sv1za
As filed with the Securities and Exchange Commission on
September 4, 2007.
Registration
No. 333-144381
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
CONSTANT CONTACT,
INC.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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7372
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04-3285398
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code No.)
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(I.R.S. Employer
Identification No.)
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Reservoir Place
1601 Trapelo Road, Suite 329
Waltham, Massachusetts 02451
(781) 472-8100
(Address, including zip code,
and telephone number,
Including area code, of
registrant’s principal executive offices)
Constant Contact, Inc.
Reservoir Place
1601 Trapelo Road, Suite 329
Waltham, Massachusetts 02451
(781) 472-8100
(Name, address, including zip
code, and telephone number,
including area code, of agent
for service)
Copies to:
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Mark G. Borden, Esq.
Philip P. Rossetti, Esq.
Wilmer Cutler Pickering Hale and Dorr
LLP
60 State Street
Boston, Massachusetts 02109
(617) 526-6000
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Robert P. Nault, Esq.
Constant Contact, Inc.
Reservoir Place
1601 Trapelo Road, Suite 329
Waltham, Massachusetts 02451
(781) 472-8100
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John R.
Utzschneider, Esq.
Bingham McCutchen LLP
150 Federal Street
Boston, Massachusetts 02110
(617) 951-8000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after this Registration
Statement is declared effective.
If any of the securities being registered on this form are
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, as amended (the
“Securities Act”), check the following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to Section 8(a), may determine.
The information
contained in this prospectus is not complete and may be changed.
These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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Subject to Completion, Dated
September 4, 2007
Shares
Common Stock
$
per share
This is an initial public offering of our common stock. We are
offering shares and the
selling stockholders identified in this prospectus are
offering shares.
We expect that the price to the public in the offering will be
between $ and
$ per share. The market price of
the shares after the offering may be higher or lower than the
offering price.
We have applied to include our common stock on the Nasdaq Global
Market under the symbol “CTCT.”
Certain of our existing stockholders have indicated an interest
in purchasing up to an aggregate
of million
shares of our common stock in this offering at the public
offering price. Because indications of interest are not binding
agreements or commitments to purchase, these stockholders may
not purchase any common stock in this offering.
Investing in our common stock involves risks. See “Risk
Factors” beginning on page 7.
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Per Share
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Total
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Price to the public
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$
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$
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Underwriting discount
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Proceeds, before expenses, to
Constant Contact
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Proceeds, before expenses, to the
selling stockholders
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We and the selling stockholders have granted an over-allotment
option to the underwriters. Under this option, the underwriters
may elect to purchase a maximum
of
additional shares
( from
us
and
from the selling stockholders) within 30 days following the
date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
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CIBC
World Markets |
Thomas
Weisel Partners LLC |
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William
Blair & Company |
Cowen
and Company |
Needham &
Company, LLC |
The date of this prospectus
is ,
2007
Email marketing really is this easy. Constant Contact makes it Create easy to create, send,
and track your email Build your list permission-based email messages More than 200
professional and send email templates that get attention and deliver results. List import wizard
and tools Track Flexible one-screen editing Customizable mailing list the results Easy drag &
drop interface sign-up form for your website Customize colors and fonts Open and click tracking
Unsubscribe management Personalization Summary and List segmentation detailed reporting Easy send
scheduling ConstantContact.com © 2007 Constant Contact. All rights reserved 07-0139 |
This summary highlights information contained elsewhere in
this prospectus. You should read the following summary together
with the more detailed information appearing in this prospectus,
including our financial statements and related notes, and the
risk factors beginning on page 7, before deciding whether to
purchase shares of our common stock. Unless the context
otherwise requires, we use the terms “Constant
Contact,” “our company,” “we,”
“us” and “our” in this prospectus to refer
to Constant Contact, Inc.
