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EX-31.1 - EXHIBIT - WEB.COM GROUP, INC.wwww2014q1-ex311.htm
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EX-32.1 - EXHIBIT - WEB.COM GROUP, INC.wwww2014q1-ex321.htm
EX-31.2 - EXHIBIT - WEB.COM GROUP, INC.wwww2014q1-ex312.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________  
FORM 10-Q
________________________   
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2014
 
or
¨
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: 000-51595
________________________ 
Web.com Group, Inc.
(Exact name of registrant as specified in its charter)
________________________  
Delaware
94-3327894
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
12808 Gran Bay Parkway, West, Jacksonville, FL
32258
(Address of principal executive offices)
(Zip Code)
 
(904) 680-6600
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
________________________ 
  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý  Yes    ¨   No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý   Yes    ¨   No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨   Yes    ý   No 

Common Stock, par value $0.001 per share, outstanding as of April 28, 2014: 51,778,062



Web.com Group, Inc.
 
Quarterly Report on Form 10-Q
 
For the Quarterly Period ended March 31, 2014
 
Index
 
Part I
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Part II
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 

2


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

 Web.com Group, Inc.
 
Consolidated Statements of Comprehensive Income (Loss)
(in thousands, except per share amounts)
(unaudited) 
 
Three months ended March 31,
 
2014
 
2013
Revenue
$
133,843

 
$
115,546

 
 
 
 
Cost of Revenue
46,586

 
42,640

 
 
 
 
Gross profit
87,257

 
72,906

Operating expenses:
 
 
 
Sales and marketing
37,533

 
33,364

Research and development
7,198

 
8,212

General and administrative
13,742

 
13,780

Depreciation and amortization
19,239

 
20,040

Total operating expenses
77,712

 
75,396

Income (loss) from operations
9,545

 
(2,490
)

 
 
 
Interest expense, net
(7,492
)
 
(9,951
)
Loss from debt extinguishment

 
(19,526
)
Net income (loss) before income taxes
2,053

 
(31,967
)
Income tax expense
(1,563
)
 
(14,536
)
Net income (loss)
$
490

 
$
(46,503
)
Other comprehensive (loss) income:
 
 
 
Unrealized (loss) gain on investments, net of tax
(2
)
 
9

Total comprehensive income (loss)
$
488

 
$
(46,494
)
 
See accompanying notes to consolidated financial statements

3



Web.com Group, Inc.
 
Consolidated Statements of Comprehensive Income (Loss)
(in thousands, except per share amounts)
(unaudited)
(continued)
 
 
 
Three months ended March 31,
 
 
2014
 
2013
Basic earnings per share:
 
 
 
 
Net income (loss) per common share
 
$
0.01

 
$
(0.97
)
Diluted earnings per share:
 
 
 
 
Net income (loss) per common share
 
$
0.01

 
$
(0.97
)
 
 
 
 
 
Basic weighted average common shares
 
50,334

 
48,085

Diluted weighted average common shares
 
54,583

 
48,085

 
See accompanying notes to consolidated financial statements


4



Web.com Group, Inc.
 
Consolidated Balance Sheets
(in thousands, except share amounts)
 
March 31,
2014
 
December 31,
2013
 
(unaudited)
 
 
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
15,228

 
$
13,806

Accounts receivable, net of allowance of $1,560 and $1,545, respectively
20,565

 
17,062

Prepaid expenses
12,173

 
7,348

Deferred expenses
64,387

 
62,073

Deferred taxes
30,477

 
35,318

Other current assets
8,901

 
2,837

Total current assets
151,731

 
138,444

 
 
 
 
Property and equipment, net
41,652

 
42,090

Deferred expenses
55,883

 
57,235

Goodwill
630,432

 
627,845

Intangible assets, net
392,100

 
401,921

Other assets
4,990

 
10,224

Total assets
$
1,276,788

 
$
1,277,759

 
 
 
 
Liabilities and stockholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
7,874

 
$
10,351

Accrued expenses
12,182

 
14,449

Accrued compensation and benefits
5,212

 
13,423

Deferred revenue
217,282

 
208,856

Current portion of debt
52,593

 
6,586

Other liabilities
4,968

 
3,651

Total current liabilities
300,111

 
257,316

 
 
 
 
Deferred revenue
190,438

 
186,539

Long-term debt
507,003

 
556,506

Deferred tax liabilities
98,991

 
102,421

Other long-term liabilities
6,033

 
4,932

Total liabilities
1,102,576

 
1,107,714

Stockholders' equity:
 

 
 

Common stock, $0.001 par value per share: 150,000,000 shares authorized, 51,757,187 and 51,193,230 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively
52

 
51

Additional paid-in capital
531,779

 
528,101

Accumulated other comprehensive income
18

 
20

Accumulated deficit
(357,637
)
 
(358,127
)
Total stockholders' equity
174,212

 
170,045

Total liabilities and stockholders' equity
$
1,276,788

 
$
1,277,759

See accompanying notes to consolidated financial statements

5


Web.com Group, Inc.
 Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Three months ended March 31,
 
2014
 
2013
Cash flows from operating activities
 

 
 

Net income (loss)
$
490

 
$
(46,503
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Loss from debt extinguishment

 
12,286

Depreciation and amortization
19,239

 
20,040

Stock based compensation
4,504

 
6,365

Deferred income taxes
1,411

 
14,217

Amortization of debt issuance costs
2,719

 
577

Changes in operating assets and liabilities:
 

 
 

Accounts receivable, net
(3,173
)
 
(1,747
)
Prepaid expenses and other assets
(4,085
)
 
(5,098
)
Deferred expenses
(941
)
 
460

Accounts payable
(3,706
)
 
2,045

Accrued expenses and other liabilities
(795
)
 
2,469

Accrued compensation and benefits
(8,243
)
 
(11,133
)
Accrued restructuring costs and other reserves
(1,139
)
 
(731
)
Deferred revenue
12,325

 
17,786

Net cash provided by operating activities
18,606

 
11,033

Cash flows from investing activities
 

 
 

Business acquisitions, net of cash acquired
(7,437
)
 

Capital expenditures
(2,921
)
 
(4,496
)
Net cash used in investing activities
(10,358
)
 
(4,496
)
Cash flows from financing activities
 

 
 

Stock issuance costs
(24
)
 
(2
)
Common stock repurchased
(4,956
)
 
(5,666
)
Payments of long-term debt
(15,000
)
 
(669,576
)
Proceeds from exercise of stock options
4,154

 
1,085

Proceeds from borrowings on long-term debt

 
658,350

Proceeds from borrowings on revolving credit facility
9,000

 
10,000

Debt issuance costs

 
(2,322
)
Net cash used in financing activities
(6,826
)
 
(8,131
)
Net increase (decrease) in cash and cash equivalents
1,422

 
(1,594
)
Cash and cash equivalents, beginning of year
13,806

 
15,181

Cash and cash equivalents, end of period
$
15,228

 
$
13,587

Supplemental cash flow information
 

 
 

Interest paid
$
5,526

 
$
15,635

Income tax paid (received)
$
191

 
$
(31
)
See accompanying notes to consolidated financial statements

6


Web.com Group, Inc.
Notes to Consolidated Financial Statements
(unaudited)

1. The Company and Summary of Significant Accounting Policies
 
Description of Company
 
Web.com Group, Inc. ("Web.com" or the "Company") provides a full range of internet services to small businesses to help them compete and succeed online. Web.com is a global domain registrar and meets the needs of small businesses anywhere along their lifecycle with affordable, subscription-based solutions including website design and management, search engine optimization, online marketing campaigns, local sales leads, social media, mobile products, eCommerce solutions and call center services. For more information about the Company, please visit http://www.web.com. The information obtained on or accessible through the Company's website is not incorporated into this Quarterly Report on Form 10-Q and you may not consider it a part of this Quarterly Report on Form 10-Q.

The Company has reviewed the criteria of Accounting Standards Codification (“ASC”) 280-10, Segment Reporting, and has determined that the Company is comprised of only one segment, web services and products.

Basis of Presentation
 
The accompanying consolidated balance sheet as of March 31, 2014, the consolidated statements of comprehensive income (loss) for the three months ended March 31, 2014 and 2013, the consolidated statements of cash flows for the three months ended March 31, 2014 and 2013, and the related notes to the consolidated financial statements are unaudited.
 
The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2013, except that certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or excluded as permitted.
 
In the opinion of management, the unaudited consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s financial position as of March 31, 2014, and the Company’s results of operations for the three months ended March 31, 2014 and 2013 and the cash flows for the three months ended March 31, 2014 and 2013. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014.

Pursuant to the rules and regulations of the SEC, certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been omitted from these interim financial statements. The Company suggests that these financial statements be read in conjunction with the audited financial statements and the notes included in the Company's most recent annual report on Form 10-K filed with the SEC on February 28, 2014 and any subsequently filed current reports on Form 8-K.

Use of Estimates
 
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

2. Business Combinations
Acquisition of SnapNames
On February 28, 2014, the Company completed the acquisition of substantially all of the assets and certain liabilities of SnapNames.com, Inc. ("SnapNames"), an Oregon corporation, from KeyDrive S.A., which primarily consisted of domain name inventory and intangible assets, including trade names, customer relationships and developed technology. The activities of the business acquired includes daily auctions, premium auctions, and brokerage transactions related to domain names (the "SnapNames Business"). The Company paid $7.4 million during the three months ended March 31, 2014 for this business. In

7


addition, the Company recorded a $1.0 million holdback liability payable to KeyDrive S. A. in February 2015, subject to certain working capital adjustments.
The Company has accounted for the acquisition of the SnapNames Business using the acquisition method as required in ASC 805, Business Combinations. As such, fair values have been assigned to the assets acquired and liabilities assumed and the excess of the total purchase price over the fair value of the net assets acquired is recorded as goodwill. The Company, with the assistance of independent valuation professionals, has estimated fair value of certain intangible assets. The goodwill recorded from this acquisition represents business benefits the Company anticipates realizing from optimizing resources and cross-sale opportunities. The goodwill from the acquisition is expected to be deductible for tax purposes.
The Company is still reviewing information surrounding accounts payable, accrued expenses and income tax considerations resulting from the acquisition, as well as determining the fair value of intangible assets, which may result in changes to the Company's preliminary purchase price allocation during the measurement period.
3. Net Income (Loss) Per Common Share
 
Basic net income (loss) per common share is calculated using net income (loss) and the weighted-average number of shares outstanding during the reporting period. Diluted net income (loss) per common share includes the effect from the potential issuance of common stock, such as common stock issued pursuant to the exercise of stock options or vesting of restricted shares. However, as of March 31, 2013, 9.2 million share-based awards have been excluded from the calculation of diluted common shares because including those securities would have been antidilutive.

The Company's potentially dilutive shares also include incremental shares issuable upon the conversion of the Company's Senior Convertible Notes due August 15, 2018 ("2018 Notes"). See Note 6, Long-term Debt, for additional information regarding the 2018 Notes. Upon conversion or maturity of the 2018 Notes, the Company may settle the notes with either cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. The Company has adopted a current policy to settle the principal amount in cash and any excess conversion value in shares of our common stock. Because the principal amount of the 2018 Notes will be settled in cash upon conversion, only the conversion spread relating to the 2018 Notes is included in our calculation of diluted net income per common share. When the market price of our stock exceeds the conversion price, as applicable, we will include, in the diluted net income per common share calculation, the effect of the additional shares that may be issued upon conversion using the treasury stock method. There were no incremental common shares from the 2018 Notes that were included in the calculation of diluted shares because the Company's average price of its common stock did not exceed the conversion price during the three months ended March 31, 2014.

