S-1/A 1 d68252a4sv1za.htm FORM S-1/A sv1za
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As filed with the Securities and Exchange Commission on November 2, 2009
Registration No. 333-160986
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 4
to
Form S-1
 
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
ANCESTRY.COM INC.
(Exact name of registrant as specified in its charter)
 
 
 
         
DELAWARE
  7379   26-1235962
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)
 
 
360 West 4800 North
Provo, UT 84604
(801) 705-7000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
 
Timothy Sullivan
Chief Executive Officer
360 West 4800 North
Provo, UT 84604
(801) 705-7000
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
 
 
Copies to:
     
Barbara L. Becker
Stewart L. McDowell
Gibson, Dunn & Crutcher LLP
200 Park Avenue
New York, NY 10166
Tel: (212) 351-4000
Fax: (212) 351-4035
  Jeffrey D. Saper
Robert G. Day
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304
Tel: (650) 493-9300
Fax: (650) 565-5147
 
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after this registration statement becomes effective.
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o        
 
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o        
 
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o        
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o
  Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
        (Do not check if a smaller reporting company)    
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to such Section 8(a) may determine.
 


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The information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we and the selling stockholders are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.
 
PROSPECTUS (Subject to Completion)
Dated November 2, 2009
 
7,407,407 Shares
 
(ANCESTRY.COM INC. LOGO)
 
COMMON STOCK
 
 
 
 
Ancestry.com Inc. is offering 4,074,074 shares of its common stock and the selling stockholders are offering 3,333,333 shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price of our common stock will be between $12.50 and $14.50 per share.
 
 
 
 
Our common stock has been approved for listing on The Nasdaq Global Select Market under the symbol ACOM, subject to official notice of issuance.
 
 
 
 
Investing in the common stock involves risks. See “Risk Factors” beginning on page 13.
 
 
 
 
PRICE $      A SHARE
 
 
 
 
                 
        Underwriting
       
    Price to
  Discounts and
  Proceeds to
  Proceeds to Selling
    Public   Commissions   Company   Stockholders
Per Share
  $          $          $          $       
Total
  $                  $                  $                  $               
 
 
Ancestry.com Inc. has granted the underwriters the right to purchase up to an additional 611,112 shares of common stock to cover over-allotments and the selling stockholders have granted the underwriters the right to purchase up to an additional 499,999 shares of common stock to cover over-allotments.
 
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
The underwriters expect to deliver the shares of common stock to purchasers on       , 2009.
 
 
 
 
MORGAN STANLEY BofA MERRILL LYNCH
 
 
 
JEFFERIES & COMPANY PIPER JAFFRAY BMO CAPITAL MARKETS
 
          , 2009


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(PICTURE)
87% of Americans have an interest in their family history.* Every month, millions turn to Ancestry.com® for answers.** Ancestry.com is the world’s largest online collection of family history resources — including records, photos, stories, family trees and a collaborative community of over a million subscribers worldwide. Our mission is to help everyone discover, preserve and share their family history. * Based on a survey commissioned by Ancestry.com and conducted by Harris Interactive July 15-17, 2009 via its QuickQuery online omnibus service interviewing a nationwide sample of 2,066 U.S. adults aged 18+, of which 87% indicated that they were either “very interested” (33%), “interested” (28%) or “somewhat interested” (26%) in learning about their family’s history. Results were weighted as needed for age, sex, race/ethnicity, education, region, and household income. Propensity score weighting was also used to adjust for respondents’ propensity to be online. ** comScore, 2009 ©2009 Ancestry.com

 


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(PICTURE)

 


 

 
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 EX-3.1
 EX-3.2
 EX-10.28
 EX-10.29
 EX-23.2
 
 
 
 
You should rely only on the information contained in this prospectus or in any free-writing prospectus we may authorize to be delivered or made available to you. We have not, the selling stockholders have not and the underwriters have not authorized anyone to provide you with additional or different information. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus or any free-writing prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
 
Until          , 2009 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
 
For investors outside the United States: We have not, the selling stockholders have not and the underwriters have not done anything that would permit this offering, or possession or distribution of this prospectus, in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.


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PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included elsewhere in this prospectus. All information in this prospectus reflects the 1-for-2 reverse stock split of our common stock effected on October 30, 2009.
 
ANCESTRY.COM INC.
 
Mission
 
Ancestry.com’s mission is to help everyone discover, preserve and share their family history.
 
Overview
 
Ancestry.com is the world’s largest online resource for family history, with more than one million paying subscribers around the world as of September 30, 2009. We have been a leader in the family history market for over 20 years and have helped pioneer the market for online family history research. We believe that most people have a fundamental desire to understand who they are and from where they came, and that anyone interested in discovering, preserving and sharing their family history is a potential user of Ancestry.com. We strive to make our service valuable to individuals ranging from the most committed family historians to those taking their first steps towards satisfying their curiosity about their family stories.
 
The foundation of our service is an extensive and unique collection of billions of historical records that we have digitized, indexed and put online over the past 12 years. We have developed efficient and proprietary systems for digitizing handwritten historical documents, and have established relationships with national, state and local government archives, historical societies, religious institutions and private collectors of historical content around the world. These digital records and documents, combined with our proprietary online search technologies and tools, enable our subscribers to research their family history, build their family trees and make meaningful discoveries about the lives of their ancestors.
 
We have built the world’s largest online community of people interested in their family histories, and we believe that this network is highly valuable to our subscribers. Our community is a large and growing source of user-generated content uniquely focused on family history. Over the past three years, our registered users have created over 12 million family trees containing more than 1.25 billion profiles. They have uploaded and attached to their trees over 26 million photographs, scanned documents, written stories and audio clips. This growing pool of user-generated content adds color and context to the family histories assembled from the digitized historical documents found on Ancestry.com. Our subscribers also have attached to their trees over 333 million records from our company-acquired content collection, a process that is helping further organize this collection by associating specific records with people in family trees.
 
In addition, we are deploying tools and technologies to facilitate social networking and crowd sourcing, a means of leveraging collaborative efforts. These tools and technologies are intended to provide our subscribers with an expanding family history collaboration network in which insights and discoveries are shared by relatives, distant and close. Our service also provides a platform from which our subscribers can share their stories. Subscribers can invite family and friends to help build their family trees, add personal memories and upload photographs and stories of their own.
 
We provide ongoing value to our subscribers by regularly adding new historical content, enhancing our websites with new tools and features and enabling greater collaboration among our users through the growth of our global community. Our plan to achieve long-term and sustainable growth is to increase our subscriber base in the United States and around the world by serving our loyal base of existing subscribers and by attracting new


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subscribers. Our revenues have increased from $122.6 million in 2004 to $197.6 million in 2008, a compound annual growth rate of 12.7%.
 
Industry Background
 
Societies around the world have historically documented the names, dates and places associated with important events of their citizenry. However, due to the vast, dispersed and disorganized nature of these data collections, the process of researching family history generally has been time consuming, painstaking and expensive. The introduction of web-based technologies greatly enhances opportunities to make family history research easier, but businesses attempting to leverage the Internet must tailor their products and services to address the distinctive challenges of family history research.
 
The Ancestry.com Solution
 
Through the design and development of a unique consumer Internet application and underlying proprietary technologies, substantial investment in content and the aggregation of network scale, we are revolutionizing how people discover, preserve and share their family history. Our solution includes:
 
Consumer Benefits
 
Easy-to-use website.  Our technology platform makes family history research and networking easier, more enjoyable and more rewarding. We seek to make Ancestry.com relevant and easy to use for both new and experienced subscribers, and we continue to advance our online tools to help our subscribers efficiently search our content, organize their research, collaborate with others and share their stories.
 
Easy access to comprehensive data sources.  We have aggregated and organized a comprehensive collection of historical records, with a particular emphasis on records from the United States, the United Kingdom and Canada. Our technologies allow subscribers to locate relevant family history records quickly and easily, resulting in a rewarding experience for new subscribers and experienced family historians alike. Subscribers input information that they know about their relatives, however limited, and can immediately view the vast content sources available to populate their family trees. Our proprietary record hinting technology suggests content to our subscribers, alerting them through “hints” delivered online and by email of potential matches to further populate their trees from our company-acquired and user-generated content.
 
Valuable community.  Our community of family history enthusiasts is a significant component of our subscription value proposition. Our subscribers can collaborate, contribute content and assist each other with family history research. The publicly available family trees created by our registered users can provide new subscribers with a substantial head start researching their families and the opportunity to connect with relatives interested and engaged in the discovery and preservation of a shared family lineage.
 
Competitive Advantages
 
Proprietary technology platform provides robust search capability and ease of use.  We have built a scalable, proprietary technology platform. Our search technology is designed to deal with the inherent difficulties of searching historical content. Our record hinting technology locates and pushes relevant content to our registered users. Our digitization and indexing processes streamline the complex and time-consuming task of putting historical records online.
 
Extensive and accessible content collection.  We have digitized and indexed the largest online collection of family history records in the world, with collections from the United States, the United Kingdom, Australia and Canada, as well as Germany, France, Italy, Sweden and China. We have invested approximately $80 million to date in making this content available to subscribers and continue to invest a substantial amount of time and money to acquire or license, digitize, index and publish additional records for our subscribers. In total, our collections represent over four billion records and an estimated eight billion names.
 
Community of dedicated and highly engaged subscribers enhances our value proposition.  We have an active and dedicated community of subscribers, approximately 43% of whom have been subscribers for more


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than two years as of September 30, 2009. In the eight months ended August 2009, visitors to our websites spent an average of 18.8 minutes on our websites per usage day, according to monthly data from comScore. We believe our online community is highly valuable to our subscribers, because the ever expanding pool of user-generated content and collaboration and sharing opportunities can significantly enhance the family history research process.
 
Growth Strategy
 
Our goal is to remain the leading online resource for family history and to grow our subscriber base in the United States and around the world by offering a superior value proposition to anyone interested in learning more about their family history. We will focus on retaining our loyal base of existing subscribers, on acquiring new subscribers and on expanding the market to new consumers. In pursuit of these goals, we will continue to focus on the following objectives:
 
Continue to build our premium brand and drive category awareness.  Over the past three years, we have expanded and improved our consumer marketing activities in the United States, which we believe has substantially increased our brand awareness. We believe that continued investments in consumer marketing and promotion will allow us to enhance our premium brand, increase awareness of the family history category and enhance our ability to acquire new subscribers.
 
Further improve our product and user experience.  We believe that investments in our product platform can make family history research easier, more enjoyable and more accessible. We continuously seek to advance and improve our core search and hinting technologies, our document image viewer, our family tree building and viewing experience and our sharing and publishing capabilities. We believe that we can leverage the latest web technologies to further transform the way people discover family history online.
 
Regularly add new content.  A vast universe of historical records around the world is yet to be digitized, and we intend to continue to expand our collection of digital historical records. We will seek to maintain and extend our existing relationships with archives and other holders of content throughout the world and to find new sources of unique family history content. We also plan to continue to promote the growth of user-generated content by making the Ancestry.com websites even better places to upload and share personal family history documents and memories.
 
Enhance our collaboration technologies.  With more than one million subscribers around the world as of September 30, 2009, we believe that we have the scale to further expand our unique family history collaboration network and to help relatives share insights and discoveries about common ancestors. We believe that collaboration is a fundamental part of family history research and that social networking technologies applied to family history research can provide our subscribers with even greater value. We intend to make family history research more collaborative and appealing to a larger market.
 
Grow our business internationally.  We believe that our business model of digitizing historical content and making records available online has appeal in multiple markets around the world, and we will seek to implement this model in other international markets. In the third quarter of 2009, we launched an initial version of Mundia.com, a lower-priced family history networking product intended for markets where we do not have a presence.
 
Risks Associated with Our Business
 
Our business is subject to numerous risks and uncertainties, as discussed more fully in the section entitled “Risk Factors” immediately following this prospectus summary. We generate substantially all of our revenues from subscriptions to our products and services, and if our efforts to satisfy, retain and attract subscribers are not successful, we may experience higher rates of monthly subscriber churn and our revenues and profitability could be adversely affected. We face competition from a number of sources, some of which provide access to records free of charge. Because of our dependence on family history products and services for substantially all of our revenues, factors such as changes in consumer preferences for our products and challenges in acquiring and making available online historical content may have a disproportionately greater impact on us than if we offered multiple products


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and services. Our attempts to grow internationally may prove difficult due to, among other things, legislation in various jurisdictions, cultural impediments, and costs and difficulties associated with acquiring relevant content. Additionally, our recent revenue growth may not be sustainable.
 
The Spectrum Investment
 
We operated as The Generations Network, Inc., which we refer to as the predecessor, until December 5, 2007. On December 5, 2007, Generations Holding, Inc., which we refer to as the successor, acquired The Generations Network, Inc. in connection with an investment by Spectrum Equity Investors V, L.P. and certain of its affiliates, which we refer to collectively as Spectrum. The successor was created for the sole purpose of acquiring the predecessor and had no prior operations.
 
The total purchase price for this transaction, which we refer to as the Spectrum investment, was $354.8 million, at an effective per share price of $5.40. The total purchase price consisted of $249.1 million of cash, $95.7 million in value of previously owned stock of predecessor, $8.2 million of stock option fair value assumed by the successor and $1.8 million of transaction related expenses. The cash consisted of approximately $100 million invested by Spectrum, $9.8 million invested by other shareholders and $140 million of borrowings under the term loan portion of our credit facility. Spectrum invested equity of our predecessor with an aggregate value of $38.6 million. Spectrum and certain of its affiliates currently hold approximately 67% of the outstanding shares of our common stock. The remaining approximately 33% of our currently outstanding shares of common stock is primarily held by a variety of corporate and individual investors and employees, including affiliates of Crosslink Capital, Inc., W Capital Partners II, L.P., the JLS Revocable Trust and Timothy Sullivan, our president and chief executive officer, who obtained their shares of our common stock in connection with the Spectrum investment by contributing equity valued at an aggregate amount of $57.1 million or investing cash in the aggregate amount of $9.8 million. A small percentage of our outstanding common stock is also held by current or former employees who exercised stock options. See “Related Party Transactions” for further information about the terms of the Spectrum investment.
 
As a result of the accounting for the Spectrum investment, our fiscal year 2007 is divided into a predecessor period from January 1, 2007 through December 5, 2007 and a successor period from December 6, 2007 through December 31, 2007.
 
Corporate Information
 
Our principal executive offices are located at 360 West 4800 North, Provo, UT 84604, and our telephone number at that address is (801) 705-7000. Our corporate website address is www.ancestry.com. We do not incorporate the information contained on, or accessible through, our corporate website into this prospectus, and you should not consider it part of this prospectus. We were originally incorporated in Utah in 1983 under the name Ancestry, Inc. We changed our name to Ancestry.com, Inc. in July 1998 and reincorporated in Delaware in November 1998. Our name was subsequently changed to MyFamily.com, Inc. in November 1999, and then to The Generations Network, Inc. in November 2006.
 
In July 2009, to better align our corporate identity with the premier branding of Ancestry.com, we changed our name to Ancestry.com Inc. References herein to “Ancestry.com,” the “company,” “we,” “our” and “us” refer to the operations of Ancestry.com Inc. and its consolidated subsidiaries in both the predecessor and successor periods, unless otherwise specified. We are a holding company, and substantially all of our operations are conducted by our wholly-owned subsidiary Ancestry.com Operations Inc., which we refer to as the operating company, and its subsidiaries. Our operations consist primarily of our flagship website Ancestry.com, which is a part of a global family of websites that includes Ancestry.co.uk, Ancestry.com.au, Ancestry.ca, Ancestry.de, Ancestry.fr, Ancestry.it and Ancestry.se. We refer to these websites collectively as the Ancestry.com websites.


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Terminology
 
In this prospectus we use the terms subscriber, registered user, record, database and title.
 
A subscriber is an individual who pays for renewable access to one of our Ancestry.com websites, and a registered user is a person who has registered on one of our Ancestry.com websites, including subscribers.
 
We use the term “record” in different ways depending on the content source. When referring to a number of records in certain of our company-acquired content collections, such as a census record, we mean information about each specific person. For example, a draft card will typically be counted as one record, as will each line in a census, because each contains information about a specific individual. When referring to unstructured data, such as a newspaper, we define each page in those data sources as a record. When referring to a number of databases, we mean groups of records we have distinguished as unique sets based on one or more common characteristics shared by the records in each set, such as a common time period, place or subject matter. When referring to a number of titles, we mean an individual book, directory or newspaper title. For example, The New York Times counts as a single title, regardless of the number of editions we have online.


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THE OFFERING
 
     
Common stock offered by Ancestry.com
  4,074,074 shares
Common stock offered by the selling stockholders
  3,333,333 shares
Total common stock offered
  7,407,407 shares
Total common stock to be outstanding after this offering
  42,402,916 shares
Use of proceeds
  We expect to use the net proceeds from this offering as follows:
   
•   approximately $12.1 million to repay a portion of our credit facility; and
   
•   the remainder for working capital and other general corporate purposes, which may include the acquisition of other businesses, products or technologies; however, we do not have commitments for any acquisitions at this time.
    We will not receive any proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”
Risk Factors
  See “Risk Factors” for a discussion of factors that you should consider carefully before deciding whether to purchase shares of our common stock.
Nasdaq Global Select Market symbol
  ACOM
 
 
 
Except as otherwise indicated, all information in this prospectus:
 
  •  gives effect to a reverse stock split of 1-for-2 of our shares of common stock on October 30, 2009;
 
  •  assumes that the underwriters will not exercise their option to purchase 611,112 additional shares from us and 499,999 additional shares from the selling stockholders;
 
  •  excludes 10,326,588 shares issuable upon the exercise of options outstanding as of September 30, 2009 with a weighted average exercise price of $5.21 per share; and
 
  •  excludes an estimated 2,120,146 shares reserved for issuance pursuant to future grants of awards under our 2009 Stock Incentive Plan as of the date of this prospectus.


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SUMMARY CONSOLIDATED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA
 
The following tables summarize the consolidated historical and unaudited pro forma financial and operating data for the periods indicated. The summary consolidated statements of operations data presented below for the year ended December 31, 2006, the predecessor period from January 1, 2007 through December 5, 2007, the successor period from December 6, 2007 through December 31, 2007 and the year ended December 31, 2008 have been derived from our consolidated financial statements which have been audited by Ernst & Young LLP, an independent registered public accounting firm and included elsewhere in this prospectus. The summary consolidated statements of operations data for the nine month periods ended September 30, 2008 and 2009 and the balance sheet data at September 30, 2009 are derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus and include all adjustments, consisting of normal and recurring adjustments, that we consider necessary for a fair presentation of the financial position and results of operations as of and for such periods. Operating results for the nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the full 2009 fiscal year. The unaudited consolidated pro forma financial data for the fiscal year ended December 31, 2007 has been prepared to give effect to the Spectrum investment in the manner described under “Unaudited Consolidated Pro Forma Financial Data” and the notes thereto. The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. The unaudited consolidated pro forma financial data are for informational purposes only and do not purport to represent what our results of operations actually would have been if the Spectrum investment had occurred on January 1, 2007, and such data do not purport to project the results of operations for any future period. See “Risk Factors” and the notes to our consolidated financial statements included elsewhere in this prospectus. You should read the summary data presented below in conjunction with our consolidated financial statements, the notes to our consolidated financial statements, “Unaudited Consolidated Pro Forma Financial Data” on page 38 of this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
 
                                                           
   
    Predecessor       Successor     Pro Forma     Successor  
          Period from
      Period from
                         
    Year Ended
    Jan. 1, 2007
      Dec. 6, 2007
    Year Ended
    Year Ended
    Nine Months Ended
 
    December 31,
    through
      through
    December 31,
    December 31,
    September 30,  
    2006     Dec. 5, 2007       Dec. 31, 2007     2007     2008     2008     2009  
    (in thousands, except per share data)  
Consolidated Statements of Operations Data:
                                                         
Revenues:
                                                         
Subscription revenues
  $ 137,643     $ 141,141       $ 11,692     $ 152,833     $ 181,391     $ 133,616     $ 152,506  
Product and other revenues
    12,909       12,269         1,278       13,547       16,200       11,542       12,287  
                                                           
Total revenues
    150,552       153,410         12,970       166,380       197,591       145,158       164,793  
Cost of revenues:
                                                         
Cost of subscription revenues
    27,344       33,590         2,462       36,212       38,187       27,699       29,755  
Cost of product and other revenues
    3,695       2,552         500       3,052       5,427       3,292       4,213  
                                                           
Total cost of revenues
    31,039       36,142         2,962       39,264       43,614       30,991       33,968  
                                                           
Gross profit
    119,513       117,268         10,008       127,116       153,977       114,167       130,825  
Operating expenses:
                                                         
Technology and development
    28,280       31,255         3,517       33,754       33,206       23,705       26,690  
Marketing and advertising
    51,421       42,400         3,157       45,607       52,341       36,634       44,226  
General and administrative
    26,978       20,723         2,142       22,964       28,931       21,035       24,569  
Amortization of acquired intangible assets
    2,216       2,132         1,542       24,061       23,779       17,832       12,165  
Transaction related expenses
          9,530                                  
                                                           
Total operating expenses
    108,895       106,040         10,358       126,386       138,257       99,206       107,650  
                                                           


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    Predecessor       Successor     Pro Forma     Successor  
          Period from
      Period from
                         
    Year Ended
    Jan. 1, 2007
      Dec. 6, 2007
    Year Ended
    Year Ended
    Nine Months Ended
 
    December 31,
    through
      through
    December 31,
    December 31,
    September 30,  
    2006     Dec. 5, 2007       Dec. 31, 2007     2007     2008     2008     2009  
    (in thousands, except per share data)  
Income (loss) from operations
    10,618       11,228         (350 )     730       15,720       14,961       23,175  
Other income (expense):
                                                         
Interest expense
    (946 )     (756 )       (1,146 )     (12,841 )     (12,355 )     (9,327 )     (4,784 )
Interest income
    2,238       2,051         289       348       872       632       746  
Other income (expense), net
    834       266         7       273       (8 )     (18 )     14  
                                                           
Income (loss) before income taxes
    12,744       12,789         (1,200 )     (11,490 )     4,229       6,248       19,151  
Income tax (expense) benefit
    (4,595 )     (5,018 )       (103 )     4,251       (1,845 )     (2,748 )     (6,927 )
                                                           
Net income (loss)
  $ 8,149     $ 7,771       $ (1,303 )   $ (7,239 )   $ 2,384     $ 3,500     $ 12,224  
                                                           
Net income per common share:(1)
                                                         
Basic
                                    $ 0.06     $ 0.09     $ 0.32  
                                                           
Diluted
                                    $ 0.06     $ 0.09     $ 0.30  
                                                           
 
 
(1) In connection with the Spectrum investment, we were recapitalized. As a result, the capital structure of our predecessor is not comparable to that of the successor. Accordingly, net income per common share is not comparable or meaningful for periods prior to 2008 and has not been presented.
 