Constant
Contact
Overview
Constant Contact is the leading provider of on-demand email
marketing solutions for small organizations, including small
businesses, associations and non-profits, as determined by the
size of our customer base. As of July 31, 2007, we had over
130,000 customers. Our customers use our email marketing product
to more effectively and efficiently create, send and track
professional and affordable permission-based email marketing
campaigns. With these campaigns, our customers can build
stronger relationships with their customers, clients and
members, increase sales and expand membership. Our email
marketing product incorporates a wide range of customizable
templates to assist in campaign creation, user-friendly tools to
import and manage contact lists and intuitive reporting to track
campaign effectiveness. In June 2007, we introduced an online
survey product that complements our email marketing product and
enables small organizations to easily create and send surveys
and effectively analyze responses. We are committed to providing
our customers with a high level of support, which we deliver via
phone, chat, email and our website.
Our email marketing customer base has grown steadily from
approximately 25,000 at the end of 2004 to over 130,000 as of
July 31, 2007. We estimate that approximately two-thirds of
our customers have fewer than ten employees and in the first
half of 2007 our top 50 email marketing customers accounted for
approximately 1% of our gross email marketing revenue. Our email
marketing customers pay a monthly subscription fee that
generally ranges between $15 per month and $150 per month based
on the size of their contact lists and, in some cases, volume of
mailings. For the first half of 2007, our average monthly
revenue per email marketing customer was approximately $33. We
believe that the simplicity of on-demand deployment combined
with our affordable subscription fees and functionality
facilitate adoption of our solution by our target customers
while generating significant recurring revenue. From January
2005 through July 2007, at least 97.4% of our customers in a
given month have continued to utilize our email marketing
product in the following month. Since the first quarter of 2002,
we have achieved 22 consecutive quarters of growth in customers
and revenue.
We acquire our customers through a variety of paid and unpaid
sources. Our paid sources include online marketing through
search engines, advertising networks and other sites; offline
marketing through radio advertising, local seminars and other
marketing efforts; and contractual relationships with over 1,700
active channel partners, which include national small business
service providers with broad reach such as Network Solutions,
LLC, American Express Company and VistaPrint Limited as well as
local small business service providers with narrow reach but
high influence. Our channel partners refer customers to us
through links on their websites and outbound promotions to their
customers. Our unpaid sources of customer acquisition include
referrals from our growing customer base, general brand
awareness and the inclusion of a link to our website in the
footer of more than 500 million emails currently sent by
our customers each month. During the first half of 2007,
approximately 56% of our new email marketing customers were
generated through marketing programs and channel partners or
were located in geographies where we do offline marketing.
Accordingly, we believe that during the first half of 2007
approximately 44% of our new email marketing customers were
generated through unpaid sources.
We were founded in 1995 and our on-demand email marketing
product was first offered commercially in 2000. In 2006, our
revenue was $27.6 million and our net loss was
$7.8 million, and in the six months ended June 30,
2007 our revenue was $21.1 million and our net loss was
$5.5 million.
1
Industry
Background
We believe that small organizations represent a large market for
email marketing. Based on statistics compiled by the
U.S. Small Business Administration and others, we believe
that our email marketing product could potentially address the
needs of more than 27.3 million small organizations in the
United States. We believe that all small organizations could
benefit by communicating regularly with their constituents and,
further, that email marketing with our product is an effective
and affordable method to facilitate this type of communication.
As of June 2007, we had customers in at least 856 of the
1,004 standard industrial classification, or SIC, codes,
which is a method the U.S. government uses to classify
industries in the U.S.
To date, however, small organizations have been slower than
large organizations to adopt email marketing. Many small
organizations lack familiarity with the benefits of email
marketing and an understanding of how to prepare, execute and
measure a campaign. Similarly, they often do not have the
technical expertise necessary to implement email marketing
software or the financial resources to hire in-house staff or
retain an outside agency to support the effort. We believe that
existing alternatives, primarily the use of general email
applications, are poorly suited to meeting the email marketing
needs of small organizations. General email applications and
services, such as Microsoft
Outlook®,
America
Online®
or
Hotmail®,
are designed for
one-on-one
emails and do not have the formatting, graphics or links needed
to produce effective email marketing campaigns. The other major
alternative is enterprise email marketing providers that offer
sophisticated services for large organizations with sizeable
marketing budgets and deliver services at a price and scale far
beyond the scope of most small organizations. As a result, we
believe there is a significant opportunity for an email
marketing product tailored to the needs of small organizations.
