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EX-31.2 - EX-31.2 - Vocus, Inc.w77606exv31w2.htm
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2009
     
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 000-51644
 
VOCUS, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
     
Delaware
  58-1806705
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
 
4296 Forbes Boulevard
Lanham, Maryland 20706
(301) 459-2590
(Address including zip code, and telephone number, including area code, of principal executive offices)
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Securities registered pursuant to Section 12(b) of the Act:
 
Common Stock, par value $.01 per share
 
(Title of Class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
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 (the “Exchange Act”) 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 þ     No o
 
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer o
  Accelerated filer þ   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ
 
The aggregate market value of the common stock held by nonaffiliates of the registrant (17,461,171 shares) based on the $19.78 closing price of the registrant’s common stock as reported on the NASDAQ Global Market on June 30, 2009, was approximately $345,381,962. For purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.
 
As of February 26, 2010, there were 19,378,515 outstanding shares of the registrant’s common stock.
 
Documents Incorporated by Reference
 
Portions of the registrant’s definitive proxy statement for the 2010 Annual Meeting of Stockholders, to be filed within 120 days after the end of the fiscal year covered by this Form 10-K, are incorporated by reference into Part III of this Form 10-K.
 


 

 
TABLE OF CONTENTS
 
                 
        Page
 
      Business     3  
      Risk Factors     13  
      Unresolved Staff Comments     25  
      Properties     25  
      Legal Proceedings     25  
      Reserved     25  
 
PART II
      Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     26  
      Selected Financial Data     29  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     31  
      Quantitative and Qualitative Disclosures About Market Risk     38  
      Financial Statements and Supplementary Data     39  
      Changes In and Disagreements With Accountants on Accounting and Financial Disclosure     39  
      Controls and Procedures     39  
      Other Information     41  
 
PART III
      Directors, Executive Officers and Corporate Governance     41  
      Executive Compensation     41  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     41  
      Certain Relationships and Related Transactions, and Director Independence     41  
      Principal Accountant Fees and Services     41  
 
PART IV
      Exhibits and Financial Statement Schedules     41  


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CAUTIONARY NOTES REGARDING FORWARD-LOOKING STATEMENTS
 
This report on Form 10-K contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to:
 
  •  our plans to develop and market new products and the timing of these development programs;
 
  •  our estimates regarding our capital requirements and our needs for additional financing;
 
  •  our estimates of expenses and future revenues and profitability;
 
  •  our estimates of the size of the markets for our solutions;
 
  •  the rate and degree of market acceptance of our solutions; and
 
  •  the success of other competing technologies that may become available.
 
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,” “potential” and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in greater detail under the heading “Risk Factors” in Item 1A. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we assume no obligation to update any forward-looking statements after the date of this report.
 
This report also contains estimates made by independent parties and by us relating to market size and growth and other industry data. These estimates involve a number of assumptions and limitations and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.


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PART I
 
Item 1.   Business
 
Overview
 
We are a leading provider of on-demand software for public relations management. In an age of real-time communication, with an increasing number of media outlets, a rapidly growing volume of news and the emergence of blogs and other social media, traditional approaches to public relations, or PR, are becoming outmoded. Our web-based software suite helps organizations of all sizes to fundamentally change the way they communicate with both the media and the public, optimizing their public relations and increasing their ability to measure its impact.
 
Our on-demand software addresses the critical functions of public relations including media relations, news distribution and news monitoring. By automating and integrating essential elements of PR functions, our solutions help organizations communicate directly with key reporters and with the public, identify and analyze relevant news stories and manage relationships with the media and other key stakeholders.
 
As a part of our solutions, we provide a proprietary information database of approximately one million journalists, analysts, media outlets, publicity opportunities and other relevant data. Our database contains extensive information about the media, including in-depth journalist profiles, contact schedules, podcast interviews, pitching preferences and other relevant information compiled by our dedicated media research team. Our database is integrated with our suite of on-demand modules that together address the communications life-cycle from identifying key contacts, to distributing information, to closing the loop with digitized feedback and management analytics.
 
We deliver our solutions over the Internet using a secure, scalable application and system architecture, which allows our customers to eliminate expensive up-front hardware and software costs and to quickly deploy and adopt our software. We were an early pioneer in hosted, multi-tenant, on-demand software, launching our first version in 1999. Our on-demand software is offered primarily as an annual subscription, and our press release distribution service is offered primarily on a per-transaction basis. As of December 31, 2009 we had 4,438 active subscription customers representing organizations of all sizes across a wide variety of industries. Our solutions are currently available in seven languages and are in use by customers around the world.
 
Our Company
 
We were initially formed in 1988 as First Data Software Publishing, Inc., a Florida corporation, and in 1992 we began selling desktop software for government relations. In 1999, we reincorporated as a Delaware corporation.
 
Industry Background
 
Public Relations
 
The process of managing relationships and communications with journalists, analysts and the public is central to an organization’s reputation, profitability and, ultimately, shareholder value. As organizations recognize the growing importance of effective PR to their success, they increasingly rely on public relations to manage and analyze critical information and to deliver quick and consistent communications. Public relations professionals handle organizational functions such as media, government, consumer, industry and community relations. Every organization, large and small, engages in public relations, whether as an organized department, a single employee’s responsibility or simply a result of public interactions by its executives.
 
Although the most basic elements of PR are practiced widely across organizations of all types, sizes and geographies, the specific objectives and complexity of a PR practice will often vary based on the size of an organization and its PR department.
 
For small organizations, traditional PR has often not been an option, as the cost of a single press release over a newswire is cost prohibitive. In addition, a small business owner often has no staff to focus on marketing or PR. For the most part, small businesses have historically relied on word-of-mouth to help grow their business and have often limited their marketing investment to more localized advertising channels such as phone directories or local


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newspapers. With the advent of the internet and the wide adoption of search engines, small businesses are better positioned to leverage PR to increase their visibility and attract new customers.
 
For mid-sized organizations, traditional PR is often expensive and time consuming. These organizations are typically faced with a decision to either use external consulting agencies, or to commit internal staff and resources, both of which often exceed available budgets. In addition, PR responsibilities for these resources are often assigned to only one or two dedicated staff or, in many cases, shared across non-dedicated staff with other full-time responsibilities. The objective for mid-sized organizations is typically to leverage limited resources in order to deliver the PR capabilities commonly found in larger organizations.
 
Larger organizations are typically well staffed and have dedicated budgets and resources. These organizations are faced with the challenges of managing large amounts of information, delivering consistent and well-executed communications, collaborating among large or geographically-dispersed teams and analyzing and reporting on the effectiveness of their PR. The objective for large organizations is typically to maximize effectiveness and ensure consistency of message, while delivering measurable results and improved efficiency.
 
Trends in business communications and the media are directly impacting the practice of PR. Technologies including the Internet, cable, satellite and wireless communications allow commercial and public media to access audiences almost instantaneously. In addition, these technologies are leading to a rapid expansion of media outlets, media channels and news sources including the rapid emergence of new social media channels such as blogs, twitter and online communities. As a result, organizations now face broader and more diverse audiences who are informed in real-time by these media, and also face a growing volume of critical business information that needs to be identified, analyzed and managed. An organization can no longer rely on a few relationships with key journalists to achieve PR objectives. As these trends continue, we believe that organizations will face greater challenges to provide a consistent corporate message, gain public support, respond to crisis situations and achieve their public relations goals.
 
Outside of traditional PR agencies, the public relations market is generally underserved, with few solutions to address the PR business process in a comprehensive, integrated and cost effective manner. A number of vendors offer one or more software products that each address a single problem or process within PR, such as contact management, news monitoring, distribution or analytics. Other than these discrete, stand-alone solutions, PR processes are generally performed by internal departments or designated staff either manually or with generic desktop software. In addition, while organizations may purchase a variety of these stand-alone products and services, the resulting combination is usually more expensive and less efficient than an integrated software suite that addresses the complete PR life-cycle.
 
Public Relations and the On-Demand Software Market
 
Information technology has created opportunities to deliver software applications directly to users over the Internet in a subscription-based, “on-demand” business model. This model is made possible by the proliferation of high-speed, broadband Internet connectivity, open standards for application integration and advances in network availability and security. On-demand software is generally delivered over the Internet via a secure, multi-tenant, scalable application and system architecture, which allows the provider to concurrently serve a large number of customers and to efficiently distribute the workload across a network of servers. For the user, on-demand software eliminates the need for expensive hardware, software and internal information technology, or IT, support. In addition, the hosted architecture helps ensure that the software and vendor-supplied content is kept current and secure without user involvement. Additional benefits include rapid deployment and training for new applications, resulting in faster product adoption and increased productivity. This typically results in a lower total cost of ownership and an increased return on investment. The on-demand model also provides operational efficiencies for the software provider in the areas of development and customer support. Traditional enterprise software vendors must develop, maintain and support multiple versions of their software on multiple hardware, operating system and database platforms. On-demand software vendors, by contrast, generally support and maintain a single version of software across all customers that is developed, maintained and supported on a single technology platform. This typically results in lower development and support costs, and allows the vendor to more rapidly develop and release new versions of the software and more efficiently support existing customers.


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The characteristics of the PR market make it well-suited for the on-demand software business model. As news distribution and communication services continue to move from manual, paper-based systems to automated digital services, the Internet and the on-demand software model provide an efficient and collaborative platform for PR professionals to access, manage and share information and resources. The simple user interface and rapid deployment of web-based software make it ideally suited for users with little or no technology background. On-demand software provides a dedicated, modern and sophisticated technology infrastructure to PR departments that would otherwise typically receive limited internal IT resources. Finally, in contrast to sensitive customer or financial data, organizations are generally comfortable with PR content residing on an external hosted platform. Currently, the customer-specific information we store includes PR collateral pieces, notes regarding customers’ contacts with journalists and media outlets, journalist contact information and similar data. We protect our customers’ information by requiring the use of user identifications and passwords to access our on-demand software.
 
Our Solutions
 
We are a leading provider of on-demand software for public relations management. Our web-based software suite helps organizations of all sizes manage local and global relationships and communications with both the media and the public. Our integrated, on-demand software modules provide extensive features and broad functionality that address the critical functions of public relations including media relations, news distribution and news monitoring. Specific modules include contact management, collateral management, project management, newsrooms, PRWeb online newswire, email campaigns, analytics & measurement and news on-demand. By automating and integrating essential elements of PR operations, our solutions allow our customers to improve effectiveness, reduce costs and measure results. We deliver our solutions to customers through a suite of on-demand applications that reduces the cost and risk associated with traditional enterprise software deployments. We believe, based upon our market research and analysis, that the use of on-demand software helps customers reduce risk and increase the predictability of software management costs, as compared to traditional enterprise software.
 
As a part of our solution, we provide a proprietary information database of approximately one million journalists, analysts, media outlets, publicity opportunities and other relevant data. Our database contains extensive information about the media, including in-depth journalist profiles, contact schedules, podcast interviews, pitching preferences and other relevant information compiled by our dedicated media research team. Our database is integrated with our suite of on-demand software modules that together enable our customers to address the communications life-cycle, from identifying key contacts, to distributing information, to closing the loop with digitized feedback and management analytics. We have developed significant domain expertise and have designed on-demand software solutions and best practices tailored specifically for public relations. As a result, our on-demand offerings meet the PR needs of a broad range of organizations regardless of their size, geography, industry or type.
 
Our comprehensive suite of integrated, on-demand software modules provides the following key benefits:
 
  •  Improved effectiveness of public relations.  Our on-demand software helps organizations maximize effectiveness through the automation and integration of disconnected processes. Our solutions help organizations manage large amounts of information, deliver consistent and well-executed communications, collaborate among large or geographically dispersed teams and analyze and report on the effectiveness of their PR.
 
  •  Increased productivity of PR functions.  Our on-demand software incorporates features and best practices that automate PR functions to reduce or eliminate manual, paper-based and discrete business activities. Our solutions allow customers to maximize the investment in their PR resources and often lead to a redeployment of PR professionals from repetitive, low-value tasks to high-value strategic initiatives. In addition, we provide capabilities that help our customers significantly reduce the time it takes to monitor, analyze and summarize large volumes of news and other information.
 
  •  Enhanced collaboration.  The growth of global brands and large or geographically dispersed PR teams has increased the need for organizations to quickly and easily share critical business information and plan well coordinated communications. Our web-based solutions provide shared, real-time access to a central repository of information related to media contacts, relationship history, PR activities, news, documents


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  and reporting. We believe that by improving the management, control, retention and sharing of this information, our solutions enable companies to deliver more effective and consistent communications.
 
  •  Lower total cost of ownership.  Our on-demand delivery model enables our customers to achieve significant savings relative to a traditional enterprise software model. Our customers do not spend time installing or maintaining the servers, network and storage equipment, security products, or other infrastructure hardware and software necessary to ensure a scalable and reliable service. In addition, because all upgrades are implemented on our servers the product enhancements automatically become part of our offering, allowing customers to immediately benefit from the upgrade.
 
  •  Rapid deployment and scalability.  Our on-demand software can be deployed rapidly and provisioned easily, without our customers having to make large and risky upfront investments in software, hardware, implementation services and dedicated IT staff. The delivery platform for our software allows it to scale to suit customers’ needs. Additional users with defined privileges can be provisioned with minimal implementation time and new modules, such as analytics & measurement, can be deployed quickly and transparently to existing customers.
 
Our Strategy
 
Our objective is to be the global leader of on-demand software for public relations management. Key elements of our strategy include:
 
  •  Expand our direct sales force.  We believe that the public relations market represents a significant opportunity that will allow us to continue our growth for the foreseeable future. We expect organizations will continue to spend and commit substantial resources on the processes that our solutions automate, and that competition is fragmented and specialized. We believe that our focus on producing a suite of integrated applications for this market will allow us to capitalize on this opportunity. As a result, we intend to expand our direct sales force to increase our coverage and penetration in the PR market.
 
  •  Expand international market presence.  We also believe that the public relations market represents a significant global opportunity. We intend to expand our international business, which accounted for approximately 9% of our 2009 revenues. To suit individual markets, our software is currently available in seven languages. We expect to deploy our solutions in additional languages in the future.
 
  •  Penetrate the small business market.  We believe the small business market represents a significant opportunity to sell our solutions to over 5 million prospect organizations. We expect these organizations will utilize our online news distribution services as a means to communicate directly with customers and to enhance their marketing strategies. We intend to expand our solutions and our direct sales force to increase our coverage and penetration in the small business market.
 
  •  Selectively pursue strategic acquisitions.  The fragmented nature of our market provides opportunities for selective acquisitions. We have acquired and integrated several private companies to date, and we will continue to identify and may acquire companies which would either expand our solutions’ functionality, provide access to new customers or markets, or both.
 
Our Products
 
On-Demand Public Relations Management
 
Our integrated, on-demand software modules provide extensive features and broad functionality that address the critical functions of public relations. By automating and integrating essential elements of PR functions, our solutions help organizations manage large amounts of information, deliver consistent and well-executed communications, collaborate among large or geographically dispersed teams and analyze and report on the effectiveness of their public relations.
 


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(VOCUS LOGO)
 
We deliver our solutions over the Internet using a secure, scalable application and system architecture, which allows our customers to eliminate expensive up-front hardware and software costs and to quickly deploy and adopt our on-demand software.
 
As a part of our solution, we provide a proprietary information database of approximately one million journalists, analysts, media outlets, publicity opportunities and relevant data. Our database contains extensive information about the media, including in-depth journalist profiles, contact schedules, podcast interviews, pitching preferences and other relevant information compiled by our dedicated media research team. Our database is integrated with our suite of on-demand software modules that together enable our customers to address the communications life-cycle, from identifying key contacts, to distributing information, to closing the loop with digitized feedback and management analytics. Our on-demand software for public relations management includes the following key modules:
 
  •  Contact Management.  Allows customers easy access to our database of journalists, media outlets and publicity opportunities. Customers can quickly create targeted lists, send messages by email, fax or mail and track meetings, telephone calls and other important activities.
 
  •  Collateral Management.  Provides a central and easily accessible repository in which to store all PR information that needs to be shared internally or externally throughout the organization. Can include documents or files of any type, such as media kits, photographs, videos, executive biographies, annual reports and other PR materials.
 
  •  Project Management.  Helps organize PR projects, including press releases, speaking engagements, or publicity events. A graphical dashboard shows the status of all open projects, allowing users to check milestones, reminders, allocated and used resources, team assignments and other tasks from the planning stage through execution and follow-up reporting.
 
  •  Newsrooms.  Provides journalists, analysts, public officials and other key audiences 24/7 access to an organization’s breaking news, press releases, digital collateral, grassroots advocacy tools and other critical public information. Matches the look and feel of the organization’s website and allows PR professionals to quickly and easily update content when and where they want, without the need for IT support.

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  •  PRWeb Online Newswire.  Allows organizations to increase their online visibility by distributing their news directly to online news sites such as Yahoo! News and directly to the public through millions of daily RSS feeds and other social media tools. PRWeb releases are optimized for search engines such as Google to help ensure that press releases are prominently displayed on search results and drive traffic to an organization’s website.
 
  •  Email Campaigns.  Enables organizations to deliver interactive communications that provide online access to related collateral material and to track and measure response rates and other campaign metrics. Provides a simple process for delivering information to journalists, analysts, legislators and other key audiences. Also provides valuable metrics on campaign initiatives, including emails opened, documents downloaded and options selected.
 
  •  Analytics & Measurement.  Automatically transforms relevant data about news coverage, PR activities and online newsroom statistics into valuable insight about a PR department’s programs and results. Provides executive-level dashboards, allowing an organization’s senior management to better understand the impact of relevant news, monitor the competitive landscape and recognize trends emerging in the media.
 
  •  News On-Demand.  Continuously monitors over 40,000 news sources, including print, broadcast, Internet news sites and key blogs to identify and deliver relevant news coverage to customers based on their individual criteria. News clippings are stored in a searchable database, for easy viewing, printing and sharing.
 
Due to our flexible architecture and modular design, we are able to easily combine these functional capabilities into pre-packaged editions with optional add-on modules, to meet the needs of a wide range of organizations, regardless of their size or specific PR management objectives. Currently we offer our on-demand software suite in the following pre-packaged editions:
 
  •  Small Business Edition.  Designed primarily for small organizations and includes online press release distribution and basic news monitoring capabilities.
 