                                                   
   
    Predecessor       Successor  
          Period from
      Period from
                   
    Year Ended
    Jan. 1, 2007
      Dec. 6, 2007
    Year Ended
    Nine Months Ended
 
    December 31,
    through
      through
    December 31,
    September 30,  
    2006     Dec. 5, 2007       Dec. 31, 2007     2008     2008     2009  
    (in thousands)  
Other Financial Data:
                                                 
Adjusted EBITDA(1)
  $ 30,455     $ 39,344       $ 3,755     $ 62,645     $ 49,062     $ 52,878  
                                                   
Free cash flow(1)
    4,212       14,025         1,774       31,712       28,018       23,848  
                                                   
Stock-based compensation expense included in:
                                                 
Cost of subscription revenues
  $ 31     $ 73       $ 3     $ 80     $ 60     $ 78  
Technology and development
    224       260         23       1,132       791       1,223  
Marketing and advertising
    196       279         27       254       180       273  
General and administrative
    3,338       286         24       3,206       2,478       2,691  
                                                   
Total stock-based compensation expense
  $ 3,789     $ 898       $ 77     $ 4,672     $ 3,509     $ 4,265  
                                                   
 
 
(1) Income from operations and net income, and therefore adjusted EBITDA and free cash flow, include an expense related to a settlement in the third quarter of 2009 of a claim regarding the timeliness and accuracy of a content index we created. The settlement resulted in an expense of approximately $2.3 million in 2009.
 
                                         
        Nine Months Ended
    Year Ended December 31,   September 30,
    2006   2007   2008   2008   2009
 
Other Data:(1)
                                       
Total subscribers(2)
    734,386       832,193       913,683       893,882       1,028,180  
Subscriber additions
    569,851       479,663       556,045       412,276       508,750  
Monthly churn(3)
            3.5 %     4.0 %     4.0 %     3.9 %
Subscriber acquisition cost(4)
  $ 49.29     $ 70.96     $ 71.99     $ 69.46     $ 68.32  
Average monthly revenue per subscriber(4)
  $ 14.52     $ 14.83     $ 16.09     $ 15.95     $ 16.50  
 
 
(1) The terms total subscribers, monthly churn, subscriber acquisition cost and average monthly revenue per subscriber are defined in the “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Key Business Metrics” section.
(2) Total subscribers were 600,411 and 681,632 for the years ended December 31, 2004 and 2005, respectively.
(3) Monthly churn is the average monthly churn for the quarters included in the periods shown. Monthly churn is not comparable for the year ended December 31, 2006 due to a change in the packaging of our products and services, and accordingly, has not been presented.
(4) Based on pro forma expenses and revenues for 2007. See “Unaudited Consolidated Pro Forma Financial Data” on page 38 of this prospectus.

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    As of September 30, 2009  
    Actual     As adjusted  
    (in thousands)  
 
Balance Sheet Data:(1)
               
Cash, cash equivalents and short-term investments
  $ 60,593     $ 96,893  
Total assets
    476,296       512,596  
Deferred revenues
    69,850       69,850  
Long-term debt (including current portion)
    114,669       102,569  
Total liabilities
    239,482       227,382  
Total stockholders’ equity
    236,814       285,214  
 
 
(1) We have presented this summary balance sheet (i) on an actual basis and (ii) on an as adjusted basis to reflect our sale of 4,074,074 shares of our common stock in this offering at an assumed initial public offering price of $13.50 per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and the application of the net proceeds of this offering as set forth herein. Each $1.00 increase or decrease in the assumed initial public price of $13.50 per share, the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease the amount of cash and cash equivalents by approximately $2.8 million, total stockholders’ equity by approximately $3.8 million, and long term debt (including current portion) by approximately $1.0 million, assuming the number of shares offered by us as set forth on the cover page of this prospectus remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us. The as adjusted information presented is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing.
 
Definitions of Other Financial Data
 
Adjusted EBITDA. We define adjusted EBITDA as net income (loss) plus net interest (income) expense; income tax expense; non-cash charges including depreciation, amortization, impairment of intangible assets and stock-based compensation expense; other (income) expense and expenses associated with the Spectrum investment, such as in-process research and development and transaction expenses.
 
Free cash flow. We define free cash flow as net income (loss) plus net interest (income) expense; income tax expense; non-cash charges including depreciation, amortization, impairment of intangible assets and stock-based compensation expense; other (income) expense and expenses associated with the Spectrum investment, such as in-process research and development and transaction expenses, and minus capitalization of content database costs, capital expenditures and cash paid for income taxes and interest expense.
 
     Discussion of other financial data
 
Adjusted EBITDA and free cash flow are financial data that are not calculated in accordance with GAAP. The table below provides a reconciliation of these non-GAAP financial measures to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP. Adjusted EBITDA and free cash flow should not be considered as an alternative to net income, income from operations or any other measure of financial performance calculated and presented in accordance with GAAP. Our adjusted EBITDA or free cash flow may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted EBITDA or free cash flow or similarly titled measures in the same manner as we do. We prepare adjusted EBITDA and free cash flow to eliminate the impact of items that we do not consider indicative of our core operating performance. We encourage you to evaluate these adjustments and the reasons we consider them appropriate, as well as the material limitations of non-GAAP measures and the manner in which we compensate for those limitations.
 
Our management uses adjusted EBITDA and is increasingly using free cash flow:
 
  •  as measures of operating performance;
 
  •  as factors when determining management’s incentive compensation;
 
  •  for planning purposes, including the preparation of our annual operating budget;


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  •  to allocate resources to enhance the financial performance of our business;
 
  •  to evaluate the effectiveness of our business strategies; and
 
  •  in communications with our board of directors concerning our financial performance.
 
Management also uses adjusted EBITDA to evaluate compliance with the debt covenants in our credit facility, which include an EBITDA covenant that is substantially similar to adjusted EBITDA. The definition of EBITDA under our credit facility differs from our definition of adjusted EBITDA in this prospectus primarily because the definition in the credit facility does not exclude interest income (though it does exclude interest expense) and other income (expense). See “Management’s Discussion and Analysis of Financial Condition — Liquidity and Capital Resources’’ for a description of our credit facility.
 
Management believes that the use of adjusted EBITDA and free cash flow provides consistency and comparability with our past financial performance, facilitates period to period comparisons of operations, and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results. Management believes that it is useful to exclude non-cash charges such as depreciation, amortization, impairment of intangible assets and stock-based compensation from adjusted EBITDA and free cash flow because (i) the amount of such non-cash expenses in any specific period may not directly correlate to the underlying performance of our business operations and (ii) such expenses can vary significantly between periods as a result of new acquisitions, full amortization of previously acquired tangible and intangible assets or the timing of new stock-based awards, as the case may be.
 
More specifically, we believe it is appropriate to exclude stock-based compensation expense from adjusted EBITDA and free cash flow because non-cash equity grants made at a certain price and point in time do not reflect how our business is performing at any particular time. While we believe that stockholders should have information about any dilutive effect of outstanding options and the cost of that compensation, we also believe that stockholders should have the ability to view the non-GAAP financial measures that exclude these costs that management uses to evaluate our business. The determination of stock-based compensation expense is based on many subjective inputs at a point in time and many of these inputs are not necessarily directly related to the performance of our business. Therefore, excluding this cost gives us a clearer view of the operating performance of our business. Because of varying available valuation methodologies, subjective assumptions and the variety of award types that companies may use under Statement of Financial Accounting Standards No. 123(R), which governs the accounting treatment for stock-based compensation, as well as the impact of non-operational factors such as our share price, on the magnitude of this expense, management believes that providing non-GAAP financial measures that exclude this stock-based compensation expense allows investors and analysts to make meaningful comparisons between our operating results with those of other companies. Stock-based compensation has been a significant non-cash recurring expense in our business and has been used as a key incentive offered to our employees. We believe such compensation contributed to the revenues earned during the periods presented and also believe it will contribute to the generation of future period revenues. Stock-based compensation expense will recur in future periods for GAAP purposes. There are material limitations to our exclusion of stock-based compensation from adjusted EBITDA and free cash flow, primarily that these expenses reduce our GAAP net income. See below for a further discussion of these limitations on our use of adjusted EBITDA and free cash flow as an analytical tool, as well as the manner in which management compensates for these limitations.
 
We believe it is appropriate to exclude depreciation and amortization from adjusted EBITDA and free cash flow because depreciation is a function of our capital expenditures which are included in our cash flow measure, while amortization reflects other asset acquisitions made at a point in time and their associated costs. In analyzing the performance of our business currently, management believes it is helpful also to consider the business without taking into account costs or benefits accruing from historical decisions on infrastructure and capacity. While these matters do affect the overall financial health of our company, they are separately evaluated and relate to historic decisions that do not affect current operations of our business on a cash flow basis. Further, depreciation and amortization do not result in ongoing cash expenditures. Investors should note that the use of assets being depreciated or amortized contributed to revenues earned during the periods presented and will continue to contribute to future period revenues. This depreciation and amortization expense will recur in future periods for GAAP purposes. There are material limitations to our exclusion of depreciation and amortization from adjusted


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EBITDA and free cash flow, primarily that these expenses reduce our GAAP net income and the assets being depreciated or amortized will often have to be replaced in the future, resulting in future cash requirements. See below for a further discussion of these limitations on our use of adjusted EBITDA and free cash flow as an analytical tool, as well as the manner in which management compensates for these limitations.
 
We believe it is appropriate to exclude impairment of intangible assets and acquired in-process research and development from adjusted EBITDA and free cash flow because these charges relate to specific past events. In analyzing the performance of our business currently, management believes it is helpful also to consider the business without taking into account costs or benefits accruing from historical decisions or acquisitions. Further, these charges do not result in ongoing cash expenditures. There are material limitations to our exclusion of impairment of intangible assets and in-process research and design from adjusted EBITDA and free cash flow, primarily that these expenses reduce our GAAP net income. See below for a further discussion of these limitations on our use of adjusted EBITDA and free cash flow as an analytical tool, as well as the manner in which management compensates for these limitations.
 
Management believes that it is useful to exclude other income (expense) from adjusted EBITDA and free cash flow because that line item consists of items that do not correlate to the underlying performance of our business, such as retirement and disposal of non-operating assets and gain or loss on non-operating investments. Management also believes that it is useful to exclude transaction expenses and in-process research and development expense associated with the Spectrum investment because these expenses were incurred in connection with the investment and therefore do not occur regularly. There are material limitations to our exclusion of other income (expense) from adjusted EBITDA and free cash flow, primarily that these may include cash income or expense that increase or reduce our GAAP net income. See below for a further discussion of these limitations on our use of adjusted EBITDA and free cash flow as an analytical tool, as well as the manner in which management compensates for these limitations.
 
We believe adjusted EBITDA and free cash flow are useful to investors in evaluating our operating performance because securities analysts use adjusted EBITDA and free cash flow as supplemental measures to evaluate the overall operating performance of companies and we anticipate that our investor and analyst presentations after we are public will include adjusted EBITDA and free cash flow.
 
Material limitations of non-GAAP measures
 
Although adjusted EBITDA and free cash flow are frequently used by investors and securities analysts in their evaluations of companies, adjusted EBITDA and free cash flow each have limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our results of operations as reported under GAAP.
 
Some of these limitations are:
 
  •  adjusted EBITDA and free cash flow do not reflect our future requirements for contractual commitments and adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures;
 
  •  adjusted EBITDA and free cash flow do not reflect changes in, or cash requirements for, our working capital;
 
  •  adjusted EBITDA does not reflect interest income or interest expense;
 
  •  adjusted EBITDA does not reflect cash requirements for income taxes;
 
  •  adjusted EBITDA and free cash flow do not reflect the non-cash component of employee compensation;
 
  •  although depreciation, amortization and impairment of intangible assets are non-cash charges, the assets being depreciated or amortized will often have to be replaced in the future, and adjusted EBITDA and free cash flow do not reflect any cash requirements for these replacements;
 
  •  adjusted EBITDA and free cash flow do not reflect acquired in-process research and development charges; and


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  •  other companies in our industry may calculate adjusted EBITDA or free cash flow or similarly titled measures differently than we do, limiting their usefulness as comparative measures.
 
Management compensates for the inherent limitations associated with using the adjusted EBITDA and free cash flow measures through disclosure of such limitations, presentation of our financial statements in accordance with GAAP and reconciliation of adjusted EBITDA and free cash flow to the most directly comparable GAAP measure, net income (loss). Further, management also reviews GAAP measures, and evaluates individual measures that are not included in adjusted EBITDA such as our level of capital expenditures, equity issuance and interest expense, among other measures.
 
The following table presents a reconciliation of adjusted EBITDA and free cash flow to net income, the most comparable GAAP measure, for each of the periods indicated:
 
                                                   
   
    Predecessor       Successor  
          Period from
      Period from
                   
    Year Ended
    Jan. 1, 2007
      Dec. 6, 2007
    Year Ended
    Nine Months Ended
 
    December 31,
    through
      through
    December 31,
    September 30,  
    2006     Dec. 5, 2007       Dec. 31, 2007     2008     2008     2009  
    (in thousands)  
Reconciliation of adjusted EBITDA and free cash flow to net income:
                                                 
Net income (loss)
  $ 8,149     $ 7,771       $ (1,303 )   $ 2,384     $ 3,500     $ 12,224  
Interest (income) expense, net
    (1,292 )     (1,295 )       857       11,483       8,695       4,038  
Income tax expense
    4,595       5,018         103       1,845       2,748       6,927  
Depreciation expense
    9,559       10,594         754       10,732       8,153       8,092  
Amortization expense
    6,489       7,094         1,974       30,046       22,439       17,346  
Stock-based compensation
    3,789       898         77       4,672       3,509       4,265  
Other (income) expense, net
    (834 )     (266 )       (7 )     8       18       (14 )
Impairment of intangible assets and acquired in-process research and development
                  1,300       1,475              
Transaction related expenses
          9,530                            
                                                   
Adjusted EBITDA
  $ 30,455     $ 39,344       $ 3,755     $ 62,645     $ 49,062     $ 52,878  
                                                   
Capitalization of content database costs
  $ (11,285 )   $ (10,591 )     $ (1,129 )   $ (8,965 )   $ (6,383 )   $ (5,855 )
Purchase of property and equipment
    (10,127 )     (10,572 )       (852 )     (11,621 )     (7,358 )     (7,566 )
Cash paid for interest
    (1,031 )     (756 )             (10,068 )     (7,206 )     (6,624 )
Cash paid for income taxes
    (3,800 )     (3,400 )             (279 )     (97 )     (8,985 )
                                                   
Free cash flow
  $ 4,212     $ 14,025       $ 1,774     $ 31,712     $ 28,018     $ 23,848  
                                                   


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RISK FACTORS
 
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and all of the other information contained in this prospectus before deciding whether to purchase our stock. Our business, prospects, financial condition or operating results could be materially adversely affected by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing the risks described below, you should also refer to the other information contained in the prospectus, including our consolidated financial statements and the related notes, before deciding to purchase any shares of our common stock.
 
Risks Related to Our Business
 
If our efforts to retain and attract subscribers are not successful, our revenues will be adversely affected.
 
We generate substantially all of our revenue from subscriptions to our products and services. We must continue to retain existing and attract new subscribers. If our efforts to satisfy our existing subscribers are not successful, we may not be able to retain them, and as a result, our revenues would be adversely affected. For example, if consumers do not perceive our products and services to be reliable, valuable and of high quality, if we fail to regularly introduce new and improved products and services, or if we introduce new products or services that are not favorably received by the market, we may not be able to retain existing or attract new subscribers. We rely on our marketing and advertising efforts, including online and offline performance-based and fixed-cost programs, to retain existing subscribers and attract new subscribers. If we are unable to effectively retain existing subscribers and attract new subscribers, our business, financial condition and results of operations would be adversely affected.
 
The relative service levels, pricing and related features of competitors to our products and services are some of the factors that may adversely impact our ability to retain existing subscribers and attract new subscribers. Some of our current competitors provide genealogical records free of charge. Some governments or private organizations may make historical records available online at no cost to consumers and some commercial entities could choose to make such records available on an advertising-supported basis rather than a subscription basis. If consumers are able to satisfy their family history research needs at no or lower cost, they may not perceive value in our products and services. If our efforts to satisfy and retain our existing subscribers are not successful, we may not be able to continue to attract new subscribers through word-of-mouth referrals. Further, subscriber growth may decrease as a result of a decline in interest in family history research. Any of these factors could cause our subscriber growth rate to fall, which would adversely impact our business, financial condition and results of operations.
 
Our recent revenue growth rate may not be sustainable, which could negatively affect our stock price or financial condition and results of operations.
 
Our revenues have grown rapidly, increasing from $122.6 million in 2004 to $197.6 million in 2008, representing a compound annual growth rate of 12.7%. We may not be able to sustain our recent growth rate in future periods and you should not rely on the revenue growth of any prior quarterly or annual periods as an indication of our future performance. If our future growth fails to meet investor or analyst expectations, it could have a negative effect on our stock price. If our growth rate were to decline significantly or become negative, it could adversely affect our financial condition and results of operations.
 
If we experience excessive rates of subscriber churn, our revenues and business will be harmed.
 
We must continually add new subscribers both to replace subscribers who choose not to renew their subscriptions and to grow our business beyond our current subscriber base. We describe the percentage of subscribers who elect not to renew their subscriptions as subscriber “churn.” Subscribers choose not to renew their subscriptions for many reasons, including a desire to reduce discretionary spending or a perception that they do not use the service sufficiently, the service is a poor value, competitive services provide a better value or experience, or subscriber service issues are not satisfactorily resolved. Subscribers may choose not to renew their subscription at any time prior to the renewal date. If we are unable to attract new subscribers in numbers greater than our subscriber


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churn, our subscriber base will decrease and our business, financial condition and results of operations will be adversely affected.
 
If public interest in family history generally or in our websites specifically were to increase as a result of a successful marketing and advertising promotion, media focus (for example, as a result of the potential introduction of the television show “Who Do You Think You Are?” in the United States in early 2010) or other reasons, we could experience a spike in new subscriptions. We anticipate that this in turn would result in an increase in our subscriber churn as our subscriber base would begin to include people who have varying degrees of interest in family history or limited experience using online subscription services. For example, in 2006 we experienced an increase in new subscriptions in the United Kingdom after the airing of “Who Do You Think You Are?” on the BBC. If our subscriber churn increases, we may be required to increase the rate at which we add new subscribers in order to maintain and grow our revenues. If excessive numbers of subscribers cancel our service, we may be required to incur significantly higher marketing and advertising expenses than we currently anticipate to replace these subscribers with new subscribers. A significant increase in our subscriber churn would have an adverse effect on our business, financial condition and results of operations.
 
Because we recognize revenues from subscriptions to our service over the term of the subscription, downturns or upturns in subscription sales may not be immediately reflected in our operating results and therefore could affect our operating results in later periods.
 
We recognize revenues from subscribers ratably over the term of their subscriptions. Given the mix of annual subscriptions, a large portion of our revenues for each quarter reflects deferred revenue from subscription agreements entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any one quarter will not necessarily be fully reflected in the revenues in that quarter but will negatively affect our revenues in future quarters. Accordingly, the effect of significant downturns or upturns in subscription sales or market acceptance of our service, or changes in subscriber churn, may not fully impact our results of operations until future periods.
 