Our
Products and Services
We provide small organizations with a convenient, effective and
affordable way to communicate with their constituents. Our email
marketing product provides customers with the following features:
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Campaign Creation Wizard. A comprehensive, easy-to-use
interface that enables our customers to create and edit email
campaigns.
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Professionally Developed Templates. Pre-designed email
message forms that help our customers to quickly create
attractive and professional campaigns.
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Contact List Management. These tools help our customers
build and manage their email contact lists.
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Email Tracking and Reporting. These features enable our
customers to review and analyze the overall effectiveness of a
campaign by tracking and reporting aggregate and individualized
information.
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Email Delivery Management. These tools are incorporated
throughout our email marketing product and are designed to
maintain our high deliverability rates.
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Image Hosting. This feature enables customers to store up
to five images for free, view and edit these images and resize
them as necessary.
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Security and Privacy. We protect our customers’ data
and require that our customers adopt a privacy policy to assist
them in complying with government regulations and email
marketing best practices.
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In addition, we recently launched an online survey product to
enable our customers to survey their customers, clients or
members and analyze the responses. Our survey product provides
customers with a survey creation wizard, over 40 different
preformatted and customizable survey templates, list management
capabilities and live customer support.
2
Business
Strengths
We believe that the following business strengths differentiate
us from our competitors and are key to our success:
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Focus on Small Organizations
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Efficient Customer Acquisition Model
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High Degree of Recurring Revenue
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Consistent Commitment to Customer Service
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Software-as-a-Service
Delivery
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Growth
Strategy
Our objective is to grow our market leadership through the
following strategies:
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Acquire New Customers. We have increased the number of
email marketing customers acquired in each of the past 12
quarters and aggressively seek to continue to attract new
customers by promoting the Constant Contact brand and
encouraging small organizations to try our products.
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Increase Revenue Per Customer. As of July 31, 2007,
we had an email marketing customer base in excess of 130,000. We
seek to increase revenue from each customer through add-on
services that enhance our products, such as image hosting.
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Provide Additional Products. We plan to continue to
invest in research and development to maintain our leadership
position in email marketing and to develop and provide our
customers with complementary products that are easy-to-use,
effective and affordable, such as our recently launched survey
product.
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Expand Internationally. Customers in over 110 countries
and territories currently use our email marketing product,
despite limited marketing efforts outside the United States, and
we believe that opportunities exist to more aggressively market
our products in English-speaking countries.
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Pursue Complementary Acquisitions. We follow industry
developments and technology advancements and intend to evaluate
and acquire technologies or businesses to cost-effectively
enhance our products, access new customers or markets or both.
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Corporate
Information
We were incorporated in Massachusetts in August 1995 under the
name Roving Software Incorporated. We reincorporated in Delaware
in July 2000 and changed our name to Constant Contact, Inc. in
December 2006. Our principal executive offices are located at
Reservoir Place, 1601 Trapelo Road, Suite 329, Waltham,
Massachusetts 02451, and our telephone number is
(781) 472-8100.
Our website address is www.constantcontact.com. Information
contained on our website is not incorporated by reference into
this prospectus, and you should not consider information
contained on our website to be part of this prospectus or in
deciding whether to purchase shares of our common stock.
Constant
Contact®,
Do-It-Yourself Email
Marketing®,
SafeUnsubscribe®,
Email Marketing
101®,
Email Marketing Hints &
Tips®
and other trademarks or service marks of Constant Contact
appearing in this prospectus are the property of Constant
Contact. This prospectus contains additional trade names,
trademarks and service marks of other companies.
