we adopted Statement of Financial Accounting Standards, or SFAS, No. 123(R), “Share-Based Payment,” on January 1, 2006 and recorded approximately $0.7 million, $1.8 million and $5.2 million in stock-based compensation expense for the fiscal years ended December 31, 2006, 2007 and 2008, respectively. We recorded $2.7 million and $3.5 million in stock-based compensation in the first six months of 2008 and the first six months of 2009, respectively. Prior to January 1, 2006, we accounted for stock-based compensation using the intrinsic value method under Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees,” which resulted in zero stock-based compensation expense. By comparing our Adjusted EBITDA in different historical periods, our investors can evaluate changes in our operating results between these periods without the additional variations of stock-based compensation expense, which is not necessarily comparable from year to year due to changes in accounting treatment, and is a non-cash expense that is not a key measure of our operations.
 
In managing our business, our management uses Adjusted EBITDA:
 
  •  for planning purposes, including the preparation of our annual operating budget;
 
  •  as a measure of operating performance against our budget because Adjusted EBITDA includes only the impact of items directly resulting from our core operations;
 
  •  to allocate resources to enhance the financial performance of our business;
 
  •  as a metric for evaluating the performance and determining the compensation of our executive team;
 
  •  to evaluate the effectiveness of our business strategies; and
 
  •  in communications with our board of directors concerning our financial performance and goals.
 
We understand that although it is frequently used by investors and securities analysts in their evaluation of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our operating results as reported under U.S. GAAP. Some of these limitations are:
 
  •  Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or other contractual commitments;


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  •  Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
 
  •  Adjusted EBITDA does not reflect interest expense or income;
 
  •  Adjusted EBITDA does not reflect cash requirements for state and federal income taxes;
 
  •  although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for these replacements; and
 
  •  other companies in our industry may calculate Adjusted EBITDA differently than we do, which limits its usefulness as a comparative measure.
 
Our management compensates for the limitations of Adjusted EBITDA by using it in connection with related U.S. GAAP financial metrics such as pre-tax income and net income. In addition, our management uses our Consolidated Statements of Cash Flows to evaluate the cash needs of our business.
 
Reconciliation of Net Income (Loss) to Adjusted EBITDA
(in thousands)
 
                                                         
          Six Months
 
          Ended
 
    Year Ended December 31,     June 30,  
    2004     2005     2006     2007     2008     2008     2009  
                                  (unaudited)  
 
Net income (loss)
  $ 1,140     $ 6,284     $ 4,517     $ 11,124     $ 12,197     $ 10,915     $ (2,561 )
Provision for income taxes
    556       3,223       2,647       5,885       7,265       5,902       2,730  
Amortization of intangible assets
    38       596       2,283       3,096       3,784       1,961       3,234  
Depreciation and amortization of property and equipment
    93       194       356       751       1,996       930       1,260  
Stock-based compensation
                725       1,797       5,153       2,666       3,540  
Write-off of initial public offering costs
                            1,217              
Reserve for vendor deposit
                                        1,270  
Settlement of litigation
                                        7,000  
Interest and other expenses
                      108       7       4       17  
Interest income
    (9 )     (39 )     (147 )     (215 )     (287 )     (186 )     (5 )
                                                         
Adjusted EBITDA (unaudited)
  $ 1,818     $ 10,258     $ 10,381     $ 22,546     $ 31,332     $ 22,192     $ 16,485  
                                                         


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RISK FACTORS
 
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with the other information in this prospectus, including our consolidated financial statements and related notes, before deciding whether to purchase shares of our common stock. If any of the following risks is realized, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the price of our common stock could decline and you could lose part or all of your investment. We have organized these risks in the following important categories:
 
  •  Risks Related to Our Business, beginning immediately below;
 
  •  Risks Related to Litigation and Government Regulation beginning on page 24; and
 
  •  Risks Related to This Offering and Our Common Stock beginning on page 30.
 
Risks Related to Our Business
 
Our quarterly operating results have fluctuated in the past and are likely to fluctuate in the future, and if we fail to meet or exceed the expectations of investors or any securities analysts, the trading price of our common stock may decline suddenly and substantially.
 
Our quarterly operating results have fluctuated in the past and are likely to fluctuate in the future as a result of many factors, many of which are outside of our control. For example, our net income of $4.8 million in the second quarter of 2008 decreased to a net loss of $6.3 million in the second quarter of 2009. If our quarterly operating results do not meet or exceed the expectations of investors or any securities analysts, the price of our common stock could decline suddenly and substantially. Factors that may cause our operating results to fluctuate include the following:
 
  •  the addition or termination of business relationships through which we acquire customers and generate revenue, or changes in the pricing or structures of these relationships;
 
  •  variable expenditures for customer acquisition;
 
  •  lower-than-anticipated levels of traffic to our websites, or reduced effectiveness in attracting customers that are likely to purchase our services;
 
  •  changes in federal, state or local laws and regulations affecting our business or the businesses of our advertisers or other vendors;
 
  •  investments in infrastructure and personnel to facilitate future growth;
 
  •  system downtimes or other service interruptions that prevent us from selling our services to our customers;
 
  •  unavailability of, or increased costs to obtain, data or other product components used to provide our information services;
 
  •  data or security breaches affecting consumer willingness to purchase our services;
 
  •  the failure of the entities that pay us fees to market their products or services or to generate current or projected levels of business;
 
  •  the failure of third parties to report accurately or timely the information on which our fees are based;
 
  •  judicial or governmental decisions, regulations, or settlements of disputes, such as our recent litigation settlement, that increase our costs or require us to change our business model; and


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  •  the timing of advertising costs, and costs incurred to develop new service offerings or businesses.
 
We believe that our quarterly revenues and operating results are likely to fluctuate significantly in future periods, and that period-to-period comparisons of our operating results may not be meaningful. These fluctuations could also cause our results to be below analyst or market expectations, which could cause the price of our common stock to decline.
 
Our limited operating history and periodic changes in our business strategy make it difficult to evaluate our business trends.
 
We have only been in existence since January 2003. During our limited operating history, we have made, and we plan to continue to make, significant changes to our strategy. Therefore, it might be difficult for you to evaluate our future prospects and the merits of investing in our common stock by evaluating our past performance. We have previously made changes in our sales and marketing approach, advertising strategy and service offerings as we continued to develop our business strategy, and may do so again. Any of these changes may harm our operating results in the short- or long-term. For example, we continue to increase our focus on subscription services and advertising, which may result in competition with some of the websites with which we currently have customer acquisition advertising relationships. In addition, we may attempt to replace advertising revenues with revenues from sales of our subscription offerings, but there can be no assurance that this effort would be successful. You should consider our business and prospects in light of the risks and difficulties that we may encounter as our business strategy evolves. We may be unable to address these risks and difficulties successfully, which could harm our business and operating results and cause the price of our common stock to decline.
 
Our operating results depend significantly on advertising revenues that we generate from a single advertising relationship. Losing this relationship could harm our operating results.
 
We generate most of our advertising revenues, which represented 27.7% of our total revenues in 2008, from a single company, Adaptive Marketing LLC. Adaptive Marketing can terminate or modify this relationship with little notice and there is no guarantee that we could establish a comparable new relationship with other companies on a timely basis, if at all. If our relationship with Adaptive Marketing were to terminate and could not be replaced, our operating results would likely be harmed due to the significant profitability of this relationship. Similarly, if the manner in which that company advertises its services on our websites is changed so that fewer customers accept the offers, our financial results could be harmed. For example, new government regulations could require revisions to the advertisements or marketing methods it uses, possibly reducing the number of our customers who accept the advertising offers. In addition, our ability to increase or maintain advertising fees from our advertising relationships primarily depends on the number of visitors to our websites and the number of customers who transact business with our advertisers. We must increase traffic and transactions in order to increase our advertising revenues.
 
Internet advertising approaches are changing, and if our customer base or technology does not evolve to meet the needs of our advertising relationships, our advertising revenues could decline. In addition, our advertising revenues have fluctuated in the past, and are likely to fluctuate in the future, due to changes in the online advertising market, including extreme fluctuations in online advertising spending patterns and advertising rates.
 
Internet advertisements may be used to distribute viruses over the Internet. If this practice becomes more prevalent, consumers may become less inclined to click on online


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advertisements, which could adversely affect the demand for Internet advertising and our revenues.
 
Because we are a consumer-oriented company, customer complaints and occasional adverse publicity are an inherent aspect of our business. If we fail to manage customer complaints properly, or incur substantial adverse publicity, our revenues and operating results may be harmed and our stock price may decline.
 
A substantial majority of our revenues are derived from sales of information services to individual consumers, including approximately 3.8 million transactions in 2008, and from post-transaction advertising to those customers. In order to promote repeat customer activity and the value of our brand generally, it is important that we provide a good customer experience, including how we handle customer complaints. We could be subject to consumer complaints if we fail to maintain our customer service at acceptable levels, if our services do not meet consumer expectations, if we are perceived as not providing fair refunds, if we are subject to a data security breach, or for other reasons. Over the past two years the number of customer complaints has risen more rapidly than the number of transactions, and the steps we have taken to reduce the number of complaints may prove to be ineffective. Sales of our Identity Protect subscription service, and post-transaction advertising of other subscription services, appear to be the focus of many customer complaints, and our efforts to reduce the incidence of complaints may also reduce our revenues from that service and our advertising. Dissatisfied customers may also deny payment for services through their charge cards, increasing our chargeback rates and our costs of doing business. Customer complaints may also lead to adverse publicity in the press or popular blogs and websites, and may lead to regulatory investigations and potential legislative or regulatory reactions that may impact our business, reduce our revenues or increase our operating expenses. For example, adverse publicity about our post-transaction advertising practices led to a reduction in our post-transaction advertising and to changes to our business model, including a greater emphasis on direct sales of our Identity Protect service. In addition, we are subject to ratings by consumer advocacy organizations, such as the Better Business Bureau, which could be adversely affected by negative publicity and customer complaints. Finally, from time to time we incur negative publicity related to our founder and chief executive, Naveen Jain. If we do not manage adverse publicity adequately, our brand and revenues could be harmed and our operating expenses could increase, harming our financial results and stock price.
 
Our corporate image might be impaired as a result of negative publicity about our use of personal information in our service offerings, which could cause a corresponding drop in our stock price.
 
Public sensitivity to the disclosure and use of personal information may create negative reactions by investors and customers to our business practices. Public concerns regarding data collection, privacy and security may cause some potential customers to choose not to purchase our services, which would inhibit or reverse the growth of our business and negatively affect our stock price. Any perception that our services might invade consumer privacy, even if our practices are in compliance with applicable law, may subject us to adverse publicity and could affect our business and the price of our common stock. Publicity by politicians and regulators threatening legislative or administrative action could adversely affect our business or the price of our common stock, whether or not the threats materialize.
 
We are subject to risks related to credit card payments we accept, including credit risk and financial penalties, which could harm our operating results.
 
A substantial majority of our revenues originates from online credit transactions. Under current payment card industry practices, we are liable for fraudulent and disputed payment


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card transactions because we do not obtain the cardholder’s signature at the time of the transaction. If we fail to maintain our chargeback rates at levels that are acceptable to the payment card associations, or otherwise fail to comply with their rules or requirements, we will face the risk that one or more payment card associations may, at any time, assess penalties against us, including higher transaction fees, or terminate our ability to accept payment card payments from customers, which would harm our business and operating results. For example, we are currently on probation with one of our payment card associations as a result of elevated levels of chargebacks, particularly those associated with sales of Identity Protect. We may also be subject to litigation and receive adverse publicity due to these issues, which could have a material adverse effect on our business and financial condition. If the terms of our subscription service offerings are not sufficiently clear, some customers may inadvertently purchase our services and subsequently seek reimbursement and chargeback. In addition, if our security measures are not sufficient, we will be at risk for a higher rate of payment card chargebacks. Because we provide online services to customers but do not process payments for approximately three days after we provide these services, we are at risk for fraudulent activity that we cannot detect in the limited time between the placement of an order and our provision of services. Fraudulent activity continues to increase in sophistication, making it more difficult to discern legitimate activities from those that are fraudulent.
 
Our business depends on our ability to attract visitors to our websites who are likely to purchase our services, and any failure to do so could adversely affect our operating results.
 
Our business model requires us to increase traffic to our websites, and to attract visitors who are most likely to purchase our services. With respect to third-party websites with which we have a cost-per-click pricing relationship, we may focus our efforts on attracting those customers who we believe are more likely to purchase our services in order to maximize revenues relative to our customer acquisition costs. In contrast, where we have a revenue-sharing or fixed-price relationship, we may attempt to attract a high level of traffic to our websites and, as a result, our conversion of visitors into customers may be lower. We may not be effective in controlling or directing the levels of traffic that we desire in order to derive the most value from these different types of relationships.
 
Other factors could affect our ability to convert visitors into customers, including:
 
  •  our failure to meet the needs of our potential customers due to a perceived lack of breadth of service offerings, perceived or actual unreliability of information, or otherwise;
 
  •  the unwillingness of potential customers to pay the prices we charge for our information services, or to pay for information-related services at all;
 
  •  deterioration in the customer experience on our websites or in our level of customer care;
 
  •  system failures that cause our websites or services to be unavailable; or
 
  •  data security breaches that damage our brand.
 
If any of these or other factors causes our rate of conversion of visitors into customers to decrease, our revenue growth could decline and our business could be harmed. We might also be forced to reduce our prices to maintain or increase our conversion rate, which would harm our revenues and operating margin.
 
We attract a significant number of the visitors to our websites through our relationships with search engines and other leading Internet companies, and changes in these relationships could harm our revenues and operating results.
 
We attract a significant number of the visitors to our websites through our relationships with third-party websites, including AT&T and Digimedia, and search engines such as Google and


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Yahoo! that feature our services on their websites through links or that advertise our services. Establishing new advertising relationships has been a significant contributor to increases in our revenues and net income in the past, and if we fail to establish new online advertising relationships or expand existing relationships in the future, our operating results could be harmed. Conversely, one or more of these companies might terminate or decide not to renew their relationships with us, or change their business focus in a way that harms our business by providing fewer visitors or introducing competitive services. Moreover, some of our agreements with third-party websites and search engines are terminable by these parties with little or no notice. If we have fewer visitors to our websites, we may generate less revenues from the sales of our services.
 
A website or search engine that displays advertisements for our services or that offers our services through a link to our websites may choose to move these advertisements or links to a less prominent place on its website, in which case the volume of traffic that the website or search engine generates for us will decrease. Similarly, the search engines that direct traffic to our websites both through algorithmic search results produced by the search engine and by purchased listings on the search engine’s website may modify their search algorithms in ways that make our services appear less prominently or frequently in search results, or may establish or change the eligibility rules for purchasing listings that may require us to change how we offer our services.
 
One or more third-party websites may attempt to charge more for advertisements or links, may charge more for purchased listings or may otherwise attempt to restructure their pricing relationship with us, for example, from revenue-sharing to cost-per-click pricing of advertisements. In addition, the prices for keyword advertising may increase due to market factors such as the increase in popularity of Internet advertising, which could lead to competition for scarce advertising slots. In any of these circumstances, our operating expenses may increase, which would lead to reduced operating margin, or traffic to our websites could decrease and our revenues could decline.
 
We may not succeed in cross-selling or up-selling additional services to our customers.
 
We seek to acquire customers based on their interest in one or more of our services and then offer additional or enhanced services to those customers. If our customers are not interested in our additional or enhanced services, or have an adverse experience with the services in which they were initially interested, the sale of additional or enhanced services to those customers and our ability to increase our revenues could be adversely affected.
 
If we are not successful in developing new information services, our operating results may be harmed.
 
A majority of our revenues in 2008 and the first six months of 2009 were derived from sales of our information services offerings. Our operating results could be substantially harmed if sales of any of these services were to decline or if we are not successful at enhancing these services or developing or acquiring new services to meet customer requirements. Any new service we develop or acquire may not be introduced in a timely or cost-effective manner and may not achieve the broad market acceptance necessary to generate significant revenues. If we are unable to develop new services to increase the breadth of our service offerings, our business and operating results may be adversely affected.


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If we are unable to increase repeat purchase activity, our revenue growth and operating margin will be harmed.
 
Sales and marketing expenses related to acquiring new customers are our largest operating expense. Repeat purchase activity reduces this operating expense by lowering our average customer acquisition cost. Our ability to generate repeat purchase activity will depend on our ability to generate compelling new service offerings and to provide a positive customer experience and high-quality customer support. If we are unable to maintain loyal customers and generate increased repeat purchase activity from these customers, our revenue growth and operating margin could be harmed.
 
Because our business depends on our reputation for high quality services and data integrity, if the information that we deliver to customers is unreliable or incomplete, or is perceived to be unreliable or incomplete, our business will be harmed.
 
We believe that the primary benefits that cause customers to purchase our information services are the accuracy, relevancy and completeness of our information. Moreover, we compete against offline providers of information services with respect to some of our service offerings, and for us to be successful, customers must perceive our services to be as reliable as services provided by our competitors, which often involve human analysis and review. The information that we provide is based on data that we collect from many online and offline sources, and we rely on the accuracy, relevancy and completeness of this underlying data. Sometimes information provided to our customers contains inaccuracies. Some of our information may be deemed incomplete; for example, information concerning litigation does not contain any federal civil litigation other than bankruptcy. If our service offerings provide inaccurate, irrelevant or incomplete information, or if this information is otherwise not useful for our customers’ needs, then our reputation will be harmed and sales of our service offerings will decline.
 
We may not be able to grow our business and our operating results may be adversely affected unless we generate greater brand recognition and market awareness of our services and increase quality traffic to our websites in a cost-effective manner.
 
We derive most of the visitors to our websites from third parties that we compensate for this traffic. Sales and marketing expenses accounted for a majority of our operating expenses for 2008 and the first six months of 2009, and customer acquisition costs related to online advertising arrangements was the largest component. If we do not increase the number of direct visitors to our websites and reduce our reliance on third-party traffic, our ability to improve our operating margin and grow our business will be limited. We must generate greater awareness of our brand and the services we offer in order to increase the proportion of direct visitors to our websites. We expect that we will need to engage in online and offline advertising, in addition to our existing customer acquisition advertising relationships, in order to generate greater brand awareness. There is no guarantee that these advertising efforts will be effective in generating increased direct traffic and generating and sustaining greater brand awareness, or that these efforts will be more cost-effective than our online advertising relationships.
 
In addition, we believe that growth of our customer base and future revenue growth depends on making our services appeal to a wider segment of the population. We must expand our range of services to appeal to wider segments of the online user population, and must engage in marketing efforts that will be effective in appealing to wider audiences.


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We intend to acquire domain names, services, technologies and businesses to facilitate development of new services and to increase customer traffic, but if we are unable to make acquisitions, or if we do not realize the anticipated benefits of acquisitions, our operating results could be harmed.
 
We have acquired domain names, services, technologies and businesses in the past, and expect to continue to do so in the future. For example, in November 2006, we acquired IntelliSense Corporation, an employment screening business, in December 2008, we acquired Zaba, Inc., a people search website, and in April 2009, we acquired the assets of Spock Networks, Inc., a people search technology company. Any acquisition could require significant capital outlays and could involve many risks, including, the following:
 
  •  integrating the operations, systems, employees, benefit programs, services and technologies of the acquired business into our existing business, workforce and services can be complex, time-consuming and expensive;
 
  •  domain names that we acquire may not generate the levels of traffic to our websites that we anticipate;
 
  •  we may be required to record substantial accounting charges, including amortization or impairment charges, which could affect our operating margin;
 
  •  an acquisition may involve entry into geographic or business markets in which we have little or no prior experience;
 
  •  an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management;
 
  •  an acquisition may require action to comply with certain privacy and data security laws and may implicate privacy and data security laws with which we had not previously been required to comply;
 
  •  we may incur debt in order to fund an acquisition, or we may assume debt or other liabilities of the acquired company, as we did with some of our previous acquisitions; and
 
  •  we may have to issue equity securities to complete an acquisition, which would dilute our stockholders’ ownership position and could adversely affect the price of our common stock.
 
