Attached files

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EX-32.2 - EXHIBIT 32.2 CERTIFICATION OF CFO - INTERNET BRANDS, INC.exhibit32_2.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION OF CEO - INTERNET BRANDS, INC.exihbit31_1.htm
EX-32.1 - EXHIBIT 32.1 CERTIFICATION OF CEO - INTERNET BRANDS, INC.exhibit32_1.htm
EX-10.7 - EXHIBIT 10.7 SEVERANCE PAYMENT AGREEMENT - INTERNET BRANDS, INC.exihibit10_7.htm
EX-31.2 - EXHIBIT 31.2 CERTIFICATION OF CFO - INTERNET BRANDS, INC.exhibit31_2.htm




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

FORM 10-Q

 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
 
For the quarterly period ended September 30, 2009
   
OR
     
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
 
For the transition period from ______ to ______
 
Commission file number: 001-33797

INTERNET BRANDS, INC.
(Exact name of Registrant as specified in its charter)

Delaware
 
95-4711621
(State or other jurisdiction of incorporation or
 
(I.R.S. Employer Identification No.)
organization)
   

909 N. Sepulveda Blvd., 11th Floor
El Segundo, California 90245
(Address of principal executive offices)

(310) 280-4000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   x    No   
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes   x        No   

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o
Accelerated filer  x
Non-accelerated filer  o
Smaller reporting company  o

Indicate by check mark whether the Registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act.
Yes   o    No   x
 
The number of shares outstanding of the Registrant’s Class A common stock and Class B common stock as of October 30, 2009 was 42,077,630 and 3,025,000, respectively.

 
 

 

 
INTERNET BRANDS, INC.
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2009


TABLE OF CONTENTS

 
Page
PART I — FINANCIAL INFORMATION
 
   
Item 1. Financial Statements:
 
   
3
   
4
   
5
   
6
   
18
   
27
   
27
   
PART II — OTHER INFORMATION
 
   
28
   
28
   
28
   
 
299
30
   
31
   
32
   
   
   
   
   
   
   
   
   
   


 
-2-

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
 
INTERNET BRANDS, INC.  
CONSOLIDATED BALANCE SHEETS
 
(in thousands, except share and per share amounts)
 
             
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
       
ASSETS
           
             
Current assets
           
Cash and cash equivalents
  $ 44,516     $ 43,648  
Investments, available for sale
    18,710       13,723  
Accounts receivable, less allowances for doubtful accounts of $754 and $1,513
 
      at September 30, 2009 and December 31, 2008, respectively     13,282       16,353  
Deferred income taxes
    4,188       9,591  
Prepaid expenses and other current assets
    935       1,299  
Total current assets
    81,631       84,614  
                 
Property and equipment, net
    14,311       11,460  
Goodwill
    215,382       203,806  
Intangible assets, net
    21,432       24,556  
Deferred income taxes
    56,577       56,262  
Other assets
    480       767  
                 
Total assets
  $ 389,813     $ 381,465  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Current liabilities
               
Accounts payable and accrued expenses
  $ 12,721     $ 17,043  
Deferred revenue
    6,962       7,325  
Total current liabilities
    19,683       24,368  
                 
Other long term liabilities
    271       -  
                 
Commitments and contingencies
               
                 
Stockholders’ equity
               
                 
    Class A Common stock, $.001 par value; 125,000,000 shares
               
    authorized; 42,077,527 and 40,946,826 issued and outstanding
               
    at September 30, 2009 and December 31, 2008, respectively
    42       41  
                 
    Class B Common stock, $.001 par value; 6,050,000 authorized;
               
    3,025,000 shares issued and outstanding at September 30, 2009
               
    and December 31, 2008, respectively
    3       3  
                 
Additional paid-in capital
    611,609       607,434  
Accumulated deficit
    (242,315 )     (250,418 )
Accumulated other comprehensive income
    520       37  
Total stockholders’ equity
    369,859       357,097  
                 
Total liabilities and stockholders’ equity
  $ 389,813     $ 381,465  
 
See accompanying notes to unaudited consolidated financial statements.

 
-3-

 

INTERNET BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share amounts)
                       
                       
   
Three Months Ended
   
Nine Months Ended
    September 30,    
September 30,
   
2009
   
2008
   
2009
   
2008
Revenues
                     
Consumer Internet
  $ 16,648     $ 18,364     $ 48,624     $ 52,743
Licensing
    8,674       8,489       23,454       24,315
Total revenues
    25,322       26,853       72,078       77,058
                               
Costs and operating expenses
                             
Cost of revenues (excluding depreciation and amortization)
    4,470       6,658       13,659       17,603
Sales and marketing (1)
    4,675       5,155       14,012       16,502
Technology (1)
    2,660       2,610       7,066       6,363
General and administrative (1)
    3,697       4,030       11,464       12,989
Depreciation and amortization of intangibles
    4,194       3,675       12,020       9,792
Total costs and operating expenses
    19,696       22,128       58,221       63,249
                               
Income from operations
    5,626       4,725       13,857       13,809
Investment and other (expense) income
    (8 )     (1,137 )     (85 )     3
Income before income taxes
    5,618       3,588       13,772       13,812
Provision for income taxes
    2,323       1,026       5,669       5,307
Net income
  $ 3,295     $ 2,562     $ 8,103     $ 8,505
                               
Basic net income per share - Class A
  $ 0.08     $ 0.06     $ 0.19     $ 0.20
Diluted net income per share - Class A
  $ 0.07     $ 0.06     $ 0.18     $ 0.19
                               
Basic net income per share - Class B
  $ 0.08     $ 0.06     $ 0.19     $ 0.20
Diluted net income per share - Class B
  $ 0.07     $ 0.06     $ 0.18     $ 0.19
                               
Class A weighted average number of shares - Basic
    40,598,449       40,034,161       40,409,920       39,927,105
Class A weighted average number of shares - Diluted
    46,498,811       45,046,551       45,846,679       45,024,356
                               
Class B weighted average number of shares - Basic and Diluted
    3,025,000       3,025,000       3,025,000       3,025,000
                               
(1) Stock-based compensation expense by function
                             
Sales and marketing
  $ 108     $ 87     $ 301     $ 213
Technology
    50       41       144       92
General and administrative
    716       537       1,973       1,567
 
See accompanying notes to unaudited consolidated financial statements.


 
-4-

 

INTERNET BRANDS, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited)
 
(in thousands)
 
             
   
Nine Months Ended
 
   
September 31,
 
   
2009
   
2008
 
Cash flows from operating activities
           
Net income
  $ 8,103     $ 8,505  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    12,020       9,792  
Provision for bad debt reserve
    40       1,055  
Stock based compensation
    2,418       1,872  
Deferred income taxes
    4,931       5,166  
Unrealized loss on investments
    -       243  
Realized gain on sale of investments
    (30 )     (25 )
Loss on disposal of fixed assets
    26       -  
Amortization of premium on investments
    (117 )     (639 )
Changes in operating assets and liabilities, net of the effect of acquisitions:
               
Accounts receivable
    3,270       (4,244 )
Prepaid expenses and other current assets
    358       692  
Other assets
    289       (756 )
Accounts payable and accrued expenses
    (2,533 )     1,171  
Deferred revenue
    (1,685 )     505  
Net cash provided by operating activities
    27,090       23,337  
                 
Cash flows from investing activities
               
Purchases of property and equipment
    (1,549 )     (2,252 )
Capitalized internal use software costs
    (5,473 )     (4,011 )
Purchases of investments
    (32,872 )     (73,341 )
Proceeds from sales and maturities of investments
    28,050       110,131  
Acquisitions, net of cash acquired, and earnouts
    (15,265 )     (63,236 )
Net cash used in investing activities
    (27,109 )     (32,709 )
                 
Cash flows from financing activities
               
Net proceeds from issuance of common stock and exercise of stock options
    222       1,460  
Repurchases of restricted common stock
    -       (66 )
Payments on capital lease obligations
    (13 )     -  
    Net cash provided by financing activities
    209       1,394  
Effect of exchange rate changes on cash and cash equivalents
    678       1,137  
Net increase (decrease) in cash and cash equivalents
    868       (6,841 )
Cash and cash equivalents
               
Beginning of period
    43,648       31,780  
End of period
  $ 44,516     $ 24,939  
                 
Supplemental schedule of non-cash consolidated cash flow information:
               
Tax payments
  $ 2,775     $ 463  

See accompanying notes to unaudited consolidated financial statements.

 
-5-

 


INTERNET BRANDS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

The Company —Internet Brands, Inc. (the “Company”) is an Internet media company that owns, operates and grows branded websites in categories marked by high consumer involvement, strong advertising spending, and significant fragmentation in offline sources of consumer information. The Company’s network of websites attracts large audiences researching high-value or specialty products or services, enabling it to sell targeted advertising.

In addition, the Company licenses its content and Internet technology products and services to major companies and individual website owners around the world.

Principles of Consolidation —The consolidated financial statements include the accounts of Internet Brands, Inc. and its wholly-owned subsidiaries, from the dates of their respective acquisitions. All significant inter-company accounts, transactions and balances have been eliminated in consolidation.

Interim Financial Information —The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. Certain information and note disclosures normally included in the consolidated annual financial statements prepared in accordance with generally accepted accounting principles in the United States have been omitted from this interim report. In the opinion of the Company’s management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the Company’s financial position, results of operations and cash flows as of and for the periods presented. The results of operations for such periods are not necessarily indicative of the results expected for the full year or for any future period.