3
The
Offering
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Common stock offered by us
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shares |
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Common stock offered by the selling stockholders
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shares |
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Common stock to be outstanding after the offering
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shares |
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Use of proceeds
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We intend to use our net proceeds from this offering for general
corporate purposes, including the development of new products,
the acquisition of new customers and capital expenditures. We
also intend to use a portion of our net proceeds to repay
outstanding debt, which was $3.1 million as of
June 30, 2007. We may use a portion of our proceeds for the
acquisition of, or investment in, businesses, technologies,
products or assets that complement our business. We have no
present understandings, commitments or agreements to enter into
any acquisitions or make any investments. We will not receive
any proceeds from the shares sold by the selling stockholders.
See “Use of Proceeds” for more information. |
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Proposed Nasdaq Global Market symbol
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CTCT |
The number of shares of our common stock to be outstanding after
this offering is based on the number of shares of common stock
outstanding as of June 30, 2007, and excludes:
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1,951,485 shares of common stock issuable upon the exercise
of stock options and warrants outstanding as of June 30,
2007 at a weighted average exercise price of $2.56 per share, of
which options and warrants to purchase 585,908 shares of
our common stock were exercisable as of June 30, 2007 with
a weighted average exercise price of $1.97 per share; and
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831,124 shares of common stock available for future
issuance under our equity compensation plans as of June 30,
2007.
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Unless otherwise stated, all information contained in this
prospectus gives effect to a 1-for-100 reverse stock split of
our common stock that was effected on November 26, 2002 and
a 1.3-for-1
stock split of our common stock to be effected on
September 6, 2007, assumes no exercise by the underwriters
of their over-allotment option, assumes the exercise of an
outstanding warrant to purchase 120,000 shares of redeemable
convertible preferred stock and gives effect to the automatic
conversion of those preferred shares into 156,000 shares of
our common stock upon the closing of this offering, gives effect
to the automatic conversion of all outstanding shares of our
redeemable convertible preferred stock into
17,146,675 shares of our common stock upon the closing of
this offering and gives effect to the restatement of our
certificate of incorporation and amendment and restatement of
our bylaws to be effective upon completion of this offering.
Entities affiliated with Commonwealth Capital Ventures, which
are existing stockholders, have indicated an interest in
purchasing up to an aggregate
of million
shares of our common stock in this offering at the initial
public offering price. Assuming an initial public offering price
of $ per share, the mid-point of
the estimated price range shown on the cover page of this
prospectus, these stockholders would purchase up to
$ million of our common stock
in this offering. However, because indications of interest are
not binding agreements or commitments to purchase, these
stockholders might not purchase any common stock in this
offering.
4
Summary
Financial Information
The following tables present our summary statements of
operations data for the three years ended December 31, 2006
and for the six months ended June 30, 2006 and 2007, and
our summary historical, pro forma and pro forma as adjusted
balance sheet data as of June 30, 2007. The summary
statements of operations data for the three years ended
December 31, 2006 are derived from our audited financial
statements for the three years ended December 31, 2006
included elsewhere in this prospectus. The summary statements of
operations data for the six months ended June 30, 2006 and
2007 and the summary balance sheet data as of June 30, 2007
have been derived from our unaudited financial statements
included elsewhere in this prospectus. Our unaudited financial
statements have been prepared on the same basis as the audited
financial statements and notes thereto and, in the opinion of
our management, include all adjustments (consisting of normal
recurring adjustments) necessary for a fair statement of the
information for the unaudited interim periods. Our historical
results for prior interim periods are not necessarily indicative
of results to be expected for a full year or for any future
period. You should read this data together with our financial
statements and related notes included elsewhere in this
prospectus and the information under “Selected Financial
Data” and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations.”