Because we generate substantially all of our revenue from online family history resources, particularly in the United States and United Kingdom, a decline in demand for our products or services or for online family history resources in general, and particularly of the United States and United Kingdom, could cause our revenue to decline.
 
We generate substantially all of our revenue from our online family history products and services, and we expect that we will continue to depend upon our online family history products and services for substantially all of our revenue in the foreseeable future. Because we are dependent on our online family history products and services, factors such as changes in consumer preferences for these products may have a disproportionately greater impact on us than if we offered multiple products and services. The market for online family history resources, and for consumer products and services in general, is subject to rapidly changing consumer demand and trends in preferences. If consumer interest in our online family history products and services declines, or if consumer interest in family history in general declines, we would likely experience a significant loss of revenue. Some of the potential factors that could affect interest in and demand for online family history products and services include:
 
  •  individuals’ interest in, and their willingness to spend time and money, conducting family history research;
 
  •  availability of discretionary funds;
 
  •  awareness of our brand and the family history category;
 
  •  the appeal and reliability of our products and services;
 
  •  the price, performance and availability of competing family history products and services;
 
  •  public concern regarding privacy and data security;
 
  •  our ability to maintain high levels of customer satisfaction; and
 
  •  the rate of growth in online commerce generally.


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In addition, we recognize substantially all of our revenues from subscribers in the United States, the United Kingdom, and to a lesser extent, Australia and Canada. Consequently, a decrease of interest in and demand for online family history products and services in these countries could have a disproportionately greater impact on us than if our geographic mix of revenue was less concentrated.
 
A change in our mix of subscription durations could have a significant impact on our revenue and churn.
 
A majority of our subscribers have annual subscriptions. At any point in time, however, the majority of new subscribers generally sign up for monthly subscriptions, and may or may not choose to renew or convert to an annual subscription. We generally experience higher rates of churn for monthly subscribers than for annual subscribers. If the percentage of overall subscribers that are monthly subscribers increases, an increasing part of our revenue would become dependent on monthly renewals, and we would likely have greater churn. A shift in mix between annual and monthly subscriptions to more monthly subscriptions as our subscriber base broadened has resulted in higher revenue per subscriber over the last several periods. This trend may not continue and may result in increased churn. We continually evaluate the types of subscriptions that are most appropriate for us and our subscribers. As we make these evaluations, we may more aggressively market subscriptions that are shorter than our annual subscriptions. Any material change in our mix of subscription duration could have a significant impact on our revenue and churn.
 
Challenges in acquiring historical content and making it available online could adversely affect our ability to retain and expand our subscriber base, and therefore adversely affect our business, financial condition and results of operations.
 
In order to retain and expand our subscriber base, both domestically and internationally, we must continue to expend significant resources to acquire significant amounts of additional historical content, digitize it and make it available to our subscribers online. We face legal, logistical and cultural challenges in acquiring new historical content. Relevant governmental records may be widely dispersed and held at a national, state or local level. Religious and private records are even more widely dispersed. These problems often pose particular challenges in acquiring content internationally. For example, content in Germany is highly dispersed, and legislation in France is particularly stringent. Desirable content may not be available to us on favorable terms, or at all, due to competition for a particular collection, privacy concerns relative to information contained in a given collection or our lack of negotiating leverage with a certain content provider. For example, some of our most popular databases include so-called “vital records” content — namely, birth, marriage and death records made available by certain governmental agencies. To help prevent identity theft, or even terrorist activities, governments may attempt to restrict the release of all or substantial portions of their vital records content, and particularly birth records, to third parties. If these efforts are successful, it may limit or altogether prevent us from acquiring these types of vital record content or continuing to make them available online. In many cases, we will be the first commercial entity that may have approached the keeper of the records, often a governmental body. In some cases, we have to lobby for legislation to be changed to enable government or other bodies to grant us access to records.
 
While we own most of the images in our database, we generally do not own the underlying historical documents. If owners of content have sold or licensed it for digitization purposes on an exclusive basis to a third party, we would not be able to acquire this content. The owners of such historical records generally can allow one or more parties to digitize those records. If owners of content have sold or licensed the rights to digitize that content, even on a non-exclusive basis, they often elect not to sell or license it for digitization purposes to any other person. Therefore, if one of our competitors acquires rights to digitize a set of content, even on a non-exclusive basis, we may be unable to acquire rights to digitize that content collection. In some cases, acquisition of content involves competitive bidding, and we have in the past and may in the future choose not to bid or not successfully bid to acquire content rights. In addition, a number of governmental bodies and other organizations are interested in making historical content available for free and owners of historical records may license or sell their records to such governmental bodies and organizations in addition to or instead of licensing or selling their content to us. Our inability to offer vital records or other valuable content as part of our family history research databases or the widespread availability of such content elsewhere at lower cost or for free could result in our subscription products and services becoming less valuable to consumers, which could have an adverse impact on our number of subscribers or subscriber churn, and therefore on our business, financial condition and results of operations.


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We depend in part upon third party licenses for some of our historical content, and a loss of those licenses, or disputes regarding royalties under these licenses, could adversely affect our ability to retain and expand our subscriber base, and therefore adversely affect our revenues, financial condition and results of operations.
 
Though we own most of the images in our databases, in some cases on a non-exclusive basis, we acquire a portion of our content pursuant to ongoing license agreements. Some of these agreements have finite terms and we may not be able to renew the agreements on terms that are advantageous to us or at all. For example, we license a significant amount of our United Kingdom content from the United Kingdom National Archives under several license agreements that generally have ten year terms, with varying automatic extension periods. These agreements with the United Kingdom National Archive expire from 2012 to 2019. The agreements are generally terminable by either party for breach by the other party and by the United Kingdom National Archives upon our insolvency or bankruptcy. Some of these agreements permit the United Kingdom National Archives to terminate these licenses if we undergo a change of control.
 
If a current or future license for a significant content collection were to be terminated, we may not be able to obtain a new license on terms advantageous to us or at all and we could be required to remove the relevant content from our websites, either immediately or after some period of time. If a content provider were to license or sell us content in violation of that content provider’s agreements with other parties, we could be required to remove that content from our websites. If we were required to remove a material amount of content from our websites, as a result of the termination of one or more licenses or otherwise, it could adversely affect our business and results of operations. Some of these license agreements restrict the manner in which we use the applicable content, which could limit our ability to leverage that content for new uses as we expand our business. We pay royalties under some of these license agreements, and the other party to those royalty-bearing agreements may have a right to audit the calculation of our royalty payments. If there were to be a disagreement regarding the calculation of royalty payments, we could be required to make additional payments under those agreements. We also have indemnification obligations under many of these agreements. While we have not experienced any claims to date, we could experience claims in the future which, if material, could have a negative impact on our results of operations and financial condition.
 
Digitizing and indexing new content can take a significant amount of time and expense, and can expose us to risks associated with the loss or damage of historical documents. Our inability to maintain or acquire content or make new content available online in a timely and cost-effective manner, or liability for loss of historical documents, could have an adverse effect on our business, financial condition and results of operations.
 
Digitizing and indexing new historical content can take a significant amount of time and expense and we generally incur the expenses related to such content significantly in advance of the time we can make it available to our subscribers. We have invested approximately $80 million in content to date and expect to continue to spend significant resources on content. Increases in the cost or time required to digitize and index new content could harm our financial results. In 2008, one of our transcription vendors, Beijing Formax, performed a majority of our data transcription as measured by cost. We do not have long-term contracts with any of our transcription vendors. If we were to replace that transcription vendor or any other transcription vendor for any reason, we would be required to provide extensive training to the new vendor, which could delay our ability to make our new content available to our subscribers, and our relationships with the new transcription vendors may be on financial or other terms less favorable to us than our existing arrangements. Our inability to maintain or acquire content or to make new content available online in a timely and cost-effective manner would have an adverse effect on our business, financial condition and results of operations.
 
In addition, if we acquire content that ultimately generates only minimal subscriber interest, the cost of acquiring and processing that content may exceed the incremental revenues produced by the content, which would adversely affect our profitability. For example, we took an impairment charge with respect to content acquired for our China-focused website after we shifted our strategy for that market.
 
While we are digitizing borrowed content, we may be in possession of valuable and irreplaceable original historical documents. While we maintain insurance with respect to such documents, any loss or damage to such


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documents, while in our possession, could cause us significant expense and could have a material adverse effect on our reputation and the potential willingness of content owners to sell, license or lend their content to us.
 
We face competition from a number of different sources, and our failure to compete effectively with current and future competitors could adversely affect our ability to retain and expand our subscriber base, and therefore adversely impact our revenues, results of operations and financial condition.
 
We face competition in our business from a variety of online and offline organizations, some of which provide genealogical records free of charge. We expect competition to increase in the future. We generally compete on the basis of content, price, technology, ease of use, brand recognition, breadth of products, service and support, and the number of network members with whom other members can collaborate.
 
Ancestry.com and our similar international websites face competition from:
 
  •  FamilySearch, and its website FamilySearch.org, a genealogy organization that is part of The Church of Jesus Christ of Latter-day Saints. The Church of Jesus Christ of Latter-day Saints has, for over 100 years, actively gathered, preserved and shared genealogical records worldwide. FamilySearch has an extensive collection of paper and microfilm records (more than 2.3 million rolls of microfilm and 180,000 sets of microfiche), which it maintains in a central storage facility in Utah. FamilySearch has digitized a large quantity of these records and has published them online at FamilySearch.org, where it makes them available to the public for free and through over 4,500 family history centers located throughout the world. FamilySearch is a well funded organization and has stated its intention to undertake a massive digitization project to bring most of its collection online over the next few years.
 
  •  Commercial entities, including online genealogical research services, library content distributors, search engines and portals, retailers of books and software related to genealogical research and family tree creation and family history oriented social networking websites.
 
  •  Other non-profit entities and organizations, genealogical societies, governments and agencies that may make vital statistics or other records available to the public for free.
 
As we continue to diversify our breadth of products and services and expand internationally, we expect our competition to expand to include other Internet-based and offline businesses, governments and other entities. Our current and future competitors may have greater resources, more well-established brand recognition or more sophisticated technologies, such as search algorithms, than we do or may more easily obtain relevant records in international markets. Additionally, our current and future competitors may offer new categories of content, products or services before us, or at lower prices, which may give them a competitive advantage in attracting subscribers. Our current and future competitors may make historical records available online at no cost or on an advertising-supported basis rather than a subscription basis. Our future competitors and their products and services may be superior to any of our current competition. There has recently been some consolidation in our industry, and such consolidation could also increase competition in the future, including competition with respect to acquisition of content, exclusivity of content or pricing. To compete effectively, we may need to expend significant resources on content acquisition, technology or marketing and advertising. We currently plan to distinguish ourselves from our competitors on the basis of access to content, technological leadership and the depth of our subscriber community. These efforts may be expensive and could reduce our margins, which could have a material adverse effect on our business, financial condition and results of operations.
 
Competitive pricing pressures could cause us to fail to retain existing or attract new subscribers and harm our revenues and results of operations.
 
Demand for our products and services is sensitive to price. Many external factors, including our marketing, content acquisition and technology costs and our current and future competitors’ pricing and marketing strategies, can significantly affect our pricing strategies, particularly in markets outside the United States. Some of our competitors provide genealogical records free of charge. If we fail to meet our subscribers’ pricing expectations, we could fail to retain existing or attract new subscribers, either of which would harm our business and results of operations. Changes in our pricing strategies could have a significant impact on our revenues and net income.


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Our growth could strain our personnel, technology and infrastructure resources, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.
 
Our growth in operations has placed a significant strain on our management, administrative, technological, operational and financial infrastructure. Anticipated future growth, including growth related to the broadening of our product and service offerings and our expansion into new geographic areas, will continue to place similar strains on our personnel, technology and infrastructure. A sudden increase in our number of registered users could strain our capacity and result in website performance issues. Our success will depend in part upon the management ability of our officers with respect to growth opportunities. To manage the expected growth of our operations, we will need to continue to improve our operational, financial, technological and management controls and our reporting systems and procedures. Additional capital investments will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term. If we fail to successfully manage our growth, it could adversely affect our business, financial condition and results of operations.
 
Any significant disruption in service on our websites or in our computer systems, which are currently hosted primarily by a single third-party, could damage our reputation and result in a loss of subscribers, which would harm our business and operating results.
 
Registered users access our service through our websites, where our family history research databases are located, and our internal billing software and operations are integrated with our product and service offerings. Our brand, reputation and ability to attract, retain and serve our subscribers is dependent upon the reliable performance of our websites, network infrastructure, content delivery processes and payment systems. We have experienced interruptions in these systems in the past, including server failures that temporarily slowed down our websites’ performance and access to content, or made our websites inaccessible, and we may experience interruptions in the future. Interruptions in these systems, whether due to system failures, computer viruses or physical or electronic break-ins, could affect the security or availability of our websites and prevent our registered users from accessing our data and using our products and services. Problems with the reliability or security of our systems may require disclosure to our lenders and could harm our reputation, and damage to our reputation and the cost of remedying these problems could negatively affect our business, financial condition and results of operations.
 
Substantially all of our communications, network and computer hardware used to operate our websites are co-located in a facility in Utah. We do not own or control the operation of this facility. We are establishing a redundant system in Denver, Colorado, and we expect to complete this project within the next 12 months. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, electronic and physical break-ins, computer viruses, earthquakes and similar events. The occurrence of any of the foregoing events could result in damage to our systems and hardware or could cause them to fail completely, and our insurance may not cover such events or may be insufficient to compensate us for losses that may occur. Our systems are not yet redundant, so a total failure of our system could cause our websites to be inaccessible by our registered users. Problems faced by our third-party web hosting provider, with the telecommunications network providers with whom it contracts or with the systems by which it allocates capacity among its customers, including us, could adversely affect the experience of our subscribers. Our third-party web hosting provider could decide to close its facilities without adequate notice. In addition, any financial difficulties, such as bankruptcy reorganization, faced by our third-party web hosting provider or any of the service providers with whom it contracts may have negative effects on our business, the nature and extent of which are difficult to predict. Additionally, if our third-party web hosting provider is unable to keep up with our growing needs for capacity, this could have an adverse effect on our business. Any errors, defects, disruptions or other performance problems with our services could harm our reputation and have an adverse effect on our business, financial condition and results of operations.
 
Our operating results depend on numerous factors and may fluctuate from quarter to quarter, which could make them difficult to predict.
 
Our quarterly operating results are tied to certain financial and operational metrics that have fluctuated in the past and may fluctuate significantly in the future. As a result, you should not rely upon our past quarterly operating


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results as indicators of future performance. Our operating results depend on numerous factors, many of which are outside of our control. In addition to the other risks described in this “Risk Factors” section, the following risks could cause our operating results to fluctuate:
 
  •  our ability to retain existing subscribers and attract new subscribers;
 
  •  the mix of annual and monthly subscribers at any given time;
 
  •  timing and amount of costs of new and existing marketing and advertising efforts;
 
  •  timing and amount of operating costs and capital expenditures relating to expansion of our business, operations and infrastructure, including content acquisition and international expansion costs;
 
  •  the cost and timing of the development and introduction of new product and service offerings by us or our competitors;
 
  •  downward pressure on the pricing of our subscriptions;
 
  •  system failures, security breaches or Internet downtime; and
 
  •  seasonal fluctuations in the usage of our websites.
 
For these or other reasons, the results of any prior quarterly or annual periods should not be relied upon as indications of our future performance and our revenue and operating results in future quarters may differ materially from the expectations of management or investors.
 
We require a significant amount of cash to service our indebtedness, which reduces the cash available to finance our organic growth and strategic acquisitions, alliances and collaborations. If we fail to grow as a result of limitations on available cash, it could harm our financial condition and stock price.
 
We have a significant amount of indebtedness, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.” Our indebtedness could:
 
  •  make us more vulnerable to unfavorable economic conditions;
 
  •  make it more difficult to obtain additional financing in the future for working capital, capital expenditures or other general corporate purposes;
 
  •  limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we operate;
 
  •  require us to dedicate or reserve a large portion of our cash flow from operations for making payments on our indebtedness, which would prevent us from using it for other purposes;
 
  •  make us susceptible to fluctuations in market interest rates that affect the cost of our borrowings to the extent that our variable rate debt is not covered by interest rate derivative agreements; and
 
  •  make it more difficult to pursue strategic acquisitions, alliances and collaborations.
 
Our existing credit facility contains a number of financial and operating covenants which could limit our flexibility in operating our business. For example, our credit facility limits our capital expenditures, which limits the amount we can spend on content acquisition, and it limits the amount we can pay when acquiring companies. These restrictions and covenants, among other things, limit our ability to: incur additional indebtedness; make investments; pay dividends or make distributions to our stockholders; grant liens on our assets; sell assets; enter into a new or different line of business; enter into transactions with our affiliates; acquire, merge or consolidate with other entities or transfer all or substantially all of our assets; and enter into sale and leaseback transactions. Our failure to comply with any covenant could result in a default under the credit facility. Our ability to service our indebtedness and comply with the covenants will depend on our future performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors. Some of these factors are beyond our control. We believe that, based upon current levels of operations, we will be able to comply with the covenants in our credit facility and meet our debt service obligations when due. Significant assumptions underlie this belief


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including, among other things, that we will continue to be successful in implementing our business strategy and that there will be no material adverse developments in our business, liquidity or capital requirements. If we cannot generate sufficient cash flow from operations to service our indebtedness and to meet our other obligations and commitments, we might be required to refinance our debt or to dispose of assets to obtain funds for such purpose. We cannot assure you that refinancings or asset dispositions could be effected on a timely basis or on satisfactory terms, if at all, or would be permitted by the terms of our debt instruments.
 
Our obligations under the existing credit facility are secured by collateral, which includes substantially all of our assets, including our intellectual property. If we are not able to satisfy our obligations under the credit facility, the creditors could exercise their rights under the credit facility, which include taking control of the collateral, including our intellectual property, which would have a material adverse effect on our business.
 
Upon consummation of the offering and the application of the net proceeds as set forth under “Use of Proceeds,” we expect our borrowings under our credit facility to be $102.6 million.
 
We may need additional capital, and we cannot be certain that additional financing will be available. If we fail to obtain additional financing if needed, it could harm our growth and our ability to respond to business challenges.
 
We have funded our operations and capital expenditures primarily from cash flow from operations during the last five years. In connection with the Spectrum investment, we incurred a significant amount of indebtedness. Although we currently anticipate that our available funds and cash flow from operations will be sufficient to meet our cash needs for at least the next 12 months, we may require additional financing in the future. Our ability to obtain financing will depend, among other things, on our development efforts, business plans, operating performance and condition of the capital markets at the time we seek financing. Additional financing may not be available to us on favorable terms, or at all, when required. The ongoing financial stress affecting the banking system and financial markets and the going concern threats to financial institutions could make it more difficult for us to obtain additional financing if we should require it. CIT Lending Services Corporation, one of the lenders in the lending syndicate for the revolving portion of our credit facility, has recently suffered financial difficulties, according to media reports, and its parent company, CIT Group Inc., has recently launched a restructuring plan, according to public filings. If it or any other of the financial institutions that are in the syndicate for the revolving portion of our credit facility were to suffer financial difficulties or enter bankruptcy, it could affect our ability to draw down on that facility. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences or privileges senior to the rights of our common stock, and our stockholders may experience dilution. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to service our outstanding indebtedness, to continue to support our business growth and to respond to business challenges could be significantly limited.
 
If our marketing and advertising efforts fail to generate additional revenues on a cost-effective basis, or if we are unable to manage our marketing and advertising expenses, it could harm our results of operations and growth.
 
Our future growth and profitability, as well as the maintenance and enhancement of our brands, will depend in large part on the effectiveness and efficiency of our marketing and advertising expenditures. We use a diverse mix of online and offline performance-based and fixed-cost marketing and advertising programs to promote our products and services and we periodically adjust our mix of marketing and advertising programs. Significant increases in the pricing of one or more of our marketing and advertising channels would increase our marketing and advertising expense or cause us to choose less expensive but less effective marketing and advertising channels. As we implement new marketing and advertising strategies and phase out older strategies, we may need to expand into marketing and advertising channels with significantly higher costs than our current channels, which could adversely affect our profitability. Further, we may over time become disproportionately reliant on one channel or partner, which would limit our marketing and advertising flexibility and could increase our operating expenses. We may incur marketing and advertising expenses significantly in advance of the time we anticipate recognizing revenue associated with such expenses, and our marketing and advertising expenditures may not result in increased revenue or generate sufficient levels of brand awareness. For example, we have purchased product integration in the television show “Who Do You Think You Are?” in the United States, but we may only at a later date, or never, experience an increase in revenue or brand awareness as a result of such expenditures. If we are unable to maintain


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our marketing and advertising channels on cost-effective terms or replace existing marketing and advertising channels with similarly effective channels, our marketing and advertising expenses could increase substantially, our subscriber levels could be affected adversely, and our business, financial condition and results of operations may suffer.
 