These interim financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, which was filed with the Securities and Exchange Commission on March 6, 2009.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates —The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Revenue Recognition —The Company recognizes revenue in accordance with Accounting Standard Codification (ASC) 605-10 (previously Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition). Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectibility of the resulting receivable is reasonably assured.   The Company’s revenues are derived from:

Consumer Internet — Consumer Internet segment revenue is earned from online advertising sales on a cost per thousand impressions (CPM), cost per click (CPC), cost per lead (CPL), cost per action (CPA) and flat-fee basis.

 
·
The Company earns CPM revenue from the display of graphical advertisements.  An impression is delivered when an advertisement appears in pages viewed by users.  Revenue from graphical advertisement impressions is recognized based on the actual impressions delivered in the period.

 
·
Revenue from the display of text-based links to the websites of the Company’s advertisers and from search advertising is earned on a CPC basis and is recognized as “click-throughs” occur.  A “click-through” occurs when a user clicks on an advertiser’s link.

 
·
Revenue from advertisers on a CPL basis is recognized in the period the leads are accepted by the dealer or mortgage lender, following the execution of a service agreement and commencement of the services.

 
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·
Under the CPA format, the Company earns revenues based on a percentage or negotiated amount of a consumer transaction undertaken or initiated through its websites. Revenue is recognized at the time of the transaction.

 
·
Revenue from flat-fee, listings-based services is based on a customer’s subscription to the service for up to twelve months and is recognized on a straight-line basis over the term of the subscription.

Licensing —The Company enters into contractual arrangements with customers to license software tools and to develop customized software and content products; revenue is earned from software licenses, content syndication, maintenance fees and consulting services. Agreements with these customers are typically for multi-year periods. For each arrangement, revenue is recognized when both parties have signed an agreement, the fees to be paid by the customer are fixed or determinable, collection of the fees is probable, delivery of the product has occurred, and no other significant obligations on the part of the Company remain. The Company does not offer a right of return on these products.

Software-related revenue is accounted for in accordance with the ASC 985-605 (previously American Institute of Certified Public Accountants’ (AICPA) Statement of Position SOP) No. 97-2 Software Revenue Recognition) and interpretations. Post-implementation development and enhancement services are not sold separately; the revenue and all related costs of these arrangements are deferred until the commencement of the applicable license period. Revenue is recognized ratably over the term of the license; deferred costs are amortized over the same period as the revenue is recognized.

Fees for stand-alone projects are fixed-bid and determined based on estimated effort and client billing rates since the Company can reasonably estimate the required effort to complete each project or each milestone within the project. There are no non-software deliverables and the functionality delivered is specific to a customer’s previously-licensed application. Recognition of the revenue and all related costs of these arrangements are deferred until delivery and acceptance of the projects in accordance with the terms of the contract.
 
Cash and Cash Equivalents —Cash and cash equivalents consist of cash on hand and highly-liquid investments with original maturities of three months or less.

Investments, Available for Sale —The Company invests excess cash in marketable securities, including highly-liquid debt instruments of the United States Government and its agencies, money market instruments, and high-quality corporate debt instruments. All highly-liquid investments with an original maturity of more than three months at original purchase are considered investments available for sale.

The Company evaluates its marketable securities periodically for possible other-than-temporary impairment, and it reviews factors such as length of time to maturity, the extent to which fair value has been below cost basis and the Company’s intent and ability to hold the marketable security for a period of time which may be sufficient for anticipated recovery in market value. The Company records impairment charges equal to the amount that the carrying value of its available-for-sale securities exceeds the estimated fair market value of the securities as of the evaluation date, if appropriate. The fair value for all securities is determined based on quoted market prices as of the valuation date as available, with the exception of one impaired asset where valuation is based on estimated fair market value.
 
Effective January 1, 2008, the Company adopted ASC 820-10 (previously Statement of Financial Accounting Standard (SFAS) No. 157), Fair Value Measurements). ASC 820-10 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820-10 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820-10 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last level unobservable, that may be used to measure fair value which are the following:
 
 
 
Level 1 - Quoted prices in active markets for identical assets or liabilities.
 
 
 
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
 
 
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
 
-7-

 
        The adoption of this statement with respect to the Company’s financial assets and liabilities did not impact our consolidated results of operations and financial condition, but required additional disclosure for assets and liabilities measured at fair value.  In accordance with ASC 820-10, the following table represents the fair value hierarchy for the Company’s financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of September 30, 2009 (in thousands):
 
Description  
Level 1
   
Level 2
   
Level 3
   
Total
 
Cash and cash equivalents
  $ 44,516       -       -     $ 44,516  
Short term available-for-sale investments
    16,200       1,974       536     $ 18,710  
                                 
Total
  $ 60,716     $ 1,974     $ 536     $ 63,226  
 
The Company has one Level 3 investment with an original cost basis of $2.0 million.  From December 2007 through September 30, 2009, the Company recorded in aggregate, an other-than temporary impairment loss of $1.1 million of which $53,000 was recorded during the nine months ended September 30, 2009. During the same period, the Company received approximately $0.4 million in returned principal relating to this investment.  As of September 30, 2009, the current estimated fair value for this Level 3 investment was $0.5 million.  The Company reviews periodic reports of an outside valuation firm to monitor its Level 3 investment and engages in discussions with representatives of this firm, as needed, as inputs in determining the fair value of this investment.

Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable are recorded at the invoiced amount and do not bear interest.  The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable.  The Company determines the allowance based on historical write-off experience and customer economic data.  The Company reviews its allowance for doubtful accounts monthly.  Account balances are charged off against the allowance when the Company believes that it is probable the receivable will not be recovered.

Internal Use Software Development Costs —The Company has adopted the provisions of the ASC 350-40 (previously SOP No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use), which requires the capitalization of certain external and internal computer software costs incurred during the application development stage. The application development stage is characterized by software design and configuration activities, coding, testing and installation. Training costs and maintenance are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality.

The Company has adopted the provisions of ASC 350-50 (previously EITF 00-2, Accounting for Website Development Costs), in accounting for internal use website software development costs. ASC 350-50 provides that certain planning and training costs incurred in the development of website software be expensed as incurred, while application development stage costs are to be capitalized pursuant to ASC 350-40.

Proprietary Software Development Costs — In accordance with ASC 985-20 (previously SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed (as amended)), the Company has capitalized certain computer software development costs upon the establishment of technological feasibility. Technological feasibility is considered to have occurred upon completion of a detailed program design that has been confirmed by documenting the product specifications, or to the extent that a detailed program design is not pursued, upon completion of a working model that has been confirmed by testing to be consistent with the product design.

Business CombinationsThe Company accounts for business combinations using the purchase method of accounting and accordingly, the assets and liabilities of the acquired businesses are recorded at their estimated fair values at the date of acquisition. Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. The Company does not amortize the goodwill balance. The primary drivers that generate goodwill are the value of synergies between the acquired businesses and the Company, and the acquired intellectual property. Identifiable intangible assets with finite lives are amortized over their useful lives. The results of operations of the acquired businesses are included in the Company’s consolidated financial statements from the respective dates of acquisition.

The Company has adopted ASC 805 (previously SFAS 141R, Business Combinations), as of January 1, 2009 which establishes the principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired business; how it recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and how it determines what information to disclose to enable users of its financial statements to evaluate the nature and financial effects of the business combination. ASC 805 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. ASC 805 requires the Company to record the present value of the most probable earnouts for all future years at the time of acquisition as an addition to goodwill. Subsequent changes to the earnout estimates will be recorded as expense or income in the statement of operations in the period of change. Additionally, the Company is required to review its estimates on at least a quarterly basis. For the nine months ended September 30, 2009, the Company entered into one agreement with an earnout clause and estimated the probable future earnout as an addition to goodwill in accordance with ASC 805.
 
 
-8-

 
Goodwill Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired in an acquisition accounted for as a purchase. Goodwill is carried at cost. In accordance with ASC 350-20 (previously SFAS 142, Goodwill and Other Intangible Assets), the Company is required to test goodwill for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. The Company’s impairment review process compares the fair value of the reporting unit in which the goodwill resides to its carrying value. The Company has determined that its reporting units are equivalent to its Consumer Internet and Licensing operating segments for the purposes of completing its ASC 350-20 analysis. Goodwill is assigned to the reporting unit that is expected to benefit from the anticipated revenue and cash flows of the business combination.
 
The Company utilizes a two-step approach to testing goodwill for impairment. The first step is to determine the fair value of the Company’s reporting units using both the Income Approach and the Market Approach. Under the Income Approach, the fair value of a business unit is based on the cash flows it can be expected to generate over its remaining life. The estimated cash flows are converted to their present value equivalent using an appropriate rate of return. The Market Approach utilizes a market comparable method whereby similar publicly-traded companies are valued using Market Values of Invested Capital (MVIC) multiples (i.e., MVIC to revenue and MVIC to Enterprise Value/EBITDA ratio) and then these MVIC multiples are applied to the Company’s operating results to arrive at an estimate of value.  If the fair values exceed the carrying values, goodwill is not impaired. The second step, if necessary, measures the amount of any impairment by applying fair value-based tests to individual assets and liabilities. If the reporting unit's carrying value exceeds its fair value, the Company compares the fair value of the goodwill with the carrying value of the goodwill.  If the carrying value of goodwill for the Company exceeds the fair value of that goodwill, an impairment loss is recognized in the amount equal to that excess. The Company performs this analysis during December of each fiscal year. No impairment loss was recorded for the years ended December 31, 2008, 2007 or 2006.

