S-1 1 b64222nisv1.htm NAMEMEDIA, INC. sv1
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As filed with the Securities and Exchange Commission on November 2, 2007
Registration No. 333 -          
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
NAMEMEDIA, INC.
(Exact name of registrant as specified in its charter)
         
Delaware
  7389   20-2353759
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)
 
 
230 Third Avenue
Waltham, MA 02451
(781) 839-2800
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
 
Kelly P. Conlin
Chairman and Chief Executive Officer
NameMedia, Inc.
230 Third Avenue
Waltham, MA 02451
(781) 839-2800
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
 
Copies to:
     
Mark T. Bettencourt, Esq.
John B. Steele, Esq.
Goodwin Procter LLP
Exchange Place
Boston, Massachusetts 02109
(617) 570-1000
  Robert Evans III, Esq.
Danielle Carbone, Esq.
Shearman & Sterling LLP
599 Lexington Avenue
New York, New York 10022
(212) 848-4000
 
 
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after this Registration Statement becomes effective.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act 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
 
If delivery of the prospectus is expected to be made pursuant to Rule 434 please check the following box.  o
 
 
 
CALCULATION OF REGISTRATION FEE
 
             
            Amount of
Title of Each Class of Securities to be Registered     Proposed Maximum Aggregate Offering Price(1)     Registration Fee(2)
Common Stock, $0.001 par value per share
    $172,500,000     $5,296
             
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act.
(2) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price and includes the shares that the underwriters have the option to purchase to cover over-allotments, if any.
 
 
 
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), shall determine.
 


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The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED November 2, 2007
 
PRELIMINARY PROSPECTUS
 
           Shares
 
(NAMEMEDIA LOGO)
 
Common Stock
 
 
  Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $      and $      per share. We will apply to list our common stock on The Nasdaq Global Market under the symbol “NAME.”
 
  We are selling      shares of common stock and the selling stockholders are selling      shares of common stock. We will not receive any of the proceeds from the sale of common stock by us and the selling stockholders.
 
  The underwriters have an option to purchase a maximum of           additional     shares from the selling stockholders to cover over-allotments.
 
Investing in our common stock involves risks. See “Risk Factors” beginning on page 9.
 
 
 
                                 
          Underwriting
          Proceeds to
 
    Price to
    Discounts and
    Proceeds to
    Selling
 
    Public     Commissions     NameMedia     Stockholders  
 
Per Share
  $       $       $       $    
Total
  $       $       $       $  
 
  Delivery of the shares of common stock will be made on or about               ,     .
 
  Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
Credit Suisse
Jefferies & Company, Inc.
 
Banc of America Securities RBC Capital Markets
 
The date of this prospectus is          ,     


 

 
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  F-1
 Ex-23.1 Consent of Ernst & Young, LLP
 Ex-23.2 Consent of Margolis & Company P.C.
 
 
You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.
 
Dealer Prospectus Delivery Obligation
 
Until          ,     (25 days after commencement of the offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.


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Graphic to Come
 


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PROSPECTUS SUMMARY
 
The following is a brief summary of selected contents of this prospectus. To understand this offering fully, you should read the following summary together with the entire prospectus, including the more detailed information regarding our business and our financial statements and the related notes appearing elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in the section entitled “Risk Factors,” before making an investment decision.
 
NameMedia, Inc.
 
Our Company
 
We operate a leading targeted online media business and a leading online marketplace for domain names. We monetize a high-quality portfolio of more than 2,250,000 domain names, including more than 750,000 domain names that we own and more than 1,500,000 domain names that are owned by third parties. We generate revenue primarily from two sources: online advertising in our media business, and the sale of domain names in our marketplace business.
 
Our media business enables advertisers to reach highly-targeted online audiences through a network of proprietary and third-party websites. This network of websites, which attracted more than 60,000,000 visitors in September 2007, creates a large amount of highly-targeted traffic which is desirable to performance-based advertisers. Our proprietary website publishing platform, SiteSense, allows us to dynamically generate and manage a variety of websites — from lead-generating websites to premium online communities — to provide the most relevant user experience and most revenue potential for our network.
 
Our domain name marketplace combines our proprietary portfolio of domain names with those of third-party domain name owners that want to list their domain names for sale, creating what we believe is the most efficient and liquid marketplace for high-quality domain names. Like the Multiple Listing Service, or MLS, for residential real estate, our Domain Listing Service, or DLS, aims to have the largest inventory for sale and the broadest distribution to buyers. Our customers can find and purchase these domain names on our sites BuyDomains.com and Afternic.com, or on sites that use our DLS, which include seven of the top ten domain registrars. Our proprietary trading platform, SiteMarket, is used to identify and value high-quality domain names that are most relevant to small and medium-sized businesses seeking online identities.
 
We generated $61.0 million in revenue in 2006 and $58.3 million in revenue during the nine months ended September 30, 2007. We generated $28.5 million in Adjusted EBITDA in 2006 and $24.1 million in Adjusted EBITDA during the nine months ended September 30, 2007. Our media business accounted for approximately 49% of our revenue in 2006 and 52% of our revenue during the nine months ended September 30, 2007, and our domain name marketplace business accounted for approximately 51% of our revenue in 2006 and 48% of our revenue during the nine months ended September 30, 2007.
 
Our Industry
 
Domain names are often referred to as the real estate of the Internet, providing opportunities to buy, sell and develop digital properties. We believe that the value of this online real estate is being positively influenced by several underlying Internet industry trends. According to a 2007 report by International Data Corporation, or IDC, the number of global Internet users is projected to grow from approximately 950 million in 2005 to over 1.5 billion in 2009. We believe that over time, advertising expenditures will follow consumer behavior and businesses will allocate a larger share of their marketing budgets to online advertising. We believe that a significant and increasing amount of Internet traffic is generated by consumers typing a search term directly into the web browser address bar, effectively using the browser address bar as a search engine. By typing a search term directly into the web browser address bar, Internet users indicate an interest in a particular subject, which results in highly-targeted online traffic.
 
In addition, businesses are increasingly incorporating the Internet into their sales and marketing strategies. According to JupiterResearch, the total Internet advertising market, excluding display advertising, is projected


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to grow 15% in 2008 to $14.1 billion, representing 62% of the total U.S. Internet advertising market. Advertisers are seeking to reach specific online audiences, and performance-based online advertising distribution providers, such as Google and Yahoo!, are continually seeking to add more highly-targeted online properties to their networks to satisfy this growing demand for performance-based online advertising.
 
According to IDC, there were approximately 8.3 million small and medium-sized businesses in the United States in 2007. We believe that businesses, particularly small and medium-sized businesses, will use domain name marketplaces to assess the inventory of available domain names, or digital real estate, like they would review a database of real estate listings to evaluate available properties. In addition, the volume of undeveloped domain name properties is growing. According to VeriSign, there were approximately 65.0 million .com and .net domain names registered as of December 31, 2006, an increase of 30% compared to December 31, 2005. This increase in registered domain names is leading to a need to create the equivalent of the MLS for domain names to make a market in the buying, selling and development of domain names. We believe that as the volume of undeveloped domain names continues to grow, the demand from domain name owners for monetization services will increase.
 
Our Business
 
We provide a leading domain name monetization solution that is comprised of our media business, which generates advertising revenue from the domain names that we develop into websites, and our domain name marketplace, which generates revenue through the selling of domain names. The key attributes of our business include:
 
Large and High-Quality Domain Name Portfolio.  We believe that our proprietary portfolio of more than 750,000 domain names is among the largest in the world. From this portfolio we have created an extensive network of websites that generates an increasing amount of Internet traffic across approximately 500 content categories.
 
Leading Website Creation and Management Platform.  We use our SiteSense platform to create and manage the websites in our network. This platform’s flexibility allows us to pursue a variety of development approaches, from websites that are focused on generating advertising leads as efficiently as possible, to sites that are enthusiast communities offering a combination of content, commerce and community elements in selected consumer niche categories.
 
Leading Domain Name Marketplace and Trading Expertise.  With an inventory of more than 2,000,000 owned and third-party domain names for sale, we believe that our domain name marketplace is among the largest in the world. We believe that the depth and quality of the inventory we offer makes it a valuable resource and an efficient marketplace for small and medium-sized businesses that are seeking to acquire a particular domain name. We use our SiteMarket platform to value and acquire domain names to continually add inventory to our marketplace.
 
Our Strategy
 
Our objective is to enhance our position as a leading targeted online media business and a leading online marketplace for domain names. To achieve this objective, we intend to:
 
  •  Continue to develop our premium domain names into enthusiast online communities
 
  •  Continue to grow our proprietary domain name portfolio
 
  •  Enhance our SiteSense platform to optimize the value of our proprietary and affiliate domain name portfolios
 
  •  Enhance our SiteMarket domain name trading platform and expand distribution for our DLS
 
  •  Pursue selected acquisitions


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Risks Associated With Our Business
 
Our business is subject to numerous risks, which are highlighted in the section entitled “Risk Factors.” These risks represent challenges to the successful implementation of our strategy and the growth of our business. Some of these risks are:
 
  •  We have a limited operating history on which you can base your evaluation of our business;
 
  •  We operate in a relatively new industry and have an unproven business model;
 
  •  We depend on the Google, Inc. and Yahoo Search Marketing/Overture, Inc. advertising networks for a significant portion of our revenue and upon the quality of traffic in our network to provide value to online advertisers;
 
  •  We do not control the means by which Internet users access our websites and technological changes and material changes to navigation or marketing practices could disrupt Internet traffic to our websites; and
 
  •  We may be unable to acquire or market premium domain names.
 
For further discussion of these and other risks you should consider before making an investment in our common stock, see the section entitled “Risk Factors” beginning on page 9.
 
Information About Us
 
We were incorporated in Delaware in February 2005 for the purpose of acquiring Rare Names LLC and Raredomains.com, LLC, which are referred to collectively as the Predecessor. The Predecessor began buying and selling domain names in 1999 and generating advertising revenue from its websites in 2002. On February 22, 2005, we acquired Rare Names, LLC and substantially all of the assets of Raredomains.com LLC. As of September 30, 2007, we had 136 employees.
 
Our principal executive offices are located at 230 Third Avenue, Waltham, Massachusetts 02451 and our telephone number is (781) 839-2800. Our corporate website address is www.namemedia.com. Information contained on our corporate website, or that can be accessed through that website or any of our network of websites, does not constitute a part of this prospectus. In this prospectus, the terms “NameMedia,” “we,” “us,” “our” and, with respect to the financial statements and other financial information included in this prospectus, “Successor” refer to NameMedia, Inc., its subsidiaries and any subsidiary that may be acquired or formed in the future.
 
Our registered servicemarks include Afternic, BuyDomains.com and SmartName. Our servicemarks include ActiveAudience, DavesGarden, NameMedia, SiteMarket and SiteSense. This prospectus includes the registered and unregistered trademarks and servicemarks of other persons.


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The Offering
 
Common stock offered by:
 
NameMedia
           shares
 
The selling stockholders
           shares
 
    Total
           shares
 
Common stock outstanding after this offering
           shares
 
Use of proceeds
We intend to use the net proceeds to us from this offering to repay all principal and interest outstanding under our term loan and the remainder for working capital and other general corporate purposes, including to finance the expansion of our operations, investment in new product development and strategic initiatives, capital expenditures and the costs of operating as a public company. We may also use a portion of the net proceeds to us for acquisitions of businesses, websites and technologies. We will not receive any proceeds from the sale of common stock by the selling stockholders. See “Use of Proceeds.”
 
An investment in our common stock involves a high degree of risk. See “Risk Factors” and other information included in this prospectus for a discussion of some of the factors you should carefully consider before deciding to invest in shares of our common stock.
 
Proposed Nasdaq Global Market symbol
“NAME”
 
The number of shares of common stock described above as outstanding immediately after this offering is based on 25,605,071 shares of common stock outstanding as of September 30, 2007, and excludes:
 
  •  643,750 shares of common stock issuable upon exercise of warrants outstanding as of September 30, 2007, at a weighted-average price of $1.93 per share;
 
  •  3,224,668 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2007, at a weighted-average exercise price of $3.65 per share;
 
  •  2,616,462 shares of common stock issuable upon payment of restricted stock units outstanding as of September 30, 2007; and
 
  •  269,694 shares of common stock reserved for future issuance as of September 30, 2007, under our stock-based compensation plans.
 
Unless otherwise stated, all information in this prospectus assumes:
 
  •  an initial public offering price of $      per share, the midpoint of the price range set forth on the cover of this prospectus;
 
  •  the conversion of all outstanding shares of our Series A convertible redeemable preferred stock and Series Z convertible redeemable preferred stock into 25,400,000 shares of common stock upon completion of this offering;
 
  •  no exercise of the over-allotment option granted to the underwriters; and
 
  •  the filing of our amended and restated certificate of incorporation immediately prior to the completion of this offering.


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References to Website Sizes and Audience Measurements
 
Throughout this prospectus, we use Google analytics measurement services to report our Internet audience metrics. Google analytics measurements are generated by our placement of “tags” on our websites, which are used to count and report audience metrics.
 
Other third-party services that also measure audiences may provide different data than those reported by our Google analytics deployments. These discrepancies may result from differences in the methodologies applied or the sampling approaches used by third-party services. Since we “tag” each of the pages on our websites, Google analytics measures the number of actual visitors who come to our websites.
 
The measurement term “monthly visitor,” to which we refer in this prospectus, refers to the total number of user-initiated sessions with our websites within a month. By way of example, if a single user returns to one of our websites more than once per month, each visit is counted as one visitor for this purpose.


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Summary Financial Data
 
The following tables set forth summary financial information for the periods indicated. You should read this information together with our financial statements and related notes and the information under “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
 
                                                 
    Predecessor Periods     Successor Periods  
          Period From
    Period From
                   
    Year Ended
    January 1 to
    February 22
    Year Ended
    Nine Months Ended
 
    December 31,
    February 21,
    to December 31,
    December 31,
    September 30,  
    2004     2005     2005     2006     2006     2007  
    (In thousands, except share and per share data)  
                            (unaudited)  
 
Statements of Income Data:
                                               
Revenue:
                                               
Online media
  $ 3,791     $ 939     $ 7,532     $ 29,843     $ 18,544     $ 30,419  
Domain name sales and related services
    15,665       2,778       20,107       31,202       23,515       27,855  
                                                 
Total revenue
    19,456       3,717       27,639       61,045       42,059       58,274  
Cost of revenue:
                                               
Online media
    331       55       1,291       9,738       6,851       7,550  
Domain name sales and related services
    3,798       879       5,959       13,173       9,717       12,207  
                                                 
Total cost of revenue:
    4,129       934       7,250       22,911       16,568       19,757  
Gross profit
    15,327       2,783       20,389       38,134       25,491       38,517  
Operating costs:
                                               
Product development
    472       55       805       2,510       1,572       4,164  
Sales and marketing
    887       129       2,264       7,480       4,781       10,212  
General and administrative(1)
    4,979       922       3,100       11,672       8,236       9,575  
Amortization of intangible assets
    11       2       393       1,584       796       3,436  
                                                 
Total operating costs
    6,349       1,108       6,562       23,246       15,385       27,387  
Operating income
    8,978       1,675       13,827       14,888       10,106       11,130  
Interest expense, net
    133       11       2,524       6,962       3,252       10,972  
                                                 
Income before income taxes
    8,845       1,664       11,303       7,926       6,854       158  
Provision (benefit) for income taxes(2)
                4,334       4,414       3,817       (2 )
                                                 
Income before cumulative effect of change in accounting principle
    8,845       1,664       6,969       3,512       3,037       160  
Cumulative effect of change in accounting principle
                      (872 )     (872 )      
                                                 
Net income
  $ 8,845     $ 1,664     $ 6,969     $ 2,640     $ 2,165     $ 160  
                                                 
Net income (loss) per share(3):
                                               
Basic
              $     $ (11.24 )   $ (8.24 )   $ (15.05 )
                                                 
Fully Diluted
              $ 0.13     $ (11.24 )   $ (8.24 )   $ (15.05 )
                                                 
Number of shares used in per share calculations:
                                               
Basic
                      126,492       106,999       191,876  
                                                 
Fully Diluted
                492,581       126,492       106,999       191,876  
                                                 
Other data (unaudited):
                                               
Adjusted EBITDA(4)
  $ 9,885     $ 1,893     $ 16,919     $ 28,484     $ 20,428     $ 24,129  
                                                 
 
The pro forma balance sheet in the table below reflects the conversion of our convertible redeemable preferred stock and our receipt of estimated net proceeds from our sale of           shares common stock in


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this offering at an assumed public offering price of $      per share, which is the midpoint of the range listed on the cover of this prospectus, after deducting the estimated underwriting discount and commissions and estimated offering expenses payable by us.
 
                 
    September 30, 2007  
          Pro Forma
 
    Actual     As Adjusted  
    (unaudited)
 
    (In thousands)  
 
Balance Sheet Data
               
Cash and cash equivalents
  $ 19,974          
Restricted cash
    13,026          
Working capital
    (49,488 )        
Total assets
    193,129          
Long term obligations
    6,202          
Total liabilities
    124,382          
Convertible redeemable preferred stock
    61,368          
Total stockholders’ equity
    7,379          
 
(1) Operating costs of the Predecessor include the compensation charge paid to their owner of approximately $3.9 million and $0 for the year ended December 31, 2004 and for the period from January 1, 2005 to February 21, 2005, respectively. See our audited financial statements beginning on page F-1 of this prospectus.
 
(2) From inception in 1999 to February 21, 2005, the Predecessor operated as a subchapter S corporation for tax purposes. For periods following the acquisition of the Predecessor on February 22, 2005, we have operated as a subchapter C corporation for tax purposes.
 
(3) As a result of the Predecessor’s status as a subchapter S corporation for the year ended December 31, 2004 and for the period from January 1, 2005 through February 21, 2005, earnings per share information has not been presented for those periods.
 