  •  Standard Edition.  Designed primarily for small and mid-sized organizations and includes contact management and basic reporting capabilities.
 
  •  Professional Edition.  Designed primarily for mid-sized and large organizations and includes contact management, news management and expanded reporting capabilities.
 
  •  Enterprise Edition.  Designed primarily for large organizations. Enterprise Edition is our most fully featured edition and includes all of the functionality of the Professional Edition, along with project management, collateral management, comprehensive reporting and configuration capabilities.
 
  •  Government Relations Edition.  Designed to meet an organization’s government relations needs, including communications with public officials and grassroots advocates, compliance reporting and issues and legislation management.
 
Additional functional capabilities are offered through a variety of add-on modules which include newsrooms, PRWeb online newswire, email campaigns, analytics & measurement and news on-demand.
 
Technology, Development and Operations
 
Technology
 
We were an early pioneer in hosted, multi-tenant, on-demand software, launching our first version in 1999. Our on-demand software is built on a single code base that leverages a highly scalable, multi-tenant application written in Visual Basic and C# for the .NET framework. We use commercially available hardware and a combination of proprietary, open source and commercially available software, including Microsoft SQL Server, Microsoft Windows, MySQL and Linux. We have developed proprietary core services such as user session management and full text indexing that are tuned to our specific architecture and environment, allowing us to continually scale


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our service. We have a seamless environment, in which a user is not bound to a single server but can be routed in the most optimal way to any number of servers.
 
Our on-demand software manages all customers as logically separate tenants in central applications and databases. As a result, we are able to spread the cost of delivering our service across our user base. In addition, because we do not have to manage thousands of distinct applications with their own business logic and database schemas, we believe that we can scale our business faster than traditional software vendors, even those that have modified their products to be accessible over the Internet.
 
Every page of our on-demand software is dynamically rendered for each specific user, including a choice of seven languages. Our customers access our solutions through any web browser without installing any software or downloading Java applets, Microsoft ActiveX, or .NET controls. Performance, functional depth and usability of our solutions drive our technology decisions and product direction.
 
Development
 
Our research and development efforts are focused on improving and enhancing our existing solutions as well as developing new features and functionality. Because of our common, multi-tenant architecture, we are able to provide all of our customers with a single version of our solutions, which allows us to maintain relatively low research and development expenses, as compared to traditional enterprise software business models which support multiple versions.
 
Site Operations
 
We serve all of our customers from two third-party facilities located in Virginia and Washington. These facilities provide a combination of security personnel, photo ID/access cards, biometric hand scanners and sophisticated fire systems. The overall security of each data center (inside and outside) and network operations center are monitored by digital video surveillance cameras 24 hours a day, seven days a week. Additionally, redundant electrical generators and environmental control devices are used to keep servers up and running. We own or lease and operate all of the hardware on which our applications run in the third-party facilities.
 
We continuously monitor the performance of our service. Our site operations team provides all system management, maintenance, monitoring and back-up. We use custom, proprietary tools as well as commercially available tools to monitor our solutions. We run tests in one minute intervals to ensure adequate response from all of our sites. We also monitor site availability and latency from over 15 geographic points around the world in five minute intervals.
 
To facilitate loss recovery, we operate a multi-tiered system configuration with load balanced web server pools, standby database servers and fault tolerant storage devices. Databases are backed up every five minutes to a hot standby database and server, which are designed to provide near real-time fail-over service in the event of a malfunction with a primary database or server. Full backups of all databases take place nightly and are archived to tape. These tapes are rotated off-site two times per week to a separate third-party managed facility. We also maintain a fully redundant site for our Virginia facility, located in Baltimore, Maryland which would serve as our primary site in the event that a disaster was to render one of the third-party sites inoperable.
 
Customer Support
 
We believe that superior customer support is critical to retaining and expanding our customer base. Our customer support group is responsible for new customer implementations, training and general help desk services, including identifying, analyzing and solving any problems or issues. Support services are available to customers on-site, by telephone, via email and via live chat over the Internet. We also offer basic and advanced training classes either on-site or via the Internet through live or pre-recorded web-based classes. Customer support is available during standard business hours to customers that subscribe to our on-demand software. We also offer 24/7 support to subscription customers at an additional charge. We have support personnel in our London, England office to handle support requests from our international customers. Such support is available during standard international business hours.


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In addition, we offer 24/7 editorial support to users of our online newswire. We also offer, for an additional charge, premium editorial services, such as editing and rewriting of press releases to help optimize distribution.
 
Sales and Marketing
 
We sell our solutions through our direct sales organization, indirect sales channels and the Internet. Our direct sales organization is separated into new customer and existing customer base sales groups. In our new customer sales group, we employ telesales personnel to make initial calls to potential customers and to qualify customer leads. We employ inside sales and field sales personnel to close sales with customers. Our existing customer base sales group focuses on renewing customer relationships and expanding those relationships by selling additional users and modules to our customers. We currently have regional field operations offices in the United States, including Maryland and Virginia, and in England and Germany.
 
We also have resellers in certain countries in Europe and Asia where we do not have a direct selling presence. International revenue was approximately 9%, 10% and 9% of our total revenue in 2007, 2008 and 2009, respectively; however, we expect international markets to provide increased opportunities for our solution offerings in the future. We have relationships with indirect channel distributors, including our resellers. Revenue from our indirect channels was approximately 4% of our total revenue in 2009.
 
We also use the Internet as a channel to sell our press release distribution services. Through our website, we attract potential customers and convert them to ongoing paying customers. These services consist of individual press releases submitted primarily by small and mid-size organizations located in the United States. We may create additional websites to sell similar services to organizations in other countries.
 
Our marketing strategy is to generate qualified sales leads, build our brand and create market awareness of Vocus as a leading provider of on-demand software for public relations management. Our marketing programs include search engine marketing, email campaigns, direct mail, issuing press releases on a regular basis, using our website to provide product and company information and launching events to publicize our solutions to existing customers and prospects. We also conduct seminars, participate in trade shows and industry conferences, host an annual user conference, publish white papers relating to PR issues and develop customer reference programs, such as customer case studies.
 
Our Customers
 
As of December 31, 2009, we had 4,438 active subscription customers in various industries, including financial and insurance, technology, healthcare and pharmaceuticals and retail and consumer products, as well as government agencies, not-for-profit organizations and educational institutions. No single end-user customer accounted for more than 1% of our revenue in 2009.
 
Competition
 
The public relations market is fragmented, competitive and rapidly evolving, and there are limited barriers to entry to some segments of this market. Within this segmentation, vendors are offering solutions through either on-demand or traditional on-premise delivery methods. We expect to encounter new and evolving competition as this market consolidates and matures and as organizations become more aware of the advantages and efficiencies that can be attained from the use of specialized software and other technology solutions. Currently, we primarily face competition from the following sources:
 
  •  generic desktop software and other commercially available software not specifically designed for PR;
 
  •  PR solution providers offering products specifically designed for PR;
 
  •  outsourced PR service providers;
 
  •  custom-developed solutions; and
 
  •  press release distribution providers.


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We compete with generic desktop software tools such as Microsoft Office or ACT, as well as other commercially available software solutions not specifically designed for PR. While these solutions have some application to PR, they typically lack the specialized content and specific workflow necessary to meet the complex needs of the PR market.
 
We compete with PR solution providers such as Cision, BurrellesLuce, Business Wire and Factiva. These vendors typically provide one or more products that each address a single problem or process within PR. We believe we are able to compete successfully with these vendors due to our comprehensive and integrated offerings and our secure, scalable application and system architecture. In particular, we believe PR departments can, in general, more readily automate and integrate many manual, paper-based and discrete business activities with our on-demand software than with our competitors’ offerings, thereby improving effectiveness, increasing productivity and lowering total cost of ownership.
 
We also compete to a lesser extent with providers of outsourced PR services, including PR agencies and other outsourced service providers. While some customers consider outsourcing services and in-house software to be competing alternatives, many customers view these as being complementary options and will often use both. In those cases where customers wish to select a single option, we believe we compete successfully against outsourced service providers by providing an in-house, automated solution that offers customers a more cost-effective and timely approach to managing their PR efforts.
 
We compete with custom-developed solutions created either internally by the organization or outside vendors. However, building a custom solution often requires extensive financial and technical resources that may not be available or cost-effective for the public relations department. In addition, in many cases the customer’s legacy database and software system were not designed to support the increasingly complex and dynamic needs of today’s PR department.
 
We compete with press release distribution providers such as Business Wire and PR Newswire. These providers offer solutions that are generally more expensive and focused on distributing news to traditional media, such as journalists and reporters. In contrast, our online press release distribution services are less expensive and are focused on distributing news directly to consumers through the Internet. These providers may offer solutions that will compete directly with our press release distribution services by expanding their online distribution services.
 
We believe the principal factors that generally determine a company’s competitive advantage in the public relations market include the following:
 
  •  broad product functionality and depth of integration;
 
  •  ease of use;
 
  •  low total cost of ownership and easily demonstrable cost-effective benefits for customers;
 
  •  flexibility and configurability to meet complex customer requirements;
 
  •  rapid deployment and adoption;
 
  •  speed, reliability and functionality;
 
  •  system performance, security, scalability and reliability;
 
  •  ease of integration with existing applications and data;
 
  •  availability and quality of implementation, training and help-desk services; and
 
  •  competitive sales and marketing capabilities.
 
Intellectual Property and Proprietary Content
 
We rely on a combination of trademark, copyright and trade secret laws in the United States and other jurisdictions as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brand. We have no issued patents; however, we have one pending patent application. We also enter into


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confidentiality and proprietary rights agreements with our employees, consultants and other third parties and control access to software, documentation and other proprietary information.
 
We pursue the registration of our trademarks in the United States and in other countries, although we have not secured registration of all of our marks. We have registered the mark Vocus in the United States, European Union, Australia, Singapore, China and Thailand and have an application pending to register the Vocus mark Hong Kong. We have registered the mark PRWeb in the United States, Singapore and China and have applications pending to register the PRWeb mark in the European Union, Hong Kong and Thailand.
 
We currently license content included in our on-demand software from several providers pursuant to data reseller, data distribution and license agreements with these providers. These agreements provide us with content such as news coverage from print and Internet news sites, as well as contact information for journalists, analysts, public officials, media outlets and publicity opportunities. The licenses for this content are non-exclusive. The agreements vary in length from one to three years, and generally renew automatically subject to certain cancellation provisions available to the parties. Fees for the content provided are generally either fixed amounts per subscriber or based upon the number of concurrent users at a subscriber. Such fees are generally paid quarterly or monthly. During 2005, we developed our own United States content which replaced a significant portion of our acquired third-party content and began providing our internally-developed content to our customers. In 2008, we developed and provided to our customers our own content for the United Kingdom and Ireland. We do not believe that any of our content providers are single source suppliers, the loss of whom would substantially affect our business.
 
If a claim is asserted that we have infringed the intellectual property of a third party, we may be required to seek licenses to that technology. In addition, we license third-party technologies that are incorporated into some elements of our services. Licenses from third parties may not continue to be available to us at a reasonable cost, or at all. Additionally, the steps we have taken to protect our intellectual property rights may not be adequate. Third parties may infringe or misappropriate our proprietary rights. Competitors may also independently develop technologies that are substantially equivalent or superior to the technologies we employ in our services.
 
Employees
 
As of December 31, 2009, we had 518 full-time and part-time employees. Our employees are not covered under any collective bargaining agreement, and we have never experienced a work stoppage. We believe we have good relations with our employees.
 
Executive Officers and Key Employees
 
Our executive officers and key employees and their respective ages and positions as of February 26, 2010 are as follows:
 
             
Name
 
Age
 
Position
 
Richard Rudman*
    48     Chief Executive Officer, President and Chairman
Stephen Vintz*
    41     Chief Financial Officer, Treasurer and Secretary
William Wagner*
    42     Chief Marketing Officer
Norman Weissberg*
    48     Senior Vice President, North American Sales
Darren Stewart
    41     Senior Vice President, Customer Services
Mark Heys
    38     Chief Technology Officer
 
 
* Denotes a named executive officer
 
Richard Rudman co-founded Vocus and has served as our Chief Executive Officer, President and Chairman since 1992. From 1986 through 1992, Mr. Rudman served as a senior executive at Dataway Corporation, a software development company. From 1984 through 1986, Mr. Rudman served as an accountant and systems analyst at Barlow Corporation, a privately held real estate development and management company. From 1979 through 1983, Mr. Rudman served in the United States Air Force. Mr. Rudman serves on the board of directors of the Baltimore Symphony Orchestra, a non-profit organization. Mr. Rudman holds a B.S. degree in accounting from the University of Maryland and is a Certified Public Accountant.


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Stephen Vintz has served as our Chief Financial Officer and Treasurer since January 2001. From November 1996 to January 2001, Mr. Vintz was Vice President of Strategic Planning and Analysis at Snyder Communications, Inc., a marketing services company. Prior to November 1996, Mr. Vintz was a manager at Ernst & Young LLP. Mr. Vintz serves on the board of directors of Fishbowl, Inc., a privately held software company. Mr. Vintz holds a B.B.A. degree in accounting from Loyola College of Maryland and is a Certified Public Accountant.
 
William Wagner has served as our Chief Marketing Officer since July 2006. From January 2000 to June 2006, Mr. Wagner served as Chief Marketing Officer at Fiberlink Communications, a global provider of security and mobility software. From 1989 to 2000, Mr. Wagner held various sales and marketing positions at AT&T. Mr. Wagner serves on the board of directors of M5 Networks, a privately held technology company. Mr. Wagner holds a B.A. degree in history from Lafayette College and an M.B.A. degree from the University of Pennsylvania’s Wharton School of Business.
 
Norman Weissberg has served as our Senior Vice President, North American Sales since June 2006. From August 1998 until June 2006, he was our Vice President, Account Sales. From March 1997 to August 1998, Mr. Weissberg was a Major Accounts Manager at Xerox Corporation. Mr. Weissberg holds a B.S. degree in business from the University of Maryland.
 
Darren Stewart has served as our Senior Vice President, Customer Services since February 1996. From January 1994 through February 1996, Mr. Stewart worked for Information Systems Group, a software consulting company. From September 1992 through January 1994, Mr. Stewart was Manager of Customer Service for Job Files Corporation, a privately held HR software and services company. Mr. Stewart holds a B.S. degree in business administration and finance from the University of Colorado.
 
Mark Heys has served as our Chief Technology Officer since February 2008. From December 1998 to until February 2008, he was our Vice President, Development. From February 1996 through November 1998 Mr. Heys served as Development Manager at T4G Limited, a privately held company. Prior to T4G, Mr. Heys was the founder and CEO of Definitive Ideas, a software company focused on Point-of-Sale applications.
 
Available Information
 
We make available free of charge on or through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission, or SEC. Our website address is www.vocus.com.
 
Item 1A.   Risk Factors
 
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This discussion highlights some of the risks which may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer.
 
Risks Related to Our Business and Industry
 
Current economic and market conditions may adversely affect our business, financial condition and results of operations.
 
The current economic downturn, which has resulted in declines in corporate spending, decreases in consumer confidence and tightening in the credit markets may adversely affect our financial condition and the financial condition and liquidity of our customers and suppliers. Among other things, these economic and market conditions may result in:
 
  •  reductions in the corporate budgets, including technology spending of our customers and potential customers;


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  •  declines in demand for our solutions;
 
  •  decreases in collections of our customer receivables;
 
  •  insolvency of our key vendors and suppliers; and
 
  •  volatility in interest rates and decreases in investment income.
 
Any of these events, which are outside of our scope of control, would likely have an adverse effect on our business, financial condition, results of operations and cash flows.
 
Our quarterly results of operations may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of investors or securities analysts which could cause our stock price to decline.
 
Our quarterly revenue and results of operations may fluctuate as a result of a variety of factors, many of which are outside of our control. If our quarterly revenue or results of operations fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Fluctuations in our results of operations may be due to a number of factors, including, but not limited to, those listed below and identified throughout this “Risk Factors” section:
 
  •  our ability to retain and increase sales to existing customers and attract new customers;
 
  •  changes in the volume and mix of subscriptions sold and press releases distributed in a particular quarter;
 
  •  seasonality of our business cycle, given that our subscription volumes are normally lowest in the first quarter and highest in the fourth quarter;
 
  •  our policy of expensing sales commissions at the time our customers are invoiced for a subscription agreement, while the majority of our revenue is recognized ratably over future periods;
 
  •  the timing and success of new product introductions or upgrades by us or our competitors;
 
  •  changes in our pricing policies or those of our competitors;
 
  •  the amount and timing of expenditures related to expanding our operations;
 
  •  changes in accounting policies or the timing of non-recurring charges;
 
  •  changes in the payment terms for our products and services;
 
  •  changes in foreign currency exchange rates;
 
  •  unforeseen fluctuations in our effective tax rate including changes in the mix of earnings in the various countries in which we operate, the valuation of deferred tax assets and liabilities and the deductibility of certain expenses;
 
  •  foreign currency exchange rates; and
 
  •  the purchasing and budgeting cycles of our customers.
 
Most of our expenses, such as salaries and third-party hosting co-location costs, are relatively fixed in the short-term, and our expense levels are based in part on our expectations regarding future revenue levels. As a result, if revenue for a particular quarter is below our expectations, we may not be able to proportionally reduce operating expenses for that quarter, causing a disproportionate effect on our expected results of operations for that quarter.
 
Due to the foregoing factors, and the other risks discussed in this report, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance.
 
The markets for our on-demand software and solutions are emerging, which makes it difficult to evaluate our business and future prospects and may increase the risk of your investment.
 
The market for software specifically designed for public relations is relatively new and emerging, making our business and future prospects difficult to evaluate. Many companies have invested substantial personnel and


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financial resources in their PR departments, and may be reluctant or unwilling to migrate to on-demand software and services specifically designed to address the public relations market. Widespread market acceptance of our solutions is critical to the success of our business. You must consider our business and future prospects in light of the challenges, risks and difficulties we encounter in the new and rapidly evolving market of on-demand public relations management solutions. These challenges, risks and difficulties include the following:
 
  •  generating sufficient revenue to maintain profitability;
 
  •  managing growth in our operations;
 
  •  managing the risks associated with developing new services and modules;
 
  •  attracting and retaining customers; and
 
  •  attracting and retaining key personnel.
 