Intangible Assets — Intangible assets are carried at cost less accumulated amortization. Intangible assets are amortized on a straight-line basis over the expected useful lives of the assets, between three and nine years, with the exception of customer relationships, which are amortized using a double-declining balance method, to more accurately reflect the pattern in which the economic benefit is consumed. Other intangible assets are reviewed for impairment in accordance with ASC 360-10-35 (previously SFAS 144, Accounting for Impairment or Disposal of Long-Lived Assets), whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Measurement of any impairment loss for long-lived assets and identifiable intangible assets that management expects to hold and use is based on the amount of the carrying value that exceeds the fair value of the asset.

Cost of Revenues — Cost of revenues represent expenses that vary proportionately with revenues and includes marketing expenses to fulfill specific customer advertising orders, direct development costs of licensing revenues, and costs of hosting websites.

Sales and Marketing — Sales and marketing expenses include online marketing and advertising costs, sales promotion, compensation and benefits costs related to the Company’s sales and sales support staff, and the direct expenses associated with the Company’s sales force. The Company recognizes advertising expense at the time the advertisement is first published.

Technology —Technology expenses include compensation, benefits, software licenses and other direct costs incurred by the Company to enhance, manage, support, monitor and operate the Company’s websites and related technologies, and to operate the Company’s internal technology infrastructure.

General and Administrative — General and administrative expenses include compensation, benefits, office expenses, and other expenses for executive, finance, legal, business development and other corporate and support-functions personnel. General and administrative expenses also include fees for professional services, insurance, business licenses, and provisions for doubtful accounts.

Depreciation and Amortization — Depreciation and amortization includes the depreciation expense of property, plant and equipment on a straight-line basis over the useful life of assets, and the amortization expense of (1) leasehold improvements over their remaining useful life or the lease period, whichever is shorter, (2) internal use and proprietary software development costs over the software’s estimated useful life, and (3) intangible assets reflecting the period and pattern in which economic benefits are used.

 
-9-

 
Stock-Based Compensation and Stock-Based Charges — The Company has adopted the provisions of ASC 718 (previously SFAS No. 123R, Share-Based Payments), using the prospective approach and, accordingly, prior periods have not been restated to reflect the impact of ASC 718. Under the prospective approach, the Company recognizes stock-based compensation expense for only those awards that were granted subsequent to December 31, 2005 and any previously existing awards that are subject to variable accounting, including certain stock options that were exercised with notes in 2003, until the awards are exercised, forfeited, or contractually expire in accordance with the prospective method and transition rules of ASC 718. Under ASC 718, stock-based awards granted after December 31, 2005, are recorded at fair value as of the grant date and recognized to expense over the employee’s requisite service period (the vesting period, generally four years), which the Company has elected to amortize on a straight-line basis. The amount of recognized compensation expense is adjusted based upon an estimated forfeiture rate.

The Company has a net operating loss carry-forward as of September 30, 2009, and no excess tax benefits for the tax deductions related to share-based awards were recognized in the statements of operations. Additionally, no incremental tax benefits were recognized from stock options exercised in the nine months ended September 30, 2009.

Leases —The Company leases office space and data centers under operating lease agreements with original lease periods up to 8 years. Certain of the lease agreements contain rent escalation provisions which are considered in determining straight-line rent expense to be recorded over the lease term. The lease term begins on the date of initial possession of the leased property for the purposes of recognizing lease expense on a straight-line basis over the term of the lease. The Company leases certain information technology equipment under a capital lease arrangement in accordance with ASC 840 (previously SFAS No. 13, Leases). The present value of the lease obligation is recorded in the liability section of the consolidated balance sheet.

Income Taxes — The Company accounts for income taxes under ASC 740 (previously SFAS No. 109, Accounting for Income Taxes). This statement requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns. The measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and the tax bases of the Company’s assets and liabilities result in a deferred tax asset, ASC 740 requires an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or the entire deferred tax asset will not be realized.
 
In July 2006, the FASB issued ASC 740-10  (previously Financial Interpretation No. 48, Accounting for Income Taxes— Interpretation of Topic 740). ASC 740-10 prescribes a recognition threshold and measurement methodology to recognize and measure an income tax position taken, or expected to be taken, in a tax return. The evaluation of a tax position is based on a two-step approach. The first step requires an entity to evaluate whether the tax position would “more likely than not” be sustained upon examination by the appropriate taxing authority. The second step requires the tax position be measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. In addition, previously recognized benefits from tax positions that no longer meet the new criteria would be derecognized. The cumulative effect of applying the provisions of ASC 740-10 are reported as an adjustment to the opening balance of retained earnings in the period of adoption. ASC 740-10 is effective for fiscal years beginning after December 15, 2006.
 
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In general, the Company is no longer subject to U.S. federal tax examinations for tax years ended prior to 2006 and for state tax examinations for tax years ended prior to 2005. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.
 
Earnings Per Share — The Company calculates net income per share in accordance with ASC 260-10 (previously SFAS 128, Earnings per Share), which requires the presentation of both basic and diluted net income (loss) per share. Basic net income (loss) per share is computed by dividing net income (loss) available to ordinary stockholders by the weighted average number of ordinary shares outstanding. Diluted net income (loss) per share includes the effect of potential shares outstanding, including dilutive share options and warrants, using the treasury stock method as prescribed by ASC 260-10. The Company maintains a dual-class structure of common stock. Earnings per share for each class are determined based on an allocation method that considers the participation rights in undistributed earnings or losses for each class. The net income per share amounts are the same for Class A and Class B common stock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation. Earnings per share for the three and nine month period ended September 30, 2009 and 2008 are as follows (in thousands except for share and per share information):
 
-10-

 
    Three Months ended September 30,  
    2009     2008  
    Class A     Class B     Class A     Class B  
                         
Numerator—basic and diluted:
                       
    Net income attributable to common stockholders, basic
$ 3,060     $ 235     $ 2,382     $ 180  
                                 
    Conversion of Class B to Class A shares
    235       -       180       -  
    Reallocation of undistributed earnings to Class B shares
    -       (20 )     -       (8 )
    Net income attributable to common stockholders, diluted
  $ 3,295     $ 215     $ 2,562     $ 172  
                                 
Denominator:
                               
Weighted-average common shares
    41,897,181       3,025,000       40,784,584       3,025,000  
Weighted-average unvested restricted stock subject to repurchase
    (1,298,732 )     -       (750,423 )     -  
                                   
Denominator for basic calculation
    40,598,449       3,025,000       40,034,161       3,025,000  
Weighted-average effect of dilutive securities:
                               
        Conversion of Class B to Class A shares     3,025,000       -       3,025,000       -  
        Employee stock options     1,576,630       -       1,236,967       -  
        Unvested restricted stock subject to repurchase     1,298,732       -       750,423       -  
Denominator for diluted calculation
    46,498,811       3,025,000       45,046,551       3,025,000  
                                 
Net income per share—basic
  $ 0.08     $ 0.08     $ 0.06     $ 0.06  
Net income per share—diluted
  $ 0.07     $ 0.07     $ 0.06     $ 0.06  
 

     
Nine months ended September 30,
 
     
2009
   
2008
 
     
Class A
   
Class B
   
Class A
   
Class B
 
Numerator—basic and diluted:
                         
  Net income attributable to common stockholders, basic
    $ 7,539     $ 564     $ 7,906     $ 599  
                                   
 Conversion of Class B to Class A shares
      564       -       599       -  
 Reallocation of undistributed earnings to Class B shares
      -       (30 )     -       (28 )
 Net income attributable to common stockholders, diluted
    $ 8,103     $ 534     $ 8,505     $ 571  
                                   
Denominator:
                                 
 Weighted-average common shares
      41,605,962       3,025,000       40,619,761       3,025,000  
 Weighted-average unvested restricted stock subject to repurchase
      (1,196,042 )     -       (692,656 )     -  
                                   
 Denominator for basic calculation
      40,409,920       3,025,000       39,927,105       3,025,000  
Weighted-average effect of dilutive securities:
                                 
        Conversion of Class B to Class A shares
 
    3,025,000       -       3,025,000       -  
        Employee stock options
 
    1,215,717       -       1,379,595       -  
        Unvested restricted stock subject to repurchase
 
    1,196,042       -       692,656       -  
Denominator for diluted calculation
      45,846,679       3,025,000       45,024,356       3,025,000  
                                   
Net income per share—basic
    $ 0.19     $ 0.19     $ 0.20     $ 0.20  
Net income per share—diluted
    $ 0.18     $ 0.18     $ 0.19     $ 0.19  
 
  
-11-
 

 
 
    Comprehensive Income — Comprehensive income includes all changes in equity during a period from non-owner sources. Other comprehensive income refers to gains and losses that under accounting principles generally accepted in the United States are recorded as an element of stockholders’ equity but are excluded from net income. For the three and nine months ended September 30, 2009 and 2008, the Company’s comprehensive income consisted of its net income, unrealized gains and losses on investments classified as available for sale and cumulative translation adjustments (in thousands).
 
 
 
 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net income
  $ 3,295     $ 2,562     $ 8,103     $ 8,505  
    Foreign currency translation
    409       1,209       631       1,333  
    Investments, fair value adjustment
    (14 )     (85 )     (148     (25 )
                                 
Comprehensive income
  $ 3,690     $ 3,686     $ 8,586     $ 9,813  
                                 
 
Foreign Currency — The financial position and results of operations of the Company’s Canadian and British subsidiaries are measured using the Canadian Dollar and Pound Sterling as the functional currencies, respectively. Revenues and expenses of these subsidiaries have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded as foreign currency translation adjustment, a component of other comprehensive income (loss).