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Six Months Ended
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Year Ended December 31,
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June 30,
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2004
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2005
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2006
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2006
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2007
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(in thousands, except per share and customer data)
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Statements of Operations
Data:
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Revenue
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$
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8,071
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$
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14,658
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$
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27,552
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$
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11,829
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$
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21,111
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Cost of revenue(1)
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2,211
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3,747
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7,801
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3,354
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5,837
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Gross profit
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5,860
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10,911
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19,751
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8,475
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15,274
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Operating expenses:(1)
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Research and development
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2,140
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3,355
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6,172
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2,774
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4,971
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Sales and marketing
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3,385
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7,460
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18,592
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7,084
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12,795
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General and administrative
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856
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1,326
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2,623
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1,079
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2,371
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Total operating expenses
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6,381
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12,141
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27,387
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10,937
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20,137
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Loss from operations
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(521
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(1,230
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(7,636
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(2,462
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(4,863
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Interest and other income
(expense), net
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(34
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(24
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(203
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(306
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(631
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Net loss
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(555
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(1,254
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(7,839
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(2,768
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(5,494
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Accretion of redeemable
convertible preferred stock
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(3,701
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(5,743
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(3,788
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(3,270
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(518
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Net loss attributable to common
stockholders
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$
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(4,256
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$
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(6,997
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$
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(11,627
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$
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(6,038
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$
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(6,012
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Net loss attributable to common
stockholders per share:
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Basic and diluted
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$
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(4.37
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$
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(2.49
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$
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(3.38
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$
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(1.82
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$
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(1.59
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)
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Weighted average shares
outstanding used in computing per share amounts:
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Basic and diluted
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974
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2,813
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3,438
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|
|
3,312
|
|
|
|
3,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period number of
customers(2)
|
|
|
25,229
|
|
|
|
47,730
|
|
|
|
89,323
|
|
|
|
67,061
|
|
|
|
123,865
|
|
|
|
|
(1)
|
|
Amounts include stock-based
compensation expense, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
–
|
|
$
|
–
|
|
$
|
25
|
|
$
|
5
|
|
$
|
32
|
Research and development
|
|
|
–
|
|
|
–
|
|
|
27
|
|
|
4
|
|
|
50
|
Sales and marketing
|
|
|
6
|
|
|
–
|
|
|
19
|
|
|
4
|
|
|
29
|
General and administrative
|
|
|
17
|
|
|
17
|
|
|
12
|
|
|
2
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23
|
|
$
|
17
|
|
$
|
83
|
|
$
|
15
|
|
$
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
We define our end of period number
of customers as email marketing customers that we billed
directly during the last month of the period.
|
5
The following table summarizes our balance sheet data as of
June 30, 2007:
|
|
|
|
•
|
on a pro forma basis to reflect the automatic conversion of all
outstanding shares of our redeemable convertible preferred stock
into shares of common stock upon the closing of the offering and
the assumed exercise of an outstanding warrant to purchase
redeemable convertible preferred stock and subsequent automatic
conversion of those shares of preferred stock into common stock;
and
|
|
|
|
|
•
|
on a pro forma as adjusted basis to reflect the pro forma
adjustments above, as well as the receipt by us of estimated net
proceeds of $ million from
the sale
of shares
of common stock offered by us, at an initial public offering
price of $ per share, the
mid-point of the estimated price range shown on the cover page
of this prospectus, after deducting the estimated underwriting
discount and offering expenses payable by us and the payment by
us of $3.1 million to repay our outstanding indebtedness as
described under “Use of Proceeds.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
as Adjusted
|
|
|
|
(in thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
short-term marketable securities
|
|
$
|
11,192
|
|
|
$
|
11,252
|
|
|
$
|
|
|
Total assets
|
|
|
19,345
|
|
|
|
19,405
|
|
|
|
|
|
Deferred revenue
|
|
|
8,047
|
|
|
|
8,047
|
|
|
|
|
|
Redeemable convertible preferred
stock warrant
|
|
|
1,465
|
|
|
|
–
|
|
|
|
|
|
Notes payable
|
|
|
3,083
|
|
|
|
3,083
|
|
|
|
|
|
Redeemable convertible preferred
stock
|
|
|
35,840
|
|
|
|
–
|
|
|
|
|
|
Total stockholders’ equity
(deficit)
|
|
|
(34,379
|
)
|
|
|
2,986
|
|
|
|
|
|
6
An investment in our common stock involves a high degree of
risk. In deciding whether to invest, you should carefully
consider the following risk factors. Any of the following risks
could have a material adverse effect on our business, financial
condition, results of operations or prospects and cause the
value of our common stock to decline, which could cause you to
lose all or part of your investment. When determining whether to
invest, you should also refer to the other information in this
prospectus, including the financial statements and related
notes.