The following table sets forth the computation of basic and diluted net income (loss) per common share (in thousands, except per share amounts):
 
 
 
 
Three months ended March 31,
 
 
 
2014
 
2013
Net income (loss)
 
 
$
490

 
$
(46,503
)
 
 
 
 
 
 
Basic weighted average common shares
 
 
50,334

 
48,085

Diluted effect of stock options
 
 
3,546

 

Diluted effect of restricted shares
 
 
703

 

Dilutive effect of the assumed conversion of the 2018 Notes
 
 

 

Diluted weighted average common shares
 
 
54,583

 
48,085

Basic earnings per share:
 
 
 
 
 
Net income (loss) per common share
 
 
$
0.01

 
$
(0.97
)
Diluted earnings per share:
 
 
 
 
 
Net income (loss) per common share
 
 
$
0.01

 
$
(0.97
)


4. Goodwill and Intangible Assets
 
In accordance with ASC 350, the Company reviews goodwill and other indefinite-lived intangible asset balances for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of goodwill or indefinite-lived intangible assets below their carrying amount. As of December 31,

8


2013, the Company completed its annual impairment test of goodwill and other indefinite-lived intangible assets and determined that there was no impairment. There were no indicators of impairment during the three months ended March 31, 2014.

The following table summarizes changes in the Company’s goodwill balances as required by ASC 350-20 for the three months ended March 31, 2014 and the year ended December 31, 2013, respectively (in thousands):    

 
March 31,
2014
 
December 31,
2013
Goodwill balance at beginning of period
$
730,139

 
$
730,139

Accumulated impaired goodwill at beginning of period
(102,294
)
 
(102,294
)
Goodwill balance at beginning of period, net
627,845

 
627,845

Goodwill acquired during the period (1)
2,587

 

Goodwill balance at end of period, net *
$
630,432

 
$
627,845

  
*Gross goodwill balances were $732.7 million as of March 31, 2014 and $730.1 million as of December 31, 2013. These include accumulated impairment losses of $102.3 million.
(1) The increase of $2.6 million is from the SnapNames acquisition. See Note 2, Business Combinations, for additional information.

The Company’s intangible assets are summarized as follows (in thousands): 
 
 
 
 
 
Weighted-average Amortization Period in Years as of
 
March 31, 2014
 
December 31, 2013
 
March 31, 2014
Indefinite-lived intangible assets:
 

 
 

 
 
Domain/Trade names
$
129,699

 
$
128,126

 
 
Definite-lived intangible assets:


 


 
 
Customer relationships
286,565

 
285,135

 
9.3
Developed technology
190,857

 
187,563

 
2.8
Non-compete agreements and other *
4,108

 
4,108

 
 
Accumulated amortization
(219,129
)
 
(203,011
)
 
 
   Total
$
392,100

 
$
401,921

 
 
*Fully amortized at March 31, 2014 and December 31, 2013
 
 
 
 
 
The weighted-average amortization period for the amortizable intangible assets remaining as of March 31, 2014 is approximately 7.7 years. Total amortization expense was $16.2 million and $17.3 million for the three months ended March 31, 2014 and 2013, respectively.
 
As of March 31, 2014, the amortization expense for the next five years is as follows (in thousands):

2014 (remainder of year)
$
43,682

2015
37,342

2016
35,391

2017
26,244

2018
24,248

Thereafter
95,494

Total
$
262,401


9



5. Restructuring Costs

Accrued restructuring as of March 31, 2014 and December 31, 2013 was $0 and $1.1 million, respectively. Payments to terminate the Herndon, Virginia lease of $1.1 million were made during the three months ended March 31, 2014.
 
6. Long-term Debt

1% Senior Convertible Notes due August 15, 2018

In August 2013, the Company issued $258.8 million aggregate principal amount of 1.00% Senior Convertible Notes due August 15, 2018 ("2018 Notes"). The 2018 Notes bear interest at a rate of 1.00% per year, payable semiannually in arrears, on February 15 and August 15 of each year, beginning on February 15, 2014. The conversion price for the 2018 Notes is equivalent to an initial effective conversion price of approximately $35.00 per share of common stock. Proceeds, net of original issuance discounts and debt issuance costs, of $252.3 million were received from the 2018 Notes. The net proceeds were used to pay down $208.0 million of the First Lien Term Loan and $43.0 million of the Revolving Credit Facility. The First Term Loan and Revolving Credit Facility are discussed below.

The Company may not redeem the 2018 Notes prior to August 20, 2016. On or after August 20, 2016, the Company may redeem for cash any or all of the 2018 Notes, at our option, if the last reported sale price of our common stock exceeds 130% of the applicable conversion price on each applicable trading day as defined by the indenture. The redemption price will equal 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date. Subsequent to December 31, 2013, holders of the 2018 Notes may also convert their notes at any time prior to May 15, 2018 if the sale price of our common stock exceeds 130% of the applicable conversion price on each applicable trading day as defined by the indenture. In addition, holders may also convert their notes any time prior to May 15, 2018 if during the five business days after any five consecutive trading day period in which the trading price was less than 98% of the product of the last reported sale price of our common stock and the conversion rate if the Company calls the notes for redemption; or upon the occurrence of specified corporate events.

Prior to August 20, 2016, the 2018 Notes are also redeemable or convertible upon certain fundamental changes, as defined in the indenture, which may require us to purchase the 2018 Notes in whole or in part for cash at a price equal to 100% of the principal amount of the 2018 Notes to be purchased, plus any accrued and unpaid interest to, but not including, the purchase date. The 2018 Notes are senior unsecured obligations and will be effectively junior to any of our existing and future secured indebtedness, including our borrowings under our First Lien Credit Agreement (discussed below).

The Company determined that the embedded conversion option in the 2018 Notes is not required to be separately accounted for as a derivative under Accounting Standards Codification ("ASC") 815, Derivatives and Hedging. The 2018 Notes are within the scope of ASC 470, Topic 20, Debt with Conversion and Other Options, which requires the Company to separate a liability component and an equity component from the proceeds received. The carrying amount of the liability component at the time of the transaction of $204.4 million was calculated by measuring the fair value of a similar debt instrument that does not have an associated equity component. The fair value of the liability component was subtracted from the initial proceeds and the remaining amount of $47.8 million was recorded as the equity component. The excess of the principal amount of the liability component over its carrying amount will be amortized to interest expense over the expected life using the effective interest method.
 
Upon conversion or maturity of the 2018 Notes, the Company may settle the notes with either cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. The Company has adopted a current policy to settle the $258.8 million of principal amount in cash and any excess conversion value in shares of our common stock. Because the principal amount of the 2018 Notes will be settled in cash upon conversion, only the conversion spread relating to the 2018 Notes may be included in our calculation of diluted net income per common share. When the market price of our stock exceeds the conversion price, as applicable, we will include, in the diluted net income per common share calculation, the effect of the additional shares that may be issued upon conversion using the treasury stock method. As such, the 2018 Notes have no impact on diluted net income per common share until the price of our common stock exceeds the conversion price (approximately $35.00 per common share) of the 2018 Notes.
 
As of March 31, 2014 and December 31, 2013, the carrying value of the debt and equity component was $210.4 million and $47.8 million and $208.0 million and $47.8 million, respectively. The unamortized debt discount of $48.4 million as of March 31, 2014 will be amortized over the remaining life of the 2018 Notes using the effective interest method.


10


First Lien Credit Agreement

On October 27, 2011, the Company entered into credit facilities, pursuant to (i) a First Lien Credit Agreement, dated as of October 27, 2011, by and among the Company, J. P. Morgan Securities LLC and Deutsche Bank Securities Inc., as Co-Syndication Agents; Goldman Sachs Lending Partners LLC and SunTrust Bank, as Co-Documentation Agents; and JPMorgan Chase Bank, N.A., as Administrative Agent, and the lenders from time to time party thereto ("the First Lien Credit Agreement") and (ii) a Second Lien Credit Agreement, dated as of October 27, 2011 (the “Second Lien Credit Agreement”). The First Lien Credit Agreement originally provided for (i) a six -year first lien term loan (the “First Lien Term Loan”) and (ii) a five -year first lien revolving credit facility (the “Revolving Credit Facility”). The Second Lien Credit Agreement originally provided for a seven -year second lien term loan (the “Second Lien Term Loan”).
The Company is required to maintain certain financial ratios under the First Lien Credit Agreement and the Second Lien Credit Agreement. In addition, there are customary covenants that limit the incurrence of debt, the payment of dividends, the disposition of assets, and making of certain payments. Substantially all of the Company’s tangible and intangible assets are pledged as collateral under the credit agreements.
On March 6, 2013, the Company repriced its First Lien Term Loan and increased the outstanding balance to $660.0 million. In addition, the Company increased the maximum amount of available borrowings under the Revolving Credit Facility to $70 million. After giving effect to the repricing, the First Lien Term Loan had an interest rate of LIBOR plus 3.50%, with a 1.0% LIBOR floor, and the revolving credit facility's interest rate is now 3.25% plus LIBOR. The proceeds received from the additional First Lien Term Loan were used to extinguish the Second Lien Term Loan's outstanding balance of $32.0 million.

The repricing of the First Lien Term Loan and the payoff of the Second Lien Term Loan were both accounted for as debt extinguishments in accordance with ASC 470, Debt. As a result of the extinguishment, the Company recorded a $19.5 million loss from debt extinguishment from accelerating unamortized deferred financing fees and loan origination discounts during the three months ended March 31, 2013. Included in the loss is $7.2 million of prepayment penalties that were paid during the first quarter of 2013 related to the extinguishment of the Second Lien Term Loan and repricing of the First Lien Term Loan.

Outstanding long-term debt and the interest rates in effect at March 31, 2014 and December 31, 2013 consist of the following (in thousands):  
 
March 31,
2014
 
December 31,
2013
Revolving Credit Facility maturing 2016, 3.40% at March 31, 2014, based on LIBOR plus 3.25%.
$
9,000

 
$

First Lien Term Loan due 2017, 4.50%, based on 1.00% LIBOR floor plus 3.50%, less unamortized discount of $634 at March 31, 2014, effective rate of 4.70%
340,216

 
355,122

Senior Convertible Notes, maturing 2018, 1.00%, less unamortized discount of $48,370 at March 31, 2014 effective rate of 5.88%
210,380

 
207,970

Total Outstanding Debt
559,596

 
563,092

Less: Current Portion of Long-Term Debt
(52,593
)
 
(6,586
)
Long-Term Portion
$
507,003

 
$
556,506

 
Debt discount and issuance costs
 
The Company recorded $2.7 million and $0.6 million expense from amortizing debt issuance costs and discount costs during the three months ended March 31, 2014 and 2013, respectively.
 
The First Lien Term Loan has repayment terms that are based on the excess cash flow generated by the Company as defined by the agreement. Excess cash flow payments are required to be made during the quarter following the calendar year ended. The Company has forecasted the excess cash flows expected to be generated during the year ended December 31, 2014 and reflected the estimate as current maturities, net of prepayments made through March 31, 2014. Subsequent to that, the minimum principal payments, excluding the excess cash flow payments, are presented due to the significant estimates required in determining such amounts. Total estimated principal payments due for the next five years as of March 31, 2014 are as follows:   

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Year 1
$
52,691

Year 2
6,600

Year 3
15,600

Year 4
274,959

Year 5
258,750

Total principal payments
$
608,600



7. Fair Value
 
The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels as follows:
 
Level 1-Quoted prices in active markets for identical assets or liabilities.
 
Level 2-Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
Level 3-Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
 
The Company has financial assets and liabilities that are not required to be remeasured to fair value on a recurring basis. The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximates fair market value as of March 31, 2014 and December 31, 2013 due to the short maturity of these items. As of March 31, 2014, the fair value and carrying value of the Company’s total long term debt was $649.8 million and $559.6 million, respectively. As of December 31, 2013, the combined fair value and carrying value of the Company's total long term debt was $648.8 million and $563.1 million, respectively. The fair value of the First Lien Loan and the 2018 Notes, including the equity component, were calculated by taking the quoted market price for the instruments multiplied by the principal amount. This is based on a Level 2 fair value hierarchy calculation obtained from quoted market prices for the Company’s long-term debt instruments that may not be actively traded at each respective period end. The Revolving Credit Facility is a variable rate debt instrument indexed to 1-Month LIBOR that resets monthly and the fair value approximates the carrying value as of March 31, 2014 and December 31, 2013.