During the fourth quarter of 2008, the Company determined that intercompany balances between the Company and its subsidiaries would not be settled in the foreseeable future; as a result, the foreign exchange gains and losses were recorded as part of cumulative translation adjustment on the balance sheet.  The Company believes that these intercompany balances will not be settled in the foreseeable future.

Gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the consolidated results of operations in accordance with ASC 830 (previously SFAS No. 52, Foreign Currency Matters).

NOTE 3. RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2009, the FASB issued ASC 855 (previously SFAS No. 165, Subsequent Events), which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or available to be issued. It is effective for interim and annual periods ending after June 15, 2009. There was no material impact upon the adoption of this standard on the Company’s consolidated financial statements.

In June 2009, the FASB issued ASC 105 (previously SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ("GAAP") - a replacement of FASB Statement No. 162), which will become the source of authoritative accounting principles generally accepted in the United States recognized by the FASB to be applied to nongovernmental entities. The Codification is effective in the third quarter of 2009, and accordingly, the Quarterly Report on Form 10-Q for the quarter ending September 30, 2009 and all subsequent public filings will reference the Codification as the sole source of authoritative literature. The Company does not believe that this will have a material effect on its consolidated financial statements.
 
In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, which amends ASC Topic 605, Revenue Recognition, to require companies to allocate revenue in multiple-element arrangements based on an element’s estimated selling price if vendor-specific or other third-party evidence of value is not available. ASU 2009-13 is effective beginning January 1, 2011. Earlier application is permitted. The Company is currently evaluating both the timing and the impact of the pending adoption of the ASU on its consolidated financial statements.

 
NOTE 4. INVESTMENTS

We consider investments with an initial term to maturity of three months or less at the date of purchase to be cash equivalents. Short-term investments are diversified and primarily consist of investment grade securities that: (1) mature within the next 12 months; (2) have characteristics of short-term investments; or (3) are available to be used for current operating activities.
 
Short and long-term investments are classified as available-for-sale and carried at fair value based on quoted market prices. Investments are recorded net of unrealized gains or losses and the related tax impact thereon. Unrealized gains or losses are reported in stockholders’ equity as a component of accumulated other comprehensive income.
 
 
-12-

 
Available-for-sale investments at their estimated fair value and contractual maturities as of September 30, 2009 are as follows (in thousands):

 
Amortized
Cost
   
Unrealized 
Gains
   
Unrealized
Losses
   
Estimated
Fair Value
 
Government and agency securities
  $ 17,812     $ 64     $ (1 )   $ 17,875  
Corporate debt securities
    820      
15
      -       835  
Total investments in available-for-sale securities
  $ 18,632     $ 79     $ (1 )   $ 18,710  
                                 
Contractual maturity dates for investment in bonds and notes:
                         
Less than one year
                          $ 18,455  
One to five years
                            255  
                            $ 18,710  
 
Available-for-sale investments at their estimated fair value and contractual maturities as of December 31, 2008 are as follows
(in thousands):

   
Amortized
   
Unrealized
   
Unrealized
   
Estimated
 
   
Cost
   
Gains
   
Losses
   
Fair Value
 
Government and agency securities
  $ 3,689     $ 38     $ (1 )   $ 3,726  
Corporate debt securities
    6,705       67       (213 )     6,559  
Asset backed securities
    2,745       -       (24 )     2,721  
Equity securities
    642       75       -       717  
Total investments in available-for-sale securities
  $ 13,781     $ 180     $ (238 )   $ 13,723  
                                 
Contractual maturity dates for investments in bonds and notes:
                         
Less than one year
                          $ 10,050  
One to five years
                            3,673  
                            $ 13,723  

NOTE 5. ACQUISITIONS OF BUSINESSES AND INTANGIBLES

During the nine months ended September 30, 2009 the Company completed eleven website-related acquisitions in the Consumer Internet segment for a total aggregate purchase price of $11.8 million. The acquisitions were designed to extend and further diversify the Company’s audiences and advertising base. The preliminary amounts of goodwill recognized in those transactions amounted to $7.7 million and the preliminary amounts of intangible assets, consisting of acquired technology, customer relationships, and domain names and trademarks, amounted to $4.1 million.

During the nine months ended September 30, 2008 the Company completed 25 website-related acquisitions in the Consumer Internet segment for a total aggregate purchase price of $59.9 million. Goodwill recognized in those transactions amounted to $45.4 million and intangible assets amounted to $14.5 million.

The acquisitions consummated during the nine months ended September 30, 2009 are not material individually; however, in aggregate they represent a material portion of our net income. The unaudited pro forma results presented below include the effect of these acquisitions as if they were consummated as of January 1, 2008. The pro forma results do not include the effect of anticipated synergies which typically drive the growth in revenue and earnings that arise once these acquisitions have been moved onto the Company’s operating platform.
 
The unaudited pro forma financial information below is not necessarily indicative of either future results of operations nor of results that might have been achieved had the acquisitions been consummated as of January 1, 2008 (in thousands, except per share amounts).
 
-13-

 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Revenue
  $ 25,812     $ 27,643     $ 72,825     $ 78,277  
Income from operations
    5,748       4,922       14,044       14,114  
Net income
    3,368       2,680       8,215       8,688  
Basic net income per share
  $ 0.08     $ 0.06     $ 0.19     $ 0.20  
Diluted net income per share
  $ 0.07     $ 0.06     $ 0.18     $ 0.19  

NOTE 6. STOCK OPTIONS AND WARRANTS

The Company has adopted three equity plans referred to as the 1998 Stock Plan, the 2000 Stock Plan, and the 2007 Equity Plan.

The 1998 Stock Plan provides for the granting of nonstatutory and incentive stock options to employees, officers, directors and consultants of the Company. Stock purchase rights may also be granted under the 1998 Stock Plan. Options granted generally vest over a four-year period and generally expire ten years from the date of grant. In addition, certain employees have options that have accelerated vesting provisions upon the transfer of ownership of 50% or more of the Company’s common stock. The December 2007 amendment provided that no further grants would be made under the plan.

The 2000 Stock Plan provides for the granting of nonstatutory and incentive stock options to employees, officers, directors and consultants of the Company. Stock purchase rights may also be granted under the 2000 Stock Plan. Options granted generally begin vesting over a four-year period. Additional options granted to employees previously holding options under either the 1998 Stock Plan or the 2000 Stock Plan vest quarterly over four years. Options generally expire ten years from the date of grant.  The December 2007 amendment to the 2000 Stock Plan provided that (1) no further grants would be made under the plan, and (2) the options previously awarded under the plan were exercisable for Class A common stock.

On October 23, 2007, the Company adopted the 2007 Equity Plan, which, as amended and restated on December 21, 2007, provides for an aggregate of 1,868,251 shares of the Company’s Class A common stock to be available for stock-option and restricted stock awards, subject to annual increases of up to 1,500,000 shares for five years beginning in 2009. The number of shares available under the 2007 Equity Plan may be further increased by certain shares awarded under the 2007 Equity Plan, the 1998 Stock Plan, or the 2000 Stock Plan that are surrendered or forfeited after the effective date of the 2007 Equity Plan. The maximum number of shares available for awards will not exceed 12,282,006 and, unless earlier terminated by the Board of Directors, the 2007 Equity Plan will expire on October 23, 2017 and no further awards may be granted under the plan after that date.

    The following table summarizes option activity under the 1998 Stock Plan, 2000 Stock Plan and 2007 Equity Plan:

   
Number
of
Shares
   
Approximate
Weighted-
Average
Exercise
Price
 
             
Options outstanding at December 31, 2008
    2,554,315     $ 3.65  
Granted
    16,500       5.06  
Exercised
    (249,580 )     1.07  
Forfeited/expired
    (8,563 )       5.65  
Options outstanding at September 30, 2009
    2,312,672     $ 3.93  


 
-14-

 
 
The following table summarizes restricted stock activity under the 2007 Equity Plan:

 
Number
Of Restricted
Shares
 
Approximate
Price at Grant Date
 
         
Restricted Shares granted at December 31, 2008
642,333   $ 8.33  
Granted
716,133     4.64  
Exercised
(27,500   7.73  
Forfeited/expired
(10,285   5.50  
Restricted Shares outstanding at September 30, 2009
1,320,681   $ 6.37  

At September 30, 2009, the Company had 75,000 outstanding options to purchase Class A common stock of the Company that had been granted outside the Company’s 1998 Stock Plan, 2000 Stock Plan, and 2007 Equity Plan at a weighted average exercise price of $1.50 per share. All of these options were vested and exercisable at September 30, 2009 with 5.4 years of remaining contractual life.