We may not be able to identify or consummate any future acquisitions on favorable terms, if at all. If we do complete an acquisition, the financial markets or investors may view the acquisition negatively. Even if we successfully complete an acquisition, it could adversely affect our business, and the anticipated benefits of any acquisition may not be realized or we may be exposed to unknown liabilities. For example, we recently settled litigation arising out of our 2005 acquisition of Qwil Company, that resulted in a settlement payment of $7.0 million. In addition, we may not be able to secure any necessary additional debt or equity financing to complete an acquisition on favorable terms, if at all.
 
Any of these factors could harm our ability to achieve anticipated levels of profitability from acquired businesses or to realize other anticipated benefits of acquisitions.
 
We depend on our leadership team, particularly our Chief Executive Officer and the Chairman of our board of directors. The loss of any of our senior management could adversely affect our future operating results.
 
Our future success will depend on the ability of our executive management, under the direction of our board of directors, to operate effectively. The loss of any of our senior management—particularly Naveen Jain, who is one of our founders and our Chief Executive Officer and President—could adversely affect our future operating results. We believe that Mr. Jain has been critical to the development of our corporate culture and strategic focus, and


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has been instrumental in the growth of our business to date. If we lose the services of Mr. Jain, our corporate culture and strategic focus could be negatively impacted, which could adversely impact our ability to achieve future growth. Mr. Jain has been a defendant in several high-profile lawsuits. Mr. Jain has devoted significant attention to these litigations at various times, and certain of these actions have received media attention. There can be no assurance that Mr. Jain will not be a defendant in additional litigation in the future. Any future litigation could distract Mr. Jain from his activities as our Chief Executive Officer and President, and harm his reputation and consequently our business. Negative publicity about litigation involving Mr. Jain may hurt our hiring efforts.
 
The loss of any of our directors, particularly the Chairman of our board, Admiral William Owens, could adversely affect our operating results. For example, Admiral Owens has been instrumental in attracting high quality individuals to serve on our board of directors and has helped us enter into important business relationships. As such, the loss of his services could adversely affect these areas of our business.
 
Our arrangements with our employees, including Mr. Jain and our other executive officers, are at-will, and therefore may be terminated at any time by us or the employee. In addition, a significant portion of the stock options and restricted stock units held by several of our executive officers are vested, which presents the risk that these individuals may lack sufficient economic incentive to continue their employment with us in future periods.
 
If our security measures are breached and unauthorized parties obtain access to customer data, our reputation might be harmed, potential and current customers might cease purchasing our services and we could be subject to regulatory penalties and litigation.
 
If unauthorized parties succeed in penetrating our network security or otherwise misappropriate our customers’ personal or payment card information, we could be subject to liability and could face reduced customer confidence in our services. If we experience breaches of our network security or sabotage, we might be required to expend significant capital and resources to protect against or alleviate these problems. We may not be able to remedy any problems caused by hackers or saboteurs in a timely manner, or at all. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the perception of the effectiveness of our security measures and our reputation could be harmed and we could lose current and potential customers. Because of our increased profile as a result of our becoming a public company, we may become subject to more frequent attempts to breach our data security.
 
The Federal Trade Commission, or FTC, and state agencies have inquired about or investigated the use and disclosure of consumers’ personal information by us along with various other Internet companies. The federal government has also enacted laws, such as the Fair Credit Reporting Act, or the FCRA, the Gramm-Leach-Bliley Act and the Drivers Privacy Protection Act, protecting the privacy of consumers’ nonpublic personal information. Our failure to comply with existing laws, including those of foreign countries, or the adoption of new laws or regulations regarding the use of personal information that require us to change the way we conduct our business, could increase the costs of operating our business.


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The planned conversion of our financial information systems and business intelligence systems to meet our continuing growth may adversely affect our ability to manage our business and report as a public company.
 
We plan to convert from our existing financial information and business intelligence systems to a new system that we expect to meet our current and future requirements based on our growth. The conversion of complex information systems is inherently risky and should the conversion be delayed or encounter problems in being implemented, our ability to report as a public company and manage our business could be jeopardized.
 
System failures could lead to decreased sales and to customer perception that our services are unreliable.
 
We have experienced system failures or brief outages in the past, and will likely experience future system failures or outages that disrupt the operation of our websites and harm our business. Our revenues depend in large part on the volume of traffic to our websites. Accordingly, the performance, reliability and availability of our websites, servers for our corporate operations and infrastructure are critical to our reputation and our ability to generate a high volume of traffic to our websites and to attract and retain customers.
 
We regularly attempt to expand and enhance our technology and network infrastructure and other technologies to accommodate increases in the volume of traffic on our websites and the number of customer transactions we can process. We may be unsuccessful in these efforts or we may be unable to project accurately the rate or timing of these increases. We cannot predict whether additional network capacity will be available on commercially reasonable terms from third-party suppliers as we require it. In addition, our network or our data suppliers’ networks may be unable to download data effectively or to maintain data transmission capacity sufficiently high to process orders, especially if the volume of customer orders increases.
 
Our corporate headquarters, computer hardware operations and backup systems are located at our facilities in the Seattle area, which is seismically active, and are at risk for earthquakes and volcanoes. If these locations experienced a significant system failure or interruption, our business would be harmed. Currently, these facilities do not provide the ability to switch immediately to another back-up site in the event of failure of the main server site. This resulting downtime could result in increased costs, lost revenues and reputational damage, which would be detrimental to our business.
 
Adverse conditions in the general economy, including declines in consumer spending, may adversely affect our business, operating results and financial condition.
 
Our performance is subject to general economic conditions and their affect on levels of consumer spending, which have recently deteriorated significantly and may remain depressed, or deteriorate further. Factors having an effect on discretionary consumer spending include general economic conditions, higher levels of unemployment, increased consumer debt, tightening of consumer credit, and reductions in net worth.
 
Consumer purchases of discretionary items generally decline during recessionary periods and other periods in which disposable income is adversely affected. Since consumers may consider purchases of our services discretionary, declines in consumer spending could have an adverse effect on our business. Continuation of, or unfavorable changes in, the above factors or in other business and economic conditions could result in reduced revenues, lower profit margins and other adverse effects on our financial condition and operating results.


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Our relationships with our vendors, advertisers and distributors may also be affected by the economic recession. Some of our vendors, advertisers and distributors may experience cash flow difficulties and difficulties accessing lines of credit or complying with debt covenants, or even continued viability. For example, in the second quarter of 2009 we reserved approximately $1.3 million related to a deposit with a business vendor that filed for bankruptcy. This reserve materially affected our results for the second quarter of 2009. If any of our other vendors, advertisers or distributors were forced to reduce their operations or to file for bankruptcy protection, it would be more difficult for us to conduct our business as we have in the past and could have a material adverse effect on our business.
 
If the data that we obtain from government and private sources becomes unavailable or more expensive, our costs will increase and our operating margin will decline.
 
Our information services depend on the continual availability of data from many external online and offline sources. For example, we obtain information from public filings, information companies and government authorities, and we rely on a large number of court vendors to complete local courthouse searches. Information provided by commercial sources may become unavailable if one or more providers change business practices, are sold or go out of business or suffer system downtimes, or as a result of other factors. We do not have multi-year agreements with some of our data suppliers. Moreover, changes in federal, state or local laws and regulations, including privacy laws, and unavailability of online public databases and other public records might contribute to the unavailability of source data. The loss or temporary unavailability of one or more sources of data might reduce the completeness and reliability of the information we provide, or reduce the breadth of our service offerings. In addition, source data that is currently obtainable without charge or at a low cost might become more expensive, which could require us to raise our prices or make it too costly for us to gather that information. Any of these factors could materially harm our operating results, financial condition and business operations.
 
We face competition from a wide variety of online and offline companies in the different markets for our service offerings, and we expect to face increased competition, particularly online. If we do not compete successfully, our business, financial condition and operating results will be adversely affected.
 
We operate in rapidly evolving and competitive markets, competing primarily with large, diversified online and offline service providers, as well as small firms and individuals. These competitors include online and offline background check and information verification service providers, large diversified Internet companies, national credit repositories and online address and phone number directories. We anticipate that as the market for our services grows and we develop and expand our service offerings, we will encounter increased competition from new and existing competitors. As we develop new service offerings, we expect that we will be exposed to new competitive threats. Many of these actual or potential competitors may have greater resources, more brand recognition and consumer awareness, greater international scope and larger customer bases than we do. We may be unable to maintain or strengthen our competitive position in our markets, especially against larger competitors. As competition intensifies, we may become more reliant on our advertising relationships, which may reduce our bargaining leverage and make us more susceptible to financial harm if any of these relationships are subsequently terminated. If we do not compete successfully, our business and operating results will be adversely affected.
 
The competitive landscape for online information services is extremely fragmented, with widespread availability of alternative services at different price points. As this market evolves, consumer demand and competitive service offerings may emerge that undermine demand for or impose pricing pressures on our services, which could result in reduced revenues and


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operating margin. Because few businesses have had success charging consumers for information or information-related services over the Internet, it is possible that competitors employing an advertising-supported business model with free or low-price information service offerings may emerge. If this were to occur we might be required to reevaluate our business model and pricing structures.
 
We are a young company that has grown rapidly, and if we are not successful in managing our expected expansion, our business could be harmed.
 
In recent years, we have expanded our operations and our employee headcount significantly, and we anticipate that further expansion will be required to realize our growth strategy. For example, from January 1, 2008 through September 30, 2009, our number of full-time employees increased from 139 to 299. To manage this expected growth, we will need to attract, hire, retain and motivate highly skilled officers, managers and employees, improve existing systems and implement new infrastructure and systems relating to our operations and financial controls. In addition, we intend to continue to expand our operations by offering new and enhanced services and by expanding our market presence through relationships with third parties. We may not be able to accomplish this expansion in a cost-effective or timely manner, or these efforts may not increase the overall market acceptance of our services. Expansion of our operations in this manner could also require significant additional expenditures and strain our management, financial and operational resources. If we are unable to manage the growth we expect in our operations, we may be unable to execute our business model. This, in turn, could make us more vulnerable to competitive pressure and harm our business.
 
The market for information services is at an early stage of development, and if it does not develop as quickly as we expect, our business will be harmed.
 
The market for information services is at an early stage of development, and it is uncertain whether high levels of demand for these services will emerge and be sustained. Our success will depend to a substantial extent on whether these services achieve high levels of market acceptance among consumers and enterprises. Historically, only a limited number of companies have had success charging consumers for information or information-related service offerings over the Internet, and increased market acceptance of these services will depend on whether a broad segment of the consumer and enterprise markets demonstrates a willingness to pay for these services. Other factors that may affect market acceptance include:
 
  •  awareness by consumers and enterprises of the availability of information services provided over the Internet;
 
  •  the accuracy, reliability and security of these services;
 
  •  availability at a reasonable cost of the underlying data that are used to provide these services;
 
  •  whether new search tools or other offerings emerge that render these services obsolete; and
 
  •  the quality of the customer experience and levels of customer service provided by information service providers.
 
If demand for these services among consumers and enterprises does not develop, or does not develop at the rate that we expect, then our long-term prospects and operating results will be harmed.


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Our Identity Protect service depends in part on our ability to receive credit-related data from third parties promptly. If either the third party’s transfer of data to us, the data’s accuracy, or our relay of data to the customer is compromised, sales of our identity protection services could be harmed.
 
We generate a significant portion of our revenues from our Identity Protect service. This service is based in part on our ability to alert consumers quickly of changes in their credit and personal data. If the customer is unaware of the change, there is a chance someone else made the change and is improperly using our customer’s identity or credit. We depend on third parties to provide us with information about changes to our customers’ credit and personal identifying information. If these third parties fail to provide us with this information accurately and quickly, or we fail to relay the information to our customers accurately and quickly, the value of our service to consumers could be harmed, or we could be subject to adverse publicity or legal liability.
 
If we are unable to market and sell services beyond our existing target markets and to develop new services to attract new customers, our operating results may suffer.
 
We have developed services and implemented marketing strategies designed to attract small business owners and consumers to our websites and encourage them to purchase our services. We believe we will need to address additional markets and attract new customers to grow our business. To access new markets and customers, we expect that we will need to develop new services that address their needs. Failure to develop new services, expand our business beyond our existing target markets and customers, and address additional market opportunities could harm our business, financial condition and operating results.
 
Our market may undergo rapid technological change, and any inability to meet the changing needs of our industry could harm our financial performance.
 
The Internet and electronic commerce are characterized by rapid technological change. Sudden changes in user and customer requirements and preferences, the frequent introduction of new services embodying new technologies and the emergence of new industry standards and practices could make our services and systems obsolete. The rapid evolution of Internet-based applications and services will require that we continually improve the performance, features and reliability of our services. Our success will depend, in part, on our ability to:
 
  •  develop or acquire new services and technologies that address the increasingly sophisticated and varied needs of our current and prospective customers; and
 
  •  respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.
 
We have elected to develop substantially all of our services internally, rather than licensing or acquiring technology from third-party vendors. The development of new services is complex, and we may not be able to complete development in a timely manner, or at all. Our internal development teams may be unable to keep pace with new technological developments that affect the marketplace for our services. If relevant technological developments or changes in the market outpace our ability to develop services demanded by current and prospective customers, our existing services may be rendered obsolete, and we may be forced to license or acquire software and other technology from third parties, or we may lose existing customers and fail to attract new customers. If we are forced to shift our strategy toward licensing our core technology from third parties, it could prove to be more costly than internal development and adversely impact our operating results.
 
The development of services and other proprietary technology involves significant technological and business risks and requires substantial expenditures and lead-time. We may


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be unable to use new technologies effectively or to adapt our internally developed technologies and services to customer requirements, emerging industry standards or regulatory requirements. In addition, as we offer new services and functionality, we will need to ensure that any new services and functionality are well integrated with our current services, particularly as we offer an increasing number of our services as part of bundled suites. To the extent that any new services offered by us do not interoperate well with our existing services, our ability to market and sell those new services would be adversely affected and our revenue level and ability to achieve and sustain profitability might be harmed.
 
Any international expansion exposes us to business risks that could limit the effectiveness of our growth strategy and cause our operating results to suffer.
 
We intend to explore opportunities to offer information services in international markets in the future. Introducing and marketing our services internationally, developing direct and indirect international sales and support channels, and managing foreign personnel and operations will require significant management attention and financial resources. We face a number of risks associated with expanding our business internationally that could negatively affect our operating results, including:
 
  •  compliance with foreign laws, including more stringent laws relating to the privacy and protection of data;
 
  •  reduced availability of data from public, publicly available and private sources due to foreign laws and absence of business arrangements with foreign sources of data;
 
  •  incompatibility of foreign data formats and languages with our current platform;
 
  •  the lower level of adoption of the Internet in many international markets;
 
  •  management, communication and integration problems resulting from cultural differences and geographic dispersion;
 
  •  to the extent we choose to make acquisitions to enable our international expansion efforts, the identification of suitable acquisition targets in the markets into which we want to expand;
 
  •  difficulties in protecting intellectual property rights in international jurisdictions;
 
  •  political and economic instability in some international markets;
 
  •  sufficiency of qualified labor pools in various international markets;
 
  •  established foreign competitors;
 
  •  currency fluctuations and exchange rates; and
 
  •  potentially adverse tax consequences or inability to realize tax benefits.
 
We may not succeed in our efforts to expand our international presence as a result of the factors described above or other factors that may have an adverse impact on our overall financial condition and operating results.
 
Our future revenue growth depends in part on our strategy of expanding sales to enterprise customers, and if we are not successful in adding and retaining enterprise customers, our revenue growth may be impaired.
 
One of our strategic objectives is to expand the sales of our services to enterprise customers, which accounted for approximately 7.0% of our total revenues in 2008, and 5.9% of our total revenues in the first six months of 2009. Sales to enterprise customers present different challenges than sales to consumers, including different sales and marketing approaches, a longer sales cycle and a lower operating margin. We also face different competitors in the enterprise market than we encounter in the consumer market, many of which are larger and better established than us. If we are not successful in adding and


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retaining enterprise customers, our revenue growth may be impaired, which could harm the price of our common stock.
 
To the extent the availability of free or relatively inexpensive Internet access to information increases, the demand for our services may decrease, which could harm our business.
 
Public sources of free or relatively inexpensive information have become increasingly available, particularly through the Internet, and we expect this trend to continue. Government agencies in particular have increased the amount of information to which they provide free public access. Public sources of free or relatively inexpensive information may reduce demand for our services. To the extent that customers choose not to obtain services from us and instead rely on information obtained at little or no cost from these public sources, our revenues could decrease, which might have an adverse effect on our business, financial condition and operating results.
 
Risks Related to Litigation and Government Regulation
 
Our operating results depend significantly on our ability to acquire and use customers’ billing information. If the rules are changed to make it more difficult to acquire and use customers’ billing information provided for one transaction in another transaction for the same consumer, our operating results could be harmed.
 
In May 2009, the Chairman of the U.S. Senate Committee on Commerce, Science and Transportation sent a letter to two marketing companies that acquire consumer billing information through other companies’ online retail sites. The letter seeks information about this practice, which it calls controversial and subject to an inordinate number of consumer complaints. We have a relationship with Adaptive Marketing, a subsidiary of one of these companies, pursuant to which we have provided Adaptive Marketing with consumer billing information for consumers who have purchased one or more of our services and had indicated their intent to purchase a service from Adaptive Marketing. We have relationships with other online retail sites pursuant to which they provide consumers’ billing information to us, after the consumer has purchased a product or service from that online retail site and has also indicated he or she wanted to purchase a service from us. Similarly, we use consumer billing information provided when a consumer purchases one of our services in connection with selling the same consumer another of our services, particularly subscription services that generate a significant portion of our revenues. If the rules and regulations applicable to the practice of transferring consumer billing information between companies or in connection with intra-company add-on purchases are changed to disallow either practice or to make it more difficult to engage in either practice, our revenues would be materially adversely affected. In addition, recent state legislative proposals would require, and some recent class action settlements have required, that consumers re-enter credit card information to confirm online purchases. We believe these requirements reduce customer willingness to enter into such transactions, and, if applicable to us, would likely reduce our revenues.
 
Changes in laws and regulations governing access to public information and the collection or sale of publicly available information could make it more difficult for us to conduct business.
 
Because we use personal information in providing our information services, we are subject to government regulation and vulnerable to adverse publicity. We provide many types of data and services that already are subject to regulation under the FCRA, Gramm-Leach-Bliley Act, Drivers Privacy Protection Act and, to a lesser extent, various other federal, state and local laws


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and regulations. Violation of these laws or regulations may result in substantial fines, judgments and other penalties.
 
These laws and regulations are designed to protect the privacy of the public and to prevent the misuse of personal information in the marketplace. However, many consumer organizations, privacy advocates and government regulators believe the existing laws and regulations do not adequately protect privacy. These groups have become increasingly concerned with the use of personal information, particularly social security numbers, department of motor vehicle data and date of birth data. As a result, there is an effort to impose restrictions on the dissemination or commercial use of personal information.
 
Many states have enacted laws to protect personal information or to give consumers more information about how their personal information is used, and restrictions on the dissemination or commercial use of personal information by the public and private sectors may be adopted in the future. For example, the Washington State Legislature recently adopted legislation prohibiting companies from selling cell phone directory services without an express opt-in by cell phone owners, which was a service we had begun to offer and subsequently discontinued as a result of this new requirement.
 