(4) The following table reconciles Net income before cumulative effect of change in accounting principle to Adjusted EBITDA for the periods presented and is unaudited:
 
                                                 
    Predecessor     Successor  
          Period From
    Period From
                   
    Year Ended
    January 1
    February 22 to
    Year Ended
    Nine Months Ended
 
    December 31,
    to February 21,
    December 31,
    December 31,
    September 30,  
    2004     2005     2005     2006     2006     2007  
    (In thousands)  
 
Net income before cumulative effect of change in accounting principle
  $  8,845     $  1,664     $  6,969     $ 3,512     $ 3,037     $ 160  
Interest expense, net
    133       11       2,524       6,962       3,252       10,972  
Provision (benefit) for income taxes
                4,334       4,414       3,817       (2 )
Depreciation and amortization
    102       18       675       2,355       1,237       5,019  
Amortization of registration rights
    805       200       2,224       5,934       4,743       4,500  
                                                 
EBITDA
  $ 9,885     $ 1,893     $ 16,726     $ 23,177     $ 16,086     $ 20,649  
Loss on early extinguishment of debt
                      717       717        
Stock-based compensation
                193       4,590       3,625       3,480  
                                                 
Other data:
                                               
Adjusted EBITDA
  $ 9,885     $ 1,893     $ 16,919     $ 28,484     $ 20,428     $ 24,129  
                                                 


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EBITDA and Adjusted EBITDA are each a measurement not in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. EBITDA represents net income before net interest expense, income tax expense, depreciation and amortization of intangible assets and amortization of registration rights. Adjusted EBITDA represents EBITDA plus stock-based compensation expense and non-cash charges related to the early extinguishment of debt. Management believes that the supplemental presentation of EBITDA and Adjusted EBITDA provides useful information to investors regarding our results of operations because such presentation assists in analyzing the operating performance of our business. This supplemental disclosure backs out potential differences caused by differences in capital structure (impacting interest expense), tax strategies (impacting our effective tax rates), the composition of our fixed assets (impacting our relative depreciation rates), the impact of purchase price allocations for acquired companies (impacting amortization of intangible assets expense) and the impact of non-cash stock-based compensation expense and charges related to the early extinguishment of debt. Although we use EBITDA and Adjusted EBITDA as a financial measure to assess the performance of our business, the use of EBITDA and Adjusted EBITDA is limited because it does not include certain material costs, such as interest and taxes, necessary to operate our business.
 
Adjusted EBITDA is also presented because covenants in our credit facility contain ratios based on this measure. Our credit facility is material to us because it is one of our primary sources of liquidity. If our Adjusted EBITDA was to decline below certain levels, covenants in our credit facility that are based on Adjusted EBITDA may be violated and could cause, among other things, an inability to incur further indebtedness under the credit facility and in certain circumstances a default or mandatory prepayment under our credit facility. See “Management Discussion and Analysis of Financial Condition and Results of Operations — Credit Facility” for additional information on the covenants in our credit facility.
 
The supplemental presentation of EBITDA and Adjusted EBITDA included in this prospectus should be considered in addition to, and not as a substitute for, net income in accordance with U.S. GAAP as a measure of performance or net cash provided by operating activities as determined in accordance with U.S. GAAP as a measure of liquidity. We understand that although EBITDA and Adjusted EBITDA are frequently used by securities analysts, lenders and others in their evaluation of companies, EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider these in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are due to the exclusion from Adjusted EBITDA of:
 
  •  Stock-based compensation expense, a non-cash charge that is a significant component of overall employee costs;
 
  •  Cash expenditures for the acquisition of registration rights;
 
  •  Cash expenditures for the acquisition of property and equipment;
 
  •  Interest expense on our debts;
 
  •  Income tax expense on our earnings; and
 
  •  Changes in, or cash requirements for, working capital.
 
To compensate for these limitations, we evaluate our liquidity by considering the economic effect of the excluded expense items independently as well as in connection with its analysis of cash flows from operations and through the use of other financial measures, such as capital expenditure budget variances, investment spending levels and return on capital analysis. Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.


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RISK FACTORS
 
An investment in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below and other information in this prospectus, including our financial statements, and the related notes to these financial statements included at the end of this prospectus, before making an investment decision. If any of the following risks or uncertainties actually occurs, our business, prospects, financial condition, results of operations or cash flows would likely suffer, possibly materially. In any such case, the trading price of our common stock could decline and you could lose all or part of your investment. You should read the section entitled “Special Note Regarding Forward-Looking Statements” immediately following these risk factors for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this prospectus.
 
Risks Related to Our Business
 
We have a limited operating history on which you can base your evaluation of our business, and our future profitability is uncertain.
 
We were incorporated in February 2005 to acquire a business which was formed in 1999 and to primarily engage in buying and selling Internet domain names. Accordingly, although the Predecessor commenced operations in 1999, we have a limited operating history and limited financial results that you can use to evaluate our business and prospects. Although we have experienced significant growth in recent periods, we may not be able to sustain this growth. Because we have limited historical financial data upon which to base planned operating expenses and forecast operating results, we cannot be certain that our revenue will grow at rates that will allow us to maintain profitability on a quarterly or annual basis. If we fail to grow our business or maintain profitability, the market price of our common stock will likely fall. You must consider our prospects in light of the risks, expenses and difficulties we face as an early stage company with a limited operating history.
 
We operate in a relatively new industry and have an unproven business model, which may make it difficult for you to evaluate our business and prospects.
 
We derive nearly all of our revenue from the sale of domain names and performance-based online advertising, both of which industries are undergoing rapid and dramatic change. Our business model is new and evolving and it may not be successful. Our business and prospects are difficult to evaluate and must be considered in light of the risks and uncertainties often encountered by companies in the early stages of development. Some of these risks and uncertainties relate to our ability to do the following:
 
  •  continue to grow our revenue and meet anticipated growth targets;
 
  •  maintain and develop relationships with online advertising providers;
 
  •  maintain and develop relationships with sources of domain names;
 
  •  successfully acquire domain names that can be resold profitably;
 
  •  maintain and increase the number of affiliate websites and domain names;
 
  •  successfully develop websites that Internet users will visit in increasing numbers;
 
  •  increase the number of our premium enthusiast websites and the Internet traffic on these websites;
 
  •  attract and retain qualified management and employees;
 
  •  continue to identify attractive acquisition candidates;
 
  •  successfully integrate acquired businesses, websites and technologies;
 
  •  enhance and build upon our existing technology platforms;
 
  •  manage our expanding operations and implement and improve our operational, financial and management controls;


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  •  respond effectively to competition;
 
  •  adapt to industry consolidation; and
 
  •  respond to government regulations relating to the Internet and other aspects of our business.
 
If we are unable to do any of these successfully, our business, results of operations and prospects could suffer.
 
Fluctuations in our operating results could make our results of operations difficult to predict or fall short of market expectations, which may cause our stock price to decline.
 
Our prior quarterly operating results have fluctuated due to changes in our business. Similarly, our future operating results may vary significantly from quarter to quarter due to a variety of factors, many of which are beyond our control. In addition, because our business is changing and evolving, our historical operating results may not be useful to you in predicting our future operating results. Fluctuations in our operating results could cause our results to be below investors’ expectations, causing the price of our common stock to fall. Factors that may increase the volatility of our operating results include the following:
 
  •  changes in the number of new websites in our proprietary network;
 
  •  changes in the number of visitors to existing websites;
 
  •  changes in demand and pricing for online advertising;
 
  •  the timing of our introduction of new premium enthusiast websites and the costs we incur to acquire or develop these websites;
 
  •  the timing and amount of marketing expenses incurred to attract new visitors to our websites;
 
  •  changes in the online advertising systems of our cost-per click, or CPC, advertisement distribution partners;
 
  •  changes in the quantity or quality of domain names available for purchase;
 
  •  changes in the selling prices of domain names and other related services;
 
  •  changes in the number of third parties using, or the number of websites in, our affiliate network;
 
  •  changes in the economic prospects of advertisers or the economy generally, which could alter current or prospective online advertisers’ spending priorities;
 
  •  changes in our charges for stock-based compensation; and
 
  •  overall Internet usage.
 
Our quarterly results have also fluctuated in the past and will fluctuate in the future due to seasonal fluctuations in the level of Internet usage. As is typical in our industry, the second and third quarters of the calendar year generally experience relatively lower usage than the first and fourth quarters. The extent to which usage may decrease during these off-peak periods is difficult to predict. As a result of this seasonality and the factors above, we do not believe that period-to-period comparisons of our results of operations are necessarily meaningful, or should be relied upon to predict future results of operations. Also, it is possible that our results of operations may not meet the expectations of investors or analysts in future periods, which may cause the price of our common stock to decline.
 
We are dependent on Google and Yahoo!, our third-party, cost-per-click advertisement distribution providers, for a significant portion of our revenue. A termination of our agreements with Google or Yahoo! or a decrease in revenue that we derive from these relationships would adversely affect our business.
 
We derive a significant portion of our revenue from Google, Inc. and Yahoo Search Marketing/Overture, Inc., or Yahoo!. Pursuant to our agreements with these advertisement distribution providers, we deliver advertisements on our network of websites and share a portion of the revenue generated from these


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advertisements. For the year ended December 31, 2006, Yahoo! delivered advertising to our entire network of websites, which generated approximately 48% of our total revenue. For the nine months ended September 30, 2007, we generated approximately 38% of our total revenue from advertising delivered to our websites by these advertisement distribution providers.
 
We use Google exclusively for CPC advertising on our proprietary domain name portfolio, and we use Yahoo! exclusively for CPC advertising on our affiliate network of websites. Our exclusive arrangement with Google expires in the first quarter of 2010 and our exclusive arrangement with Yahoo! expires in the fourth quarter of 2009. These advertisement distribution providers, however, can terminate their respective agreements with us before the expiration of the term upon the occurrence of certain events. There can be no assurances that our agreements with these advertisement distribution providers will be extended or renewed after their respective expirations or that we will be able to extend or renew our agreements with these advertisement distribution providers on terms and conditions favorable to us. If our agreements with these advertisement distribution providers are terminated, we may not be able to enter into agreements with alternative third-party advertisement distribution partners on acceptable terms or on a timely basis or both. Any termination of our relationships with these advertisement distribution providers, and any extension or renewal after the initial term on terms and conditions less favorable to us, would have a material adverse effect on our business, financial condition and results of operations.
 
Our agreements with these advertisement distribution providers may not continue to generate levels of revenue commensurate with what we have achieved during past periods. Our ability to generate online advertising revenue from these advertisement distribution providers depends on their assessment of the quality of Internet traffic resulting from online advertisements on our network of websites as well as other elements of their advertising technology platforms. We have no control over any of these quality assessments or over their advertising technology platforms. These advertisement distribution providers may from time to time change their existing, or establish new, methodologies and metrics for valuing the quality of Internet traffic and delivering CPC advertisements. Any changes in these methodologies, metrics and advertising technology platforms could decrease the amount of revenue that we generate from online advertisements. In addition, these advertisement distribution providers may at any time change or suspend the nature of the service that they provide to online advertisers and the catalog of advertisers from which online advertisements are sourced. These types of changes or suspensions would adversely impact our ability to generate revenue from CPC advertising. Any decrease in revenue due to lower traffic or a change in the type of services that these advertisement distribution providers provide to us would have a material adverse effect on our business, financial condition and results of operations.
 
We do not control the means by which Internet users access our websites and material changes to navigation practices, technologies or marketing practices could disrupt Internet traffic to our network of websites.
 
The success of our business depends in large part upon access to our websites. Internet users access our websites primarily through the following methods: directly by typing descriptive keywords or keyword strings into the web browser’s address bar; by clicking on bookmarked websites; through search engines, such as Google and Yahoo!, and web directories. Each of these methods of access requires the use of a third-party product or service, such as a web browser, search engine or directory. Web browsers may provide alternatives to the URL address box to locate websites, and search engines may from time to time change existing, or establish new algorithms, methodologies or rules relating to the listing of paid and unpaid search results. Product developments and market practices for these means of accessing our websites are not within our control. We may experience a decline in traffic to our websites if web browser technologies or search engine algorithms, methodologies or rules are changed to our disadvantage. Any of these changes could reduce traffic to our network of websites, which would reduce our revenue from online advertising.


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We are dependent upon the quality of traffic in our network to provide value to online advertisers, and any failure in our quality control could have a material adverse effect on the value of our websites to our third-party advertisement distribution providers and online advertisers and adversely affect our revenue.
 
We use certain monitoring processes to monitor the quality of the Internet traffic that we deliver to online advertisers. Among the factors we seek to monitor are sources and causes of low quality clicks such as non-human processes, including robots, spiders or other software; the mechanical automation of clicking; and other types of invalid clicks, click fraud, or click spam, the purpose of which is something other than to view the underlying content. Even with such monitoring in place, there is a risk that a certain amount of low-quality traffic, or traffic that is deemed to be less valuable by online advertisers, will be delivered to such online advertisers, which may be detrimental to our relationships with Google and Yahoo!, our current third-party advertisement distribution providers, and online advertisers, and could adversely affect our revenue.
 
We generate a significant portion of our revenue from our affiliate network of websites. A decrease in the number of third parties who utilize our affiliate network could have a material adverse impact on our business and operating results.
 
We generated approximately 18% of our total revenue from our affiliate network of websites for the year ended December 31, 2006 and approximately 21% of our total revenue from such network during the nine months ended September 30, 2007. Our affiliate network is available for use by third parties on an at-will basis. Accordingly, the third parties who utilize our affiliate network to sell or otherwise monetize their domain names may decide, at any time, to no longer use our affiliate network. A decrease in the number of third parties using our affiliate network, a decrease in the number of websites in our affiliate network or both would cause our revenue to decline.
 
We may need additional funding to support our operations and capital expenditures, which may not be available to us on favorable terms or at all.
 
For the foreseeable future, we intend to fund our operations and capital expenditures from cash flow from operations, our cash on hand and the net proceeds of this offering. If our capital resources are insufficient, we will need to raise additional funds. We cannot assure you that financing in addition to our revolving line of credit will be available in amounts or on terms acceptable to us, if at all. Furthermore, the sale of additional equity or convertible debt securities may result in dilution to existing stockholders, and incurring additional debt may hinder our operational flexibility. If sufficient additional funds are not available, we may be required to delay, reduce the scope of or eliminate material parts of our business strategy, including growth in our domain name portfolio, development of premium domain names into enthusiast websites and acquisitions of complementary businesses and technologies.
 
We depend on our senior management team and other key personnel, and if we are unable to retain them we may not be able to effectively manage our operations and meet our strategic objectives.
 
We depend on the continued services of our senior management team and other key personnel. We are heavily dependent upon the continued services of Kelly P. Conlin, our chairman and chief executive officer, Vincent A. Chippari, our chief financial officer, and Jeffrey S. Bennett, our president and chief operating officer, and the other members of our senior management team. Our ability to retain our senior management team will be a critical factor in determining whether we will be successful in the future. Each member of our senior management team may terminate their employment with us at any time. The loss of any of our senior management team or key personnel could harm our business.
 
Our potential inability to compete effectively for and retain and recruit qualified personnel could slow the growth of our business.
 
Competition for experienced personnel in the Internet industry is intense. We may be unable to continue to attract qualified employees or retain those employees who are important to the success of our business. We have experienced, and expect to continue to experience, difficulty in hiring and retaining highly-skilled


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employees with appropriate qualifications as a result of our rapid growth and expansion. If we cannot continue to attract new personnel or retain and motivate our current personnel, our business may not succeed.
 
We may be unable to effectively manage our growth.
 
As our operations have expanded, we have experienced rapid growth in our headcount. When we acquired the Predecessor in 2005, it had 17 employees. As of September 30, 2007, we had 136 employees. We expect to continue to increase headcount in the future. Our rapid growth has demanded, and will continue to demand, substantial resources and attention from our management. We will need to continue to hire additional qualified personnel for operations and portfolio management, product development, and sales and marketing and improve and maintain our technology to properly manage our growth. If we do not effectively manage our growth, our business could suffer and our costs could increase, which could harm our reputation, increase our expenses, and reduce our profitability.
 
If we are unable to acquire, renew or sell premium domain names, we may not be able to grow our domain name marketplace business.
 
The continued growth of our domain name marketplace business depends on our ability to acquire high-quality premium domain names from a variety of sources. These sources include previously registered domain names that are not renewed at the domain name registry by the current owner, private sales of domain names, participation in domain name auctions and registering new names identified by us. Changes in the way expired registrations of domain names are made available for acquisition could make it more difficult to acquire high-quality domain names. Similarly, increasing competition from other potential buyers could make it more difficult for us to acquire high-quality domain names on a cost-effective basis. Any such adverse change in our ability to acquire high-quality, previously-owned domain names, as well as any increase in competition in the domain name reseller market, could have a material adverse affect on our ability to grow our domain name marketplace business. In addition, our failure to renew our domain name registrations or any increase in the cost of renewal could have a material adverse effect on our revenue or profitability.
 
Our growth strategy includes the development of premium enthusiast website properties, which is a new and unproven business for us.
 
A major part of our growth strategy includes the development of a network of premium website properties based upon enthusiast communities, such as photography and gardening. We did not generate significant revenue from premium enthusiast websites in 2006, but we expect revenue from premium enthusiast websites to be the fastest growing portion of our business. We do not have significant historical experience to assess the likelihood of achieving the anticipated revenue from premium enthusiast websites, the related costs of development, and whether we will be able to introduce a sufficient number of premium websites to achieve expected revenue growth in the segment. If we fail to launch new premium enthusiast websites as quickly as we expect, our revenue may not meet our expectations and our business may not grow or may grow at a slower pace.
 
If we are unable to close and integrate suitable future acquisitions, our business may not grow.
 
A key part of our growth strategy is to acquire additional businesses, websites or technologies. If we are unable to identify a sufficient number of attractive opportunities, or to complete acquisitions on satisfactory terms, our business will grow at a slower pace. Acquisitions involve a high degree of risk. If we complete acquisitions, we may experience:
 
  •  difficulties in integrating any acquired businesses, personnel, operations, technologies and websites into our existing business;
 
  •  delays in realizing the benefits of the acquired businesses, technologies and websites;
 
  •  diversion of financial resources or our management’s time and attention from other business concerns;
 
  •  higher integration costs than we anticipated;


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  •  difficulties in retaining key employees of the acquired business who are necessary to manage these acquisitions; or
 
  •  difficulties in protecting acquired intellectual property.
 
For any of these reasons or as a result of other factors, we may not realize the anticipated benefits of acquisitions.
 
We may incur unforeseen liabilities from our domain names and websites, which could negatively impact our financial results.
 
We have acquired, and intend to continue to acquire, previously-owned domain names and websites. Any of these previously-owned domain names and websites may have trademark significance that is not readily apparent to us or is not identified by us in the acquisition process. We have in the past faced, and may in the future face, demands by third-party trademark owners asserting infringement or dilution of their rights and seeking transfer of acquired domain names under the Uniform Domain Name Dispute Resolution Policy administered by ICANN or actions under the U.S. Anti-Cybersquatting Consumer Protection Act. We cannot guarantee that we will be able to resolve these disputes without litigation. The potential violation of third-party intellectual property rights and potential causes of action under consumer protection laws may subject us to unforeseen liabilities including injunctions and judgments for money damages.
 
Our acquisitions of domain names and websites may inadvertently include registered trademarks or company names, vulgar or obscene language, or language associated with any illegal enterprise, which would violate the terms of certain third-party agreements.
 
We may inadvertently acquire domain names and websites that could include, among others, registered trademarks or company names, vulgar or obscene language or content, or language or content associated with any illegal enterprise. The acquisition of these domain names could violate the terms of our existing credit facility and our agreements with Google and Yahoo!. Any such violation of our credit facility could result in an event of default and any such violation of our agreements with Google and Yahoo! could result in the suspension or termination of these relationships. In addition, our business reputation could suffer and we may experience a loss of advertisers and a decrease in revenue.
 