8. Income Taxes
 
The Company recognized income tax expense of $1.6 million and $14.5 million during the three months ended March 31, 2014 and 2013, respectively, based on its effective tax rate. The Company's estimated annual effective tax rate for the three months ended March 31, 2014 reflects an increase in our projected year-end valuation allowance related to an increase in our non-reversing deferred tax liabilities, partially offset by our estimated pre-tax income for 2014.

9. Stock-Based Compensation
 
Stock Options
 
Compensation costs related to the Company’s stock option plans were $2.8 million and $2.3 million for the three months ended March 31, 2014 and 2013, respectively. During the three months ended March 31, 2014 and 2013, 0.4 million and 0.1 million common shares were issued from options exercised, respectively.
 
Restricted Stock
 
Compensation expense related to restricted stock plans for the three months ended March 31, 2014 and 2013 was approximately $1.7 million and $4.1 million, respectively. During the three months ended March 31, 2014, approximately 0.2 million shares totaling approximately $5.0 million were withheld by the Company for minimum income tax withholding requirements. During the three months ended March 31, 2014 and 2013, 0.3 million and 0.7 million restricted common shares were granted, respectively.

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10. Related Party Transactions
 
The Company outsources data center services to Quality Technology Services LLC (“QTS”). General Atlantic LLC was one of the Company’s greater than 5 percent shareholder as of March 31, 2013, and has approximately a 50 percent ownership interest in QTS. This business relationship was an agreement between QTS and Network Solutions and was acquired by the Company as a result of the Company's acquisition of Network Solutions and commenced on October 27, 2011 upon the consummation of that acquisition. The Company incurred approximately $0.4 million of expense for data center services during each of the three months ended March 31, 2014 and 2013.

11. Commitments and Contingencies
 
The Company utilizes letters of credit to back certain payment obligations relating to its facility operating leases. The Company had approximately $3.0 million in standby letters of credit as of March 31, 2014, $2.0 million of which was drawn against the Revolving Credit Facility.
 
The Company and its subsidiaries are named from time to time as defendants in various legal actions that are incidental to their business and arise out of or are related to claims made in connection with Web.com's customer and vendor contracts and employment related disputes. The Company believes that the resolution of these legal actions will not have a material adverse effect on its financial position or results of operations. There were no material legal matters that were reasonably possible and estimable at March 31, 2014

 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements
 
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” provisions created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including any projections or earnings. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
 
Safe Harbor
 
In the following discussion and analysis of results of operations and financial condition, certain financial measures may be considered “non-GAAP financial measures” under Securities and Exchange Commission rules. These rules require supplemental explanation and reconciliation, which is provided in this Quarterly Report on Form 10-Q.

We believe presenting non-GAAP net income attributable to common stockholders, non-GAAP net income per share attributable to common stockholders and non-GAAP operating income measures are useful to investors, because they describe the operating performance of the Company, excluding some recurring charges that are included in the most directly comparable measures calculated and presented in accordance with GAAP. We use these non-GAAP measures as important indicators of our past performance and in planning and forecasting performance in future periods. The non-GAAP financial information we present may not be comparable to similarly-titled financial measures used by other companies, and investors

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should not consider non-GAAP financial measures in isolation from, or in substitution for, financial information presented in compliance with GAAP.


Overview
 
Web.com Group, Inc. ("Web.com", "the Company" or "We") provides a full range of internet services to small businesses to help them compete and succeed online. Web.com is a global domain registrar and meets the needs of small businesses anywhere along their lifecycle with affordable, subscription-based solutions including domains, hosting, website design and management, search engine optimization, online marketing campaigns, local sales leads, social media, mobile products, eCommerce solutions and call center services. For more information about the company, please visit http://www.web.com. The information obtained on or accessible through our website is not incorporated into this Quarterly Report on Form 10-Q and you may not consider it a part of this Quarterly Report on Form 10-Q.
  
Key Business Metrics
 
Management periodically reviews certain key business metrics to evaluate the effectiveness of our operational strategies, allocate resources and maximize the financial performance of our business. These key business metrics include:
 
Net Subscriber Additions

We maintain and grow our subscriber base through a combination of adding new subscribers and retaining existing subscribers. We define net subscriber additions in a particular period as the gross number of new subscribers added during the period, less subscriber cancellations during the period. For this purpose, we only count as new subscribers those customers whose subscriptions have extended beyond the free trial period, if applicable.

We review this metric to evaluate whether we are performing to our business plan. An increase in net subscriber additions could signal an increase in subscription revenue, higher customer retention, and an increase in the effectiveness of our sales efforts. Similarly, a decrease in net subscriber additions could signal decreased subscription revenue, lower customer retention, and a decrease in the effectiveness of our sales efforts. Net subscriber additions above or below our business plan could have a long-term impact on our operating results due to the subscription nature of our business.
  
Monthly Turnover (Churn)

Monthly turnover, or churn, is a metric we measure each quarter, and which we define as customer cancellations in the quarter divided by the sum of the number of subscribers at the beginning of the quarter and the gross number of new subscribers added during the quarter, divided by three months. Customer cancellations in the quarter include cancellations from gross subscriber additions, which is why we include gross subscriber additions in the denominator. Monthly turnover is the key metric that allows management to evaluate whether we are retaining our existing subscribers in accordance with our business plan.

Average Revenue per User (Subscriber)
 
Monthly average revenue per user, or ARPU, is a metric we measure on a quarterly basis. We define ARPU as quarterly subscription revenue divided by the average of the number of subscribers at the beginning of the quarter and the number of subscribers at the end of the quarter, divided by three months. We exclude from subscription revenue the impact of the fair value adjustments to deferred revenue resulting from acquisition-related write downs. The fair market value adjustment was $7.4 million and $12.5 million for the three months ended March 31, 2014 and 2013, respectively. ARPU is the key metric that allows management to evaluate the impact on monthly revenue from product pricing, product sales mix trends, and up-sell/cross-sell effectiveness.
 
Sources of Revenue
 
Subscription Revenue
 
We currently derive a substantial majority of our revenue from fees associated with our subscription services, which generally include web services, online marketing, eCommerce, and domain name registration offerings. We bill a majority of our customers in advance through their credit cards, bank accounts, or business merchant accounts. The revenue is recognized on a daily basis over the life of the contract.
 

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Professional Services and Other Revenue
 
We generate professional services revenue from custom website design, eCommerce store design and support services. Our custom website design and eCommerce store design work is typically billed on a fixed price basis and over very short periods. Other revenue consists of all fees earned from granting customers licenses to use our patents. Generally, revenue is recognized when the service has been completed.  

Cost of Revenue
 
Cost of revenue consists of expenses related to compensation of our web page development staff, domain name registration fees, directory listing fees, customer support costs, eCommerce store design, search engine registration fees, billing costs, hosting expenses, marketing fees, and allocated overhead costs. We allocate overhead costs such as rent and utilities to all departments based on headcount. Accordingly, general overhead expenses are reflected in each cost of revenue and operating expense category. As our customer base and web services usage grows, we intend to continue to invest additional resources in our website development and support staff.
 
Operating Expenses
 
Sales and Marketing Expense
 
Our direct marketing expenses include the costs associated with the online marketing channels we use to promote our services and acquire customers. These channels include search marketing, affiliate marketing, direct television advertising and online partnerships. Sales costs consist primarily of compensation and related expenses for our sales and marketing staff. Sales and marketing expenses also include marketing programs, such as advertising, corporate sponsorships and other corporate events and communications.
 
We plan to continue to invest in sales and marketing to add new subscription customers, and increase sales of additional and new services and products to our existing customer base. We also plan to increase our investment in direct response television advertising to further increase revenue growth. As part of our stated objective to use our larger scale to increase brand awareness, we have invested a portion of our incremental marketing budget in branding activities such as the umbrella sponsorship of the newly re-named Web.com Tour and other sports marketing activities.
 
Research and Development Expense
 
Research and development expenses consist primarily of compensation and related expenses for our research and development staff and allocated overhead costs. We have historically focused our research and development efforts on increasing the functionality of the technologies that enable our web-based services and products. Our technology architecture enables us to provide all of our customers with a service based on a single version of the applications that serve each of our product offerings. We do not anticipate significant increases in our research and development costs in the near term.
 
General and Administrative Expense
 
General and administrative expenses consist of compensation and related expenses for executive, finance, administration, and management information systems personnel, as well as professional fees, corporate development costs, other corporate expenses, and allocated overhead costs. General and administrative expenses are expected to increase during 2014, but remain relatively flat as a percentage of revenue.
 
Depreciation and Amortization Expense
 
Depreciation and amortization expenses relate primarily to our intangible assets recorded due to the acquisitions we have completed, as well as depreciation expense from computer and other equipment, internally developed software, furniture and fixtures, and building and improvement expenditures. Depreciation is expected to increase slightly as we realize a full year's impact of depreciation from the data centers, as well as from internally developed software projects. Amortization expense is expected to decrease as certain intangible assets become fully amortized during 2014.


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Critical Accounting Policies and Estimates
 
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requires us to make estimates, assumptions and judgments that affect our assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information we believe are reasonable. Actual results may differ from these estimates. For a full description of our critical accounting policies, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2014.

Results of Operations
 
Comparison of the results for the three months ended March 31, 2014 to the results for the three months ended March 31, 2013
 
The following table sets forth our key business metrics:  
 
Three months ended March 31,
 
2014
 
2013
 
(unaudited)
Net subscriber additions
50,618

 
21,373

Churn
1
%
 
1
%
Average revenue per user (monthly)
$
14.75

 
$
13.89

  
Net subscribers increased by 50,618 customers during the three months ended March 31, 2014, as compared to an increase of 21,373 during the three months ended March 31, 2013. Churn remained at a low level of 1% during the three months ended March 31, 2014. The increase in customers and the maintenance of our low churn level is primarily due to our increased marketing efforts in prior periods, as well as during the first quarter ended March 31, 2014.
 
The average revenue per user was $14.75 during the three months ended March 31, 2014, as compared to $13.89 during the same prior year period ended March 31, 2013. The growth in average revenue per subscriber continues to be driven principally by our up-sell and cross-sell campaigns focused on selling higher revenue products to our existing customers as well as the introduction of new product offerings and sales channels oriented toward acquiring higher value customers.
 
Revenue
 
 
Three months ended March 31,
 
2014
 
2013
 
(unaudited, in thousands)
Revenue:
 

 
 

Subscription
$
131,784

 
$
113,280

Professional services and other
2,059

 
2,266

Total revenue
$
133,843

 
$
115,546

 
Total revenue increased 16% to $133.8 million in the three months ended March 31, 2014 from $115.5 million in the three months ended March 31, 2013. Total revenue during the three months ended March 31, 2014 and 2013, includes the unfavorable impact of $7.4 million and $12.5 million, respectively, from amortizing into revenue, deferred revenue that was recorded at fair value at the acquisition date. The fair value of the acquired deferred revenue was approximately 51% less than the pre-acquisition historical basis of Network Solutions and Register.com. The unfavorable impact declined $5.2 million during the three months ended March 31, 2014 compared to the same prior period. The remaining $13.1 million increase in revenue during the three months ended March 31, 2014 is driven principally by an increase in domain registration and domain-related services and to increases in sales of our custom website product, online marketing and search engine products and

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services to new and existing customers. Advertising revenue also increased during the three months ended March 31, 2014 when compared to the same prior year period.
 
Subscription Revenue. Subscription revenue increased 16% during the three months ended March 31, 2014 to $131.8 million from $113.3 million during the three months ended March 31, 2013. The increase is primarily due to the overall revenue drivers discussed above.
 
Professional Services and Other Revenue. Professional services revenue decreased 9% to $2.1 million in the three months ended March 31, 2014 from $2.3 million in the three months ended March 31, 2013 due to a slightly lower volume of custom website design revenue.
 