The following legal and regulatory developments could have a material adverse effect on our business, financial position and operating results and could result in substantial regulatory compliance and litigation expenses:
 
  •  amendment, enactment or interpretation of laws and regulations that restrict the access to and use of personal information and reduce the supply of data available to customers;
 
  •  additional restrictions or requirements or increases in data prices implemented by credit bureaus and other providers of data;
 
  •  changes in cultural and consumer attitudes to favor further restrictions on information collection and sharing;
 
  •  failure of our services to comply with current laws and regulations; and
 
  •  failure of our services to adapt to changes in the regulatory environment in an efficient, cost-effective manner.
 
Further, laws and regulations that apply to Internet communications, commerce and advertising are becoming more prevalent and restrictive. These regulations could affect the costs and effectiveness of communicating over the Internet, adversely affect the demand for our services, or the efficiency of our advertising, or otherwise harm our business, operating results and financial condition.
 
We are the subject of a Washington State Attorney General investigation about third-party subscription services advertised on our websites and our own Identity Protect subscription services. This inquiry could result in fines or other remedies that could adversely affect our business.
 
The office of the Washington State Attorney General has started a formal inquiry, including depositions of some of our executives, about some of our business practices, particularly those involving our business relationship with Adaptive Marketing and associated with our sales of subscription services. These programs have been the fastest growing sources of our revenues over the past two years, and if the Washington State Attorney General’s office concludes that the critical components of these services must be changed, or imposes fines or penalties on us, or precipitates negative publicity about these services, our revenues and operating results could be adversely affected.


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We are the subject of a Federal Trade Commission investigation about our compliance with the Fair Credit Reporting Act, which could result in fines or other remedies that could adversely affect our business.
 
The FTC has commenced an inquiry into our compliance with the FCRA. At the conclusion of its investigation, the FTC may impose monetary penalties or other restrictions on us, which could have a material adverse effect on our business. While we believe that our enterprise screening services are FCRA-compliant, we do not know whether the FTC will take the view that the FCRA is also applicable to our delivery of consumer information services such as our background check and nanny check services. A determination by the FTC that the FCRA covers delivery of consumer services could have a material adverse effect on our business. In 2005, the FTC levied penalties of $15 million against one of our competitors for violations of the FCRA and the FTC might impose monetary penalties, which also could have a material adverse effect on our business.
 
Class action complaints for alleged unfair and deceptive business practices could harm our reputation and operating results.
 
Complaints from customers about our services, third party services and the marketing of those services may from time to time result in class actions litigation against us. For example, on August 31, 2009, a resident of the state of California filed an action against us and Adaptive Marketing in Federal Court in California. The complaint alleges causes of action for unfair and deceptive business practices, false advertising, breach of financial privacy and conversion. The complaint is a purported class action complaint on behalf of all similarly situated California residents. More specifically, the complaint alleges that we have not adequately disclosed the terms of our Identity Protect service offer and have not obtained proper approval from consumers before debiting consumer bank accounts or charging consumer charge cards. The complaint also alleges that Adaptive Marketing has not adequately disclosed the terms of its post-transaction offers appearing on our websites and that we improperly transferred consumers’ credit card information to Adaptive Marketing without obtaining proper approval.
 
Any such purported class action lawsuit, and any other private or governmental claims or actions that may be brought against us in the future relating to these programs, could cause us to incur substantial legal fees to defend claims or result in our being obligated to pay substantial damages. These fees and damages could be disproportionate to the revenues we generate through these programs, which would have an adverse effect on our operating results. Even if we are successful in defending against these claims, the time spent doing so may cause management distraction. In addition, customer dissatisfaction, or a significant reduction in, or termination of, membership offers on our website as a result of these claims, could harm our brand, revenues and profitability.
 
We could face liability based on the nature of our services and the information we report, which may not be covered or fully covered by insurance.
 
We face potential liability from individuals, classes of individuals, customers or regulatory bodies for claims based on the nature, content or accuracy of our services and the information used and reported by us. This potential liability includes claims of non-compliance with laws and regulations governing our services and claims of defamation, invasion of privacy, negligence, and copyright, patent or trademark infringement. In some cases, this potential liability may be determined without fault.
 
Insurance may not be adequate to cover us for all risks to which we are exposed or may not be available to cover these claims at all. For example, punitive damages, which generally are not covered by insurance, may be available under the FCRA to consumers for the failure to comply with the FCRA. Any imposition of liability, particularly liability that is not covered by


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insurance or is in excess of our insurance coverage, could have a material adverse effect on our business, financial condition and operating results.
 
We may be subject to costly litigation arising out of information presented on our websites or collected in connection with our employment screening services, and the litigation could have a material adverse effect on our business if decided adversely.
 
In the proper circumstances, individuals, businesses and government agencies may rely on our information services in making hiring decisions and conducting background checks of potential business partners. If our services provide inaccurate information, individuals seeking employment may be denied opportunities on the basis of that information. Conversely, if the information provided by our services is erroneous or incomplete, employers may hire someone with a fraudulent resume or business credential, or a criminal record. We may face potential liability in any of these situations, with potential claims such as defamation, breach of contract and negligence. For example, in the past we have faced a claim because we reported that a person had been convicted of criminal activity when the person had merely been charged with the activity. Some laws require us to withhold disclosure of identifying information regarding certain individuals in some circumstances; however, because an individual’s identifying information may change without our knowledge, the individual may still be searchable in our database.
 
From time to time, we have been subject to lawsuits by potential employees of our customers, alleging that we provided inaccurate or improper information that negatively impacted the customers’ hiring decisions. Such claims and similar lawsuits in the future could divert the attention of our management, subject us to equitable remedies relating to the operation of our business and provision of services and result in significant legal expenses, any of which could have a material adverse effect on our business, financial condition and operating results.
 
We could be subject to legal claims, government enforcement actions and damage to our reputation if we or our customers fail to comply with federal, state and foreign laws, regulations or policies governing consumer privacy, which could materially harm our business.
 
Recent growing public concern regarding privacy and the collection, distribution and use of information about Internet users has led to increased federal, state and foreign scrutiny and legislative and regulatory activity concerning data collection and use practices. The U.S. Congress has considered, and will continue to consider, legislation regarding privacy and data security measures (for example, the Personal Data Privacy and Security Act of 2009). Any failure by us to comply with applicable federal, state and foreign laws may result in, among other things, administrative enforcement actions and fines, class action lawsuits, cease and desist orders, and civil and criminal liability, and materially harm our business.
 
Third parties may bring class action lawsuits against us relating to online privacy and data collection. We disclose our information collection and dissemination policies, and we may be subject to claims if we act or are perceived to act inconsistently with these published policies. Any claims or inquiries could be costly and divert management’s attention, and the outcome of these claims or inquiries could harm our reputation and our business.
 
Our customers could improperly use the information on our websites, and we may be held liable.
 
Our customers are also subject to various federal and state laws concerning the collection and use of information regarding individuals. For example, the FCRA regulates the way information that may be available through our websites may be used in connection with


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background checks for employment, insurance, tenancy and real estate. We cannot assure you that our customers are currently in compliance, or will remain in compliance, with these laws and their own privacy policies. We may be held liable if our customers use our services in a manner that is not in compliance with these laws or their own stated privacy policies.
 
We may be required to indemnify our customers or data suppliers, which could have a material adverse effect on our cash flow, operating results and financial condition.
 
Some of our customer and data supplier contracts contain indemnification provisions that require us to indemnify our customers and suppliers against certain claims, including those for improper use of information, non-compliance with applicable laws and regulations and intellectual property infringement. To the extent these claims are successful and are not covered by our insurance coverage, these obligations could have a material adverse effect on our cash flow, operating results and financial condition.
 
The introduction of tax laws targeting companies engaged in electronic commerce could materially adversely affect our business, financial condition and operating results.
 
We file tax returns in those states where existing regulations applicable to traditional businesses require these filings. However, one or more states could seek to impose additional income tax obligations or sales tax collection obligations on out-of-jurisdiction companies, such as ours, that engage in or facilitate electronic commerce. A number of proposals have been made at various government levels that could impose taxes on the sale of services through the Internet or on the income derived from these sales. These proposals, if adopted, could substantially impair the growth of electronic commerce and materially adversely affect our business, financial condition and operating results.
 
The moratorium on certain U.S. federal, state and local taxation of online services and electronic commerce has been extended by the U.S. Congress to November 1, 2014. Any future imposition of these taxes could materially adversely affect our business, financial condition and operating results.
 
Laws governing Internet communications and commerce over the Internet could adversely affect our business.
 
The legal and regulatory environment pertaining to the Internet is uncertain and may change in the future. New laws may be passed, existing laws may be deemed to apply to the Internet or existing legal safe harbors may be narrowed, both by U.S. federal or state governments and by governments of foreign jurisdictions. These changes could affect, among other things, user privacy and security issues, consumer protection, transfer of and charges to credit cards, sales tax and other taxes, and cross-border commerce.
 
The adoption of any new laws or regulations, or the application or interpretation of existing laws or regulations to the Internet, could hinder growth in use of the Internet and online services generally, and decrease acceptance of the Internet and online services as a means of communication, commerce and advertising. In addition, it could increase our costs of doing business, subject our business to increased liability or prevent us from delivering our services over the Internet, thereby harming our business and operating results.


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If a third party asserts that we are infringing its intellectual property, it could subject us to costly and time-consuming litigation or require us to obtain expensive licenses, which could harm our competitive position, operating margin and financial condition.
 
The Internet, software and technology industries are generally characterized by the importance of trade secrets, patents, trademarks, service marks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. Third parties may assert patent and other intellectual property infringement claims against us in the form of lawsuits, letters or other types of communications. For example, in the past we have been the subject of a trademark infringement claim. If a third party successfully asserts a claim that we are infringing its proprietary rights, royalty or licensing agreements might not be available on terms we find acceptable, or at all, or may result in injunctive relief prohibiting the sale of our services. As not all currently pending patent applications are publicly available, we cannot anticipate all possible claims or know with certainty whether our technology infringes the intellectual property rights of third parties. We expect that the number of infringement claims will increase as the number of services and competitors in our industry grows. These claims against us, whether or not successful, could:
 
  •  divert our management’s attention;
 
  •  result in costly and time-consuming litigation;
 
  •  require us to seek to enter into royalty or licensing agreements, which might not be available on acceptable terms, or at all; or
 
  •  require us to redesign our software and services to avoid infringement.
 
As a result, any third-party intellectual property claims against us could increase our expenses and adversely affect our business. Even if we have not infringed a third party’s intellectual property rights, our legal defense could require us to expend significant financial and management resources and may prove unsuccessful.
 
The success of our business depends in large part on our ability to protect and enforce our intellectual property rights, and failure to do so could harm our business and operating results.
 
To establish and protect our intellectual property rights, we currently rely primarily on trade secret laws, confidentiality and non-compete restrictions and trademarks, all of which offer only limited protection. We enter into agreements with our employees and contractors, and parties with which we do business, in order to limit access to and disclosure of our proprietary information. The steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary rights or the reverse engineering of our technology. Moreover, others may independently develop technologies that are competitive with ours and our intellectual property protection may not prevent these competitors from selling services similar to ours.
 
We currently have no issued patents, and existing patent applications may not result in issued and valid patents. Any future issued patents or registered trademarks or service marks might not be enforceable or provide adequate protection for our proprietary rights.
 
Because of the global nature of the Internet, our websites can be viewed worldwide. However, we do not have intellectual property protection in every jurisdiction. Furthermore, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which our services become available over the Internet. In addition, the legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in Internet-related industries are uncertain and still evolving.


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Some of our services utilize “open source” software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.
 
Some of our services utilize software licensed by its authors or other third parties under so-called “open source” licenses, including, but not limited to, the GNU General Public License, GNU Lesser General Public License, the Mozilla Public License, the BSD License, the PHP License, the MySQL License and the Apache License. Some of those licenses may require as a condition of the license that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software, that we provide notices with our services, and/or that we license any modifications or derivative works under the terms of a particular open source license or other license granting certain rights of further use to third parties. If we combine our proprietary software with open source software in a certain manner, we could under some of the open source licenses be required to release the source code of our proprietary software. If an author or other third party that distributes open source software were to obtain a judgment against us based on allegations that we had not complied with the terms of any applicable open source license, we could be subject to liability for copyright infringement damages and breach of contract for our past distribution of that particular open source software. In addition, we could be enjoined from selling our services that contained the open source software and required to make the source code for the open source software available, to grant third parties certain rights of further use of our software or to remove the open source software from our services, which could disrupt our distribution and sale of some of our services.
 
We may be subject to and in violation of state private investigator licensing laws and regulations, which could adversely affect our ability to do business in some states and subject us to liability.
 
The laws and regulations relating to private investigator licensing requirements vary by state. If we do not comply with these laws and regulations, we may be subject to penalties or restrictions on our ability to continue our operations in certain states. We are not currently licensed as a private investigator in any state. We cannot assure you that we will not receive inquiries from, or be subject to, enforcement actions by state agencies. If we are required to cease or limit our operations in one or more states, it could have a material adverse effect on our business, financial condition and operating results.
 
Risks Related to This Offering and Our Common Stock
 
Our directors, executive officers and principal stockholders will continue to have substantial control over us after this offering and could delay or prevent a change in corporate control.
 
After this offering, our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, will beneficially own, in the aggregate,     % of our outstanding common stock. As a result, these stockholders, acting together, would have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, would have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of our common stock by:
 
  •  delaying, deferring or preventing a change in control of us;
 
  •  impeding a merger, consolidation, takeover or other business combination involving us; or


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  •  discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.
 
An active, liquid and orderly trading market for our common stock may not develop.
 
Prior to this offering, there has been no public market for any shares of our common stock. We and the representatives of the underwriters will determine the initial public offering price of our common stock through negotiation. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell shares of our common stock following this offering. In addition, the trading price of our common stock following this offering is likely to be volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include:
 
  •  quarterly variations in our operating results or those of our competitors;
 
  •  our ability to develop and market new and enhanced services on a timely basis;
 
  •  announcements by us or our competitors of significant acquisitions, new services, material contracts or new commercial relationships;
 
  •  changes in the makeup of competition for our various service offerings;
 
  •  commencement of, our involvement in, or results of litigation;
 
  •  a determination by the FTC that our consumer services are regulated by the FCRA;
 
  •  changes in federal, state or local regulation affecting our business;
 
  •  negative media coverage or legislative action focusing on us or our industry;
 
  •  changes in earnings estimates or recommendations by any public market analysts who elect to follow our company;
 
  •  whether any public market analysts choose to follow our company and continue to follow our company;
 
  •  any major change in our board of directors or management; and
 
  •  general economic conditions and slow or negative growth of our markets.
 
In addition, the stock market in general, and the market for the shares of Internet companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market prices of companies’ stock, including ours, regardless of their actual operating performance. These fluctuations may be even more pronounced in the trading market for our common stock shortly following this offering. In addition, in the past, following periods of volatility in the overall market and the market prices of particular companies’ securities, securities class action litigation has often been instituted against these companies. This type of litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
 
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and under Delaware law could discourage a takeover that stockholders may consider favorable.
 
Our amended and restated certificate of incorporation and amended and restated bylaws, each of which will become effective upon the completion of this offering, contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change of control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:
 
  •  authorize the issuance of 10,000,000 shares of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares to


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  discourage a takeover attempt or that could be used in connection with the adoption of a stockholder rights plan, or “poison pill”;
 
  •  prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
 
  •  prohibit stockholders from calling special meetings, which may deter a takeover attempt; and
 
  •  require advance notice of stockholder actions to be taken at a meeting of our stockholders.
 
In addition, because we are incorporated in Delaware, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirors to negotiate with our board of directors, they would apply even if an offer rejected by our board of directors were considered beneficial by some stockholders.
 
Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.
 
The initial public offering price of our common stock will be substantially higher than the net tangible book value per share of our common stock immediately after this offering. Therefore, if you purchase our common stock in this offering, you will incur an immediate dilution of $      in net tangible book value per share from the price you paid, based on the pro forma net tangible book value of our common stock at June 30, 2009 and an assumed initial public offering price of $      per share. If previously granted options to purchase shares of our common stock are exercised, additional dilution will occur. As of June 30, 2009, options to purchase 4,066,974 shares of our common stock at a weighted average exercise price of $5.24 per share were outstanding.
 
Future sales of shares by our existing stockholders or option holders could cause our stock price to decline.
 
If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the contractual lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline. Based on shares outstanding as of September 30, 2009, after this offering we will have a total of           shares of our common stock outstanding. Of these shares, the           shares of common stock to be sold in this offering will be freely tradable in the public market. Of the remaining 23,897,252 shares,           shares are subject to 180-day lock-up agreements between our stockholders and Deutsche Bank Securities Inc. and UBS Securities LLC, which may, in their sole discretion, permit our directors, officers, employees and stockholders to sell shares prior to the expiration of the 180-day contractual lock-up period. The remaining           shares of our common stock will be freely tradable immediately, without restriction, in the public market.
 
In addition, as of September 30, 2009, 4,103,612 shares underlying outstanding stock options will, to the extent they are exercised, become eligible for sale in the public market to the extent permitted by the provisions of various option agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act of 1933. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.


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Because management has broad discretion regarding the use of the net proceeds from this offering, you may not agree with how we use them, and these proceeds may not be invested successfully.
 
Our management will have broad discretion with respect to the net proceeds from this offering. We intend to use the net proceeds from the offering for working capital and other general corporate purposes. However, we are continuously seeking new opportunities to apply our information services platform to new service offerings, both within the United States and abroad, and some of the net proceeds may be used in pursuing one or more of these new opportunities. You will be relying on the judgment of our management concerning these uses, and you will not have the opportunity, as part of your investment decision, to assess whether the net proceeds will be used appropriately. The failure of our management to apply these proceeds effectively could result in unfavorable returns and uncertainty about our prospects, either of which could cause the price of our common stock to decline.
 
We have never paid cash dividends and we do not anticipate paying cash dividends in the foreseeable future.
 
We have never declared or paid cash dividends on our common stock. We intend to retain any earnings to finance the operation and expansion of our business, and we do not anticipate paying any cash dividends in the future. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases.


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
AND INDUSTRY DATA
 
This prospectus includes forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “will,” “would” and “could,” and similar expressions or phrases, identify forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
 
  •  anticipated growth of and trends in the market for information services provided over the Internet and for information services generally;
 
  •  our ability to anticipate market needs or to develop and release, on a timely basis, new or enhanced services to meet those needs;
 
  •  our ability to maintain our relationships with third-party websites and search engines, to expand those relationships, and to develop new online marketing relationships;
 
  •  our ability to generate greater awareness of our brand and to increase direct traffic to our websites;
 
  •  our ability to compete in our market;
 
  •  our intention to make acquisitions in the future, including our ability to identify acquisition targets and to manage any potential acquisitions successfully;
 
  •  our intention to expand into international markets in the future and our ability to manage this expansion;
 
  •  our future funding needs and ability to obtain funding on acceptable terms;
 
  •  our expectations regarding the use of net proceeds from this offering; and
 
  •  other statements regarding anticipated trends and challenges in our business and the markets in which we operate.
 
Forward-looking statements involve risks, assumptions and uncertainties. The occurrence of the events described, and the achievement of the expected results, depend on many events, some or all of which are not predictable or within our control. Actual results may differ materially from expected results. See the section titled “Risk Factors” and elsewhere in this prospectus for a more complete discussion of these risks, assumptions and uncertainties and for other risks and uncertainties. These risks, assumptions and uncertainties are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this prospectus might not occur. We assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as provided by law.
 