RISKS
RELATED TO OUR BUSINESS AND INDUSTRY
If we are
unable to attract new customers and retain existing customers on
a cost-effective basis, our business and results of operations
will be affected adversely.
To succeed, we must continue to attract and retain a large
number of customers on a cost-effective basis, many of whom have
not previously used an email marketing service. We rely on a
variety of methods to attract new customers, such as paying
providers of online services, search engines, directories and
other websites to provide content, advertising banners and other
links that direct customers to our website and including a link
to our website in substantially all of our customers’
emails. In addition, many of our new customers are referred to
us by existing customers. If we are unable to use any of our
current marketing initiatives or the cost of such initiatives
were to significantly increase or our efforts to satisfy our
existing customers are not successful, we may not be able to
attract new customers or retain existing customers on a
cost-effective basis and, as a result, our revenue and results
of operations would be affected adversely.
Our
business is substantially dependent on the market for email
marketing services for small organizations.
We derive, and expect to continue to derive, substantially all
of our revenue from our email marketing product for small
organizations, including small businesses, associations and
non-profits. As a result, widespread acceptance of email
marketing among small organizations is critical to our future
growth and success. The overall market for email marketing and
related services is relatively new and still evolving, and small
organizations have generally been slower than large
organizations to adopt email marketing as part of their
marketing mix. There is no certainty regarding how or whether
this market will develop, or whether it will experience any
significant contractions. Our ability to attract and retain
customers will depend in part on our ability to make email
marketing convenient, effective and affordable. If small
organizations determine that email marketing does not
sufficiently benefit them, existing customers may cancel their
accounts and new customers may decide not to adopt email
marketing. In addition, many small organizations lack the
technical expertise to effectively send email marketing
campaigns. As technology advances, however, small organizations
may establish the capability to manage their own email marketing
and therefore have no need for our email marketing product. If
the market for email marketing services fails to grow or grows
more slowly than we currently anticipate, demand for our
services may decline and our revenue would suffer.
U.S.
federal legislation entitled Controlling the Assault of
Non-Solicited Pornography and Marketing Act of 2003 imposes
certain obligations on the senders of commercial emails, which
could minimize the effectiveness of our email marketing product,
and establishes financial penalties for non-compliance, which
could increase the costs of our business.
In December 2003, Congress enacted Controlling the Assault of
Non-Solicited Pornography and Marketing Act of 2003, or the
CAN-SPAM Act, which establishes certain requirements for
commercial email messages and specifies penalties for the
transmission of commercial email messages that are intended to
deceive the recipient as to source or content. The CAN-SPAM Act,
among other things, obligates the sender of commercial emails to
provide recipients with the ability to opt out of receiving
future emails from the sender. In addition, some states have
passed laws regulating commercial email practices that are
significantly more
7
punitive and difficult to comply with than the CAN-SPAM Act,
particularly Utah and Michigan, which have enacted do-not-email
registries listing minors who do not wish to receive unsolicited
commercial email that markets certain covered content, such as
adult or other harmful products. Some portions of these state
laws may not be preempted by the CAN-SPAM Act. The ability of
our customers’ constituents to opt out of receiving
commercial emails may minimize the effectiveness of our email
marketing product. Moreover, non-compliance with the CAN-SPAM
Act carries significant financial penalties. If we were found to
be in violation of the CAN-SPAM Act, applicable state laws not
preempted by the CAN-SPAM Act, or foreign laws regulating the
distribution of commercial email, whether as a result of
violations by our customers or if we were deemed to be directly
subject to and in violation of these requirements, we could be
required to pay penalties, which would adversely affect our
financial performance and significantly harm our business. We
also may be required to change one or more aspects of the way we
operate our business, which could impair our ability to attract
and retain customers or increase our operating costs.