We may not be able to successfully address any of these challenges, risks and difficulties, including the other risks related to our business and industry described below. Failure to adequately do so could adversely affect our business, results of operations or financial condition.
 
If our on-demand solutions are not widely accepted, our business will be harmed.
 
We derive, and expect to continue to derive for the foreseeable future, principally all of our revenue from providing on-demand solutions. Our success will depend to a substantial extent on the willingness of companies to increase their use of on-demand solutions in general and for on-demand public relations software and services in particular. If businesses do not perceive the benefits of our on-demand solutions, then the market may not develop further, or it may develop more slowly than we expect, either of which would adversely affect our business, financial condition and results of operations.
 
A majority of our on-demand solutions are sold pursuant to subscription agreements, and if our existing subscription customers elect either not to renew these agreements or renew these agreements for fewer modules or users, our business, financial condition and results of operations will be adversely affected.
 
A majority of our on-demand solutions are sold pursuant to annual subscription agreements and our customers have no obligation to renew these agreements. As a result, we may not be able to consistently and accurately predict future renewal rates. Our subscription customers’ renewal rates may decline or fluctuate or our subscription customers may renew for fewer modules or users as a result of a number of factors, including their level of satisfaction with our solutions, budgetary or other concerns, and the availability and pricing of competing products. Additionally, we may lose our subscription customers due to the high turnover rate in the PR departments of small and mid-sized organizations. If large numbers of existing subscription customers do not renew these agreements, or renew these agreements on terms less favorable to us, and if we cannot replace or supplement those non-renewals with new subscription agreements generating the same or greater level of revenue, our business, financial condition and results of operations will be adversely affected.
 
Because we recognize subscription revenue over the term of the applicable subscription agreement, the lack of subscription renewals or new subscription agreements may not be immediately reflected in our operating results.
 
We recognize revenue from our subscription customers over the terms of their subscription agreements. The majority of our quarterly revenue usually represents deferred revenue from subscription agreements entered into during previous quarters. As a result, a decline in new or renewed subscription agreements in any one quarter will not necessarily be fully reflected in the revenue for the corresponding quarter but will negatively affect our revenue in future quarters. Additionally, the effect of significant downturns in sales and market acceptance of our solutions may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.


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We might not generate increased business from our current customers, which could limit our revenue in the future.
 
The success of our strategy is dependent, in part, on the success of our efforts to sell additional modules and services to our existing customers and to increase the number of users per subscription customer. These customers might choose not to expand their use of or make additional purchases of our solutions. If we fail to generate additional business from our current customers, our revenue could grow at a slower rate or decrease.
 
Our business model continues to evolve, which may cause our results of operations to fluctuate or decline.
 
Our business model continues to evolve, and is therefore subject to additional risk and uncertainty. For example, through our acquisition of PRWeb International, Inc. in August 2006, we began providing online press release distribution. We anticipate that our future financial performance and revenue growth will depend, in part, upon the growth of these services. Unlike our historical, subscription-based model, we recognize revenue from our online news distribution services on a per transaction basis when our customers’ press releases are made available to the public. Since our transaction revenue is not derived from subscription agreements, the amount of transaction revenue we recognize in any period could fluctuate significantly from prior periods, which could adversely affect our financial condition and results of operations.
 
We depend on search engines to attract new customers, and if those search engines change their listings or our relationship with them deteriorates or terminates, we may be unable to attract new customers and our business may be harmed.
 
We rely on search engines to attract new customers, and many of our customers locate our websites by clicking through on search results displayed by search engines such as Google and Yahoo!. Search engines typically provide two types of search results, algorithmic and purchased listings. Algorithmic search results are determined and organized solely by automated criteria set by the search engine and a ranking level cannot be purchased. Advertisers can also pay search engines to place listings more prominently in search results in order to attract users to advertisers’ websites. We rely on both algorithmic and purchased listings to attract customers to our websites. Search engines revise their algorithms from time to time in an attempt to optimize their search result listings. If search engines on which we rely for algorithmic listings modify their algorithms, then our websites may not appear at all or may appear less prominently in search results which could result in fewer customers clicking through to our websites, requiring us to resort to other potentially costly resources to advertise and market our services. If one or more search engines on which we rely for purchased listings modifies or terminates its relationship with us, our expenses could rise, or our revenue could decline and our business may suffer. Additionally, the cost of purchased search listing advertising is rapidly increasing as demand for these channels grows, and further increases could greatly increase our expenses.
 
Failure to effectively develop and expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our solutions.
 
Increasing our customer base and achieving broader market acceptance of our solutions will depend to a significant extent on our ability to expand our sales and marketing operations. We plan to continue to expand our direct sales force and engage additional third-party channel partners, both domestically and internationally. This expansion will require us to invest significant financial and other resources. Our business will be seriously harmed if our efforts do not generate a corresponding significant increase in revenue. We may not achieve anticipated revenue growth from expanding our direct sales force if we are unable to hire and develop talented direct sales personnel, if our new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time or if we are unable to retain our existing direct sales personnel. We also may not achieve anticipated revenue growth from our third-party channel partners if we are unable to attract and retain additional motivated third-party channel partners, if any existing or future third-party channel partners fail to successfully market, resell, implement or support our solutions for their customers, or if they represent multiple providers and devote greater resources to market, resell, implement and support competing products and services.


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If we fail to develop our brands, our business may suffer.
 
We believe that developing and maintaining awareness of our brands is critical to achieving widespread acceptance of our existing and future services and is an important element in attracting new customers. Successful promotion of our brands will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful solutions. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brands. If we fail to successfully promote and maintain our brands, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brands, we may fail to attract new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business could suffer.
 
If our information databases do not maintain market acceptance, our business, financial condition and results of operations could be adversely affected.
 
We have developed our own content that is included in the information databases that we make available to our customers through our on-demand software. If our internally-developed content does not maintain market acceptance, current subscription customers may not continue to renew their subscription agreements with us, and it may be more difficult for us to acquire new subscription customers.
 
We rely on third-parties to provide certain content for our solutions, and if those third-parties discontinue providing their content, our business, financial condition and results of operations could be adversely affected.
 
We rely on third-parties to provide certain data for our information databases and our news on-demand solutions. These third-parties may not renew agreements to provide content to us or may increase the price they charge for their content. Additionally, the quality of the content provided to us may not be acceptable to us and we may need to enter into agreements with additional third-parties. In the event we are unable to use such third-party content or are unable to enter into agreement with third-parties, current subscription customers may not renew their subscription agreements with us, and it may be difficult to acquire new subscription customers.
 
We depend on search engines for the placement of our customers’ online news distribution, and if those search engines change their listings or our relationship with them deteriorates or terminates, our reputation will be harmed and we may lose customers or be unable to attract new customers.
 
Our online news distribution business depends upon the placement of our customers’ news releases. If search engines on which we rely modify their algorithms or purposefully block our content, then information distributed via our online service may not be displayed or may be displayed less prominently in search results, and as a result we could lose customers or fail to attract new customers and our results of operations could be adversely affected.
 
We have incurred operating losses in the past and may incur operating losses in the future.
 
We have incurred operating losses in the past and we may incur operating losses in the future. Our recent operating losses were $821,000 for 2007 and $300,000 for 2008. Although we had operating income in 2009, we expect our operating expenses to increase as we expand our operations, and if our increased operating expenses exceed our revenue growth, we may not be able to maintain operating income. You should not consider recent quarterly revenue growth as indicative of our future performance. In fact, in future quarters, we may not have any revenue growth or our revenue could decline.
 
We face competition, and our failure to compete successfully could make it difficult for us to add and retain customers and could reduce or impede the growth of our business.
 
The public relations market is fragmented, competitive and rapidly evolving, and there are limited barriers to entry to some segments of this market. We expect the intensity of competition to increase in the future as existing competitors develop their capabilities and as new companies enter our market. Increased competition could result in pricing pressure, reduced sales, lower margins or the failure of our solutions to achieve or maintain broad market acceptance. If we are unable to compete effectively, it will be difficult for us to maintain our pricing rates and add


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and retain customers, and our business, financial condition and results of operations will be seriously harmed. We face competition from:
 
  •  PR solution providers offering products specifically designed for PR;
 
  •  generic desktop software and other commercially available software not specifically designed for PR;
 
  •  outsourced PR service providers; and
 
  •  custom-developed solutions; and
 
  •  press release distribution providers.
 
Many of our current and potential competitors have longer operating histories, a larger presence in the general PR market, access to larger customer bases and substantially greater financial, technical, sales and marketing, management, service, support and other resources than we have. As a result, our competitors may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or customer requirements or devote greater resources to the promotion and sale of their products and services than we can. To the extent our competitors have an existing relationship with a potential customer, that customer may be unwilling to switch vendors due to existing time and financial commitments with our competitors.
 
We also expect that new competitors, such as enterprise software vendors and online service providers that have traditionally focused on enterprise resource planning or back office applications, will enter the on-demand public relations management market with competing products as the on-demand public relations management market develops and matures. Many of these potential competitors have established or may establish business, financial or strategic relationships among themselves or with existing or potential customers, alliance partners or other third parties or may combine and consolidate to become more formidable competitors with better resources. It is possible that these new competitors could rapidly acquire significant market share.
 
We expect that the traditional press release distribution providers will offer press release distribution services through the internet. We had or continue to have partnerships with these providers to co-market and sell our press release distribution services. It is possible that these new competitors could rapidly acquire significant market share.
 
If we fail to respond to evolving industry standards, our on-demand solutions may become obsolete or less competitive.
 
The market for our on-demand solutions is characterized by changes in customer requirements, changes in protocols and evolving industry standards. If we are unable to enhance or develop new features for our existing solutions or develop acceptable new solutions that keep pace with these changes, our on-demand software and services may become obsolete, less marketable and less competitive and our business will be harmed. The success of any enhancements, new modules and on-demand software and services depends on several factors, including timely completion, introduction and market acceptance of our solutions. Failure to produce acceptable new offerings and enhancements may significantly impair our revenue growth and reputation.
 
If there are interruptions or delays in providing our on-demand solutions due to third-party error, our own error or the occurrence of unforeseeable events, delivery of our solutions could become impaired, which could harm our relationships with customers and subject us to liability.
 
All of our solutions reside on hardware that we own or lease and operate. Our hardware is currently located in two third-party facilities maintained and operated in Virginia and Washington. Our third-party facility providers do not guarantee that our customers’ access to our solutions will be uninterrupted, error-free or secure. Our operations depend, in part, on our third-party facility providers’ ability to protect systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, criminal acts and similar events. In the event that our third-party facility arrangements are terminated, or there is a lapse of service or damage to such third-party facilities, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities and services.


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Our disaster recovery computer hardware and systems are located at a third-party facility in Baltimore, Maryland. Our disaster recovery systems have not been tested under actual disaster conditions and may not have sufficient capacity to recover all data and services in the event of an outage occurring at our third-party facilities. Moreover, our disaster recovery computer hardware and systems are located within the same geographic region as one of our third-party facilities and may be equally or more affected by any disaster affecting such third-party facilities. Any or all of these events could cause our customers to lose access to our on-demand software. In addition, the failure by our third-party facilities to meet our capacity requirements could result in interruptions in such service or impede our ability to scale our operations.
 
We architect the system infrastructure and procure and own or lease the computer hardware used for our services. Design and mechanical errors, spikes in usage volume and failure to follow system protocols and procedures could cause our systems to fail, resulting in interruptions in our service. Any interruptions or delays in our service, whether as a result of third-party error, our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with customers and our reputation. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors in turn could reduce our revenue, subject us to liability, and cause us to issue credits or cause customers to fail to renew their subscriptions, any of which could adversely affect our business, financial condition and results of operations.
 
The market for our solutions among large customers may be limited if they require customized features or functions that we do not currently intend to provide in our solutions or that would be difficult for individual customers to customize within our solutions.
 
Prospective customers, especially large enterprise customers, may require heavily customized features and functions unique to their business processes. If prospective customers require customized features or functions that we do not offer, and that would be difficult for them to implement themselves, then the market for our solutions will be more limited and our business could suffer.
 
Acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and consume resources that are necessary to sustain our business.
 
One of our business strategies is to selectively acquire companies which would either expand our solutions’ functionality, provide access to new customers or markets, or both. An acquisition may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the technologies, products, personnel or operations of the acquired organizations, particularly if the key personnel of the acquired company choose not to work for us, and we may have difficulty retaining the customers of any acquired business due to changes in management and ownership. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for ongoing development of our business. We also may experience lower rates of renewal from subscription customers obtained through acquisitions than our typical renewal rates. Moreover, we cannot provide assurance that the anticipated benefits of any acquisition, investment or business relationship would be realized or that we would not be exposed to unknown liabilities. In connection with one or more of these transactions, we may:
 
  •  issue additional equity securities that would dilute the ownership of our stockholders;
 
  •  use cash that we may need in the future to operate our business;
 
  •  incur or assume debt on terms unfavorable to us or that we are unable to repay;
 
  •  incur large charges or substantial liabilities;
 
  •  encounter difficulties retaining key employees of an acquired company or integrating diverse business cultures; and
 
  •  become subject to adverse tax consequences, substantial depreciation or deferred compensation charges.
 
To date, we have completed several acquisitions. For example, in November 2004 we acquired substantially all of the assets of Gnossos Software, Inc., and in August 2006 we acquired certain assets and assumed certain


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liabilities of PRWeb International, Inc. In each of these transactions, the consideration we paid included both cash and shares of our common stock. The issuance of shares of our common stock diluted the ownership of our existing stockholders, and the cash consideration paid reduced the cash available to us for other purposes.
 
We may be liable to our customers and may lose customers if we provide poor service, if our solutions do not comply with our agreements or if there is a loss of data.
 
The information in our databases may not be complete or may contain inaccuracies that our customers regard as significant. Our ability to collect and report data may be interrupted by a number of factors, including our inability to access the Internet, the failure of our network or software systems or failure by our third-party facilities to meet our capacity requirements. In addition, computer viruses and intentional or unintentional acts of our employees may harm our systems causing us to lose data we maintain and supply to our customers or data that our customers input and maintain on our systems, and the transmission of computer viruses could expose us to litigation. Our subscription agreements generally give our customers the right to terminate their agreements for cause if we materially breach our obligations. Any failures in the services that we supply or the loss of any of our customers’ data that we cannot rectify in a certain time period may give our customers the right to terminate their agreements with us and could subject us to liability. As a result, we may also be required to spend substantial amounts to defend lawsuits and pay any resulting damage awards. In addition to potential liability, if we supply inaccurate data or experience interruptions in our ability to supply data, our reputation could be harmed and we could lose customers.
 
Although we maintain general liability insurance, including coverage for errors and omissions, this coverage may be inadequate, or may not be available in the future on acceptable terms, or at all. In addition, we cannot provide assurance that this policy will cover any claim against us for loss of data or other indirect or consequential damages and defending a suit, regardless of its merit, could be costly and divert management’s attention.
 
If our solutions fail to perform properly or if they contain technical defects, our reputation will be harmed, our market share would decline and we could be subject to product liability claims.
 
Our on-demand software may contain undetected errors or defects that may result in product failures or otherwise cause our solutions to fail to perform in accordance with customer expectations. Because our customers use our solutions for important aspects of their business, any errors or defects in, or other performance problems with, our solutions could hurt our reputation and may damage our customers’ businesses. If that occurs, we could lose future sales or our existing subscription customers could elect to not renew. Product performance problems could result in loss of market share, failure to achieve market acceptance and the diversion of development resources. If one or more of our solutions fail to perform or contain a technical defect, a customer may assert a claim against us for substantial damages, whether or not we are responsible for our solutions’ failure or defect. We do not currently maintain any warranty reserves.
 
Product liability claims could require us to spend significant time and money in litigation or arbitration/dispute resolution or to pay significant settlements or damages. Although we maintain general liability insurance, including coverage for errors and omissions, this coverage may not be sufficient to cover liabilities resulting from such product liability claims. Also, our insurer may disclaim coverage. Our liability insurance also may not continue to be available to us on reasonable terms, in sufficient amounts, or at all. Any product liability claim successfully brought against us could cause our business to suffer.
 
Our online press release and news distribution is a trusted information source. To the extent we were to distribute an inaccurate or fraudulent press release, our reputation could be harmed, even though we are not responsible for the content distributed via our online new distribution service.
 
Changes in laws and/or regulations related to the Internet or changes in the Internet infrastructure itself may cause our business to suffer.
 
The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting data privacy, the use of the Internet as a


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commercial medium and the use of email for marketing or other consumer communications. In addition, certain government agencies or private organizations have begun to impose taxes, fees or other charges for accessing the Internet or for sending commercial email. These laws or charges could limit the growth of Internet-related commerce or communications generally, result in a decline in the use of the Internet and the viability of Internet-based services such as ours and reduce the demand for our products.
 
The Internet has experienced, and is expected to continue to experience, significant user and traffic growth, which has, at times, caused user frustration with slow access and download times. If Internet activity grows faster than Internet infrastructure or if the Internet infrastructure is otherwise unable to support the demands placed on it, or if hosting capacity becomes scarce, our business growth may be adversely affected.
 
If we are unable to protect our proprietary technology and other intellectual property rights, it will reduce our ability to compete for business.
 
If we are unable to protect our intellectual property, our competitors could use our intellectual property to market products similar to our products, which could decrease demand for our solutions. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as licensing agreements, third-party nondisclosure agreements and other contractual provisions and technical measures, to protect our intellectual property rights. These protections may not be adequate to prevent our competitors from copying our solutions or otherwise infringing on our intellectual property rights. Existing laws afford only limited protection for our intellectual property rights and may not protect such rights in the event competitors independently develop solutions similar or superior to ours. In addition, the laws of some countries in which our solutions are or may be licensed do not protect our solutions and intellectual property rights to the same extent as do the laws of the United States.
 
To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. These agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information.
 
If a third-party asserts that we are infringing its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or expensive licenses, and our business may be harmed.
 