We may finance future acquisitions by issuing equity securities which are dilutive to our current stockholders or by incurring additional indebtedness.
 
Following this offering, we intend to pursue the acquisition of businesses, websites or technologies, and we may finance these acquisitions with substantial portions of our available cash or dilutive issuances of securities. In the event that we use debt to finance an acquisition, the debt may contain financial or other covenants, which could reduce our future operating flexibility. These covenants may also require us to maintain certain levels of financial performance and we may not be able to do so; any such failure may result in the acceleration of such debt and the foreclosure by those creditors on any collateral we used to secure the debt. In the event of a bankruptcy or liquidation of our company, any outstanding debt would rank senior to our outstanding capital stock, including the shares of common stock offered in this offering. In addition, an acquisition could impair our operating results if we are required to recognize acquisition expenses or amortize, depreciate or impair acquired assets.
 
The failure of online advertising and marketing to grow at projected rates could adversely affect our operating results.
 
Our operating results will be subject to fluctuations based on the level of online advertising spending. If there were to be a general economic downturn that affected consumer activity in particular, the levels of spending on online advertising and marketing budgets may not increase or may be reduced. We believe that during periods of lower consumer activity, spending on online advertising and marketing is more likely to be reduced, and more quickly, than many other types of business expenses, and such a reduction could adversely affect our operating results.


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We rely on third-party technology, server and hardware providers, and if they fail to provide service or if they suffer sustained or repeated system failures, our business and reputation could be adversely affected.
 
We rely upon third-party co-location providers for our data servers, storage devices and network access. If these providers experience any interruption in operations or cease operations for any reason or if we are unable to agree on satisfactory terms for continued hosting relationships, we would be forced to enter into a relationship with other service providers or assume hosting responsibilities ourselves. If we are forced to switch hosting facilities, we may not be successful in finding an alternative service provider on acceptable terms or in hosting the computer servers ourselves. We may also be limited in our remedies against these providers in the event of a failure of service. We also rely on third-party providers for components of our technology platform, such as hardware and software providers, and domain name registrars. A failure or limitation of service or available capacity by any of these third-party providers could adversely affect our business and reputation.
 
Sustained or repeated system failures could significantly impair our operations and reduce the attractiveness of our services and websites to our current and potential users and advertisers. The continuous and uninterrupted performance of our systems is critical to our success. Our advertisers and users may become dissatisfied by any systems disruption or failure that interrupts our ability to provide our services and content to them. Substantial or repeated system disruptions or failures would reduce the attractiveness of our online websites significantly.
 
We do not presently have any redundant systems or a formal disaster recovery plan. We may be unable to develop or implement adequate protections or safeguards to overcome any of these events. We also may not have anticipated or addressed many of the potential events that could threaten or undermine our technology network such as fire, floods, earthquakes, power loss, natural disasters, network failures, hardware failures, software failures, telecommunications failures, terrorism or war, vandalism and other malicious acts, break-ins and similar events that could damage these systems. In addition, if a person is able to circumvent our security measures, he or she could destroy or misappropriate valuable information or disrupt our operations. In addition, we continue to make investment in and modify our software technology platform. If we fail to accomplish these technology upgrades in a manner which is not disruptive to our business, our business and reputation will likely suffer.
 
Although we maintain property insurance and business interruption insurance, our insurance may not be adequate to compensate us for all losses that may occur as a result of a catastrophic system failure or other loss, and our insurers may not be able or may decline to do so for a variety of reasons. If we fail to address these issues in a timely manner, we may lose the confidence of our users, online advertisers and our third-party advertisement distribution providers, our revenue may decline and our business could suffer.
 
We do not rely on patent protection for our proprietary technology, which may make it less difficult for competitors to develop competing technology.
 
We do not rely on patent protection for our proprietary technology. We rely primarily on trade secrets, servicemarks, common law and registered trademarks and copyrights to protect our proprietary rights. We do not own registrations for the servicemarks SiteSense and SiteMarket; we rely on common law protection for these marks and have filed servicemark applications in the United States for SiteMarket and SiteSense. We routinely enter into confidentiality agreements with our employees and other third parties. In the event these agreements are breached, they may not provide adequate remedies in the event of unauthorized use or disclosure of confidential information. Despite our efforts to protect our trade secrets, our employees or consultants may unintentionally or willfully disclose our proprietary information to competitors.
 
Our confidential and proprietary information and technology might also be independently developed by or otherwise become known by third parties, which may damage our competitive position. If we fail to maintain our trade secrets, or competitors otherwise develop competing technologies, our competitive position could suffer, which could harm our results of operations. Enforcement of claims that a third party has illegally obtained and is using trade secrets is expensive, time consuming and the outcome is uncertain. If our


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competitors independently develop equivalent knowledge, methods and know-how, we would not be able to assert our trade secrets against them and our business could be harmed.
 
Our services may infringe the intellectual property rights of others and we may be subject to claims of intellectual property infringement.
 
We may be subject to claims against us alleging infringement of the intellectual property rights of others, including our competitors. Any intellectual property claims, regardless of merit, could be expensive to litigate or settle and could significantly divert our management’s attention from other business concerns. Our technologies and content may not be able to withstand third-party claims of infringement. If we were unable to successfully defend against such claims, we might have to pay significant damages, stop using the technology or content found to be in violation of a third party’s rights, seek a license for the infringing technology or content, or develop alternative non-infringing technology or content. Licenses for such infringing technology or content may not be available on reasonable terms, if at all. In addition, developing alternative non-infringing technology or content could require significant effort and expense. If we cannot license or develop technology or content for any infringing aspects of our business, we may be forced to limit our service offerings. Any of these results could reduce our ability to compete effectively and harm our business.
 
Expansion of our international operations may require management attention and resources and may be unsuccessful, which could harm our future business development and existing domestic operations.
 
To date, we have conducted limited international operations, but we may expand into international markets in order to grow our business. Expansion into international markets would require management attention and resources and may be unsuccessful. We have limited experience in conforming our products and services to local cultures, standards and policies. We may have to compete with local companies that understand the local market better than we do. We may not be successful in expanding into any international markets or in generating revenue from foreign operations. In addition, different privacy, censorship and liability standards and regulations and different intellectual property laws in foreign countries may cause our business to be harmed.
 
We are exposed to risks associated with credit card fraud and credit payment, and we may suffer losses as a result of fraudulent data.
 
Our failure to control fraudulent credit card transactions adequately could reduce our revenue and gross margin and negatively impact our standing with applicable credit card authorization agencies.
 
Risks Related to Our Industry
 
If we are unable to compete in highly competitive markets for domain name sales and performance-based online advertising, we may experience reduced demand for our products and services.
 
We operate in a highly competitive and changing environment, and we face significant competition in each of our primary markets. We expect competition to increase because of the business opportunities presented by the continued growth of the Internet and online advertising.
 
Our ability to remain competitive will depend to a great extent upon our ability to maintain and enhance our portfolio of owned domain names and websites, as well as the number of third parties who utilize our platforms to sell or otherwise monetize their domain names through our affiliate network. We cannot assure you that our domain name portfolio or media network will continue to compete favorably or that we will be successful in the face of increasing competition from existing competitors or new companies entering our principal markets.
 
Many of our current and potential competitors, such as Google, Microsoft, and Yahoo! in the performance-based advertising solution business, have longer operating histories, significantly greater financial, technical and marketing resources, greater name recognition and substantially larger user or customer bases than we have and, therefore, have a significantly greater ability to attract advertisers and Internet users. Many


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of our competitors may be able to respond more quickly than we can to new or emerging technologies and changes in Internet user requirements, as well as devote greater resources than we can to the development, promotion and sale of services.
 
If we are not able to respond to the rapid technological changes in the Internet industry, we may not be competitive.
 
The market for our services is characterized by rapid change in business models and technological infrastructure, and we will need to constantly adapt to changing markets and technologies to provide new and competitive services. If we are unable to ensure that third-party domain owners and online advertisers and our third-party advertisement distribution providers have a high-quality experience with our services, then they may become dissatisfied and move to competitors’ services. Accordingly, our future success will depend, in part, upon our ability to develop and offer competitive services for both our target markets and in new markets. We may not, however, be able to successfully do so, and our competitors may develop innovations that render our products and services obsolete or uncompetitive.
 
Our growth depends on the continued growth of the Internet, and any decrease or less than anticipated growth in Internet usage could adversely affect our business prospects.
 
Our future revenue and profits, if any, depend upon the continued widespread use of the Internet as an effective commercial and business medium. Factors which could reduce the widespread use of the Internet include:
 
  •  possible disruptions or other damage to the Internet or telecommunications infrastructure;
 
  •  failure of the networking infrastructures of our online advertisers and third-party advertisement distribution providers to alleviate potential overloading and delayed response times;
 
  •  a decision by advertisers and consumers to spend less of their marketing dollars online;
 
  •  increased governmental regulation and taxation; and
 
  •  actual or perceived lack of security or privacy protection.
 
In particular, concerns over the privacy of users and security of transactions conducted over the Internet, including the risk of identity theft, may inhibit the growth of the Internet and online services. Any decrease or less than anticipated growth in Internet usage could have a material adverse effect on our business prospects.
 
Government regulation of the Internet may adversely affect our business and operating results.
 
The application of existing laws and regulations to the Internet industry is continually evolving and is not entirely settled. For example, we may be subject to the new applications and interpretations of existing laws and regulations relating to a wide variety of issues such as privacy, data security, sweepstakes, promotions, financial market regulation, and intellectual property ownership and infringement. In addition, existing laws that regulate or require advertisers to obtain licenses or permits may be unclear in their application to our business, including those related to insurance and securities brokerage, law offices and pharmacies. Our business may be negatively affected by a variety of new or existing laws and regulations, which may expose us to substantial compliance costs and liabilities and may impede the growth in the use of the Internet.
 
Companies engaging in online search, e-commerce and related businesses face uncertainty related to future government regulation of the Internet through the enactment of new and/or reinterpretation of existing laws at the international, federal, state, local or foreign level. Due to the rapid growth and widespread use of the Internet, legislatures at the international, federal, state, local and foreign levels have enacted and are considering various laws and regulations relating to the Internet. Individual states may also enact stricter legislation that affects the conduct of our business, particularly as such legislation pertains to consumer protection. State legislation can be particularly burdensome as differences and inconsistencies from state to state may lead to difficult compliance challenges.


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Existing federal laws that may impact our business and pose compliance challenges include, among others:
 
  •  The Children’s Online Privacy Protection Act, which imposes restrictions on the ability of online services to collect user information from minors.
 
  •  The Protection of Children from Sexual Predators Act of 1998, which requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances.
 
  •  The CAN-SPAM Act of 2003 and certain state laws, which impose limitations and penalties on the transmission of unsolicited commercial electronic mail via the Internet.
 
These laws are relatively new and have not been subject to a significant amount of interpretation by the courts. Courts may apply each of these laws in unintended and unexpected ways. We may be subject to an action brought under any of these or future laws governing various aspects of e-commerce and online services.
 
In addition, several existing and proposed federal laws could have an impact on our ability to conduct our business and the costs involved with conducting our business. Among the types of legislation currently being considered at the federal and state levels are consumer laws regulating the practices for software applications or downloads. These laws may introduce requirements for user consent and other restrictions. These proposed laws are intended to target applications often referred to as spyware, invasiveware or adware, although the scope may also include some software applications currently used in the online advertising industry to serve and distribute advertisements. At the federal level, there have also been proposals for new legislation in areas of data security, online marketing and information brokerage, some of which may have negative implications for the way in which we conduct our business or the costs that are involved with conducting our business.
 
In operating our business, we may unknowingly be conduits for illegal or prohibited materials, which could subject us to liability. For example, it is possible that courts could find strict liability or impose “know your customer” standards of conduct in some circumstances. Although we may not be directly involved in any of these practices, under current and future regulation, we may ultimately be held responsible for the actions of our online advertisers or third-party advertising distribution providers.
 
We may also be subject to costs and liabilities with respect to privacy and data security issues. Several companies have incurred costs and paid penalties for violating their privacy policies. In addition, several states have adopted legislation that requires businesses to implement and maintain reasonable security procedures and practices to protect sensitive personal information and to provide notice to consumers of unauthorized access to their personal information. In addition, the Federal Trade Commission, or FTC, has commenced enforcement actions against companies for their failure to adequately protect the personal data in their possession. Further, it is anticipated that new legislation will be adopted by federal and state governments with respect to user privacy and data security. Such legislation may result in increased costs for our business, additional compliance obligations and could negatively affect our business.
 
Additionally, foreign governments may pass laws which could negatively impact our business and/or foreign governmental authorities may commence legal actions against us for claims relating to our products and services based upon existing laws. Any such legal actions and/or costs incurred in addressing compliance with foreign laws and regulations could negatively affect our business or cause us to incur greater expenditures on compliance-related activities.
 
The restrictions imposed by, and cost of complying with, current and possible future laws and regulations related to our business could impact the way we are permitted to conduct operations, resulting in harm to our business and having a negative impact upon our operating results.
 
Future regulation of online advertising may adversely affect our ability to generate revenue from our websites.
 
The FTC has reviewed the way in which search engines disclose paid placements or paid inclusion practices to Internet users. The FTC has issued guidance recommending that all search engine companies ensure that all sponsored links are clearly distinguished from non-sponsored links, that the use of paid


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inclusion is clearly and conspicuously explained and disclosed and that other disclosures are made to avoid misleading users about the possible effects of paid placement or paid inclusion listings on search results. If such FTC disclosure reduces the desirability of our websites and “click-throughs” of our sponsored links decrease, our business could be adversely affected.
 
Changes in regulations or user concerns regarding privacy and protection of user data could harm our business.
 
Federal, state and international laws and regulations may govern the collection, use, sharing and security of personally identifiable data that we receive from our customers and users. In addition, we have, and post on our website, our privacy policies and practices concerning the collection, use and disclosure of customer and user data. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any data-related consent orders, FTC requirements or other federal, state or international privacy-related laws and regulations could result in proceedings or actions against us by governmental entities or other third parties, including class action lawsuits, which could potentially harm our business. Further, failure or perceived failure to comply with our policies or applicable requirements related to the collection, use or security of personal information or other privacy-related matters could damage our reputation and result in a reduction in Internet traffic to our websites.
 
We may be sued for information posted on or retrieved from our sites.
 
Our operations do not involve manual screening and review of all content posted by users on our premium websites. Although our website terms of use specifically require customers to represent that they have the right and authority to reproduce the content they provide and that the content does not infringe the rights of others or otherwise violate laws or regulations, we do not have the ability to determine the accuracy of these representations on a case-by-case basis for all content provided to our websites by users. There is a risk that a user, member or customer may supply an image or other content that is the property of another party used without permission, that infringes the copyright or trademark of another party, or that would be considered to be defamatory, pornographic, hateful, racist, scandalous, obscene or otherwise offensive, objectionable or illegal under the laws or court decisions of the jurisdiction where that user or customer lives. The Digital Millennium Copyright Act is intended to reduce the liability of online service providers for listing or linking to third-party websites that include materials that infringe copyrights or rights of others. If we did not meet the safe harbor requirements of the Digital Millennium Copyright Act, we could be exposed to copyright actions, which could be costly and time-consuming. Further, while the Digital Millennium Copyright Act does provide a limited safe harbor for unintentional copyright infringement, it does not provide protection for other types of claims that may result from materials made available by third parties.
 
There is, therefore, a risk that customers and users may intentionally or inadvertently access information and content from us that is in violation of the rights of another party or a law or regulation of a particular jurisdiction. If we should become legally obligated in the future to perform manual screening and review all content posted by third parties, we will incur additional expenses and may cease accepting third-party content, each of which could substantially harm our business and results of operations. We may be subject to claims for defamation, negligence, copyright or trademark infringement or personal injury, or claims based on other legal theories, relating to the information we publish on our websites. These types of claims have been brought, sometimes successfully, against online services as well as other print publications in the past. Our insurance, which covers commercial general liability, may not adequately protect us against these types of claims. Any dispute or litigation might result in substantial costs and diversion of resources and management attention and could affect our ability to compete or have a material adverse effect on our business or financial condition.


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Risks Related to Our Common Stock and this Offering
 
There is no public market for our common stock, and an active and liquid trading market may not develop or be sustained after this offering is completed.
 
Before this offering, there was no public market for shares of our common stock. Following this offering, an active, liquid trading market for our common stock may not develop or be sustained. As a result, you may not be able to sell all or a significant portion of your holdings quickly. The initial public offering price of the shares offered by this prospectus will be determined by negotiations between us and representatives of the underwriters based upon a number of factors, including the history of, and the prospects for, our company and our industry, and may not be indicative of prices that will prevail following completion of this offering. The market price of our common stock may decline below the initial public offering price, and you may not be able to resell your shares of our common stock at or above the initial public offering price.
 
Our stock price may be volatile, and your investment in our common stock could suffer a decline in value.
 
There has been significant volatility in the market price and trading volume of equity securities, particularly in the Internet industry. This volatility is often unrelated or disproportionate to the financial performance of particular companies. These broad market fluctuations may negatively affect the market price of our common stock.
 
Price fluctuations could be in response to various factors, including:
 
  •  actual or forecasted changes in our quarterly or annual operating results;
 
  •  our announcements or our competitors’ announcements of new products or services or marketing initiatives;
 
  •  the market’s reaction to our press releases, our other public announcements and our filings with the Securities and Exchange Commission, or SEC;
 
  •  strategic actions by us or our competitors, involving acquisitions, significant strategic partnerships or restructurings;
 
  •  new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
 
  •  changes in accounting standards, policies, guidance, interpretations or principles;
 
  •  the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
 
  •  the loss of key personnel;
 
  •  changes in our growth rates or our competitors’ growth rates;
 
  •  developments regarding our proprietary rights or those of our competitors;
 
  •  our inability to raise additional capital;
 
  •  changes in financial markets or general economic conditions, including those resulting from war, incidents of terrorism and responses to such events;
 
  •  sales of common stock, or the expectation that such sales may occur, by us, our directors, officers or principal stockholders; and
 
  •  changes in stock market analyst recommendations or earnings estimates regarding our common stock, other comparable companies or our industry generally or failure to meet or exceed these estimates.
 
As a result of these and other factors, you may not be able to resell your shares of common stock at or above the initial public offering price. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. We may be the target of


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similar litigation in the future. A securities class action suit against us could result in potential liabilities, substantial costs and the diversion of our management’s attention and resources that would otherwise be used to benefit the future performance of our business, regardless of the outcome.
 
Our directors, officers and current principal stockholders own a large percentage of our common stock and could limit new stockholders’ influence over corporate decisions.
 