This prospectus also contains statistical data and estimates, including those relating to market size and growth rates of the markets in which we participate, that we obtained from industry publications and reports generated by, among others, BusinessWeek, comScore, eMarketer, IDC and Interactive Advertising Bureau. These publications and reports represent data, research opinions or viewpoints that are not representations of fact. They speak as of their original publication date, not as of the date of this prospectus, and these opinions are subject to change without notice.
 


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USE OF PROCEEDS
 
We estimate that our net proceeds from the sale of the common stock in this offering will be approximately $     , assuming an initial public offering price of $      per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and our estimated offering expenses. Each $1.00 increase or decrease in the assumed initial public offering price of $      per share would increase or decrease, as applicable, our net proceeds by approximately $      million, assuming the number of shares that we offer as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. If the underwriters’ option to purchase additional shares in this offering is exercised in full, we estimate that our net proceeds will be approximately $     .
 
We intend to use the net proceeds from this offering for working capital and other general corporate purposes, including to finance our growth, develop new service offerings and fund capital expenditures. In addition, we may choose to expand our current business through potential acquisitions of other complementary domain names, businesses, services or technologies. We do not, however, have any agreements or commitments for specific acquisitions at this time. We also are continuously seeking new opportunities to apply our information services platform to new service offerings, both within the United States and abroad, and some of the net proceeds may eventually be used in pursuing one or more of these new opportunities.
 
Our management will retain broad discretion in the allocation and use of the net proceeds of this offering, and investors will be relying on the judgment of our management regarding the application of these net proceeds. Pending the uses described above, we will invest the net proceeds from this offering in short-term, interest-bearing, investment-grade securities. We cannot predict whether this investment of the net proceeds will yield a favorable return.
 
DIVIDEND POLICY
 
We have never declared or paid cash dividends on our capital stock. We do not anticipate paying cash dividends within the foreseeable future. Any future determination to declare cash dividends would be made at the discretion of our board of directors, subject to our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors might deem relevant.


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CAPITALIZATION
 
The following table sets forth our cash and cash equivalents and our capitalization as of June 30, 2009:
 
  •  on an actual basis;
 
  •  on a pro forma basis to give effect to the conversion of all outstanding shares of convertible preferred stock into common stock on a one-to-one basis upon the completion of this offering; and
 
  •  on a pro forma as adjusted basis to give effect to (1) our receipt of the net proceeds from our sale of           shares of common stock in this offering at an assumed initial public offering price of $      per share, which is the midpoint of the range shown on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and our estimated offering expenses and (2) the filing of our amended and restated certificate of incorporation in Delaware in connection with the completion of this offering.
 
You should read this table in conjunction with the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.
 
                         
    As of June 30, 2009  
                Pro Forma
 
    Actual     Pro Forma     as Adjusted(1)  
    (In thousands, except share and per share data)  
 
Cash and cash equivalents
  $ 19,149     $ 19,149     $             
                         
Capital lease obligations
    76       76          
Stockholders’ equity:
                       
Convertible preferred stock, $0.0001 par value: 1,667,500 shares authorized, 1,667,500 issued and outstanding, actual; 1,667,500 shares authorized, no shares issued or outstanding, pro forma; no shares authorized, issued or outstanding, pro forma as adjusted
                   
Preferred stock, $0.0001 par value: 10,000,000 shares authorized, no shares issued or outstanding, actual, pro forma, and pro forma as adjusted
                   
Common stock, $0.0001 par value: 100,000,000 shares authorized, 22,146,870 shares issued and outstanding, actual; 100,000,000 shares authorized, 23,814,370 shares issued and outstanding, pro forma; 100,000,000 shares authorized,          shares issued and outstanding, pro forma as adjusted
    2       2          
Additional paid-in capital
    30,662       30,662          
Treasury stock
    (3,269 )     (3,269 )        
Retained earnings
    17,961       17,961          
                         
Total stockholders’ equity
    45,356       45,356          
                         
Total capitalization
  $ 64,581     $ 64,581     $  
                         
 
 
(1) Each $1.00 increase or decrease in the assumed initial public offering price of $      per share would increase or decrease, respectively, the amount of pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $      million, assuming the number of shares we offer,


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as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. If the underwriters’ option to purchase additional shares of our common stock in this offering is exercised in full, the amount of pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization would increase by approximately $     , and we would have           shares of our common stock issued and outstanding.
 
 
This table excludes the following:
 
  •  4,066,974 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $5.24 per share.
 
  •  1,341,944 unvested and outstanding restricted stock units; and
 
  •  4,180,472 shares that remain available for issuance pursuant to future awards under our 2005 Stock Incentive Plan.


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DILUTION
 
If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of common stock immediately after completion of this offering. Net tangible book value per share represents the amount of our total tangible assets (total assets less intangible assets) less the amount of our total liabilities, divided by the total number of shares of common stock outstanding.
 
As of June 30, 2009, the pro forma net tangible book value of our common stock was $19.8 million, or $0.83 per share. The pro forma net tangible book value of common stock gives effect to the conversion of all outstanding shares of our preferred stock into common stock upon the completion of this offering.
 
Assuming our sale of           shares of common stock in this offering at an initial public offering price of $      per share, after deducting estimated underwriting discounts and commissions and our estimated offering expenses, the pro forma as adjusted net tangible book value of our common stock as of June 30, 2009 would have been $      , or $      per share. This represents an immediate increase in net tangible book value of $      per share to our existing stockholders and an immediate dilution of $      per share to new investors purchasing shares in this offering. The following table illustrates this per share dilution:
 
                 
Assumed initial public offering price per share
          $        
Pro forma net tangible book value per share as of June 30, 2009, before giving effect to this offering
    0.83          
Increase per share attributable to this offering
               
                 
Pro forma as adjusted net tangible book value per share after giving effect to this offering
               
                 
Dilution per share to new investors in this offering
          $    
                 
 
A $1.00 increase or decrease in the assumed initial public offering price of $      per share would increase or decrease our pro forma as adjusted net tangible book value per share after this offering by $      per share and the dilution per share to new investors by $     , assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.
 
The following table shows, as of September 30, 2009, the number of shares of common stock purchased from us (assuming conversion of all preferred shares), the total consideration paid to us and the average price paid per share by existing stockholders and by new investors purchasing common stock in this offering at an assumed initial public offering price of $      per share, before deducting the estimated underwriting discounts and commissions and our estimated offering expenses.
 
                                         
                            Average
 
    Shares Purchased     Total Consideration     Price per
 
    Number     Percent     Amount     Percent     Share  
 
Existing stockholders
    23,897,252       %     $ 19,448,484       %     $ 0.814  
New investors
                                                                                    
                                         
Total
                     %     $         %          
                                         
 
A $1.00 increase or decrease in the assumed initial public offering price of $      per share would increase or decrease, respectively, total consideration paid by new investors and total consideration paid by all stockholders by approximately $      million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.


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The above discussion and tables are based on 23,897,252 shares outstanding as of September 30, 2009, and do not reflect:
 
  •  4,103,612 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $5.30 per share;
 
  •  1,324,544 unvested and outstanding restricted stock units; and
 
  •  4,069,102 shares that remained available for issuance pursuant to future awards under our 2005 Stock Incentive Plan.
 
If the underwriters exercise in full their over-allotment option to purchase up to           additional shares from us in this offering, our pro forma as adjusted net tangible book value per share as of September 30, 2009 would be $     , representing an immediate increase in pro forma net tangible book value per share attributable to this offering of $      to our existing stockholders and an immediate dilution per share to new investors in this offering of $     . If the underwriters’ over-allotment option is exercised in full, our existing stockholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding after this offering.
 
Assuming the exercise in full of outstanding stock options, the pro forma as adjusted net tangible book value as of June 30, 2009 would have been $      per share, representing an immediate dilution of $      per share to new investors in this offering. Assuming the exercise in full of the outstanding stock options, the shares purchased by the new investors would constitute     % of all shares purchased from us, and the total consideration paid by new investors would constitute     % of the total consideration paid for all shares purchased from us. In addition, the average price per share paid by existing stockholders would be $     .


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SELECTED CONSOLIDATED FINANCIAL DATA
 
The following tables present selected consolidated financial data for our business. The consolidated statements of operations data for the years ended December 31, 2006, 2007 and 2008 and the consolidated balance sheet data as of December 31, 2007 and 2008 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2004 and 2005 and the consolidated balance sheet data as of December 31, 2004, 2005 and 2006 have been derived from our audited consolidated financial statements not included in this prospectus. The consolidated statements of operations data for the six months ended June 30, 2008 and 2009, and the consolidated balance sheet data as of June 30, 2009 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements include, in the opinion of management, all adjustments, which include only normal recurring adjustments, that management considers necessary for the fair presentation of the financial information set forth in those consolidated financial statements. You should read this financial data in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements, related notes and other financial information included elsewhere in this prospectus. The consolidated financial data in this section is not intended to replace the consolidated financial statements and is qualified in its entirety by the consolidated financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future.
 
Consolidated Statements of Operations Data
(in thousands, except per share data)
 
                                                         
          Six Months
 
          Ended
 
    Year Ended December 31,     June 30,  
    2004     2005     2006     2007     2008     2008     2009  
                                  (unaudited)  
 
Consolidated Statements of Operations Data:
                                                       
Revenues
  $ 18,122     $ 44,040     $ 54,720     $ 88,529     $ 122,949     $ 63,898     $ 74,184  
                                                         
Costs and expenses:
                                                       
Content and support
    3,162       5,262       6,752       13,895       18,235       8,285       11,246  
Sales and marketing
    11,015       26,415       35,545       48,194       68,497       31,714       43,741  
Product development
    825       1,064       1,490       3,328       5,713       2,604       4,436  
General and administrative
    1,433       1,831       3,916       6,210       10,105       4,660       14,580 (1)
                                                         
Total costs and expenses
    16,435       34,572       47,703       71,627       102,550       47,263       74,003  
                                                         
Operating income
    1,687       9,468       7,017       16,902       20,399       16,635       181  
Interest and other expenses
                      (108 )     (7 )     (4 )     (17 )
Write-off of initial public offering costs
                            (1,217 )            
Interest income
    9       39       147       215       287       186       5  
                                                         
Income before income taxes
    1,696       9,507       7,164       17,009       19,462       16,817       169  
Provision for income taxes
    556       3,223       2,647       5,885       7,265       5,902       2,730  
                                                         
Net income (loss)
  $ 1,140     $ 6,284     $ 4,517     $ 11,124     $ 12,197     $ 10,915     $ (2,561 )
                                                         
 
 
(1) General and administrative expenses include a $7.0 million litigation settlement and a $1.3 million reserve for vendor deposit.


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          Six Months Ended
 
    Year Ended December 31,     June 30,  
    2004     2005     2006     2007     2008     2008     2009  
                                  (unaudited)  
 
 
Net income (loss) per share(1):
Basic:
                                                       
Class A common stock and common stock
  $ 0.06     $ 0.31     $ 0.22     $ (0.14 )   $ 0.56     $ 0.50     $ (0.12 )
Class B common stock, giving effect to distributed earnings to Class B common stockholders
  $ 0.06     $ 0.31     $ 0.22     $ 1.75 (2)   $     $     $  
Diluted:
                                                       
Class A common stock and common stock
  $ 0.05     $ 0.28     $ 0.20     $ (0.14 )   $ 0.49     $ 0.43     $ (0.12 )
Class B common stock, giving effect to distributed earnings to Class B common stockholders
  $ 0.05     $ 0.28     $ 0.20     $ 1.75 (2)   $     $     $  
Shares used in calculation of net income (loss) per share:
                                                       
Basic:
                                                       
Class A common stock and common stock
    11,900       12,103       12,405       13,235       21,867       21,868       21,860  
Class B common stock
    8,100       8,100       8,100       7,425                    
Diluted:
                                                       
Class A common stock and common stock
    13,909       14,380       14,769       13,235       25,100       25,131       21,860  
Class B common stock
    8,100       8,100       8,100       7,425                    
 
Pro forma net income (loss) per share excluding the distribution to Class B common stockholders and assuming the conversion of Class B common stock into Class A common stock as of January 1, 2007 at the conversion ratio of 1-to-1.15 (unaudited)(3):
Basic
  $ 0.06     $ 0.31     $ 0.22     $ 0.51     $ 0.56     $ 0.50     $ (0.12 )
Diluted
  $ 0.05     $ 0.28     $ 0.20     $ 0.45     $ 0.49     $ 0.43     $ (0.12 )
Shares used in calculation of pro forma net income per share:
                                                       
Basic
    20,000       20,203       20,505       21,772       21,867       21,868       21,860  
Diluted
    22,009       22,480       22,869       24,457       25,100       25,131       21,860  
 
 
(1) See Note 2 to our consolidated financial statements regarding the calculation of net income (loss) per share.
 
(2) Includes a $14.1 million distribution of earnings to Class B common stockholders, representing the fair value of additional shares of Class A common stock issued to the holders of Class B common stock in excess of shares issuable under the original conversion ratio.
 
(3) See “Pro Forma Net Income (Loss) per Share” below regarding pro forma net income (loss) per share.


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Pro Forma Net Income (Loss) per Share (unaudited)
 
We have included in our selected consolidated financial data the presentation of pro forma net income (loss) per share which excludes the distribution to holders of Class B common stock and assumes the conversion of Class B common stock into Class A common stock as of January 1, 2007 at the conversion rate of 1 to 1.15 to provide greater comparability between the periods presented. The change in the conversion ratio was accounted for as a distribution of earnings to holders of Class B common stock. We believe this presentation is useful for an understanding of the trends in our net income (loss) per share.
 
As discussed in Note 6 to our consolidated financial statements, on November 30, 2007, we amended our certificate of incorporation to change the ratio at which the shares of Class B common stock converted into shares of Class A common stock. Prior to that amendment, each share of Class B common stock was convertible into one share of Class A common stock. Effective with the amendment, each share of Class B common stock was convertible into 1.15 shares of Class A common stock. The change in the conversion ratio resulted in a 1,215,000 share increase in the number of shares of Class A common stock into which the Class B common stock was convertible. We determined that the fair value of the additional shares was $14.1 million.
 
We determined that the change in the conversion ratio between Class B and Class A common stock was analogous to an inducement offer as defined in SFAS No. 84,“Induced Conversion of Convertible Debt.”
 
We further decided to treat the induced conversion of Class B common stock in a manner analogous to the treatment of the induced conversion of the preferred stock as prescribed by Emerging Issues Task Force, or EITF, Issue D-42, “The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock.”
 
As a result, we accounted for the change in the conversion ratio as a distribution of earnings to Class B common stockholders in the amount of the fair value of the additional shares issuable to Class B common stockholders on conversion. This distribution of earnings was deducted from net income to arrive at undistributed net earnings available to common stockholders for the purposes of calculation of earnings per share.


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The table below presents the calculation of pro forma net income (loss) per share and the reconciliation of the numerator used for the net income (loss) per share calculation and the numerator used for the pro forma net income (loss) per share calculation (in thousands except per share data):
 
                                                                         
          Six Months
 
    Year Ended December 31,     Ended June 30,  
    2004     2005     2006     2007     2007     2007     2008     2008     2009  
                      Class A and
                               
                      Class B
                               
                      Common on a
                               
                      Combined
                (2)
    (2)
    (2)
 
                      Basis Prior to
                Class A
    Class A
    Class A
 
    Class A and
    Class A and
    Class A and
    Allocation of
          (1)
    Common
    and
    Common
 
    Class B
    Class B
    Class B
    Undistributed
    Class A
    Class B
    and
    Class B
    and
 
    Common     Common     Common     Income     Common     Common     Common     Common     Common  
                                              (unaudited)  
 
 
Pro forma net income (loss) per share excluding the distribution to Class B common stockholders and assuming the conversion of Class B common stock into Class A common stock as of January 1, 2007 at the conversion rate of 1 to 1.15 (unaudited):
Numerator:
                                                                       
Net income (loss)
  $ 1,140     $ 6,284     $ 4,517     $ 11,124     $     $     $ 12,197     $ 10,915     $ (2,561 )
Denominator for basic pro forma income per share excluding the distribution to Class B common stockholders
    20,000       20,203       20,505       21,772                   21,867       21,868       21,860  
Denominator for diluted pro forma income per share excluding the distribution to Class B common stockholders
    22,009       22,480       22,869       24,457                       25,100       25,131       21,860  
Basic pro forma income (loss) per share excluding the distribution to Class B common stockholders
  $ 0.06     $ 0.31     $ 0.22     $ 0.51                     $ 0.56     $ 0.50     $ (0.12 )
Diluted pro forma income (loss) per share excluding the distribution to Class B common stockholders
  $ 0.05     $ 0.28     $ 0.20     $ 0.45                     $ 0.49     $ 0.43     $ (0.12 )
 
Reconciliation of the numerator used for basic and diluted earnings per share and the numerator used for pro forma basic and diluted earnings per share excluding the distribution to Class B common stockholders and assuming the conversion of Class B common stock into Class A common stock as of January 1, 2007 at the conversion rate of 1 to 1.15 (unaudited):
Numerator for basic and diluted earnings (loss) per share:
                                                                       
Net income (loss)
  $ 1,140     $ 6,284     $ 4,517     $ 11,124                     $ 12,197     $ 10,915     $ (2,561 )
Less:
                                                                       
Distributed earnings to Class B common stockholders in the amount of the fair value of additional Class A common stock issued to the holder of Class B common stock in excess of the original conversion ratio
                      (14,058 )                                  
                                                                         
Undistributed net income (loss) available to common stockholders
    1,140       6,284       4,517       (2,934 )                     12,197       10,915       (2,561 )
                                                                         
Net income (loss) available to common stockholders on the allocated basis
  $ 1,140     $ 6,284     $ 4,517             $ (1,880 )   $ (1,054 )   $ 12,197     $ 10,915     $ (2,561 )
                                                                         


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Consolidated Balance Sheet Data
(in thousands)
 
                                                 
    As of December 31,     As of June 30,  
    2004     2005     2006     2007     2008     2009  
                                  (unaudited)  
 
Cash and cash equivalents
  $ 1,757     $ 2,983     $ 5,327     $ 11,811     $ 24,876     $ 19,149  
Working capital
    685       4,154       4,438       13,011       14,313       14,759  
Total assets
    5,241       15,933       22,961       39,493       76,528       73,521  
Deferred revenue
    155       1,119       1,508       1,274       4,684       5,686  
Total long-term liabilities
    31       1,281       634       384       3,350       2,360  
Total stockholders’ equity
    2,329       10,358       15,881       29,104       43,779       45,356  


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this prospectus.
 
Overview
 
We are a leading online information commerce company that provides information services to consumers and enterprises. Our consumer information services include search services and monitoring services that help consumers find information about people, businesses and assets, and manage personal information security risks. Our enterprise information services principally include employment-related screening and management services. We generate revenues primarily from consumers who purchase our services on a pay-per-use or subscription basis, from companies that provide directory services to customers we have referred to them, and from online merchants that provide targeted advertising to our customers.
 
We sell information services through our network of owned and operated websites, including our primary website, www.Intelius.com. The Intelius network of websites was one of the top 100 most visited web properties in the United States for September 2009, according to comScore Media Metrix, a leading Internet audience measurement firm. We have established relationships with leading online portals and directories, including Yahoo! and AT&T, that market our services on their websites and direct visitors to our websites.
 