Cost of Revenue
 
Three months ended March 31,
 
2014
 
2013
 
(unaudited, in thousands)
Cost of revenue
$
46,586

 
$
42,640

 
Cost of Revenue. Cost of revenue increased 9% or $3.9 million during the three months ended March 31, 2014 compared to the three months ended March 31, 2013. Costs of revenue as a percentage of total revenue was slightly lower during the three months ended March 31, 2014 compared to the same prior year period. The overall cost increase included $4.3 million from domain registration costs partly offset by $0.9 million of lower online marketing and advertising costs.
 
Our gross margin increased from 63% during the three months ended March 31, 2013 to 65% during the three months ended March 31, 2014. As the impact of the fair value adjustment to acquired deferred revenue continues to decrease over the course of 2014, we expect gross margins to improve. Excluding the $7.4 million and $12.5 million effect of the adjustment related to the fair value of acquired deferred revenue for the three months ended March 31, 2014 and 2013, respectively, the gross margin was essentially flat at 67%.
 
Operating Expenses
 
 
Three months ended March 31,
 
2014
 
2013
 
(unaudited, in thousands)
Operating Expenses:
 

 
 

Sales and marketing
$
37,533

 
$
33,364

Research and development
7,198

 
8,212

General and administrative
13,742

 
13,780

Depreciation and amortization
19,239

 
20,040

Total operating expenses
$
77,712

 
$
75,396

 
Sales and Marketing Expenses. Sales and marketing expenses increased 12% to $37.5 million and were 28% of total revenue during the three months ended March 31, 2014, up from $33.4 million, which was 29% of revenue during the three months ended March 31, 2013. Included in the $4.2 million increase is approximately $3.2 million of additional investments in sales and marketing activities including corporate sponsorships, direct response television advertising, as well as a $0.9 million increase in salaries and benefits from additional sales and online marketing resources that have been added. We expect sales and marketing expenses to continue to increase in the quarters ahead as we invest in building our brand and acquiring customers that subscribe to higher revenue products.
 
Research and Development Expenses. Research and development expenses of $7.2 million, or 5% of total revenue, during the three months ended March 31, 2014 decreased $1.0 million from $8.2 million, or 7% of total revenue during the three months ended March 31, 2013. The decline was primarily from lower data center and software support costs.
 

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General and Administrative Expenses. General and administrative expenses remained essentially flat at $13.7 million or 10% of total revenue, during the three months ended March 31, 2014, as compared to $13.8 million, and 12% of total revenue during the three months ended March 31, 2013. Overall, during the three months ended March 31, 2014, employee-related compensation and benefits expense decreased approximately $0.2 million.
  
Depreciation and Amortization Expense. Depreciation and amortization expense decreased to $19.2 million during the three months ended March 31, 2014 down from $20.0 million during the three months ended March 31, 2013. Amortization expense decreased by $1.2 million during the three months ended March 31, 2014, compared to the same prior year period as certain intangible assets were fully amortized, while depreciation expense increased $0.3 million primarily from internally developed software projects that were placed into service.
 
Interest Expense, net. Net interest expense totaled $7.5 million and $10.0 million for the three months ended March 31, 2014 and 2013, respectively. Included in the interest expense for the three months ended March 31, 2014 and 2013, respectively, is approximately $2.7 million and $0.6 million from amortizing deferred financing fees and loan origination discounts. The three months ended March 31, 2014 includes approximately $2.4 million of increased amortization expense from the debt discount resulting from the August 2013 convertible debt transaction. The overall decrease was driven by $4.6 million of lower interest expense during the first quarter ended March 31, 2014 compared to the first quarter of 2013, from realizing a full quarter of the March 2013 and August 2013 debt repricings as well as lower debt levels due to repayments made.

Loss on Debt Extinguishment. In March 2013, we repriced our First Lien Term Loan and increased the outstanding balance of $627.9 million by $32.1 million to $660.0 million. The proceeds received were used to pay off the Second Lien Term Loan. The repricing and pay off of the Second Lien Term Loan were accounted for as debt extinguishments in accordance with ASC 470, Debt. As a result of the extinguishments, we recorded a $19.5 million loss from accelerating unamortized deferred financing fees and loan origination discounts related to both instruments during the three months ended March 31, 2013. Included in the loss is $7.2 million of prepayment penalties that were paid during the first quarter of 2013.

Income Tax Expense. We recorded income tax expense of $1.6 million and $14.5 million during the three months ended March 31, 2014 and 2013, respectively, based upon our estimated annual effective tax rate. Our estimated annual effective tax rate for the three months ended March 31, 2014 reflects an increase in our projected year-end valuation allowance related to an increase in our non-reversing deferred tax liabilities, partially offset by our estimated pre-tax income 2014.

Outlook. We are focused on driving double-digit revenue growth by providing our broad suite of value-added services to our large customer base, while continuing to add new subscribers and maintaining best-in-class retention rates. Our growth is being driven through sales and marketing investments in four customer acquisition channels - online marketing, inbound and outbound telesales, direct response TV and radio ads and a direct local sales force (Feet on the Street). We plan to add new solutions to our extensive service offering and enhance the efficiency of our marketing programs, while holding margins stable. We expect continued ARPU growth from our cross-sell/up-sell activities. We are pursuing a long-term growth strategy to build corporate brand awareness with our umbrella sponsorship of the Web.com Tour and targeted advertising initiatives. We plan to use our free cash flow to deleverage the balance sheet, which will provide additional interest savings and positively impact profitability.

Liquidity and Capital Resources
 
The following table summarizes total cash flows for operating, investing and financing activities for the three months ended March 31, (in thousands):   
 
Three months ended March 31,
 
2014
 
2013
 
(unaudited)
Net Cash Provided by Operating Activities
$
18,606

 
$
11,033

Net Cash Used in Investing Activities
(10,358
)
 
(4,496
)
Net Cash Used in Financing Activities
(6,826
)
 
(8,131
)
Increase (Decrease) in Cash and Cash Equivalents
$
1,422

 
$
(1,594
)
 
Cash Flows
As of March 31, 2014, we had $15.2 million of cash and cash equivalents and $148.4 million in negative working capital, as compared to $13.8 million of cash and cash equivalents and $118.9 million in negative working capital as of December 31,

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2013. The unfavorable change in working capital is primarily due to a $46.0 million increase in current debt obligations. As of December 31, 2013, all excess cash flow required payments had been made for the year ended December 31, 2013. The March 31, 2014 current portion of long-term debt reflects the estimated 2014 excess cash flow requirements, net of payments made during the first quarter of 2014, which are payable by March 31, 2015. The unfavorable changes were partially offset by higher prepaid expenses and other current assets from the timing of payments for marketing sponsorships and by an increase in our domain name inventory. The majority of the negative working capital is due to significant balances of deferred revenue, partially offset by deferred expenses and deferred tax assets, which get amortized to revenue or expense/benefit rather than settled with cash. The Company expects cash generated from operating activities to be more than sufficient to meet future working capital and debt servicing requirements.

Net cash provided by operations for the three months ended March 31, 2014 increased $7.6 million from the three months ended March 31, 2013 primarily due to improvements in operating income principally driven by lower cash interest payments, partially offset by unfavorable working capital requirements during the three months ended March 31, 2014.

Net cash used in investing activities during the three months ended March 31, 2014 was $10.4 million, as compared to $4.5 million in the three months ended March 31, 2013. Capital expenditures during the first three months ended March 31, 2014 decreased by $1.6 million to $2.9 million. The decrease was due to the absence of capital spending from building out centralized data centers that were completed and put into service in the first quarter of 2013. Capital spending during the three months ended March 31, 2014 primarily consisted of capitalized costs from increased efforts to improve internally developed software and websites. In February 2014, we acquired substantially all of the assets and certain liabilities of SnapNames.com, Inc. (the "SnapNames Business"), an Oregon corporation from KeyDrive S.A. for which we paid $7.4 million using $9.0 million of increased borrowings from our revolving credit facility to pay for the acquisition. See Note 2, Business Combinations, for additional information surrounding the purchase.

Net cash used in financing activities of $6.8 million included principal payments of $6.0 million, net of additional revolving credit facility borrowings, during the three months ended March 31, 2014. Proceeds received from the exercise of stock options increased by $3.1 million to $4.2 million in the three months ended March 31, 2014 when compared to the same prior year period. Approximately $5.0 million and $5.7 million of cash was used to pay employee minimum tax withholding requirements in lieu of receiving common shares during the three months ended March 31, 2014 and 2013, respectively. The three months ended March 31, 2013 included $2.3 million of debt issuance costs from the March 2013 repricing of First Lien Term Loan.

Repricing Long Term Debt
During the first quarter of 2013, we repriced our First Lien Term Loan and increased the outstanding balance of $627.9 million to $660.0 million. In addition, we increased the maximum amount of available borrowings under the Revolving Credit Facility from $60.0 million to $70.0 million. After giving effect to the repricing, the First Lien Term Loan had an interest rate of LIBOR plus 3.50%, with a 1.0% LIBOR floor, and the Revolving Credit Facility's interest rate is now 3.25% plus LIBOR. The proceeds received from the additional First Lien Term Loan were used to pay off the Second Lien Term Loan by $32.0 million in its entirety. See Note 6, Long-Term Debt, for additional information.

Debt Covenants
The credit agreements entered into on October 27, 2011 and subsequently amended in connection with the repricing which became effective on March 6, 2013, as discussed above, require that we maintain a First Lien Net Leverage Ratio (in the case of the First Lien Credit Agreement) as specified in the table below. The First Lien Net Leverage Ratio is defined as the total of the outstanding debt under the First Lien Credit Agreement and Revolving Credit Facility less up to $50.0 million of unrestricted cash and cash equivalents, divided by Consolidated EBITDA. Consolidated EBITDA is defined as consolidated net income before (among other things) interest expense, income tax expense, depreciation and amortization, impairment charges, restructuring costs, changes in deferred revenue and deferred expenses, stock-based compensation expense and acquisition related costs.

Outstanding debt as of March 31, 2014 for purposes of the First Lien Net Leverage Ratio is approximately $334.6 million. The covenant calculation as of March 31, 2014 on a trailing 12-month basis is as follows:

Covenant Description
 
Covenant Requirement as of 
March 31, 2014
 
Ratio at March 31, 2014
 
Favorable/
(Unfavorable)
First Lien Net Debt to Consolidated EBITDA
 
Not greater than 4.75
 
2.29

 
2.46

 

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In addition to the financial covenant listed above, the First Lien Credit Agreement includes customary covenants that limit (among other things) the incurrence of debt, the disposition of assets, and making of certain payments. Substantially all of our tangible and intangible assets collateralize the long-term debt as required by the Credit Agreement.

 Non-GAAP Financial Measures
 
In addition to our financial information presented in accordance with U.S. GAAP, management uses certain “non-GAAP financial measures” within the meaning of the SEC Regulation G. Generally, a non-GAAP financial measure is a numerical measure of a company's operating performance, financial position or cash flows that excludes or includes amounts that are included in or excluded from the most directly comparable measure calculated and presented in accordance with U.S. GAAP.

We believe presenting non-GAAP measures is useful to investors because it describes the operating performance of the company, excluding some recurring charges that are included in the most directly comparable measures calculated and presented in accordance with GAAP. Our management uses these non-GAAP measures as important indicators of the Company's past performance and in planning and forecasting performance in future periods. The non-GAAP financial information we present may not be comparable to similarly-titled financial measures used by other companies, and investors should not consider non-GAAP financial measures in isolation from, or in substitution for, financial information presented in compliance with GAAP. You are encouraged to review the reconciliation of non-GAAP financial measures to GAAP financial measures included elsewhere in this Quarterly Report on Form 10-Q.
 