The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. Third-parties may assert patent and other intellectual property infringement claims against us in the form of lawsuits, letters, or other forms of communication. As currently pending patent applications are not publicly available, we cannot anticipate all such claims or know with certainty whether our technology infringes the intellectual property rights of third-parties. We expect that the number of infringement claims in our market will increase as the number of solutions and competitors in our industry grows. These claims, whether or not successful, could:
 
  •  divert management’s attention;
 
  •  result in costly and time-consuming litigation;
 
  •  require us to enter into royalty or licensing agreements, which may not be available on acceptable terms, or at all; or
 
  •  require us to redesign our solutions to avoid infringement.
 
As a result, any third-party intellectual property claims against us could increase our expenses and adversely affect our business. In addition, many of our customer agreements require us to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us resulting from an adverse ruling in any such claim. Even if we have not infringed any third-parties’ intellectual property rights, we cannot be sure our legal defenses will be successful, and even if we are successful in defending against such claims, our legal defense could require significant financial resources and management’s time, which could adversely affect our business.


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Our growth could strain our personnel and infrastructure resources, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.
 
Rapid growth in our headcount and operations may place a significant strain on our management, administrative, operational and financial infrastructure. Between January 1, 2005 and December 31, 2009, the number of our full-time equivalent employees increased from 146 to 484. We anticipate that additional growth will be required to address increases in our customer base, as well as expansion into new geographic areas.
 
Our success will depend in part upon the ability of our senior management to manage growth effectively. To do so, we must continue to hire, train and manage new employees as needed. To date, we have not experienced any significant problems as a result of the rapid growth in our headcount, other than occasional office space constraints. However, our anticipated future growth may place greater strains on our resources. For instance, if our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees as needed, or if we are not successful in retaining our existing employees, our business may be harmed. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. The additional headcount and capital investments we expect to add will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term. If we fail to successfully manage our growth, we will be unable to execute our business plan.
 
We are dependent on our executive officers and other key personnel, and the loss of any of them may prevent us from implementing our business plan in a timely manner if at all.
 
Our success depends largely upon the continued services of our executive officers. We are also substantially dependent on the continued service of our existing development personnel because of the complexity of our service and technologies. We do not have employment agreements with any of our development personnel that require them to remain our employees nor do the employment agreements we have with our executive officers require them to remain our employees and, therefore, they could terminate their employment with us at any time without penalty. We do not currently maintain key man life insurance on any of our executives, and such insurance, if obtained in the future, may not be sufficient to cover the costs of recruiting and hiring a replacement or the loss of an executive’s services. The loss of one or more of our key employees could seriously harm our business.
 
We may not be able to attract and retain the highly skilled employees we need to support our planned growth.
 
To execute our business strategy, we must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for senior sales executives and engineers with high levels of experience in designing and developing software. We may not be successful in attracting and retaining qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than us. In addition, in making employment decisions, particularly in the Internet and high-technology industries, job candidates often consider the value of the stock options and awards they are to receive in connection with their employment. Significant volatility in the price of our stock may, therefore, adversely affect our ability to attract or retain key employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.
 
Because we conduct operations in foreign jurisdictions, which accounted for approximately 9% of our 2009 revenues, and because our business strategy includes expanding our international operations, our business is susceptible to risks associated with international operations.
 
We have small but growing international operations and our business strategy includes expanding these operations. Conducting international operations subjects us to new risks that we have not generally faced in the United States. These include:
 
  •  fluctuations in currency exchange rates;
 
  •  unexpected changes in foreign regulatory requirements;


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  •  difficulties in managing and staffing international operations;
 
  •  potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings; and
 
  •  the burdens of complying with a wide variety of foreign laws and different legal standards.
 
The occurrence of any one of these risks could negatively affect our international operations and, consequently, our results of operations generally. In addition, the Internet may not be used as widely in international markets in which we expand our international operations and, as a result, we may not be successful in offering our solutions internationally.
 
We might require additional capital to support business growth, and this capital might not be available.
 
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new solutions or enhance our existing solutions, enhance our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in further equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.
 
Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.
 
Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.
 
Compliance with new regulations governing public company corporate governance and reporting is uncertain and expensive.
 
Many new laws, regulations and standards have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices and have created uncertainty for public companies. These new laws, regulations and standards are subject to interpretations due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by varying regulatory bodies. This may cause continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Our implementation of these reforms and enhanced new disclosures may result in increased general and administrative expenses and a significant diversion of management’s time and attention from revenue-generating activities. Any unanticipated difficulties in implementing these reforms could result in material delays in complying with these new laws, regulations and standards or significantly increase our operating costs.
 
Risks Related to our Common Stock and the Securities Markets
 
If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.
 
The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. There are many large, well-established


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publicly traded companies active in our industry and market, which may mean it will be less likely that we receive widespread analyst coverage. Furthermore, if one or more of the analysts who do cover us downgrade our stock, our stock price would likely decline rapidly. If one or more of these analysts cease coverage of us, we could lose visibility in the market, which in turn could cause our stock price to decline.
 
Volatility of our stock price could adversely affect stockholders.
 
The market price of our common stock could fluctuate significantly as a result of:
 
  •  quarterly variations in our operating results;
 
  •  seasonality of our business cycle;
 
  •  interest rate changes;
 
  •  changes in the market’s expectations about our operating results;
 
  •  our operating results failing to meet the expectation of securities analysts or investors in a particular period;
 
  •  changes in financial estimates and recommendations by securities analysts concerning our company or the on-demand software industry in general;
 
  •  operating and stock price performance of other companies that investors deem comparable to us;
 
  •  news reports relating to trends in our markets;
 
  •  changes in laws and regulations affecting our business;
 
  •  material announcements by us or our competitors;
 
  •  sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur; and
 
  •  economic conditions including a slowdown in economic growth and uncertainty in equity and credit markets; and
 
  •  general political conditions such as acts of war or terrorism.
 
Provisions in our amended and restated certificate of incorporation and bylaws or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our stock.
 
Our amended and restated certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:
 
  •  establish a classified board of directors so that not all members of our board of directors are elected at one time;
 
  •  provide that directors may only be removed “for cause” and only with the approval of 662/3 percent of our stockholders;
 
  •  require super-majority voting to amend our bylaws or specified provisions in our amended and restated certificate of incorporation;
 
  •  authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares and to discourage a takeover attempt;
 
  •  limit the ability of our stockholders to call special meetings of stockholders;
 
  •  prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
 
  •  provide that the board of directors is expressly authorized to adopt, amend, or repeal our bylaws; and


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  •  establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
 
In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company.
 
Future sales, or the availability for sale, of our common stock may cause our stock price to decline.
 
Our directors and officers hold shares of our common stock that they generally are currently able to sell in the public market. We have also registered shares of our common stock that are subject to outstanding stock options, or reserved for issuance under our stock option plan, which shares can generally be freely sold in the public market upon issuance. Moreover, from time to time, our executive officers and directors have established trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, for the purpose of effecting sales of our common stock. Sales of substantial amounts of our common stock in the public market could adversely affect the market price of our common stock and could materially impair our future ability to raise capital through offerings of our common stock.
 
Item 1B.   Unresolved Staff Comments
 
Not applicable.
 
Item 2.   Properties
 
Our corporate headquarters, including our principal administrative, marketing, sales, technical support and research and development facilities, are located in Lanham, Maryland, where we lease approximately 57,300 square feet under three agreements that expire in 2011. Our content research division is located in College Park, Maryland where we lease approximately 6,400 square feet of space under an agreement that expires in 2010, at which time we will relocate to a nearby location and lease approximately 7,300 square feet of space under an agreement that expires in 2020. Operations related to our online press release distribution service are located in Ferndale, Washington where we lease approximately 7,200 square feet of space under two agreements that expire in 2010. We also currently occupy several domestic and international sales and service offices in Herndon, Virginia and London, England, where we lease an aggregate of approximately 14,900 square feet under multiple leases, which have terms that expire at various times through November 2014.
 
We believe that our current facilities are suitable and adequate to meet our current needs, and that suitable additional or substitute space will be available as needed to accommodate expansion of our operations.
 
Item 3.   Legal Proceedings
 
We are not currently subject to any material legal proceedings. From time to time, however, we are named as a defendant in legal actions arising from our normal business activities. Although we cannot accurately predict the amount of our liability, if any, that could arise with respect to legal actions currently pending against us; we do not expect that any such liability will have a material adverse effect on our financial position, operating results or cash flows.
 
We believe that we have obtained adequate insurance coverage or rights to indemnification, or where appropriate, have established reserves in connection with these legal proceedings.
 
Item 4.   Reserved


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PART II
 
Item 5.   Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market for Common Stock
 
Since December 7, 2005, our common stock has been listed on the NASDAQ Global Market under the symbol “VOCS.” Prior to such time, there was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low closing sale prices of our common stock as reported by NASDAQ, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.
 
                 
    High     Low  
 
Fiscal Year Ended December 31, 2008
               
First Quarter
  $ 35.14     $ 21.44  
Second Quarter
    34.01       22.97  
Third Quarter
    39.21       31.08  
Fourth Quarter
    33.30       14.20  
Fiscal Year Ended December 31, 2009
               
First Quarter
    19.50       11.66  
Second Quarter
    20.27       13.66  
Third Quarter
    21.23       14.99  
Fourth Quarter
    21.65       16.34  
 
As of February 26, 2010, there were approximately 82 holders of record of our common stock. This figure does not reflect persons or entities that hold their stock in nominee or “street” name through various brokerage firms.
 
Dividends
 
We have never declared or paid any cash dividends on our capital stock and do not expect to pay any cash dividends for the foreseeable future. We intend to retain any future earnings, if any, in the operation and expansion of our business. Any future determination to pay cash dividends will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors deems relevant. In addition, the terms of any future indebtedness that we may incur could preclude us from paying dividends.
 
Uses of Proceeds From Registered Securities
 
In connection with our initial public offering of our common stock, the SEC declared our Registration Statement on Form S-1 (No. 333-125834), filed under the Securities Act of 1933, effective on December 6, 2005. On December 12, 2005, we closed the sale of 5,000,000 shares of our common stock registered under the Registration Statement. On January 6, 2006, certain selling stockholders sold 750,000 shares of our common stock pursuant to the exercise in full of the underwriters’ over-allotment option. Thomas Weisel Partners LLC, RBC Capital Markets, Wachovia Securities and William Blair & Company served as the managing underwriters.
 
The initial public offering price was $9.00 per share. The aggregate sale price for all of the shares sold by us was $45.0 million, resulting in net proceeds to us of approximately $40.0 million after payment of underwriting discounts and commissions and legal, accounting and other fees incurred in connection with the offering of approximately $5.0 million. The aggregate sales price for all of the shares sold by the selling stockholders was approximately $6.8 million. We did not receive any of the proceeds from the sale of shares of common stock by the selling stockholders.
 
In December 2005, we used approximately $6.8 million from the net proceeds received from our initial public offering to repay certain indebtedness.


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In August 2006, we used approximately $20.9 million of the offering proceeds for the acquisition of PRWeb International, Inc. We have invested the remainder of the proceeds from the initial public offering in short-term, interest-bearing, investment-grade securities and money market funds. We anticipate that we will use the remaining proceeds to fund working capital and general corporate purposes, which may include the expansion of our content and service offerings and potential acquisitions of complementary businesses, products and technologies. We cannot specify with certainty all of the particular uses for the proceeds. The amounts we actually spend for these purposes may vary significantly and will depend on a number of factors. Accordingly, our management will retain broad discretion in the allocation of the proceeds.
 
Issuer Purchases of Equity Securities
 
We did not purchase any of our common stock during the fourth quarter of 2009. In November 2008, our Board of Directors authorized a stock repurchase program for up to $30,000,000 of our shares of common stock. The shares may be purchased from time to time in the open market, and there is no expiration date specified for the program. During the year ended December 31, 2009, we purchased an aggregate of 224,192 shares of our common stock for $3.5 million under the program.


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Performance Graph
 
The following line graph compares cumulative total stockholder returns for the period from December 7, 2005, the date of our initial public offering, through December 31, 2009 for (1) our common stock; (2) the Nasdaq Market Index; and (3) the Nasdaq Computer & Data Processing Index. The graph assumes an investment of $100 on December 7, 2005, which was the first day on which our stock was listed on the Nasdaq Global Market. The calculations of cumulative stockholder return on the Nasdaq National Index and the Nasdaq Computer & Data Processing Index include reinvestment of dividends, but the calculation of cumulative stockholder return on our common stock does not include reinvestment of dividends because we did not pay dividends during the measurement period. The performance shown is not necessarily indicative of future performance.
 
(PERFORMANCE GRAPH)
 
                                                 
    12/7/2005     12/31/2005     12/31/2006     12/31/2007     12/31/2008     12/31/2009  
 
Vocus, Inc. 
  $ 100.00     $ 115.44     $ 186.67     $ 383.67     $ 202.33     $ 200.00  
Nasdaq Composite
    100.00       97.93       107.25       117.77       70.03       100.76  
Nasdaq Computer and Data Processing Index
    100.00       97.03       103.00       125.51       66.91       114.29  


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Item 6.   Selected Financial Data
 
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report. The data for the years ended December 31, 2007, 2008 and 2009 are derived from consolidated financial statements included elsewhere in this report. The data for the years ended December 31, 2005 and 2006 is derived from audited financial statements not included in this report.
 
                                         
    Year Ended December 31,  
    2005     2006(3)     2007     2008     2009  
    (In thousands, except per share data)  
 
Consolidated Statement of Operations:
                                       
Revenues
  $ 28,062     $ 40,328     $ 58,076     $ 77,520     $ 84,579  
Cost of revenues(1)
    6,537       8,293       10,922       14,675       15,461  
Accelerated amortization of prepaid royalty fees and contract termination costs
    1,399                          
                                         
Gross profit
    20,126       32,035       47,154       62,845       69,118  
Operating expenses:(1)(2)
                                       
Sales and marketing
    14,837       18,912       26,548       35,140       41,123  
Research and development
    2,515       2,896       3,822       4,998       4,675  
General and administrative
    6,051       9,626       14,743       20,356       21,018  
Amortization of intangible assets
    1,605       1,705       2,862       2,651       1,926  
                                         
Total operating expenses
    25,008       33,139       47,975       63,145       68,742  
Income (loss) from operations
    (4,882 )     (1,104 )     (821 )     (300 )     376  
Other income (expense):
                                       
Interest and other income
    177       1,819       2,541       2,136       485  
Interest expense
    (359 )     (88 )     (47 )     (27 )     (31 )
                                         
Total other income (expense)
    (182 )     1,731       2,494       2,109       454  
Income (loss) before provision (benefit) for income taxes
    (5,064 )     627       1,673       1,809       830  
Provision (benefit) for income taxes
          185       674       (5,119 )     2,854  
                                         
Net income (loss)
    (5,064 )     442       999       6,928       (2,024 )
Accretion of preferred stock
    (1,900 )                        
                                         
Net income (loss) attributable to common stockholders
  $ (6,964 )   $ 442     $ 999     $ 6,928     $ (2,024 )
                                         
Net income (loss) attributable to common stockholders per share, basic
  $ (1.43 )   $ 0.03     $ 0.06     $ 0.38     $ (0.11 )
Net income (loss) attributable to common stockholders per share, diluted
  $ (1.43 )   $ 0.03     $ 0.05     $ 0.37     $ (0.11 )
 
 
(1) Cost of revenues and operating expenses include stock-based compensation expense from equity awards in the following amounts:
 


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    Year Ended December 31,  
    2005     2006     2007     2008     2009  
 
Cost of revenues
  $     $ 69     $ 581     $ 1,262     $ 1,453  
Sales and marketing
          530       1,498       3,212       3,753  
Research and development
          219       548       769       989  
General and administrative
          1,042       3,025       5,929       6,697  
                                         
Total
  $     $ 1,860     $ 5,652     $ 11,172     $ 12,892  
                                         
 
(2) Operating expenses include stock-based compensation expense related to purchases of our common stock in the following amounts:
 
                                         
    Year Ended December 31,
    2005   2006   2007   2008   2009
 
General and administrative
  $ 1,006     $     $     $     $  
 
(3) On August 4, 2006, we acquired PRWeb International, Inc., an online distributor of press releases. The operating results of PRWeb have been included in our results of operations since the date of acquisition.
 
                                         
    December 31,
    2005   2006   2007   2008   2009
    (In thousands)
 
Balance Sheet Data:
                                       
Cash, cash equivalents and investments
  $ 41,427     $ 29,863     $ 67,480     $ 87,187     $ 104,669  
Working capital
    24,915       8,521       42,013       58,427       70,594  
Total assets
    55,836       74,770       114,243       139,979       159,240  
Total debt
    1,407       762       335       373       245  
Total deferred revenue
    20,696       26,631       34,964       42,854       47,750  
Redeemable stock
    189       33                    
Stockholders’ equity
    30,387       40,974       71,004       91,408       104,381  

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in “Risk Factors” in Item 1A.
 
Overview
 
We are a leading provider of on-demand software for public relations management. Our web-based software suite helps organizations of all sizes fundamentally change the way they communicate with both the media and the public, optimizing their public relations and increasing their ability to measure its impact. Our on-demand software addresses the critical functions of public relations including media relations, news distribution and news monitoring. We deliver our solutions over the Internet using a secure, scalable application and system architecture, which allows our customers to eliminate expensive up-front hardware and software costs and to quickly deploy and adopt our on-demand software.
 
We sell access to our on-demand software primarily through our direct sales channel. As of December 31, 2009, we had 4,438 active subscription customers from a variety of industries, including financial and insurance, technology, healthcare and pharmaceutical and retail and consumer products, as well as government agencies, not-for-profit organizations and educational institutions. We define active subscription customers as unique customer accounts that have an active subscription and have not been suspended for non-payment.
 
We are also a provider of online distribution of press releases. We enable our customers to achieve visibility on the Internet by distributing search engine optimized press releases directly to various news sites and the public. We offer on-demand solutions which allow our customers to widely distribute press releases containing important elements of content-rich media such as images, podcasts and video messages designed to drive Internet traffic to websites and increase brand awareness.
 