We were formed in January 2003 and began offering our People Search service in February 2003 and our Background Check service in April 2003. Since then, we have periodically released new information services, as well as enhancements and variations of our existing services. We also have acquired businesses, domain names and other assets that have extended our network of websites and enhanced our ability to market our services. For example, in August 2005 we acquired Qwil Company, which operated the website www.addresses.com, for a purchase price of $3.8 million in cash and stock; in November 2006 we acquired substantially all of the assets of IntelliSense Corporation, an employment screening business, for $2.5 million in cash and stock; in December 2008 we acquired Zaba, Inc. for $14.0 million in cash; and in April 2009 we acquired substantially all of the assets of Spock Networks, Inc. for $3.7 million in cash and stock.
 
We generate revenues from the sale of information services, on a pay-per-use or subscription basis, and through advertisements shown to our customers and visitors of our websites. Our revenues have grown from $54.7 million in 2006 to $88.5 million in 2007 to $122.9 million in 2008. Our revenues for the first six months of 2009 were $74.2 million as compared to $63.9 million in the first six months of 2008.
 
We generated net income of $4.5 million in 2006, $11.1 million in 2007, and $12.2 million in 2008. We incurred a net loss of $2.6 million in the first six months of 2009 as compared to net income of $10.9 million in the first six months of 2008.
 
Sources of Revenues
 
We sell our services, which include the license to use our proprietary software to access our platform, primarily to consumers, and since 2005 we have also sold services to enterprise


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customers. The table below presents our consumer and enterprise revenues for 2006, 2007 and 2008, as well as for the first six months of 2008 and 2009 (in thousands):
 
                                         
          Six Months
 
    Years Ended December 31,     Ended June 30,  
    2006     2007     2008     2008     2009  
                      (unaudited)  
 
Consumer Revenues:
                                       
Information Services
  $ 51,649     $ 67,386     $ 81,197     $ 36,925     $ 51,160  
Advertising
          13,043       33,204       22,636       18,637  
                                         
Total Consumer Revenue
    51,649       80,429       114,401       59,561       69,797  
Enterprise Revenue
    3,071       8,100       8,548       4,337       4,387  
                                         
Total Revenue
  $ 54,720     $ 88,529     $ 122,949     $ 63,898     $ 74,184  
                                         
 
Consumer Revenues
 
Consumer revenues include revenues from sales of information services to consumers and fees charged to online marketers for advertising to our customers and visitors to our websites.
 
Information Services
 
Our information services include search services and monitoring services:
 
Search services revenues are primarily generated from sales of our Background Check, Phone Number Verification and People Search services. We sell these services on a per transaction basis and deliver the services over the Internet in the form of reports that can be viewed on screen or printed. Customers typically pay by credit card at the time of purchase over the Internet, and we recognize revenues at the time of the transaction. Unearned revenues are recorded when payments are made by customers for volume purchases of reports in advance of report delivery and amortized into revenues as the reports are delivered. Each transaction is considered a single delivered element. As a result, the entire fee is recognized when the reports are delivered to the customer. We do not provide post-contract support services and have no ongoing obligation after the delivery of the reports.
 
Revenues from business search fees are earned from online directory services companies and are based on cost-per-search, or CPS, pricing arrangements. Business search revenues are recognized when a user completes a search for information about a business on an Intelius website and the search result is provided by an online directory services company.
 
Monitoring services revenues consist primarily of sales of our Identity Protect offering. Our monitoring services are sold on a subscription basis, over terms ranging from one month to three years, for which we charge the customer upfront and recognize revenues ratably on a straight-line basis over the subscription period.
 
For distribution relationships in which we share a portion of the revenues earned through a distributor’s website, revenues are recorded on a gross basis in accordance with EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.”
 
Advertising
 
Advertising revenues are derived primarily from post-transaction advertising and, to a lesser extent, display advertising on our websites. Revenues from post-transaction advertising are based on cost-per-action, or CPA, pricing arrangements. We recognize revenues from CPA arrangements when our customers accept an offer for services of a third-party merchant displayed on an Intelius website. Revenues from display advertising are derived from cost-per-click, or CPC, and cost-per-impression, or CPM, pricing arrangements. In the case of


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CPC arrangements, we generate revenues from the display of text and image-based links to the websites of our advertisers, which are placed on our websites. We recognize revenues from these arrangements when a user clicks on the advertisement. Revenues from CPM arrangements are generated from the display of graphical advertisements placed on our websites. We recognize revenues as “impressions,” which is the number of times that an advertisement appears in pages viewed by users of our websites, are delivered.
 
Enterprise Revenues
 
Enterprise revenues include the sales of information services, including Employment Screening and Tenant Screening, to businesses and other organizations. We recognize revenues as services are delivered, and we typically bill our enterprise customers monthly based on the quantity of services delivered.
 
Consumer Transactions
 
We believe that the number of consumer transactions is an important indicator of trends in our consumer revenue. We generate consumer information services revenues and advertising revenues primarily from consumer transactions on our websites. We define consumer transactions as purchases of consumer information services, including both pay-per-use and monthly subscription charges, net of refunds.
 
The table below presents the number of our consumer transactions for 2006, 2007 and 2008, as well as for the first six months of 2008 and 2009 (in thousands):
 
                                         
    Year Ended December 31,   Six Months Ended June 30,
    2006   2007   2008   2008   2009
 
Consumer transactions
    1,893       2,283       3,761       1,680       2,597  
 
Costs and Expenses
 
Content and Support
 
Content and support costs consist of content, customer support, credit card processing and website maintenance costs. To provide our information services, we draw on a wide variety of offline and online data sources, including third parties that compile public, publicly available and commercial record information, national credit repositories and government agencies. Content costs, which represent the majority of our content and support costs, consist of fees paid to third parties for content or data and our internal costs of data processing. Our content costs include fixed monthly fee arrangements for unlimited data access, and variable fee arrangements based on data usage. Our content costs should decrease as a percentage of revenues over time as we leverage these data sources across our service offerings and distribution relationships.
 
Customer support costs reflect compensation-related expenses for our call center employees. Credit card processing costs consist of transaction processing fees that we incur for credit card collections. Website maintenance costs consist of expenses incurred by our network operations, including personnel, depreciation of network equipment, data center lease and operating costs and bandwidth fees. Content and support costs also include allocated facilities and other overhead costs.
 
Sales and Marketing
 
Sales and marketing expenses consist of advertising and marketing programs, compensation and related expenses for our enterprise sales force and other marketing personnel and amortization of intangible assets. The majority of our sales and marketing


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expenses are related to online advertising and marketing initiatives to attract visitors to our websites and sell our services. Our online advertising and marketing relationships require us to make payments according to revenue-sharing, CPC, CPM or fixed-fee pay structures. We also incur additional expenses to develop our brand, including expenses relating to broadcast and print advertising, trade shows, marketing collateral and public relations. These costs should decrease as a percentage of revenues over time as we increase the number of our service offerings and develop direct relationships with our consumer base to drive more repeat purchases. To the extent that online advertising costs rise, we may incur unanticipated, significant increases in the costs of attracting customers to our websites, and sales and marketing expenses could increase as a percentage of revenues.
 
Amortization of marketing-related and customer-related intangible assets and other related costs consist primarily of amortization expense for domain names that we have acquired to attract more direct customer traffic, including domain names and customer relationships we obtained through acquisitions. Sales and marketing costs also include allocated facilities and other overhead costs.
 
Product Development
 
Product development expenses consist primarily of research and development activities to develop new service offerings and maintain and significantly enhance existing service offerings. Costs of internal use software are accounted for in accordance with Statement of Position, or SOP, 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” and Emerging Issue Task Force, or EITF, Issue No. 00-02, “Accounting for Website Development Costs.” SOP 98-1 and EITF 00-02 require that we expense computer software and website development costs as they are incurred during the preliminary project and maintenance stages. During the application development stage, external direct costs of materials and services consumed in developing or obtaining internal use software, including website development, the payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal use computer software and associated interest costs, are capitalized. No costs have been capitalized to date as these costs have not been considered material.
 
General and Administrative
 
General and administrative expenses consist of costs of legal, consulting and accounting services, allocated facilities and other personnel and overhead costs, including corporate officers, state and local taxes and insurance costs.
 
Stock-Based Compensation
 
SFAS No. 123(R), “Share-Based Payment,” requires measurement of compensation expense for all stock-based awards at fair value on the date of grant and recognition of compensation expense over the service period for awards expected to vest. We determine the fair value of our stock options using the Black-Scholes valuation model. Restricted stock units, or RSUs, and restricted stock awards are measured based on the fair market values of the underlying stock on the dates of grant.
 
The application of the Black-Scholes model to the valuation of options requires the use of input assumptions, including expected volatility, expected term, expected dividend rate and expected risk-free rate of return. Expected volatilities are based on those of similar publicly traded companies, as our stock is not currently publicly traded and, therefore, we do not have observable share-price volatility. The expected term represents the weighted-average period of time that options granted are expected to be outstanding, giving consideration to vesting schedules. The dividend rate is based on our history of not paying dividends and the low


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resultant future expectation of dividend payments; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected term of the option.
 
Stock-based compensation expenses recognized since the adoption of SFAS No. 123(R) are based on the grant date fair value of awards ultimately expected to vest. We estimate expected forfeiture rate at the time of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
 
We recorded stock-based compensation expenses of $0.7 million in 2006, $1.8 million in 2007 and $5.2 million in 2008. We recorded $3.5 million of stock-based compensation expenses in the first six months of 2009, as compared to $2.7 million in the first six months of 2008. At June 30, 2009, we had $18.0 million of unrecognized compensation expense related to unvested stock options.
 
We allocate stock-based compensation expenses among content and support, sales and marketing, product development and general and administrative expenses based on the job function of the holders of the outstanding stock options, as follows (in thousands):
 
                                         
          Six Months
 
    Year Ended December 31,     Ended June 30,  
    2006     2007     2008     2008     2009  
                      (unaudited)  
 
Stock-based compensation expense included in:
                                       
Content and support
  $ 14     $ 52     $ 194     $ 111     $ 140  
Sales and marketing
    218       559       1,127       596       629  
Product development
    106       252       902       452       793  
General and administrative
    387       934       2,930       1,507       1,978  
                                         
Total stock-based compensation expense
  $ 725     $ 1,797     $ 5,153     $ 2,666     $ 3,540  
                                         
 
Results of Operations
 
We have experienced revenue growth since our inception, particularly in consumer revenues, which have grown due to our ability to increase the number of transactions we conduct with consumers. We have increased, and expect to continue to increase, our information services revenues and the number of consumer transactions by introducing new services, enhancing our existing offerings, and attracting new customers through new distribution relationships.
 
In 2003, we launched our site with a limited number of service offerings, including People Search and Background Check. Between 2004 and 2007, we entered into a number of distribution agreements, including with Yahoo! and AT&T, made significant enhancements to our Background Check and People Search services and introduced IDWatch, which directly contributed to our revenue growth during these years. In 2007, we introduced a number of new services, including Business Search. Our Business Search revenues have grown significantly due to the expansion of our distribution relationships, as these relationships have been a large source of additional business search queries.
 
We also expect to increase our revenues from sales of consumer information services to customers who come directly to our websites. In the past two years, the number of transactions and revenues from customers who come directly to our websites has increased, which has improved our margins because we incur minimal incremental sales and marketing costs from sales to these customers in comparison with customers we acquire through our distribution relationships. Future growth in consumer information services will depend on our ability to introduce compelling services at prices that provide significant value for consumers and our ability to sell additional services to our customers. As we continue to grow the


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number of consumer transactions and the number of subscription customers, we expect information services to increase as a percentage of total revenues.
 
Advertising revenues have been a key contributor to revenue growth and profitability since our introduction of post-transaction advertising in 2007. In May 2008, we undertook an initiative to significantly improve the transparency and customer experience related to this third-party advertising. As a result, we reduced the frequency with which we advertise to our customers, resulting in a reduction in advertising revenues in the third quarter of 2008. We expect advertising revenues to decline as a percentage of total revenues from current levels.
 
Enterprise revenues have grown significantly since our November 2006 purchase of IntelliSense Corporation, which we have integrated into our screening platform to enhance our Employment Screening and Tenant Screening services. A number of new services were introduced in 2007 and 2008, which also resulted in revenue growth. While we expect enterprise revenues to continue to grow, we believe enterprise revenues will decrease as a percentage of total revenues as consumer revenues grow at a faster rate.
 
Costs and expenses increased in 2007, 2008 and 2009 due to investments that we made in personnel and infrastructure, content, and sales and marketing to support revenue growth. Content and support costs have increased, as we invested in additional content required for new services that we launched in 2007, 2008 and 2009, including iSearch, a social network people search service. Our acquisition of IntelliSense in November 2006 also significantly increased our content and support costs. From late 2007 and through 2009, we invested in a new network operations center in Tukwila, Washington. We expect to make additional facility investments in 2010.
 
Sales and marketing expenses constitute the majority of our operating expenses and has increased as our information services revenues have grown. These expenses are closely related to our information services revenues, as they include payments to our distribution partners and costs for online advertising to attract new customers. We expect the price of online advertising and our costs for acquiring new customers to increase; however, we believe that this impact may be partially offset by growth in revenues generated from repeat customers and from recurring subscription revenues.
 
In 2007, we created a new software development environment to enhance and accelerate the process of developing and delivering new services to consumers, which resulted in increased product development expenses. Our product development expenses primarily consist of personnel and related expenses, and we expect them to grow as we expand and improve our service offerings; however, we expect product development expenses to decrease as a percentage of total revenues in future periods.
 
General and administrative expenses have generally increased due to additional finance and accounting personnel anticipation of becoming a public company. We have also incurred significant professional fees associated with our efforts to become a public company. In 2009 and 2010, we expect general and administrative costs to increase as we deploy a new enterprise resource planning software system to support our continued growth. Due to the investments we have made over the last two years and our pace of revenue growth, we expect operating expenses to decrease as a percentage of total revenues.
 
In 2009, we leased 24,154 square feet in Bothell, Washington to take advantage of current market rates for rent expense, as well as accommodate anticipated growth. Our Bothell office houses all customer service, enterprise content and support personnel, and enterprise sales and marketing operations. The five-year lease has a total lease inducement of $0.7 million, which includes termination fees of our prior lease, all tenant improvements, furniture purchases, and four months of free rent. The resulting average monthly rent is $26,000. As of


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September 30, 2009, the building housed 155 employees and had a capacity of approximately 175 employees.
 
The following table provides financial data as a percentage of revenues for the periods indicated:
 
                                         
    Year Ended December 31,     Six Months Ended June 30,  
    2006     2007     2008     2008     2009  
                      (unaudited)  
 
Revenues
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
                                         
Costs and expenses:
                                       
Content and support
    12.3 %     15.7 %     14.8 %     13.0 %     15.2 %
Sales and marketing
    65.0 %     54.4 %     55.7 %     49.6 %     59.0 %
Product development
    2.7 %     3.8 %     4.6 %     4.1 %     6.0 %
General and administrative
    7.2 %     7.0 %     8.2 %     7.3 %     19.7 %
                                         
Total costs and expenses
    87.2 %     80.9 %     83.4 %     74.0 %     99.8 %
                                         
Operating income
    12.8 %     19.1 %     16.6 %     26.0 %     0.2 %
Interest and other expenses
    0.0 %     (0.1 )%     0.0 %     0.0 %     0.0 %
Write-off of initial public offering costs
    0.0 %     0.0 %     (1.0 )%     0.0 %     0.0 %
Interest income
    0.3 %     0.2 %     0.2 %     0.3 %     0.0 %
                                         
Income before income taxes
    13.1 %     19.2 %     15.8 %     26.3 %     0.2 %
Provision for income taxes
    4.8 %     6.6 %     5.9 %     9.2 %     3.7 %
                                         
Net income (loss)
    8.3 %     12.6 %     9.9 %     17.1 %     (3.5 )%
                                         
 
Six Months Ended June 30, 2008 and June 30, 2009
 
Revenues
 
                         
    Six Months
   
    Ended June 30,   Percent
    2008   2009   Increase
    (unaudited)    
 
Revenues (in thousands)
  $ 63,898     $ 74,184       16.1 %
 
Total revenues increased $10.3 million for the six months ended June 30, 2009, compared to the same period in 2008. This was driven primarily by an increase in consumer revenues of $10.2 million, which was attributable to an increase in consumer information service revenues of $14.2 million, or 38.6%, offset by a decline of $4.0 million, or 17.7%, in advertising revenues. The volume of consumer transactions increased to $2.6 million for the six months ended June 30, 2009 from $1.7 million for the same period in 2008.
 
Consumer information services revenues increased primarily due to increased sales of our subscriptions monitoring services, in particular our Identity Protect service, which we introduced in April 2008. The growth in revenues from our monitoring services reflects our increased marketing of these services, and increased consumer awareness and demand for identity theft protection services. We also experienced growth from our Business Search service as a result of an increased number of queries. Yellow Book USA, Inc. was our primary Business Search relationship and accounted for 14.8% and 12.3% of our total revenues for the first six months of 2009 and 2008, respectively. We expect consumer information services revenues to continue to increase in future periods as a result of the growing demand for our search and monitoring services and our planned increase in spending on sales and marketing.


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The decrease in advertising revenues was due to active promotion of our own subscription offerings and reduced use of third-party post-transaction advertising. We generated most of our advertising revenues from Adaptive Marketing, which accounted for 26.2% and 35.7% of our total revenues for the first six months of 2009 and 2008, respectively. Adaptive Marketing was also a customer for some of our information services.
 
Enterprise revenues increased by $50,000, or 1.2%, for the six months ended June 30, 2009, compared to the same period in 2008. We believe the economic downturn in the United States has affected hiring decisions, resulting in less demand for employment screening services from our existing customers. We have, however, been able to offset this impact through the acquisition of new enterprise customers.
 
Costs and Expenses
 
Content and Support
 
                         
    Six Months
   
    Ended June 30,   Percent
    2008   2009   Increase
    (unaudited)    
 
Content and support (in thousands)
  $ 8,285     $ 11,246       35.7 %
Content and support (as % of revenues)
    13.0 %     15.2 %        
 
Content and support costs increased by $3.0 million for the six months ended June 30, 2009, compared to the same period in 2008, primarily due to content cost, customer support, network operations, and associated headcount. Content costs increased $1.0 million due to a higher volume of sales and the purchase of new data associated with new product offerings. Customer support costs increased by $0.6 million primarily due to increased costs of merchant processing fees of $0.5 million. Network operations increased by $0.3 million as we expanded our network operations center to support increased transaction loads. Personnel-related costs increased by $0.8 million due to increased headcount to support our new network operations center, offices in Bothell, Washington and increased headcount in our enterprise operations.
 
Sales and Marketing
 
                         
    Six Months
   
    Ended June 30,   Percent
    2008   2009   Increase
    (unaudited)    
 
Sales and marketing (in thousands)
  $ 31,714     $ 43,741       37.9 %
Sales and marketing (as % of revenues)
    49.6 %     59.0 %        
 
Sales and marketing expenses increased by $12.0 million for the six months ended June 30, 2009, compared to the same period in 2008.
 
Advertising and marketing programs increased by $9.4 million, which is the result of increased online advertising on search engines and new online advertising campaigns designed to drive additional consumers to our websites. Payments to our distribution partners also increased during the period.
 
Amortization of marketing-related and customer-related intangible assets and other related costs increased by $1.2 million. Amortization consists primarily of amortization expense for domain names that we have acquired to attract more direct customer traffic, including domain names and customer relationships we obtained through acquisitions.
 
Consulting costs associated with re-branding and advertising campaigns increased by $0.6 million and marketing personnel costs increased by $0.7 million.


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Product Development
 
                         
    Six Months
   
    Ended June 30,   Percent
    2008   2009   Increase
    (unaudited)    
 
Product development (in thousands)
  $ 2,604     $ 4,436       70.4 %
Product development (as % of revenues)
    4.1 %     6.0 %        
 
Product development expenses increased by $1.8 million for the six months ended June 30, 2009, compared to the same period in 2008. Headcount increased from 35 to 62 during this period as the result of internal growth and the Spock Networks acquisition. Additional personnel costs associated with the Spock Networks hires that support new product development increased expenses by $1.5 million.
 