Relative to each of the non-GAAP measures Web.com presents, management further sets forth its rationale as follows:
Non-GAAP Revenue. We exclude from non-GAAP revenue the impact of the fair value adjustment to amortized deferred revenue because we believe that excluding such measures helps management and investors better understand our revenue trends.
Non-GAAP Operating Income and Non-GAAP Operating Margin. We exclude from non-GAAP operating income and non-GAAP operating margin, amortization of intangibles, fair value adjustment to deferred revenue and deferred expense, restructuring expenses, corporate development expenses, stock-based compensation charges, and gains or losses from asset sales. We believe that excluding these items assists management and investors in evaluating period-over-period changes in Web.com's operating income without the impact of items that are not a result of the Company's day-to-day business and operations.
Non-GAAP Net Income and Non-GAAP Net Income Per Diluted Share. We exclude from non-GAAP net income and non-GAAP net income per diluted share amortization of intangibles, income tax provision, fair value adjustment to deferred revenue and deferred expense, restructuring expenses, corporate development expenses, amortization of debt discounts and fees, stock-based compensation, loss on debt extinguishment, gains or losses from asset sales and includes estimated cash income tax payments, because we believe that excluding such measures helps management and investors better understand the Company's operating activities.
Adjusted EBITDA. We exclude from adjusted EBITDA depreciation expense, amortization of intangibles, income tax provision, interest expense, interest income, stock-based compensation, fair value adjustments to deferred revenue and deferred expense, gains or losses from asset sales, corporate development expenses, gain on sale of equity method investment and restructuring expenses, because management believes that excluding such items helps investors better understand the Company's operating activities.
In respect of the foregoing, Web.com provides the following supplemental information to provide additional context for the use and consideration of the non-GAAP financial measures used elsewhere in this press release:
Stock-based compensation. These expenses consist of expenses for employee stock options and employee awards under ASC 718-10. While stock-based compensation expense calculated in accordance with ASC 718-10 constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because such expense is not used by management to assess the core profitability of the Company's business operations. We further believe these measures are useful to investors in that they allow for greater transparency to certain line items in our financial statements. In addition, when management performs internal comparisons to Web.com's historical operating results and compares the Company's operating results to the Company's competitors, management excludes this item from various non-GAAP measures.
Amortization of intangibles. We incur amortization of acquired intangibles under ASC 805-10-65. Acquired intangibles primarily consist of customer relationships, non-compete agreements, trade names, and developed

20


technology. We expect to amortize for accounting purposes the fair value of the acquired intangibles based on the pattern in which the economic benefits of the intangible assets will be consumed as revenue is generated. Although the intangible assets generate revenue, the Company believes the non-GAAP financial measures excluding this item provide meaningful supplemental information regarding the Company's operational performance. In addition, when management performs internal comparisons to Web.com's historical operating results and compares the Company's operating results to the Company's competitors, management excludes this item from various non-GAAP measures.
Depreciation expense. We record depreciation expense associated with our fixed assets. Although fixed assets generate revenue for Web.com, the item is excluded because management believes certain non-GAAP financial measures excluding this item provide meaningful supplemental information regarding the Company's operational performance. In addition, when management performs internal comparisons to Web.com's historical operating results and compares the Company's operating results to the Company's competitors, management excludes this item from various non-GAAP measures.
Amortization of debt discounts and fees. We incur amortization expense related to debt discounts and deferred financing fees. The difference between the effective interest expense and the coupon interest expense (i.e. debt discount), as well as, amortized deferred financing fees are excluded because we believe the non-GAAP measures excluding these items provide meaningful supplemental information regarding the Company's operational performance. In addition, when management performs internal comparisons to Web.com's historical operating results and compares the Company's operating results to the Company's competitors, management excludes this item from various non-GAAP measures.
Restructuring expense. We have recorded restructuring expenses and exclude the impact of these expenses from its non-GAAP measures, because such expense is not used by management to assess the core profitability of the Company's business operations.
Income tax expense (benefit). Due to the magnitude of Web.com's historical net operating losses and related deferred tax asset, we exclude income tax from its non-GAAP measures primarily because it is not indicative of the actual tax to be paid by the Company and therefore is not reflective of ongoing operating results. We believe that excluding this item provides meaningful supplemental information regarding our operational performance and facilitates management's internal comparisons to the Company's historical operating results and comparisons to the Company's competitors' operating results. We include the estimated tax that the Company expects to pay for operations during the periods presented.
Fair value adjustment to deferred revenue and deferred expense. We have recorded a fair value adjustment to acquired deferred revenue and deferred expense in accordance with ASC 805-10-65. We exclude the impact of these adjustments from its non-GAAP measures, because doing so results in non-GAAP revenue and non-GAAP net income which are reflective of ongoing operating results and more comparable to historical operating results, since the majority of the Company's revenue is recurring subscription revenue. Excluding the fair value adjustment to deferred revenue and deferred expense therefore facilitates management's internal comparisons to Web.com's historical operating results.
Corporate development expenses. We incurred expenses relating to the acquisitions and successful integration of acquisitions. We exclude the impact of these expenses from its non-GAAP measures, because such expense is not used by management to assess the core profitability of the Company's business operations.
Gains or losses from asset sales and certain other transactions. We exclude the impact of asset sales and certain other transactions including debt extinguishments and the sale of equity method investments from our non-GAAP measures because the impact of these items is not considered part of the Company's ongoing operations.
The following table presents our non-GAAP measures for the periods indicated (in thousands):


21


Web.com Group, Inc.
Reconciliation of GAAP to Non-GAAP Results
(in thousands, except for per share data and percentages)
(unaudited)

 
Three months ended March 31,
 

 
2014
 
2013
 
Reconciliation of GAAP revenue to non-GAAP revenue
 

 

 
GAAP revenue
 
$
133,843

 
$
115,546

 
   Fair value adjustment to deferred revenue
 
7,391

 
12,547

 
Non-GAAP revenue
 
$
141,234

 
$
128,093

 
 
 
 
 
 
 
Reconciliation of GAAP net income (loss) to non-GAAP net income
 

 

 
GAAP net income (loss)
 
$
490

 
$
(46,503
)
 
   Amortization of intangibles
 
16,184

 
17,286

 
   Loss on sale of assets
 

 
(6
)
 
   Stock based compensation
 
4,504

 
6,365

 
   Income tax expense
 
1,563

 
14,536

 
   Corporate development
 
40

 

 
   Amortization of debt discounts and fees
 
2,718

 
583

 
   Cash income tax expense
 
(132
)
 
(286
)
 
   Fair value adjustment to deferred revenue
 
7,391

 
12,547

 
   Fair value adjustment to deferred expense
 
301

 
454

 
   Loss on debt extinguishment
 

 
19,526

 
Non-GAAP net income
 
$
33,059

 
$
24,502

 
 
 
 
 
 
 
Reconciliation of GAAP diluted net income (loss) per share to non-GAAP diluted net income per share
 
 
 
 
 
Diluted shares:
 
 
 
 
 
   Basic weighted average common shares
 
50,334

 
48,085

 
   Diluted stock options
 
3,546

 
2,134

 
   Diluted restricted stock
 
703

 
681

 
Total diluted weighted average common shares
 
54,583

 
50,900

 
 
 
 
 
 
 
Reconciliation of GAAP diluted net income (loss) per share to non-GAAP diluted net income per share
 
 
 

 
Diluted GAAP net income (loss) per share
 
$
0.01

 
$
(0.97
)
 
   Diluted equity
 

 
0.06

 
   Amortization of intangibles
 
0.29

 
0.33

 
   Stock based compensation
 
0.08

 
0.13

 
   Income tax expense
 
0.03

 
0.29

 
   Amortization of debt discounts and fees
 
0.05

 
0.01

 
   Cash income tax expense
 

 
(0.01
)
 
   Fair value adjustment to deferred revenue
 
0.14

 
0.25

 
   Fair value adjustment to deferred expense
 
0.01

 
0.01

 
   Loss on debt extinguishment
 

 
0.38

 
Diluted Non-GAAP net income per share
 
$
0.61

 
$
0.48

 
 
 


 


 

22


 
 
Three months ended March 31,
 
 
 
2014
 
2013
 
Reconciliation of GAAP operating income (loss) to non-GAAP operating income
 
 
 
 
 
GAAP operating income (loss)
 
$
9,545

 
$
(2,490
)
 
   Amortization of intangibles
 
16,184

 
17,286

 
   Loss on sale of assets
 

 
(6
)
 
   Stock based compensation
 
4,504

 
6,365

 
   Corporate development
 
40

 

 
   Fair value adjustment to deferred revenue
 
7,391

 
12,547

 
   Fair value adjustment to deferred expense
 
301

 
454

 
Non-GAAP operating income
 
$
37,965

 
$
34,156

 
 
 
 
 
 
 
Reconciliation of GAAP operating margin to non-GAAP operating margin
 
 
 
 
 
GAAP operating margin
 
7
%
 
(2
)%
 
   Amortization of intangibles
 
11

 
13

 
   Stock based compensation
 
3

 
5

 
   Fair value adjustment to deferred revenue
 
6

 
10

 
   Fair value adjustment to deferred expense
 

 
1

 
Non-GAAP operating margin
 
27
%
 
27
 %
 
 
 
 
 
 
 
Reconciliation of GAAP operating income (loss) to adjusted EBITDA
 
 
 
 
 
GAAP operating income (loss)
 
$
9,545

 
$
(2,490
)
 
   Depreciation and amortization
 
19,239

 
20,040

 
   Loss on sale of assets
 

 
(6
)
 
   Stock based compensation
 
4,504

 
6,365

 
   Corporate development
 
40

 

 
   Fair value adjustment to deferred revenue
 
7,391

 
12,547

 
   Fair value adjustment to deferred expense
 
301

 
454

 
Adjusted EBITDA
 
$
41,020

 
$
36,910

 
 
Contractual Obligations and Commitments
 
We have no material changes outside the ordinary course of business to the Contractual Obligations table as presented in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2013 Annual Report on Form 10-K.
 
Off-Balance Sheet Arrangements
 
As of March 31, 2014 and December 31, 2013, 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.

 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 
Interest Rate Sensitivity
 
We had unrestricted cash and cash equivalents totaling $15.2 million and $13.8 million at March 31, 2014 and December 31, 2013, respectively. These amounts were invested primarily in money market funds. The unrestricted cash, cash equivalents and short-term marketable securities are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we do not anticipate that the interest rates will

23


materially fluctuate; therefore, we believe we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income.
 
As of March 31, 2014, we have $608.6 million of total debt outstanding, excluding unamortized debt discounts. We have exposure to market risk for changes in interest rates related to $349.9 million of these borrowings. Our variable rate debt is based on 1-month LIBOR plus 3.50% on the First Lien Credit Agreement, which is subject to a 1.0% LIBOR floor. The interest rate of our Revolving Credit Facility is 1-month LIBOR plus 3.25%. Since the First Lien Credit Agreement is subject to a LIBOR floor of 1.0%, a 10% increase or decrease in LIBOR would not impact our interest expense on those loans during the three months ended March 31, 2014. A hypothetical 10% increase in the current variable interest rates in effect would have resulted in additional interest expense of $0.1 million during the three months ended March 31, 2014, assuming the principal balances remain unchanged.

24


 Item 4. Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures.
 
Based on their evaluation as of March 31, 2014, our Chief Executive Officer and Chief Financial Officer have concluded that 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) were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in this quarterly report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules, and that such information is accumulated and communicated to us to allow timely decisions regarding required disclosures.
 
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.
 
Changes in Internal Controls Over Financial Reporting.
 
There have been no changes in our internal controls over financial reporting during the three months ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 PART II—OTHER INFORMATION

 Item 1. Legal Proceedings.
 
The Company and its subsidiaries are named from time to time as defendants in various legal actions that are incidental to our business and arise out of or are related to claims made in connection with our customer and vendor contracts and employment-related disputes. We believe that the resolution of these legal actions will not have a material adverse effect on our financial position or results of operations. There were no material legal matters that were reasonably possible or estimable at March 31, 2014.