We anticipate that as we market our products and services to a broader market, including people who may not be Internet-savvy or may be new to family history research, we may be required to develop new, more costly online and offline advertising channels, such as television advertising. Such expanded efforts may yield fewer new subscriptions per marketing and other greater advertising expenditures than our strategies to date. We may decide to expand our international marketing and advertising efforts, which will lead to a significant increase in our marketing and advertising expenses. Any of these additional expenses may not result in sufficient customer growth to offset cost, which would have an adverse effect on our business, financial condition and results of operations.
 
If we are unable to improve market recognition of and loyalty to our brands, or if our reputation were to be harmed, we could lose subscribers or fail to increase the number of subscribers, which could harm our revenues, results of operations and financial condition.
 
We believe that maintaining and enhancing our Ancestry.com and other brands is critical to our success. We believe that the importance of brand recognition and loyalty will only increase in light of increasing competition in our markets. We plan to continue to promote our brands, both domestically and internationally, but there is no guarantee that our selected strategies will increase the favorable recognition of our brands. Some of our existing and potential competitors, including search engines, media companies and government and religious institutions have well-established brands with greater brand recognition than we have. Additionally, from time to time, our subscribers express dissatisfaction with our service, including, among other things, dissatisfaction with our auto-renewal and other billing policies, our handling of personal data and the way our services operate. To the extent that dissatisfaction with our service is widespread or not adequately addressed, our brand may be adversely impacted. If our efforts to promote and maintain our brand are not successful, our operating results and our ability to attract and retain subscribers may be adversely affected. In addition, even if our brand recognition and loyalty increases, this may not result in increased use of our products and services or higher revenues. Many of our subscribers are passionate about family history research, and many of these subscribers participate in blogs on this topic both on our websites and elsewhere. If actions we take or changes we make to our products upset these subscribers, their blogging could negatively affect our brand and reputation. We have a limited operating history, and you should not rely upon our historic growth rates as an indicator of future growth.
 
Online family history research is a relatively new industry and our operational history in the online family history research industry is also relatively limited. Consequently, it is difficult to predict the ultimate size of the industry and the acceptance by the market of our products and services. Our business strategy and projections rely on a number of assumptions, some or all of which may be incorrect. For example, we believe that consumers will be willing to pay for subscriptions to our online family history resources, notwithstanding the fact that some of our current and future competitors provide such resources free of charge. We cannot accurately predict whether our products and services will achieve significant acceptance by potential users in significantly larger numbers than at present. You should therefore not rely on our historic growth rates as an indication of future growth.
 
Our business could be adversely affected if our subscribers are not satisfied with our products and services. If we lose subscribers or fail to increase the number of subscribers due to dissatisfaction with our products and services, it could harm our revenues, results of operations and financial condition.
 
Our business depends on our ability to satisfy our subscribers. Our subscribers’ satisfaction may be negatively impacted by factors that are actual or perceived by them, such as limitations in our technologies, changes in our products and services, interruptions or slowness in online capacity of our websites, privacy and data security concerns, speed of search of our online content and relevance of search results, as well as perceived ease of search, and our automatic subscription renewal by credit card policy, including any perceptions of credit card fraud. If we do not handle subscriber complaints effectively, our brand and reputation may suffer, we may lose our subscribers’ confidence, and they may choose not to renew their subscriptions. Complaints or negative publicity about our


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products, services or billing practices could adversely impact our business, financial condition and results of operations.
 
Our promotional offerings and our introduction of new products may have unintended effects on the demand for our products and services, which could negatively affect our total number of subscribers and adversely affect our revenues over time.
 
Many of our promotional offerings involve temporary free access to our data. By granting temporary free access to many of our records, and permanent free access to a smaller set of our records, we may provide sufficient access to some registered users who are not subscribers to satisfy their family history needs, and may therefore fail to generate additional revenues as intended. Additionally, alternative subscriptions with terms of less than one year, such as monthly subscriptions and pay-per-view offerings, may result in fewer annual subscriptions from both new and existing subscribers and lower revenues per subscriber over time. If any of these products or offerings has the effect of reducing our long-term subscriber base or total number of subscriptions, our revenues may decrease over time and our business may suffer.
 
We face many risks associated with our plans to continue to expand our international offerings and marketing and advertising efforts, which could harm our business, financial condition and results of operations.
 
In addition to our United States and United Kingdom websites, since 2006, we have launched websites directed at Australia, Canada, Germany, France, Italy, Sweden and China and launched an initial version of our global Mundia.com website in the third quarter of 2009. For the nine months ended September 30, 2009, approximately 34% of subscribers to our Ancestry.com websites, and approximately 25% of our revenues from subscribers, were from locations outside the United States. We anticipate that our continuing international expansion will entail the marketing and advertising of our products, services and brands, and the development of localized websites. We may not succeed in these efforts and achieve our subscriber acquisition or other goals. For some international markets, customer preferences and buying behaviors may be different, and we may use business models that are different from our traditional subscription model that provides company-acquired content to subscribers. Our revenues from new foreign markets may not exceed the costs of establishing, marketing and maintaining our international offerings, and therefore may not be profitable on a sustained basis. We will be subject to risks of doing business internationally, including the following:
 
  •  difficulties in developing and marketing our offerings and brands as a result of distance, language and cultural differences;
 
  •  foreign currency exchange rate fluctuations;
 
  •  more stringent consumer and data protection laws;
 
  •  local socio-economic and political conditions;
 
  •  technical difficulties and costs associated with the localization of our service offerings;
 
  •  strong local competitors;
 
  •  lack of experience in certain geographical markets;
 
  •  different and conflicting legal and regulatory regimes;
 
  •  changes in governmental regulations;
 
  •  different and conflicting intellectual property laws;
 
  •  difficulties in staffing and managing international operations; and
 
  •  risk of business or user fraud.
 
One or more of these factors could harm our business, financial condition and results of operations.


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If we are unable to continually enhance our products and services and adapt them to technological changes and subscriber needs, we may not remain competitive and our business may fail to grow or decline.
 
Our business is rapidly changing. To remain competitive, we must continue to provide relevant content and enhance and improve the functionality and features of our products and services. If competitors introduce new solutions embodying new technologies, our existing products and services may become obsolete. Our future success will depend, among other things, on our ability to:
 
  •  anticipate demand for new products and services;
 
  •  enhance our existing solutions; and
 
  •  respond to technological advances on a cost-effective and timely basis.
 
Developing the technologies in our products entails significant technical and business risks. We may use new technologies ineffectively, or we may fail to adapt our products and services to the demands of our subscribers. If we face material delays in introducing new or enhanced solutions, our subscribers may forego the use of our solutions in favor of those of our competitors.
 
Undetected product or service errors or defects could result in the loss of revenues, delayed market acceptance of our products or services or claims against us.
 
We offer a variety of Internet-based products and a software product, Family Tree Maker, all of which are complex and frequently upgraded. Our Internet-based products and software product may contain undetected errors, defects, failures or viruses, especially when first introduced or when new versions or enhancements are released. Despite product testing, our products, or third party products that we incorporate into ours, may contain undetected errors, defects or viruses that could, among other things:
 
  •  require us to make extensive changes to our subscription products and services or software product, which would increase our expenses;
 
  •  expose us to claims for damages;
 
  •  require us to incur additional technical support costs;
 
  •  cause a negative registered user reaction that could reduce future sales;
 
  •  generate negative publicity regarding us and our subscription products and software product; or
 
  •  result in subscribers delaying their subscription or software purchase or electing not to renew their subscriptions.
 
Any of these occurrences could have a material adverse effect upon our business, financial condition and results of operations.
 
Privacy concerns could require us to incur significant expense and modify our operations in a manner that could result in restrictions and prohibitions on our use of certain information, and therefore harm our business.
 
As part of our business, we make biographical and historical data available through our websites, we use registered users’ personal data for internal purposes and we host websites and message boards, among other things, that contain content supplied by third parties. In addition, in connection with our Ancestry.com | DNA product, we obtain biological DNA samples used for genetic testing. For privacy or security reasons, privacy groups, governmental agencies and individuals may seek to restrict or prevent our use or publication of certain biological or historical information pertaining to individuals, particularly living persons. We will also face additional privacy issues as we expand into other international markets, as many nations have privacy protections more stringent than those in the United States. We have incurred, and will continue to incur, expenses to comply with privacy and security standards and protocols imposed by law, regulation, industry standards or contractual obligations. Increased domestic or international regulation of data utilization and distribution practices, including self-


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regulation, could require us to modify our operations and incur significant expense, which could have an adverse effect on our business, financial condition and results of operations.
 
Our possession and use of personal information presents risks and expenses that could harm our business. Unauthorized disclosure or manipulation of such data, whether through breach of our network security or otherwise, could expose us to costly litigation and damage our reputation.
 
Maintaining our network security is of critical importance because our online systems store confidential registered user, employee and other sensitive data, such as names, addresses, credit card numbers and other personal information. In particular, a substantial majority of our subscribers use credit and debit cards to purchase our products and services. If we or our processing vendors were to have problems with our billing software, it could have an adverse effect on our subscriber satisfaction and could cause one or more of the major credit companies to disallow our continued use of their payment products. In addition, if our billing software fails to work properly and, as a result, we do not automatically charge our subscribers’ credit cards on a timely basis or at all, our business, financial condition and results of operations could be adversely affected.
 
In addition, our online systems store the content that our registered users upload onto our websites, such as family records and photos. This content is often personally meaningful, and our registered users may rely on our online system to store digital copies of such content. If we were to lose such content, if our users’ private content were to be publicly available or if third parties were able to access and manipulate such content, we may face liability and harm to our brand and reputation.
 
We and our vendors use commercially available encryption technology to transmit personal information when taking orders. We use security and business controls to limit access and use of personal information, including registered users’ uploaded content. However, third parties may be able to circumvent these security and business measures by developing and deploying viruses, worms and other malicious software programs that are designed to attack or attempt to infiltrate our systems and networks. In addition, employee error, malfeasance or other errors in the storage, use or transmission of personal information could result in a breach of registered user or employee privacy.
 
If third parties improperly obtain and use the personal information of our registered users or employees, we may be required to expend significant resources to resolve these problems. A major breach of our network security and systems could have serious negative consequences for our businesses, including possible fines, penalties and damages, reduced demand for our products and services, an unwillingness of subscribers to provide us with their credit card or payment information, an unwillingness of registered users to upload family records or photos onto our websites, harm to our reputation and brand and loss of our ability to accept and process subscriber credit card orders. Similarly, if a well-publicized breach of data security at any other major consumer website were to occur, there could be a general public loss of confidence in the use of the Internet for commercial transactions. Any of these events could have material adverse effects on our business, financial condition and results of operations.
 
Any claims related to activities of registered users and the content they upload could result in expenses that could harm our results of operations and financial condition.
 
Our registered users often upload their own content onto our websites. The terms of use of such content are set forth in the terms and conditions of our websites and a submission agreement that registered users agree to when they upload their content. Disputes or negative publicity about the use of such content could make members more reluctant to upload personal content or harm our reputation. We do not review or monitor content uploaded by our registered users, and could face claims arising from or liability for making any such content available on our websites. In addition, our collaboration tools and other features of our site allow registered users to contact each other. While registered users can choose to remain anonymous in such communications, registered users may choose to engage with one another without anonymity. If any such contact were to lead to fraud or other harm, we may face claims against us and negative publicity. Litigation to defend these claims or efforts to counter any negative publicity could be costly and any other liabilities we incur in connection with any such claims may harm our business, financial condition and results of operations.


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Increases in credit card processing fees would increase our operating expenses and adversely affect our results of operations, and the termination of our relationship with any major credit card company would have a severe, negative impact on our ability to collect revenues from subscribers.
 
The substantial majority of our subscribers pay for our products and services using credit cards. From time to time, the major credit card companies or the issuing banks may increase the fees that they charge for each transaction using their cards. An increase in those fees would require us to either increase the prices we charge for our products, or suffer a negative impact on our profitability, either of which could adversely affect our business, financial condition and results of operations.
 
In addition, our credit card fees may be increased by credit card companies if our chargeback rate, or the rate of payment refunds, exceeds certain minimum thresholds. If we are unable to maintain our chargeback rate at acceptable levels, our credit card fees for chargeback transactions, or for all credit card transactions, may be further increased, and, if the problem significantly worsens, credit card companies may increase our fees or terminate their relationship with us. Any increases in our credit card fees could adversely affect our results of operations, particularly if we elect not to raise our subscription rates to offset the increase. The termination of our ability to process payments on any major credit or debit card would significantly impair our ability to operate our business.
 
If government regulation of the Internet or other areas of our business changes or if consumer attitudes toward use of the Internet change, we may need to change the manner in which we conduct our business in a manner that is less profitable or incur greater operating expenses, which could harm our results of operations.
 
The adoption, modification or interpretation of laws or regulations relating to the Internet or other areas of our business could adversely affect the manner in which we conduct our business or the overall popularity or growth in use of the Internet. Such laws and regulations may cover automatic subscription renewal, credit card processing procedures, sales and other procedures, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts, consumer protection, broadband residential Internet access and the characteristics and quality of services. In foreign countries, such as countries in Europe, such laws may be more restrictive than in the United States. It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the Internet. If we are required to comply with new regulations or legislation or new interpretations of existing regulations or legislation, this compliance could cause us to incur additional expenses, make it more difficult to renew subscriptions automatically, make it more difficult to attract new subscribers or otherwise alter our business model. Any of these outcomes could have a material adverse effect on our business, financial condition or results of operations.
 
Our revenues may be adversely affected if we are required to charge sales taxes in additional jurisdictions and/or other taxes for our products and services.
 
We collect or have imposed upon us sales or other taxes related to the products and services we sell in certain states and other jurisdictions. Additional states or one or more countries or other jurisdictions may seek to impose sales or other tax collection obligations on us in the future. A successful assertion by any country, state or other jurisdiction in which we do business that we should be collecting sales or other taxes on the sale of our products and services could, among other things, create significant administrative burdens for us, result in substantial tax liabilities for past sales, discourage registered users from purchasing from us or otherwise substantially harm our business and results of operations.
 
We face risk associated with currency exchange rate fluctuations, which could adversely affect our operating results.
 
For the nine months ended September 30, 2009, approximately 20% of our total revenues were received, and approximately 10% of our total expenses were paid, in currencies other than the United States dollar, such as the British pound sterling, the Canadian dollar and the Australian dollar. As a result, we are at risk for exchange rate fluctuations between such foreign currencies and the United States dollar, which could affect our results of operations. We attempt to limit our exposure by paying our operating expenses incurred in foreign jurisdictions with revenues received in the applicable currency, but if we do not have enough local currency to pay all our expenses in


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that currency, we are exposed to currency exchange rate risk with respect to those expenses. We are also exposed to exchange rate risk with respect to our profits earned in foreign currency. Even if we were to implement hedging strategies to mitigate foreign currency risk, these strategies might not eliminate our exposure to foreign exchange rate fluctuations and would involve costs and risks of their own, such as ongoing management time and expertise, external costs to implement the strategies and potential accounting implications.
 
If we acquire any businesses or technologies in the future, they could prove difficult to integrate, disrupt our ongoing business, dilute stockholder value or have an adverse effect on our results of operations.
 
As part of our business strategy, we may engage in acquisitions of businesses or technologies to augment our organic or internal growth. While we have engaged in some acquisitions in the past, we do not have extensive experience with integrating and managing acquired businesses or assets. Acquisitions involve challenges and risks in negotiation, execution, valuation and integration. Moreover, we may not be able to find suitable acquisition opportunities on terms that are acceptable to us. Even if successfully negotiated, closed and integrated, certain acquisitions may not advance our business strategy, may fall short of expected return-on-investment targets or may fail. Any future acquisition could involve numerous risks including:
 
  •  potential disruption of our ongoing business and distraction of management;
 
  •  difficulty integrating the operations and products of the acquired business;
 
  •  use of cash to fund the acquisition or for unanticipated expenses;
 
  •  limited market experience in new businesses;
 
  •  exposure to unknown liabilities, including litigation against the companies we may acquire;
 
  •  additional costs due to differences in culture, geographic locations and duplication of key talent;
 
  •  acquisition-related accounting charges affecting our balance sheet and operations;
 
  •  dilution to our current stockholders from the issuance of equity securities; and
 
  •  potential loss of key employees or customers of the acquired company.
 
In the event we enter into any acquisition agreements, closing of the transactions could be delayed or prevented by regulatory approval requirements, including antitrust review, or other conditions. We may not be successful in addressing these risks or any other problems encountered in connection with any attempted acquisitions, and we could assume the economic risks of such failed or unsuccessful acquisitions.
 
Our business may be significantly impacted by a change in the economy, including any resulting effect on consumer spending.
 
Our business may be affected by changes in the economy generally, including any resulting effect on consumer spending specifically. Our products and services are discretionary purchases, and consumers may reduce their discretionary spending on our products and services during an economic downturn such as the present economic downturn. Although we have not yet experienced a material increase in subscription cancellations or a material reduction in subscription renewals, we may yet experience such an increase or reduction in the future, especially in the event of a prolonged recessionary period. Conversely, consumers may spend more time using the Internet during an economic downturn and may have less time for our products and services in a period of economic growth. In addition, media prices may increase in a period of economic growth, which could significantly increase our marketing and advertising expenses. As a result, our business, financial condition and results operations may be significantly affected by changes in the economy generally.
 
The loss of one or more of our key personnel, or our failure to attract, assimilate and retain other highly qualified personnel in the future, could harm our business.
 
We depend on the continued service and performance of our key personnel, including Timothy Sullivan, our President and Chief Executive Officer. We do not maintain key man insurance on any of our officers or key


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employees. We also do not have long-term employment agreements with any of our officers or key employees. In addition, much of our key technology and systems are custom-made for our business by our personnel. The loss of key personnel, including key members of our management team, as well as certain of our key marketing, sales, product development or technology personnel, could disrupt our operations and have an adverse effect on our ability to grow our business.
 
Several of our key personnel have only recently been employed by us, and we are still in the process of assimilating and integrating these personnel into our operations. Our failure to successfully integrate these key employees into our business could adversely affect our business.
 
In addition, to execute our growth plan, we must attract and retain highly qualified personnel. Competition for these employees is intense, and we may not be successful in attracting and retaining qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. In addition, in making employment decisions, particularly in the Internet and high-technology industries, job candidates often consider the value of the stock options they are to receive in connection with their employment. Accounting principles generally accepted in the United States relating to the expensing of stock options may discourage us from granting the size or type of stock option awards that job candidates may require to join our company. If we fail to attract new personnel, or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.
 
We will be subject to additional regulatory compliance matters, including Section 404 of the Sarbanes-Oxley Act of 2002, as a result of becoming a public company and our management has limited experience managing a public company. Failure to comply with these regulatory matters could harm our business.
 
We have never operated as a public company and will incur significant legal, accounting and other expenses that we did not incur as a private company. Our management team and other personnel will need to devote a substantial amount of time to new compliance initiatives and to meeting the obligations that are associated with being a public company, and we may not successfully or efficiently manage our transition into a public company. We expect rules and regulations such as the Sarbanes-Oxley Act of 2002 to increase our legal and finance compliance costs and to make some activities more time-consuming. We may need to hire a number of additional employees with public accounting and disclosure experience in order to meet our ongoing obligations as a public company. For example, we have recently employed an outside consultant and expect to hire an additional employee to assist us in preparing our provision for income taxes in a timely manner as a public company. Furthermore, Section 404 of the Sarbanes-Oxley Act of 2002 requires that our management report on, and our independent auditors to attest to, the effectiveness of our internal control structure and procedures for financial reporting in our annual report on Form 10-K for the fiscal year ending December 31, 2010. Section 404 compliance may divert internal resources and will take a significant amount of time and effort to complete. We may not be able to successfully complete the procedures and certification and attestation requirements of Section 404 by the time we will be required to do so. If we fail to do so, or if in the future our chief executive officer, chief financial officer or independent registered public accounting firm determines that our internal controls over financial reporting are not effective as defined under Section 404, we could be subject to sanctions or investigations by the Nasdaq Stock Market, the Securities and Exchange Commission, or SEC, or other regulatory authorities. Furthermore, investor perceptions of our company may suffer, and this could cause a decline in the market price of our stock. Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in an adverse opinion on internal controls from our independent auditors. If we are unable to retain enough independent directors to our board to meet the listing standards of the Nasdaq Stock Market by the deadlines set by the exchange, it could affect our continued listing on the exchange.
 
Our reported financial results may be adversely affected by changes in accounting principles applicable to us.
 
Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the Securities and


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Exchange Commission and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. In addition, the SEC has announced a multi-year plan that could ultimately lead to the use of International Financial Reporting Standards by United States issuers in their SEC filings. Any such change could have a significant effect on our reported financial results.
 
Any expenses or liability resulting from litigation could adversely affect our results of operations and financial condition.
 