General & Administrative
 
                         
    Six Months
   
    Ended June 30,   Percent
    2008   2009   Increase
    (unaudited)    
 
General and administrative (in thousands)
  $ 4,660     $ 14,580       212.9 %
General and administrative (as % of revenue)
    7.3 %     19.7 %        
 
General and administrative expenses increased by $9.9 million for the six months ended June 30, 2009, compared to the same period in 2008. The settlement of the Qwil Company litigation of $7.0 million, along with associated legal fees of $0.5 million, and the reserve taken for a deposit paid by us to a vendor who filed for bankruptcy protection under Chapter 11 of $1.3 million, were the major factors contributing to the increase. Personnel costs, including stock-based compensation, increased $0.7 million.
 
Provision for Income Taxes
 
                         
    Six Months
   
    Ended June 30,   Percent
    2008   2009   Increase
    (unaudited)    
 
Provision for income taxes
  $ 5,902     $ 2,730       (53.7 )%
Provision for income taxes (as % of revenue)
    9.2 %     3.7 %        
 
The decrease in the provision for income taxes is primarily the result of a decrease in pre-tax income. This decrease is offset by the expenses related to the Qwil litigation settlement, which are being treated as non-deductible capital costs for tax purposes.
 
Years Ended December 31, 2007 and 2008
 
Revenues
 
                         
    Year Ended December 31,   Percent
    2007   2008   Increase
 
Revenues (in thousands)
  $ 88,529     $ 122,949       38.9 %
 
Total revenues increased by $34.4 million in 2008, as compared to 2007, primarily due to an increase in consumer revenues of $34.0 million. The increase in consumer revenues was primarily driven by growth in consumer transactions, which increased from 2.3 million in 2007 to 3.8 million in 2008.
 
Consumer information services revenues increased from $67.4 million in 2007 to $81.2 million in 2008, due to the introduction of our Business Search and Identity Protect


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services, which we launched in April 2007 and May 2008, respectively, and the addition of new distribution relationships, which drove additional customers to our websites. Yellow Book USA, Inc. was our primary Business Search directory vendor and accounted for 15.3% and 11.4% of our total revenues in 2008 and 2007, respectively.
 
Advertising revenues increased from $13.0 million in 2007 to $33.2 million in 2008, primarily due to the increase in volume of post transaction advertising. We generated most of our advertising revenue from Adaptive Marketing, which accounted for 17.2% and 27.7%, of our total revenues in 2007 and 2008 respectively. Adaptive Marketing was also a customer for some of our information services.
 
Enterprise revenues increased from $8.1 million in 2007 to $8.5 million in 2008, primarily due to increased sales of Employment Screening as a result of introduction of a number of new services and growth in customer base due to various marketing initiatives.
 
Costs and Expenses
 
Content and Support
 
                         
    Year Ended
   
    December 31,   Percent
    2007   2008   Increase
 
Content and support (in thousands)
  $ 13,895     $ 18,235       31.2 %
Content and support (as % of revenues)
    15.7 %     14.8 %        
 
Content and support costs increased by $4.3 million in 2008 compared to 2007, primarily due to increases in the costs for website maintenance and customer support.
 
Approximately $1.7 million of the increase in content and support costs represents increased expenses for the hosting and maintenance of our off-site network operating center. In the fourth quarter of 2007, we invested in our network infrastructure needed for the expansion of our website capacity by adding a larger network operation center at a new location, resulting in the increase in hosting fees. Throughout 2008, we also made significant investments in network equipment that subsequently resulted in an increase in related depreciation expenses.
 
Approximately $1.7 million of the increase in content and support costs was attributable to higher compensation-related expenses in network operations and customer support related to increased headcount. The headcount increases resulted in higher costs of expanded facilities and office expenses. Personnel and office expenses increased primarily due to the expansion of our customer support group and the expansion of website capacity and related infrastructure of the network operations. Office depreciation rent and supplies increased by $0.7 million. The remainder of the increase was due to $0.6 million increase in payment processing and web hosting fees associated with increased sales volumes. The increases are offset slightly by $0.7 million decrease in content and support costs.
 
Sales and Marketing
 
                         
    Year Ended
   
    December 31,   Percent
    2007   2008   Increase
 
Sales and marketing (in thousands)
  $ 48,194     $ 68,497       42.1 %
Sales and marketing (as % of revenues)
    54.4 %     55.7 %        
 
Sales and marketing expenses increased by $20.3 million in 2008 as compared to 2007. $18.9 million of this increase reflects payments for online advertising in connection with increased sales and expanded programs with our distribution relationships. An additional $1.1 million was associated with the higher compensation expense of our growing sales and


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marketing staff, including revenue-based commissions and stock-based compensation. The remainder was due to the increased amortization of intangible assets, primarily domain names, as we acquired new websites during 2008.
 
Product Development
 
                         
    Year Ended
   
    December 31,   Percent
    2007   2008   Increase
 
Product development (in thousands)
  $ 3,328     $ 5,713       71.7 %
Product development (as % of revenues)
    3.8 %     4.6 %        
 
Product development expenses increased by $2.4 million in 2008 as compared to 2007. This increase was principally attributable to an increase in compensation expense of $2.1 million, including stock-based compensation, related to the hiring of additional personnel.
 
General and Administrative
 
                         
    Year Ended
   
    December 31,   Percent
    2007   2008   Increase
 
General and administrative (in thousands)
  $ 6,210     $ 10,105       62.7 %
General and administrative (as % of revenues)
    7.0 %     8.2 %        
 
General and administrative expenses increased by $3.9 million in 2008 as compared to 2007. Of this amount, $3.1 million was attributable to higher compensation expense, including stock-based compensation, related to the hiring of additional personnel. The remainder of the increase in general and administrative expenses was attributable to higher allocated corporate overhead expenses and higher business taxes related to the expansion of our operations.
 
Initial Public Offering Costs
 
We had capitalized all external legal and accounting costs directly attributable to a proposed initial public offering, or IPO. In recognition of the unsettled financial markets and under the guidance of SEC Staff Accounting Bulletin Topic 5A, in September 2008 we expensed cumulative IPO costs totaling $1.2 million. At December 31, 2008 there were no capitalized IPO costs recorded on the balance sheet. As of June 30, 2009, $71,700 in IPO costs had been recorded on the balance sheet in recognition of the renewed efforts towards an IPO.
 
Provision for Income Taxes
 
                         
    Year Ended December 31,   Percent
    2007   2008   Increase
 
Provision for income taxes
  $ 5,885     $ 7,265       23.4 %
Provision for income taxes (as % of revenue)
    6.6 %     5.9 %        
 
In 2008, we recognized a $7.3 million provision for income taxes, compared to $5.9 million in 2007, due to the increase in our pre-tax income. Our effective tax rate of 37.3% for 2008 was higher than the effective rate of 34.6% for 2007. This increase in the effective tax rate was primarily due to non-deductible costs associated with the write-off of IPO costs due to market conditions in the second half of 2008.


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Years Ended December 31, 2006 and 2007
 
Revenues
 
                         
    Year Ended
   
    December 31,   Percent
    2006   2007   Increase
 
Revenues (in thousands)
  $ 54,720     $ 88,529       61.8 %
 
The increase in revenues in 2007, as compared to 2006, was due primarily to the increase in consumer revenues of $28.8 million. The increase in consumer revenues was the result of increased volume of consumer transactions from the addition of new distribution relationships that drove additional customers to our websites, and increased consumer revenues per transaction due to the introduction of new service offerings and advertising. The volume of consumer transactions increased from 1.9 million in 2006 to 2.3 million in 2007.
 
Consumer information services revenues increased from $51.6 million in 2006 to $67.4 million in 2007, primarily due to the increased volume of sales of our existing services and the addition of new marketing relationships including expansion of our Business Search service, which helped drive additional visitors to our websites. Yellow Book USA, Inc. accounted for 4.8% and 11.4%, of our revenues in 2006 and 2007, respectively.
 
Advertising revenues were insignificant in 2006 and increased to $13.0 million in 2007. This increase in revenues was primarily the result of the introduction of post-transaction advertising in July 2007. We generated most of our advertising revenues from Adaptive Marketing, which accounted for 17.2% of our revenues in 2007. Adaptive Marketing was also a customer for some of our information services.
 
Enterprise revenues increased from $3.1 million in 2006 to $8.1 million in 2007, primarily due to increased sales of employment screening services as a result of our acquisition of IntelliSense Corporation in November 2006. The IntelliSense Corporation acquisition allowed us to expand our employment screening service offerings and provided us with a larger existing customer base for the related services.
 
Costs and Expenses
 
Content and Support
 
                         
    Year Ended
   
    December 31,   Percent
    2006   2007   Increase
 
Content and support (in thousands)
  $ 6,752     $ 13,895       105.8 %
Content and support (as % of revenues)
    12.3 %     15.7 %        
 
Content and support costs increased by $7.1 million in 2007 compared to 2006, primarily due to increases in the costs for content, website maintenance and customer support.
 
Of this increase, $4.4 million represented an increase in the cost of content purchased from outside vendors. The increase in content costs was primarily attributable to the further development of our employment screening services, associated with our acquisition of IntelliSense in November of 2006. Content and support costs also increased due to a higher volume of sales of our consumer information services. Approximately $1.5 million of the increase in content and support costs was attributable to higher compensation-related expenses in network operations and customer support related to increased headcount. The headcount increases resulted in higher costs of expanded facilities and office expenses, which increased by $0.6 million. Personnel and office expenses increased primarily due to the expansion of our customer support center stemming from our IntelliSense acquisition and the expansion of website capacity and related infrastructure of the network operations. The


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remainder of the increase was due to higher payment processing and web hosting fees associated with increased sales volumes.
 
Sales and Marketing
 
                         
    Year Ended
   
    December 31,   Percent
    2006   2007   Increase
 
Sales and marketing (in thousands)
  $ 35,545     $ 48,194       35.6 %
Sales and marketing (as % of revenues)
    65.0 %     54.4 %        
 
Sales and marketing expenses increased by $12.6 million in 2007 as compared to 2006. $10.5 million of this increase reflects payments for online advertising in connection with increased sales and expanded programs with our distribution partners. An additional $1.8 million was associated with the higher compensation expense of our growing sales and marketing staff, including revenue-based commissions and stock-based compensation. The remainder was due to the increased amortization of intangible assets, primarily domain names, as we acquired new websites during 2007.
 
Product Development
 
                         
    Year Ended
   
    December 31,   Percent
    2006   2007   Increase
 
Product development (in thousands)
  $ 1,490     $ 3,328       123.4 %
Product development (as % of revenues)
    2.7 %     3.8 %        
 
Product development expenses increased by $1.8 million in 2007 as compared to 2006. This increase was principally attributable to an increase in compensation expense of $1.6 million, including stock-based compensation, related to the hiring of additional personnel.
 
General and Administrative
 
                         
    Year Ended
   
    December 31,   Percent
    2006   2007   Increase
 
General and administrative (in thousands)
  $ 3,916     $ 6,210       58.6 %
General and administrative (as % of revenues)
    7.2 %     7.0 %        
 
General and administrative expenses increased by $2.3 million in 2007 as compared to 2006. Of this amount, $1.5 million was attributable to higher compensation expense, including stock-based compensation, related to the hiring of additional personnel, and $0.4 million was attributable to the increase in professional fees for accounting and consulting services.
 
The increase in accounting and consulting costs reflects costs for developing and implementing new internal control processes in connection with our efforts to prepare to meet the public company reporting requirements, as well as the increased complexity of our accounting operations in preparation for an initial public offering. The remainder of the increase in general and administrative expenses was attributable to higher allocated corporate overhead expenses and higher business taxes related to the expansion of our operations.
 
Provisions for Income Taxes
 
                         
    Year Ended December 31,   Percent
    2006   2007   Increase
 
Provision for income taxes
  $ 2,647     $ 5,885       122.3 %
Provision for income taxes (as % of revenue)
    4.8 %     6.6 %        


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In 2007, we recognized a $5.9 million provision for income taxes, compared to $2.6 million in 2006, due to the increase in our pre-tax income. However, our effective tax rate of 34.6% for 2007 was lower than the effective rate of 36.9% for 2006, due primarily to non-deductible permanent differences in 2006 resulting from the legal and accounting costs incurred as we began preparation for an initial public offering.
 
Quarterly Results of Operations
 
The following tables provide our unaudited results of operations, for each quarter in the ten-quarter period ended June 30, 2009. In our opinion, this unaudited information has been prepared on the same basis as our audited consolidated financial statements. This information includes all adjustments, which include only normal recurring adjustments, necessary for a fair presentation of the information for the quarters presented when read in conjunction with our consolidated financial statements and the notes to our consolidated financial statements. The results of operations for any quarter are not necessarily indicative of our future results.
 
                                                                                 
    Three Months Ended  
    3/31/07     6/30/07     9/30/07     12/31/07     3/31/08     6/30/08     9/30/08     12/31/08     3/31/09     6/30/09  
    (unaudited)  
 
Revenues
  $ 17,242     $ 17,745     $ 25,251     $ 28,291     $ 31,843     $ 32,055     $ 27,890     $ 31,161     $ 35,719     $ 38,465  
                                                                                 
Costs and expenses:
                                                                               
Content and support
    2,899       3,512       3,563       3,921       3,832       4,453       4,906       5,044       5,260       5,986  
Sales and marketing
    10,668       11,016       12,951       13,559       15,129       16,585       18,264       18,307       19,972       23,769  
Product development
    509       657       950       1,212       1,255       1,348       1,506       1,603       1,976       2,460  
General and administrative
    1,197       1,493       1,609       1,911       2,297       2,364       2,442       3,214       2,756       11,824  
                                                                                 
Total costs and expenses
    15,273       16,678       19,073       20,603       22,513       24,750       27,118       28,168       29,964       44,039  
                                                                                 
Operating income (loss)
    1,969       1,067       6,178       7,688       9,330       7,305       772       2,993       5,755       (5,574 )
Interest and other expenses
          (103 )     (3 )     (2 )     (2 )     (2 )     (2 )     (1 )     (16 )     (1 )
Write-off of initial public offering costs
                                        (1,217 )                  
Interest income
    44       37       36       98       89       97       98       3             5  
                                                                                 
Income (loss) before income taxes
    2,013       1,001       6,211       7,784       9,417       7,400       (349 )     2,995       5,739       (5,570 )
Provision for income taxes
    711       261       2,121       2,792       3,337       2,565       171       1,193       2,048       682  
                                                                                 
Net income (loss)
  $ 1,302     $ 740     $ 4,090     $ 4,992     $ 6,080     $ 4,835     $ (520 )   $ 1,802     $ 3,691     $ (6,252 )
                                                                                 
 
Our revenues increased each quarter from the second quarter of 2007 to the second quarter of 2008 primarily as a result of the introduction of post-transaction advertising and new information services.
 
Our revenues declined in the third quarter of 2008 relative to the second quarter of 2008 primarily because we reduced our use of post-transaction advertising, as we undertook efforts to improve the transparency and customer experience related to post-transaction offers. The decline in revenue was offset in part by sales of our Identity Protect subscription offering.
 
Our revenues increased in each quarter following the third quarter of 2008 primarily as a result of increases in the volume of transactions of our Identity Protect service and in advertising revenues.
 
Our content and support costs have generally increased throughout 2007, 2008 and the first two quarters of 2009, consistent with increases in revenues.
 
Our sales and marketing expenses increased in 2007, 2008 and the first two quarters of 2009, as a result of increased spending on web advertising, which contributed to increased revenues.
 
Our product development expenses have increased due to the growth in our engineering staff dedicated to developing new information services.


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Our general and administrative expenses have continued to increase as a result of the increase in our finance and accounting personnel and increased professional fees related to preparation for an initial public offering. In the second quarter of 2009, general and administrative expenses increased as a result of settling a lawsuit for $7.0 million with former shareholders of Qwil and reserving $1.3 million for a deposit paid by us and held by a vendor that has filed for Chapter 11 bankruptcy protection.
 
Liquidity and Capital Resources
 
Since our inception, we have funded our operations and met our capital expenditure requirements primarily from operating cash flow and the sale of equity securities. As of December 31, 2007, December 31, 2008 and June 30, 2009, we had $11.8 million, $24.9 million and $19.1 million, respectively, in cash and cash equivalents. Our working capital as of December 31, 2007, as of December 31, 2008 and as of June 30, 2009 was $13.0 million, $14.3 million, and $14.8 million, respectively.
 
The following table presents a summary of our cash flows for the years ended December 31, 2006, 2007 and 2008 and for the six months ended June 30, 2008 and 2009 (in thousands):
 
                                         
          Six Months
 
    Year Ended December 31,     Ended June 30,  
    2006     2007     2008     2008     2009  
                      (unaudited)  
 
Net cash provided by operating activities
    $9,308     $ 12,842     $ 20,228       $9,881       $13,383  
Net cash used in investing activities
    (6,872 )     (6,660 )     (4,488 )     (3,314 )     (18,256 )
Net cash provided by (used in) financing activities
    (92 )     302       (2,675 )     69       (854 )
 
Operating Activities
 
Our operating activities provided net cash of $9.3 million, $12.8 million and $20.2 million in 2006, 2007 and 2008, respectively. Our operating activities provided net cash of $9.9 million and $13.4 million in the first six months of 2008 and 2009, respectively. This net cash provided by operating activities resulted primarily from net income except for the first six months of 2009 in which the net loss of $2.6 million was offset primarily by stock based compensation of $3.5 million, amortization of $3.2 million, depreciation of $1.3 million, and an increase in accrued expenses of $7.7 million primarily related to the Qwil legal settlement.
 
The difference between our net income and our net cash provided by operating activities was attributable to non-cash expenses included in net income, and changes in the operating assets and liabilities, as presented below (in thousands):
 
                                         
          Six Months
 
    Year Ended December 31,     Ended June 30,  
    2006     2007     2008     2008     2009  
                      (unaudited)  
 
Operating activities:
                                       
Net income (loss)
  $ 4,517     $ 11,124     $ 12,197     $ 10,915       $(2,561 )
Add: non-cash expenses in operating activities
    3,364       5,644       10,933       5,557       9,074  
Add (deduct): changes in operating assets and liabilities
    1,427       (3,926 )     (2,902 )     (6,591 )     6,870  
                                         
Net cash provided by operating activities
  $ 9,308     $ 12,842     $ 20,228       $9,881       $13,383  
                                         
 
Non-cash expenses are associated with the amortization of databases and other intangible assets, depreciation and amortization of property and equipment, stock-based compensation


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expenses resulting from the issuance of stock options, awards, and units, and deferred income taxes.
 
Changes in operating assets and liabilities primarily reflect changes in working capital components of the balance sheet apart from cash and cash equivalents. Net cash provided by operating activities also reflects changes in some non-current components of the balance sheet, such as long-term deferred revenue, long-term deferred rent, long-term tax assets and liabilities and non-current deposits.
 
Investing Activities
 
Net cash used in investing activities was $6.9 million, $6.7 million and $4.5 million in 2006, 2007 and 2008 respectively. Net cash used in investing activities was $3.3 million and $18.3 million in the first six months of 2008 and 2009, respectively. Net cash used in investing activities in 2006, 2007 and 2008 and the first six months of 2008 was primarily the result of purchases of property and equipment, databases and other intangible assets. In 2006 and in the first six months of 2009, in addition to purchases of property and equipment, our net cash used in investing activities also reflected acquisitions of businesses. In 2006, $2.2 million of cash was paid in connection with the acquisition of IntelliSense Corporation. In the first six months of 2009, $14.0 million in cash was paid in connection with the acquisition of Zaba, Inc. and an additional $2.0 million in cash was used in the acquisition of certain assets of Spock Networks, Inc.
 