After this offering, our directors, officers and current stockholders holding more than 5% of our common stock collectively will beneficially own, in the aggregate, approximately     % of our outstanding common stock, assuming the exercise of all options held by such persons. As a result, these stockholders, if they act together, would be able to control most matters requiring stockholder approval, including the election of directors and approval of mergers or other significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control. The interests of these stockholders may not always coincide with our corporate interests or the interests of our other stockholders, and they may act in a manner with which you may not agree or that may not be in the best interests of our other stockholders.
 
Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale.
 
Sales of substantial amounts of our common stock in the public market following this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.
 
Upon completion of this offering, we will have          outstanding shares of common stock, assuming no exercise of outstanding options or warrants after September 30, 2007. The           shares sold pursuant to this offering will be immediately tradable without restriction. Of the remaining shares:
 
  •  no shares will be eligible for sale immediately upon completion of this offering;
 
  •             shares will be eligible for sale upon the expiration of lock-up agreements, subject in some cases to volume and other restrictions of Rule 144 and Rule 701 under the Securities Act; and
 
  •             shares will be eligible for sale upon the exercise of vested options after the expiration of the lock-up agreements.
 
The lock-up agreements expire 180 days after the date of this prospectus. The representatives of the underwriters may, in their sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements.
 
Holders of           shares of our common stock have contractual rights to require us to register their shares for resale to the public or to include their shares in registration statements that we may file or that we may file for other stockholders. See “Description of Capital Stock — Registration Rights.”
 
After the closing of this offering, we intend to register approximately           shares of common stock that have been issued or reserved for future issuance under our stock incentive plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to some restrictions under the securities laws and the lock-up agreements described above.
 
If any of these stockholders cause a large number of securities to be sold in the public market, or if there is an expectation that such sales may occur, the sales could cause the trading price of our common stock to decline.
 
We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to SEC and Nasdaq compliance rules.
 
We expect that the obligations of being a public company will require significant additional expenditures and place additional demands on our management, administrative, operational and accounting resources as we


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comply with the reporting requirements of a public company. As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the Sarbanes-Oxley Act of 2002 and the listing requirements of the Nasdaq Stock Market, Inc. The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls over financial reporting and disclosure controls and procedures. In particular, commencing in 2009, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management time on compliance-related issues. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting, the market price of our stock could decline and we could be subject to sanctions or investigations by the Nasdaq Stock Market, the SEC or other regulatory authorities.
 
We will also need to upgrade our systems, implement additional financial and management controls, reporting systems and procedures, hire an internal audit group and additional accounting, auditing and financial staff with appropriate public company experience and technical accounting knowledge. This will increase our general and administrative expenses and capital expenditures. The rules and regulations applicable to public companies may make it more difficult and more costly for us to obtain directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher premiums. We cannot currently estimate the amount of additional costs we may incur as a result of the reporting requirements applicable to public companies, but we expect our operating results will be adversely affected by the costs of operating as a public company.
 
As a new investor, you will experience immediate and substantial dilution in net tangible book value.
 
If you purchase common stock in this offering, you will pay more for your shares than the amounts paid by existing stockholders for their shares. As a result, you will incur immediate and substantial dilution of approximately $      per share, representing the difference between the initial public offering price for our shares in this offering and our pro forma net tangible book value per share after giving effect to this offering at an assumed public offering price of $     , the mid-point of the range on the cover page of this prospectus. If the holders of outstanding options to purchase our common stock exercise these options in the future, you will incur further dilution. If we raise additional equity by issuing equity securities or convertible debt, or if we acquire other companies or technologies by issuing equity, the newly issued shares will further dilute your percentage ownership and may reduce the value of your investment.
 
Provisions of our certificate of incorporation and by-laws and Delaware law could discourage, delay or prevent a change in control of our company.
 
Provisions in our restated certificate of incorporation and restated bylaws may discourage, delay or prevent an acquisition involving us that our stockholders may consider favorable, including transactions in which you might receive a premium for you shares. In addition, these provisions could make it more difficult for our stockholders to replace or remove our board of directors.
 
The provisions include:
 
  •  authorizing the issuance of preferred stock with rights that may be senior to those of the common stock without any further action by the holders of our common stock;
 
  •  providing for a classified board of directors with staggered terms;
 
  •  requiring that our stockholders provide advance notice when nominating our directors or proposing matters that can be acted on by stockholders at stockholders meetings;


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  •  eliminating the ability of our stockholders to convene a stockholders’ meeting; and
 
  •  prohibiting our stockholders to act by written consent.
 
After this offering, we will also be subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. Under these provisions, if anyone becomes an “interested stockholder,” we may not enter into a “business combination” with that person for three years without special approval, which could discourage a third-party from making a takeover offer and could delay or prevent a change of control. For purposes of Section 203, “interested stockholder” means, generally, someone owning 15% or more of our outstanding voting stock or an affiliate of ours that owned 15% or more of our outstanding voting stock during the past three years, subject to certain exceptions as described in Section 203.
 
We do not expect to pay dividends in the future, and any return on your investment in our common stock will be limited to any appreciation in the value of our common stock.
 
We have never declared or paid cash dividends on our common stock and we do not anticipate paying cash dividends in the foreseeable future. As a result, you should not rely on any investment our stock to provide dividend income as part of your investment return. Any return on your investment in our common stock would result from an increase in the market price of your stock, which is uncertain and unpredictable.
 
Our management will have broad discretion in the use of certain proceeds from this offering.
 
Our management will have broad discretion in the application of our net proceeds of this offering in excess of the amounts we owe under our credit facility. We currently intend to use our net proceeds from this offering to repay all amounts outstanding under our credit facility, and to finance our working capital needs and for general corporate purposes. We may also use a portion of our net proceeds to acquire businesses, technologies or websites as described under the heading “Use of Proceeds.” Within those categories, our management will have broad discretion over the use and investment of our net proceeds of this offering, and you will need to rely upon the judgment of our management with respect to the use of proceeds. Our management may spend our net proceeds from this offering in ways that our stockholders may not agree with or that may not result in a significant or any return on your investment.


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus includes forward-looking statements. All statements contained in this prospectus other than statements of historical facts, including statements regarding our future results of operations and financial position, our business strategy and plans and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend” and “expect” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors.” In light of these risks, uncertainties and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
 
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of these forward-looking statements after the date of this prospectus to conform these statements to actual results or revised expectations.
 
This prospectus also contains estimates and other information concerning our industry, including market size and growth rates of the markets in which we participate, that are based on industry publications, surveys and forecasts generated by IDC, JupiterResearch, the National Gardening Association and VeriSign. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors including those described in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications, surveys and forecasts.
 
You should read this prospectus, the documents to which we refer in this prospectus and those we have filed as exhibits to the registration statement of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
 
We operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
 
You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur and actual results could differ materially from those projected in the forward-looking statements.


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USE OF PROCEEDS
 
We estimate that we will receive net proceeds of $      from the sale of common stock offered by us in this offering, assuming an initial public offering price of $      per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $      increase (decrease) in the assumed initial offering price of $      per share would increase (decrease) the net proceeds to us from this offering by $     , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of common stock by the selling stockholders.
 
We currently estimate that of the net proceeds we receive from this offering we will repay all principal and interest outstanding under our term loan. As of September 30, 2007 we have approximately $108.0 million principal and interest outstanding. The term loan accrues interest at a rate equal to LIBOR plus 6.0%, which rate was 11.33% as of September 30, 2007. The stated maturity of the term loan is September 7, 2008, although, we are required to use the net proceeds from this offering to prepay all principal and interest outstanding. We used the proceeds we received from the term loan to retire outstanding debt and for permitted purchases of domain names and acquisitions of businesses.
 
We intend to use the remainder of the net proceeds to us from this offering for working capital and other general corporate purposes, including financing the expansion of our operations, the investment in new product development and strategic initiatives, capital expenditures and the costs of operating as a public company. We may also use a portion of the net proceeds to us for acquisitions of businesses, websites and technologies, although we have no agreements or understandings with respect to any acquisition at this time.
 
Pending the uses described above, we intend to invest the net proceeds from this offering in short-term, interest-bearing, investment-grade securities.
 
DIVIDEND POLICY
 
We have never declared or paid any cash dividends on our capital stock and do not expect to pay any cash dividends for the foreseeable future. We intend to use future earnings, if any, in the operation and expansion of our business. In addition, the terms of our credit facility restrict our ability to pay dividends, and any future indebtedness that we may incur could preclude us from paying dividends.


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CAPITALIZATION
 
The following table sets forth our cash and cash equivalents, short term debt and capitalization as of September 30, 2007, as follows:
 
  •  on an actual basis; and
 
  •  on an as adjusted basis to give effect to the conversion of all of our outstanding shares of convertible redeemable preferred stock, the conversion of our Series A convertible redeemable preferred stock warrant to a common stock warrant, the repayment by us of our outstanding indebtedness, the filing of our amended and restated certificate of incorporation to increase the number of authorized shares of common stock and the sale of           shares of common stock by us in this offering at an assumed initial public offering price of $      per share, the midpoint of the price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and the application by us of the proceeds to us from this offering.
 
A $      increase (decrease) in the assumed initial offering price of $      per share would increase (decrease) the net proceeds to us from this offering by $     , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
 
You should read this table together with “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing elsewhere in this prospectus.
 
                 
    As of September 30,
 
    2007  
          Pro Forma
 
    Actual     As Adjusted  
    (In thousands,
 
    except share data)  
 
Cash and cash equivalents and restricted cash
  $ 33,000     $          
                 
Total long-term debt, including current portion
  $ 105,000     $    
                 
Series A convertible redeemable preferred stock warrant
  $ 4,105     $  
Convertible redeemable preferred stock, $.001 par value per share, 5,350,000 shares authorized, 5,080,000 shares issued and outstanding, actual; 5,000,000 shares authorized, no shares issued and outstanding pro forma as adjusted
    61,368          
Stockholders equity:
               
Common stock, $.001 par value per share, 74,000,000 shares authorized, 289,176 shares issued and 205,071 shares outstanding actual; 200,000,000 shares authorized,           shares issued and outstanding pro forma as adjusted
             
Less: treasury stock, 84,105 shares
    (421 )        
Additional paid-in capital
    8,599          
Retained (deficit) earnings
    (799 )        
                 
Total stockholders’ equity
    7,379          
                 
Total capitalization
  $ 72,852          
                 


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The table above excludes the following shares:
 
  •  643,750 shares of common stock issuable upon exercise of warrants outstanding as of September 30, 2007, at a weighted-average price of $1.93 per share;
 
  •  3,224,668 shares of common stock issuable on the exercise of options outstanding as of September 30, 2007, at a weighted-average exercise price of $3.65 per share;
 
  •  2,616,462 shares of common stock issuable upon payment of restricted stock units outstanding as of September 30, 2007; and
 
  •  269,694 shares of common stock reserved for future issuance as of September 30, 2007, under our stock-based compensation plans.


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DILUTION
 
If you invest in our common stock, your interest will be diluted 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 our common stock immediately after this offering. Pro forma net tangible book value per share represents the amount of our total pro forma stockholders’ equity less total goodwill and intangible assets, divided by the number of shares of common stock outstanding as of September 30, 2007 after giving effect to the assumed conversion of all of our outstanding Series A convertible redeemable preferred stock and Series Z convertible redeemable preferred stock, into an aggregate of 25,400,000 shares of our common stock and the conversion of our Series A convertible redeemable preferred stock warrant into a common stock warrant.
 
Investors participating in this offering will incur immediate, substantial dilution. Our pro forma net tangible book value was approximately $(33.9) million, computed as total pro forma stockholders’ equity less total goodwill and intangible assets, or $(1.32) per share of common stock as of September 30, 2007. After giving effect to the sale of           shares of common stock by us in this offering at the assumed initial public offering price of $      per share, the midpoint of the range on the cover page of this prospectus, after deducting underwriting discounts, commissions and estimated offering expenses we are responsible for paying, our pro forma as adjusted net tangible book value as of September 30, 2007 would have been $      million, or $      per share of common stock. This represents an immediate increase in pro forma net tangible book value of $      per share of common stock to our existing stockholders and an immediate dilution of $      per share to the new investors purchasing shares in this offering. The following table illustrates this per share dilution:
 
                 
Assumed initial public offering price
          $             
Pro forma net tangible book value per share before this offering at September 30, 2007
  $ (1.32 )        
Increase in net tangible book value per share attributable to new investors in this offering
                      
                 
Pro forma as adjusted net tangible book value per share after this offering
               
                 
Dilution per share to new investors
          $    
                 
 
A $      increase (decrease) in the assumed initial offering price of $      per share would increase (decrease) the as adjusted net tangible book value by $      and the as adjusted net tangible book value per share after this offering by $      per share and decrease (increase) the dilution per share to new investors by $      per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
 
The following table summarizes, as of September 30, 2007, on a pro forma as adjusted basis, the total number of shares, the consideration paid to us, and the average price per share paid by existing stockholders and by new investors purchasing shares of common stock in this offering from us at the assumed initial public offering price of $      per share, the midpoint of the range on the cover page of this prospectus, and before deducting the underwriting discounts, commissions and estimated offering expenses we are responsible for paying (dollars in thousands except per share amounts):
 
                                         
    Shares Purchased     Total Consideration     Average Price
 
    Number     Percent     Number     Percent     per Share  
 
Existing stockholders
    25,605,071               $50,800               $1.98  
New investors
                                                                          
                                         
Total
            100 %             100 %        
                                         


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The number of shares and total consideration of the existing stockholders includes 750,000 shares of Series Z convertible redeemable preferred stock valued at $10 per share that were issued in connection with the acquisition of the Predecessor.
 
If the underwriters exercise their over-allotment option in full, the following will occur: (1) the number of shares of common stock held by our existing stockholders will represent approximately     % of the total number of shares of common stock outstanding; and (2) the number of newly issued shares of common stock held by new investors will be increased to     , or approximately     % of the total number of shares of our common stock outstanding after this offering.
 
The discussion and tables above are based on the number of shares of common stock, Series A convertible redeemable preferred stock and Series Z convertible redeemable preferred stock outstanding as of September 30, 2007.
 
The table above excludes the following shares:
 
  •  643,750 shares of common stock issuable upon exercise of warrants outstanding as of September 30, 2007, at a weighted-average price of $1.93 per share;
 
  •  3,224,668 shares of common stock issuable on the exercise of options outstanding as of September 30, 2007, at a weighted-average exercise price of $3.65 per share;
 
  •  2,616,462 shares of common stock issuable upon payment of restricted stock units outstanding as of September 30, 2007; and
 
  •  269,694 shares of common stock reserved for future issuance as of September 30, 2007, under our stock-based compensation plans.


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SELECTED FINANCIAL DATA
 
The following statement of income data for the year ended December 31, 2004, the period from January 1, 2005 to February 21, 2005, the period from February 22, 2005 to December 31, 2005 and the year ended December 31, 2006, and the balance sheet data as of December 31, 2005 and 2006 are derived from our audited financial statements included elsewhere in this prospectus. The statements of income data for the year ended December 31, 2002 and balance sheet data as of December 31, 2002 are unaudited. The statements of income data for the year ended December 31, 2003 and balance sheet data as of December 31, 2003 is derived from our audited financial statements for that period, which is not included in this prospectus. The statement of income data for the nine months ended September 30, 2006 and 2007 and the balance sheet data as of September 30, 2006 and September 30, 2007 have been derived from our unaudited consolidated financial statements and related notes, which have been included elsewhere in the prospectus. The selected financial data presented below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus. The historical results are not necessarily indicative of the results to be expected for any future periods.
 
                                                                 
    Predecessor     Successor  
                      Period From
    Period From
                   
                      January 1
    February 22
          Nine Months
 
                      to
    to
    Year Ended
    Ended
 
    Year Ended December 31,     February 21,
    December 31,
    December 31,
    September 30,  
    2002     2003     2004     2005     2005     2006     2006     2007  
    (unaudited)     (In thousands, except share and per share data)     (unaudited)  
 
Statement of Income Data:
                                                               
Revenue:
                                                               
Online media
  $ 226     $ 874     $ 3,791     $ 939     $ 7,532     $ 29,843     $ 18,544     $ 30,419  
Domain names sales and related services
    5,596       8,409       15,665       2,778       20,107       31,202       23,515       27,855  
                                                                 
Total revenue
    5,822       9,283       19,456       3,717       27,639       61,045       42,059       58,274  
Cost of revenue:
                                                               
Online media
    155       160       331       55       1,291       9,738       6,851       7,550  
Domain names sales and related services
    1,089       1,796       3,798       879       5,959       13,173       9,717       12,207  
                                                                 
Total cost of revenue
    1,244       1,956       4,129       934       7,250       22,911       16,568       19,757  
Gross profit
    4,578       7,327       15,327       2,783       20,389       38,134       25,491       38,517  
Operating costs(1):
                                                               
Product development
    423       218       472       55       805       2,510       1,572       4,164  
Sales and marketing
    398       526       887       129       2,264       7,480       4,781       10,212  
General and administrative(2)
    984       2,041       4,979       922       3,100       11,672       8,236       9,575  
Amortization of intangible assets(3)
    11       11       11       2       393       1,584       796       3,436  
                                                                 
Total operating costs
    1,816       2,796       6,349       1,108       6,562       23,246       15,385       27,387  
Operating income
    2,762       4,531       8,978       1,675       13,827       14,888       10,106       11,130  
Interest expense, net
          6       133       11       2,524       6,962       3,252       10,972  
                                                                 
Income before income taxes
    2,762       4,525       8,845       1,664       11,303       7,926       6,854       158  
Provision (benefit) for income taxes(4)
                            4,334       4,414       3,817       (2 )
                                                                 
Income before cumulative effect of change in accounting principle
    2,762       4,525       8,845       1,664       6,969       3,512       3,037       160  
Cumulative effect of change in accounting principle
                                  (872 )     (872 )      
                                                                 
Net income
  $ 2,762     $ 4,525     $ 8,845     $   1,664     $ 6,969     $ 2,640     $ 2,165     $ 160  
                                                                 


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    Predecessor     Successor  
                      Period From
    Period From
                   
                      January 1
    February 22
          Nine Months
 
                      to
    to
    Year Ended
    Ended
 
    Year Ended December 31,     February 21,
    December 31,
    December 31,
    September 30,  
    2002     2003     2004     2005     2005     2006     2006     2007  
    (unaudited)     (In thousands, except share and per share data)     (unaudited)  
 
Net income (loss) per share:(5)
                                                               
Basic
                          $     $ (11.24 )   $ (8.24 )   $ (15.05 )
                                                                 
Fully diluted
                          $ 0.13     $ (11.24 )   $ (8.24 )   $ (15.05 )
                                                                 
Number of shares used in per share calculations:
                                                               
Basic
                                  126,492       106,999       191,876  
                                                                 
Fully diluted
                            492,581       126,492       106,999       191,876  
                                                                 
Unaudited:
                                                               
Pro forma net income per share:(6)
                                                               
Basic
                                          $               $    
                                                                 
Fully diluted
                                          $               $    
                                                                 
Pro forma number of shares used in per share calculations:
                                                               
Basic
                                                               
                                                                 
Fully diluted
                                                               
                                                                 
Other data:
                                                               
Adjusted EBITDA (unaudited)(7)
  $  2,870     $  4,881     $ 9,885     $ 1,893     $ 16,919     $ 28,484     $ 20,428     $ 24,129  
 
                                                                 
                      As of
                         
    As of December 31,     February 21,
    As of December 31,     As of September 30,  
    2002     2003     2004     2005     2005     2006     2006     2007  
    (unaudited)                 (unaudited)                 (unaudited)  
    (in thousands)  
 
Balance Sheet Data:
                                                               
Cash and cash equivalents
  $    503     $    875     $    124     $    1,942     $    9,433     $    15,555     $    4,577     $    19,974  
Restricted cash
                            100       34,933       56,921       13,026  
Working capital
    2,225       4,532       8,722       10,803       19,342       71,149       83,108       (49,488 )
Total assets
    2,509       6,127       10,032       12,321       93,716       189,691       183,927       193,129  
Long term obligations
          2,444       2,338       2,130       25,378       110,574       109,689       6,202  
Total liabilities
    147       3,904       3,435       4,060       35,111       124,593       119,568       124,382  
Convertible redeemable preferred stock
                            54,902       58,320       57,104       61,368  
Total members or stockholders’ equity
    2,362       2,223       6,597       8,261       3,703       6,778       7,255       7,379  

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(1)  Amounts include stock-based compensation, as follows:
 
                                                                 
    Predecessor     Successor  
                      Period From
    Period From
                   
                      January 1
    February 22
                   
                      to
    to
    Year Ended
    Nine Months Ended
 
    Year Ended December 31,     February 21,
    December 31,
    December 31,
    September 30,  
    2002     2003     2004     2005     2005     2006     2006     2007  
    (unaudited)                       (In thousands)           (unaudited)  
 
Cost of Revenue:
                                                               
Online media cost of revenue
       —          —          —          —     $    9     $    97     $    68     $    80  
Domain name sales and related services
                                    26       80       41       95  
Operating costs:
                                                               
Product development
                            47       235       137       346  
Sales and marketing
                            58       461       288       768  
General and administrative
                            53       3,717       3,091       2,191  
                                                                 
Total
                          $ 193     $ 4,590     $ 3,625     $ 3,480  
                                                                 
 
(2)  Operating costs of the Predecessor include compensation charges paid to the owner of approximately $545,000, $1.5 million, $3.9 million and $0 for the years ended December 31, 2002, 2003 and 2004 and the period from January 1, 2005 to February 21, 2005, respectively. See our audited financial statements beginning on page F-1 of this prospectus.
 