We plan to continue the expansion of our customer base by expanding our direct distribution channels, expanding our international market penetration and selectively pursuing strategic acquisitions. As a result, we plan to hire additional personnel, particularly in sales and marketing, and expand our domestic and international selling and marketing activities, increase the number of locations around the world where we conduct business and develop our operational and financial systems to manage a growing business. We also intend to seek to identify and acquire companies which would either expand our solution’s functionality, provide access to new customers or markets, or both.
 
Sources of Revenues
 
We derive our revenues from subscription agreements and related services and from the online distribution of press releases. Our subscription agreements contain multiple service elements and deliverables, which include use of our on-demand software, hosting services, content and content updates, implementation and training services and customer support. The typical term of our subscription agreements is one year; however, our customers may purchase subscriptions with multi-year terms. We invoice our customers in advance of their annual subscription, with payment terms that require our customers to pay us generally within 30 days of invoice. Our subscription agreements typically are non-cancelable, though customers have the right to terminate their agreements for cause if we materially breach our obligations under the agreement. Our subscription agreements may include amounts that are not yet contractually billable to customers, and any such unbilled amounts are not recorded in deferred revenue until invoiced. We had approximately $10.4 million and $11.4 million of these unbilled amounts at December 31, 2008 and 2009, respectively. These amounts may fluctuate from year-to-year depending on the billing cycles for our subscription agreements, including seasonality in our sales cycle, the timing of renewal agreements and the amount of multi-year subscription agreements. Such fluctuations may not be indicative of our future revenue.


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Additionally, we derive revenue on a per-transaction basis from the online distribution of press releases. We generally receive payment in advance of the distribution of the press release.
 
Professional services revenue consists primarily of data migration, training and configuration services sold separately after the initial subscription agreement. Our professional service engagements are billed on a fixed fee basis with payment terms requiring our customers to pay us within 30 days of invoice. Revenues from professional services sold separately from subscription agreements have not been material to our business. During the year ended December 31, 2009, professional services sold separately accounted for less than 3% of our revenues.
 
Cost of Revenues and Operating Expenses
 
Cost of Revenues.  Cost of revenues consists primarily of compensation for training, editorial and support personnel, hosting infrastructure, press release distribution, acquisition, maintenance and amortization of content, amortization of purchased technology, amortization of capitalized software development costs, depreciation associated with computer equipment and software and allocated overhead. We allocate overhead expenses such as employee benefits, computer and office supplies, management information systems and depreciation for computer equipment based on headcount. As a result, indirect overhead expenses are included in cost of revenues and each operating expense category.
 
We believe content is an integral part of our solution and provides our customers with access to broad, current and relevant information critical to their public relations efforts. We expect to continue to make investments in both our own content as well as content acquired from third parties and to continue to enhance our proprietary information database and news on-demand service. We expect that in 2010, cost of revenues will increase in absolute dollars but will remain flat as a percentage of revenues.
 
Sales and Marketing.  Sales and marketing expenses are our largest operating expense, accounting for 49% of our revenues for the year ended December 31, 2009. Sales and marketing expenses consist primarily of compensation for our sales and marketing personnel, sales commissions and incentives, marketing programs, including lead generation, promotional events, webinars and other brand building expenses and allocated overhead. We expense our sales commissions at the time a subscription agreement is executed by the customer, and we recognize substantially all of our revenues ratably over the term of the corresponding subscription agreement. As a result, we incur sales expense before the recognition of the related revenues.
 
As our revenues increase, we plan to invest in sales and marketing by increasing the number of sales and marketing personnel to add new customers, increase sales to our existing customers and increase sales of our online press release distribution services. We also plan to expand our marketing activities in order to build brand awareness and generate additional leads for our growing sales personnel. We expect that in 2010, sales and marketing expenses will increase in absolute dollars and as a percentage of revenues.
 
Research and Development.  Research and development expenses consist primarily of compensation for our software application development personnel and allocated overhead. We have historically focused our research and development efforts on increasing the functionality and enhancing the ease of use of our on-demand software. Because of our hosted, on-demand model, we are able to provide all of our customers with a single, shared version of our most recent application. As a result, we do not have to maintain legacy versions of our software, which enables us to have relatively low research and development expenses as compared to traditional enterprise software business models. We expect that in 2010, research and development expenses will increase in absolute dollars but will remain flat as a percentage of revenues.
 
General and Administrative.  General and administrative expenses consist of compensation and related expenses for executive, finance, legal, human resources and administrative personnel, as well as legal, accounting and professional fees, facilities rent other corporate expenses and allocated overhead. We expect that in 2010, general and administrative expenses will increase in absolute dollars but will decrease slightly as a percentage of revenues.
 
Amortization of Intangible Assets.  Amortized intangible assets consist of customer relationships, a trade name and agreements not-to-complete acquired in business combinations.


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Critical Accounting Policies
 
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
 
We believe that of our significant accounting policies, which are described in Note 2 to the consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
 
Revenue Recognition.  We recognize revenues when there is persuasive evidence of an arrangement, the service has been provided to the customer, the collection of the fee is probable and the amount of the fees to be paid by the customer is fixed or determinable. Our subscription agreements generally contain multiple service elements and deliverables. These elements include access to our software and often specify initial services including implementation and training. Our subscription agreements do not provide customers the right to take possession of the software at any time. All elements in our multiple element subscription agreements are considered a single unit of accounting, and accordingly, we recognize all associated fees over the subscription period, which is typically one year. We recognize our revenue over the subscription period because the access to our software is the last element delivered to the customer and the predominant element of our agreements. We determined that we do not have objective and reliable evidence of the fair value of the subscription to our on-demand software after delivery of specified initial services. When we sell this subscription separately from professional services the price charged varies and, therefore, we cannot objectively and reliably determine the subscription’s fair value. As a result, subscription revenues are recognized ratably over the subscription period. Professional services sold separately from a subscription arrangement are recognized as the services are performed.
 
We distribute press releases over the Internet which are indexed by major search engines and distributed directly to various news sites, journalists and other key constituents. We recognize revenue on a per-transaction basis when the press releases are made available to the public.
 
Sales Commissions.  Sales commissions are expensed when we invoice a customer under their subscription agreement. As a result, we incur sales expense before the recognition of the related revenues.
 
Stock-Based Compensation.  We recognize compensation expense for equity awards based on the fair value of the award and on a straight-line basis over the requisite service period of the award based on the estimated portion of the award that is expected to vest. We apply estimated forfeiture rates based on analyses of historical data, including termination patterns and other factors. We use the quoted closing market price of our common stock on the grant date to measure the fair value of our restricted stock awards. We use the Black-Scholes option pricing model to measure the fair value of our option awards. We became a public entity in December 2005, and therefore have a limited history of volatility. Accordingly, the expected volatility is based primarily on the historical volatilities of similar entities’ common stock over the most recent period commensurate with the estimated expected term of the awards. The expected term of an award is equal to the midpoint between the vesting date and the end of the contractual term of the award. The risk-free interest rate is based on the rate on U.S. Treasury securities with maturities consistent with the estimated expected term of the awards. We have not paid dividends and do not anticipate paying a cash dividend in the foreseeable future and, accordingly, use an expected dividend yield of zero.
 
Goodwill and Long-Lived Assets.  Goodwill is not amortized, but rather is assessed for impairment at least annually. Goodwill impairment is evaluated using a two step process. The first step is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment test is not necessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any. The second step compares the implied fair value of


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goodwill with the carrying amount of goodwill. If the implied fair value of goodwill exceeds the carrying amount, then goodwill is not considered impaired. However, if the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The fair value of the reporting unit is allocated to all the assets and liabilities, including any previously unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. We conducted the goodwill annual impairment test for 2009 with no resulting impairment. There were no events or circumstances from the date of the assessment through December 31, 2009 that would impact this conclusion.
 
Definite-lived intangible assets consist of acquired customer relationships, a trade name and agreements not-to-compete and are amortized either on a straight-line or accelerated basis over their estimated useful lives ranging from five to seven years. We assess the impairment of definite-lived intangible and other long-lived assets when events or changes in circumstances indicate that the carrying value of an asset may no longer be fully recoverable. We determine the impairment, if any, by comparing the carrying value of the assets to future undiscounted net cash flows expected to be generated by the related assets. An impairment charge is recognized to the extent the carrying value exceeds the estimated fair value of the assets. Impairment charges for long-lived assets for the years ended December 31, 2007 and 2008 were not material. There were no impairment charges for long-lived assets for the year ended December 31, 2009.
 
Income taxes.  We use the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax-credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amount of assets and liabilities and their tax bases. Deferred tax assets are reduced by the valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
 
Our judgments relative to the current provision for income taxes take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We file income tax returns in the U.S. federal jurisdictions and various state and foreign jurisdictions and are subject to U.S. federal tax, state and foreign tax examinations for years ranging from 2002 to 2009. Our judgments relative to the value of deferred tax assets and liabilities take into account estimates of the amount of future taxable income. Actual operating results and the underlying amount of income in future years could render our current estimates of recoverable net deferred taxes inaccurate. Any of the judgments mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations.
 
At December 31, 2008 and 2009, we had approximately $10.3 and $13.1 million in gross deferred tax assets, respectively. Historically, we maintained a full valuation allowance on our deferred tax assets because we were unable to conclude that it was more likely than not that we would realize the tax benefits of these deferred tax assets. During 2008, we concluded that it is more likely than not that we will have future income sufficient to realize certain of our deferred tax assets and we reversed our valuation allowance against our U.S. deferred tax assets. As of December 31, 2009, we maintained a full valuation against our foreign deferred tax assets.


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Results of Operations
 
The following tables set forth selected consolidated statements of operations data for each of the periods indicated as a percentage of total revenues.
 
                         
    Year Ended December 31,  
    2007     2008     2009  
 
Revenues
    100 %     100 %     100 %
Cost of revenues
    19       19       18  
                         
Gross profit
    81       81       82  
Operating expenses:
                       
Sales and marketing
    46       45       49  
Research and development
    6       7       6  
General and administrative
    25       26       25  
Amortization of intangible assets
    5       3       2  
                         
Total operating expenses
    82       81       82  
Income (loss) from operations
    (1 )            
Other income, net
    4       3       1  
                         
Income before provision (benefit) for income taxes
    3       3       1  
Provision (benefit) for income taxes
    1       (6 )     3  
                         
Net income (loss)
    2 %     9 %     (2 )%
                         
 
Years Ended December 31, 2009 and 2008
 
Revenues.  Revenues for 2009 were $84.6 million, an increase of $7.1 million, or 9%, over revenues of $77.5 million for 2008. The increase in revenues was primarily due to the increase in the number of total active subscription customers to 4,438 as of December 31, 2009 from 3,379 as of December 31, 2008. The increase in active subscription customers was the result of additional sales personnel focused on acquiring new customers and renewing existing customers. Revenue growth from the increase in active subscription customers was $4.7 million. Revenue growth from transaction revenue was $2.4 million. Total deferred revenue as of December 31, 2009 was $47.8 million, representing an increase of $4.9 million, or 11%, over total deferred revenue of $42.9 million as of December 31, 2008.
 
Cost of Revenues.  Cost of revenues for 2009 was $15.5 million, an increase of $786,000, or 5%, over cost of revenues of $14.7 million for 2008. The increase in cost of revenues was due to an increase of $399,000 in employee related costs from additional personnel, $301,000 in third-party license and royalty fees, and $191,000 in stock-based compensation. We had 146 full-time employee equivalents in our professional and other support services group at December 31, 2009 compared to 149 full-time employee equivalents at December 31, 2008. Compensation costs for our content group in the United Kingdom were included in research and development prior to the launch of our United Kingdom and Ireland media database in September 2008. Subsequent to the launch, the compensation costs and related headcount are included in costs of revenues.
 
Sales and Marketing Expenses.  Sales and marketing expenses for 2009 were $41.1 million, an increase of $6.0 million or 17%, over sales and marketing expenses of $35.1 million for 2008. The increase was primarily due to an increase of $3.0 million in employee related costs from additional personnel, $2.6 million in marketing program costs primarily to increase awareness and attract customers to our online press release services and $541,000 in stock-based compensation, offset by a decrease of $558,000 in incentive compensation reflecting our relative sales performance against established incentive targets. Our sales and marketing headcount increased by 25% as we hired sales personnel to focus on acquiring new customers and increasing revenues from existing customers and marketing personnel to expand our marketing activities to build brand awareness. We had 257 full-time sales and


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marketing employee equivalents as of December 31, 2009 compared to 206 full-time employee equivalents as of December 31, 2008.
 
Research and Development Expenses.  Research and development expenses for 2009 were $4.7 million, a decrease of $323,000, or 6%, compared to research and development expenses of $5.0 million for 2008. The decrease in research and development was primarily due to decreases of $313,000 in employee-related costs and $109,000 in incentive compensation reflecting our relative performance against established incentive targets, offset by an increase of $220,000 in stock-based compensation. For the year ended 2009 and 2008, we capitalized $160,000 and $77,000, respectively of employee-related costs for internally developed software used in our on-demand software. We had 31 full-time research and development employee equivalents as of December 31, 2009 and December 31, 2008. Compensation costs for our content group in the United Kingdom were included in research and development prior to the launch of our United Kingdom and Ireland media database in September 2008. Subsequent to the launch, the compensation costs and related headcount are included in costs of revenues.
 
General and Administrative Expenses.  General and administrative expenses for 2009 were $21.0 million, an increase of $662,000, or 3%, over general and administrative expenses of $20.4 million for 2008. The increase in general and administrative expenses was primarily due to an increase of $248,000 in employee related costs from additional personnel, $210,000 in professional fees and travel, $251,000 in rents and facility costs relating to expansion of our offices and $768,000 in stock-based compensation, offset by a decrease of $661,000 in incentive compensation reflecting our relative performance against established incentive targets. We had 51 full-time employee equivalents in our general and administrative group at December 31, 2009 compared to 47 full-time employee equivalents at December 31, 2008.
 
Amortization of Intangible Assets.  Amortization of intangible assets for 2009 was $1.9 million, a decrease of $725,000, or 27%, compared to amortization of intangible assets of $2.7 million for 2008. Intangible assets acquired in the purchase of Gnossos Software, Inc. were fully amortized in October 2008 resulting in decreased amortization. Amortization expense for 2008 included $633,000 related to these assets.
 
Other Income (Expense).  Other income for 2009 was $454,000, a decrease of $1.7 million, or 78% compared to $2.1 million for 2008. The continued decline in interest rate yields in 2009 resulted in decreased interest income.
 
Provision (Benefit) for Income Taxes.  The provision for income taxes for 2009 was $2.9 million. For 2009, our effective tax rate differed from the U.S. Federal statutory rates primarily due to operating losses in foreign jurisdictions for which no tax benefit is currently available, non-deductible compensation, and to a lesser extent, state income taxes and certain other non-deductible expenses. The benefit for income taxes for 2008 of $5.1 million primarily relates to the reversal of the valuation allowance against our U.S. deferred tax assets. For 2008, our effective tax rate differed from the U.S. Federal statutory rates primarily due to the effect of reversing the valuation allowance related to our U.S. deferred tax assets and, to a lesser extent, operating losses in foreign jurisdictions for which no tax benefit is currently available, state income taxes and certain non-deductible expenses.
 
Years Ended December 31, 2008 and 2007
 
Revenues.  Revenues for 2008 were $77.5 million, an increase of $19.4 million, or 33%, over revenues of $58.1 million for 2007. The increase in revenues was primarily due to the increase in the number of total active subscription customers to 3,379 as of December 31, 2008 from 2,427 as of December 31, 2007. The increase in active subscription customers was the result of additional sales personnel focused on acquiring new customers and renewing existing customers. Revenue growth from the increase in active subscription customers was $16.1 million. Revenue growth from transaction revenue was $3.6 million. Total deferred revenue as of December 31, 2008 was $42.9 million, representing an increase of $7.9 million, or 23%, over total deferred revenue of $35.0 million as of December 31, 2007.
 
Cost of Revenues.  Cost of revenues for 2008 was $14.7 million, an increase of $3.8 million, or 34%, over cost of revenues of $10.9 million for 2007. The increase in cost of revenues was due to an increase of $1.3 million in employee related costs from additional personnel, $846,000 in third-party license and royalty fees, $521,000 in hosting infrastructure costs and $681,000 in stock-based compensation. We had 149 full-time employee equivalents


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in our professional and other support services group at December 31, 2008 compared to 107 full-time employee equivalents at December 31, 2007.
 
Sales and Marketing Expenses.  Sales and marketing expenses for 2008 were $35.1 million, an increase of $8.6 million or 32%, over sales and marketing expenses of $26.5 million for 2007. The increase was primarily due to an increase of $3.2 million in employee related costs from additional personnel, $1.1 million in sales commissions and incentive based compensation, $2.5 million in marketing program costs and $1.7 million in stock-based compensation. Our sales and marketing headcount increased by 27% as we hired sales personnel to focus on acquiring new customers and increasing revenues from existing customers and marketing personnel to expand our marketing activities to build brand awareness. We had 206 full-time sales and marketing employee equivalents as of December 31, 2008 compared to 162 full-time employee equivalents as of December 31, 2007.
 
Research and Development Expenses.  Research and development expenses for 2008 were $5.0 million, an increase of $1.2 million, or 31%, over research and development expenses of $3.8 million for 2007. The increase in research and development expenses was primarily due to an increase of $728,000 in employee related costs from additional personnel and an increase of $221,000 in stock-based compensation. For the years ended 2008 and 2007, we capitalized $77,000 and $340,000, respectively of employee-related costs for internally developed software used in our on-demand software. We had 31 full-time research and development employee equivalents as of December 31, 2008 compared to 29 full-time employee equivalents as of December 31, 2007. Compensation costs for our content group in the United Kingdom were included in research and development prior to the launch of our United Kingdom and Ireland media database in September 2008. Subsequent to the launch, the compensation costs and related headcount are included in costs of revenues.
 
General and Administrative Expenses.  General and administrative expenses for 2008 were $20.4 million, an increase of $5.7 million, or 38%, over general and administrative expenses of $14.7 million for 2007. The increase in general and administrative expenses was primarily due to an increase of $601,000 in employee related costs from additional personnel, $751,000 in professional fees, $505,000 in rents and facility costs relating to expansion of our offices and $2.9 million in stock-based compensation. We had 47 full-time employee equivalents in our general and administrative group at December 31, 2008 compared to 43 full time employee equivalents at December 31, 2007.
 