NOTE 7. SEGMENT INFORMATION

The Company manages its business within two identifiable segments. The following tables present the summarized information by segment (in thousands):

   
Consumer
Internet
   
Licensing
   
Total
 
For the nine-month period ended September 30, 2009
                 
Revenues
  $ 48,624     $ 23,454     $ 72,078  
Investment and other income (loss)
    938       (1,023 )     (85 )
Depreciation and amortization
    9,898       2,122       12,020  
Segment pre-tax income
    7,532       6,240       13,772  
Segment assets
  $ 312,682     $ 77,131     $ 389,813  
                         


   
Consumer
Internet
   
Licensing
   
Total
 
For the nine-month period ended September 30, 2008
                 
Revenues
  $ 52,743     $ 24,315     $ 77,058  
Investment and other income (loss)
    (2,733 )     2,736       3  
Depreciation and amortization
    7,690       2,102       9,792  
Segment pre-tax income
    7,569       6,243       13,812  
Segment assets
  $ 303,280     $ 74,157     $ 377,437  


NOTE 8. COMMITMENTS AND CONTINGENCIES

On October 7, 2008, the Company entered into a Loan and Security Agreement with Silicon Valley Bank pursuant to which the Company has access to a $35 million revolving line of credit that will mature on October 7, 2012.  The interest to be paid on the used portion of the credit facility will be based upon LIBOR or the prime rate plus a spread based on the ratio of debt to adjusted earnings before interest, taxes, depreciation and amortization.  In addition, the obligations under the Loan and Security Agreement are secured by a lien on substantially all of the assets of the Company. There currently is no debt outstanding under the credit facility.

Contingencies — From time to time, the Company has been party to various litigation and administrative proceedings relating to claims arising from its operations in the normal course of business. Based on the information presently available, including discussion with counsel, management believes that resolution of these matters will not have a material adverse effect on the Company’s business, consolidated results of operations, financial condition, or cash flows.

Earnout Agreements — The Company has entered into earnout agreements as part of the consideration for certain acquisitions. The Company accounts for earnout consideration in accordance with ASC 805 as an addition to goodwill and accrued expenses at the present value of all anticipated future earnouts at the acquisition date for acquisitions occurring in fiscal years beginning after December 15, 2008. Earnouts occurring from acquisitions prior to December 31, 2008 are accounted for under EITF 95-8, Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Combination, as an addition to compensation expense or goodwill in the period earned. As of September 30, 2009, the Company paid earnouts totaling $3.7 million and anticipates that the most probable earnout amount for the remainder of 2009 will be zero.  The Company cannot reasonably estimate maximum earnout payments, as a significant number of the Company’s acquisition agreements do not contain maximum payout clauses.

 
-15-

 
      Capital Lease Obligations — The Company has entered into leases for certain information technology equipment and software and has accounted for them as capital leases in accordance with ASC 840 (previously SFAS No. 13, Leases). As of September 30, 2009, the Company has assets of $0.5 million of net property, plant and equipment with short-term liabilities of $0.2 million and long-term liabilities of $0.3 million recorded on its consolidated balance sheet associated with these capital leases. The Company’s future minimum lease payments, including interest and service fees, over the next five years are as follows (in thousands):

2009
  $ 80  
2010
    159  
2011
    159  
2012
    80  
2013
    -  
      478  
Less: interest expense
    (22 )
         
Present value of
       
minimum lease payments
  $ 456  

Severance Payment Agreements — The Company has entered into severance payment agreements with certain members of its management which provide for minimum salaries, perquisites and payments due upon certain defined future events.

Legal Contingencies — On August 8, 2008, Versata Software, Inc. (Versata Software) and Versata Development Group, Inc. (Versata Development) filed suit against the Company and its subsidiaries, Autodata Solutions Company (Autodata) and Autodata Solutions, Inc. (Autodata Solutions) in the United States District Court for the Eastern District of Texas, Marshall Division, claiming that certain software and related services offered by the Company and its Autodata subsidiaries violate Versata Development’s  U.S. Patent No. 7,130,821 entitled “Method and Apparatus for Product Comparison” and its U.S. Patent No. 7,206,756 entitled “System and Method for Facilitating Commercial Transactions over a Data Network,” breach of a settlement agreement entered into in 2001 related to a previous lawsuit brought by the Versata entities, and tortious interference with an existing contract and prospective contractual relations.  On August 25, 2008, Versata Software and Versata Development filed an amended complaint against the Company, Autodata and Autodata Solutions, asserting additional claims that certain software and related services offered by the Company and its Autodata subsidiaries violate Versata Development’s U.S. Patent No. 5,825,651 entitled “Method and Apparatus for Maintaining and Configuring Systems,” Versata Development’s  U.S. Patent No. 6,675,294 entitled “Method and Apparatus for Maintaining and Configuring Systems,” and Versata Software’s  U.S. Patent No. 6,405,308 entitled “Method and Apparatus for Maintaining and Configuring Systems” and seeking declaratory judgment regarding the validity of the Versata entities’ revocation and termination of licenses included in the 2001 settlement agreement.  Versata Software and Versata Development seek unspecified damages, attorneys’ fees and costs and permanent injunctions against the Company, Autodata and Autodata Solutions. In December 2008, the Company filed a Motion to Dismiss the lawsuit for lack of personal jurisdiction that is pending.

On August 12, 2009, the Company, Autodata and Autodata Solutions filed suit in the District Court of Travis County, Texas, in which the Company asserts unauthorized disclosure, misappropriation and conversion of proprietary, trade secret and confidential information imparted by us to Versata Software and Versata Development in 1997 and 1998.  The Company alleges that Versata Software and Versata Development disclosed such confidential information to the U.S. Patent & Trademark Office in their applications for U.S. Patent No. 7,130,821 and U.S. Patent No. 7,206,756, and claimed it as their own.  The Company petition seeks declaratory relief to quiet title resulting from Versata Software and Versata Development’s claimed ownership of the technology and confidential information underlying the patents as well as unspecified damages, attorneys’ fees and costs.

On August 12, 2009, Versata Software and Versata Development filed suit for declaratory judgment against the Company, Autodata and Autodata Solutions, in the United States District Court for the Western District of Texas, Austin Division, alleging apprehension of a potential lawsuit by the Company against them for their breach of a confidentiality agreement between the parties.

 
-16-

 
The Company believes these claims against it are without merit and intend to vigorously defend the lawsuits, but the Company cannot predict the outcome of these matters, and an adverse outcome could have a material impact on our financial condition, results of operations or cash flows.  Even if the Company is successful in defending the lawsuits, the Company may incur substantial costs and diversion of management time and resources to defend the litigation. The Company is not able to estimate a probable loss, if any.

NOTE 9. SUBSEQUENT EVENTS

On October 15, 2009, Internet Brands, Inc., entered into a Second Amendment to Office Lease (the “Lease Amendment”) with Kilroy Realty, L.P., to amend the Office Lease, dated June 25, 2004, as amended by First Amendment to Office Lease, dated November 11, 2005, relating to the Company’s corporate headquarters, including administration, operations, technology, and sales and marketing departments.

The Lease Amendment, which commences on July 1, 2010, extends for a period of 4 years the term of the Company’s lease of approximately 54,000 square feet of office space in El Segundo, California, such that the lease expires on June 30, 2014.  Under the terms of the Lease Amendment, the total aggregate base rent for the facilities for the period from July 1, 2010 through June 30, 2014 is approximately $5.4 million. The Lease Amendment also provides an option to further renew the lease for two additional years on substantially the same terms, a tenant improvement allowance, and certain expansion rights, among other provisions.

On November 3, 2009, the Company entered into amended and restated severance payment agreement with Scott A. Friedman, the Company’s Chief Financial Officer. Pursuant to the terms of Mr. Friedman’s executive severance payment agreement, in the event Mr. Friedman is terminated without cause (as defined in the agreement), he will be entitled to receive a lump sum payment equal to nine months’ base salary plus 75% of his maximum annual cash bonus target, and up to nine months continued participation in our employee benefit plans. In the event of a change of control (as defined in the agreement), the vesting of equity grants will accelerate and vest on a daily pro-rata basis until the date immediately prior to the closing date of the change of control.  Then, 50% of the remaining unvested portion of Mr. Friedman’s equity grants will automatically vest immediately prior to the change of control.  In addition, we or our successor entity will reserve amounts sufficient to pay the remaining 50% of unvested equity grants, and such remaining equity grants will continue to vest through the earlier of the first anniversary of the closing date of the change of control transaction, or Mr. Friedman’s termination without cause, upon which date all remaining unvested equity grants will automatically vest and he will be paid all amounts reserved for such purpose.

 
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Investors are cautioned that certain statements contained in this Report, as well as some statements by us in periodic press releases and other public disclosures and some oral statements by us to securities analysts and stockholders during presentations, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements give management’s expectations about the future and are not guarantees of performance.  Words like “believe,” “expect,” “anticipate,” “promise,” “plan” and other expressions or words of similar meaning, as well as future or conditional verbs such as “will,” “would,” “should,” “could,” or “may,” are generally intended to identify forward-looking statements.  Generally, forward-looking statements include projections of our revenues, income, earnings per share, capital structure, or other financial items; descriptions of our plans or objectives for future operations, products or services; forecasts of our future economic performance, interest rates, profit margins and our share of future markets; and descriptions of assumptions underlying or relating to any of the foregoing.  Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about our operations and economic and market factors, among other things. Such factors, many of which are beyond our control, could cause actual results and timing of selected events to differ materially from management’s expectations.

Given such risks and uncertainties, investors are cautioned not to place undue reliance on forward-looking statements.  Forward-looking statements speak only as of the date they are made.  We undertake no obligation to revise or update such statements.  Please see our periodic reports and other filings with the Securities and Exchange Commission, or SEC, for further discussion of risks and uncertainties applicable to our business.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this Report.  References in this Report to “we,” “our,” “the Company” and “Internet Brands” refer to Internet Brands, Inc. and its consolidated subsidiaries, unless otherwise indicated.