(3)  Amortization of intangible assets is calculated based on the assets acquired on a straight line basis generally over a two to five year basis. See our audited financial statements beginning on page F-1 of this prospectus.
 
(4)  From inception in 1999 to February 21, 2005, the Predecessor operated as a subchapter S corporation for tax purposes. Commencing with the acquisition of the Predecessor on February 22, 2005, we have operated as a subchapter C corporation.
 
(5)  As a result of the Predecessor’s status as a subchapter S corporation for the years ended 2002, 2003 and 2004 and for the period from January 1, 2005 through February 21, 2005, earnings per share information has not been presented for those periods.
 
(6)  Pro forma to give effect to the conversion of convertible redeemable preferred stock and the conversion of the Series A convertible redeemable preferred stock warrant into a common stock warrant as if such conversion had occured at the beginning of the period.


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(7)  The following table reconciles Net income before cumulative effect of change in accounting principle to Adjusted EBITDA for the periods presented and is unaudited:
 
                                                                 
    Predecessor     Successor  
                      Period
    Period
                   
                      From
    From
                   
                      January 1
    February 22
                   
                      to
    to
    Year Ended
    Nine Months Ended
 
    Year Ended December 31,     February 21,
    December 31,
    December 31,
    September 30,  
    2002     2003     2004     2005     2005     2006     2006     2007  
                (In thousands)              
 
Net income before cumulative effect of change in accounting principle
  $ 2,762     $ 4,525     $ 8,845     $ 1,664     $ 6,969     $ 3,512     $ 3,037     $ 160  
Interest expense, net
          6       133       11       2,524       6,962       3,252       10,972  
Provision (benefit) for income taxes
                            4,334       4,414       3,817       (2 )
Depreciation and amortization
    63       67       102       18       675       2,355       1,237       5,019  
Amortization of registration rights
    45       283       805       200       2,224       5,934       4,743       4,500  
                                                                 
EBITDA
  $ 2,870     $ 4,881     $ 9,885     $ 1,893     $ 16,726     $ 23,177     $ 16,086     $ 20,649  
Loss on early extinguishment of debt
                                  717       717        
Stock-based compensation
                            193       4,590       3,625       3,480  
                                                                 
Adjusted EBITDA
  $ 2,870     $ 4,881     $ 9,885     $ 1,893     $ 16,919     $ 28,484     $ 20,428     $ 24,129  
                                                                 
 
EBITDA and Adjusted EBITDA are each a measurement not in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. EBITDA represents net income before net interest expense, income tax expense, depreciation and amortization of intangible assets and amortization of registration rights. Adjusted EBITDA represents EBITDA plus stock-based compensation expense and non-cash charges related to the early extinguishment of debt. We believe that the supplemental presentation of EBITDA and Adjusted EBITDA provides useful information to investors regarding our results of operations because such presentation assists in analyzing the operating performance of our business. This supplemental disclosure backs out potential differences caused by differences in capital structure (impacting interest expense), tax strategies (impacting our effective tax rates), the composition of our fixed assets (impacting our relative depreciation rates), the impact of purchase price allocations for acquired companies (impacting amortization of intangible assets expense) and the impact of non-cash stock-based compensation expense and charges related to the early extinguishment of debt. Although we use EBITDA and Adjusted EBITDA as a financial measure to assess the performance of our business, the use of EBITDA and Adjusted EBITDA is limited because it does not include certain material costs, such as interest and taxes, necessary to operate our business.
 
Adjusted EBITDA is also presented because covenants in our credit facility contain ratios based on this measure. Our credit facility is material to us because it is one of our primary sources of liquidity. If our Adjusted EBITDA was to decline below certain levels, covenants in our credit facility that are based on Adjusted EBITDA may be violated and could cause, among other things, an inability to incur further indebtedness under the credit facility and in certain circumstances a default or mandatory prepayment under our credit facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Credit Facility” for additional information on the covenants in our credit facility.
 
The supplemental presentation of EBITDA and Adjusted EBITDA included in this prospectus should be considered in addition to, and not as a substitute for, net income in accordance with U.S. GAAP as a measure of performance or net cash provided by operating activities as determined in accordance with U.S. GAAP as a measure of liquidity. We understand that although EBITDA and Adjusted EBITDA are frequently used by securities analysts, lenders and others in their evaluation of companies, EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider these in isolation, or as a substitute for analysis of


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our results as reported under U.S. GAAP. Some of these limitations are due to the exclusion from Adjusted EBITDA of:
 
  •  Stock-based compensation expense, a non-cash charge that is a significant component of overall employee costs;
 
  •  Cash expenditures for the acquisition of registration rights;
 
  •  Cash expenditures for the acquisition of property and equipment;
 
  •  Interest expense on our debts;
 
  •  Income tax expense on our earnings; and
 
  •  Changes in, or cash requirements for, working capital.
 
To compensate for these limitations, we evaluate our liquidity by considering the economic effect of the excluded expense items independently as well as in connection with its analysis of cash flows from operations and through the use of other financial measures, such as capital expenditure budget variances, investment spending levels and return on capital analysis. Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes that are included elsewhere in this prospectus. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those described under “Risk Factors” or elsewhere in this prospectus. We have prepared our discussion of the results of operations by comparing our results for the year ended December 31, 2006 to the combined results of the Predecessor and Successor for the year ended December 31, 2005 (the “Combined 2005 Results”). The Combined 2005 Results have been compared to the Predecessor’s combined results for the year ended December 31, 2004.
 
Overview
 
We operate a leading targeted online media business and a leading online marketplace for domain names. We monetize a high-quality portfolio of more than 2,250,000 domain names, including more than 750,000 domain names that we own and more than 1,500,000 domain names that are owned by third-party affiliates. We generate revenue from online media, primarily through advertising, and from the sale of domain names and related services.
 
Our media business enables advertisers to reach highly-targeted online audiences through a network of proprietary and third-party websites. This network of owned and affiliate websites, which attracted more than 60,000,000 visitors in September 2007, creates a large amount of highly-targeted traffic which is desirable to performance-based advertisers. Our proprietary website publishing platform, SiteSense, allows us to dynamically update and manage a variety of websites — from lead-generating websites to premium online communities — to provide the most relevant user experience and most revenue potential for our network. The depth of development of an individual website is generally based on the nature of the specific domain name and the category to which it relates.
 
Our domain name marketplace combines our proprietary portfolio of domain names with those of third-party domain name owners that want to list their domain names for sale, creating what we believe is the most efficient and liquid marketplace for high-quality domain names. Like the Multiple Listing Service, or MLS, for residential real estate, our Domain Listing Service, or DLS, aims to have the largest inventory for sale and the broadest distribution to buyers. Our customers can find and purchase these domain names on our websites BuyDomains.com and Afternic.com, or on websites that use our DLS, which include seven of the top ten domain registrars. Our proprietary trading platform, SiteMarket, is used to identify and value high-quality domain names that are most relevant to small and medium-sized businesses seeking online identities. Our objective is to create an efficient, comprehensive marketplace of all available domain names for sale in the secondary market for business owners looking to purchase a premium domain name.
 
History
 
We were incorporated in Delaware in February 2005 for the purpose of acquiring Rare Names, LLC and Raredomains.com, LLC, which are referred to collectively as the Predecessor. The Predecessor began buying and selling domain names in 1999 and generating advertising revenue from its websites in 2002. In 2003, the Predecessor generated total revenue of $9.3 million, including $8.4 million from the sale of Internet domain names and related services, and in 2004, total Predecessor revenue increased to $19.5 million. Since acquiring the Predecessor, we have developed our SiteSense media platform and our SiteMarket domain name trading platform. We generated total revenue of $31.4 million in 2005 and $61.0 million in 2006.
 
Acquisitions
 
Since the acquisition of the Predecessor in February 2005, we have completed eight acquisitions of businesses and technologies and one acquisition of a large, premium domain name portfolio. Aggregate initial consideration for these acquisitions of approximately $62.5 million was funded from operating cash flow and


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from the proceeds of a debt financing we completed in September 2006. We anticipate the majority of our acquisition activity in the future to be in our media business. Acquisitions have included the following:
 
SmartName LLC
 
In September 2006, we acquired the assets of SmartName, LLC, a provider of affiliate domain name monetization services, for approximately $16.5 million. The acquisition was funded with the proceeds of our debt financing. This acquisition enabled us to market a set of services that complement the domain name monetization services provided by our SiteSense platform.
 
Premium Domain Name Portfolio
 
In December 2006, we acquired approximately 40 domain names from an unrelated third-party for cash consideration of approximately $13.5 million. The acquisition was funded with the proceeds of our debt financing. Approximately half of these names are being held for development as premium enthusiast websites. The remainder are included in registration rights available for sale.
 
Visionary Networks, Inc.
 
In January 2007, we acquired the assets of Visionary Networks, Inc., which provides an online community in astrology and other related subjects. The purchase price of the acquisition was approximately $14.1 million. Terms of the acquisition also provide for future purchase payments, not to exceed $7.5 million, contingent upon achieving certain financial milestones for the years ended December 31, 2007 and 2008.
 
Other Acquisitions
 
In addition to the acquisitions detailed above, we completed six additional acquisitions for aggregate initial cash consideration of $18.4 million. Three of these acquisitions provide for potential future purchase payments, not to exceed $2.6 million in the aggregate, contingent upon achievement of financial and other milestones.
 
Components of Our Statement of Operations
 
Our revenue is classified into two types: online media, and domain name sales and related services. Revenue from online media accounted for 19.5% of our combined total revenue in 2004, 27.0% of our combined total revenue in 2005, 48.9% of our total revenue in 2006, 44.1% of our total revenue during the nine months ended September 30, 2006 and 52.2% of our total revenue during the nine months ended September 30, 2007. Revenue from domain name sales and related services accounted for 80.5% of our combined total revenue in 2004, 73.0% of our combined total revenue in 2005, 51.1% of our total revenue in 2006, 55.9% of our total revenue during the nine months ended September 30, 2006 and 47.8% of our total revenue during the nine months ended September 30, 2007.
 
Online Media Revenue.  Our online media revenue is derived primarily from performance-based advertising. The vast majority of advertising revenue we derive is on a cost-per-click, or CPC, basis. Under this model, we earn revenue when a visitor to one of our websites clicks on a sponsored advertising link. The advertising revenue we generate on our websites is based on agreements with third-party advertising distribution providers that maintain direct relationships with advertisers. These providers pay us a percentage of their net revenue generated from these advertising services. In instances where the CPC advertising is generated by a visit to a website within our affiliate network, we share the revenue that we receive with our affiliate.
 
Domain Name Sales and Related Services Revenue.  Our domain name sales revenue consists primarily of the sale of domain names. Domain name sales are recorded on a transaction basis and are most often paid for at the time of sale by credit card. We also generate a small amount of revenue from other sources, including business services referral fees and commission-based revenue for the sale of domain names owned by our affiliates.


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Cost of Online Media Revenue.  Cost of online media revenue consists primarily of performance-based advertising costs, compensation and associated costs related to technology operations and portfolio management personnel and, to a lesser extent, the cost of maintaining the computer systems and technology infrastructure supporting our media network and the amortization of developed software and technology.
 
Cost of Domain Name Sales and Related Services Revenue.  Cost of domain name sale revenue consists primarily of the costs of our domain name portfolio, compensation and associated costs related to technology operations and portfolio management personnel and, to a lesser extent, the cost of maintaining the computer systems and technology infrastructure supporting our domain name portfolio and the amortization of developed software and technology. Our domain name portfolio management team is primarily responsible for identifying, acquiring, analyzing and managing our portfolio of domain names.
 
Operating Expenses
 
Product development.  Our product development expenses primarily consist of the compensation and associated costs for technology personnel and consultants, as well as costs for other services and supplies. We expect product development expenses to increase as we grow our business and as we expand and upgrade our product offerings and websites.
 
Sales and marketing.  Our sales and marketing expenses primarily consist of the compensation and associated costs for sales, marketing and customer service personnel, certain marketing and advertising activities, general business development activities, and related consulting services. We expect sales and marketing expenses to increase with the growth of our business.
 
General and administrative.  Our general and administrative expenses primarily consist of the compensation and associated costs for management, finance, legal and administrative personnel, facility costs, and other costs such as insurance. We expect that general and administrative expenses will increase as we hire additional personnel and incur costs related to the anticipated growth of our business and our operation as a public company.
 
Amortization of intangible assets.  Amortization of intangible assets consists of amortization of identifiable intangible assets, excluding the amortization of developed software and technology, recorded in connection with our acquisitions. Intangible assets which consist of developed software, developed technology, trade names, customer lists and non-competition agreements, are amortized on a straight-line basis over their useful lives generally ranging from three to five years, with the amortization of developed software and technology included in cost of revenue.
 
Interest expense, net.  Net interest expense includes interest incurred on debt financing, the amortization of debt issuance costs and fair market value adjustments related to convertible redeemable preferred stock warrants, partially offset by interest income earned on our cash and cash equivalents.
 
Income taxes.  We are a subchapter C corporation subject to United States federal and state income taxes. The accounting for income taxes is discussed in more detail in the section below entitled “Critical Accounting Policies and Use of Estimates — Accounting for Income Taxes.”
 
Stock-Based Compensation Expense
 
Prior to January 1, 2006, we accounted for stock option grants in accordance with Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25, and complied with the disclosure provisions of Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. Under APB 25, deferred stock-based compensation expense is recorded for the intrinsic value of options (the difference between the deemed fair value of our common stock and the option exercise price) at the grant date and is amortized ratably over the option’s vesting period. We also accounted for non-employee option grants on a fair-value basis using the Black-Scholes model and recognized this expense over the applicable vesting period.


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On January 1, 2006, we adopted the requirements of SFAS No. 123(R), Share-based Payment, or SFAS No. 123(R). SFAS No. 123(R) requires us to measure the cost of employee services received in exchange for an award of equity instruments, based on the fair value of the award on the date of grant, and to recognize the cost over the period during which the employee is required to provide the services in exchange for the award. We adopted SFAS No. 123(R) using the modified prospective method, which requires us to apply its provisions to non-vested stock-based awards to employees granted prior to January 1, 2006 and all employee awards granted or modified subsequent to January 1, 2006. For the years ended December 31, 2005 and 2006, we recorded expense of approximately $193,000 and approximately $4.6 million, respectively, in connection with share-based payment awards. For the nine months ended September 30, 2007, we recorded expense of approximately $3.5 million in connection with share-based payment awards. As of September 30, 2007, unrecognized stock-based compensation expense for non-vested options and restricted stock units of $11.3 million is expected to be recognized using the straight-line method over a weighted-average period of 2.58 years. The adoption of SFAS No. 123(R) will have no effect on our cash flow for any period.
 
Critical Accounting Policies and the Use of Estimates
 
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. 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 value of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
 
Our significant accounting policies are described in Note 2 of the notes to our financial statements, and of those policies, we believe that the following accounting policies involve the greatest degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations.
 
Principles of Consolidation
 
The accompanying consolidated financial statements for the period from February 22, 2005 through December 31, 2005, for the year ended December 31, 2006, and for the nine month periods ended September 30, 2006 and 2007 include our accounts and those of our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
 
The accompanying combined financial statements, for the year ended December 31, 2004 and for the period from January 1, 2005 through February 22, 2005 include the accounts of Raredomains.com, LLC and Rare Names, LLC. The Predecessor had substantially similar member ownership and interrelated operations. Accordingly, combining Raredomains.com, LLC and Rare Names, LLC into a single combined financial statement presentation is considered by management to be most meaningful. All significant intercompany accounts and transactions have been eliminated.
 
Revenue Recognition
 
We recognize revenue when the price is fixed or determinable, persuasive evidence of an arrangement exists, the product is delivered or the services are performed, and collectibility of the resulting receivable is reasonably assured.
 
We recognize the components of our online media revenue as follows:
 
Advertising Revenue.  Advertising revenue is generated through our relationship with third-party advertising distribution providers that pay us a fee based on the number of advertisement-related clicks, actions or impressions on our network of proprietary and affiliate websites. Revenue is recognized in the period in which the click, action or impression occurs. On our owned websites, we recognize revenue net of our advertising


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distribution providers’ share. On our affiliated websites, we recognize revenue net of our advertising distribution providers’ share and net of our affiliates’ share.
 