25



Item 1A. Risk Factors.
In evaluating Web.com and our business, you should carefully consider the risks and uncertainties set forth below, together with all of the other information in this report. The following risks should be read in conjunction with our “Management's Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. If any of the following risks occur, our business, financial condition, operating results, and prospects could be materially harmed. In that event, the price of our common stock could decline, and you could lose part or all of your investment.
The risks relating to our business and industry, as set forth in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on February 28, 2014, are set forth below and are unchanged substantively at March 31, 2014, other than those designated by an asterisk “*”.

* In the future, we may be unable to generate sufficient cash flow to satisfy our debt service obligations.
As of March 31, 2014, we had $349.9 million aggregate principal amount of our First Lien Term Loan (defined above in Note 6, "Long-term Debt") and $258.8 million aggregate principal amount of 1.00% Senior Convertible Notes due August 15, 2018 ("2018 Notes") outstanding. Our ability to generate cash flow from operations to make principal and interest payments on our debt will depend on our future performance, which will be affected by a range of economic, competitive and business factors. If our operations do not generate sufficient cash flow from operations to satisfy our debt service obligations, we may need to seek additional capital to make these payments or undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets or reducing or delaying capital investments and acquisitions. We cannot assure you that such additional capital or alternative financing will be available on favorable terms, if at all. Our inability to generate sufficient cash flow from operations or obtain additional capital or alternative financing on acceptable terms could have a material adverse effect on our business, financial condition and results of operations.
Our operating results are difficult to predict and fluctuations in our performance may result in volatility in the market price of our common stock.
Due to our evolving business model, and the unpredictability of our evolving industry, our operating results are difficult to predict. We expect to experience fluctuations in our operating and financial results due to a number of factors, such as:
our ability to retain and increase sales to existing customers, attract new customers, and satisfy our customers' requirements;
the renewal rates and renewal terms for our services;
changes in our pricing policies;
the introduction of new services and products by us or our competitors;
our ability to hire, train and retain members of our sales force;
the rate of expansion and effectiveness of our sales force;
technical difficulties or interruptions in our services;
general economic conditions;
additional investment in our services or operations;
ability to successfully identify acquisition targets and integrate acquired businesses and technologies; and
our success in maintaining and adding strategic marketing relationships.
These factors and others all tend to make the timing and amount of our revenue unpredictable and may lead to greater period-to-period fluctuations in revenue than we have experienced historically.
Additionally, in light of current global and U.S. economic conditions, we believe that our quarterly revenue and results of operations are likely to vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful. The results of one quarter may not be relied on as an indication of future performance. 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.
We may expand through acquisitions of, or investments in, other companies or technologies, which may result in additional dilution to our stockholders and consume resources that may be necessary to sustain our business.

26


One of our business strategies is to acquire complementary services, technologies or businesses. In connection with one or more of those transactions, we may:
issue additional equity securities that would dilute our stockholders;
use cash that we may need in the future to operate our business; and
incur debt that could have terms unfavorable to us or that we might be unable to repay.
Business acquisitions also involve the risk of unknown liabilities associated with the acquired business. In addition, we may not realize the anticipated benefits of any acquisition, including securing the services of key employees. Incurring unknown liabilities or the failure to realize the anticipated benefits of an acquisition could seriously harm our business.
We rely heavily on the reliability, security, and performance of our internally developed systems and operations, and any difficulties in maintaining these systems may result in service interruptions, decreased customer service, or increased expenditures.
The software and workflow processes that underlie our ability to deliver our web services and products have been developed primarily by our own employees. The reliability and continuous availability of these internal systems are critical to our business, and any interruptions that result in our inability to timely deliver our web services or products, or that materially impact the efficiency or cost with which we provide these web services and products, would harm our reputation, profitability, and ability to conduct business. In addition, many of the software systems we currently use will need to be enhanced over time or replaced with equivalent commercial products, either of which could entail considerable effort and expense. If we fail to develop and execute reliable policies, procedures, and tools to operate our infrastructure, we could face a substantial decrease in workflow efficiency and increased costs, as well as a decline in our revenue.
We have a risk of system and Internet failures, which could harm our reputation, cause our customers to seek reimbursement for services paid for and not received, and cause our customers to seek another provider for services.
We must be able to operate the systems that manage our network around the clock without interruption. Our operations depend upon our ability to protect our network infrastructure, equipment, and customer files against damage from human error, fire, earthquakes, hurricanes, floods, power loss, telecommunications failures, sabotage, intentional acts of vandalism and similar events. Our networks are currently subject to various points of failure. For example, a problem with one of our routers (devices that move information from one computer network to another) or switches could cause an interruption in the services that we provide to some or all of our customers. In the past, we have experienced periodic interruptions in service. We have also experienced, and in the future we may again experience, delays or interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees, or others. Any future interruptions could:
cause customers or end users to seek damages for losses incurred;
require us to replace existing equipment or add redundant facilities;
damage our reputation for reliable service;
cause existing customers to cancel their contracts; or
make it more difficult for us to attract new customers.
If our security measures are breached, our services may be perceived as not being secure, and our business and reputation could suffer.
Our web services involve the storage and transmission of our customers' proprietary information. It is critical to our business strategy that our facilities and infrastructure remain secure and are perceived by the marketplace to be secure. Although we employ data encryption processes, intrusion detection systems, and other internal control procedures to assure the security of our customers' data, we cannot guarantee that these measures will be sufficient for this purpose. If our security measures are breached as a result of third-party action, employee error or otherwise, and as a result our customers' data becomes available to unauthorized parties, we could incur liability and our reputation would be damaged, which could lead to the loss of current and potential customers. If we experience any breaches of our network security or sabotage, we might be required to expend significant capital and other resources to remedy, protect against or alleviate these and related problems, and we may not be able to remedy these problems in a timely manner, or at all. Because techniques used by outsiders to obtain unauthorized network access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures.
We have had past security breaches, and, although they did not have a material adverse effect on our operating results, there can be no assurance of a similar result in the future.  Our servers are also frequently subjected to denial of service attacks and other

27


attempts to disrupt traffic to ours and our customers' websites. Although we have been able to minimize these disruptions in the past, there is no guarantee that we will be able to do so successfully in the future. Our users have been and will continue to be targeted by parties using fraudulent “spoof” and “phishing” emails to misappropriate personal information or to introduce viruses or other malware through “trojan horse” programs to our users' computers. These emails appear to be legitimate emails sent by us, but direct recipients to fake websites operated by the sender of the email or request that the recipient send a password or other confidential information through email or download malware. Despite our efforts to mitigate “spoof” and “phishing” emails through product improvements and user education, “spoof” and “phishing” activities remain a serious problem that may damage our brands, discourage use of our websites and services and increase our costs.
If we cannot adapt to technological advances, our web services and products may become obsolete and our ability to compete would be impaired.
Changes in our industry occur very rapidly, including changes in the way the Internet operates or is used by small businesses and their customers. As a result, our web services and products could become obsolete quickly. The introduction of competing products employing new technologies and the evolution of new industry standards could render our existing products or services obsolete and unmarketable. To be successful, our web services and products must keep pace with technological developments and evolving industry standards, address the ever-changing and increasingly sophisticated needs of our customers, and achieve market acceptance. If we are unable to develop new web services or products, or enhancements to our web services or products, on a timely and cost-effective basis, or if our new web services or products or enhancements do not achieve market acceptance, our business would be seriously harmed.
Our failure to build brand awareness quickly could compromise our ability to compete and to grow our business.
As a result of the highly competitive nature of our market, and the likelihood that we may face competition from new entrants with well established brands, we believe our own brand name recognition and reputation are important. If we do not continue to build brand awareness quickly, we could be placed at a competitive disadvantage to companies whose brands are more recognizable than ours.
Providing web services and products to small businesses designed to allow them to Internet-enable their businesses is a fragmented and changing market; if this market fails to grow, we will not be able to grow our business.
Our success depends on a significant number of small businesses outsourcing website design, hosting, and management as well as adopting other online business solutions. The market for our web services and products is relatively fragmented and constantly changing. Custom website development has been the predominant method of Internet enablement, and small businesses may be slow to adopt our template-based web services and products. Further, if small businesses determine that having an online presence is not giving their businesses an advantage, they would be less likely to purchase our web services and products. If the market for our web services and products fails to grow or grows more slowly than we currently anticipate, or if our web services and products fail to achieve widespread customer acceptance, our business would be seriously harmed.
A portion of our web services are sold on a month-to-month basis, and if our customers are unable or choose not to subscribe to our web services, our revenue may decrease.
A portion of our web service offerings are sold pursuant to month-to-month subscription agreements and our customers generally can cancel their subscriptions to our web services at any time with little or no penalty.
There are a variety of factors, which have in the past led, and may in the future lead, to a decline in our subscription renewal rates. These factors include the cessation of our customers' businesses, the overall economic environment in the United States and its impact on small businesses, the services and prices offered by us and our competitors, and the evolving use of the Internet by small businesses. If our renewal rates are low or decline for any reason, or if customers demand renewal terms less favorable to us, our revenue may decrease, which could adversely affect our financial performance.
* We were profitable for the three months ended March 31, 2014 but were not profitable for the years ended December 31, 2013, 2012 and 2011 and we may not become or stay profitable in the future.
We were profitable for the three months ended March 31, 2014 but were not profitable for the years ended December 31, 2013, 2012 and 2011, and may not be profitable in future years. As of March 31, 2014, we had an accumulated deficit of approximately $357.6 million. We expect that our expenses relating to the sale and marketing of our web services, technology improvements and general and administrative functions, as well as the costs of operating and maintaining our technology infrastructure, will increase in the future. Accordingly, we will need to increase our revenue to be able to again achieve and, if achieved, to later maintain profitability. We may not be able to reduce in a timely manner or maintain our expenses in response

28


to any decrease in our revenue, and our failure to do so would adversely affect our operating results and our level of profitability.
If Internet usage does not grow or if the Internet does not continue to be the standard for eCommerce, our business may suffer.
Our success depends upon the continued development and acceptance of the Internet as a widely used medium for eCommerce and communication. Rapid growth in the uses of, and interest in, the Internet is a relatively recent phenomenon and its continued growth cannot be assured. A number of factors could prevent continued growth, development and acceptance, including:
the unwillingness of companies and consumers to shift their purchasing from traditional vendors to online vendors;
the Internet infrastructure may not be able to support the demands placed on it, and its performance and reliability may decline as usage grows;
security and authentication issues may create concerns with respect to the transmission over the Internet of confidential information; and
privacy concerns, including those related to the ability of websites to gather user information without the user's knowledge or consent, may impact consumers' willingness to interact online.
Any of these issues could slow the growth of the Internet, which could limit our growth and revenues.
Weakened global economic conditions may harm our industry, business and results of operations.
Our overall performance depends in part on worldwide economic conditions, which may remain challenging for the foreseeable future. Global financial developments seemingly unrelated to us or our industry may harm us. The United States and other key international economies have been impacted by falling demand for a variety of goods and services, poor credit, restricted liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies, and overall uncertainty with respect to the economy. These conditions affect spending and could adversely affect our customers' ability or willingness to purchase our service, delay prospective customers' purchasing decisions, reduce the value or duration of their subscriptions, or affect renewal rates, all of which could harm our operating results.
Our existing and target customers are small businesses. These businesses may be more likely to be significantly affected by economic downturns than larger, more established businesses. For instance, a financial crisis affecting the banking system or financial markets or the possibility that financial institutions may consolidate or go out of business would result in a tightening in the credit markets, which could limit our customers' access to credit. Additionally, these customers often have limited discretionary funds, which they may choose to spend on items other than our web services and products. If small businesses experience economic hardship, or if they behave more conservatively in light of the general economic environment, they may be unwilling or unable to expend resources to develop their online presences, which would negatively affect the overall demand for our services and products and could cause our revenue to decline.
If we fail to comply with the established rules of credit card associations, we will face the prospect of financial penalties and could lose our ability to accept credit card payments from customers, which would have a material adverse effect on our business, financial condition and results of operations.
A substantial majority of our revenue originates from online credit card transactions. Under credit card association rules, penalties may be imposed at the discretion of the association. Any such potential penalties would be imposed on our credit card processor by the association. Under our contract with our processor, we are required to reimburse our processor for such penalties. We face the risk that one or more credit card associations may, at any time, assess penalties against us or terminate our ability to accept credit card payments from customers, which would have a material adverse effect on our business, financial condition and results of operations. For example, under current credit card industry practices, we are liable for fraudulent and disputed credit card transactions because we do not obtain the cardholder's signature at the time of the transaction, even though the financial institution issuing the credit card may have authorized the transaction.
Charges to earnings resulting from acquisitions may adversely affect our operating results.
One of our business strategies is to acquire complementary services, technologies or businesses and we have a history of such acquisitions. Under applicable accounting, we allocate the total purchase price of a particular acquisition to an acquired company's net tangible assets and intangible assets based on their fair values as of the date of the acquisition, and record the excess of the purchase price over those fair values as goodwill. Our management's estimates of fair value are based upon