Amortization of Intangible Assets.  Amortization of intangible assets for 2008 was $2.7 million, a decrease of $211,000, or 7%, compared to amortization of intangible assets of $2.9 million for 2007. Intangible assets acquired in the purchase of Gnossos Software, Inc. were fully amortized in October 2008 resulting in decreased amortization.
 
Other Income (Expense).  Other income for 2008 was $2.1 million, a decrease of $385,000, or 15% compared to $2.5 million for 2007. The decline in interest rate yields in 2008 resulted in decreased interest income.
 
Provision (Benefit) for Income Taxes.  The benefit for income taxes for 2008 of $5.1 million primarily relates to the reversal of the valuation allowance against our U.S. deferred tax assets. The provision for income taxes for 2007 of $674,000 consists primarily of deferred income tax expense resulting from amortization of tax deductible goodwill related to PRWeb and to a lesser extent, state income taxes and Federal alternative minimum tax.
 
Liquidity and Capital Resources
 
As of December 31, 2009, our principal sources of liquidity were cash and cash equivalents totaling $85.8 million, investments totaling $18.9 million and net accounts receivable totaling $18.2 million.
 
Operating Activities.  Net cash provided by operating activities for the year ended December 31, 2009 was $16.1 million, reflecting a net loss of $2.0 million, non-cash charges for depreciation and amortization of $3.6 million, stock-based compensation of $12.9 million and $1.0 million from net increases in accounts receivable and deferred revenue due to growth in our subscription agreements invoiced in 2009. Net cash provided by operating activities is also impacted by changes in other working capital accounts in the ordinary course of business.
 
Investing Activities.  Net cash used in investing activities for the year ended December 31, 2009 was $1.3 million, which primarily resulted from proceeds received from net maturities of investments of $2.9 million and investments in property, equipment and software of $1.6 million to support our continued growth.


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Financing Activities.  Net cash provided by financing activities for the year ended December 31, 2009 was $3.1 million. In 2009, we purchased 265,404 shares of our common stock at an aggregate cost of $4.1 million and received proceeds from the exercise of stock option awards of $2.4 million.
 
As of December 31, 2009, we had a letter of credit outstanding in favor of our principal landlord. The letter of credit is collateralized by a $270,000 certificate of deposit which is maintained at the granting financial institution. The letter of credit renews annually through April 2011 and the certificate of deposit matures in 2011.
 
As of December 31, 2009, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Other than our operating leases for office space and computer equipment, we do not engage in off-balance sheet financing arrangements. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
 
We intend to fund our operating expenses and capital expenditures primarily through cash flows from operations. We believe that our current cash, cash equivalents and investments together with our expected cash flows from operations will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for at least the next 12 months.
 
The following table summarizes our contractual obligations as of December 31, 2009 that requires us to make future cash payments.
 
                                         
    Payments Due by period  
          Less than
    1-3
    3-5
    More than
 
Contractual Obligations
  Total     1 Year     Years     Years     5 Years  
 
Operating leases
  $ 4,367     $ 1,485     $ 1,101     $ 875     $ 906  
Contractual commitments
    3,139       2,334       761       44        
Capital lease obligations
    274       221       49       4        
                                         
Total obligations
  $ 7,780     $ 4,040     $ 1,911     $ 923     $ 906  
                                         
 
The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum services to be used; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Obligations under agreements that we can cancel without a significant penalty are not included in the table above.
 
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk
 
Foreign Currency Exchange Risk
 
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British pound sterling. As a result, we are exposed to movements in the exchange rates of currencies against the U.S. Dollar. Revenues from subscription agreements denominated in a foreign currency were approximately 6% of our total revenues in the years ended December 31, 2007 and 2009 and 7% of our total revenues in the year ended 2008. Exchange rate fluctuations have not significantly impacted our results of operations, financial condition and cash flows. Historically, we have not utilized derivative financial instruments to hedge our foreign exchange exposure; however, we may choose to use such contracts in the future.
 
Interest Rate Sensitivity
 
Our cash equivalents and investments consist primarily of money market funds, corporate notes and bonds, government-sponsored agency securities and other debt securities. Our interest income is subject to interest rate risk. For the year ended December 31, 2009 a fluctuation in interest rates of 1 percentage point would change interest income by approximately $1 million.


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Item 8.   Financial Statements and Supplementary Data
 
Our consolidated financial statements and related notes required by this item are set forth as a separate section of this report. See Part IV, Item 15 of this Form 10-K.
 
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A.   Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information required to be disclosed is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
 
Changes in Internal Controls
 
There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.
 
Management’s Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
 
A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to further periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.
 
Under the supervision and with the participation of management, including its principal executive officer and principal financial officer, our management assessed the design and operating effectiveness of internal control over financial reporting as of December 31, 2009 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
Based on its evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2009. The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.


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Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting
 
The Board of Directors and Stockholders of Vocus, Inc.
 
We have audited Vocus, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Vocus, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Vocus, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Vocus, Inc. and subsidiaries as of December 31, 2008 and 2009, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2009 and our report dated March 9, 2010 expressed an unqualified opinion thereon.
 
/s/ Ernst & Young LLP
 
McLean, Virginia
March 9, 2010


40


 

Item 9B.   Other Information
 
None.
 
PART III
 
Item 10.   Directors, Executive Officers and Corporate Governance
 
A listing of our executive officers, key employees and their biographies are included under the caption “Executive Officers and Key Employees” under Item 1 of this Form 10-K. The remaining information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2010 Annual Meeting of Stockholders.
 
Item 11.   Executive Compensation
 
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2010 Annual Meeting of Stockholders.
 
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2010 Annual Meeting of Stockholders.
 
Item 13.   Certain Relationships and Related Transactions, and Director Independence
 
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2010 Annual Meeting of Stockholders.
 
Item 14.   Principal Accountant Fees and Services
 
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2010 Annual Meeting of Stockholders.
 
PART IV
 
Item 15.   Exhibits and Financial Statement Schedules
 
(a) Documents filed as part of this report:
 
  1.  Consolidated Financial Statements:
 
  •  Report of Independent Registered Public Accounting Firm;
 
  •  Consolidated balance sheets as of December 31, 2008 and 2009;
 
  •  Consolidated statements of operations for the years ended December 31, 2007, 2008 and 2009;
 
  •  Consolidated statements of stockholders’ equity for the years ended December 31, 2007, 2008 and 2009;
 
  •  Consolidated statements of cash flows for the years ended December 31, 2007, 2008 and 2009; and
 
  •  Notes to consolidated financial statements.
 
  2.  Consolidated Financial Statement Schedule:
 
  •  Schedule II — Valuation and Qualifying Accounts.
 
All other financial schedules are not required under the related instructions or are inappropriate and therefore have been omitted.
 
(b) Exhibits
 
The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this report.


41


 

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
VOCUS, INC.
 
  By: 
/s/  Richard Rudman
Richard Rudman
Chief Executive Officer, President and Chairman
 
Date: March 9, 2010
 
POWER OF ATTORNEY
 
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard Rudman and Stephen Vintz, jointly and severally, his attorney-in-fact, each with the full power of substitution, for such person, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might do or could do in person hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute, may do or cause to be done by virtue hereof.
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
 
             
Signature
 
Title
 
Date
 
         
/s/  Richard Rudman

Richard Rudman
  Chief Executive Officer, President and Chairman (Principal Executive Officer)   March 9, 2010
         
/s/  Stephen Vintz

Stephen Vintz
  Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)   March 9, 2010
         
/s/  Kevin Burns

Kevin Burns
  Director   March 9, 2010
         
/s/  Gary Golding

Gary Golding
  Director   March 9, 2010
         
/s/  Gary Greenfield

Gary Greenfield
  Director   March 9, 2010
         
/s/  Ronald Kaiser

Ronald Kaiser
  Director   March 9, 2010
         
/s/  Robert Lentz

Robert Lentz
  Director   March 9, 2010
         
/s/  Richard Moore

Richard Moore
  Director   March 9, 2010


42


 


 

 
Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders of Vocus, Inc.
 
We have audited the accompanying consolidated balance sheets of Vocus, Inc. and subsidiaries as of December 31, 2008 and 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the index at Item 15(a)2. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vocus, Inc. and subsidiaries at December 31, 2008 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Vocus, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2010 expressed an unqualified opinion thereon.
 
/s/ Ernst & Young LLP
 
McLean, Virginia
March 9, 2010


F-2


 

Vocus, Inc. and Subsidiaries
 
 
                 
    December 31,  
    2008     2009  
    (Dollars in thousands, except per share data)  
 
Current assets:
               
Cash and cash equivalents
  $ 65,429     $ 85,817  
Short-term investments
    21,758       17,851  
Accounts receivable, net of allowance for doubtful accounts of $294 and $212 at December 31, 2008 and December 31, 2009, respectively
    14,739       18,245  
Current portion of deferred income taxes
    394       685  
Prepaid expenses and other current assets
    3,340       1,753  
                 
Total current assets
    105,660       124,351  
Long-term investments
          1,001  
Property, equipment and software, net
    4,615       4,666  
Intangible assets, net
    5,906       3,980  
Goodwill
    17,090       17,090  
Deferred income taxes, net of current portion
    6,097       7,459  
Other assets
    611       693  
                 
Total assets
  $ 139,979     $ 159,240  
                 
Current liabilities:
               
Accounts payable
  $ 497     $ 1,148  
Accrued compensation
    2,297       2,384  
Accrued expenses
    2,479       3,239  
Current portion of notes payable and capital lease obligations
    185       197  
Current portion of deferred revenue
    41,775       46,789  
                 
Total current liabilities
    47,233       53,757  
Notes payable and capital lease obligations, net of current portion
    188       48  
Other liabilities
    71       93  
Deferred revenue, net of current portion
    1,079       961  
                 
Total liabilities
    48,571       54,859  
Commitments and contingencies
               
Stockholders’ equity:
               
Preferred stock, $0.01 par value, 10,000,000 shares authorized; no shares issued and outstanding at December 31, 2008 and December 31, 2009
           
Common stock, $0.01 par value, 90,000,000 shares authorized; 19,380,866 and 19,854,585 issued at December 31, 2008 and December 31, 2009, respectively; 17,965,129 and 18,173,444 shares outstanding at December 31, 2008 and December 31, 2009, respectively
    194       199  
Additional paid-in capital
    129,897       149,279  
Treasury stock, 1,415,737 and 1,681,141 shares at December 31, 2008 and December 31, 2009, respectively, at cost
    (10,783 )     (14,914 )
Accumulated other comprehensive income
    564       305  
Accumulated deficit
    (28,464 )     (30,488 )
                 
Total stockholders’ equity
    91,408       104,381  
                 
Total liabilities and stockholders’ equity
  $ 139,979     $ 159,240  
                 
 
See accompanying notes.


F-3


 

Vocus, Inc. and Subsidiaries
 
 
                         
    Year Ended December 31,  
    2007     2008     2009  
    (Dollars in thousands, except per share data)  
 
Revenues
  $ 58,076     $ 77,520     $ 84,579  
Cost of revenues
    10,922       14,675       15,461  
                         
Gross profit
    47,154       62,845       69,118  
Operating expenses:
                       
Sales and marketing
    26,548       35,140       41,123  
Research and development
    3,822       4,998       4,675  
General and administrative
    14,743       20,356       21,018  
Amortization of intangible assets
    2,862       2,651       1,926  
                         
Total operating expenses
    47,975       63,145       68,742  
Income (loss) from operations
    (821 )     (300 )     376  
Other income (expense):
                       
Interest and other income
    2,541       2,136       485  
Interest expense
    (47 )     (27 )     (31 )
                         
Total other income (expense)
    2,494       2,109       454  
Income before provision (benefit) for income taxes
    1,673       1,809       830  
Provision (benefit) for income taxes
    674       (5,119 )     2,854  
                         
Net income (loss)
  $ 999     $ 6,928     $ (2,024 )
                         
Net income (loss) per share:
                       
Basic
  $ 0.06     $ 0.38     $ (0.11 )
Diluted
  $ 0.05     $ 0.37     $ (0.11 )
Weighted average shares outstanding used in computing per share amounts:
                       
Basic
    17,147,889       17,997,123       18,077,616  
Diluted
    18,267,020       18,958,500       18,077,616  
 
See accompanying notes.


F-4


 

Vocus, Inc. and Subsidiaries
 
 
 
                                                         
                            Accumulated
             
                Additional
          Other
          Total
 
    Common Stock     Paid-In
    Treasury
    Comprehensive
    Accumulated
    Stockholders’
 
    Shares     Amount     Capital     Stock     Income (Loss)     Deficit     Equity  
 
Balance at December 31, 2006
    16,993,515     $ 170     $ 80,526     $ (3,283 )   $ (48 )   $ (36,391 )   $ 40,974  
Public offering, net of costs
    1,217,137       12       21,645                         21,657  
Issuance of common stock to directors
    5,196             110                         110  
Exercise of stock options and warrants
    435,567       4       1,594                         1,598  
Tax benefit from equity awards
                78                         78  
Accretion of redeemable common stock
                (1 )                       (1 )
Forfeiture of common stock redemption right
    5,000             34                         34  
Stock-based compensation
                5,567                         5,567  
Comprehensive income:
                                                       
Foreign currency translation
                            (25 )           (25 )
Net unrealized gain on available for sale securities, net of tax
                            13             13  
Net income
                                  999       999  
                                                         
Total comprehensive income
                                                    987  
                                                         
Balance at December 31, 2007
    18,656,415       186       109,553       (3,283 )     (60 )     (35,392 )     71,004  
Issuance of common stock to directors
    210             6                         6  
Exercise of stock options
    709,490       8       7,218                         7,226  
Tax benefit from equity awards
                1,951                         1,951  
Repurchase of 404,960 shares of common stock
                      (7,500 )                 (7,500 )
Stock-based compensation
    14,751             11,169                         11,169  
Comprehensive income:
                                                       
Foreign currency translation
                            601             601  
Net unrealized gain on available for sale securities, net of tax
                            23             23  
Net income
                                  6,928       6,928  
                                                         
Total comprehensive income
                                                    7,552  
                                                         
Balance at December 31, 2008
    19,380,866       194       129,897       (10,783 )     564       (28,464 )     91,408  
Exercise of stock options
    264,133       3       2,400                         2,403  
Vesting of restricted stock awards
    209,586       2       (2 )                        
Tax benefit from equity awards
                4,088                         4,088  
Repurchase of 265,404 shares of common stock
                      (4,131 )                 (4,131 )
Stock-based compensation
                12,896                         12,896  
Comprehensive loss:
                                                       
Foreign currency translation
                            (225 )           (225 )
Net unrealized loss on available for sale securities, net of tax
                            (34 )           (34 )
Net loss
                                  (2,024 )     (2,024 )
                                                         
Total comprehensive loss
                                                    (2,283 )
                                                         
Balance at December 31, 2009
    19,854,585     $ 199     $ 149,279     $ (14,914 )   $ 305     $ (30,488 )   $ 104,381  
                                                         
 
See accompanying notes.


F-5


 

Vocus, Inc. and Subsidiaries
 
 
                         
    Year Ended December 31,  
    2007     2008     2009  
    (Dollars in thousands)  
 
Cash flows from operating activities
                       
Net income (loss)
  $ 999     $ 6,928     $ (2,024 )
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization of property, equipment and software
    1,480       1,821       1,658  
Amortization of intangible assets
    2,982       2,722       1,926  
Loss (gain) on disposal of assets
    (26 )     10       3  
Impairment of long-lived assets
    24       68        
Stock-based compensation
    5,657       11,172       12,892  
Provision for doubtful accounts
    75       237       265  
Deferred income taxes
    454       (7,154 )     (1,631 )
Excess tax benefit from equity awards
    (78 )     (1,951 )     (5,048 )
Changes in operating assets and liabilities:
                       
Accounts receivable
    (4,277 )     (1,075 )     (3,642 )
Prepaid expenses and other current assets
    (744 )     (1,532 )     1,621  
Other assets
    (25 )     (145 )     (93 )
Accounts payable
    (416 )     (405 )     616  
Accrued compensation
    1,020       (712 )     75  
Accrued expenses
    599       1,422       4,814  
Deferred revenue
    8,304       8,836       4,624  
Other liabilities
    4       (18 )     23  
                         
Net cash provided by operating activities
    16,032       20,224       16,079  
Cash flows from investing activities
                       
Purchases of property and equipment
    (1,046 )     (1,742 )     (1,445 )
Software development costs
    (322 )     (74 )     (156 )
Proceeds from disposal of assets
    34              
Purchases of available-for-sale securities
    (14,237 )     (46,008 )     (32,332 )
Sales of available-for-sale securities
    625       800        
Maturities of available-for-sale securities
    6,043       34,437       35,183  
                         
Net cash provided by (used in) investing activities
    (8,903 )     (12,587 )     1,250  
Cash flows from financing activities
                       
Proceeds from public offerings, net of offering costs
    21,657              
Repurchases of common stock
          (7,500 )     (4,131 )
Proceeds from exercises of stock options and warrants
    1,598       7,226       2,403  
Excess tax benefit from equity awards
    78       1,951       5,048  
Payments on notes payable and capital lease obligations
    (427 )     (360 )     (218 )
                         
Net cash provided by financing activities
    22,906       1,317       3,102  
Effect of exchange rate changes on cash and cash equivalents
          (66 )     (43 )
                         
Net increase in cash and cash equivalents
    30,035       8,888       20,388  
Cash and cash equivalents at beginning of year
    26,506       56,541       65,429  
                         
Cash and cash equivalents at end of year
  $ 56,541     $ 65,429     $ 85,817  
                         
Supplemental disclosure of cash flow information:
                       
Cash paid for interest
  $ 44     $ 29     $ 31  
Cash paid for income taxes
  $ 20     $ 621     $ 101  
Supplemental disclosure of non-cash investing and financing activities:
                       
Assets acquired under capital leases and other financing arrangements
  $     $ 514     $ 90  
Forfeiture of common stock redemption right
  $ 34     $     $  
 
See accompanying notes.