From time to time, we may be subject to claims or litigation. Any such claims or litigation may be time-consuming and costly, divert management resources, require us to change our products and services, require us to accept returns of software products, or have other adverse effects on our business. Any of the foregoing could have a material adverse effect on our results of operations and could require us to pay significant monetary damages. For example, we have recently received a letter from Shutterfly, Inc., alleging infringement by our MyCanvas.com website. Based on our investigation to date, we believe that the identified claims either are not valid or are not currently infringed by us and we do not believe that the resolution of these claims will have a material impact on our financial condition. While MyCanvas.com revenues have represented a small percentage of our total revenue, intellectual property litigation is subject to inherent uncertainties, and there can be no assurance that the expenses associated with defending any litigation or the resolution of this dispute would not have a material adverse impact on our results of operations or cash flows. In addition, on September 16, 2009, we settled a claim with respect to the timeliness and accuracy of a content index we created. The settlement resulted in an expense of approximately $2.3 million in 2009. See “Business — Legal Proceedings.”
 
Risks Related to Intellectual Property
 
If our intellectual property and technologies are not adequately protected to prevent use or appropriation by our competitors, the value of our brand and other intangible assets may be diminished, and our business may be adversely affected.
 
Our future success and competitive position depend in part on our ability to protect our proprietary technologies and intellectual property. We rely and expect to continue to rely on a combination of confidentiality and license agreements with our employees, consultants and third parties with whom we have relationships, as well as trademark, copyright, patent and trade secret protection laws, to protect our proprietary technologies and intellectual property. In the United States, we currently have three patents issued, and we have a number of patents pending relating to digitization, indexing, storage, correlation, search and display of content. Ancestry.com, myfamily.com and Family Tree Maker are among our registered trademarks. In addition, in the United States, we have filed various trademark applications for certain aspects of our technologies, and we have also filed trademark applications in certain foreign countries for the Ancestry and other website names. Many of our trademarks contain words or terms having a common usage and, as a result, may not be protectable under applicable law. Because of this concern, we have elected not to file applications with respect to certain of our trademarks, and some of our trademarks for which we have filed applications may not be protectable. We also possess intellectual property rights in aspects of our digital content, search technology, software products and digitization and indexing processes. However, our digital content is not protected by any registered copyrights or other registered intellectual property or statutory rights. Rather, our digital content is protected by user agreements that limit access to and use of our data, and by our proprietary indexing and search technology that we apply to make our digital content searchable. Compliance with use restrictions is difficult to monitor, and our proprietary rights in our digital content databases may be more difficult to enforce than other forms of intellectual property rights.
 
There can be no assurance that the steps we take will be adequate to protect our technologies and intellectual property, that our patent and trademark applications will lead to issued patents and registered trademarks, that others will not develop or patent similar or superior technologies, products or services, or that our patents, trademarks and other intellectual property will not be challenged, invalidated or circumvented by others. Furthermore, the intellectual property laws of other countries at which our websites are or may be in the future be directed may


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not protect our products and intellectual property rights to the same extent as the laws of the United States. The legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in Internet-related industries are uncertain and still evolving, both in the United States and in other countries. In addition, third parties may knowingly or unknowingly infringe our patents, trademarks and other intellectual property rights, and litigation may be necessary to protect and enforce our intellectual property rights. Any such litigation could be very costly and could divert management attention and resources. If the protection of our technologies and intellectual property is inadequate to prevent use or appropriation by third parties, the value of our brand and other intangible assets may be diminished and competitors may be able to more effectively mimic our subscription products and methods of operations. Any of these events would have a material adverse effect on our business, financial condition and results of operations.
 
We also expect that the more successful we are, the more likely it will become that competitors will try to develop products that are similar to ours, which may infringe on our proprietary rights. It may also be more likely that competitors will claim that our products infringe on their proprietary rights. If we are unable to protect our proprietary rights or if third parties independently develop or gain access to our or similar technologies, our business, revenue, reputation and competitive position could be harmed.
 
Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information. Failure to protect our proprietary information could make it easier for third parties to compete with our products and harm our business.
 
A substantial amount of our tools and technologies are protected by trade secret laws. In order to protect our proprietary technologies and processes, we rely in part on security measures, as well as confidentiality agreements with our employees, licensees, independent contractors and other advisors. These measures and agreements may not effectively prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. We could potentially lose future trade secret protection if any unauthorized disclosure of such information occurs. In addition, others may independently discover our trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Laws regarding trade secret rights in certain markets in which we operate may afford little or no protection to our trade secrets. The loss of trade secret protection could make it easier for third parties to compete with our products by copying functionality. In addition, any changes in, or unexpected interpretations of, the trade secret and other intellectual property laws in any country in which we operate may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our business, revenue, reputation and competitive position.
 
Intellectual property claims against us could be costly and result in the loss of significant rights related to, among other things, our websites and marketing and advertising activities.
 
Trademark, copyright, patent and other intellectual property rights are important to us and other companies. Our intellectual property rights extend to our technologies, business processes and the content on our websites. We use intellectual property licensed from third parties in merchandising our products and marketing and advertising our services. From time to time, third parties may allege that we have violated their intellectual property rights. See “Business — Legal Proceedings.” If there is a claim against us for infringement, misappropriation, misuse or other violation of third party intellectual property rights, and we are unable to obtain sufficient rights or develop non-infringing intellectual property or otherwise alter our business practices on a timely basis, our business and competitive position may be adversely affected. Many companies are devoting significant resources to obtaining patents that could potentially affect many aspects of our business. There are numerous patents that broadly claim means and methods of conducting business on the Internet. We have not exhaustively searched patents relevant to our technologies and business. If we are forced to defend ourselves against intellectual property infringement claims, whether they are with or without merit or are determined in our favor, we may face costly litigation, diversion of technical and management personnel, limitations on our ability to use our current websites or inability to market or provide our products or services. As a result of any such dispute, we may have to develop non-infringing technology, pay damages, enter into royalty or licensing agreements, cease providing certain products or


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services, adjust our merchandizing or marketing and advertising activities or take other actions to resolve the claims. These actions, if required, may be costly or unavailable on terms acceptable to us. In addition, many of our co-branding, distribution and other partnering agreements require us to indemnify our partners for third-party intellectual property infringement claims, which could increase the cost to us of an adverse ruling in such an action.
 
In addition, as a publisher of online content, we face potential liability for negligence, copyright, patent or trademark infringement or other claims based on the nature and content of data and materials that we publish or distribute. These claims could potentially arise with respect to both company-acquired content and user-generated content. Litigation to defend these claims could be costly and any other liabilities we incur in connection with the claims may harm our business, financial condition and results of operations.
 
If we are unable to protect our domain names, our reputation and brand could be affected adversely, which would adversely affect our subscriber base, and therefore adversely affect our revenues.
 
We have registered domain names for website destinations that we use in our business, such as Ancestry.com, Genealogy.com and myfamily.com. However, if we are unable to maintain our rights in these domain names, our competitors could capitalize on our brand recognition by using these domain names for their own benefit. In addition, our competitors could capitalize on our brand recognition by using domain names similar to ours. Domain names similar to ours have been registered in the United States and elsewhere, and in many countries the top-level domain names “ancestry” or “genealogy” are owned by other parties. Though we own the “ancestry.co.uk” domain name in the United Kingdom, we might not be able to, or may choose not to, acquire or maintain other country-specific versions of the “ancestry” and “genealogy” domain names. Further, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights varies from jurisdiction to jurisdiction and is unclear in some jurisdictions. We may be unable to prevent third parties from acquiring and using domain names that infringe on, are similar to, or otherwise decrease the value of, our brand or our trademarks or service marks. Protecting and enforcing our rights in our domain names and determining the rights of others may require litigation, which could result in substantial costs and divert management attention. We may not prevail if any such litigation is initiated.
 
Risks Related to this Offering and our Common Stock
 
An active, liquid and orderly trading market for our common stock may not develop, our share price may be volatile and you may be unable to sell your shares at or above the offering price.
 
Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which a trading market will develop or how liquid that market might become. The initial public offering price for our shares will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section and others beyond our control, including:
 
  •  actual or anticipated fluctuations in our key operating metrics, financial condition and operating results;
 
  •  a greater than expected loss of existing subscribers;
 
  •  a negative change in one or more of our key metrics;
 
  •  actual or anticipated changes in our growth rate;
 
  •  issuance of new or updated research or reports by securities analysts;
 
  •  our announcement of actual results for a fiscal period that are higher or lower than projected or expected results or our announcement of revenue or earnings guidance that is higher or lower than expected;
 
  •  fluctuations in the valuation of companies perceived by investors to be comparable to us;
 
  •  share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
 
  •  sales or expected sales of additional common stock;


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  •  announcements from, or operating results of, our competitors; or
 
  •  general economic and market conditions.
 
Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may cause the market price of shares of our common stock to decline. If the market price of shares of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.
 
If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
 
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not currently have any and may never obtain research coverage by industry or financial analysts. If no or few analysts commence coverage of us, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, if one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
 
Substantial future sales of our common stock in the public market could cause our stock price to fall.
 
Additional sales of our common stock in the public market after this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. Upon completion of this offering (assuming no exercise of the underwriters’ over-allotment option), we will have 42,402,916 shares of common stock outstanding. The 7,407,407 shares sold in this offering, as well as any shares disposed of upon exercise of the underwriters’ over-allotment option, will be freely transferable without restriction or additional registration under the Securities Act of 1933, as amended (the “Securities Act”). The remaining shares of common stock outstanding after this offering will be available for sale as follows (assuming no exercise of the underwriters’ over-allotment option):
 
     
Date of Availability for Sale
  Number of Shares
 
180 days after the date of this prospectus (subject to extension upon the occurrence of specified events) due to the release of the lock-up agreement these stockholders have with the underwriters
  11,131,719
180 days after the date of this prospectus (subject to extension upon the occurrence of specified events) due to the release of the lock-up agreement these stockholders have with the underwriters that are held by affiliates and therefore subject to volume restrictions under Rule 144
  23,566,030
 
In addition, the approximately 12.4 million shares underlying options that are either subject to the terms of our equity compensation plans or reserved for future issuance under our equity compensation plans as of the date of this prospectus will become eligible for sale in the public market to the extent permitted by the provisions of various option agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act. At any time and without public notice, any or all of the shares subject to the lock-up may be released prior to expiration of the 180-day lock-up period at the discretion of Morgan Stanley & Co. Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated. As resale restrictions end, the market price of our common stock could decline if the holders of those shares sell them or are perceived by the market as intending to sell them. In addition, after this offering (assuming no exercise of the underwriters’ over-allotment option), the holders of approximately 35 million shares of common stock will be entitled to rights to cause us to register the sale of those shares under the Securities Act but


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cannot exercise any such registration rights during the 180-day lock-up period. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration.
 
Our principal stockholder and its affiliates will likely control our company after this offering and their interests may not always coincide with the interests of the other holders of our common stock.
 
As of September 30, 2009, Spectrum Equity Investors V, L.P. and certain of its affiliates beneficially owned in the aggregate shares representing approximately 67% of our outstanding voting power. Two persons associated with Spectrum Equity Investors V, L.P. currently serve on our board of directors. After this offering, Spectrum Equity Investors V, L.P. and certain of its affiliates will beneficially own in the aggregate shares representing approximately 54.8% of our outstanding voting power, or approximately 53.2%, if the underwriters exercise their over-allotment option in full. As a result, Spectrum Equity Investors V, L.P. and certain of its affiliates could control all matters presented to our stockholders for approval, including election and removal of our directors and change of control transactions. The interests of Spectrum Equity Investors V, L.P. and certain of its affiliates may not always coincide with the interests of the other holders of our common stock.
 
As a new investor, you will experience immediate and substantial dilution.
 
Purchasers in this offering will immediately experience substantial dilution in net tangible book value. Because our common stock has in the past been sold at prices substantially lower than the initial public offering price that you will pay, you will suffer immediate dilution of $15.77 per share in net tangible book value, based on an assumed initial offering price of $13.50 per share of common stock. The exercise of outstanding options, 5,976,194 of which are outstanding and exercisable as of September 30, 2009, may result in further dilution.
 
Management may apply our net proceeds from this offering to uses that do not increase our market value or improve our operating results.
 
We expect to use $12.1 million of the net proceeds we receive to repay a portion of the amount outstanding under our credit facility. We intend to use the remainder for general corporate purposes, including as yet undetermined amounts related to working capital and capital expenditures. Our management will have considerable discretion in applying our net proceeds and you will not have the opportunity, as part of your investment decision, to assess whether we are using our net proceeds appropriately. Until the net proceeds we receive are used, they may be placed in investments that do not produce income or that lose value. We may use our net proceeds for purposes that do not result in any increase in our results of operations, which could cause the price of our common stock to decline.
 
Delaware law and our corporate charter and bylaws contain and will contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.
 
Provisions in our certificate of incorporation and bylaws that we intend to adopt before the completion of this offering may have the effect of delaying or preventing a change of control or changes in our management. For example, our board of directors has the authority to issue up to five million shares of preferred stock in one or more series and to fix the powers, preferences and rights of each series without stockholder approval. The ability to issue preferred stock could discourage unsolicited acquisition proposals or make it more difficult for a third party to gain control of our company, or otherwise could adversely affect the market price of our common stock. Our amended and restated certificate of incorporation will require that any action to be taken by stockholders must be taken at a duly called meeting of stockholders, which may only be called by our board of directors, the chairperson of our board of directors or the chief executive officer, with the concurrence of a majority of our board of directors, and may not be taken by written consent. Our amended and restated bylaws will require that any stockholder proposals or nominations for election to our board of directors must meet specific advance notice requirements and procedures, which make it more difficult for our stockholders to make proposals or director nominations. In addition, we will have a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change membership of a majority of our board of directors. For additional information, please see “Description of Capital Stock.”


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Furthermore, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit or restrict large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our certificate of incorporation and bylaws and under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in our market price being lower than it would without these provisions.
 
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
 
We have never declared or paid any cash dividends on our common stock and do not intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. In addition, the provisions of our credit facility prohibit us from paying cash dividends. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. We may, in some cases, use words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” “will” or “may,” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this prospectus include statements about:
 
  •  our future financial performance, including our revenues, cost of revenues, operating expenses and ability to sustain profitability;
 
  •  our rate of revenue growth;
 
  •  our ability to attract and retain subscribers;
 
  •  our ability to generate additional revenues on a cost-effective basis;
 
  •  our ability to acquire content and make it available online;
 
  •  the success of our promotional programs and new products;
 
  •  disruptions in our services;
 
  •  our international expansion plans;
 
  •  success with respect to any future acquisitions;
 
  •  our ability to retain and hire necessary employees;
 
  •  our ability to adequately protect our intellectual property;
 
  •  the impact of claims or litigation;
 
  •  our liquidity and working capital requirements; and
 
  •  the effect of laws applying to our business.
 
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements, which statements apply only as of the date of this prospectus. These important factors include those that we discuss in this prospectus under the caption “Risk Factors” and elsewhere. You should read these factors and the other cautionary statements made in this prospectus as being applicable to all related forward-looking statements wherever they appear in this prospectus. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.


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USE OF PROCEEDS
 
We estimate that the net proceeds we receive from this offering will be approximately $48.4 million based on the assumed initial public offering price of $13.50 per share, which is the midpoint of the range included on the cover page of this prospectus after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares in this offering from us is exercised, our estimated net proceeds will be approximately $56.1 million after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders. A $1.00 increase or decrease in the assumed initial public offering price of $13.50 per share would increase or decrease the net proceeds we receive from this offering by approximately $3.8 million, assuming the number of shares offered by us as set forth on the cover page of this prospectus remains the same and after deducting the estimated underwriter discounts and commissions and estimated offering expenses payable by us.
 
We expect to use $12.1 million of the net proceeds we receive to repay a portion of the amount outstanding under our credit and guarantee agreement with CIT Lending Services Corporation, as Administrative Agent, and certain other financial institutions. This credit facility has a maturity date of December 5, 2012 and had an outstanding balance of approximately $114.7 million and an interest rate of approximately 4.0% as of September 30, 2009.
 
We expect to use the remainder of the net proceeds for working capital and general corporate purposes. We may also use a portion of the proceeds to expand our current business through acquisitions or investments in other strategic businesses, products or technologies. We have no commitments with respect to any acquisitions at this time. We will have broad discretion in the way we use the net proceeds.
 
We intend to invest the net proceeds in short- and intermediate-term interest-bearing obligations, investment-grade instruments, certificates of deposit or guaranteed obligations of the United States government, pending their use as described above.
 
The primary purposes of this offering are to raise additional capital, create a public market for our common stock, allow us easier and quicker access to the public markets should we need more capital in the future, increase the profile and prestige of our company with existing and possible future registered users, vendors and strategic partners, and make our stock more valuable and attractive to our employees and potential employees for compensation purposes.
 
DIVIDEND POLICY
 
We have never declared or paid any cash dividends on our capital stock. Our credit facility prohibits us from paying cash dividends. We currently expect to retain future earnings to finance the growth and development of our business and do not anticipate paying any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will be dependent on then-existing conditions.


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CAPITALIZATION
 
The following table sets forth our cash and cash equivalents, our current portion of long-term debt and capitalization at September 30, 2009 on:
 
  •  an actual basis (after giving effect to the 1-for-2 reverse split of our common stock and an increase in the authorized common stock from 100 million to 175 million and authorized preferred stock from 1 million to 5 million on October 30, 2009); and
 
  •  an as adjusted basis to give effect to (i) the sale by us of 4,074,074 shares of common stock in this offering and our receipt of the estimated net proceeds from that sale after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and (ii) our use of $12.1 million of the net proceeds to repay a portion of the amount outstanding under our credit agreement.
 
You should read this table in conjunction with the financial statements and notes to the consolidated financial statements included elsewhere in this prospectus.
 
                 
    September 30, 2009  
    Actual     As adjusted  
    (in thousands)  
 
Cash and cash equivalents
  $ 60,593     $ 96,893  
                 
Current portion of long-term debt
  $ 12,028     $ 10,759  
                 
Long-term debt
  $ 102,641     $ 91,810  
Common stock, $0.001 par value; 175,000,000 shares authorized, actual and as adjusted, 38,328,842 issued and outstanding, actual, and 42,402,916 issued and outstanding, as adjusted
    38       42  
Preferred stock, $0.001 par value; 5,000,000 shares authorized, zero and zero issued and outstanding, actual and as adjusted
           
Additional paid-in capital
    223,471       271,867  
Accumulated other comprehensive income
           
Retained earnings
    13,305       13,305  
                 
Total stockholders’ equity
    236,814       285,214  
                 
Total capitalization
  $ 339,455     $ 377,024  
                 
 
Each $1.00 increase or decrease in the assumed initial public price of $13.50 per share, the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease the amount of cash and cash equivalents by approximately $2.8 million, total stockholders’ equity by approximately $3.8 million, and long term debt (including current portion) by approximately $1.0 million, assuming the number of shares offered by us as set forth on the cover page of this prospectus remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.


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DILUTION
 
If you invest in our common stock, you will be diluted to the extent the initial public offering price per share of our common stock exceeds the net tangible book value per share of our common stock immediately after this offering. Our net tangible book value as of September 30, 2009 was a deficit of approximately $(144.6) million, or $(3.77) per share of common stock. The net tangible book value per share represents the amount of our tangible net worth, or total tangible assets less total liabilities, divided by 38,328,842 shares of our common stock outstanding as of that date.
 
After giving effect to the issuance and sale of 4,074,074 shares of our common stock sold by us in this offering and our receipt of the estimated net proceeds from such sale, based on an assumed public offering price of $13.50 per share (the midpoint of the range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discount and commission and the estimated expenses of the offering, our as adjusted net tangible book value per share as of September 30, 2009 would have been approximately $(2.27) per share. This amount represents an immediate increase in net tangible book value of $1.50 per share to existing stockholders and an immediate dilution in net tangible book value of $15.77 per share to new investors purchasing shares of our common stock in this offering. Dilution per share is determined by subtracting the net tangible book value per share as adjusted for this offering from the amount of cash paid by a new investor for a share of our common stock. Net tangible book value is not affected by the sale of shares of our common stock offered by the selling stockholders. The following table illustrates the per share dilution:
 
                 
Assumed initial public offering price per share
          $ 13.50  
Net tangible book value per share as of September 30, 2009
  $   (3.77 )        
Increase in net tangible book value per share attributable to new investors
  $ 1.50          
                 
Adjusted net tangible book value per share after this offering
          $ (2.27 )
                 
Dilution per share to new investors
          $ 15.77  
                 
 
A $1.00 increase (decrease) in the assumed initial public offering price of $13.50 per share would increase (decrease) our net tangible book value by $3.8 million, the net tangible book value per share after this offering by $0.09 and the dilution per share to new investors by $0.91, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
 
The following table summarizes as of September 30, 2009, after giving effect to the offering:
 
  •  the total number of shares of common stock purchased from us;
 
  •  the total consideration paid to us before deducting estimated underwriting discounts and commissions payable by us of $3.9 million and estimated offering expenses of approximately $2.8 million; and
 
  •  the average price per share paid by existing stockholders and by new investors who purchase shares of common stock in this offering at the assumed initial public offering price of $13.50 per share.
 
