As filed with the Securities and Exchange Commission on October 20, 2009

Registration No. 333-160986

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Amendment No. 3

to

Form S-1

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

ANCESTRY.COM INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

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:

 

 

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):

 

CALCULATION OF REGISTRATION FEE

 

 

 

 

 

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.

 

 

PROSPECTUS (Subject to Completion)

Issued October 20, 2009

 

7,407,407 Shares

 

 

COMMON STOCK

 

 

 

 

Ancestry.com Inc. is offering 4,074,074 shares of its common stock and the selling stockholders are offering 3,333,333 shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price of our common stock will be between $12.50 and $14.50 per share.

 

 

 

 

We have applied to list our common stock on the Nasdaq Global Select Market under the symbol ACOM.

 

 

 

 

Investing in the common stock involves risks. See “Risk Factors” beginning on page 13.

 

 

 

 

PRICE $      A SHARE

 

 

 

 

 

 

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.

 

 

 

 

 

 

 

 

          , 2009

 

TABLE OF CONTENTS

 

 

 

 

 

You should rely only on the information contained in this prospectus or in any free-writing prospectus we may authorize to be delivered or made available to you. We have not, the selling stockholders have not and the underwriters have not authorized anyone to provide you with additional or different information. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus or any free-writing prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Until          , 2009 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

For investors outside the United States: We have not, the selling stockholders have not and the underwriters have not done anything that would permit this offering, or possession or distribution of this prospectus, in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

 

PROSPECTUS SUMMARY

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

	•	assumes a reverse stock split of 1-for-2 of our shares of common stock effective immediately prior to the consummation of this offering;

	•	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.

		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

		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.

		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.

	•	as measures of operating performance;
	•	as factors when determining management’s incentive compensation;
	•	for planning purposes, including the preparation of our annual operating budget;

	•	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.

	•	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

	•	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.

		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

 

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

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:

 

 

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.

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

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:

 

 

 

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.

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

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:

 

 

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:

 

 

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

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

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

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:

 

 

One or more of these factors could harm our business, financial condition and results of operations.

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:

 

 

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:

 

 

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-

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.

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

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:

 

 

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

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

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

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

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:

 

 

 

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):

 

 

In addition, the approximately 12,446,734 million shares underlying options that are either subject to the terms of our equity compensation plans or reserved for future issuance under our equity compensation plans as of the date of this prospectus will become eligible for sale in the public market to the extent permitted by the provisions of various option agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act. At any time and without public notice, any or all of the shares subject to the lock-up may be released prior to expiration of the 180-day lock-up period at the discretion of Morgan Stanley & Co. Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated. As resale restrictions end, the market price of our common stock could decline if the holders of those shares sell them or are perceived by the market as intending to sell them. In addition, after this offering (assuming no exercise of the underwriters’ over-allotment option), the holders of approximately 35 million shares of common stock will be entitled to rights to cause us to register the sale of those shares under the Securities Act but

cannot exercise any such registration rights during the 180-day lock-up period. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration.

 

Our principal stockholder and its affiliates will likely control our company after this offering and their interests may not always coincide with the interests of the other holders of our common stock.

 

As of September 30, 2009, Spectrum Equity Investors V, L.P. and certain of its affiliates beneficially owned in the aggregate shares representing approximately 67% of our outstanding voting power. Two persons associated with Spectrum Equity Investors V, L.P. currently serve on our board of directors. After this offering, Spectrum Equity Investors V, L.P. and certain of its affiliates will beneficially own in the aggregate shares representing approximately 54.8% of our outstanding voting power, or approximately 53.2%, if the underwriters exercise their over-allotment option in full. As a result, Spectrum Equity Investors V, L.P. and certain of its affiliates could control all matters presented to our stockholders for approval, including election and removal of our directors and change of control transactions. The interests of Spectrum Equity Investors V, L.P. and certain of its affiliates may not always coincide with the interests of the other holders of our common stock.

 

As a new investor, you will experience immediate and substantial dilution.

 

Purchasers in this offering will immediately experience substantial dilution in net tangible book value. Because our common stock has in the past been sold at prices substantially lower than the initial public offering price that you will pay, you will suffer immediate dilution of $15.77 per share in net tangible book value, based on an assumed initial offering price of $13.50 per share of common stock. The exercise of outstanding options, 5,976,194 of which are outstanding and exercisable as of September 30, 2009, may result in further dilution.

 

Management may apply our net proceeds from this offering to uses that do not increase our market value or improve our operating results.

 

We expect to use $12.1 million of the net proceeds we receive to repay a portion of the amount outstanding under our credit facility. We intend to use the remainder for general corporate purposes, including as yet undetermined amounts related to working capital and capital expenditures. Our management will have considerable discretion in applying our net proceeds and you will not have the opportunity, as part of your investment decision, to assess whether we are using our net proceeds appropriately. Until the net proceeds we receive are used, they may be placed in investments that do not produce income or that lose value. We may use our net proceeds for purposes that do not result in any increase in our results of operations, which could cause the price of our common stock to decline.

 

Delaware law and our corporate charter and bylaws will contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

 

Provisions in our certificate of incorporation and bylaws that we intend to adopt before the completion of this offering may have the effect of delaying or preventing a change of control or changes in our management. For example, our board of directors will have the authority to issue up to five million shares of preferred stock in one or more series and to fix the powers, preferences and rights of each series without stockholder approval. The ability to issue preferred stock could discourage unsolicited acquisition proposals or make it more difficult for a third party to gain control of our company, or otherwise could adversely affect the market price of our common stock. Our amended and restated certificate of incorporation will require that any action to be taken by stockholders must be taken at a duly called meeting of stockholders, which may only be called by our board of directors, the chairperson of our board of directors or the chief executive officer with the concurrence of a majority of our board of directors, and may not be taken by written consent. Our amended and restated bylaws will require that any stockholder proposals or nominations for election to our board of directors must meet specific advance notice requirements and procedures, which make it more difficult for our stockholders to make proposals or director nominations. In addition, we will have a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change membership of a majority of our board of directors. For additional information, please see “Description of Capital Stock.”

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.

 

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:

 

 

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.

 

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.

 

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.

 

The following table sets forth our cash and cash equivalents, our current portion of long-term debt and capitalization at September 30, 2009 on:

 

 

 

You should read this table in conjunction with the financial statements and notes to the consolidated financial statements included elsewhere in this prospectus.

 

 

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.

 

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:

 

 

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 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.

 

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.

 

 

 

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.”