Overview

 We are an Internet media company that owns, operates and grows branded websites in categories marked by high consumer involvement, strong advertising spending, and significant fragmentation in offline sources of consumer information.  We believe that as individuals increasingly use the Internet to pursue and share areas of passion, research topics of interest, and make purchases, both individuals and the advertisers who seek to market to them will demand access to online media in the form of vertical websites like ours. Vertical websites provide highly targeted content focused on specific categories of products and services.
 
We have continued to expand and diversify our vertical website categories to capture these highly focused audiences and their advertisers.  In addition to the six vertical categories which we have historically operated in automotive, careers, home, money and business, shopping and travel & leisure, we have recently added a seventh category in health.  Our health-related websites provide news, information and resources to help consumers manage their health, nutrition and fitness and locate health care providers in a variety of specialties.  We operate more than 90 websites that received in excess of 100,000 unique visitors during the month of September 2009, which are hereafter referred to as “principal websites.” More than 96% of the traffic to our websites is from non-paid sources.  Our international audiences account for approximately 25% of total monthly visitors to our websites in September 2009.
 
Throughout this Report, we use Google analytics measurement services to report Internet audience metrics.  The measurement term “monthly unique visitors” refers to the total number of unique users (a user is defined as a unique IP address) who visit one of our websites in a given month. We measure the total number of unique visitors to our websites by adding the number of unique visitors to each of our websites in a given month.  The term “monthly visitors” is defined as the total number of user-initiated sessions with our websites within a month. “Page views” refers to the number of website pages that are requested by and displayed to our users. Traffic calculations for the third quarter of 2009 include websites acquired in September 2009 on a pro forma basis.  In the third quarter of 2009, our websites’ monthly average was 50 million unique visitors, an increase of approximately 25% from 40 million unique visitors in the third quarter of 2008, and an average of 679 million page views in the third quarter of 2009, an increase of approximately 6% from 639 million page views in the third quarter of 2008.   The ratio of page views to unique visitors declined year-over-year primarily as a result of new website features that combined elements from multiple pages to single pages.
 
We also license our content and Internet technology products and services to major companies and individual website owners around the world. Our subsidiaries, Autodata Solutions, Inc. and Autodata Solutions Company, are suppliers of licensed content and technology services to the automotive industry, serving most of the major U.S., Japanese and European automotive manufacturers. Throughout this Report, we refer to the business of Autodata Solutions, Inc. and Autodata Solutions Company as the “Autodata Solutions division.”  We also own and operate vBulletin software, which allows website owners to offer online community features, such as a bulletin board. The vBulletin product is designed to be easily downloaded and installed by the user, and provides a variety of features that are both secure and scalable.  We directly market vBulletin on the Internet and have sold more than 100,000 licenses to date.
 
During the period from January 1, 2009 through September 30, 2009, we completed eleven website-related acquisitions in our Consumer Internet segment for an aggregate purchase price of $11.8 million. We expect to continue to grow our business by acquiring additional websites and improving and growing our existing websites through the application of our operating platform. We have historically been able to deploy capital for acquisitions efficiently, and then integrate acquired websites onto our platform quickly and effectively. Although we believe we will continue to identify, negotiate and purchase websites that meet our operating platform criteria, we cannot predict whether we can continue to purchase websites at the same rate and on similarly favorable terms.
 
 
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Our Revenues

We derive our revenues from two segments: Consumer Internet and Licensing. In our Consumer Internet segment, our revenues are primarily derived from advertisers. In our Licensing segment, our revenues are derived from the licensing of data and technology tools and services to automotive manufacturers and proprietary software for website communities.
 
Consumer Internet Revenues

Our Consumer Internet segment generates revenues through sales of online advertising in various monetization formats such as cost per thousand impressions (CPM), cost per click (CPC), cost per lead (CPL), cost per action (CPA) and flat fees. Under the CPM format, advertisers pay a fee for displays of their graphical advertisements, typically at an incremental rate per thousand displays or “impressions.” Under the CPC model, we earn revenue based on “click-throughs” on text-based links displayed on our websites, which occur when a user clicks on an advertiser’s listing. We derive revenues on a CPC model through direct sales to advertisers, as well as through various third-party advertising networks, such as Google, Yahoo! and Tribal Fusion, for which we receive a negotiated percentage of their advertising revenues. Under the CPL model, our advertiser customers pay for leads generated through our websites and accepted by the customer. Under the CPA format, we earn revenues based on a percentage or negotiated amount of a consumer transaction undertaken or initiated through our websites.

As consumer and advertiser preferences continue to evolve and our website audiences grow, we expect to continue to diversify our revenue sources and mix on our websites to address those changing needs and optimize our revenue yields.

Licensing Revenues

We license customized products, services and automotive vehicle marketing data to most major U.S., Japanese and European automotive manufacturers and other online automotive service providers. Customers typically enter into multi-year licensing and technology development agreements for these products and services, which include market analytics, product planning, vehicle configuration, management and order placement, in-dealership retail systems and consumer-facing websites. We also sell and license vBulletin software to U.S. and international website owners. vBulletin revenues are primarily derived from website owners paying an upfront fee for a perpetual software license and twelve months of customer service.

Expenses

The largest component of our expenses is personnel. Personnel costs include salaries and benefits for our employees, commissions for our sales staff and stock-based compensation, which are categorized in our statements of operations based on each employee’s principal function (i.e., Sales and Marketing, Technology or General and Administrative). Cost of revenues represent direct expenses that vary proportionately with revenues and consist of development costs, including personnel costs, related to the licensing business, marketing costs directly related to the fulfillment of specific customer advertising orders and costs of hosting our websites. Sales and marketing expenses include both personnel and online marketing costs.  General and administrative expenses include personnel, audit, tax and legal fees, insurance and facilities costs.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and the accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We believe the following accounting policies to be the most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
 
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Revenue Recognition

We recognize revenue in accordance with Accounting Standard Codification (ASC) 605-10 (Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 104), Revenue Recognition). Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectibility of the resulting receivable is reasonably assured. Our revenues are derived from our Consumer Internet and Licensing segments.

Consumer Internet

Consumer Internet segment revenue is earned from online advertising sales on a cost per impression (CPM), cost per click (CPC), cost per lead (CPL), cost per action (CPA) or flat-fee basis.
 
 
·
We earn CPM revenue from the display of graphical advertisements.  An impression is delivered when an advertisement appears in pages viewed by users.  Revenue from graphical advertisement impressions is recognized based on the actual impressions delivered in the period.  
 
·
Revenue from the display of text-based links to the websites of our advertisers is recognized on a CPC basis, and search advertising is recognized as "click-throughs" occur.  A "click-through" occurs when a user clicks on an advertiser's link.
 
·
Revenue from advertisers on a CPL basis is recognized in the period the leads are accepted by the dealer or mortgage lender, following the execution of a service agreement and commencement of the services. Service agreements generally have a term of 12 months or less.
 
·
Under the CPA format, we are earn revenues based on a percentage or negotiated amount of a consumer transaction undertaken or initiated through our websites. Revenue is recognized at the time of the transaction.
 
·
Revenue from flat-fee, listings-based services are based on a customer's subscription to the service for up to twelve months and are recognized on a straight-line basis over the term of the subscription.
 
Licensing
 
We enter into contractual arrangements with customers to license software and content products and to develop customized software; revenue is earned from software licenses, content syndication, maintenance fees and consulting services. Agreements with these customers are typically for multi-year periods. For each arrangement, revenue is recognized when both parties have signed an agreement, the fees to be paid by the customer are fixed or determinable, collection of the fees is probable, delivery of the product has occurred, and no other significant obligations on our part remain. We do not offer a right of return on these products.

Software-related revenue is accounted for in accordance with ASC 985-605 (previously Statement of Position (SOP) 97-2, Software Revenue Recognition), and interpretations thereof.  Post-implementation development and enhancement services are not sold separately; the revenue and all related costs of these arrangements are deferred until the commencement of the applicable license period. Revenue is recognized ratably over the term of the license; deferred costs are amortized over the same period as the revenue is recognized.

Fees for stand-alone and post-implementation development and enhancement services are fixed-bid and determined based on estimated effort and client billing rates since we can reasonably estimate the required effort to complete each project or each milestone within the project. There are no non-software deliverables and the functionality delivered is specific to a customer’s previously-licensed application. Recognition of the revenue and all related costs of these arrangements are deferred until delivery and acceptance of the project, in accordance with the terms of the contract.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount and do not bear interest.  The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivables.  We determine the allowance based on historical write-off experience and customer economic data.  We review our allowance for doubtful accounts monthly.  Account balances are charged off against the allowance when we believe that it is probable the receivable will not be recovered.

 
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Business Combinations

We use the purchase method of accounting for business combinations and the results of the acquired businesses are included in the income statement from the date of acquisition. The purchase price has historically included the direct costs of the acquisition.  However, beginning in the first quarter of 2009, acquisition-related costs are expensed as incurred, in accordance with ASC 805 (previously SFAS No. 141R, Business Combinations). Amounts allocated to intangible assets are amortized over their estimated useful lives; no amounts are allocated to in-progress research and development. Goodwill represents the excess of consideration paid over the net identifiable business assets acquired.

We have entered into earnout agreements which are contingent on the acquired business achieving agreed upon performance milestones. Earnout payments are not based on the seller’s on-going service to the Company; when the seller does provide services following the acquisitions, the cost of the seller’s services is recorded as compensation expense in the period the services were performed. We have historically accounted for earnout consideration as an addition to goodwill in the period earned.  Beginning in the first quarter of 2009, in accordance with ASC 805, for any new acquisitions with an earnout component, we estimate the net present value of expected earnout payments and record such amount as an addition to goodwill and liability or equity, at the time of closing.  Subsequent changes of earnout projections are recorded on the statement of operations as other income or expense in the period of remeasurement.  If earnout projections are recorded as equity, then no subsequent remeasurement is required.  