                                         
                    Average
    Shares Purchased   Total Consideration   Price per
    Number   Percent   Amount   Percent   Share
 
Existing stockholders
    38,328,842            90 %   $ 206,521       79 %   $ 5.39  
New investors
    4,074,074       10       55,000       21       13.50  
                                         
Total
    42,402,916       100 %   $ 261,521       100 %     6.17  
                                         
 
The foregoing table does not reflect proceeds to be realized by existing stockholders in connection with the sales by them in this offering, options outstanding under our stock option plans or stock options to be granted after the offering. As of September 30, 2009, there were 10,326,588 options outstanding with an average exercise price of $5.21 per share.


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UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL DATA
 
The following supplemental unaudited consolidated pro forma statements of operations data have been developed by applying pro forma adjustments to our historical consolidated statements of operations. The Spectrum investment, which occurred on December 5, 2007, has been accounted for as a business combination. As a result of the Spectrum investment, we applied purchase accounting standards which required a new basis of accounting resulting in assets and liabilities being recorded at their respective fair values at the investment date. Although our operations did not change as a result of the Spectrum investment, the accompanying unaudited consolidated pro forma financial data is presented for the “predecessor” and “successor” relating to the periods preceding and succeeding the Spectrum investment, respectively. The unaudited consolidated pro forma statement of operations for the year ended December 31, 2007 gives effect to the Spectrum investment as if it had occurred on January 1, 2007. Assumptions underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with this unaudited consolidated pro forma financial data.
 
The unaudited pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. The unaudited consolidated pro forma financial data is presented for supplemental informational purposes only. The unaudited consolidated pro forma financial data does not purport to represent what our results of operations would have been had the Spectrum investment actually occurred on January 1, 2007, and they do not purport to project our results of operations or financial condition for any future period. The unaudited consolidated pro forma statements of operations should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as “Selected Consolidated Financial Data” and our audited consolidated financial statements and related notes thereto appearing elsewhere in this prospectus. All pro forma adjustments and their underlying assumptions are described more fully in the notes to our unaudited consolidated pro forma statements of operations.


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    Predecessor     Successor           Pro Forma  
    Period from Jan. 1,
    Period from Dec. 6,
          Year Ended
 
    2007 through Dec. 5,
    2007 through Dec. 31,
          December 31,
 
    2007     2007     Adjustments     2007  
 
Revenues:
                               
Subscription revenues
  $ 141,141     $ 11,692     $     $ 152,833  
Product and other revenues
    12,269       1,278             13,547  
                                 
Total revenues
    153,410       12,970             166,380  
Costs of revenues:
                               
Cost of subscription revenues
    33,590       2,462       160 (1)     36,212  
Cost of product and other revenues
    2,552       500             3,052  
                                 
Total cost of revenues
    36,142       2,962       160       39,264  
                                 
Gross profit
    117,268       10,008       (160 )     127,116  
Operating expenses:
                               
Technology and development
    31,255       3,517       (1,018 )(1)(2)     33,754  
Marketing and advertising
    42,400       3,157       50 (1)     45,607  
General and administrative
    20,723       2,142       99 (1)     22,964  
Amortization of acquired intangible assets
    2,132       1,542       20,387 (3)     24,061  
Transaction related costs
    9,530             (9,530 )(4)      
                                 
Total operating expenses
    106,040       10,358       9,988       126,386  
                                 
Income (loss) from operations
    11,228       (350 )     (10,148 )     730  
Other income (expense):
                               
Interest expense
    (756 )     (1,146 )     (10,939 )(5)     (12,841 )
Interest income
    2,051       289       (1,992 )(6)     348  
Other income (expense), net
    266       7             273  
                                 
Income (loss) before income taxes
    12,789       (1,200 )     (23,079 )     (11,490 )
Income tax (expense) benefit
    (5,018 )     (103 )     9,372 (7)     4,251  
                                 
Net income (loss)
  $ 7,771     $ (1,303 )   $ (13,707 )   $ (7,239 )
                                 
 
 
(1) Represents an increase in rent expense due to the elimination of a deferred gain on the sale/leaseback of our corporate headquarter facility of $0.6 million recorded in 2007, of which $0.3 million is included in technology and development expenses.
 
(2) Represents the elimination of in-process research and development charges of $1.3 million as a result of the Spectrum investment.
 
(3) Represents the net increase in amortization expense due to fair value adjustments related to long-lived intangible assets with definite lives. Identifiable long-lived intangible assets are amortized either on a straight-line basis or on the rate of attrition of subscribers used to calculate the fair value of the intangible asset resulting from the Spectrum investment.
 
(4) Represents the elimination of non-recurring transaction costs that were directly attributable to the Spectrum investment.
 
(5) Reflects the net increase in interest expense resulting from interest expense on the long-term debt entered into in connection with the Spectrum investment offset by actual interest expense incurred on predecessor debt that was eliminated at the time of the Spectrum investment.
 
(6) Reflects a reduction in interest income resulting from the decrease in our cash and short-term investment balances used in the Spectrum investment.
 
(7) Reflects the income tax effect of the pro forma adjustments resulting in a pro forma effective tax rate based on our combined federal and state statutory rate of 37%.


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SELECTED CONSOLIDATED FINANCIAL DATA
 
The tables on the following pages set forth the consolidated financial and operating data as of and for the periods indicated. The consolidated statements of operations data presented below for the years ended December 31, 2004 and 2005 and the balance sheet data as of December 31, 2004, 2005 and 2006 have been derived from our consolidated financial statements, which have been audited by Ernst & Young LLP, an independent registered public accounting firm, and which are not included in this prospectus. The consolidated statements of operations data presented below for the year ended December 31, 2006, the predecessor period from January 1, 2007 through December 5, 2007, the successor period from December 6, 2007 through December 31, 2007 and the year ended December 31, 2008, and the balance sheet data as of December 31, 2007 and 2008 have been derived from our consolidated financial statements, which have been audited by Ernst & Young LLP and which are included in this prospectus. The consolidated statements of operations data for the nine month periods ended September 30, 2008 and 2009 and the balance sheet data at September 30, 2009 are derived from our unaudited interim consolidated financial statements and include all adjustments, consisting of normal and recurring adjustments that we consider necessary for a fair presentation of the financial position and results of operations as of and for such periods. Operating results for the nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the full 2009 fiscal year. See “Risk Factors” and the notes to our consolidated financial statements. You should read the consolidated financial data presented on the following pages in conjunction with our consolidated financial statements, the notes to our consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 


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    Predecessor       Successor  
                      Period from
      Period from
    Year
             
                      Jan. 1, 2007
      Dec. 6, 2007
    Ended
    Nine Months Ended
 
    Year Ended Dec. 31,     through
      through
    Dec. 31,
    September 30,  
    2004     2005     2006     Dec. 5, 2007       Dec. 31, 2007     2008     2008     2009  
    (in thousands, except per share data)  
Consolidated Statements of Operations Data:
                                                                 
Revenues:
                                                                 
Subscription revenues
  $ 107,127     $ 126,031     $ 137,643     $ 141,141       $ 11,692     $ 181,391     $ 133,616     $ 152,506  
Product and other revenues
    15,513       14,228       12,909       12,269         1,278       16,200       11,542       12,287  
                                                                   
Total revenues
    122,640       140,259       150,552       153,410         12,970       197,591       145,158       164,793  
Costs of revenues:
                                                                 
Cost of subscription revenues
    22,190       25,205       27,344       33,590         2,462       38,187       27,699       29,755  
Cost of product and other revenues
    3,255       3,367       3,695       2,552         500       5,427       3,292       4,213  
                                                                   
Total cost of revenues
    25,445       28,572       31,039       36,142         2,962       43,614       30,991       33,968  
                                                                   
Gross profit
    97,195       111,687       119,513       117,268         10,008       153,977       114,167       130,825  
Operating expenses:
                                                                 
Technology and development
    17,123       20,600       28,280       31,255         3,517       33,206       23,705       26,690  
Marketing and advertising
    56,913       60,821       51,421       42,400         3,157       52,341       36,634       44,226  
General and administrative
    12,435       16,608       26,978       20,723         2,142       28,931       21,035       24,569  
Amortization of acquired intangible assets
    1,482       1,166       2,216       2,132         1,542       23,779       17,832       12,165  
Transaction related expenses
                      9,530                            
Impairment of intangibles
    1,000       310                                        
                                                                   
Total operating expenses
    88,953       99,505       108,895       106,040         10,358       138,257       99,206       107,650  
                                                                   
Income (loss) from operations
    8,242       12,182       10,618       11,228         (350 )     15,720       14,961       23,175  
Other income (expense):
                                                                 
Interest expense
    (1,444 )     (1,357 )     (946 )     (756 )       (1,146 )     (12,355 )     (9,327 )     (4,784 )
Interest income
    423       1,146       2,238       2,051         289       872       632       746  
Other income (expense), net
    640       1,259       834       266         7       (8 )     (18 )     14  
                                                                   
Income (loss) before income taxes
    7,861       13,230       12,744       12,789         (1,200 )     4,229       6,248       19,151  
Income tax expense
    (2,928 )     (5,086 )     (4,595 )     (5,018 )       (103 )     (1,845 )     (2,748 )     (6,927 )
                                                                   
Net income (loss)
  $ 4,933     $ 8,144     $ 8,149     $ 7,771       $ (1,303 )   $ 2,384     $ 3,500     $ 12,224  
                                                                   
Net income per common share:(1)
                                                                 
Basic
                                            $ 0.06     $ 0.09     $ 0.32  
                                                                   
Diluted
                                            $ 0.06     $ 0.09     $ 0.30  
                                                                   
 
 
(1) In connection with the Spectrum investment, we were recapitalized. As a result, the capital structure of our predecessor is not comparable to that of the successor. Accordingly, net income per common share is not comparable or meaningful for periods prior to 2008 and has not been presented.
 

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    Predecessor       Successor  
                     
Period from
      Period from
    Year
             
                      Jan. 1, 2007
      Dec. 6, 2007
    Ended
    Nine Months Ended
 
    Year Ended Dec. 31,     through
      through
    Dec. 31,
    September 30,  
    2004     2005     2006     Dec. 5, 2007       Dec. 31, 2007     2008     2008     2009  
    (in thousands)  
Other Financial Data:
                                                                 
Adjusted EBITDA(1)
  $ 21,986     $ 23,513     $ 30,455     $  39,344       $  3,755     $ 62,645     $ 49,062     $ 52,878  
                                                                   
Free cash flow(1)
    (13,451 )     (3,586 )     4,212       14,025         1,774       31,712       28,018       23,848  
                                                                   
Stock-based compensation expense
included in:
                                                                 
Cost of subscription revenues
  $ 15     $ (9 )   $ 31     $ 73       $ 3     $ 80     $ 60     $ 78  
Technology and development
    1,802       (1,082 )     224       260         23       1,132       791       1,223  
Marketing and advertising
    764       (176 )     196       279         27       254       180       273  
General and administrative
    632       (77 )     3,338       286         24       3,206       2,478       2,691  
                                                                   
Total stock-based compensation expense
  $ 3,213     $ (1,344 )   $ 3,789     $ 898       $ 77     $ 4,672     $ 3,509     $ 4,265  
                                                                   
 
 
(1) Income from operations and net income, and therefore adjusted EBITDA and free cash flow, include an expense related to a settlement in the third quarter of 2009 of a claim regarding the timeliness and accuracy of a content index we created. The settlement resulted in an expense of approximately $2.3 million in 2009.
 
                                                   
    Predecessor     Successor
    As of December 31,   As of September 30,
    2004   2005   2006     2007   2008   2009
    (in thousands)
Balance Sheet Data:
                                                 
Cash, cash equivalents and short-term investments
  $ 37,156     $ 38,113     $ 43,219       $ 12,277     $ 40,121     $ 60,593  
Total assets
    123,598       140,126       140,640         476,212       477,975       476,296  
Deferred revenues
    53,470       56,714       52,307         56,730       61,178       69,850  
Long-term debt (including current portion)
    28,776       25,000       15,000         140,000       133,000       114,669  
Total liabilities
    100,239       102,229       95,129         263,830       258,187       239,482  
Total stockholders’ equity
    23,359       37,897       45,511         212,382       219,788       236,814  

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The following table presents a reconciliation of adjusted EBITDA and free cash flow to net income (loss), the most comparable GAAP measure, for each of the periods identified. For additional information, please see the discussion of adjusted EBITDA and free cash flow in “Prospectus Summary.”
 
                                                                   
    Predecessor       Successor  
                      Period from
      Period from
    Year
             
                      Jan. 1, 2007
      Dec. 6, 2007
    Ended
    Nine Months
 
    Year Ended Dec. 31,     through
      through
    Dec. 31,
    Ended September 30,  
    2004     2005     2006     Dec. 5, 2007       Dec. 31, 2007     2008     2008     2009  
    (in thousands)  
Reconciliation of adjusted EBITDA and free cash flow to net income (loss):
                                                                 
Net income (loss)
  $ 4,933     $ 8,144     $ 8,149     $ 7,771       $ (1,303 )   $ 2,384     $ 3,500     $ 12,224  
Interest (income) expense, net
    1,021       211       (1,292 )     (1,295 )       857       11,483       8,695       4,038  
Income tax expense
    2,928       5,086       4,595       5,018         103       1,845       2,748       6,927  
Depreciation expense
    5,147       7,598       9,559       10,594         754       10,732       8,153       8,092  
Amortization expense
    4,384       4,767       6,489       7,094         1,974       30,046       22,439       17,346  
Stock-based compensation
    3,213       (1,344 )     3,789       898         77       4,672       3,509       4,265  
Other (income) expense, net
    (640 )     (1,259 )     (834 )     (266 )       (7 )     8       18       (14 )
Impairment of intangible assets and acquired in-process research and development
    1,000       310                     1,300       1,475              
Transaction related expenses
                      9,530                            
                                                                   
Adjusted EBITDA
  $ 21,986     $ 23,513     $ 30,455     $ 39,344       $ 3,755     $ 62,645     $ 49,062     $ 52,878  
                                                                   
Capitalization of content database costs
  $ (7,579 )   $ (11,521 )   $ (11,285 )   $ (10,591 )     $ (1,129 )   $ (8,965 )   $ (6,383 )   $ (5,855 )
Purchase of property and equipment
    (21,900 )     (11,873 )     (10,127 )     (10,572 )       (852 )     (11,621 )     (7,358 )     (7,566 )
Cash paid for interest
    (1,246 )     (1,480 )     (1,031 )     (756 )             (10,068 )     (7,206 )     (6,624 )
Cash paid for income taxes
    (4,712 )     (2,225 )     (3,800 )     (3,400 )             (279 )     (97 )     (8,985 )
                                                                   
Free cash flow
  $ (13,451 )   $ (3,586 )   $ 4,212     $ 14,025       $ 1,774     $ 31,712     $ 28,018     $ 23,848  
                                                                   


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under “Risk Factors” and elsewhere in this prospectus. See “Special Note Regarding Forward Looking Statements.”
 
Company Overview
 
Ancestry.com is the world’s largest online resource for family history, with more than one million paying subscribers around the world as of September 30, 2009. Our mission is to help everyone discover, preserve and share their family history. Our subscribers use our proprietary online platform, extensive digital historical record collection, and easy-to-use technology to research their family histories, build their family trees, collaborate with other subscribers, upload their own records and publish and share their stories with their families. We offer our service on a subscription basis, typically annual or monthly. These subscribers are our primary source of revenue. We charge each subscriber the full price for their subscription at the commencement of their subscription period and at each renewal date. The predominantly annual commitments of our subscribers enhance management’s near-term visibility on our revenues and provide working capital benefits, which we believe enable us to more effectively manage the growth of our business.
 
We operated as The Generations Network, Inc., which we refer to as the predecessor, until December 5, 2007. On December 5, 2007, Generations Holding, Inc., which we refer to as the successor, acquired The Generations Network, Inc. in connection with an investment by Spectrum Equity Investors V, L.P. and certain of its affiliates. The successor was created for the sole purpose of acquiring The Generations Network, Inc. and had no prior operations. As a result of that transaction, which we refer to as the Spectrum investment, Spectrum and certain of its affiliates currently hold approximately 67% of the outstanding shares of our common stock. As a result of the accounting for the Spectrum investment, our fiscal year 2007 is divided into a predecessor period from January 1, 2007 through December 5, 2007 and a successor period from December 6, 2007 through December 31, 2007.
 
We have funded our operations primarily from cash flows from operations during the last five years. Our revenues increased from $122.6 million in 2004 to $197.6 million in 2008. Our revenues were $145.2 million for the nine months ended September 30, 2008, as compared to $164.8 million for the nine months ended September 30, 2009. The number of subscribers on the Ancestry.com websites has increased from approximately 460,000 in January 2004 to more than one million as of September 30, 2009. Our average monthly revenue per subscriber was $16.09 in 2008.
 
We believe our previous investments in technology and content have provided us a foundation for a scalable business model that will help us to increase our margins over the long term and effectively manage our costs as our business grows. However, we expect to continue to devote substantial resources and funds to improving our technologies and product offerings and acquiring new and relevant content, and also to expanding awareness of our brand and category through marketing, which may reduce our margins in the near term.
 
Key Business Metrics
 
Our management regularly reviews a number of financial and operating metrics, including the following key operating metrics to evaluate our business, determine the allocation of resources, make decisions regarding corporate strategies and evaluate forward-looking projections. The following key operating metrics reflect data with respect to the Ancestry.com websites and exclude our other subscription-based websites, such as myfamily.com and Geneology.com.
 
  •  Total subscribers.  A subscriber is an individual who pays for renewable access to one of our Ancestry.com websites. Total subscribers is defined as the number of subscribers at the end of the relevant period.
 
  •  Monthly churn.  Monthly churn is a measure representing the number of subscribers that cancel in the quarter divided by the sum of beginning subscribers and subscriber additions during the quarter. To arrive at


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  monthly churn, we divide the result by three. Management uses this measure to determine the health of our subscriber base.
 
  •  Average monthly revenue per subscriber.  Average monthly revenue per subscriber is total subscription revenues earned in the period from subscriptions to one of the Ancestry.com websites divided by the average number of subscribers in the period, divided by the number of months in the period. The average number of subscribers for the period is calculated by taking the average of the beginning and ending number of subscribers for the period.
 
  •  Subscriber acquisition cost.  Subscriber acquisition cost is external marketing and advertising expense, divided by total subscriber additions in the period. Management uses this metric to determine the efficiency of our marketing and advertising programs in acquiring new subscribers.
 
A significant number of our renewals occur in the first quarter of each year. Because we recognize subscription revenues ratably over the subscription period, this trend generally has not resulted in a material seasonal impact on our revenues, but may result in a seasonal effect on one or more of the key business metrics described above.
 
The following represents our performance highlights for the periods presented:
 
                                         
    Year Ended December 31,   Nine Months Ended September 30,
    2006   2007   2008   2008   2009
 
Total subscribers
    734,386       832,193       913,683       893,882       1,028,180  
Subscriber additions
    569,851       479,663       556,045       412,276       508,750  
Monthly churn(1)
            3.5 %     4.0 %     4.0 %     3.9 %
Subscriber acquisition cost(2)
  $ 49.29     $ 70.96     $ 71.99     $ 69.46     $ 68.32  
Average monthly revenue per subscriber(2)
  $ 14.52     $ 14.83     $ 16.09     $ 15.95     $ 16.50  
 
 
(1) Monthly churn is the average monthly churn for the quarters included in the periods shown. Monthly churn is not comparable for the year ended December 31, 2006 due to a change in the packaging of our products and services, and accordingly, has not been presented.
 
(2) Based on pro forma expenses and revenues for 2007. See “Unaudited Consolidated Pro Forma Financial Data” on page 38 of this prospectus.
 
Components of Consolidated Statements of Operations
 
Revenues
 
Subscription revenues.  We derive subscription revenues primarily from providing access to our products and services via our various Ancestry.com websites. Subscription revenues are recognized ratably over the subscription period which consists primarily of monthly and annual subscriptions, net of estimated cancellations. We typically charge each subscriber’s credit card for the full price for their subscription at the commencement of their subscription period and at each renewal date (whether annual or monthly), unless they cancel their subscription before the renewal date. The amount of unrecognized revenues is recorded in deferred revenue. We generally record cancellations and returns as a reduction to deferred revenues. When people sign up for trial subscriptions, we automatically charge their credit card for a subscription at the end of the trial period unless they cancel before the end of the trial period. Registered users that accept the offer of a 14-day free trial are not billed for services until after the 14-day trial period. Revenue is recognized over the subscription period once billed. No revenue is recognized or allocated to the 14-day free trial period. Subscription revenues from our Ancestry.com websites accounted for 94% of the total subscription revenues for the year ended December 31, 2008. Subscription revenues also include annual subscriptions to our myfamily.com website and other subscription-based products and services.
 
A majority of our subscription revenues are derived from subscribers in the United States. We attribute subscription revenues by country based on the billing address of the subscriber, regardless of which of our websites the person subscribes. Revenues from subscribers in the United States, the United Kingdom and other countries collectively were 82%, 14% and 4% of our subscription revenues, respectively, in 2006 compared to 75%, 19% and 6%, respectively, in the period from January 1, 2007 through December 5, 2007, 74%, 20% and 6%, respectively, in the period from December 6, 2007 through December 31, 2007 and 74%, 18% and 8%, respectively, in 2008.