F-6


 

 
 
1.   Business Description
 
Organization and Description of Business
 
Vocus, Inc. (Vocus or the Company) is a provider of on-demand software for public relations management. The Company’s on-demand software addresses the critical functions of public relations including media relations, news distribution and news monitoring. The Company is headquartered in Lanham, Maryland with sales and other offices in Virginia, Maryland, California, Washington, and England.
 
2.   Summary of Significant Accounting Policies
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of Vocus, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents.
 
Investments
 
Management determines the appropriate classification of investments at the time of purchase and evaluates such determination as of each balance sheet date. The Company’s investments were classified as available-for-sale securities and were stated at fair value at December 31, 2008 and 2009. Realized gains and losses are included in other income (expense) based on the specific identification method. Realized gains or losses for the years ended December 31, 2008 and 2009 were not material. Net unrealized gains and losses on available-for-sale securities are reported as a component of other comprehensive income (loss), net of tax. As of December 31, 2008 and 2009, the net unrealized gains on available-for-sale securities were not material. The Company regularly monitors and evaluates the fair value of its investments to identify other-than-temporary declines in value. Management believes no such declines in value existed at December 31, 2009.
 
Fair Value Measurements
 
The Company measures certain financial assets at fair value, including cash equivalents and available-for-sale securities pursuant to a fair value hierarchy based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable


F-7


 

 
Vocus, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
inputs reflect a reporting entity’s pricing based upon its own market assumptions. The fair value hierarchy consists of the following three levels:
 
         
Level 1
    Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2
    Inputs are quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3
    Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
 
Allowance for Doubtful Accounts
 
Estimates are used to determine the amount of the allowance for doubtful accounts necessary to reduce accounts receivable to the estimated net realizable value. These estimates are made by analyzing the status of significant past-due receivables and by establishing general provisions for estimated losses by analyzing current and historical bad debt trends. Actual collection experience has not varied significantly from prior estimates.
 
Software Development and Information Database Costs
 
The Company incurs software development costs related to its on-demand software developed for subscription services. Qualifying costs incurred during the application development stage are capitalized. These costs primarily consist of internal labor and are amortized using the straight-line method over the estimated useful life of the software, generally two years. All other development costs are expensed as incurred. The Company also capitalized the costs to acquire and develop its proprietary information database. These costs are amortized using the straight-line method over the estimated useful lives of nine to thirteen years. Costs to maintain and update the information database are expensed as cost of revenues as incurred.
 
Property, Equipment and Software
 
Property, equipment and software are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally two to five years. Assets acquired under capital leases and leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the terms of the leases. Amortization of assets acquired under capital leases is included in depreciation expense. Repairs and maintenance costs are charged to expense as incurred. When assets are retired or otherwise disposed of, the asset and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is recorded in the results of operations.
 
Long-Lived Assets
 
Long-lived assets include property, equipment and software and intangible assets with finite lives. Intangible assets consist of customer relationships, a trade name and agreements not-to-compete acquired in business combinations. Intangible assets are amortized using the straight-line method or an accelerated basis over their estimated useful lives ranging from five to seven years. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the assets are impaired, the impairment recognized is measured by the amount by which the carrying amount exceeds the estimated fair value of the assets. Impairment charges for long-lived assets for the years ended December 31, 2007 and 2008 were not material. There were no impairment charges for long-lived assets for the year ended December 31, 2009.


F-8


 

 
Vocus, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
Goodwill
 
Goodwill represents the excess of the cost of an acquired entity over the net fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortized, but rather is assessed for impairment at least annually. The first step is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment test is not necessary. The Company performed its annual impairment assessment on November 1st. The estimated fair value of the Company’s reporting unit exceeded its carrying amount, including goodwill, and as such, no potential goodwill impairment was noted.
 
Foreign Currency and Operations
 
The functional currency for the Company’s foreign subsidiaries are the British pound and the Euro. The translation of each subsidiary’s financial statements into U.S. dollars is performed for assets and liabilities using exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate during the period. The resulting translation adjustments are recognized in accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Realized foreign currency transaction gains and losses are included in other income (expense) in the consolidated statements of operations.
 
Comprehensive Income (Loss)
 
Comprehensive income (loss) includes the Company’s net income (loss) as well as other changes in stockholders’ equity that result from transactions and economic events other than those with stockholders. Other comprehensive income (loss) includes foreign currency translation adjustments and net unrealized gains and losses on investments classified as available-for-sale securities. The components of accumulated other comprehensive income are as follows (in thousands):
 
                 
    Year Ended
 
    December 31,  
    2008     2009  
 
Foreign currency translation adjustment
    524       299  
Unrealized net gain on available-for-sale securities, net of tax
    40       6  
                 
Accumulated other comprehensive income
  $ 564     $ 305  
                 
 
Revenue Recognition
 
The Company derives its revenues from subscription arrangements and related services permitting customers to access and utilize the Company’s on-demand software and from the online distribution of press releases. The Company recognizes revenue when there is persuasive evidence of an arrangement, the service has been provided to the customer, the collection of the fee is probable and the amount of the fees to be paid by the customer is fixed or determinable.
 
Subscription agreements generally contain multiple service elements and deliverables. These elements include access to the Company’s on-demand software, hosting services, content and content updates, customer support and often specify initial services including implementation and training. Subscription agreements do not provide customers the right to take possession of the software at any time. The Company considers all elements in its multiple element subscription arrangements as a single unit of accounting and recognizes all associated fees over the subscription period. The Company determined that it does not have objective and reliable evidence of the fair value of the subscription fees after delivery of specified initial services; and therefore, accounts for its subscription arrangements and its related service fees as a single unit of accounting. As a result, all revenue from multiple element subscription arrangements is recognized ratably over the term of the subscription. The subscription term


F-9


 

 
Vocus, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
commences on the start date specified in the subscription arrangement or the date access to the software is provided to the customer.
 
The Company distributes press releases over the Internet which are indexed by major search engines and distributed directly to various news sites, journalists and other key constituents. The Company recognizes revenue on a per-transaction basis when the press releases are made available to the public.
 
Deferred Revenue
 
Deferred revenue consists of payments received from or billings to customers in advance of revenue recognition. Deferred revenue to be recognized in the succeeding 12-month period is included in current deferred revenue with the remaining amounts included in noncurrent deferred revenue.
 
Sales Commissions
 
Sales commissions are expensed when a subscription agreement is executed by the customer.
 
Advertising Costs
 
The Company expenses advertising costs as incurred. Advertising costs for the years ended December 31, 2007, 2008 and 2009 were $2,686,000, $3,925,000 and $4,955,000, respectively.
 
Stock-Based Compensation
 
The Company recognizes compensation expense for its equity awards on a straight-line basis over the requisite service period of the award based on the estimated portion of the award that is expected to vest and applies estimated forfeiture rates based on analyses of historical data, including termination patterns and other factors. Estimated forfeiture rates are applied based on analyses of historical data, including termination patterns and other factors. The Company uses the quoted closing market price of its common stock on the grant date to measure the fair value of restricted stock awards and the Black-Scholes option pricing model to measure the fair value of stock option awards. The Company became a public entity in December 2005, and therefore has a limited history of volatility. Accordingly, the expected volatility is based primarily on the historical volatilities of similar entities’ common stock over the most recent period commensurate with the estimated expected term of the awards. The expected term of an award is equal to the midpoint between the vesting date and the end of the contractual term of the award. The risk-free interest rate is based on the rate on U.S. Treasury securities with maturities consistent with the estimated expected term of the awards. The Company has not paid dividends and does not anticipate paying a cash dividend in the foreseeable future and, accordingly, use an expected dividend yield of zero.
 
Concentrations of Credit Risk
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, investments and accounts receivable. The Company generally maintains its cash and cash equivalents with various nationally recognized financial institutions. Investments consist of investment grade, interest bearing securities.
 
Customers are granted credit on an unsecured basis. Management monitors the creditworthiness of its customers and believes that it has adequately provided for any exposure to potential credit losses.
 
The Company provides on-demand software and services to various customers across several industries. As of December 31, 2008 and 2009, no individual customer accounted for 10% or more of net accounts receivable. For the years ended December 31, 2007, 2008 and 2009, no individual customer accounted for 10% or more of revenue. As of December 31, 2008 and 2009, total assets located outside the United States were approximately 1% and 2%, of total assets, respectively. Revenues from sales to customers outside the United States were approximately 9% of


F-10


 

 
Vocus, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
total revenues for the years ended December 31, 2007 and 2009 and 10% of total revenues for the year ended December 31, 2008.
 
Income Taxes
 
Income taxes are determined utilizing the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax-credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amount of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
 
The Company had no material uncertain tax positions at December 31, 2008 and 2009. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax positions as a component of income tax expense. No interest and penalties related to uncertain income tax positions were accrued at December 31, 2008 and 2009. The Company does not believe its unrecognized tax positions will materially change over the next twelve months. The Company files income tax returns in the U.S. federal jurisdictions and various state and foreign jurisdictions. The Company is subject to U.S. federal tax, state and foreign tax examinations for years ranging from 2002 to 2009.
 
Earnings Per Share
 
Basic net income or loss per share is computed by dividing net income or loss by the weighted average number of common shares outstanding for the period. Nonvested shares of restricted stock are not included in the computation of basic net income per share until vested. Diluted net income per share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted net income per share also includes the dilutive effect of nonvested shares of restricted stock. The following summarizes the calculation of basic and diluted net income (loss) per share (dollars in thousands, except per share amounts):
 
                         
    Year Ended December 31,  
    2007     2008     2009  
 
Net income (loss)
  $ 999     $ 6,928     $ (2,024 )
Weighted average shares outstanding, basic
    17,147,889       17,997,123       18,077,616  
Dilutive effect of:
                       
Options to purchase common stock
    1,046,643       961,377        
Warrants to purchase common stock
    72,488              
Nonvested shares of restricted stock
                 
                         
Weighted average shares outstanding, diluted
    18,267,020       18,958,500       18,077,616  
                         
Net income (loss) per share:
                       
Basic
  $ 0.06     $ 0.38     $ (0.11 )
                         
Diluted
  $ 0.05     $ 0.37     $ (0.11 )
                         
 
For the years ended December 31, 2007 and 2008, diluted earnings per share excluded 22,000 and 65,540 outstanding stock options, respectively, because the exercise prices exceeded the average market price of the Company’s common stock during the periods and, as a result, the impact of their inclusion would be anti-dilutive. For the year ended December 31, 2008, diluted earnings per share excluded 676,450 nonvested shares of restricted stock, as the impact of their inclusion would be anti-dilutive. For the year ended December 31, 2009, the Company incurred net losses and, therefore, the effect of the Company’s outstanding stock options and nonvested shares of


F-11


 

 
Vocus, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
restricted stock was not included in the calculation of diluted loss per share as the effect would be anti-dilutive. Accordingly, basic and diluted net loss per share were identical. For the year ended December 31, 2009, diluted earnings per share excluded 2,134,979 outstanding stock options and 1,229,358 nonvested shares of restricted stock.
 
Segment Data
 
The Company’s chief operating decision maker manages the Company’s operations on a consolidated basis for purposes of assessing performance and making operating decisions. Accordingly, the Company reports on one segment of its business.
 
Recent Accounting Pronouncements
 
In October 2009, the FASB issued authoritative guidance on multiple deliverable revenue arrangements. Pursuant to the new guidance, when vendor specific objective evidence or third-party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. However, early adoption is permitted. The Company is currently evaluating the impact the adoption of the new guidance will have on its consolidated financial statements.
 
3.   Cash Equivalents and Investments
 
The components of cash equivalents and short-term investments at December 31, 2008 are as follows (dollars in thousands):
 
                                 
          Unrealized     Fair Market
 
    Cost     Gains     Losses     Value  
 
Cash equivalents:
                               
Money market funds
  $ 4,056     $     $     $ 4,056  
Commercial paper
    33,345                   33,345  
Government-sponsored agency debt securities
    1,504                   1,504  
Certificates of deposit
    4,798                   4,798  
Short-term investments:
                               
Government-sponsored agency debt securities
    17,944       76       (10 )     18,010  
Certificates of deposit
    2,299       1       (1 )     2,299  
Corporate notes and bonds
    1,450             (1 )     1,449  
                                 
Total
  $ 65,396     $ 77     $ (12 )   $ 65,461  
                                 


F-12


 

 
Vocus, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
The components of cash equivalents and investments at December 31, 2009 are as follows (dollars in thousands):
 
                                 
          Unrealized     Fair Market
 
    Cost     Gains     Losses     Value  
 
Cash equivalents:
                               
Money market funds
  $ 7,045     $     $     $ 7,045  
Commercial paper
    37,144                   37,144  
Certificates of deposit
    2,900                   2,900  
Short-term investments:
                               
Commercial paper
    6,497       2             6,499  
Government-sponsored agency debt securities
    8,746       5             8,751  
Certificates of deposit
    700                   700  
Corporate notes and bonds
    1,900       1             1,901  
Long-term investments:
                               
Government-sponsored agency debt securities
    1,000       1             1,001  
                                 
Total
  $ 65,932     $ 9     $     $ 65,941  
                                 
 
Cash equivalents have original maturity dates of three months or less. Short-term investments have original maturity dates greater than three months but less than one year. As of December 31, 2009, long-term investments have original maturity dates between one and two years.
 
4.   Fair Value Measurements
 
The fair value measurements of the Company’s financial assets measured on a recurring basis at December 31, 2009 are as follows (dollars in thousands):
 
                                 
    Total     Level 1     Level 2     Level 3  
 
Cash equivalents
  $ 47,089     $ 9,945     $ 37,144     $  
Short-term investments
    17,851       11,352       6,499        
Long-term investments
    1,001       1,001              
                                 
Total
  $ 65,941     $ 22,298     $ 43,643     $  
                                 
 
Cash equivalents and investments are classified within Level 1 or Level 2 of the fair value hierarchy since they are valued using quoted market prices or alternative pricing sources that utilize market observable inputs.


F-13


 

 
Vocus, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
 
5.   Property, Equipment and Software
 
Property, equipment and software consisted of the following (dollars in thousands):
 
                 
    December 31,  
    2008     2009  
 
Purchased software, computer and office equipment
  $ 4,440     $ 5,474  
Office furniture
    965       1,117  
Leasehold improvements
    1,117       1,317  
Equipment under capital lease obligations
    534       603  
Capitalized software development costs
    865       1,025  
Information database costs
    2,565       2,565  
                 
      10,486       12,101  
Less accumulated depreciation and amortization
    (5,871 )     (7,435 )
                 
Property, equipment and software, net
  $ 4,615     $ 4,666  
                 
 
Depreciation expense on equipment under capital leases was $32,000, $136,000 and $80,000 for the years ended December 31, 2007, 2008 and 2009, respectively.
 
6.   Intangible Assets
 
Intangible assets at December 31, 2008 consisted of the following (dollars in thousands):
 
                                 
    Weighted-Average
    Gross
             
    Amortization
    Carrying
          Net Carrying
 
    Period     Amount     Amortization     Amount  
 
Customer relationships
    5.0     $ 3,041     $ (1,747 )   $ 1,294  
Trade name
    7.0       3,946       (1,356 )     2,590  
Agreements not-to-compete
    5.0       3,913       (1,891 )     2,022  
                                 
Total
          $ 10,900     $ (4,994 )   $ 5,906  
                                 
 
Intangible assets at December 31, 2009 consisted of the following (dollars in thousands):
 
                                 
    Weighted-Average
    Gross
             
    Amortization
    Carrying
          Net Carrying
 
    Period     Amount     Amortization     Amount  
 
Customer relationships
    5.0     $ 3,041     $ (2,326 )   $ 715  
Trade name
    7.0       3,946       (1,920 )     2,026  
Agreements not-to-compete
    5.0       3,913       (2,674 )     1,239  
                                 
Total
          $ 10,900     $ (6,920 )   $ 3,980  
                                 
 
Future expected amortization of intangible assets at December 31, 2009 was as follows (dollars in thousands):
 
         
2010
  $ 1,821  
2011
    1,260  
2012
    564  
2013
    335  
         
    $ 3,980  
         


F-14


 

 
Vocus, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
 
7.   Debt
 
Term Loans and Equipment Line of Credit
 
The Company has a secured revolving equipment line of credit (the Equipment Line) that provides for borrowings up to $2,000,000. In May 2008, the Company modified the Equipment Line to extend the expiration date to June 30, 2010. Outstanding borrowings under the Equipment Line convert to term loans with principal and interest payments payable monthly over a maximum period of 36 months depending on the date of the borrowing and asset purchased. Borrowings bear interest at the bank’s prime rate, and interest is payable monthly. Borrowings are collateralized by the equipment purchased under the Equipment Line. There were no outstanding borrowings under the term loans at December 31, 2009.
 
8.   Stockholders’ Equity
 
Public Offerings of Common Stock
 
On April 4, 2007, the Company completed the sale of 1,217,137 shares of common stock, at an offering price of $19.50 per share. A total of $23,734,000 in gross proceeds was raised by the Company in the public offering. After deducting the underwriters’ commissions and offering expenses of $2,077,000, net proceeds of the offering to the Company were $21,657,000.
 
Common Stock Repurchases
 
In November 2008, the Company’s Board of Directors authorized a stock repurchase program for up to $30,000,000 of the Company’s shares of common stock. The shares may be purchased from time to time in the open market. During the year ended December 31, 2008 and 2009, the Company purchased an aggregate of 404,960 and 224,192 shares of its common stock for $7,500,000 and $3,500,000, respectively. During the year ended December 31, 2009, the Company also purchased 41,212 shares of restricted stock for $631,000 that were withheld from employees to satisfy the minimum statutory tax withholding obligations upon the vesting of their restricted stock awards during 2009.
 
9.   Stock-Based Compensation
 
The Company’s 1999 Stock Option Plan and 2005 Stock Award Plan (the “Plans”) provide for the grant of stock options, restricted stock, stock appreciation rights and other equity awards to employees, consultants, officers and directors. The 2005 Stock Award Plan was adopted by the Board of Directors and stockholders in November 2005 in conjunction with the Company’s initial public offering. Under the 2005 Stock Award Plan, 5,233,663 shares have been reserved for future issuance, subject to annual increases. The Plans are administered by the Compensation Committee of the Board of Directors, which has the authority, among other things, to determine which individuals receive awards pursuant to the Plans, and the terms of the awards. Stock options granted under the Plans have a 10-year term and generally vest annually over a four-year period. The Company’s outstanding equity awards include stock option awards and restricted stock awards. At December 31, 2009, 983,424 shares were available for future grants. All shares available for future grant are restricted to the 2005 Stock Award Plan.