Goodwill, Intangible Assets and the Impairment of Long-Lived Assets
 
 We assess the recoverability of the carrying value of long-lived assets. If circumstances suggest that long-lived assets may be impaired, and a review indicates that the carrying value will not be recoverable, the carrying value is reduced to its estimated fair value. ASC 350-20 (previously SFAS No. 142, Goodwill and Other Intangible Assets), requires goodwill to be tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. Our impairment review process compares the fair value of the reporting unit in which the goodwill resides to its carrying value. We determined that our reporting units are equivalent to our Consumer Internet and Licensing operating segments for the purposes of completing our ASC 350-20 analysis. Goodwill is assigned to the reporting unit that is expected to benefit from the anticipated revenue and cash flows of the business combination.
 
We utilize a two-step approach to testing goodwill for impairment. The first step is to determine the fair value of our reporting units using the Income Approach and the Market Approach. Under the Income Approach, the fair value of a business unit is based on the cash flows it can be expected to generate over its remaining life. The estimated cash flows are converted to their present value equivalent using an appropriate rate of return. The Market Approach utilizes a market comparable method whereby similar publicly-traded companies are valued using Market Values of Invested Capital (MVIC) multiples (i.e., MVIC to revenue and MVIC to Enterprise Value/EBITDA ratio) and then these MVIC multiples are applied to a company’s operating results to arrive at an estimate of value. We perform this analysis during December of each fiscal year. No impairment loss was recorded for the years ended December 31, 2008, 2007 or 2006.
 
Intangible assets are carried at cost less accumulated amortization. Intangible assets are amortized on a straight-line basis over the expected useful lives of the assets, between three and nine years, with the exception of customer relationships, which are amortized using a double-declining balance method, to more accurately reflect the pattern in which the economic benefit is consumed. Other intangible assets are reviewed for impairment in accordance with ASC 360-10-35 (previously SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets), whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Measurement of any impairment loss for long-lived assets and identifiable intangible assets that management expects to hold and use is based on the amount of the carrying value that exceeds the fair value of the asset.

We have acquired many companies in each of the last few years and our current business strategy includes continuing to make additional acquisitions in the future. These acquisitions will continue to give rise to goodwill and other intangible assets which will need to be assessed for impairment from time to time.

Provision for Income Taxes and Deferred Income Taxes

Deferred income tax assets and liabilities are periodically computed for temporary differences between the financial statement and income tax bases of assets and liabilities. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to years in which the differences are expected to reverse. A valuation allowance is established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. Significant judgment is necessary in determining valuation allowances necessary for our deferred tax assets. Accounting standards require us to establish a valuation allowance for that portion of our deferred tax assets for which it is more likely than not that we will not receive a future benefit. In making this judgment, all available evidence is considered, some of which, particularly estimates of future profitability and income tax rates, are subjective in nature. Estimates of deferred income taxes are based on management's assessment of actual future taxes to be paid on items reflected in the consolidated financial statements, giving consideration to both timing and the probability of realization. Actual income taxes could vary from these estimates due to future changes in income tax law, state income tax apportionment or the outcome of any review of our tax returns by the Internal Revenue Service, as well as actual operating results that vary significantly from anticipated results.  Our effective income tax rate for the nine months ended September 30, 2009 was 41.2%.
 
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Seasonality

The automotive industry in which we provide Consumer Internet products and services has historically experienced seasonality with relatively stronger sales in the second and third quarters and weaker sales in the fourth quarter. However, the current macroeconomic environment has overwhelmed the typically stronger automotive sales during the three months ended September 30, 2009. In 2008, we entered the online shopping category which has historically experienced relatively stronger sales in the fourth quarter.

Results of Operations

The following table sets forth our consolidated statements of operation data as a percentage of total revenues for each of the periods indicated:
 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
2009
   
2008
   
2009
   
2008
 
 
(unaudited)
 
                       
Revenues
  100.0 %     100.0 %     100.0 %     100.0 %
                               
Costs and operating expenses
                             
                               
Cost of revenues
  17.7       24.8       19.0       22.8  
Sales and marketing
  18.5       19.2       19.4       21.4  
Technology
  10.5       9.7       9.8       8.3  
General and administrative
  14.6       15.0       15.9       16.9  
Depreciation and amortization of intangibles
  16.6       13.7       16.7       12.7  
Total operating expenses
  77.8       82.4       80.8       82.1  
Operating income
  22.2       17.6       19.2       17.9  
Investment and other (expense) income
  -       (4.2 )     (0.1 )     -  
Income from operations before income taxes
  22.2       13.4       19.1       17.9  
Provision for income taxes
  9.2       3.8       7.9       6.9  
Net income
  13.0 %     9.6 %     11.2 %     11.0 %
                               
 

Revenues
   
Three Months Ended
   
Increase (decrease)
   
Nine Months Ended
   
Increase (decrease)
 
   
September 30,
   
2009 vs. 2008
   
September 30,
   
2009 vs. 2008
 
   
2009
   
2008
     $     %       2009       2008                  $     %  
Revenues:
                                                       
Consumer Internet
  $ 16,648     $ 18,364     $ (1,716 )     (9.3 )%   $ 48,624     $ 52,743     $ (4,119 )     (7.8 )%
Licensing
    8,674       8,489       185       2.2 %     23,454       24,315       (861 )     (3.5 )%
Total revenues
  $ 25,322     $ 26,853     $ (1,531 )     (5.7 )%   $ 72,078     $ 77,058     $ (4,980 )     (6.5 )%
 
         Our revenues for the three month period ended September 30, 2009, decreased $1.5 million, or 6%, from our revenues in the three month period ended September 30, 2008.
 
-22-

 
         Consumer Internet advertising revenues from our websites increased $2.0 million, or 21%, on a year-over-year basis, with organic growth from websites owned more than one year contributing significantly to this growth.  However this increase was offset by a $3.7 million, or 43%, decrease in automotive e-commerce revenues due to continued weakness in consumer demand for automobiles resulting from the current economic climate.  Consequently, overall Consumer Internet revenues decreased $1.7 million, or 9%, during the three month period ended September 30, 2009 compared to the prior year period.
 
         Licensing revenues increased by $0.2 million, or 2%, during the three month period ended September 30, 2009 compared to the prior year period. 
 
         Our revenues for the nine month period ended September 30, 2009, decreased $5.0 million, or 7%, from our revenues in the nine month period ended September 30, 2008.
 
         Consumer Internet advertising revenues from our non-auto e-commerce websites increased $5.9 million, or 22% on a year-over-year basis as a result of both organic growth of our websites and acquisitions.  However, this growth was offset by a $10.0 million, or 38%, decrease in automotive e-commerce revenues for the same period.  As noted above, the decrease was due to continued weakness in consumer demand for automobiles resulting from the current economic climate. Therefore, total Consumer Internet revenues decreased $4.1 million, or 8%, during the nine month period ended September 30, 2009 compared to the prior year period.
 
         Licensing revenues decreased by $0.9 million, or 4%, during the nine month period ended September 30, 2009 compared to the prior year period due to foreign currency exchange fluctuations. If the Company used a fixed year-over-year exchange rate, licensing revenues for the nine month period ended September 30, 2009 would have been approximately $1.1 million higher than reported.

Cost of revenues and operating expenses

   
Three Months Ended
   
Increase (decrease)
   
Nine Months Ended
   
Increase (decrease)
 
   
September 30,
   
2009 vs. 2008
   
September 30,
   
2009 vs. 2008
 
   
2009
   
2008
     $       %       2009       2008      $       %  
Cost of revenues
  $ 4,470     $ 6,658     $ (2,188 )     (32.9 )%   $ 13,659     $ 17,603     $ (3,944 )     (22.4 )%
Percentage of revenues
    17.7 %     24.8 %                     19.0 %     22.8 %                
 
         Our cost of revenues decreased $2.2 million, or 33%, and $3.9 million, or 22%, in the three and nine month periods ended September 30, 2009, respectively, over the prior year periods. The lower cost of revenues in both periods was driven by the decrease in fulfillment costs associated with specific advertiser orders, consistent with the decline in revenues from our automotive e-commerce business.
 
    Sales and Marketing
                                                 
   
Three Months Ended
   
Increase (decrease)
   
Nine Months Ended
   
Increase (decrease)
 
   
September 30,
   
2009 vs. 2008
   
September 30,
   
2009 vs. 2008
 
   
2009
   
2008
     $       %       2009      2008      $     %  
Sales and marketing
  $ 4,675     $ 5,155     $ (480 )     (9.3 )%   $ 14,012     $ 16,502     $ (2,490 )     (15.1 )%
Percentage of revenues
    18.5 %     19.2 %                     19.4 %     21.4 %                
 
         Sales and marketing expenses declined $0.5 million, or 9%, and $2.5 million, or 15%, in the three month and nine month periods ended September 30, 2009, respectively, over the prior year periods.  The decline in both periods is the result of a reduction in headcount and headcount-related costs in our automotive e-commerce business.