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Revenues from subscribers in the United States, the United Kingdom and other countries collectively were 74%, 18% and 8% of our subscription revenues, respectively, in the nine months ended September 30, 2008 compared to 75%, 17% and 8%, respectively, in the nine months ended September 30, 2009.
 
Product and other revenues.  Product and other revenues consist of sales of desktop software (Family Tree Maker), DNA testing (Ancestry.com | DNA), books, periodicals, certificates, our self-publishing products (MyCanvas.com), advertising services and access to our family history content on a pay-per-view basis, which is available on our United Kingdom and certain other internationally directed websites. Revenues related to these products are recognized upon shipment, delivery of genetic results, shipment of magazine or delivery of online ad impressions or granting of pay-per-view access, as applicable.
 
Cost of Revenues
 
Cost of subscription revenues.  Cost of subscription revenues consist of amortization of our database content costs, depreciation expense on web servers and equipment, credit card processing fees, web hosting costs, royalty costs on certain content licensed from others, personnel-related costs for database content support and call center personnel. Since January 1, 2007, our call center has primarily functioned as a subscriber service organization. A majority of the costs associated with our call center since January 1, 2007 have been recorded in cost of subscription revenues. We expect database content amortization and web hosting costs to continue to increase in 2009 as we continue to add database content and develop a redundant hosting location.
 
Cost of product and other revenues.  Cost of product and other revenues consist of our direct costs to purchase the products, shipping costs, credit card processing fees, personnel-related costs of warehouse personnel, warehouse storage costs and royalties on products licensed from others.
 
Gross profit.  Gross profit is the result of total revenues minus our total cost of revenues.
 
Personnel-related costs for each category of cost of revenues and operating expenses include salaries, bonuses, stock-based compensation and employee benefit costs.
 
Operating Expenses
 
Technology and development.  Technology and development expenses consist of personnel-related costs incurred in product development, maintenance and testing of our websites, enhancing our record search and linking technologies, developing solutions for new product lines, internal information systems and infrastructure, third-party development, and other internal-use software systems. Technology and development expenses also include depreciation of computer hardware and purchased software. Our development costs are primarily based in the United States and are primarily devoted to providing content and tools for individuals to do family history research. We expect our investment in technology and development to increase in absolute dollars in future periods.
 
Marketing and advertising.  Marketing and advertising expenses consist primarily of direct expenses related to online, television and print advertising, retention marketing expenses, payments made to affiliates to generate new subscribers and personnel-related expenses. Prior to January 1, 2007, our call center was principally a sales organization. The majority of the costs associated with the call center prior to January 1, 2007 were recorded in marketing and advertising. Marketing and advertising costs are principally incurred in the United States, but we do have marketing and advertising offices in Europe, Australia and Canada. We expect marketing expenses to increase in absolute dollars but to remain relatively stable in the near future as a percentage of revenues, except for an increase in marketing expenses primarily in 2010 related to a one time payment we expect to make for product integration on the U.S. version of the television show “Who Do You Think You Are?” We do not control the release of this television show and cannot be sure if or when it will be released or if it will have any effect on our revenues or results of operations. If our revenues increase as a result of interest in Ancestry.com attributable to the airing of this program, such increase may not be sustainable over time.
 
General and administrative.  General and administrative expenses consist principally of personnel-related expenses for our executive, finance, legal, human resources and other administrative personnel, as well as accounting and legal professional fees and other general corporate expenses, including settlement of legal claims. We expect our general and administrative expenses to increase when we become a public company as we expect our


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accounting, legal and personnel-related expenses and directors and officers insurance costs to increase as we institute and monitor a more comprehensive compliance and board governance function, maintain and review internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act and prepare and distribute periodic reports.
 
Amortization of acquired intangible assets.  Amortization of acquired intangible assets is the amortization expense associated with subscriber relationships and contracts, core technologies, and intangible assets, including trademarks and tradenames, resulting from the Spectrum investment.
 
Transaction related expenses.  Transaction related expenses consist of one-time costs of our predecessor company associated with the Spectrum investment.
 
Other Income (Expense)
 
Interest expense.  Interest expense includes the interest expense associated with our long-term debt and amortization of debt-issuance costs.
 
Interest income.  Interest income includes interest earned on cash and cash equivalents and short-term investments.
 
Income tax expense.  Income tax expense consists of federal and state income taxes in the United States and taxes in certain foreign jurisdictions.
 
Critical Accounting Estimates
 
Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. These estimates and assumptions are often based on judgments that we believe to be reasonable under the circumstances at the time made, but all such estimates and assumptions are inherently uncertain and unpredictable. Actual results may differ from those estimates and assumptions, and it is possible that other professionals, applying their own judgment to the same facts and circumstances, could develop and support alternative estimates and assumptions that would result in material changes to our operating results and financial condition. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances.
 
We consider the assumptions and estimates associated with recoverability of intangible assets, the period of amortization of our database content costs, stock-based compensation and income taxes to be our critical accounting estimates. For further information on our significant accounting policies, see Note 1 of the accompanying notes to our consolidated financial statements.
 
Recoverability of Intangible Assets, Including Goodwill
 
Intangible assets consist of acquisition costs related to database costs, subscriber relationships and contracts, technologies, trade names and trademarks, and other intangible assets. Intangible assets acquired in a business combination are measured at fair value at the date of acquisition. We amortize all intangible assets, except for acquired subscriber relationships, on a straight line basis over their expected lives in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS 142). Acquired subscriber relationships were amortized on a straight-line basis prior to the acquisition of our predecessor and, subsequent to the acquisition, are amortized based on the rate of attrition of subscribers used to calculate the fair value of the intangible asset in the acquisition and purchase price allocation. As of December 31, 2007 and 2008, respectively, we had approximately $285.0 million and approximately $285.5 million of goodwill and approximately $127.5 and approximately $104.9 million of intangible assets with estimable useful lives on our consolidated balance sheets.
 
We review our indefinite-lived intangible assets for impairment at least annually or as indicators of impairment exist based on comparing the fair value of the asset to the carrying value of the asset in accordance with SFAS 142. Goodwill is currently our only indefinite-lived intangible asset. We perform our annual goodwill impairment test in


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the fourth quarter. Our goodwill impairment test requires the use of fair-value techniques, which are inherently subjective.
 
Fair value was estimated in October 2008 using an equal weighting of the income and market value approaches for our company, which we account for as a single reporting unit. The equal weighting of these two approaches reflects our view that both these valuation methods provided a reasonable estimate of fair value and were equally reliable methods.
 
Under the income approach, we calculated the fair value of our reporting unit based on the present value of estimated future cash flows. Under the market approach, we estimated the fair value based on market multiples of revenue and earnings for comparable publicly traded companies. The estimates and assumptions used in our calculations included revenue growth rates, expense growth rates, expected capital expenditures to determine projected cash flows, expected tax rates, and an estimated discount rate to determine present value of expected cash flows. These estimates are based on historical experience, our projections of future operating activity, and our weighed average cost of capital based on returns on interest bearing debt and common stock.
 
The fair value of our reporting unit or the business enterprise value as a whole calculated in October 2008 for our goodwill impairment test in the fourth quarter of 2008 differs from the implied market capitalization based on the fair value of an individual share of our common stock used for granting stock options as of October 27, 2008, as described below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates — Stock-Based Compensation,” because the business enterprise value is the estimated value that would be received for the sale of the company as a whole in an orderly transaction between market participants whereas the estimated value used to determine the fair value of an individual share of common stock was determined on the basis of a non-marketable minority share of a non-public company. The calculation of the non-marketable minority interest of an individual share takes into consideration interest bearing debt, the fair value of stock options issued, shares outstanding and a marketability discount on common stock that is not freely tradable in a public market.
 
The valuation of goodwill could be affected if actual results differ substantially from our estimates. Circumstances that could affect the valuation of goodwill include, among other things, a significant change in our business climate and buying habits of our subscriber base along with increased costs to provide systems and technologies required to support our content and search capabilities. Based on our analysis in the fourth quarter of 2008, no impairment of goodwill was indicated. We have determined that a 10% change in our cash flow assumptions or a marginal change in our discount rate as of the date of our most recent goodwill impairment test would not have changed the outcome of the test.
 
We evaluate the recoverability of our long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets (SFAS 144). SFAS 144 requires recognition of impairment of long-lived assets in the event that the net book value of such assets exceeds the future undiscounted net cash flows attributable to such assets. In accordance with SFAS 144, we recognize impairment, if any, in the period of identification to the extent the carrying amount of an asset exceeds the fair value of such asset. Based on our analysis, we recorded an impairment of approximately $1.5 million for the year ended December 31, 2008 related to a database content set we were developing for release in China. The impairment was expensed to cost of subscription revenues for the year ended December 31, 2008. No impairment was indicated as of December 31, 2007.
 
Period of Amortization of Our Database Costs
 
Our database consists of historical information that has been digitized and indexed to allow subscribers to search and view our content online. Database costs include the costs to acquire or license the historical data, costs incurred by our employees or by third parties to scan the content, and costs to have the content keyed and indexed in order to be searchable. Among the most utilized content in our databases is the United States and United Kingdom census records which are released by government entities every ten years. We amortize our database costs on a straight-line basis over ten years after the content is released for viewing on our websites.


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Stock-Based Compensation
 
We account for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment (SFAS 123(R)). Under the provisions of SFAS 123(R), stock-based compensation cost for each award is estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes option-pricing model and is recognized as expense over the requisite service period. The Black-Scholes model requires various highly judgmental assumptions including fair value of the underlying stock, volatility and expected option life. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense is adjusted accordingly and stock-based compensation expense may differ materially in the future from that recorded in the current period.
 
We adopted SFAS 123(R) prospectively as of January 1, 2006 and therefore have applied the valuation provisions of SFAS 123(R) to all new options and to options that were outstanding prior to the effective date that were subsequently modified. For the year ended December 31, 2006, we had variable stock options which accounted for a de minimus amount of compensation expense. No other periods were affected by variable stock options. We also recorded non-cash compensation expense for the repurchase of common stock within six months of the exercise of employee stock options of approximately $3.0 million for the year ended December 31, 2006.
 
In January 2006, we modified the terms of then-outstanding stock options with exercise prices above $4.60, reducing the exercise price of the options to $4.60. As a result of the modification we recorded incremental compensation expense of $0.4 million and $0.1 million for the year ended December 31, 2006 and the period from January 1, 2007 through December 5, 2007, respectively, and a de minimus amount for the period from December 6, 2007 through December 31, 2007 and for the year ended December 31, 2008.
 
As of December 31, 2007 and 2008 and September 30, 2009 there was approximately $2.1 million, $8.6 million and $9.4 million, respectively, of unrecognized stock-based compensation expense related to non-vested stock option awards that we expect to be recognized over a weighted average period of 3.1, 2.6 and 2.8 years, respectively.
 
The following tables set forth the total non-cash compensation expense included in the related financial statement line items, which total non-cash compensation expense includes SFAS 123(R) stock-based compensation expense, variable stock options expense and compensation expense associated with the repurchase of common stock described above:
 
                                                     
    Predecessor       Successor  
            Period from
      Period from
                   
            January 1,
      December 6,
                   
    Year Ended
      through
      through
    Year Ended
    Nine Months
 
    December 31,
      December 5,
      December 31,
    December 31,
    Ended September 30,  
    2006       2007       2007     2008     2008     2009  
                    (in thousands)              
Cost of subscription
revenues
  $ 31       $ 73       $ 3     $ 80     $ 60     $ 78  
Technology and development
    224         260         23       1,132       791       1,223  
Marketing and advertising
    196         279         27       254       180       273  
General and administrative
    3,338         286         24       3,206       2,478       2,691  
                                                     
Total
  $ 3,789       $    898       $     77     $ 4,672     $ 3,509     $ 4,265  
                                                     
 
We estimated the fair value of each option granted using the Black-Scholes option-pricing method using the following assumptions for the periods presented in the table below. We have not set forth any assumptions for the


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successor period from December 6, 2007 through December 31, 2007 because we did not grant any options during that period.
 
                                         
        Period from
           
        January 1, 2007
           
    Year Ended
  through
  Year Ended
  Nine Months
    December 31,
  December 5,
  December 31,
  Ended September 30,
    2006   2007   2008   2008   2009
 
Expected stock price volatility
    65 %     65 %     50 %     50 %     50 %
Expected life of options
    4 years       4 years       4 years       4 years       4.2 years  
Expected dividend yield
    0       0       0       0       0  
Risk-free interest rate
    4.6-5.0 %     4.6-4.9 %     1.4-3.1 %     2.2-3.1 %     1.5-3.7 %
 
As of each stock option grant date, we considered the fair value of the underlying common stock, determined as described below, in order to establish the option exercise price. As of each stock option grant date, we reviewed an average of the disclosed year-end volatility of a group of companies that we considered peers based on a number of factors including, but not limited to, similarity to us with respect to industry, business model, stage of growth, financial risk or other factors, along with considering the future plans of our company to determine the appropriate volatility. The expected life was based on our historical stock option activity. The risk-free interest rate was determined by reference to the United States Treasury rates with the remaining term approximating the expected life assumed at the date of grant. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those options expected to vest. We estimate the forfeiture rate based on our historical experience. Further, to the extent our actual forfeiture rate is different from our estimate, stock-based compensation expense is adjusted accordingly.
 
The following table sets forth all stock option grants since January 1, 2006 through the date of this prospectus:
 
                                 
                Intrinsic
            Common Stock
  Value per
    Number of
      Fair Value per
  Share at
Grant Date
  Options Granted   Exercise Price   Share at Grant Date   Grant Date
 
February 14, 2006
    147,500     $ 4.60     $ 4.60     $  
March 30, 2006
    280,000       4.60       4.60        
May 25, 2006
    215,250       4.60       4.60        
July 27, 2006
    335,000       4.60       4.60        
September 21, 2006
    136,500       4.60       4.60        
November 17, 2006
    97,500       4.60       4.60        
January 31, 2007
    91,750       4.70       4.70        
May 1, 2007
    180,000       4.70       4.70        
July 19, 2007
    81,000       4.70       4.70        
March 27, 2008
    3,489,121       5.40       5.40        
April 29, 2008
    86,250       5.40       5.40        
July 30, 2008
    240,750       5.40       5.40        
November 3, 2008
    361,500       5.50       5.50        
December 5, 2008
    10,500       5.50       5.50        
February 11, 2009
    568,000       5.50       5.50        
March 13, 2009
    212,168       5.50       7.36       1.86  
May 27, 2009
    646,000       7.36       7.36        
July 20, 2009
    362,000       8.54       8.54        
September 1, 2009
    10,000       8.54       13.50       4.96  
October 14, 2009
    100,750       13.50       13.50        


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These estimates of the fair value of our common stock were made based on information from the following valuation dates:
 
         
    Fair Value
Valuation Date
  per Share
 
November 11, 2005
  $ 4.60  
December 31, 2006
    4.70  
October 27, 2008
    5.50  
March 31, 2009
    7.36  
June 30, 2009
    8.54  
 
Since our common stock is not publicly traded, we considered numerous objective and subjective factors in valuing our common stock at each valuation date in accordance with the guidance in the American Institute of Certified Public Accountants Practice Aid Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or Practice Aid. These objective and subjective factors included, but were not limited to:
 
  •  arm’s-length sales of our common stock in privately negotiated transactions;
 
  •  valuations of our common stock;
 
  •  our stage of development and financial position; and
 
  •  our future financial projections.
 
On December 5, 2007, we acquired our predecessor for a common stock price of $5.40 per share in connection with the Spectrum investment. The Practice Aid indicates that a third-party transaction between a willing buyer and a willing seller is the best indication of the fair value of an enterprise. At each grant date subsequent to the Spectrum investment, our board of directors considered the objective and subjective factors and determined that the $5.40 value was a reasonable approximation of fair value until a new valuation was performed in October 2008.
 
In the contemporaneous common stock valuations performed on October 27, 2008, March 31, 2009 and June 30, 2009, the fair value of our common stock was determined by taking the average value calculated under two different valuation approaches, the income approach and market approach, with each method weighted equally. The equal weighting of these two approaches reflects our view that both these valuation methods provide a reasonable estimate of fair value, are equally reliable and resulted in similar values.
 
  •  The income approach quantified the present value of the future cash flows that management expected to achieve. These future cash flows were discounted to their present values using a rate corresponding to our estimated weighted average cost of capital. The discount rate reflects the risks inherent in the cash flows and the market rates of return available from alternative investments of similar type and quality as of the valuation date. Our weighted average cost of capital was calculated by weighting the required returns on interest-bearing debt and common equity capital in proportion to their estimated percentages in our capital structure. The weighted average cost of capital used in the common stock valuations on October 27, 2008, March 31, 2009 and June 30, 2009 was 14.0%, 15.0% and 14.5%, respectively.
 
  •  The market approach considered multiples of financial metrics based on acquisition and/or trading multiples of a peer group of companies. These multiples were then applied to our financial metrics to derive an indication of value. The valuation on October 27, 2008 applied a weighting of 50% of the trailing twelve month (TTM) earnings before interest, taxes, depreciation, and amortization (EBITDA) and 50% of the forward twelve month (FTM) EBITDA to indicate the value of invested capital. The multiples used in the October 27, 2008 valuation for TTM EBITDA and FTM EBITDA were 7.7x and 5.5x. The valuations on March 31, 2009 and June 30, 2009 applied a weighting of 10%, 40%, 10% and 40% to the TTM of revenue, TTM of EBITDA, next full year (NFY) revenue, NFY EBITDA, respectively. These multiples were:
 
                 
Date of Valuation
  TTM Revenue   TTM EBITDA   NFY Revenue   NFY EBITDA
 
March 31, 2009
  2.0x   7.5x   1.9x   7.0x
June 30, 2009
  2.2x   7.5x   2.0x   7.0x


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The resulting fair value obtained by averaging the values calculated under the income approach and the market approach was then discounted for the lack of marketability of the common stock for being a private company. The marketability discount was 34%, 10% and 10%, respectively, for the valuations on October 27, 2008, March 31, 2009 and June 30, 2009.
 
At each grant date from November 3, 2008 through March 13, 2009, our board of directors considered objective and subjective factors including the most recent contemporaneous valuation of our common stock on October 27, 2008.
 
For the grants on May 27, 2009, our board of directors considered objective and subjective factors including the most recent contemporaneous valuation of our common stock on March 31, 2009. The March 31, 2009 valuation was higher than the October 27, 2008 valuation principally due to the application of a much lower discount for marketability. At the times of the prior valuation in October 2008 and grants made from November 2008 through February 2009, our board of directors believed that the likelihood of an initial public offering in the near term was low, particularly given the turmoil in the debt and equity capital markets and the challenging economic environment during that period. While the income factors used in our valuations did not change materially between the October 2008 valuation and the March 2009 valuation, the discount for marketability in the March 2009 valuation was lowered to 10% compared to 34% in the October 2008 valuation as a result of various initial public filings being favorably received, indicating a significant improvement in the market, and our board of directors increased interest in pursuing a public offering of our common stock in the nearer term.
 
Due to the proximity of the grant on March 13, 2009 to the March 31, 2009 valuation and because in March 2009 our board of directors became more optimistic that we could consider an initial public offering in the nearer term, we decided to use the March 31, 2009 common stock valuation as fair value in our SFAS 123(R) calculation of stock compensation expense for the March 13, 2009 grants. We determined, however, that the February 11, 2009 option grant was properly granted at an exercise price equal to the fair value determined as of October 27, 2008, because at the time of grant the board of directors believed the prospect of an initial public offering in the near term was comparable to that at the time of the October 2008 valuation and that the decreased discount for marketability used in the March 31, 2009 valuation was therefore not appropriate to apply retrospectively to the February 11, 2009 grant.
 
For the grants on July 20 and September 1, 2009, our board of directors considered objective and subjective factors including the most recent contemporaneous valuation of our common stock on June 30, 2009. The June 30, 2009 valuation was higher than the March 31, 2009 valuation principally due to an increase in business enterprise value due to continued improvements in the equity markets, and to a lesser extent the company experiencing strong growth and cash flow.
 
For the grants on October 14, 2009, our board of directors considered objective and subjective factors including the midpoint of the proposed price range of the common stock in the offering, developed in consultation with the underwriters. Due to the proximity of the September 1, 2009 grants with the expected initial public offering, we decided to use the mid-point of the range for the common stock in the offering as the fair value for our SFAS 123(R) calculation of stock compensation expense.
 
Assuming an initial public offering price of $13.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, the intrinsic value of the options outstanding at September 30, 2009, was $85.6 million, of which $52.7 million related to the options that were vested and $32.9 million related to the options that were not vested.
 
Income taxes
 
We are subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS 109, Accounting for Income Taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of


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related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.
 
Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, the refinement of an estimate or changes in tax laws. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.
 