29


assumptions believed to be reasonable but are inherently uncertain. Going forward, the following factors, among others, could result in material charges that would adversely affect our financial results:
impairment of goodwill and/or intangible assets;
charges for the amortization of identifiable intangible assets and for stock-based compensation;
accrual of newly identified pre-merger contingent liabilities that are identified subsequent to the finalization of the purchase price allocation; and
charges to eliminate certain of our pre-merger activities that duplicate those of the acquired company or to reduce our cost structure.
Additional costs may include costs of employee redeployment, relocation and retention, including salary increases or bonuses, accelerated amortization of deferred equity compensation and severance payments, reorganization or closure of facilities, taxes and termination of contracts that provide redundant or conflicting services. Some of these costs may have to be accounted for as expenses that would decrease our net income and earnings per share for the periods in which those adjustments are made.
The failure to integrate successfully the businesses of Web.com and an acquired company, if any, in the future within the expected timeframe would adversely affect the combined company's future results.
One of our business strategies is to acquire complementary services, technologies or businesses. The success of any future acquisition will depend, in large part, on the ability of the combined company to realize the anticipated benefits, including annual net operating synergies, from combining the businesses of Web.com and the acquired company. To realize these anticipated benefits, the combined company must successfully integrate the businesses of Web.com and an acquired company. This integration will be complex and time consuming.
The failure to integrate successfully and to manage successfully the challenges presented by the integration process may result in the combined company's failure to achieve some or all of the anticipated benefits of the acquisition.
Potential difficulties that may be encountered in the integration process include the following:
lost sales and customers as a result of customers of either of the two companies deciding not to do business with the combined company;
complexities associated with managing the larger, more complex, combined business;
integrating personnel from the two companies while maintaining focus on providing consistent, high quality services and products;
potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the acquisition; and
performance shortfalls at one or both of the companies as a result of the diversion of management's attention caused by completing the acquisition and integrating the companies' operations.
Successful integration of Web.com's and an acquired company's operations, products and personnel may place a significant burden on the combined company's management and internal resources. Challenges of integration include the combined company's ability to incorporate acquired products and business technology into its existing product offerings, and its ability to sell the acquired products through Web.com's existing or acquired sales channels. Web.com may also experience difficulty in effectively integrating the different cultures and practices of the acquired company, as well as in assimilating its' broad and geographically dispersed personnel. Further, the difficulties of integrating the acquired company could disrupt the combined company's ongoing business, distract its management focus from other opportunities and challenges, and increase the combined company's expenses and working capital requirements. The diversion of management attention and any difficulties encountered in the transition and integration process could harm the combined company's business, financial condition and operating results.
We may not realize the anticipated benefits from an acquisition.
Acquisitions involve the integration of companies that have previously operated independently. We expect that acquisitions may result in financial and operational benefits, including increased revenue, cost savings and other financial and operating benefits. We cannot be certain, however, that we will be able to realize increased revenue, cost savings or other benefits from any acquisition, or, to the extent such benefits are realized, that they are realized timely or to the same degree as we anticipated. Integration may also be difficult, unpredictable, and subject to delay because of possible cultural conflicts and different opinions on product roadmaps or other strategic matters. We may integrate or, in some cases, replace, numerous systems, including those involving management information, purchasing, accounting and finance, sales, billing, employee benefits,

30


payroll and regulatory compliance, many of which may be dissimilar. Difficulties associated with integrating an acquisition's service and product offering into ours, or with integrating an acquisition's operations into ours, could have a material adverse effect on the combined company and the market price of our common stock.
Our business depends in part on our ability to continue to provide value-added web services and products, many of which we provide through agreements with third parties. Our business will be harmed if we are unable to provide these web services and products in a cost-effective manner.
A key element of our strategy is to combine a variety of functionalities in our web service offerings to provide our customers with comprehensive solutions to their online presence needs, such as Internet search optimization, local yellow pages listings, and eCommerce capability. We provide many of these services through arrangements with third parties, and our continued ability to obtain and provide these services at a low cost is central to the success of our business. For example, we currently have agreements with several service providers that enable us to provide, at a low cost, Internet yellow pages advertising. However, these agreements may be terminated on short notice, typically 30 to 90 days, and without penalty. If any of these third parties were to terminate their relationships with us, or to modify the economic terms of these arrangements, we could lose our ability to provide these services at a cost-effective price to our customers, which could cause our revenue to decline or our costs to increase.
Our data centers are maintained by third parties. A disruption in the ability of one of these service providers to provide service to us could cause a disruption in service to our customers.
A substantial portion of the network services and computer servers we utilize in the provision of services to customers are housed in data centers owned by other service providers. In particular, a significant number of our servers are housed in data centers in Atlanta, Georgia; Jacksonville, Florida; and Sterling, Virginia. We obtain Internet connectivity for those servers, and for the customers who rely on those servers, in part through direct arrangements with network service providers and in part indirectly through the owners of those data centers. We also utilize other third-party data centers in other locations. In the future, we may house other servers and hardware items in facilities owned or operated by other service providers.
A disruption in the ability of one of these service providers to provide service to us could cause a disruption in service to our customers. A service provider could be disrupted in its operations through a number of contingencies, including unauthorized access, computer viruses, accidental or intentional actions, electrical disruptions, and other extreme conditions. Although we believe we have taken adequate steps to protect our business through contractual arrangements with our service providers, we cannot eliminate the risk of a disruption in service resulting from the accidental or intentional disruption in service by a service provider. Any significant disruption could cause significant harm to us, including a significant loss of customers. In addition, a service provider could raise its prices or otherwise change its terms and conditions in a way that adversely affects our ability to support our customers or could result in a decrease in our financial performance.
We face intense and growing competition. If we are unable to compete successfully, our business will be seriously harmed.
The market for our web services and products is highly competitive and is characterized by relatively low barriers to entry. Our competitors vary in terms of their size and what services they offer. We encounter competition from a wide variety of company types, including:
website design and development service and software companies;
Internet service providers and application service providers;
Internet search engine providers;
local business directory providers;
website domain name providers and hosting companies; and
eCommerce platform and service providers.
In addition, due to relatively low barriers to entry in our industry, we expect the intensity of competition to increase in the future from both established and emerging companies. Increased competition may result in reduced gross margins, the loss of market share, or other changes which could seriously harm our business. We also expect that competition will increase as a result of industry consolidations and formations of alliances among industry participants.
Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, greater brand recognition and, we believe, a larger installed base of customers. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. They

31


may also be able to devote greater resources to the promotion and sale of their services and products than we can. If we fail to compete successfully against current or future competitors, our revenue could increase less than anticipated or decline and our business could be harmed.
Our business could be affected by new governmental regulations regarding the Internet.
To date, government regulations have not materially restricted use of the Internet in most parts of the world. The legal and regulatory environment pertaining to the Internet, however, is uncertain and may change. New laws may be passed, existing but previously inapplicable or unenforced laws may be deemed to apply to the Internet or regulatory agencies may begin to rigorously enforce such formerly unenforced laws, or existing legal safe harbors may be narrowed, both by U.S. federal or state governments and by governments of foreign jurisdictions. These changes could affect:
the liability of online resellers for actions by customers, including fraud, illegal content, spam, phishing, libel and defamation, infringement of third-party intellectual property and other abusive conduct;
other claims based on the nature and content of Internet materials;
user privacy and security issues;
consumer protection;
sales taxes by the states in which we sell certain of our products and other taxes, including the value-added tax of the European Union member states, which could impact how we conduct our business by requiring us to set up processes to collect and remit such taxes and could increase our sales audit risk;
characteristics and quality of services; and
cross-border eCommerce.
The adoption of any new laws or regulations, or the application or interpretation of existing laws or regulations to the Internet, could hinder growth in use of the Internet and online services generally, and decrease acceptance of the Internet and online services as a means of communications, ecommerce and advertising. In addition, such changes in laws could increase our costs of doing business, subject our business to increased liability or prevent us from delivering our services over the Internet, thereby harming our business and results of operations.
Changes in legislation or governmental regulations, policies or standards applicable to our product offerings may have a significant impact on our ability to compete in our target markets.
The telecommunications industry is regulated by the Federal Communications Commission ('FCC") in the U.S. While most such regulations do not affect us directly, certain of those regulations may affect our product offerings. For example, effective October 16, 2013, new FCC rules require companies to obtain prior express written consent from consumers before calling them with prerecorded telemarketing "robocalls" or before using an autodialer to call their wireless numbers with telemarketing messages unless unambiguous written consent is obtained before the telemarketing call or text message. If we are unable to satisfy such FCC rules, we could be prevented from providing such product offering to our customers, which could materially and adversely affect our future revenues.
We could become involved in claims, lawsuits or investigations that may result in adverse outcomes.
We may become involved in claims, such as lawsuits and investigations, involving but not limited to general business, patents, or employee matters. Such proceedings may initially be viewed as immaterial but could prove to be material. Litigation is inherently unpredictable, and excessive verdicts do occur. Adverse outcomes in lawsuits and investigations could result in significant monetary damages, including indemnification payments, or injunctive relief that could adversely affect our ability to conduct our business and may have a material adverse effect on our financial condition and results of operations. Given the inherent uncertainties in litigation, even when we are able to reasonably estimate the amount of possible loss or range of loss and therefore record an aggregate litigation accrual for probable and reasonably estimable loss contingencies, the accrual may change in the future due to new developments or changes in approach. In addition, such investigations, claims and lawsuits could involve significant expense and diversion of management's attention and resources from other matters.
We might require additional capital to support business growth, and this capital might not be available on acceptable terms, or at all.
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 services and products or enhance our existing web services, enhance