F-15


 

 
Vocus, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
The following table sets forth the stock-based compensation expense for equity awards recorded in the consolidated statements of operations for the years ended December 31, 2007, 2008 and 2009 (in thousands):
 
                         
    Year Ended December 31,  
    2007     2008     2009  
 
Cost of revenues
  $ 581     $ 1,262     $ 1,453  
Sales and marketing
    1,498       3,212       3,753  
Research and development
    548       769       989  
General and administration
    3,025       5,929       6,697  
                         
Total
  $ 5,652     $ 11,172     $ 12,892  
                         
 
Stock Option Awards
 
The following weighted-average assumptions were used in calculating stock-based compensation for stock option awards granted during the years ended December 31, 2007, 2008 and 2009:
 
                         
    Year Ended December 31,  
    2007     2008     2009  
 
Stock price volatility
    52 %     54 %     62 %
Expected term (years)
    6.2       6.1       6.2  
Risk-free interest rate
    4.8 %     3.0 %     2.5 %
Dividend yield
    0 %     0 %     0 %
 
The summary of stock option activity for the year ended December 31, 2009 is as follows:
 
                                         
                Weighted-
    Weighted-
    Aggregate Intrinsic
 
                Average
    Average
    Value as of
 
    Number of
    Range of
    Exercise Price
    Contractual
    December 31,
 
    Options     Exercise Prices     per Share     Term     2009  
                            (In thousands)  
 
Balance outstanding at January 1, 2009
    2,567,074     $ 0.30 - $35.98     $ 14.05                  
Granted
    62,689       16.64 - 19.78       17.23                  
Exercised
    (264,133 )     0.30 - 18.65       9.10                  
Forfeited or cancelled
    (230,651 )     0.30 - 34.53       17.84                  
                                         
Balance outstanding at December 31, 2009
    2,134,979     $ 0.30 - 35.98     $ 14.35       6.6     $ 9,404  
                                         
Vested and expected to vest at December 31, 2009
    2,053,774     $ 0.30 - $35.98     $ 14.17       6.6     $ 9,362  
                                         
Balance exercisable at December 31, 2009
    1,441,223     $ 0.30 - $35.98     $ 12.24       6.3     $ 8,972  
                                         
 
The weighted-average grant date fair value of stock options granted during the years ended December 31, 2007, 2008 and 2009 was $11.30, $15.19 and $10.17, respectively. The fair value of stock options that vested during the years ended December 31, 2007, 2008 and 2009 was $2,600,000, $5,973,000 and $5,355,000, respectively. As of December 31, 2009, $5.0 million of total unrecognized stock-based compensation cost is related to nonvested stock option awards and is expected to be recognized over a weighted-average period of 1.1 years.
 
The aggregate intrinsic value in the table above represents the difference between the exercise price of the underlying equity awards and the quoted closing price of the Company’s common stock at the last day of the year


F-16


 

 
Vocus, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
multiplied by the number of shares that would have been received by the stock option holders had all holders exercised their stock options on the last day of each respective year. The aggregate intrinsic value of options exercised during the years ended December 31, 2007, 2008 and 2009 was $4,890,000, $16,066,000 and $2,092,000, respectively.
 
The following details the outstanding stock options at December 31, 2009:
 
                                         
    Options Outstanding     Options Exercisable  
          Weighted-
    Weighted-
          Weighted-
 
          Average
    Average
          Average
 
Range of
  Outstanding
    Remaining
    Exercise
    Exercisable
    Exercise
 
Exercise
  as of
    Contractual
    Price per
    as of
    Price per
 
Prices
  12/31/09     Term     Share     12/31/09     Share  
 
$ 0.30 - $ 3.59
    9,710       2.3     $ 2.09       9,710     $ 2.09  
$ 3.60 - $ 7.19
    102,303       5.0       4.77       102,303       4.77  
$ 7.20 - $10.78
    786,241       5.9       9.00       786,241       9.00  
$10.79 - $14.38
    141,250       6.5       13.10       71,250       13.11  
$14.39 - $17.99
    84,689       8.3       16.49       20,750       16.09  
$18.00 - $21.58
    922,496       7.1       18.80       415,957       18.78  
$21.59 - $35.98
    88,290       7.8       27.92       35,012       27.83  
                                         
      2,134,979       6.6     $ 14.35       1,441,223     $ 12.24  
                                         
 
Restricted Stock Awards
 
The fair value of the restricted stock awards is determined based on the quoted closing market price of the Company’s common stock on the grant date.
 
The summary of restricted stock award activity for the year ended December 31, 2009 is as follows:
 
                 
    Number of Shares
    Weighted-Average
 
    Underlying Stock
    Grant Date Fair
 
    Awards     Value  
 
Balance nonvested at January 1, 2009
    676,450     $ 29.46  
Awarded
    867,433       16.73  
Vested
    (209,586 )     28.27  
Forfeited
    (104,939 )     26.36  
                 
Balance nonvested at December 31, 2009
    1,229,358     $ 20.94  
                 
 
As of December 31, 2009, $19.0 million of total unrecognized stock-based compensation cost is related to nonvested shares of restricted stock and is expected to be recognized over a weighted-average period of 2.7 years.
 
10.   Employee Benefit Plans
 
The Company sponsors defined-contribution and profit-sharing plans in the United States and the United Kingdom. Total expenses for the plans for the years ended December 31, 2007, 2008 and 2009 were approximately $283,000, $355,000 and $370,000, respectively.


F-17


 

 
Vocus, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
 
11.   Income Taxes
 
A reconciliation of the Company’s effective income tax rate on income before taxes with the federal statutory rate is as follows:
 
                         
    2007     2008     2009  
 
Current expense
  $ 220     $ 2,035     $ 4,677  
Deferred expense (benefit)
    454       (7,154 )     (1,823 )
                         
Provision (benefit) for income taxes
  $ 674     $ (5,119 )   $ 2,854  
                         
 
For the years ended December 31, 2007, 2008 and 2009, the provision for income taxes differs from the expected tax provision computed by applying the U.S. Federal statutory rate to income before taxes as a result of the following:
 
                         
    2007     2008     2009  
 
Statutory federal tax rate
    35 %     35 %     35 %
State income taxes
    7       9       29  
Effect of foreign losses
    8       13       24  
Non-deductible compensation
    11       30       145  
Other non-deductible expenses
    4       4       14  
Changes in valuation allowance
    (25 )     (374 )     97  
                         
      40 %     (283 )%     344 %
                         
 
The provision for income taxes for the year ended December 31, 2009 differed from the expected tax provision computed by applying the U.S. Federal statutory rate to income before income taxes primarily due to operating losses in foreign jurisdictions for which no tax benefit is currently available, non-deductible compensation, and to a lesser extent, state income taxes and certain other non-deductible expenses. Historically, the Company maintained a full valuation allowance on its deferred tax assets because it was unable to conclude that it was more likely than not that it would realize the tax benefits of these deferred tax assets. During 2008, the Company concluded that it was more likely than not that it would not have future taxable income sufficient to realize certain of its deferred tax assets and reversed its valuation allowance against its U.S. deferred tax assets. For the year ended December 31, 2008, the effective tax rate differed from the U.S. Federal statutory rate primarily due to the reversal of the valuation allowance and, to a lesser extent, state income taxes, certain nondeductible expenses and operating losses in foreign jurisdictions for which no tax benefit is currently available. As of December 31, 2009, the Company maintained a full valuation against its foreign deferred tax assets.
 
During the fourth quarter of 2009, the Company identified an error in its accounting for income taxes that affected certain prior periods. The cumulative effect of the error was corrected in the three months ended December 31, 2009 resulting in a $773,000 increase to income tax expense. The Company concluded that the impact of the error was not material to the consolidated financial statements for any prior interim or annual period.


F-18


 

 
Vocus, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
The Company’s deferred tax components consisted of the following (dollars in thousands):
 
                 
    December 31,  
    2008     2009  
 
Deferred tax assets:
               
NOL carryforwards
  $ 1,921     $ 2,728  
Allowance for doubtful accounts
    96       66  
Deferred revenue
    105       226  
Accrued expenses
    165       239  
Depreciation
    258       303  
Intangible asset amortization
    3,088       3,339  
Stock-based compensation
    4,478       5,572  
Other
    189       633  
                 
Total deferred tax assets
    10,300       13,106  
Valuation allowance
    (1,921 )     (2,728 )
                 
Net deferred tax assets
    8,379       10,378  
                 
Deferred tax liabilities:
               
Capitalized software development
    (810 )     (743 )
Goodwill
    (1,054 )     (1,487 )
Other
    (24 )     (4 )
                 
Total deferred tax liabilities
    (1,888 )     (2,234 )
                 
Net deferred tax asset
  $ 6,491     $ 8,144  
                 
 
At December 31, 2009, the Company had net operating loss (NOL) carryforwards for federal tax purposes of approximately $2.3 million which will begin to expire in 2024. For the year ended December 31, 2009, the loss before income taxes from foreign operations totaled $3.8 million.
 
The exercise and vesting of equity awards has generated income tax deductions in excess of amounts recorded for financial reporting purposes. In 2007, the Company did not realize a significant tax benefit from the exercise of stock options as it had incurred cumulative losses for federal and certain state income tax purposes. In 2008 and 2009, the Company realized a tax benefit from the utilization of NOLs related to stock-based compensation and the exercise and vesting of equity awards. The Company recorded a tax benefit from equity awards to additional paid-in capital for the years ended December 31, 2007, 2008 and 2009. The Company has elected to use the “with and without” method for recognition of excess tax benefits related to equity awards.
 
12.   Commitments and Contingencies
 
Leases
 
The Company has various non-cancelable operating leases, primarily related to office real estate, that expire through 2020 and generally contain renewal options for up to five years. Rent expense was $1,065,000, $1,364,000 and $1,666,000 for the years ended December 31, 2007, 2008, and 2009, respectively. The Company also leases computer and office equipment under non-cancelable capital leases and other financing arrangements that expire through 2011.


F-19


 

 
Vocus, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
Future minimum lease payments under non-cancelable operating and capital leases at December 31, 2009 are as follows (dollars in thousands):
 
                 
    Operating
    Capital
 
    Leases     Leases  
 
2010
  $ 1,485     $ 221  
2011
    670       36  
2012
    431       13  
2013
    443       4  
2014
    432        
2015 and thereafter
    906        
                 
Total future minimum payments
  $ 4,367       274  
                 
Less amount representing interest
            (29 )
Less current portion
            (197 )
                 
Long-term capital lease obligations
          $ 48  
                 
 
Purchase Commitments
 
The Company has entered into various agreements with vendors primarily for the hosting of and content used in its on-demand software services. As of December 31, 2009, minimum required payments in future years under these arrangements are $2,300,000, $584,000, $177,000 and $44,000 in 2010, 2011, 2012 and 2013, respectively.
 
Letter of Credit
 
The Company has established a letter of credit in favor of its landlord. The letter of credit is collateralized by a $270,000 certificate of deposit. The certificate of deposit matures in 2011 and the balance plus accrued interest is included in other assets in the accompanying consolidated balance sheets. As of December 31, 2009, the letter of credit remained outstanding; however, no amounts had been drawn against it. The letter of credit renews annually through April 2011.
 
Litigation and Claims
 
The Company is subject to lawsuits, investigations, and claims arising out of the ordinary course of business, including those related to commercial transactions, contracts, government regulation, and employment matters. In the opinion of management based on all known facts, all such matters are either without merit or are of such kind, or involve such amounts that would not have a material effect on the financial position or results of operations of the Company if disposed of unfavorably.


F-20


 

 
Vocus, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
 
13.   Quarterly Financial Information (Unaudited)
 
                                                                 
    March 31,
    June 30,
    September 30,
    December 31,
    March 31,
    June 30,
    September 30,
    December 31,
 
    2008     2008(1)     2008     2008     2009     2009     2009     2009(2)  
 
Summary consolidated statement of operations data:
                                                               
Revenues
  $ 17,867     $ 19,085     $ 19,953     $ 20,615     $ 20,411     $ 21,079     $ 21,042     $ 22,047  
Gross profit
    14,435       15,458       16,252       16,700       16,504       17,232       17,181       18,201  
Net income (loss)
    (403 )     5,664       218       1,449       (478 )     (343 )     (382 )     (821 )
Net income (loss) per share:
                                                               
Basic
  $ (0.02 )   $ 0.32     $ 0.01     $ 0.08     $ (0.03 )   $ (0.02 )   $ (0.02 )   $ (0.05 )
Diluted
  $ (0.02 )   $ 0.30     $ 0.01     $ 0.08     $ (0.03 )   $ (0.02 )   $ (0.02 )   $ (0.05 )
Weighted average shares outstanding used in computing per share amounts:
                                                               
Basic
    17,682,504       17,868,247       18,193,456       18,239,463       18,026,397       18,051,243       18,092,595       18,138,830  
Diluted
    17,682,504       18,957,313       19,349,935       18,523,210       18,026,397       18,051,243       18,092,595       18,138,830  
 
 
(1) During the three months ended June 30, 2008, the Company reversed the valuation allowance against its U.S. deferred tax assets in the amount of $8.0 million.
 
(2) See Note 11 for discussion of certain items impacting the provision for income taxes.


F-21


 

Vocus, Inc.
 
Schedule II — Valuation and Qualifying Accounts
 
                                 
    Balance
                Balance at
 
    Beginning of
    Charged to
          End of
 
    Period     Expense     Deductions(1)     Period  
 
Allowance for doubtful accounts:
                               
Year ended December 31, 2007
  $ 280     $ 75     $ (104 )   $ 251  
Year ended December 31, 2008
    251       224       (181 )     294  
Year ended December 31, 2009
    294       265       (347 )     212  
Deferred tax valuation allowance:
                               
Year ended December 31, 2007
  $ 10,021     $ (977 )   $     $ 9,044  
Year ended December 31, 2008
    9,044       (7,123 )           1,921  
Year ended December 31, 2009
    1,921       807             2,728  
 
 
(1) Includes actual write-off of accounts written-off, net of recoveries.


II-1


 

Index to Exhibits
 
         
Exhibit
   
Numbers
 
Exhibits
 
  3 .1(6)   Fifth Amended and Restated Certificate of Incorporation.
  3 .2(6)   Amended and Restated Bylaws.
  4 .1(4)   Specimen common stock certificate.
  10 .1(1)   1999 Stock Option Plan.
  10 .2(1)   Form of Option Agreement under Registrant’s 1999 Stock Option Plan.
  10 .3(5)   2005 Stock Award Plan.
  10 .4(10)   Form of Option Agreement for executive officers under Registrant’s 2005 Stock Award Plan.
  10 .5(10)   Form of Option Agreement for non-employee directors under Registrant’s 2005 Stock Award Plan.
  10 .6(1)   Agreement of Lease, dated December 21, 2000, between MOR FORBES LLLP and Registrant as amended.
  10 .7(5)   Form of Indemnification Agreement entered into by the Registrant and each of its executive officers and directors.
  10 .8(2)   License Agreement between the Registrant and PR Newswire Association LLC, dated August 1, 2003, as amended.
  10 .9(10)   Amended and Restated Agreement between the Registrant and PR Newswire Association, Inc., dated August 1, 2006.
  10 .10(3)   OEM License Agreement between the Registrant and Moreover Technologies, Inc., dated March 1, 2006, as amended.
  10 .11(7)   Form of Employment Agreement for Richard Rudman and Stephen Vintz, and schedule of details omitted therefrom.
  10 .12(7)   Form of Employment Agreement for Norman Weissberg, and schedule of details omitted therefrom.
  10 .13(8)   Employment Agreement for William Wagner dated July 17, 2006.
  10 .14(8)   Indemnification Agreement for William Wagner dated July 17, 2006.
  10 .15(9)   Asset Purchase Agreement, dated August 4, 2006, among the Registrant, Vocus PRW Holdings LLC, PRWeb, LLC and the sole stockholder of PRWeb International, Inc. and sole owner of PRWeb, LLC.
  10 .16(11)   Form of Restricted Stock Agreement for executive officers under Registrant’s 2005 Stock Award Plan.
  10 .17(11)   Form of Restricted Stock Agreement for non-employee directors under Registrant’s 2005 Stock Award Plan.
  10 .18(11)   Summary of board of directors’ compensation.
  21 .1*   List of subsidiaries.
  23 .1*   Consent of Ernst & Young LLP.
  24 .1*   Power of Attorney (included on the signature page to this report).
  31 .1*   Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934.
  31 .2*   Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934.
  32 .1**   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
Filed herewith
 
** Furnished herewith
 
(1) Incorporated by reference to an exhibit to the Registration Statement on Form S-1 of Vocus, Inc. (Registration No. 333-125834) filed with the Securities and Exchange Commission on June 15, 2005.
 
(2) Incorporated by reference to an exhibit to Amendment No. 2 to the Registration Statement on Form S-1 of Vocus, Inc. (Registration No. 333-125834) filed with the Securities and Exchange Commission on August 5, 2005.


II-2


 

 
(3) Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on March 1, 2006.
 
(4) Incorporated by reference to an exhibit to Amendment No. 5 to the Registration Statement on Form S-1 of Vocus, Inc. (Registration No. 333-125834) filed with the Securities and Exchange Commission on November 9, 2005.
 
(5) Incorporated by reference to an exhibit to Amendment No. 6 to the Registration Statement on Form S-1 of Vocus, Inc. (Registration No. 333-125834) filed with the Securities and Exchange Commission on December 6, 2005.
 
(6) Incorporated by reference to an exhibit to the Registration Statement on Form S-8 of Vocus, Inc. (Registration No. 333-132206) filed with the Securities and Exchange Commission on March 3, 2006.
 
(7) Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on December 12, 2005.
 
(8) Incorporated by reference to an exhibit to the Current Report on Form 8-K of Vocus, Inc. filed with the Securities and Exchange Commission on July 20, 2006.
 
(9) Incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2006.
 
(10) Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2007.
 
(11) Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2008.
 
(12) Incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 12, 2008.


II-3