    Technology
                                                 
   
Three Months Ended
   
Increase (decrease)
   
Nine Months Ended
   
Increase (decrease)
 
   
September 30,
   
2009 vs. 2008
   
September 30,
   
2009 vs. 2008
 
   
2009
   
2008
    $       %       2009       2008      $       %  
Technology
  $ 2,660     $ 2,610     $ 50       1.9 %   $ 7,066     $ 6,363     $ 703       11.0 %
Percentage of revenues
    10.5 %     9.7 %                     9.8 %     8.3 %                
 
         Technology expenses were relatively flat in the three month period ended September 30, 2009 compared to the three month period ended September 30, 2008. Technology expenses increased $0.7 million, or 11%, in the nine month period ended September 30, 2009 compared to the nine month period ended September 30, 2008 due to additional headcount and support costs to further develop, grow and maintain our websites.

 
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   General and administrative
                                                 
   
Three Months Ended
   
Increase (decrease)
   
Nine Months Ended
   
Increase (decrease)
 
   
September 30,
   
2009 vs. 2008
   
September 30,
   
2009 vs. 2008
 
   
2009
   
2008
    $       %       2009       2008      $       %  
General and administrative
  $ 3,697     $ 4,030     $ (333 )     (8.3 )%   $ 11,464     $ 12,989     $ (1,525 )     (11.7 )%
Percentage of revenues
    14.6 %     15.0 %                     15.9 %     16.9 %                
 
General and administrative expenses decreased $0.3 million, or 8%, and $1.5 million, or 12%, in the three and nine month periods ended September 30, 2009, respectively, over the prior year periods. The declines are due to lower bad debt expense resulting from strong collection efforts and reduced days sales outstanding, and reductions in headcount related expenses.

    Depreciation and amortization
                                                 
   
Three Months Ended
   
Increase (decrease)
   
Nine Months Ended
   
Increase (decrease)
 
   
September 30,
   
2009 vs. 2008
   
September 30,
   
2009 vs. 2008
 
   
2009
   
2008
    $       %       2009       2008      $       %  
Depreciation and amortization
                                                       
    of intangibles
  $ 4,194     $ 3,675     $ 519       14.1 %   $ 12,020     $ 9,792     $ 2,228       22.8 %
Percentage of revenues
    16.6 %     13.7 %                     16.7 %     12.7 %                
 
Depreciation and amortization expenses increased $0.5 million, or 14%, and $2.2 million, or 23%, in the three and nine month periods, ended September 30, 2009, respectively, over the prior year periods, reflecting the increased value of intangible assets acquired over the past 12 months, as well as additional capitalized software costs.
 
Investment and other income
                                               
   
Three Months Ended
   
Increase (decrease)
   
Nine Months Ended
   
Increase (decrease)
 
   
September 30,
   
2009 vs. 2008
   
September 30,
   
2009 vs. 2008
 
   
2009
   
2008
     $     %       2009     2008     $       %  
Investment and other (expense) income
  $ (8 )   $ (1,137 )   $ (1,129   (99.3 )%   $ (85 )   $ 3     $ (88 )  
nm
 
Percentage of revenues
    -       (4.2 )%                   (0.1 )%     -                  
 
Investment and other expense decreased $1.1 million in the three month period ended September 30, 2009 over the prior year period as the 2008 period included losses from foreign currency translation and an impairment charge related to one of our investments.  Investment and other income declined $0.1 million during the nine month period ended September 30, 2009, over the prior year period primarily reflecting decreased interest income. Lower interest rates on our investment portfolio are due to the current economic environment and our short-term investment horizon.

    Provision for income taxes
                                               
   
Three Months Ended
   
Increase (decrease)
   
Nine Months Ended
   
Increase (decrease)
 
   
September 30,
   
2009 vs. 2008
   
September 30,
   
2009 vs. 2008
 
   
2009
   
2008
  $     %    2009      2008      $   %  
Provision (benefit) from income taxes
  $ 2,323     $ 1,026     $ 1,297       126.4 %   $ 5,669     $ 5,307     $ 362   6.8 %
Percentage of revenues
    9.2 %     3.8 %                     7.9 %     6.9 %            
 
Our provision for income taxes increased $1.3 million in the three month period ended September 30, 2009 over the prior year period, a result of higher pre-tax income. The effective tax rates for the three and nine month periods ended September 30, 2009 were 41.3%, and 41.2%, respectively. The effective tax rates for the three and nine month periods ended September 30, 2008 were 28.6% and 38.4%, respectively. Our net operating losses (NOLs) currently provide an offset to our federal and state income tax liabilities. The state of California prohibits the use of NOLs for fiscal years 2008 and 2009.

 
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Adjusted EBITDA

We employ Adjusted EBITDA, defined as earnings before investment and other income, income taxes, depreciation and amortization and stock-based compensation, for several purposes, including as a measure of our operating performance. We use Adjusted EBITDA because it is an important indicator of our operating performance as it provides information related to the Company’s ability to maintain cash flows for acquisitions, capital expenditures and working capital requirements.

A reconciliation of Adjusted EBITDA to net income, the most directly comparable measure under accounting principles generally accepted in the United States, for each of the fiscal periods indicated, is as follows (in thousands):

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(unaudited)
 
Net income
  $ 3,295     $ 2,562     $ 8,103     $ 8,505  
Provision for income taxes
    2,323       1,026       5,669       5,307  
Depreciation and amortization
    4,194       3,675       12,020       9,792  
Stock-based compensation
    874       665       2,418       1,872  
Investment and other (income) expense
    8       1,137       85       (3 )
                                 
Adjusted EBITDA
  $ 10,694     $ 9,065     $ 28,295     $ 25,473  
 
Liquidity and Capital Resources

We have financed our operations primarily through cash provided by our operating activities and private and public sales of our common stock. At September 30, 2009, we had $63.2 million in cash, cash equivalents and available-for-sale investments; these investments are comprised mainly of U.S. government and debt securities.

Our principal sources of liquidity are cash, cash equivalents and available-for-sale investments, as well as the cash flow that we generate from our operations. We believe that our existing cash, cash equivalents, available-for-sale investments, cash generated from operations, and the net proceeds from the initial public offering of our Class A common stock will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months.

On October 7, 2008, we entered into a Loan and Security Agreement with Silicon Valley Bank pursuant to which we will have the right to borrow up to a $35 million revolving line of credit that will mature on October 7, 2012.  The interest to be paid on the used portion of the credit facility will be based upon LIBOR or the prime rate plus a spread based on the ratio of debt to Adjusted EBITDA. In addition, the obligations under the Loan and Security Agreement are secured by a lien on substantially all of the assets of the Company.  We have no debt outstanding under this revolving line of credit.

Operating Activities

We generated $27.1 million of net cash from operating activities for the nine months ended September 30, 2009, compared to $23.3 million for the same period in 2008.

Acquisitions Activities

During the nine months ended September 30, 2009 cash used in acquisition-related activities, including acquisition and earnout payments, totaled $15.3 million.  Eleven website-related acquisitions were completed during the nine months ended September 30, 2009 for an aggregate purchase price of $11.8 million. The preliminary amounts of goodwill recognized for these transactions amounted to $7.7 million, and the preliminary amounts of intangible assets, consisting of acquired technology, customer relationships, and domain names and trademarks, amounted to $4.1 million.

During the nine months ended September 30, 2008 we completed 25 website-related acquisitions in the Consumer Internet segment for a total aggregate purchase price of $59.9 million. The goodwill recognized in those transactions amounted to $45.4 million and intangible assets amounted to $14.5 million.

 
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        We have entered into earnout agreements as part of the consideration for certain acquisitions.  We account for earnout consideration in accordance with ASC 805 (previously SFAS No.141R, Business Combinations), as an addition to goodwill and accrued expenses at the present value of all future earnouts at the acquisition date for acquisitions occurring in fiscal years beginning after December 15, 2008.  Earnouts occurring from acquisitions prior to December 31, 2008 are accounted for under EITF 95-8, Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Combination as an addition to compensation expense or goodwill in the period earned. As of September 30, 2009, we paid earnouts totaling $3.7 million and anticipate that the most probable earnout amounts to be paid for the remainder of 2009 will be zero. We cannot reasonably estimate maximum earnout payments as a significant number of agreements do not contain maximum payout clauses. Earnouts related to each website business are contingent upon achievement of agreed upon performance milestones such as future web site traffic, page views, revenue growth and operating income.  A significant portion of earnout payments is triggered upon achieving significant revenue and operating income milestones and is specifically designed such that the additional cash flow outweighs the liquidity impact of the earnout payments. As a result, we do not believe that future earnout payments will have a significant impact on our liquidity and cash position.
 
        Contingencies
 
         From time to time, we have been party to various litigation and administrative proceedings relating to claims arising from operations in the normal course of business. Based on the information presently available, including discussion with counsel, management believes that resolution of these matters will not have a material adverse effect on our business, consolidated results of operations, financial condition, or cash flows; see Part II, Item 1, “Legal Proceedings.”

Off-Balance Sheet Arrangements
 
    As of September 30, 2009, we did not have any off-balance sheet arrangements.

Recent Accounting Pronouncements
 
         In June 2009, the FASB issued ASC 855 (previously SFAS No. 165, Subsequent Events), which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date, but before the financial statements are issued or available to be issued. It is effective for interim and annual periods ending after June 15, 2009. There was no material impact upon the adoption of this standard on our consolidated financial statements.
 
         In June 2009, the FASB issued ASC 105 (previously SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ("GAAP") - a replacement of FASB Statement No. 162), which will become the source of authoritative accounting principles generally accepted in the United States recognized by the FASB to be applied to nongovernmental entities. It is effective for financial statements issued for interim and annual p