In 2006, 2007 and 2008, intangible asset purchases of $3.8 million, $2.9 million and $2.3 million reflected primarily the acquisition of domain names that allowed us to expand our customer base. In 2006, 2007 and 2008, net cash used in investing activities included $0.9 million, $3.8 million and $2.1 million of fixed asset purchases, primarily aimed at the expansion of our network operational capacity and the expansion of office facilities to support our growth. In the first six months of 2008 and 2009, net cash used in investing activities included $1.8 million and $1.7 million of equipment purchases, respectively. Those purchases were primarily related to network operations equipment in connection with the addition of a new network operation center and our expansion into a new office in Bothell, Washington.
 
Financing Activities
 
Net cash used in financing activities of $0.1 million in 2006 reflected the final part of a repayment of a loan to a stockholder. Our acquisition of Qwil Company in August 2005 resulted in indebtedness to the primary shareholder of Qwil, which we repaid in several installments during the second half of 2005 and in the first quarter of 2006.
 
In 2006, the net cash used in financing activities was partially offset by proceeds from the issuance of stock upon the exercise of employee stock options. In 2007, the net cash provided by financing activities of $0.3 million reflected primarily the proceeds from the issuance of common stock upon the exercise of employee stock options. In 2008, the net cash used in financing activities reflected $2.8 million used in acquisition of treasury stock, and $0.2 million payment on settlement of Restricted Share Units. The net cash used by financing activities of $0.9 million in the first six months of 2009 reflected $0.5 million used in acquisition of treasury stock, and $0.3 million payment on settlement of Restricted Share Units.
 
We believe that the net proceeds we will receive from this offering, together with our existing cash and cash equivalents and any operating cash flow, will be sufficient to meet our projected operating and capital expenditure requirements for at least the next 12 months. However, our ability to generate cash is subject to our performance, general economic conditions, industry trends and other factors. To the extent that funds from this offering, together with existing cash and cash equivalents, are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. If


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additional funds are obtained by issuing equity securities, substantial dilution to existing stockholders may result. We may be unable to secure additional funds on terms favorable to us or at all.
 
Contractual Obligations and Contingencies
 
We lease office space under operating leases that are non-cancelable. Our facilities commitments include leases for our corporate headquarters in Bellevue, Washington and for our office in Bothell, Washington. Additionally, we lease small sales offices in a few other states. Our operating leases expire at various times between 2009 and 2012.
 
Since March 2007, we have leased computer equipment under a three-year capital lease.
 
Our purchase obligations include primarily the arrangements to acquire data that we use to provide our consumer information services, as well as guaranteed minimums on certain advertising contracts and payments for hosting our network operations center.
 
Our contractual commitments at June 30, 2009 are presented below (in thousands):
 
                                 
                Purchase
       
Six Months Ending December 31,
  Operating     Capital     Obligations     Total  
 
2009
  $ 759     $ 43     $ 1,025     $ 1,827  
                                 
Year Ending December 31,
                               
2010
    1,501       35       1,517       3,053  
2011
    1,475             644       2,119  
2012
    1,075             92       1,167  
2013
    480             35       515  
Thereafter
    121                   121  
                                 
    $ 5,411     $ 78     $ 3,313     $ 8,802  
                                 
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements as defined under Item 303 of Regulation S-K.
 
Critical Accounting Policies
 
Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate significant estimates used in preparing our financial statements, including those related to:
 
  •  revenue recognition, including allowances for estimated sales returns and uncollectible accounts;
 
  •  stock-based compensation;
 
  •  the allocation of purchase price in business combinations to intangible assets; and
 
  •  accounting for goodwill and other long-lived intangible assets.
 
We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily


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apparent from other sources. Actual results may differ from these estimates if our assumptions change or if actual circumstances differ from those in our assumptions.
 
We believe the following critical accounting policies affect the more significant judgments and estimates used in preparing our consolidated financial statements.
 
Revenue Recognition
 
We recognize revenues when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectibility is reasonably assured.
 
In general, we generate revenues either by charging our customers fees for information services or by providing advertising through Company-owned websites. We have restructured our product line reporting to reflect our current lines of business including the transition from third-party, post-transaction offerings to in-house information offerings meeting the same need and the growth in business information search products. We also sell information services to enterprises. Those services include employment and tenant screening and are sold on a transaction or subscription basis. Enterprise customers are ordinarily billed on a monthly basis for services provided; however, we also make prepayment arrangements available to our customers.
 
All of our information services include a license to use our proprietary software to access our platform. Each transaction is considered a single delivered element. As a result, the entire fee is recognized when the reports are delivered to the customer. We do not provide post-contract support services and have no ongoing obligation after the delivery of the reports.
 
Unearned revenues are recorded when payments are made by customers for volume purchases of reports in advance of report delivery and amortized into revenues as the reports are delivered. Revenues from the sale of subscriptions and continuous services are also deferred and recognized ratably on a straight-line basis over the term of the agreement, ranging from one month to three years.
 
We also generate revenues from advertising. These revenues consist of post-transaction advertising fees and, to a lesser extent, fees for display advertisements placed on selected sections of our websites.
 
Revenues from post-transaction advertising fees are based on cost-per-action, or CPA, arrangements. Revenues generated from CPA arrangements are recognized when our customers accept an offer for services of a third-party merchant displayed on Intelius websites.
 
Revenues from display advertising are derived from cost-per-click, or CPC, and cost-per-impression, or CPM, arrangements. In the case of CPC arrangements, we generate revenues from the display of text and image based links to the websites of our advertisers, which are placed on our websites. We recognize revenues from these arrangements as “click-throughs” occur. A “click-through” occurs when a user clicks on an advertiser’s listing. Revenues on CPM contracts are recognized as “impressions,” which is the number of times that an advertisement appears in pages viewed by users of our websites, are delivered.
 
For distribution relationships in which we share a portion of the revenues earned through a distributor’s website, revenues are recorded on a gross basis in accordance with EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.”
 
We record an allowance for estimated returns in the same period the related revenues are recorded. This estimated allowance is based on historical return rates and other known factors. The returns can be either voluntarily authorized by us at the customer’s request or can be initiated by consumers through their credit card issuer in the form of a chargeback, which is a reversal of the original transaction based on a customer dispute. The timeframe to initiate a


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chargeback varies by issuer, however is generally limited to a maximum of 180 days from the date of original sale. Federal laws limit the timeframe to challenge credit card charges for customer disputes to one year from the date of transaction. Historically, substantially all of our voluntary returns, as well as chargebacks, occurred within three months from the original sale.
 
We record an allowance for uncollectible accounts based upon our assessment of various factors. We consider historical experience, the age of the accounts receivable balances, the credit quality of our customers, current economic conditions and other factors that may affect customers’ ability to pay to determine the level of allowance required.
 
Concentration of Risks
 
We generate a majority of our revenues from two customers. These customers represented the following percentages of our revenues for the periods indicated:
 
                                         
    Year Ended December 31,   Six Months Ended June 30,
    2006   2007   2008   2008   2009
 
Yellow Book USA, Inc. 
    4.8 %     11.4 %     15.3 %     12.3 %     14.8 %
Adaptive Marketing LLC
    0.0 %     17.2 %     27.7 %     35.7 %     26.2 %
 
Accounts receivable related to these customers represented the following percentage of our accounts receivable as of the dates indicated:
 
                         
    December 31,
  December 31,
  June 30,
    2007   2008   2009
 
Yellow Book USA, Inc. 
    31.6 %     30.6 %     25.8 %
Adaptive Marketing LLC
    43.2 %     42.6 %     47.0 %
 
Cash and Cash Equivalents
 
At December 31, 2007 and 2008, cash equivalents consisted primarily of money market funds held at one commercial bank. At June 30, 2009, cash equivalents consisted primarily of treasury securities maturing between one week and three months held in trust for us by an investment bank. At December 31, 2007 and 2008, cash equivalents totaled $9.8 million and $17.9 million respectively. At June 30, 2009, cash equivalents totaled $17.0 million.
 
Fair Values of Financial Instruments
 
The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates their fair value based on the liquidity of these financial instruments or based on their short-term nature.
 
We maintain cash at a commercial bank insured by the Federal Deposit Insurance Corporation, or FDIC, and invest excess cash in trust in its name through an investment banking firm. At times, the balances in these commercial bank accounts may be in excess of the FDIC insurance limit of $250,000.
 
Business Combinations
 
On January 1, 2009, we adopted SFAS No. 141(R), “Business Combinations.” We accounted for the acquisition of Spock Networks using SFAS No. 141(R) and will account for future business combinations using this acquisition method. Among the more significant changes are the following:
 
  •  acquisition related costs are expensed under SFAS No. 141(R), while previously included in purchase allocation under SFAS No. 141;


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  •  in-progress research and development is capitalized under SFAS No. 141(R), while previously expensed under SFAS No. 141; and
 
  •  the acquisition date is the date on which the acquirer assumes control of the acquired entity under SFAS No. 141(R), while previously the acquisition date was the date assets were received or consideration given and the acquisition date could be set by agreement at the beginning of an accounting period under SFAS No. 141.
 
Prior to the adoption of SFAS No. 141(R), we accounted for business combinations, including the Zaba, Inc. acquisition on December 31, 2008 (more fully described in footnote 11), using the purchase method of accounting prescribed by SFAS No. 141, “Business Combinations.” Under SFAS No. 141, the total consideration paid in an acquisition is allocated to the fair value of the acquired company’s identifiable assets and liabilities. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. The consolidated financial statements reflect the results of operations of an acquired business from the completion date of an acquisition. The costs to acquire a business, including transaction costs, are allocated to the fair value of net assets acquired.
 
We identified and recorded separately the intangible assets acquired apart from goodwill based on the specific criteria for separate recognition established in SFAS No. 141, namely:
 
  •  the asset arises from contractual or other legal rights; or
 
  •  the asset is capable of being separated from the acquired entity and sold, transferred, licensed, rented or exchanged.
 
Databases and Other Intangible Assets with Definite Lives
 
Databases consist of information used in our services and purchased from outside sources. Databases are amortized over the estimated useful life of seven years.
 
Other intangible assets with definite lives are comprised of domain names, customer relationships, noncompetition agreements and acquired technology. Other intangible assets are amortized over their estimated useful lives of three to seven years.
 
Impairment
 
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the carrying value of long-lived assets, including property and equipment and intangible assets with definite lives are reviewed on a regular basis for the existence of factors that may indicate that the assets are impaired. An asset is considered impaired when the estimated undiscounted future cash flows expected to result from its use and disposition are less than the amount of its carrying value. If the carrying value of an asset is deemed not recoverable, it is adjusted downward to the estimated fair value.
 
Goodwill
 
Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired, including domains and other definite-lived intangible assets, and liabilities assumed in business combinations accounted for under the purchase method.
 
Goodwill is not amortized, but instead tested for impairment at least annually or more frequently upon the occurrence of certain events. SFAS No. 142, “Goodwill and other Intangible Assets,” prescribes the use of the two-phase approach for testing goodwill for impairment. The first phase is a screen for potential impairment, while the second phase (if necessary) measures the amount of impairment, if any. Goodwill is written down and charged to operating results in periods in which the recorded value of goodwill exceeds its fair value.


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We conducted our most recent annual test for impairment as of September 2008. No impairment of goodwill has been recognized since the initial recording of goodwill.
 
Product Development
 
Costs of internal use software are accounted for in accordance with SOP 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” and EITF No. 00-02, “Accounting for Website Development Costs.” SOP 98-1 and EITF No. 00-02 require that we expense computer software and website development costs as they are incurred during the preliminary project and maintenance stages. During the application development stage, external direct costs of materials and services consumed in developing or obtaining internal-use software, including website development, the payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal use computer software and associated interest costs are capitalized. No costs have been capitalized to date as such costs have not been considered material.
 
Advertising Costs
 
We expense advertising costs as incurred. Total advertising expenses were approximately $30.3 million, $39.9 million and $58.2 million for the years ended December 31, 2006, 2007 and 2008, respectively. Total advertising expenses were approximately $26.7 million and $36.0 million for the six months ended June 30, 2008 and 2009, respectively.
 
Stock-Based Compensation
 
SFAS No. 123(R), “Share-Based Payment,” requires measurement of compensation expense for all stock-based awards at fair value on the date of grant and recognition of compensation expense over the service period for awards expected to vest. We determine the fair value of our stock options using the Black-Scholes valuation model. Restricted stock units, or RSUs, and restricted stock awards are measured based on the fair market values of the underlying stock on the dates of grant.
 
The application of the Black-Scholes model to the valuation of options requires the use of input assumptions, including expected volatility, expected term, expected dividend rate and expected risk-free rate of return. Expected volatilities are based on those of similar publicly-traded companies, as our stock is not currently publicly traded and therefore, we do not have observable share-price volatility. The expected term represents the weighted-average period of time that options granted are expected to be outstanding giving consideration to vesting schedules. The dividend rate is based on our history of not paying dividends and the low resultant future expectation of dividend payments; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected term of the option.
 
Stock-based compensation expenses recognized since the adoption of SFAS No. 123(R) are based on the grant date fair value of awards ultimately expected to vest. We estimate expected forfeiture rate at the time of grant and revise the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
 
The fair value of our common stock during the years ended December 31, 2007 and 2008, and June 30, 2009 was determined by our board of directors with assistance from our management. In conducting the contemporaneous valuations, we used a two-step methodology that first estimated the fair value of our company as a whole and then allocated a portion of the enterprise value to our common stock. This approach is consistent with the methods outlined in the AICPA Practice Aid, “Valuation of Privately-Held Company Equity Securities Issued as Compensation.”


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The valuation methodology used included both an “income approach” and a “market approach” to estimate enterprise value. The income approach involved forecasting future cash flows and discounting those cash flows to present value using an equity discount rate of 21%. Future cash flows were estimated by our management based on several factors, including:
 
  •  historical results;
 
  •  recently acquired assets;
 
  •  key customer contracts; and
 
  •  addition of new revenue opportunities.
 
The discount rate was estimated using the capital asset pricing model with a beta coefficient derived from guideline public companies.
 
The market approach consisted of identifying eight publicly-traded companies in the information retrieval services industries, computing pricing metrics such as “enterprise value to revenue” and “enterprise value to EBITDA” and applying these metrics to our revenues and EBITDA, respectively.
 
We also reviewed merger and acquisition pricing data from such sources as “Thomson Financial Mergers & Acquisitions.” The identified transaction metrics, “enterprise value to revenue” and “enterprise value to EBITDA” were applied to our revenues and EBITDA, respectively.
 
To allocate enterprise value to the various securities that comprise our capital structure, the probability expected return method was used. This allocation model was selected based on our belief that an initial public offering could be consummated in the foreseeable future and the potential increase in the value of our common stock that would accompany such an event. In implementing the probability expected return method, we:
 
  •  estimated an initial public offering price based on management’s revenue forecast and current pricing metrics;
 
  •  assigned a value to the company under a “stay private” scenario based on the income and market approaches discussed previously; and
 
  •  assigned a probability of occurrence to each of these potential outcomes based on our performance and stock market conditions.
 
Future value was then allocated to our equity securities based on each class’s rights and preferences. The allocated future value of each class of equity security was then discounted to the present based on a capital asset pricing model-derived discount rate.
 
Segment Information
 
SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” establishes standards for the manner in which companies report in their financial statements information about operating segments, products, services, geographic areas and major customers. We operate in one industry segment, which entails providing information-based intelligence services and search and marketing services to consumers and enterprises. The business activities in which we engage are similar in nature, representing primarily service activities provided over the Internet. Management, including the chief operating decision maker, evaluates our performance based on our overall operating results. Separate profitability or discrete financial information is not analyzed for particular individual services. Therefore, under SFAS No. 131, we do not present a disaggregation of consolidated financial results into multiple operating segments, products, or services.


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Income Taxes
 
We record federal and state income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Deferred income assets and liabilities reflect the tax effect of temporary differences between the valuation of assets and liabilities for financial reporting purposes and valuation as measured for tax purposes as well as for tax net operating loss and credit carryforwards if it is more likely than not that the tax benefits will be realized. In June 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation Number, or FIN, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting and disclosure requirements for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109. The interpretation prescribes the minimum recognition threshold and measurement attribute required to be met before a tax position that has been taken or is expected to be taken is recognized in the financial statements. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition, and clearly excludes uncertainty in income taxes from guidance prescribed by SFAS No. 5, “Accounting for Contingencies.” We adopted this interpretation on January 1, 2007. The adoption of FIN 48 did not have a material impact on our balance sheet or statement of income.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Critical accounting estimates involved in applying our accounting policies are those that require management to make assumptions about matters that are highly uncertain at the time the accounting estimate was made and those for which different estimates reasonably could have been used for the current period. Critical accounting estimates are also those which are reasonably likely to change from period to period and would have a material impact on the presentation of our financial condition, changes in financial condition or results of operations. Our most critical accounting estimates pertain to accounting policies for determining certain provisions, including allowance for returns and allowance for uncollectible accounts, useful lives for property and equipment, databases and other intangible assets, the fair value of Intelius’ common stock and stock option awards, the fair value of the Series A preferred stock, tax expense and related receivables or payables, and deferred revenue and other accruals.
 
These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts these estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, commodity and energy markets, and declines in consumer spending have combined to increase the uncertainty inherent in these estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
 
Recent Accounting Pronouncements
 
In April 2009, the FASB issued FASB Staff Position, or FSP, No. 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies,” to address application issues regarding the accounting and disclosure


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provisions for contingencies in SFAS No. 141(R). FSP 141(R)-1 generally applies to assets acquired and liabilities assumed in a business combination that would be within the scope of SFAS No. 5, Accounting for Contingencies, if acquired or assumed outside of a business combination. If an asset or a liability arising from a contingency does not meet the criteria for acquisition-date recognition, it should be accounted for in subsequent periods following other applicable generally accepted accounting principles, such as SFAS No. 5. FSP 141(R)-1 also amends the disclosure provisions of SFAS No. 141(R). FSP 141(R)-1 has the same effective date as SFAS No. 141(R), and therefore, is currently in effect. The adoption of FSP 141(R)-1 did not have a material impact on us.
 
Quantitative and Qualitative Disclosures about Market Risk
 
Our investment portfolio, consisting primarily of investment in treasury securities maturing between one week and three months held in trust for us by an investment bank, was $17.0 million as of June 30, 2009.
 
Treasury securities are subject to interest rate risk and will decline in value if market interest rates increase. If the market rates were to increase immediately, we may experience a decline in the fair value of our investment portfolio if we sell the securities before the maturity to meet any cash flow requirements. All our investments have very short term to maturity and, therefore, we would not expect to recognize any material adverse impact in income or cash flows due to a sudden increase in market rates.
 
We do not purchase or hold any derivative financial instruments for the purpose of speculation or arbitrage.
 
To date we have not recognized any operating revenues and have not entered into any material agreements denominated in other than U.S. dollars. Accordingly, we believe we have no material exposure to risk from changes in foreign currency exchange rates.
 
During the normal course of business we are subject to a variety of market risks, as we discussed above. We continuously assess these risks and have established policies and procedures to protect against the adverse effects of these and other potential exposures. Although we do not anticipate any material losses in these risk areas, no assurance can be made that material losses will not be incurred in these areas in the future.