We recognize the components of our domain name marketplace revenue as follows:
 
  •  Sales of our Domain Name Registration Rights.  Revenue from sales of our domain name registration rights is recognized upon reaching an agreement as to the terms of the sale and the receipt of payment.
 
  •  Business Services Revenue.  Business Services revenue consists of commissions received from affiliates selling their domain name registration rights through our SiteMarket platform and from partners that provide business services to our customers, such as domain name registration and website-hosting. This revenue is recognized when the sale is completed or a referral is transmitted.
 
Domain Name Registration Rights
 
Substantially all of our domain name registration rights are both held for sale and used to generate advertising revenue. Domain name registration rights are carried at the lower of unamortized cost or net realizable value. Cost includes the fees paid to initially register or acquire the rights to use a domain name registration right. We aggregate monthly purchases of domain names and such costs are charged to cost of revenue based on the greater of (a) the percentage of the number of domain names sold during the period compared to the number of names estimated to be sold over the estimated life of the domain names or (b) the straight-line amortization of domain name registration rights over their estimated economic life. The economic life of the domain name registration rights is estimated to be seven years based on several factors including the projected traffic and sales pattern for acquired domain names, the treatment employed by another public company in the industry, and management’s judgment. The estimate of the number of domain names to be sold in a period is based upon historical sales trends, current and projected sales staffing levels, the number of domain name acquisitions, market conditions, seasonality and sales strategies.
 
We periodically assess our costing model to ensure that our projections are a reasonable basis for the rate at which the cost of our acquired domain name registration rights is expensed. We assess our sales volume assumptions assigned to our domain name registration rights collection on at least an annual basis or when facts and circumstances indicate to management that sales trends may materially differ from our projections. This assessment is based on a comparison of the actual sales rate to the projected sales rate by acquisition year.
 
A small number of domain name registration rights are held solely for our own use and are classified as long term assets. These domain name registration rights, which represent less than one percent of our total registration rights, are held primarily for development of websites and are not currently offered for sale. The economic life of the domain name registration rights held for use is estimated to be seven years, consistent with the useful life of registration rights available for sale.
 
At least at each balance sheet date, we compare the unamortized costs to the net realizable value of the domain name registration rights by acquisition year, taking into consideration estimated future revenue from sales of the domain name registration rights and advertising revenue, and we record a reserve if necessary to reduce the carrying value of the names to net realizable value.
 
Domain Name Registration Rights Renewal Costs
 
Following the initial domain name registration period, in order to retain the rights of a domain name, we are required to renew annually the domain name registration right. These renewal fees, which are typically between six to eight dollars per domain name per year, are recorded as a prepaid asset and are expensed on a straight-line basis over the one-year renewal period.
 
Goodwill and Intangible Assets
 
Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed in business combinations accounted for under the purchase method. Purchase price is


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assigned to the acquired assets and liabilities based on their estimated fair value as determined by management, generally with the assistance of an independent appraiser.
 
Intangible assets other than goodwill are carried at cost less accumulated amortization. Intangible assets are generally amortized on a straight-line basis over the useful lives of the respective assets, generally three to five years. Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
 
We apply the provisions of the Financial Accounting Standards Board’s, or FASB, SFAS No. 142, Goodwill and Other Intangible Assets, or SFAS No. 142. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment on a reporting unit basis in accordance with the provisions of SFAS No. 142.
 
We perform impairment tests of goodwill assigned to reporting units on an annual basis or when facts and circumstances indicate to management that impairment may exist. Impairment tests are based on a comparison of the fair value of the reporting unit to the carrying value of the assets assigned to that reporting unit. In instances where impairment exists, goodwill is written down to fair value.
 
We review long-lived assets when facts and circumstances indicate to management that the carrying value of those assets may not be fully realizable over the remainder of their useful lives. If impairment exists, we compare the fair value of the asset, based on a discounted cash flow projection or other method as deemed appropriate by management, to the carrying value. If fair value is determined to be less than the carrying value, we record an impairment charge to reduce the carrying value to fair value.
 
Income Taxes
 
The Predecessor elected to be taxed under the provisions of subchapter S of the Internal Revenue Code. Therefore, no provision or benefit for federal income taxes has been included in the Predecessor financial statements since taxable income or losses pass through to, and are reportable by, its members individually. The Predecessor made distributions to members to fund income tax payments. Upon our incorporation in February 2005, we elected to be taxed under the provisions of subchapter C of the Internal Revenue Code, and are subject to federal and state income taxes. We account for income taxes in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes, or SFAS No. 109. SFAS No. 109 requires us to account for income taxes using an asset and liability approach, which requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. Deferred income taxes have been provided for the differences between the financial reporting carrying values and the income tax reporting basis of our assets and liabilities. These temporary differences consist of differences between the timing of the deduction of certain amounts for income tax and financial statement reporting purposes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during those periods in which those temporary differences become deductible.
 
Accounting for Stock-Based Compensation
 
Through December 31, 2005, we accounted for our stock-based compensation awards to employees using the intrinsic value method prescribed in APB 25 and related interpretations. Under the intrinsic value method, compensation expense is measured on the date of grant as the difference between the deemed fair value of our common stock and the option exercise price multiplied by the number of options granted.
 
On December 16, 2004, the FASB issued SFAS No. 123(R), which requires all share-based payments to employees, including grants of employee stock options and restricted stock units, to be recognized in the income statement based on their fair values. We adopted SFAS No. 123(R) effective January 1, 2006. SFAS No. 123(R) allows companies that used the fair value method under SFAS No. 123 for either recognition or pro forma disclosures to apply SFAS No. 123(R) using the modified prospective-transition method.


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Effective with our adoption of SFAS No. 123(R) on January 1, 2006, we have elected to use the Black-Scholes option pricing model to determine the weighted-average fair value of options granted. In accordance with SFAS No. 123(R), we will recognize the compensation cost of share-based awards on a straight-line basis over the vesting period of the award.
 
As there has been no public market for our common stock prior to this offering, we have determined the volatility for equity awards since January 1, 2006 based on an analysis of reported data for a peer group of companies that issued equity with substantially similar terms. The expected volatility of equity awards has been determined using an average of the historical volatility measures of this peer group of companies for a period equal to the expected life of the award. The expected volatility for equity awards during the year ended December 31, 2006 was 71% and during the nine months ended September 30, 2007 was 71%. The expected life of equity awards has been determined utilizing the “simplified” method as prescribed by the Staff Accounting Bulletin No. 107, Share-Based Payment. The expected life of equity awards during the year ended December 31, 2006 was 6.02 years and during the nine months ended September 30, 2007 was 6.16 years. For the year ended December 31, 2006, the weighted-average risk free interest rate used ranged from 4.33% to 5.02%. For the nine months ended September 30, 2007, the weighted-average risk free interest rate used ranged from 4.05% to 5.02%. The risk-free interest rate is based on a zero coupon United States treasury instrument with a term that is consistent with the expected life of the award. We have not paid and do not anticipate paying cash dividends on our shares of common stock. Therefore, the expected dividend yield is assumed to be zero. In addition, SFAS No. 123(R) requires companies to utilize an estimated forfeiture rate when calculating the expense for the period. SFAS No. 123 permitted companies to record forfeitures based on actual forfeitures, which was our historical policy under SFAS No. 123. As a result, we applied an estimated forfeiture rate, based on our limited historical forfeiture experience, of 3.75% in the year ended December 31, 2006 and of 2.52% in the nine months ended September 30, 2007 in determining the expense recorded in our consolidated statements of income.
 
We have historically granted stock options at exercise prices equal to the fair value of our common stock as of the date of grant, as determined by our board of directors. Because there has been no public market for our common stock, in determining the fair value of our common stock, our board of directors considered a number of objective and subjective factors, including our operating and financial performance and corporate milestones, the prices at which we sold shares of convertible redeemable preferred stock, the superior rights and preferences of securities senior to our common stock at the time of each grant, and the risk and non-liquid nature of our common stock. For all equity awards during the period from October 1, 2006 through September 30, 2007, including stock option grants and awards of restricted stock units, our board of directors has also considered contemporaneous valuations of the fair value of our common stock in determining the fair value thereof.
 
In 2006, in connection with the preparation of our 2005 and first quarter 2006 financial statements, we retrospectively reassessed the fair value of our common stock during the period from September 2005 through February 2006. In retrospectively reassessing the fair value of the common stock underlying the equity awards granted during this period, we followed guidelines set forth in the AICPA’s Practice Aid Valuation of Privately-Held Company Equity Securities Issued as Compensation, or the AICPA Practice Aid. In making such retrospective reassessments of fair value, we used a probability-weighted combination of the guideline public company method and the discounted future cash flow method to estimate our aggregate enterprise value at each valuation date. The guideline public company method estimates the fair market value of a company by applying to that company market multiples which, in our case, were revenue and EBITDA multiples of publicly traded firms in similar lines of business. The companies used for comparison under the guideline public company method were selected based on a number of factors, including but not limited to, the similarity of their industry, business model, financial risk and other factors. The projections used in connection with this valuation were based on our expected operating performance over the forecast period. There is inherent uncertainty in these estimates. If we had used different discount rates or assumptions, the valuation would have been different.
 
To allocate the retrospectively reassessed enterprise value determined under the guideline public company method and the discounted future cash flow method to our common stock, we used the probability-weighted


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expected return method. Under the probability-weighted expected return method, the retrospectively reassessed fair value of our common stock was estimated based upon an analysis of future values for our company assuming various future outcomes, the timing of which were based on the plans of our board and management. Share value is based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us as well as the rights of each share class. The fair market value of our common stock was estimated using a probability-weighted analysis of the present value of the returns afforded to our shareholders as a continuing private company without a future liquidity event, as well as under each of three possible future liquidity scenarios — the IPO scenario, the sale scenario and the liquidation scenario.
 
In addition, in connection with this retrospective reassessment, in 2006, we offered the holders of then outstanding stock options granted during the period from September 2005 through February 2006 the opportunity to amend the terms of their stock option agreements to increase the exercise price of such stock options to reflect the retrospectively reassessed fair values of our common stock during the period from September 2005 through February 2006. Although we believe that all of the affected options were granted with an exercise price per share equal to the fair value of our common stock as of the date of original grant, our board of directors determined that it was in our best interest and in the best interest of the optionees to increase the exercise price of affected options to avoid potential penalties under Section 409A of the Internal Revenue Code. The number of shares covered by each amended stock option were decreased to ensure that the aggregate exercise price of that affected option remained unchanged. In addition, for those holders who agreed with us to amend their affected options, we awarded affected optionees restricted stock units covering that number of shares of our common stock as was equal to the number of shares by which his or her affected options were reduced.
 
Based on this retrospective reassessment, we will recognize additional compensation expense of $1.6 million to reflect the difference between the value calculated using the Black-Scholes option pricing model with the initial assessment of fair value of common stock and the value calculated using the Black-Scholes option pricing model with the reassessed fair value of common stock for the stock-based awards granted in July 2006 which are accounted for under the fair value method of SFAS No. 123(R). The compensation expense will be recognized over the vesting schedule of the awards. As a result of the reassessment, we recognized compensation expense under APB 25 of approximately $193,000 during the year ended December 31, 2005. Including stock-based compensation expense related to the retrospective reassessment of the fair value of our common stock, we recorded stock-based compensation expense of approximately $4.6 million for the year ended December 31, 2006 and approximately $3.5 million for the nine months ended September 30, 2007. As of September 30, 2007, a future expense of $11.3 million related to our unvested stock option and restricted stock unit awards is expected to be recognized over a weighted-average period of 2.58 years.


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Results of Operations
 
The following Management’s Discussion and Analysis of Results of Operations is presented on a combined basis, in which we and the Predecessor are viewed as one. We have prepared our discussion of the results of operations by comparing our results for the year ended December 31, 2006 to the combined results of the Predecessor and Successor for the year ended December 31, 2005 (the “Combined 2005 Results”). The Combined 2005 Results have been compared to the Predecessor’s combined results for the year ended December 31, 2004. The Predecessor financial statements do not reflect the application of purchase accounting relating to our acquisition of the Predecessor. Upon the acquisition in February 2005, an independent third-party assessed the fair value of our domain name registration rights to be $15.0 million, an increase of more than $7.0 million over book value. In addition, we recorded $3.1 million of intangible assets which are being amortized over three to five years from the date of acquisition. Subsequent to our acquisition of the Predecessor, we are subject to the payment of income taxes whereas the Predecessor was not. Despite these differences, we believe this presentation provides a more meaningful comparison than comparing the results for a partial year. The following table sets forth the items in our historical statements of income for the periods indicated:
 
                                                         
    Predecessor     Successor     Combined     Successor  
          Period
    Period
                         
          From
    From
                         
          January 1
    February 22
                Nine Months
 
    Year Ended
    to
    to
    Year Ended
    Year Ended
    Ended
 
    December 31,
    February 21,
    December 31,
    December 31,
    December 31,
    September 30,  
    2004     2005     2005     2005     2006     2006     2007  
                      (unaudited)           (unaudited)  
    (in thousands)  
 
Statements of Income Data:
                                                       
Revenue:
                                                       
Online media
  $ 3,791     $ 939     $ 7,532     $ 8,471     $ 29,843     $ 18,544     $ 30,419  
Domain name sales and related services
    15,665       2,778       20,107       22,885       31,202       23,515       27,855  
                                                         
Total revenue
    19,456       3,717       27,639       31,356       61,045       42,059       58,274  
Cost of revenue:
                                                       
Online media
    331       55       1,291       1,346       9,738       6,851       7,550  
Domain name sales and related services
    3,798       879       5,959       6,838       13,173       9,717       12,207  
                                                         
Total cost of revenue
    4,129       934       7,250       8,184       22,911       16,568       19,757  
Gross profit
    15,327       2,783       20,389       23,172       38,134       25,491       38,517  
Operating costs:
                                                       
Product development
    472       55       805       860       2,510       1,572       4,164  
Sales and marketing
    887       129       2,264       2,393       7,480       4,781       10,212  
General and administrative
    4,979       922       3,100       4,022       11,672       8,236       9,575  
Amortization of intangible assets
    11       2       393       395       1,584       796       3,436  
                                                         
Total operating costs
    6,349       1,108       6,562       7,670       23,246       15,385       27,387  
Operating income
    8,978       1,675       13,827       15,502       14,888       10,106       11,130  
Interest expense, net
    133       11       2,524       2,535       6,962       3,252       10,972  
                                                         
Income before income taxes
    8,845       1,664       11,303       12,967       7,926       6,854       158  
Provision (benefit) for income taxes
                4,334       4,334       4,414       3,817       (2 )
                                                         
Income before cumulative effect of change in accounting principle
    8,845       1,664       6,969       8,633       3,512       3,037       160  
Cumulative effect of change in accounting principle
                            (872 )     (872 )      
                                                         
Net income
  $ 8,845     $ 1,664     $ 6,969     $ 8,633     $ 2,640     $ 2,165     $ 160  
                                                         


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In the preceding table, cost of revenue and operating costs include stock-based compensation expense as follows:
 
                                                         
    Predecessor     Successor        
          Period
    Period
                         
          From
    From
                         
    Year
    January 1
    February 22
    Year
                   
    Ended
    to
    to
    Ended
    Nine Months Ended
       
    December 31,
    February 21,
    December 31,
    December 31,
    September 30,        
    2004     2005     2005     2006     2006     2007        
                     (in thousands)     (unaudited)        
 
Online media cost of revenue
              $ 9     $ 97     $ 68     $ 80          
Domain name sale cost of revenue
                    26       80       41       95          
Operating costs:
                                                       
Product development
                47       235       137       346          
Sales and marketing
                58       461       288       768          
General and administrative
                53       3,717       3,091       2,191          
                                                         
Total
              $ 193     $ 4,590     $ 3,625     $ 3,480          
                                                         
 
The following table sets forth income statement data for the year ended December 31, 2004, the period from January 1, 2005 to February 21, 2005, the period from February 22 to December 31, 2005, the combined period from January 1, 2005 to December 31, 2005, the year ended December 31, 2006 and the nine month periods ended September 30, 2006 and 2007 as a percentage of total revenue.
 
                                                         
    Predecessor     Successor     Combined     Successor  
          Period From
    Period From
                         
          January 1
    February 22
                Nine Months
 
    Year Ended
    to
    to
    Year Ended
    Year Ended
    Ended
 
    December 31,
    February 21,
    December 31,
    December 31,
    December 31,
    September 30,  
    2004     2005     2005     2005     2006     2006     2007  
                      (unaudited)           (unaudited)  
 
Statements of Income Data:
                                                       
Revenue:
                                                       
Online media
    19.5 %     25.3 %     27.3 %     27.0 %     48.9 %     44.1 %     52.2 %
Domain name sales and related services
    80.5       74.7       72.7       73.0       51.1       55.9       47.8  
                                                         
Total revenue
    100.0       100.0       100.0       100.0       100.0       100.0       100.0  
Cost of revenue:
                                                       
Online media
    1.7       1.5       4.7       4.3       16.0       16.3       13.0  
Domain name sales and related services
    19.5       23.6       21.6       21.8       21.6       23.1       20.9  
                                                         
Total cost of revenue
    21.2       25.1       26.3       26.1       37.6       39.4       33.9  
Gross profit
    78.8       74.9       73.7       73.9       62.4       60.6       66.1  
Operating costs:
                                                       
Product development
    2.4       1.5       2.9       2.7       4.1       3.7       7.1  
Sales and marketing
    4.6       3.5       8.2       7.6       12.3       11.4       17.5  
General and administrative
    25.6       24.8       11.2       12.8       19.1       19.6       16.4  
Amortization of intangible assets
    0.1       0.1       1.4       1.3       2.6       1.9       5.9  
                                                         
Total operating costs
    32.7       29.9       23.7       24.4       38.1       36.6       46.9  
Operating income
    46.1       45.0       50.0       49.5       24.3       24.0       19.2  
Interest expense, net
    0.7       0.3       9.1       8.1       11.4       7.7       18.8  
                                                         
Income before income taxes
    45.4       44.7       40.9       41.4       12.9       16.3       0.4  
Provision (benefit) for income taxes
                15.7       13.8       7.2       9.1       0.0  
                                                         
Income before cumulative effect of change on accounting principle
    45.4       44.7       25.2       27.6       5.7       7.2       0.4  
Cumulative effect of change on accounting principle
                            (1.4 )     (2.1 )      
                                                         
Net income
    45.4 %     44.7 %     25.2 %     27.6 %     4.3 %     5.1 %     0.4 %
                                                         


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Comparison of the Nine Months Ended September 30, 2006 and 2007
 
Revenue
 
                                 
    Nine Months Ended
             
    September 30,           Percent
 
    2006     2007     Increase     Change  
    (dollars in thousands)  
    (unaudited)              
 
Online media
  $ 18,544     $ 30,419     $ 11,875       64.0 %
Domain name sales and related services
    23,515       27,855       4,340       18.5 %
                                 
Total revenue
  $ 42,059     $ 58,274     $ 16,215       38.6 %
 
Online media.  The increase in online media revenue was attributable primarily to increased volume of cost-per-click advertising and, to a lesser extent, to revenue derived from newly-acquired or -launched premium enthusiast websites. This increase in cost-per-click advertising resulted from our acquisitions of domain names and businesses and technical improvements to our SiteSense platform which produced more targeted advertising. The increase in premium enthusiast website revenue was due to acquisitions completed in 2007. We anticipate that our online media revenue will increase as a percentage of total revenue as we continue to increase the number of developed websites and particularly premium enthusiast websites.
 