In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including our past operating results, our forecast of future market growth, forecasted earnings, future taxable income and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. We believe it is more likely than not that the deferred tax assets recorded on our balance sheet will ultimately be realized. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period in which we make such determination.
 
Our effective tax rates have differed from the statutory tax rate primarily due to the tax impact of foreign operations, certain impairment charges, state taxes, and certain benefits realized related to stock option activity. The effective tax rates were 36.1%, 39.2% and 43.6% for the year ended December 31, 2006, the period from January 1, 2007 through December 5, 2007 and the year ended December 31, 2008, respectively. Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws, regulations, accounting principles or interpretations thereof. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.
 
Results of Operations
 
The following table sets forth, for the periods presented, our consolidated statements of operations. In the table below and throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations:” consolidated statements of operations data for the year ended December 31, 2006, the predecessor period from January 1, 2007 through December 5, 2007, the successor period from December 6, 2007 through December 31, 2007 and the year ended December 31, 2008 have been derived from our audited consolidated financial statements; the consolidated statement of operations data for the nine month periods ended September 30, 2008 and 2009 have been derived from our unaudited interim consolidated financial statements; and our unaudited consolidated pro forma financial data for the year ended December 31, 2007 have been derived from our “Unaudited Consolidated Pro Forma Financial Data,” each of which are included elsewhere in this prospectus. The information contained in the table below should be read in conjunction with our consolidated financial statements and the related notes and “Unaudited Consolidated Pro Forma Financial Data” on page 38 of this prospectus.
 


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    Predecessor       Successor     Pro Forma     Successor  
          Period from
      Period from
                         
          January 1,
      December 6,
                         
    Year Ended
    through
      through
    Year Ended
    Year Ended
    Nine Months Ended
 
    December 31,
    December 5,
      December 31,
    December 31,
    December 31,
    September 30,  
    2006     2007       2007     2007     2008     2008     2009  
    (in thousands, except per share data)  
Revenues:
                                                         
Subscription revenues
  $ 137,643     $ 141,141       $ 11,692     $ 152,833     $ 181,391     $ 133,616     $ 152,506  
Product and other revenues
    12,909       12,269         1,278       13,547       16,200       11,542       12,287  
                                                           
Total revenues
    150,552       153,410         12,970       166,380       197,591       145,158       164,793  
Costs of revenues:
                                                         
Cost of subscription revenues
    27,344       33,590         2,462       36,212       38,187       27,699       29,755  
Cost of product and other revenues
    3,695       2,552         500       3,052       5,427       3,292       4,213  
                                                           
Total cost of revenues
    31,039       36,142         2,962       39,264       43,614       30,991       33,968  
                                                           
Gross profit
    119,513       117,268         10,008       127,116       153,977       114,167       130,825  
                                                           
Operating expenses:
                                                         
Technology and development
    28,280       31,255         3,517       33,754       33,206       23,705       26,690  
Marketing and advertising
    51,421       42,400         3,157       45,607       52,341       36,634       44,226  
General and administrative
    26,978       20,723         2,142       22,964       28,931       21,035       24,569  
Amortization of acquired intangible assets
    2,216       2,132         1,542       24,061       23,779       17,832       12,165  
Transaction related expenses
          9,530                                  
                                                           
Total operating expenses
    108,895       106,040         10,358       126,386       138,257       99,206       107,650  
                                                           
Income (loss) from operations
    10,618       11,228         (350 )     730       15,720       14,961       23,175  
Other income (expense):
                                                         
Interest expense
    (946 )     (756 )       (1,146 )     (12,841 )     (12,355 )     (9,327 )     (4,784 )
Interest income
    2,238       2,051         289       348       872       632       746  
Other income (expense), net
    834       266         7       273       (8 )     (18 )     14  
                                                           
Income (loss) before income taxes
    12,744       12,789         (1,200 )     (11,490 )     4,229       6,248       19,151  
Income tax (expense) benefit
    (4,595 )     (5,018 )       (103 )     4,251       (1,845 )     (2,748 )     (6,927 )
                                                           
Net income (loss)
  $ 8,149     $ 7,771       $ (1,303 )   $ (7,239 )   $ 2,384     $ 3,500     $ 12,224  
                                                           
Net income per common share:(1) Basic
                                    $ 0.06     $ 0.09     $ 0.32  
                                                           
Diluted
                                    $ 0.06     $ 0.09     $ 0.30  
                                                           
 
(1) In connection with the Spectrum investment, we were recapitalized. As a result, the capital structure of our predecessor is not comparable to that of the successor. Accordingly, net income per common share is not comparable or meaningful for periods prior to 2008 and has not been presented.

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The following table sets forth, for the periods presented, our consolidated statements of operations as a percentage of total revenues. The information contained in the table below should be read in conjunction with the consolidated financial statements and the related notes and “Unaudited Consolidated Pro Forma Financial Data” on page 38 of this prospectus.
 
                                                           
    Predecessor       Successor     Pro Forma     Successor  
          Period from
      Period from
                         
          January 1,
      December 6,
                Nine Months
 
    Year Ended
    through
      through
    Year Ended
    Year Ended
    Ended
 
    December 31,
    December 5,
      December 31,
    December 31,
    December 31,
    September 30,  
    2006     2007       2007     2007     2008     2008     2009  
Revenues:
                                                         
Subscription revenues
    91.4 %     92.0 %       90.1 %     91.9 %     91.8 %     92.0 %     92.5 %
Product and other revenues
    8.6       8.0         9.9       8.1       8.2       8.0       7.5  
                                                           
Total revenues
    100.0       100.0         100.0       100.0       100.0       100.0       100.0  
Cost of revenues:
                                                         
Cost of subscription revenues
    18.2       21.9         19.0       21.8       19.3       19.1       18.0  
Cost of product and other revenues
    2.4       1.7         3.8       1.8       2.8       2.2       2.6  
                                                           
Total cost of revenues
    20.6       23.6         22.8       23.6       22.1       21.3       20.6  
                                                           
Gross profit
    79.4       76.4         77.2       76.4       77.9       78.7       79.4  
                                                           
Operating expenses:
                                                         
Technology and development
    18.8       20.4         27.1       20.3       16.8       16.3       16.2  
Marketing and advertising
    34.1       27.6         24.4       27.4       26.5       25.2       26.8  
General and administrative
    17.9       13.5         16.5       13.8       14.7       14.5       14.9  
Amortization of acquired intangible assets
    1.5       1.4         11.9       14.5       12.0       12.3       7.4  
Transaction related expenses
          6.2                                  
                                                           
Total operating expenses
    72.3       69.1         79.9       76.0       70.0       68.3       65.3  
                                                           
Income (loss) from operations
    7.1       7.3         (2.7 )     0.4       7.9       10.3       14.1  
Other income (expense):
                                                         
Interest expense
    (0.6 )     (0.5 )       (8.8 )     (7.7 )     (6.2 )     (6.4 )     (2.9 )
Interest income
    1.5       1.3         2.2       0.2       0.4       0.4       0.4  
Other income (expense), net
    0.5       0.2         0.1       0.2       (0.0 )     (0.0 )     0.0  
                                                           
Income (loss) before income taxes
    8.5       8.3         (9.2 )     (6.9 )     2.1       4.3       11.6  
Income tax (expense) benefit
    (3.1 )     (3.2 )       (0.8 )     2.5       (0.9 )     (1.9 )     (4.2 )
                                                           
Net income (loss)
    5.4       5.1         (10.0 )     (4.4 )     1.2       2.4       7.4  
                                                           
 
Nine Months Ended September 30, 2008 and 2009
 
Revenues
 
                         
    Nine Months Ended
       
    September 30,     % Change
 
    2008     2009     2009 Over 2008  
    (in thousands)        
 
Subscription revenues
  $ 133,616     $ 152,506       14.1 %
Product and other revenues
    11,542       12,287       6.5  
                         
Total revenues
  $ 145,158     $ 164,793       13.5  
                         
 
Subscription revenues.  The increase in our subscription revenues of $18.9 million in the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 was primarily the result of an increase in the number of total subscribers and to some extent an increase in higher monthly revenue per subscriber. A shift in mix between annual and monthly subscriptions to more monthly subscriptions as our subscriber base


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broadened resulted in higher revenue per subscriber in the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008. However, we do not believe that this trend was the result of specific marketing or advertising campaigns targeted to increasing monthly subscriptions versus annual subscriptions. During the nine months ended September 30, 2009, changes in foreign currency exchange rates had an unfavorable impact on subscription revenues. Had average exchange rates remained the same in the nine months ended September 30, 2009 as average exchange rates in effect in the nine months ended September 30, 2008, our reported revenues in the nine months ended September 30, 2009 would have been approximately 4.5% higher.
 
Product and other revenues.  The increase in product and other revenues of $0.7 million in the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 was primarily due to an increase in revenues associated with a new release in August 2009 of our Family Tree Maker desktop software of $1.5 million, the growth of our vital records products, introduced in the United Kingdom during August 2008, of $1.0 million, and a $0.2 million increase in shipping revenue, primarily resulting from increased sales of Family Tree Maker and vital records products. These increases were offset by decreases in our royalty revenue of $1.1 million and advertising revenue of $0.9 million.
 
Cost of Revenues and Gross Profit
 
                         
    Nine Months Ended September 30,   % Change
    2008   2009   2009 Over 2008
    (in thousands)    
 
Revenues:
                       
Subscription revenues
  $ 133,616     $ 152,506       14.1 %
Product and other revenues
    11,542       12,287       6.5  
                         
Total revenues
    145,158       164,793       13.5  
Costs of revenues:
                       
Cost of subscription revenues
    27,699       29,755       7.4  
Cost of product and other revenues
    3,292       4,213       28.0  
                         
Total cost of revenues
    30,991       33,968       9.6  
                         
Gross profit
  $ 114,167     $ 130,825       14.6  
                         
Gross profit percentage
    78.7 %     79.4 %        
 
Cost of subscription revenues.  The increase in our cost of subscription revenues of $2.1 million in the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 was primarily due to a $1.0 million increase in our web hosting costs, an increase in amortization of content costs of $0.6 million and an increase in equipment maintenance related costs of $0.4 million.
 
Cost of product revenues.  The increase in our cost of product revenues of $0.9 million in the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 was primarily due to a $0.4 million increase as a result of the introduction of our vital records products in the United Kingdom and a $0.4 million increase in shipping costs.


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Operating Expenses
 
                         
    Nine Months Ended September 30,   % Change
    2008   2009   2009 Over 2008
    (in thousands)    
 
Operating expenses:
                       
Technology and development
  $ 23,705     $ 26,690       12.6 %
Marketing and advertising
    36,634       44,226       20.7  
General and administrative
    21,035       24,569       16.8  
Amortization of acquired intangible assets
    17,832       12,165       (31.8 )
                         
Total operating expenses
  $ 99,206     $ 107,650       8.5  
                         
 
Technology and development.  The increase in technology and development expenses of $3.0 million in the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 was primarily the result of an increase in personnel-related expenses resulting from an increase in the number of technology and development personnel at September 30, 2009 as compared to September 30, 2008.
 
Marketing and advertising.  The increase in marketing and advertising expenses of $7.6 million in the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 was primarily attributable to a $5.9 million increase in television and online advertising, as well as a $1.2 million increase in personnel-related expenses resulting from an increase in the number of marketing and advertising personnel at September 30, 2009 as compared to September 30, 2008.
 
General and administrative.  The increase in general and administrative expenses of $3.5 million in the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 is primarily the result of a settlement of a claim related to a content index, which resulted in an expense of $2.3 million, and to increased personnel-related costs of $1.6 million due to an increase in the number of general and administrative personnel. These increases were offset by a change in foreign currency gains and losses of $0.9 million from a loss of $0.5 million in the nine months ended September 30, 2008 to a gain of $0.4 million in the nine month period ended September 30, 2009.
 
Amortization of acquired intangible assets.  The decrease in amortization of acquired intangible assets of $5.7 million in the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 was due to the amortization of our subscriber relationship intangible asset, which is amortized on an accelerated basis. Subscriber relationships and contracts are amortized based on an annual turnover rate, or rate of attrition, of the subscribers that approximates our monthly churn, resulting in an accelerated basis of amortization. This is the same rate of attrition that was used to determine the fair value of the intangible asset at the acquisition date. We believe that recognizing amortization expense in this pattern better matches the amortization expense with the revenue generated from these subscribers. The subscriber relationship asset was recorded in connection with the Spectrum investment.
 
Other Income (Expense) and Income Tax Expense
 
                         
    Nine Months Ended September 30,   % Change
    2008   2009   2009 Over 2008
    (in thousands)    
 
Other income (expense):
                       
Interest expense
  $ (9,327 )   $ (4,784 )     (48.7 )%
Interest income
    632       746       18.0  
Other income, net
    (18 )     14       n/m  
Income tax expense
    (2,748 )     (6,927 )     152.1  
Other data:
                       
Effective tax rate
    44.0 %     36.2 %        


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Interest expense.  The decrease in interest expense of $4.5 million in the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 was due to a decrease in our effective interest rate from 8.2% as of September 30, 2008 to 4.0% as of September 30, 2009. In addition, we had a lower debt balance during the nine months ended September 30, 2009 due to principal payments made during that period.
 
Income tax expense
 
Income tax expense for the nine months ended September 30, 2009 was $6.9 million. Our effective tax rate of 36.2% differed from the federal statutory rate of 35% principally due to state income taxes of 1.8%, to changes in the state tax apportionment factors resulting from enacted legislation of (5.5)%, to foreign income taxes of 1.4% and to other items of 3.5%. We may in the future evaluate whether there are strategies that would increase our tax efficiency.
 
Income tax expense for the nine months ended September 30, 2008 was $2.7 million. Our effective tax rate of 44.0% differed from the federal statutory rate of 35% principally due to state income taxes of 7.8%, to foreign income taxes of 5.8% as a result of net operating losses in foreign jurisdictions for which no income tax benefit has been recognized, to non-deductible expenses of (11.6)% associated with the Spectrum investment as reflected in our federal income tax return to provision true-up, to non-deductible stock-based compensation expenses of 8.1% and to other items of (1.1)%.
 
Years Ended December 31, 2006, 2007 and 2008
 
Revenues
 
                                           
    Predecessor       Successor     Pro Forma     Successor  
          Period from
      Period from
             
          January 1,
      December 6,
             
    Year Ended
    through
      through
    Year Ended
    Year Ended
 
    December 31,
    December 5,
      December 31,
    December 31,
    December 31,
 
    2006     2007       2007     2007     2008  
    (in thousands)  
                                           
Subscription revenues
  $ 137,643     $ 141,141       $ 11,692     $ 152,833     $ 181,391  
Product and other revenues
    12,909       12,269         1,278       13,547       16,200  
                                           
Total revenues
  $ 150,552     $ 153,410         12,970     $ 166,380     $ 197,591  
                                           
 
Subscription revenues
 
2007 compared to 2008.  Subscription revenues were $181.4 million in 2008, compared to $141.1 million for the predecessor period from January 1, 2007 through December 5, 2007 and $11.7 million for the successor period from December 6, 2007 through December 31, 2007, and pro forma subscription revenues of $152.8 million for 2007. The increase was primarily the result of an increase in the number of total subscribers and also to an increase in monthly revenue per subscriber. A shift in mix between annual and monthly subscriptions to more monthly subscriptions as our subscriber base broadened has resulted in higher revenue per subscriber in the last three years. However, we do not believe that this trend was the result of specific marketing or advertising campaigns targeted to increasing monthly subscriptions versus annual subscriptions. Foreign currency exchange rates did not have a material impact on revenues in 2008 compared to pro forma revenues in 2007.
 
2006 compared to 2007.  Subscription revenues were $141.1 million for the predecessor period from January 1, 2007 through December 5, 2007 and $11.7 million for the successor period from December 6, 2007 through December 31, 2007, compared to $137.6 million for 2006. The increase was primarily the result of an increase in the number of total subscribers. Foreign currency exchange rates had a nominal beneficial effect on our revenues in 2007 compared to 2006.
 
Product and other revenues
 
2007 compared to 2008.  Product and other revenues were $16.2 million in 2008, compared to $12.3 million for the predecessor period from January 1, 2007 through December 5, 2007 and $1.3 million for the successor


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period from December 6, 2007 through December 31, 2007, and pro forma product and other revenues of $13.5 million for 2007. The increase in our product and other revenues was due to, among other things, a $2.4 million increase in our DNA product revenues, a $1.3 million increase in our advertising services and a $0.7 million increase in sales of our MyCanvas.com products. This increase was offset by a $1.6 million decrease in sales of our legacy products (e.g., CD ROMs, books, posters). Our DNA product was released in the fourth quarter of 2007.
 
2006 compared to 2007.  Product and other revenues were $12.3 million for the predecessor period from January 1, 2007 through December 5, 2007 and $1.3 million for the successor period from December 6, 2007 through December 31, 2007, compared to product and other revenues of $12.9 million for 2006. The change was primarily due to $0.9 million from the expansion of our advertising services, $0.4 million from the launch of our DNA product and $0.6 million from a new release of our Family Tree Maker software, offset by a decrease in sales of our legacy products of $1.4 million.
 
Cost of Revenues and Gross Profit
 
                                           
    Predecessor       Successor     Pro Forma     Successor  
          Period From
      Period From
             
          January 1,
      December 6,
             
    Year Ended
    Through
      Through
    Year Ended
    Year Ended
 
    December 31,
    December 5,
      December 31,
    December 31,
    December 31,
 
    2006     2007       2007     2007     2008  
    (in thousands)  
Revenues:
                                         
Subscription revenues
  $ 137,643     $ 141,141       $ 11,692     $ 152,833     $ 181,391  
Product and other revenues
    12,909       12,269         1,278       13,547       16,200  
                                           
Total revenues
    150,552       153,410         12,970       166,380       197,591  
Cost of revenues:
                                         
Cost of subscription revenues
    27,344       33,590         2,462       36,212       38,187  
Cost of product and other revenues
    3,695       2,552         500       3,052       5,427  
                                           
Total cost of revenues
    31,039       36,142         2,962       39,264       43,614  
                                           
Gross profit
  $ 119,513     $ 117,268       $ 10,008     $ 127,116     $ 153,977  
                                           
Gross profit percentage
    79.4 %     76.4 %       77.2 %     76.4 %     77.9 %
 
Cost of subscription revenues
 
2007 compared to 2008.  Cost of subscription revenues was $38.2 million in 2008, compared to $33.6 million for the predecessor period from January 1, 2007 through December 5, 2007 and $2.5 million for the successor period from December 6, 2007 through December 31, 2007, and pro forma cost of subscription revenues of $36.2 million for 2007. Cost of subscription revenues increased primarily due to the impairment of database content costs of $1.5 million in 2008 and an increase in database content amortization, merchant fees and web hosting costs of $2.1 million, partially offset by decreases in personnel-related costs of $0.9 million and royalty expenses of $0.6 million. The impairment of database content costs was a result of a change in our strategy for our Chinese content.
 
2006 compared to 2007.  Cost of subscription revenues was $33.6 million for the predecessor period from January 1, 2007 through December 5, 2007 and $2.5 million for the successor period from December 6, 2007 through December 31, 2007, compared to $27.3 million for 2006. The increase was primarily due to the change in the operations of our call center from a sales based organization to a subscriber support organization beginning January 1, 2007. The majority of the costs associated with the call center prior to January 1, 2007 were recorded in marketing and advertising expense and the majority of the costs associated with the call center subsequent to January 1, 2007 were recorded in cost of subscription revenues. This change resulted in an increase in cost of subscription revenues of $5.7 million, although call center costs in total decreased by $7.7 million. Additionally, database hosting and support costs increased $3.9 million due to increased database content amortization and web


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hosting support costs associated with adding new database content, and merchant fees of $0.6 million. These increases were offset by a $2.8 million decrease in royalty expenses due to the termination of a royalty agreement in 2006.
 
Cost of product and other revenues
 
2007 compared to 2008.  Cost of product and other revenues was $5.4 million in 2008, compared to $2.6 million for the predecessor period from January 1, 2007 through December 5, 2007 and $0.5 million for the successor period from December 6, 2007 through December 31, 2007, and pro forma cost of product and other revenues of $3.1 million for 2007. Cost of product and other revenues increased primarily due to $2.2 million related to the introduction of our DNA product and $0.3 million related to the introduction of our MyCanvas.com products. Cost of product and other revenues as a percentage of total revenue increased due to our decision to sell our DNA product at a reduced price.
 
2006 compared to 2007.  Cost of product and other revenues was $2.6 million for the predecessor period from January 1, 2007 through December 5, 2007 and $0.5 million for the successor period from December 6, 2007 through December 31, 2007, compared to $3.7 million for 2006. The decrease was primarily due to a $0.8 million decrease related to the discontinuation of our full service genealogy product in the fourth quarter of 2006, a $0.5 million decrease in revenues and related cost of revenues from our legacy products offset by increases of $0.3 million from to the introduction of our DNA product and $0.3 million due to the introduction of our MyCanvas.com products.
 
Operating Expenses
 
                                           
    Predecessor       Successor     Pro Forma     Successor  
          </