32


our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds.
The global financial crisis, which included, among other things, significant reductions in available capital and liquidity from banks and other providers of credit and substantial reductions or fluctuations in equity and currency values worldwide, may make it difficult for us to obtain additional financing on terms favorable to us, if at all. 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. 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 impaired.
The Company's ability to use its net operating loss carry forwards ("NOLs") to offset future taxable income for U.S. federal income tax purposes may be limited if taxable income does not reach a sufficient level, or as a result of a change in control which could limit available NOLs.
As of December 31, 2013, the Company has Federal NOLs of approximately $284.2 million (excluding $50.7 million related to excess tax benefits for stock-based compensation tax deductions in excess of book compensation which will be credited to additional paid-in capital when such deductions reduce taxes payable, as determined on a “with-and-without” basis) available to offset future taxable income which expire between 2020 and 2033. The NOLs are subject to various limitations under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). Accordingly, the Company estimates that at least $230.6 million of the NOLs will be available during the carry forward period based on our existing Section 382 limitations. As of December 31, 2013, our valuation allowance includes $158.3 million of these NOLs as it is not more likely than not that this portion of the NOLs will be realized based on the expected reversals of our existing deferred tax liabilities and current Section 382 limits.
Section 382 of the Code imposes an annual limitation on the amount of post-ownership change taxable income generated that may be offset with pre-ownership change NOLs of the corporation that experiences an ownership change. The limitation imposed by Section 382 of the Code for any post-ownership change year generally would be determined by multiplying the value of such corporation's stock immediately before the ownership change by the applicable long-term tax-exempt rate. Any unused annual limitation may, subject to certain limits, be carried over to later years, and the limitation may, under certain circumstances, be increased by built-in gains or reduced by built-in losses in the assets held by such corporation at the time of the ownership change.
If the Company experiences any future “ownership change” as defined in Section 382 of the Code, the Company's ability to utilize its NOLs could be further limited depending on several factors, including but not limited to, the amount of taxable income generated during any post-ownership change year and the annual limitation discussed above. Similar results could apply to our state NOLs because the states in which we operate generally follow Section 382.
Additionally, the Company's ability to use its NOLs will also depend on the amount of taxable income generated in future periods. The NOLs may expire before the Company can generate sufficient taxable income to utilize the NOLs.
The accounting method for convertible debt securities that may be settled in cash, such as the 2018 Notes, could have a material effect on our reported financial results.
Under ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments (such as the 2018 Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer's economic interest cost. The effect of ASC 470-20 on the accounting for the 2018 Notes is that the equity component is required to be included in the additional paid-in-capital section of stockholders' equity on our consolidated balance sheet, and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the 2018 Notes. As a result, we will be required to record a greater amount of non-cash interest expense from the amortization of the discounted carrying value of the 2018 Notes to their face amount over the term of the 2018 Notes. We will also report lower net income or increased net loss in our financial results, the trading price of our common, and the trading price of the 2018 Notes.
In addition, under certain circumstances, convertible debt instruments (such as the 2018 Notes) that may be settled entirely or partly in cash may be accounted for utilizing the treasury stock method, the effect of which is that the shares that would be issuable upon conversion of the 2018 Notes are not included in the calculation of diluted earnings per share except to the extent the conversion value of the 2018 Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings

33


per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit our use the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the 2018 Notes, then our diluted earnings per share may be adversely affected.
Any growth could strain our resources and our business may suffer if we fail to implement appropriate controls and procedures to manage our growth.
Growth in our business may place a strain on our management, administrative, and sales and marketing infrastructure. If we fail to successfully manage our growth, our business could be disrupted, and our ability to operate our business profitably could suffer. Growth in our employee base may be required to expand our customer base and to continue to develop and enhance our web service and product offerings. To manage growth of our operations and personnel, we would need to enhance our operational, financial, and management controls and our reporting systems and procedures. This would require additional personnel and capital investments, which would increase our cost base. The growth in our fixed cost base may make it more difficult for us to reduce expenses in the short term to offset any shortfalls in revenue.
If we fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial results, which could cause our stock price to fall or result in our stock being delisted.
Effective internal controls are necessary for us to provide reliable and accurate financial reports. We will need to devote significant resources and time to comply with the requirements of Sarbanes-Oxley with respect to internal control over financial reporting. In addition, Section 404 under Sarbanes-Oxley requires that we assess and our auditors attest to the design and operating effectiveness of our internal control over financial reporting. Our ability to comply with the annual internal control report requirement for our fiscal year ending on December 31, 2014 will depend on the effectiveness of our financial reporting and data systems and controls across our company and our operating subsidiaries. We expect these systems and controls to become increasingly complex as we integrate acquisitions and our business grows. To effectively manage this complexity, we will need to continue to improve our operational, financial, and management controls and our reporting systems and procedures. Any failure to implement required new or improved controls, or difficulties encountered in the implementation or operation of these controls, could harm our operating results or cause us to fail to meet our financial reporting obligations, which could adversely affect our business and jeopardize our listing on the NASDAQ Global Select Market, either of which would harm our stock price.
We are dependent on our executive officers, and the loss of any key member of this team may compromise our ability to successfully manage our business and pursue our growth strategy.
Our future performance depends largely on the continuing service of our executive officers and senior management team, especially that of David Brown, our Chief Executive Officer. Our executives are not contractually obligated to remain employed by us. Accordingly, any of our key employees could terminate their employment with us at any time without penalty and may go to work for one or more of our competitors after the expiration of their non-compete period. The loss of one or more of our executive officers could make it more difficult for us to pursue our business goals and could seriously harm our business.
Our growth will be adversely affected if we cannot continue to successfully retain, hire, train, and manage our key employees, particularly in the telesales and customer service areas.
Our ability to successfully pursue our growth strategy will depend on our ability to attract, retain, and motivate key employees across our business. We have many key employees throughout our organization that do not have non-competition agreements and may leave to work for a competitor at any time. In particular, we are substantially dependent on our telesales and customer service employees to obtain and service new customers. Competition for such personnel and others can be intense, and there can be no assurance that we will be able to attract, integrate, or retain additional highly qualified personnel in the future. In addition, our ability to achieve significant growth in revenue will depend, in large part, on our success in effectively training sufficient personnel in these two areas. New hires require significant training and in some cases may take several months before they achieve full productivity, if they ever do. Our recent hires and planned hires may not become as productive as we would like, and we may be unable to hire sufficient numbers of qualified individuals in the future in the markets where we have our facilities. If we are not successful in retaining our existing employees, or hiring, training and integrating new employees, or if our current or future employees perform poorly, growth in the sales of our services and products may not materialize and our business will suffer.
Our business could be materially harmed if the administration and operation of the Internet no longer rely upon the existing domain system.

34


The domain registration industry continues to develop and adapt to changing technology. This development may include changes in the administration or operation of the Internet, including the creation and institution of alternate systems for directing Internet traffic without the use of the existing domain system. The widespread acceptance of any alternative systems could eliminate the need to register a domain to establish an online presence and could materially adversely affect our business, financial condition and results of operations.
We may be unable to protect our intellectual property adequately or cost-effectively, which may cause us to lose market share or otherwise harm our competitive position.
Our success depends, in part, on our ability to protect and preserve the proprietary aspects of our technology, web services, and products. If we are unable to protect our intellectual property, our competitors could use our intellectual property to market services and products similar to those offered by us, which could decrease demand for our web services and products. We may be unable to prevent third parties from using our proprietary assets without our authorization. We do not currently rely on patents to protect all of our core intellectual property. To protect, control access to, and limit distribution of our intellectual property, we generally enter into confidentiality and proprietary inventions agreements with our employees, and confidentiality or license agreements with consultants, third-party developers, and customers. We also rely on copyright, trademark, and trade secret protection. However, these measures afford only limited protection and may be inadequate. Enforcing our rights to our technology could be costly, time-consuming and distracting. Additionally, others may develop non-infringing technologies that are similar or superior to ours. Any significant failure or inability to adequately protect our proprietary assets will harm our business and reduce our ability to compete.
Impairment of goodwill and other intangible assets would result in a decrease in earnings.
Current accounting rules require that goodwill and other intangible assets with indefinite useful lives may not be amortized, but instead must be tested for impairment at least annually. These rules also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We have substantial goodwill and other intangible assets, and we would be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or intangible assets is determined. Any impairment charges or changes to the estimated amortization periods could have a material adverse effect on our financial results.
Provisions in our amended and restated certificate of incorporation and bylaws or under 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 common 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 of 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 are elected at one time;
provide that directors may only be removed for cause and only with the approval of 66 2/3% of our stockholders;
require super-majority voting to amend some provisions in our amended and restated certificate of incorporation and bylaws;
authorize the issuance of blank check preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;
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 make, alter, or repeal our bylaws; and

establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.
Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder and which may discourage, delay, or prevent a change of control of our company.


35



 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
None.

Item 3. Defaults Upon Senior Securities.
 
None.

Item 4. Mine Safety Disclosures.
 
Not applicable.

Item 5. Other Information.

None.
Item 6. Exhibits.

 
Exhibit No.
 
Description of Document
3.1

 
Amended and Restated Certificate of Incorporation of Web.com Group, Inc. (1)
3.2

 
Amended and Restated Bylaws of Web.com Group, Inc. (2)
3.3

 
Certificate of Ownership and Merger of Registration (3)
4.1

 
Reference is made to Exhibits 3.1 and 3.2
4.2

 
Specimen Stock Certificate. (3)
4.3

 
Indenture dated August 14, 2013 between the Company and Wells Fargo Bank, National Association, as Trustee. (4)
4.4

 
First Supplemental Indenture, dated August 14, 2013, between the Company and Wells Fargo Bank, National Association, as Trustee (including the form of 1.00% Senior Convertible Notes due 2018). (5)
31.1

 
Chief Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a).
31.2

 
Chief Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a).
32.1

 
Certifications of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350). (6)
EX-101.INS

 
XBRL Instance Document.*
EX-101.SCH

 
XBRL Taxonomy Extension Schema Document.*
EX-101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase Document.*
EX-101.DEF

 
XBRL Taxonomy Extension Definition Linkbase Document.*
EX-101.LAB

 
XBRL Taxonomy Extension Label Linkbase Document.*
EX-101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase Document.*
  
* The XBRL information is being furnished with this Form 10-Q, not filed
________________________ 
 
(1)
Filed as an Exhibit to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.
(2)
Filed as an Exhibit to the Registrant’s current report on Form 8-K (000-51595), filed with the SEC on February 10, 2009, and incorporated herein by reference.
(3)
Filed as an Exhibit to the Registrant’s current report on Form 8-K (000-51595), filed with the SEC on October 30, 2008, and incorporated herein by reference.

36


(4)
Filed as an Exhibit to the Registrant's current report on Form 8-K (000-51595), filed with the SEC on August 14, 2013, and incorporated herein by reference.
(5)
Filed as an Exhibit to the Registrant's current report on Form 8-K (000-51595), filed with the SEC on August 14, 2013, and incorporated by reference.

(6)
The certification attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Web.com Group, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

37



SIGNATURES
 
Pursuant to the requirements 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. 
 
Web.com Group, Inc.
 
(Registrant)
 
 
May 2, 2014
/s/ Kevin M. Carney
Date
Kevin M. Carney
Chief Financial Officer
(Principal Financial and Accounting Officer)
  

38




INDEX OF EXHIBITS
 
Exhibit No.
 
Description of Document
3.1
 
Amended and Restated Certificate of Incorporation of Web.com Group, Inc. (1)
3.2
 
Amended and Restated Bylaws of Web.com Group, Inc. (2)
3.3
 
Certificate of Ownership and Merger of Registration (3)
4.1
 
Reference is made to Exhibits 3.1 and 3.2
4.2
 
Specimen Stock Certificate. (3)
4.3
 
Indenture dated August 14, 2013 between the Company and Wells Fargo Bank, National Association, as Trustee. (4)
4.4
 
First Supplemental Indenture, dated August 14, 2013, between the Company and Wells Fargo Bank, National Association, as Trustee (including the form of 1.00% Senior Convertible Notes due 2018). (5)
31.1
 
Chief Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a).
31.2
 
Chief Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a).
32.1
 
Certifications of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350). (6)
EX-101.INS
 
XBRL Instance Document.*
EX-101.SCH
 
XBRL Taxonomy Extension Schema Document.*
EX-101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.*
EX-101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.*
EX-101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.*
EX-101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.*
 
(1)
Filed as an Exhibit to the Company’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.
(2)
Filed as an Exhibit to the Company’s current report on Form 8-K (000-51595), filed with the SEC on February 10, 2009, and incorporated herein by reference.
(3)
Filed as an Exhibit to the Company’s current report on Form 8-K (000-51595), filed with the SEC on October 30, 2008, and incorporated herein by reference.
(4)
Filed as an Exhibit to the Registrant's current report on Form 8-K (000-51595), filed with the SEC on August 14, 2013, and incorporated herein by reference.
(5)
Filed as an Exhibit to the Registrant's current report on Form 8-K (000-51595), filed with the SEC on August 14, 2013, and incorporated by reference.
(6)
The certification attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Web.com Group, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.


*                     The XBRL information is being furnished with this Form 10-Q, not filed.


39