Domain name sales and related services.  The increase in domain name sales and related services was primarily attributable to an increase in the volume of our domain names sold due to the increased size of our domain name portfolio, number of domain name sales personnel and use of resellers. We expect domain name sales revenue to continue to grow as we continue to invest in our domain name marketplace business to maintain our position as one of the largest domain name marketplaces on the Internet.
 
Cost of revenue
 
                                 
    Nine Months Ended
             
    September 30,           Percent
 
    2006     2007     Increase     Change  
    (dollars in thousands)  
    (unaudited)              
 
Online media
  $ 6,851     $ 7,550     $ 699       10.2 %
Domain name sales and related services
    9,717       12,207       2,490       25.6 %
                                 
Total cost of revenue
  $ 16,568     $ 19,757     $ 3,189       19.2 %
Percentage of revenue
    39.4 %     33.9 %                
 
Online media cost of revenue.  The increase in online media cost of revenue was primarily attributable to a $477,000 increase in royalties and other product-related costs for premium enthusiast websites, a $408,000 increase in amortization of intangible assets related to acquired software and technologies, and a $407,000 increase in hosting costs, offset by a $796,000 decrease in marketing costs. We anticipate that online media costs will decrease as a percentage of online media revenue as result of our focus on increasing non-paid sources of Internet traffic, such as Direct Search and referral links.
 
Domain name sales and related services cost of revenue.  The increase in domain name sales and related services cost of revenue is primarily attributable to a $814,000 increase in amortization of domain name renewal fees, a $764,000 increase in the marketing costs and a $661,000 increase in commissions paid to our marketplace affiliates, offset by a $390,000 decrease in amortization and specific identification costs related to the sale of registration rights. We anticipate our domain name sales and related services cost of revenue to decrease as a percentage of total domain name sales and related services revenue as we realize expected efficiencies from our domain name portfolio management and network operations staff.


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Product development
 
                                 
    Nine Months Ended
       
    September 30,       Percent
    2006   2007   Increase   Change
    (dollars in thousands)
    (unaudited)        
 
Product development expense
  $ 1,572     $ 4,164     $ 2,592       164.9 %
Percentage of revenue
    3.7 %     7.1 %                
 
The increase in product development expenses was primarily attributable to a $1.6 million increase related to hiring additional technology personnel and a $674,000 increase in consulting costs, both related to personnel involved in the development of new and upgraded product offerings. We anticipate our product development expenses to increase in absolute dollar amounts and as a percentage of revenue as we continue to make planned investments in additional product and technology professionals and in the capabilities to provide additional services to our customers.
 
Sales and marketing
 
                                 
    Nine Months Ended
       
    September 30,       Percent
    2006   2007   Increase   Change
    (dollars in thousands)
    (unaudited)        
 
Sales and marketing expense
  $ 4,781     $ 10,212     $ 5,431       113.6 %
Percentage of revenue
    11.4 %     17.5 %                
 
The increase in sales and marketing expenses was primarily attributable to a $3.0 million increase related to hiring additional sales and marketing personnel, a $692,000 increase in consulting costs, a $481,000 increase in stock-based compensation and increases in travel, bad debt expense and other items. We anticipate our sales and marketing expenses to increase in absolute dollar amounts as we continue to build and acquire new premium enthusiast websites, hire additional sales professionals and expand our business services offerings. These sales and marketing expense increases will be driven largely by the full-year impact of acquisitions completed in 2006 as well as by any acquisitions completed subsequent to 2006.
 
General and administrative
 
                                 
    Nine Months Ended
       
    September 30,       Percent
    2006   2007   Increase   Change
    (dollars in thousands)
    (unaudited)        
 
General and administrative expense
  $ 8,236     $ 9,575     $ 1,339       16.3 %
Percentage of revenue
    19.6 %     16.4 %                
 
The increase in general and administrative expenses was primarily attributable to an increase of $1.6 million in legal and accounting costs, including approximately $1.0 million of costs related to a dispute settled in June 2007, a $681,000 increase in salary expenses related to hiring additional management and executive professionals, a $637,000 increase in facilities costs and higher depreciation costs, offset by a $900,000 decrease in stock-based compensation expense related to grants made in the first quarter of 2006 and a $717,000 loss on early extinguishment of debt, incurred in September 2006. We anticipate our general and administrative expenses will increase in absolute dollar amounts as we continue to expand our accounting, legal, human resources and finance teams, and incur additional costs relating to operating as a public company, including a significant increase in our directors’ and officers’ insurance premiums.


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Amortization of intangible assets
 
                                 
    Nine Months Ended
       
    September 30,       Percent
    2006   2007   Increase   Change
    (dollars in thousands)
    (unaudited)        
 
Amortization of intangible assets expense
  $  796     $ 3,436     $ 2,640       331.7 %
Percentage of revenue
    1.9 %     5.9 %                
 
The increase in amortization of intangible assets expense was primarily due to identified intangible assets arising from our acquisitions. We anticipate our amortization of intangibles expenses to increase in absolute dollar amounts and as a percentage of revenue as a result of the full-year impact of amortization of acquisitions completed prior to September 30, 2007 as well as any acquisitions completed subsequent to September 30, 2007.
 
Interest expense, net
 
                                 
    Nine Months Ended
       
    September 30,        
     
          Percent
    2006   2007   Increase   Change
    (dollars in thousands)
    (unaudited)        
 
Interest expense, net
  $ 3,252     $ 10,972     $ 7,720       237.4 %
Percentage of revenue
    7.7 %     18.8 %                
 
Our interest expense, net increased as a percentage of revenue from 7.7% in 2006 to 18.8% in 2007. This increase was primarily due to our September 2006 debt financing and the adoption of a new accounting policy related to our Series A convertible redeemable preferred stock warrant, offset by interest earned on average cash balances in our money market accounts.
 
Provision (benefit) for income taxes.  Provision for income taxes decreased from $3.8 million for the nine months ended September 30, 2006 to a benefit of $2 for the nine months ended September 30, 2007, due to a decrease in pre-tax income of $6.7 million. We anticipate that our effective tax rate for 2007 will be 80.47%. We expensed approximately $3.6 million and $3.5 million in stock-based compensation during in the nine months ended September 2006 and 2007, respectively which is not deductible for taxes.
 
Comparison of the Years Ended December 31, 2005 and 2006
 
Revenue
 
                                 
    Year Ended December 31,              
    Combined
                Percent
 
    2005     2006     Increase     Change  
    (dollars in thousands)  
    (unaudited)                    
 
Online media
  $ 8,471     $ 29,843     $ 21,372       252.3 %
Domain name sales and related services
    22,885       31,202       8,317       36.3 %
                                 
Total revenue
  $ 31,356     $ 61,045     $ 29,689       94.7 %
 
Online media.  The increase in online media revenue was primarily attributable to increased cost-per-click advertising. This increase in cost-per-click advertising resulted from our acquisitions of domain names and businesses, increased marketing, and technical improvements to our SiteSense platform which produced more targeted advertising. We also received a higher revenue share from our primary third-party advertising distribution provider based on the full-year impact in 2006 of a contract signed in December 2005.
 
Domain name sales and related services.  The increase in domain name sales and related services was primarily attributable to an increase in the volume of our domain names sold due to the increased size of our domain name portfolio, number of domain name sales personnel and use of resellers.


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Cost of revenue
 
                                 
    Year Ended
             
    December 31,              
    Combined
                Percent
 
    2005     2006     Increase     Change  
    (dollars in thousands)  
    (unaudited)                    
 
Online media
  $ 1,346     $ 9,738     $ 8,392       623.5 %
Domain name sales and related services
    6,838       13,173       6,335       92.6 %
                                 
Total cost of revenue
  $ 8,184     $ 22,911     $ 14,727       179.9 %
Percentage of revenue
    26.1 %     37.6 %                
 
Online media cost of revenue.  The increase in online media cost of revenue was primarily attributable to an increase in marketing programs designed to generate Internet traffic to our websites.
 
Domain name sales and related services cost of revenue.  The increase in domain name sales and related services cost of revenue is primarily attributable to a $3.5 million increase in the amortization of domain name registration rights and a $1.0 million increase in domain name renewal costs, resulting in each case primarily from the growth of our domain name portfolio. This increase was also attributable to an $800,000 increase in marketing costs.
 
Product development
 
                                 
    Year Ended
       
    December 31,        
    Combined
          Percent
    2005   2006   Increase   Change
    (dollars in thousands)
    (unaudited)            
 
Product development expense
  $ 860     $ 2,510     $ 1,650       191.9 %
Percentage of revenue
    2.7 %     4.1 %                
 
The increase in product development expenses was primarily attributable to a $1.3 million increase related to hiring additional technology personnel, and small increases in consulting costs and stock-based compensation, all related to personnel involved in the development of new and upgraded product offerings.
 
Sales and marketing
 
                                 
    Year Ended
       
    December 31,        
    Combined
          Percent
    2005   2006   Increase   Change
    (dollars in thousands)
    (unaudited)            
 
Sales and marketing expense
  $ 2,393     $ 7,480     $ 5,087       212.6 %
Percentage of revenue
    7.6 %     12.3 %                
 
The increase in sales and marketing expenses was primarily attributable to a $2.6 million increase related to hiring additional sales and marketing personnel, an increase of sales commissions of $790,000, consulting and market research of $740,000 and a $400,000 increase in stock-based compensation.


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General and administrative
 
                                 
    Year Ended
       
    December 31,        
    Combined
          Percent
    2005   2006   Increase   Change
    (dollars in thousands)
    (unaudited)            
 
General and administrative expense
  $ 4,022     $ 11,672     $ 7,650       190.2 %
Percentage of revenue
    12.8 %     19.1 %                
 
The increase in general and administrative expenses was primarily attributable to a $3.7 million increase in stock-based compensation expense related to the hiring of several senior executives, $1.4 million increase in salary expenses related to hiring additional management and executive professionals, a $1.1 million increase in legal costs, a $717,000 expense related to the early extinguishment of debt in connection with our September 2006 debt financing and a $393,000 increase in rental costs related to our expansion into new facilities.
 
Amortization of intangible assets
 
                                 
    Year Ended December 31,        
    Combined
          Percent
    2005   2006   Increase   Change
    (dollars in thousands)
    (unaudited)            
 
Amortization of intangible assets expense
  $ 395     $ 1,584     $ 1,189       301.0 %
Percentage of revenue
    1.3 %     2.6 %                
 
The increase in amortization of intangible assets expense was primarily due to identified intangible assets arising from our acquisitions.
 
Interest expense, net
 
                                 
    Year Ended
       
    December 31,        
    Combined
          Percent
    2005   2006   Increase   Change
    (dollars in thousands)
    (unaudited)            
 
Interest expense, net
  $ 2,535     $ 6,962     $ 4,427       174.6 %
Percentage of revenue
    8.1 %     11.4 %                
 
Our interest expense, net increased as a percentage of revenue from 8.1% in 2005 to 11.4% in 2006. This increase was primarily due to our September 2006 debt financing and the adoption of a new accounting policy in 2006 related to our Series A convertible redeemable preferred stock warrant, offset by interest earned on average cash balances in our money market accounts.
 
Provision for income taxes.  Provision for income taxes increased from $4.3 million for the Successor, an effective tax rate of 38.4%, for the period from February 22, 2005 to December 31, 2005, to $4.4 million, an effective tax rate of 55.7%, in 2006. The increase in our 2006 effective tax rate was primarily related to permanent differences between book expenses and tax expenses. Significant permanent differences in 2006 include $1.0 million in stock-based compensation and a $1.5 million fair market value adjustment on a Series A convertible redeemable preferred stock warrant. For the period from January 1, 2005 to February 21, 2005, the Predecessor was a subchapter S corporation and, as such, did not record any income taxes. As a subchapter S corporation, taxes were paid directly by their members.


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Comparison of the Years Ended December 31, 2004 and 2005
 
Revenue
 
                                 
    Year Ended
             
    December 31,              
          Combined
          Percent
 
    2004     2005     Increase     Change  
    (dollars in thousands)  
          (unaudited)              
 
Online media
  $ 3,791     $ 8,471     $ 4,680       123.5 %
Domain name sales and related services
    15,665       22,885       7,220       46.1 %
                                 
Total revenue
  $ 19,456     $ 31,356     $ 11,900       61.2 %
 
Online media.  The increase in online media revenue was primarily attributable to increased cost-per-click advertising derived from acquisitions of domain names and technical improvements to our SiteSense platform which produced more targeted advertising.
 
Domain name sales and related services.  The increase in revenue from our domain name marketplace was primarily attributable to an increase in the number of domain names sold, due to the increased size of our domain name portfolio, and a higher average sales price.
 
Cost of revenue
 
                                 
    Year Ended
             
    December 31,              
          Combined
          Percent
 
    2004     2005     Increase     Change  
    (dollars in thousands)  
          (unaudited)              
 
Online media
  $ 331     $ 1,346     $ 1,015       306.6 %
Domain name sales and related services
    3,798       6,838       3,040       80.0 %
                                 
Total cost of revenue
  $ 4,129     $ 8,184     $ 4,055       98.2 %
Percentage of revenue
    21.2 %     26.1 %                
 
Online media cost of revenue.  The increase in online media cost of revenue was primarily attributable to an increase of $880,000 in marketing programs designed to generate Internet traffic.
 
Domain name sales and related services cost of revenue.  The increase in domain name sales and related services cost of revenue is primarily attributable to a $1.5 million increase in the amortization of domain name registration rights and a $980,000 increase in domain name renewal costs, resulting in each case primarily from the growth of our domain name portfolio.
 
Product development
 
                                 
    Year Ended December 31,        
        Combined
      Percent
    2004   2005   Increase   Change
        (dollars in thousands)    
        (unaudited)        
 
Product development expense
  $ 472     $ 860     $ 388       82.2 %
Percentage of revenue
    2.4 %     2.7 %                
 
The increase in product development expenses was primarily attributable to a $640,000 increase related to hiring additional technology personnel, offset by a $300,000 decrease in third-party website development costs.


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Sales and marketing
 
                                 
    Year Ended
       
    December 31,        
        Combined
      Percent
    2004   2005   Increase   Change
        (dollars in thousands)    
        (unaudited)        
 
Sales and marketing expense
  $ 887     $ 2,393     $ 1,506       169.8 %
Percentage of revenue
    4.6 %     7.6 %                
 
The increase in sales and marketing expenses was primarily attributable to a $750,000 increase related to hiring additional sales and marketing personnel and a $370,000 increase in sales commissions.
 
General and administrative
 
                                 
    Year Ended
       
    December 31,        
        Combined
      Percent
    2004   2005   Decrease   Change
        (dollars in thousands)    
        (unaudited)        
 
General and administrative expense
  $ 4,979     $ 4,022     $ (957 )     (19.2 )%
Percentage of revenue
    25.6 %     12.8 %                
 
The decrease in general and administrative costs was primarily due to a $3.9 million decrease in payments to members of the Predecessor, partially offset by a $960,000 increase in professional fees such as legal, accounting and recruiting, a $700,000 increase related to the hiring of finance and management personnel, $600,000 in payroll taxes, and $280,000 in office related costs.
 
Amortization of intangible assets
 
                                 
    Year Ended
       
    December 31,        
        Combined
      Percent
    2004   2005   Increase   Change
        (dollars in thousands)    
        (unaudited)        
 
Amortization of intangible assets expense
  $ 11     $ 395     $ 384       3,490.9 %
Percentage of revenue
    0.1 %     1.3 %                
 
The increase in amortization of intangible assets expense was primarily due to identified intangible assets arising from the acquisition of the Predecessor in February 2005.
 
Interest expense, net
 
                                 
    Year Ended
       
    December 31,        
        Combined
      Percent
    2004   2005   Increase   Change
        (dollars in thousands)    
        (unaudited)        
 
Interest expense, net
  $ 133     $ 2,535     $ 2,402       1,806.0 %
Percentage of revenue
    0.7 %     8.1 %                
 
Interest expense, net increased from $133,000 in 2004 to $2.5 million in 2005. Our interest expense, net increased as a percentage of revenue from 0.7% in 2004 to 8.1% in 2005. This increase was primarily due to our debt financing in connection with our acquisition of the Predecessor in February 2005, offset by interest earned on average cash balances in our money market accounts.
 
Provision for income taxes.  A comparison to the Predecessor is not meaningful because the Predecessor was a subchapter S corporation and, as such, did not record any income taxes.


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Quarterly Results of Operations
 
The following table sets forth unaudited quarterly income statement data for the seven quarters ended September 30, 2007. This data has been derived from the unaudited interim financial statements prepared on the same basis as the audited financial statements contained in this prospectus and, in our opinion, includes all adjustments consisting only of normal recurring adjustments that we consider necessary for a fair presentation of such information. This data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes thereto appearing elsewhere in this prospectus. The operating results for any quarter should not be considered indicative of results for any future period.
 
                                                         
    Three Months Ended,  
    Mar 31,
    June 30,
    Sept. 30,
    Dec. 31,
    Mar. 31,
    June 30,
    Sept. 30,
 
    2006     2006     2006     2006     2007     2007     2007  
    (dollars in thousands)
 
    (unaudited)  
 
Statements of Income Data:
                                                       
Revenue:
                                                       
Online media
  $ 4,027     $ 6,159     $ 8,358     $ 11,299     $ 10,273     $ 8,732     $ 11,414  
Domain name sales and related services
    7,559       7,936       8,020       7,687       8,809       9,454       9,592  
                                                         
Total revenue
    11,586       14,095       16,378       18,986       19,082       18,186       21,006  
Cost of revenue:
                                                       
Online media
    1,222       2,547       3,082       2,887       1,825       3,077       2,648  
Domain name sales and related services
    2,291       2,549       4,877       3,456       3,913       4,219       4,075  
                                                         
Total cost of revenue
    3,513       5,096       7,959       6,343       5,738       7,296       6,723  
Gross profit
    8,073       8,999       8,419       12,643       13,344       10,890       14,283  
Operating costs:
                                                       
Product development
    472       397       703       938       1,476       1,275       1,413  
Sales and marketing
    1,281       1,613       1,887       2,699       3,304       3,344       3,564  
General and administrative
    2,837       2,189       3,210       3,436       2,939       3,492       3,144  
Amortization of intangible assets
    143       282       371       788       1,017       1,199       1,220  
                                                         
Total operating costs
    4,733       4,481       6,171       7,861       8,736       9,310       9,341  
Operating income
    3,340       4,518       2,248       4,782       4,608       1,580       4,942  
Interest expense, net
    794       586       1,872       3,710       3,201       4,134       3,637  
                                                         
Income (loss) before income taxes
    2,546       3,932       376       1,072       1,407       (2,554 )     1,305  
Provision (benefit) for income taxes
    1,421       2,190       206       597       1,003       (2,056 )     1,051  
                                                         
Income (loss) before cumulative effect of change in accounting principle
    1,125       1,742       170       475       404       (498 )     254  
Cumulative effect of change in accounting principle
    (872 )                                    
                                                         
Net income (loss)
  $ 253     $ 1,742     $ 170     $ 475     $ 404     $ (498 )   $ 254  
                                                         


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The following table sets forth unaudited quarterly income statement data for the seven quarters ended September 30, 2007 as a percentage of revenue.
 