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BUSINESS
 
Overview
 
We are a leading online information commerce company that provides information services to consumers and enterprises. Our consumer information services include search services and monitoring services that help consumers find information about people, businesses and assets, and manage personal information security risks. Our enterprise information services principally include employment-related screening and management services. We generate revenues primarily from consumers who purchase our services on a pay-per-use or subscription basis, from companies that provide directory services to customers we have referred to them, and from online merchants that provide targeted advertising to our customers.
 
We have developed a proprietary service delivery platform that provides customers with actionable information by applying our sophisticated analytics technology to publicly and commercially available data. Our accurate, timely and useful information services allow customers to make decisions regarding people, businesses and assets that are important to their private, professional and social lives.
 
We sell information services through our network of owned and operated websites, including our primary website, www.Intelius.com. The Intelius network of websites was one of the top 100 most visited web properties in the United States for September 2009, according to comScore Media Metrix, a leading Internet audience measurement firm. We have established relationships with leading online portals and directories, including Yahoo! and AT&T, that market our services on their websites and direct visitors to our websites.
 
Since our inception in January 2003, we have sold our information services to over nine million customer accounts. Our business has grown rapidly, increasing our revenues from $18.1 million in 2004, our first full year of operations, to $122.9 million in 2008, and from $63.9 million in the first six months of 2008 to $74.2 million in the first six months of 2009.
 
Industry Overview
 
Growth of Commerce and Advertising on the Internet
 
The Internet has become an increasingly important medium for commerce and entertainment, and an important source of information about people and businesses. Consumers are increasingly using free and paid Internet services to contact acquaintances, gather information about people and businesses, and expand social and professional networks. According to comScore Media Metrix, the number of online searches in the United States in September 2009 reached approximately 21.3 billion. BusinessWeek, a leading business publication, reported in July 2007 that over 30% of all online searches are for information about people.
 
While the Internet has become an excellent tool for finding information about people, it also has a wealth of detailed information on commercial products and services, which has been a key contributor to the growth and penetration of the Internet as a retail commerce channel. According to eMarketer, an Internet market research firm, consumer online commerce sales in the United States are expected to reach $300.6 billion in 2013 from $227.6 billion in 2008. Additionally, eMarketer estimates that over 68% of Internet users in the United States purchased a product or service online in 2008.
 
As online commerce has grown and consumer media consumption has migrated to the Internet, advertisers have begun shifting a greater proportion of their marketing budgets to the Internet. According to IDC, a leading independent research firm, online advertising spending in the United States reached $27.2 billion in 2008 and is projected to increase to $43.3 billion by 2013. According to Interactive Advertising Bureau, an Internet industry trade organization,


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within the online advertising market, performance-based advertising, such as cost-per-click and cost-per-action, is the largest and fastest growing segment, representing 57% of the market in 2008, up from 51% in 2007.
 
The Need for Information Services
 
In today’s society, individuals and businesses often must make critical decisions based on limited or fragmentary information. At the same time, the pace of decision-making has accelerated, and risks associated with decisions have increased, as society has become more mobile and contacts traditionally based on personal referrals have been replaced by more impersonal networks. In response to these developments, consumers and organizations are increasingly turning to the Internet for information services to make better-informed decisions about the people, businesses and assets with which they interact. Information services provide consumers and organizations with information to help them identify, monitor, interpret and respond to specific situations and their environment. Consumers may require basic information, such as phone numbers and addresses, or more advanced services, such as background screening, identity theft protection, credit monitoring and employment verification.
 
Sources of Information
 
A wealth of existing information can be used to provide services that help identify and locate individuals and businesses, manage information security and mitigate personal safety risks. This information falls into the following categories:
 
  •  Public Records.  Public records consist of information that is maintained by government agencies and is generally available, such as property title and lien documents, birth and death certificates, business records and court records. In addition, government organizations maintain information available only for restricted uses, including driving records and employment authorizations.
 
  •  Publicly Available Information.  Publicly available information consists of online and offline information that is generally available but is not maintained by a government agency, such as names, addresses and telephone numbers of individuals and businesses, professional licensing and trade organization information, press releases and newspaper articles. Publicly available information is increasingly available over the Internet due to the proliferation of online search engines, blogs, social networks and directories.
 
  •  Commercial Records.  Commercial records consist of information that is maintained by enterprises that is available for purchase, such as mailing and telemarketing lists, phone connect and disconnect information, and business profile data. Additionally, consumer credit profile information is available pursuant to the Fair Credit Reporting Act, or FCRA.
 
Challenges Faced by Existing Information Services
 
Most free and paid information services face significant challenges and frequently fail to provide consumers and enterprises with valuable, accurate and timely information about people, businesses and assets. These challenges include:
 
  •  Limited Breadth of Data Sources and Information.  Many available information services, including Internet search engines, public records and directories, provide access to a single data source or subset of available information, and are not comprehensive in nature.
 
  •  Failure to Integrate Data from Multiple Sources.  Data currently resides in disparate online and offline sources and in many different formats. In order to analyze the data


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  and present useful information to a consumer, the data must be aggregated and normalized into a consistent, meaningful format.
 
  •  Failure to Cleanse Out-of-Date or Conflicting Data.  Much of the public, publicly available and commercially available information is inaccurate or inconsistent, as many sources fail to regularly update their data and reconcile inaccurate and inconsistent data to create up-to-date records.
 
  •  Lack of Advanced Technologies to Analyze Data.  Few services apply the sophisticated analytics technologies required to transform raw data into valuable information from which consumers can make useful inferences.
 
  •  Lack of Relevant Information for Specific Decisions.  Many services aggregate large volumes of data but fail to integrate the data and present information in an organized and understandable format that can be used to make decisions.
 
  •  Lack of Automation and Efficiency.  Services that require extensive research, data collection, cleansing and analysis are often performed manually by private search firms and individuals. These services are time intensive, difficult to scale to large volumes and difficult to update.
 
  •  Failure to Provide Quality Services at an Affordable Price.  Due to the difficulties and inefficiency in aggregating and reconciling information from a myriad of sources, most service providers are unable to offer consumers quality services at attractive prices.
 
The Intelius Solution
 
We have developed a proprietary platform from which we deliver useful and timely information services to consumers over the Internet. Our platform dynamically accesses, collects and integrates data from thousands of online and offline data sources and uses sophisticated analytics technologies to cleanse, verify and augment this data in real time to provide our customers with actionable information. Our information services help our customers make important decisions about people, businesses and assets. These services include search services such as Background Check, People Search, Phone Number Verification and Property and Neighborhood Report, and monitoring services such as Identity Protect and Credit Reports and Scores. We sell our information services on a pay-per-use or subscription basis and enable online advertisers to provide targeted advertising to our customers. Key elements of our solution include:
 
Broad Portfolio of Information Services
 
We offer over 100 information services, including Identity Protect, Background Check, Phone Number Verification, People Search, and Property and Neighborhood Report, which address a variety of consumer and business demands. Our services provide consumers with valuable information that helps them address potential safety and security concerns, manage and protect their personal information and locate businesses or family, friends and colleagues with whom they have lost contact. We also offer enterprise information services to provide businesses with tools and services to identify, screen and administer prospective and current employees that can be used to mitigate risks, reduce costs, increase efficiency and address regulatory requirements.
 
Compelling Value and User Experience
 
We provide a high-quality user experience by delivering valuable services, an intuitive user interface and dedicated customer service at affordable prices. We sell our consumer information services on a pay-per-use or subscription basis at price points designed to appeal to a wide cross-section of consumers and to encourage repeat purchase activity. We provide our customers instant access to our services over the Internet through an easy-to-navigate user


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interface. We actively monitor trends in customer usage and market demand in order to continuously innovate and develop services that anticipate and respond to our customers’ evolving needs. We believe the compelling value and positive user experience we provide enhances customer satisfaction and increases customer loyalty.
 
Useful Information About People, Businesses and Assets
 
Our consumer information services are based on a collection of more than 15 billion public, publicly available and commercial records about people, businesses and assets. The innovative technologies built into our platform enable us to dynamically access, manage, integrate, cleanse and validate massive amounts of data in real time from hundreds of internal and external databases and repositories. This allows us to provide timely, useful and accurate information that helps consumers make better informed decisions.
 
Proprietary Technologies and Extensible Platform
 
We have developed advanced proprietary technologies that access, collect and normalize a broad range of consumer and business-related information. Our analytics technologies verify and augment multiple terabytes of data, usually in disparate formats and with varying degrees of accuracy and completeness, from a myriad of sources in order to make inferences and predictions based on this data. For example, our technologies enable us to construct a single identity profile for a person who has changed his or her last name, address or phone number. Furthermore, our extensible platform gives us the flexibility to develop and quickly bring to market new service offerings based on our existing technologies and information sources. This enables us to develop new sources of revenues without incurring significant incremental development costs.
 
Security and System Reliability
 
By leveraging standards-based technologies, we have implemented industry-leading security measures and innovative security technologies to enhance customer confidence when they are using our services or providing information to us. These security measures also conform to the security requirements of our commercial relationships, such as credit bureaus and credit card processors. To verify the robustness and compliance of our security technologies, we hire external consultants to perform extensive internal and external security audits on a quarterly basis. Furthermore, our infrastructure is designed to handle expanding volumes of customer visits, transactions and service offerings in an efficient and cost-effective manner.
 
Large Audience and Attractive Customer Base
 
In September 2009, the Intelius network of websites that attracts users interested in obtaining consumer information services drew over 11.7 million unique visitors in the United States, according to comScore Media Metrix. We have generated transactions from over nine million consumer accounts since our inception. In addition to the visitors who come to our websites directly, we draw visitors through our relationships with Internet portals and directories, such as Yahoo! and AT&T, that offer our services to their users and direct visitors to our websites. We believe that our customers and visitors to our websites appeal to advertisers because they have attractive demographic characteristics and have demonstrated the ability and willingness to purchase goods and services online.


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Our Strategy
 
Our objective is to be the leading provider of information services. Our strategy for achieving this goal includes the following initiatives:
 
Expand Our Customer Base.  We intend to grow our large, established customer base and reach a broader consumer audience by developing our existing distribution relationships with leading Internet companies, establishing new online distribution relationships, and adding new websites to our website network that attract consumers of information services. Additionally, we believe offline retail and mobile devices represent exciting new distribution channels for us to reach new consumers with our offerings.
 
Expand Our Portfolio of Service Offerings.  We closely follow broad consumer usage and Internet industry trends to identify new compelling services for our customers. We plan to continue to innovate, add new data sources and leverage our advanced technologies to develop new information service offerings for consumers. We also intend to optimize the way we offer these services, including through new subscription offerings such as Property and Neighborhood Report and Credit Reports and Scores. By developing new services and enhancing the depth and functionality of existing offerings, we believe we can reach new customers and increase sales to existing customers.
 
Increase Revenue Per Customer.  We seek to maximize our revenue per customer by up-selling, cross-selling and advertising. During the transaction process, we might up-sell by offering an enhanced version of the initially requested offering. We cross-sell complementary services, such as Identity Protect, and offer promotional pricing to entice customers to make additional purchases. We integrate advertising during the transaction process as another source of revenue. We continuously evaluate our transaction process for opportunities to increase revenues per customer through the introduction of additional product offerings.
 
Increase Repeat Purchase Activity.  Repeat customers generally account for a substantial portion of our revenues. We believe these customers are more likely to access our websites directly than are new customers, resulting in more profitable transactions. We intend to increase repeat purchase activity and customer loyalty by extending the breadth and quality of our service offerings, continuously improving our customer experience and providing excellent customer service. We actively promote our subscription service offerings to facilitate increased customer loyalty and repeat purchase activity.
 
Enhance Our Brand.  We plan to invest to enhance our brand. We intend to build a recognized brand through advertising and marketing initiatives, including online advertising, print and outdoor advertising, trade shows, viral marketing and word-of-mouth. We also intend to continue to enhance our brand through quality of service initiatives, maintaining industry best practices, such as expansion of our service center, and improving customer interfaces on our websites. In addition to raising public awareness, we believe that these brand-building initiatives will enhance our sales and profitability over the long term by attracting more direct traffic to our network of websites.
 
Expand Through Strategic Acquisitions.  We intend to pursue acquisitions of relevant domain names, as well as acquisitions of companies with complementary customers, technology and services, in order to augment our customer base, increase traffic to our websites, enhance awareness of our brand, add new services and provide new sources of revenues. To date, we have made acquisitions that have allowed us to increase direct traffic to our network of websites, improve our search engine relevance and expand our product offerings.
 
Consumer Services
 
We offer consumers a broad range of search and monitoring services that address their immediate needs for information about people, businesses and assets. Our search services are


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designed to help consumers identify and verify unknown or missing contact information for people and businesses, locate and connect with friends, colleagues and businesses, and acquire detailed information on real estate and other assets. Our monitoring services provide a comprehensive examination and ongoing monitoring of critical personal information, which can be used to alert consumers of potential identity theft and financial fraud concerns.
 
We utilize the most up-to-date, complete and accurate information available to us to create our service offerings, which we sell individually and in bundles of complementary services. Most of our services are offered to our customers in an easy-to-use and understandable format through our primary website, www.Intelius.com. Our core service offerings include:
 
Information Services
 
Search Services
 
Background Check provides a detailed examination of an individual’s personal history based on name and state of residence. It draws from thousands of continuously updated data sources that include government, criminal, court, property and other public and publicly available records. Background Check delivers a detailed analysis of an individual’s address history, aliases, criminal history, liens and judgments, bankruptcy, professional licenses, marriage, divorce, death, property and other asset information. Some components of Background Check are also available as individual offerings.
 
Business Search enables consumers searching for information, products and services to connect with merchants. Leading online directory services provide us with listing information about businesses and service providers related to a consumer’s search query. Our Business Search helps these online directories generate additional exposure for their merchant customers and helps merchants acquire customers and sell products and services.
 
People Search enables consumers to locate a physical address, email address and phone number information for individuals. This service analyzes billions of public and publicly available records, including addresses and daily phone connect and disconnect information, to deliver information that helps consumers locate family, friends and colleagues.
 
Date Check provides individuals with the information provided by our Background Check service and our Business People Search service along with a social network lookup.
 
Phone Number Verification enables consumers to identify phone numbers they do not recognize. It provides up-to-date information associated with residential, commercial, mobile, Internet, pager and pay phone numbers, listed and unlisted. Phone Number Verification provides our customers with the name, current address (when available), phone company and connection status of the unrecognized phone number.
 
Email Verification enables consumers to identify email addresses they do not recognize. Email Verification provides up-to-date information associated with an email address, including residential, commercial, mobile and Internet phone numbers and postal addresses by utilizing data sources containing both listed and unlisted numbers and addresses.
 
Identity Verification enables individuals or businesses to verify the identities of individuals based on information provided, including social security number, name, address, phone number and other key variables. This service searches for fraud and validates that an individual is using his or her true identity on an application or other form of registration.
 
Business People Search provides consumers with the ability to locate professionals by name, location, company and other search criteria. This service analyzes multiple forms of public and publicly available records, including corporate records, professional licenses, business profiles, addresses, and daily phone connect and disconnect information, to deliver information that helps consumers and professionals locate colleagues and associates.


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Property and Neighborhood Report enables consumers to make decisions about property value and verify other details about the surrounding area of a residential or commercial property. This service analyzes many forms of public and publicly available information, including property tax data, census records, sex offender information, and liens and judgments, to provide consumers with relevant information and statistics about individual properties, neighborhood residents and community demographics and characteristics.
 
Monitoring Services
 
Identity Protect, our identity theft protection subscription service, provides individuals with the ability to monitor and protect proactively against cases of identity theft. We offer comprehensive identity reports and real-time identity fraud monitoring that analyzes thousands of public and commercial data sources for potential fraudulent activity and changes in users’ personal profiles, such as changes of address or new account activations. Our service alerts customers via email to suspicious behavior involving their personal information and includes an insurance and recovery plan that provides $25,000 of coverage in the event that identity theft does occur.
 
Background Monitoring allows consumers and businesses to receive periodic updated background reports on individuals that keep them informed of the dynamic and changing nature of the individual’s background. We alert our customers to any new information about the individual, such as a recent criminal charge, civil lawsuit, judgment, lien or bankruptcy.
 
Credit Reports and Scores is a subscription service that helps consumers understand and monitor their credit profile. This service includes a credit report, which provides consumers their credit history as reported by one of the three national credit repositories, Equifax, Experian or TransUnion; a credit score based on the credit history from one of the three national credit repositories; and credit monitoring, which includes the periodic review of credit-related information from each of the three nationwide credit reporting agencies designed to detect and notify the consumer of fraudulent activity, new inquiries, new accounts, late payments and other matters affecting his or her creditworthiness.
 
Advertising
 
We provide advertising in several formats to our customers and to visitors of our websites. We charge our advertisers on a cost-per-action, cost-per-impression and cost-per-click basis.
 
Post-transaction Advertising offers advertisers the ability to reach our customers with targeted service offerings and promotions after a customer has completed a transaction on our website. This advertising is highly valued because it is presented to our customers at a time when they are open to making purchases. Upon acceptance of these offers, we enable our customers to securely transfer their billing information in order to facilitate their purchase.
 
Display Advertising helps businesses build their brands, acquire customers and market products and services to visitors of our websites. We provide display advertising, in the form of banner advertisements or text links, on many of our websites.
 
Enterprise Services
 
We provide employers and real estate managers with detailed personal and background information that is necessary for conducting pre-employment screenings of potential hires and screening of potential tenants. All of our enterprise screening services require consent of the individual being screened and we gather this consent in compliance with the FCRA. Our enterprise information services include:
 
Employment Screening consists of our background screening service, which includes address and criminal history and may be augmented with education and employment


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verification, a credit report, drug screening, a department of motor vehicle records check, and other information and services selected by the employer.
 
Tenant Screening consists of our background screening service, and may be augmented with a credit report and rental history.
 
Technology
 
We have developed several proprietary technologies that serve as the foundation of our technology platform and allow us to view, analyze and adjust how we acquire and market to our customers. We also employ industry-leading technologies and in-depth security policies designed to ensure that our operations and information are protected. Our technology infrastructure enables us to scale our business at a low cost while providing a flexible platform for integrated application development.
 
Data Access, Analysis and Integration
 
We draw upon a wide variety of online and offline sources for our data, including government agencies, credit bureaus and third parties that compile public, publicly available and commercial record information. This information is delivered to us via digital media or accessed via electronic gateways. Update frequencies range from daily to annually, depending on the source. We do not rely on a single source to operate any of our services, and we believe we would be able to continue our service offerings should any single source become unavailable.
 
Our technology platform is designed to standardize access to disparate information sources so that we can uniformly search and analyze all sources. Whether information is stored in our internal databases or accessed in real time from external sources, we apply the same normalization techniques. We then apply a real-time integration process that allows us to create an accurate and comprehensive virtual record from the information sources used, while minimizing duplication. Our innovative technology employs sophisticated analytics that allow us to make inferences and predictions from disparate information sources. We apply cost-optimization algorithms to deliver high-quality information at an affordable cost.
 
Operations and Information Security
 
We implement security at multiple levels in our hardware and software and follow rigorous industry standards to protect our internal operations and the personal information we require and provide. We use leading enterprise firewalls and monitoring systems for intrusion detection. We encrypt all sensitive data and store it with the 256-bit Rijndael Advanced Encryption Standard approved by the National Institute of Standards and Technology and control limited logged access by access control lists. We engage in extensive annual internal and external security audits, as well as quarterly external network scans and penetration tests conducted by VeriSign. We also engaged VeriSign to conduct an assessment of our policies and procedures, and VeriSign certified that we were in compliance with the VeriSign Security Certification Program as of September 25, 2009. For the assessment, VeriSign focused on the security components of the following industry standards:
 
  •  Payment Card Industry, or PCI, Data Security Standard v1.2;
 
  •  Gramm-Leach-Bliley Act;