                                                         
    Three Months Ended,  
    Mar. 31,
    June 30,
    Sept. 30,
    Dec. 31,
    Mar. 31,
    June 30,
    Sept. 30,
 
    2006     2006     2006     2006     2007     2007     2007  
    (unaudited)  
 
Statements of Income Data:
                                                       
Revenue:
                                                       
Online media
    34.8 %     43.7 %     51.0 %     59.5 %     53.8 %     48.0 %     54.3 %
Domain name sales and related services
    65.2       56.3       49.0       40.5       46.2       52.0       45.7  
                                                         
Total revenue
    100.0       100.0       100.0       100.0       100.0       100.0       100.0  
Cost of revenue:
                                                       
Online media
    10.5       18.1       18.8       15.2       9.6       16.9       12.6  
Domain name sales and related services
    19.8       18.1       29.8       18.2       20.5       23.2       19.4  
                                                         
Total cost of revenue
    30.3       36.2       48.6       33.4       30.1       40.1       32.0  
Gross profit
    69.7       63.8       51.4       66.6       69.9       59.9       68.0  
Operating costs:
                                                       
Product development
    4.1       2.8       4.3       4.9       7.7       7.0       6.7  
Sales and marketing
    11.1       11.4       11.5       14.2       17.3       18.4       17.0  
General and administrative
    24.5       15.5       19.6       18.1       15.4       19.2       15.0  
Amortization of intangible assets
    1.2       2.0       2.3       4.2       5.3       6.6       5.8  
                                                         
Total operating costs
    40.9       31.7       37.7       41.4       45.7       51.2       44.5  
Operating income
    28.8       32.1       13.7       25.2       24.2       8.7       23.5  
Interest expense, net
    6.9       4.2       11.4       19.5       16.8       22.7       17.3  
                                                         
Income (loss) before income taxes
    21.9       27.9       2.3       5.7       7.4       (14.0 )     6.2  
Provision (benefit) for income taxes
    12.3       15.5       1.3       3.1       5.3       (11.3 )     5.0  
                                                         
Income (loss) before cumulative effect of change in accounting principle
    9.6       12.4       1.0       2.6       2.1       (2.7 )     1.2  
Cumulative effect of change in accounting principle
    (7.5 )                                    
                                                         
Net income (loss)
    2.1 %     12.4 %     1.0 %     2.6 %     2.1 %     (2.7 )%     1.2 %
                                                         
 
Except for the three months ended June 30, 2007, our total revenue increased in each quarter primarily from an increase in the number of paid advertisements delivered across our media network as well as an increase in the number of domains names sold. Our total revenue decreased in the quarter ended June 30, 2007 as a result of a decrease in our online media revenue, as described below. Our costs of revenue generally increased each quarter as a result of the increase in our performance-based marketing initiatives as well as higher costs related to our collection of domain names.
 
Our online media revenue for each of the three months ended March 31, 2007 and June 30, 2007 declined sequentially as a result of changing our exclusive CPC advertisement distribution partner in March 2007. As a result of this change, online media revenue from our affiliate network declined by $1.1 million in the three months ended March 31, 2007 compared to the three months ended December 31, 2006, and by $2.3 million in the three months ended June 30, 2007 compared to the three months ended March 31, 2007. These declines were due to decreased revenue realized per affiliate website as a result of lower levels of monetization that resulted from our transition to a new CPC advertisement distribution partner. This lower level of monetization also resulted in a decrease in the number of affiliate network customers. In May 2007, we began using a dual-source arrangement for CPC advertisements. Since that time, we have engaged an exclusive CPC advertisement distribution partner for our proprietary network of websites and another exclusive CPC advertisement


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distribution partner for our affiliate network. Online media revenue from our affiliate network began to increase after implementing this dual-source arrangement, due both to increasing revenue per website and an increase in the number of affiliate network customers.
 
Additional significant quarterly changes include the following:
 
  •  The results of SmartName LLC are included from the acquisition date of September 7, 2006, which positively impacted our online media revenue for the three months ended December 31, 2006.
 
  •  The quarter ended September 30, 2006 reflects a charge of $717,000 in general and administrative expenses related to the early extinguishment of debt.
 
  •  The quarter ended September 30, 2006 includes revenue of approximately $1.1 million and related cost of revenue from the sale of a portfolio of domain names associated with the implementation of our company policy not to own domain names that include, among others, registered trademarks or company names, vulgar or obscene language or content, or language or content associated with any illegal enterprise.
 
  •  We incurred approximately $675,000 during the quarter ended December 31, 2006, approximately $193,000 during the quarter ended March 31, 2007, approximately $950,000 during the quarter ended June 30, 2007, and approximately $45,000 during the quarter ended September 30, 2007 in general and administrative expenses in connection with the settlement of litigation and related legal fees.
 
  •  The quarter ended March 31, 2006 includes a change of approximately $872,000 as a result of a change in accounting principles related to our Series A convertible redeemable preferred stock warrant effective as of January 1, 2006.
 
  •  We adopted the provisions of SFAS No. 123(R) on January 1, 2006, resulting in an increase in the amount of stock-based compensation reflected in our statements of income.
 
Seasonality and Cyclicality
 
We believe that our business is subject to seasonal and cyclical fluctuations. Overall Internet usage generally declines during the summer months, which could result in lower Internet traffic to our network and therefore lower revenue primarily during the third fiscal quarter. In addition, domestic advertising spending generally is cyclical in reaction to overall conditions in the U.S. economy. Our rapid historical growth rate has masked the impact of seasonality on our business. We expect the seasonal pattern of our business to become more pronounced.
 
Liquidity and Capital Resources
 
We were incorporated in February 2005 for the purpose of acquiring the Predecessor. At that time, we issued $50.6 million of Series A and Z convertible redeemable preferred stock, as well as $30.0 million of debt securities. None of the net proceeds from the sale of our Series A and Z convertible redeemable preferred stock and the debt securities was available to fund our initial operations. In September 2006, we entered into a credit agreement providing for $105.0 million of term debt financing and for a $10.0 million revolving line of credit which expired in September 2007. A portion of the net proceeds of this financing was used to repay our original debt financing used to fund the acquisition of the Predecessor. The balance of the term debt financing after repayment of our original debt financing, approximately $73.3 million, was available for limited purposes, including permitted purchases of domain names and acquisitions of businesses. As of September 30, 2007, we had used approximately $61.6 million for such permitted purchases. The remaining funds are recorded on our balance sheet as restricted cash. At September 30, 2007, we had approximately $33.0 million of cash, cash equivalents and restricted cash on our balance sheet, of which approximately $13.0 million was restricted cash. Our principal sources of liquidity are our cash, cash equivalents and restricted cash, as well as the cash flow that we generate from our operations.


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Operating Activities
 
Our net cash provided by operating activities was $10.1 million for the nine months ended September 30, 2007. Our net cash provided by operating activities was $8.4 million in 2006, compared to $11.1 million in 2005 and $4.2 million in 2004. Acquisitions of domain name registration rights is a use of cash within our cash from operations and totaled $2.0 million in the nine months ended September 30 2007, $6.1 million in 2006, $3.4 million in 2005 and $4.4 million in 2004.
 
Our net cash provided by operating activities for the nine months ended September 30, 2007 was derived from a net income of $0.2 million, plus non-cash charges of $18.2 million, less changes in operating assets and liabilities of $8.3 million. Our most significant non-cash charges included amortization of domain name registration rights of $4.5 million, amortization of domain name renewal fees of $3.2 million, stock-based compensation of $3.5 million and amortization of intangible assets of $4.4 million. Amortization of domain name registration rights and domain name renewal fees are likely to increase as we increase the size of our domain name portfolio. Amortization of intangible assets is also expected to increase based on the full-year impact of acquisitions completed in 2006 and 2007, and as a result of any acquisitions completed subsequent to September 30, 2007. The increase in net operating assets related primarily to the increase in domain name registration rights discussed above and an increase in prepaid domain name renewal fees. In addition, we had increased prepaid expenses, primarily related to income taxes, largely offset by a decrease in accounts receivable and other receivables, primarily due to timing of collections.
 
Our net cash provided by operating activities in 2006 was derived from net income of $2.6 million, plus non-cash charges of $17.9 million, less changes in operating assets and liabilities of $12.2 million. Our most significant non-cash charges included amortization of domain name registration rights of $5.9 million, amortization of domain name renewal fees of $3.5 million, stock-based compensation of $4.6 million and amortization of intangible assets of $1.9 million. Amortization of domain name registration rights and domain name renewal fees are likely to increase as we increase the size of our domain name portfolio. Amortization of intangible assets is also expected to increase based on the full-year impact of acquisitions completed in 2006, and as a result of any acquisitions completed subsequent to 2006. The 2006 increase in net operating assets related primarily to the increase in domain name registration rights discussed above and the increase in prepaid domain name renewal fees. In addition, our accounts receivable increased by approximately $9.1 million in 2006, due primarily to the increasing percentage of revenue derived from our media business. A significant amount of this increase relates to advertising revenue in our affiliate network. This increase in accounts receivable was offset by an increase of $9.5 million in accrued liabilities, including $5.4 million related to payments due to affiliate network participants for their share of advertising revenue and $2.9 million of interest payable. We expect continued growth in net operating assets, due primarily to increases in our domain name portfolio.
 
Our net cash generated from operations for the period February 22, 2005 through December 31, 2005 resulted from net income of $7.0 million, plus non-cash charges of $6.0 million, less changes in operating assets and liabilities of $3.8 million. Our most significant non-cash charges were amortization of domain name registration rights of $2.2 million and amortization of domain name renewal fees of $2.2 million. Changes in our net operating assets included an increase in domain name registration rights of $3.4 million and an increase in prepaid domain name renewal fees of $2.4 million, partially offset by an increase in taxes payable of $1.7 million. The Predecessor generated net cash from operations for the period January 1, 2005 through February 21, 2005 from net income of $1.7 million plus non-cash charges of $0.5 million, less changes in operating assets and liabilities of $0.3 million. The most significant non-cash charges of the Predecessor were amortization of domain name registration rights and amortization of domain name renewal fees.
 
Net cash generated from Predecessor operations in 2004 resulted from net income of $8.8 million, plus non-cash charges of $2.4 million, less changes in operating assets and liabilities of $7.1 million. The most significant non-cash charges were amortization of domain name registration rights of $0.8 million and amortization of domain name renewal fees of $1.5 million. Changes in net operating assets included an increase in domain name registration rights of $4.4 million and an increase in prepaid domain name renewal fees of $2.3 million.


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Investing Activities
 
Our net cash used in investing activities was $5.7 million for the nine months ended September 30, 2007, comprised primarily of acquisitions of businesses of $23.8 million and an increase in registration rights held for use of $1.7 million, partially offset by a decrease in restricted cash of $21.9 million. The decrease in restricted cash relates to amounts funded from escrow under our credit facility to fund permitted acquisitions of businesses and domain names. Capitalized development costs and purchases of property and equipment were $2.2 million in the aggregate in the period.
 
Our net cash used in investing activities was $72.6 million in 2006, comprised primarily of acquisitions of $23.7 million, an increase in domain name registration rights held for use of $12.6 million and an increase in restricted cash of $34.8 million. The increase in restricted cash relates to amounts available under our credit facility to fund permitted purchases of domain names and acquisitions of businesses. Our acquisitions of domain name registration rights held for use included the acquisition of a portfolio of premium domain names in a single transaction for approximately $11.4 million. We do not currently expect to enter into similar transactions in the foreseeable future and, accordingly, we expect acquisitions of domain name registration rights to decrease below 2006 levels. Our purchases of property and equipment were $1.3 million in 2006. Our property and equipment needs are expected to increase modestly in the near future.
 
Our net cash used in investing activities was $72.9 million for the period February 22, 2005 through December 31, 2005, including the acquisition of the Predecessor for $72.5 million. Net cash used in Predecessor investing activities was not significant for the period January 1, 2005 through February 21, 2005 and the year ended December 31, 2004.
 
Financing Activities
 
Our net cash provided by financing activities was not significant for the nine months ended September 30, 2007. Net cash provided by financing activities was $70.4 million in 2006, including net proceeds of $100.6 million from our debt financing discussed above, less repayment of $30.3 million of our original debt financing use to fund the acquisition of the Predecessor.
 
Our net cash provided by financing activities was $73.1 million for the period February 22, 2005 through December 31, 2005 from the issuance of convertible redeemable preferred stock and debt financing related to the acquisition of the Predecessor. Net cash used in Predecessor investing activities was not significant for the period January 1, 2005 through February 21, 2005. Net cash used in Predecessor financing activities was $4.7 million in 2004, including a $3.4 million distribution to the members of the Predecessor.
 
We believe that our current cash, cash equivalents and cash flow from operations will be sufficient to meet our anticipated cash needs for working capital purposes and purchases of domain names and equipment for the foreseeable future. We may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these sources of cash are insufficient to satisfy our cash requirements, we may seek to sell debt securities or additional equity securities or to obtain a credit facility. The sale of convertible debt securities or additional equity securities could result in additional dilution to our stockholders. The incurrence of indebtedness would result in incurring debt service obligations and could result in operating and financial covenants that would restrict our operations. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all.
 
A portion of the net proceeds to us from this offering will provide us additional liquidity for use in the expansion of our operations and for acquisitions of domain names, businesses and technologies. After repayment of our existing term debt obligations, we expect to invest a portion of these net proceeds in short term interest-bearing, investment-grade securities, which will result in additional interest income.
 
Credit Facility
 
In September 2006, we entered into a $115.0 million credit facility which consists of a $105.0 million term loan, to be used for permitted purchases of domain names and acquisitions of businesses, and a


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$10.0 million revolving line of credit which expired in September 2007. A portion of the term loan was used to retire outstanding debt. We are required to pay interest every three months. The note, which is payable in full on September 7, 2008, accrues interest at a rate equal to LIBOR plus 6.0%. As of September 30, 2007, this rate was 11.33% and approximately $108.0 million in principal and interest was outstanding under this term note. Our credit agreement requires that we use the proceeds of a public offering of equity securities to repay all debt outstanding under the credit agreement. Borrowings under the credit facility are secured by certain of our assets.
 
Our credit facility also contains certain financial covenants, including the following:
 
  •  Interest Coverage Ratio, which requires our ratio of Adjusted EBITDA to cash interest expense for the most recently completed twelve months to exceed certain thresholds. The interest coverage ratio is tested on a quarterly basis. As of September 30, 2007, our interest coverage ratio was required to be no less than 2.20:1.00.
 
  •  Leverage Ratio, which requires our ratio of total indebtedness to Adjusted EBITDA for the most recently completed twelve months not to exceed certain thresholds. The leverage ratio is tested on a quarterly basis. As of September 30, 2007, our leverage ratio was required to be no greater than 3.65:1.00.
 
  •  Maximum Capital Expenditures, which prohibits us from making or incurring capital expenditures in excess of certain thresholds during a fiscal year. As of September 30, 2007, we were not permitted to make capital expenditures in excess of $2.0 million in the aggregate during the fiscal year ending December 31, 2007.
 
In addition, the credit facility restricts our ability, among other things, to:
 
  •  incur or guaranty additional indebtedness;
 
  •  create liens;
 
  •  make loans or investments;
 
  •  pay dividends or make distributions on our stock;
 
  •  sell assets;
 
  •  consolidate or merge with other entities; or
 
  •  enter into transactions with affiliates.
 
These financial and operating covenants may restrict our ability to finance our operations, engage in business activities or expand or pursue our business strategies. To the extent we are unable to satisfy those covenants in the future, we will need to obtain waivers to avoid being in default of the terms of this credit facility. In addition to a covenant default, other events of default under our credit facility include any material breach of a representation or warranty or attachment of funds or a material judgment against us. If a default occurs, we may be required to repay all then outstanding amounts. After this offering, we expect that we will have sufficient resources to fund any amounts which may become due under this credit facility as a result of a default by us or otherwise.


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Contractual Obligations
 
Our major outstanding contractual obligations relate to our long-term debt obligations and operating lease obligations. We have no contractual obligations of more than five years. We have summarized in the table below our fixed contractual cash obligations as of September 30, 2007.
 
                                         
Contractual
  Payments Due By Period  
Obligations
  Total     Less than 1 Year     1 to 3 Years     3 to 5 Years     More than 5 Years  
    (In thousands)  
 
Long-term debt obligations
  $ 105,000     $ 105,000                    
Operating lease obligations
    1,301       657       592       52        
                                         
Total
  $ 106,301     $ 105,657     $ 592     $ 52        
                                         
 
The above summary does not reflect our contingent obligations, incurred in connection with completed acquisitions, to pay up to approximately $7.3 million in the first quarter of 2008, up to approximately $1.3 million in the second quarter of 2008, and up to approximately $2.5 million in the first quarter of 2009, based upon achievement of financial milestones.
 
Off-Balance Sheet Arrangements
 
We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions, foreign currency forward contracts or any other off-balance sheet arrangements.
 
Quantitative and Qualitative Disclosures about Market Risk
 
Foreign Currency Risk
 
Our exposure to adverse movements in foreign currency exchange rates is primarily related to nominal payments to international website publishers. A hypothetical change of 10% in foreign currency exchange rates would not have a material impact on our financial statements or results of operations. All of our sales are denominated in U.S. Dollars.
 
Interest Rate Risk
 
Our exposure to market risks for changes in interest rates relates primarily to borrowings under our term loan facility and our revolving line of credit. As of September 30, 2007, we had $108.0 million of indebtedness outstanding under our term loan facility, all of which was locked at a fixed rate of interest until November 5, 2007. Based on our assets and liabilities as of September 30, 2007, and assuming the balance of these assets and liabilities remain unchanged until September 30, 2008, a one percent increase or decrease in LIBOR would change our net income by approximately $635,000. We anticipate that we will repay the outstanding indebtedness under our term loan facility with the proceeds to us from this offering. See “Use of Proceeds.”