Evolving
regulations concerning data privacy may restrict our
customers’ ability to solicit, collect, process and use
data necessary to conduct email marketing campaigns or to send
surveys and analyze the results or may increase their costs,
which could harm our business.
Federal, state and foreign governments have enacted, and may in
the future enact, laws and regulations concerning the
solicitation, collection, processing or use of consumers’
personal information. Such laws and regulations may require
companies to implement privacy and security policies, permit
users to access, correct and delete personal information stored
or maintained by such companies, inform individuals of security
breaches that affect their personal information, and, in some
cases, obtain individuals’ consent to use personal
information for certain purposes. Other proposed legislation
could, if enacted, prohibit the use of certain technologies that
track individuals’ activities on web pages or that record
when individuals click through to an Internet address contained
in an email message. Such laws and regulations could restrict
our customers’ ability to collect and use email addresses,
page viewing data, and personal information, which may reduce
demand for our products.
As
Internet commerce develops, federal, state and foreign
governments may draft and propose new laws to regulate Internet
commerce, which may negatively affect our business.
As Internet commerce continues to evolve, increasing regulation
by federal, state or foreign governments becomes more likely.
Our business could be negatively impacted by the application of
existing laws and regulations or the enactment of new laws
applicable to email marketing. The cost to comply with such laws
or regulations could be significant and would increase our
operating expenses, and we may be unable to pass along those
costs to our customers in the form of increased subscription
fees. In addition, federal, state and foreign governmental or
regulatory agencies may decide to impose taxes on services
provided over the Internet or via email. Such taxes could
discourage the use of the Internet and email as a means of
commercial marketing, which would adversely affect the viability
of our products.
In the
event we are unable to minimize our loss of existing customers
or to grow our customer base by adding new customers, our
operating results will be adversely affected.
From January 2005 through July 2007, at least 97.4% of our
customers in a given month have continued to utilize our email
marketing product in the following month. Such historic
performance is not indicative of future performance, and there
is no guarantee that new customers will demonstrate the loyalty
our existing customers have exhibited in the past or that our
existing customers will continue to use our products
consistently. Our growth strategy requires us to minimize the
loss of our existing customers and grow our customer base by
adding new customers. Customers cancel their accounts for many
reasons, including a perception that they do not use our product
effectively, the service is a poor value and they can manage
their email campaigns without our product. In some cases, we
terminate an account because the customer fails to comply with
our standard terms and conditions. We must continually add new
customers to replace customers whose accounts are cancelled or
terminated, which may involve significantly higher marketing
expenditures
8
than we currently anticipate. If too many of our customers
cancel our service, or if we are unable to attract new customers
in numbers sufficient to grow our business, our operating
results would be adversely affected.
As we
expand our customer base through our marketing efforts, our new
customers may use our products differently than our existing
customers and, accordingly, our business model may not be as
efficient at attracting and retaining new customers.
As we expand our customer base, our new customers may use our
products differently than our existing customers. For example, a
greater percentage of new customers may take advantage of the
free trial period we offer but choose to use another form of
marketing to reach their constituents. If our new customers are
not as loyal as our existing customers, our attrition rate will
increase and our customer referrals will decrease, which would
have an adverse effect on our results of operations. In
addition, as we seek to expand our customer base, we expect to
increase our marketing spend in order to attract new customers,
which will increase our operating costs. There can be no
assurance that these marketing efforts will be successful.
The
market in which we participate is competitive and, if we do not
compete effectively, our operating results could be
harmed.
The market for our products is competitive and rapidly changing,
and the barriers to entry are relatively low. With the
introduction of new technologies and the influx of new entrants
to the market, we expect competition to persist and intensify in
the future, which could harm our ability to increase sales and
maintain our prices.
Our principal competitors include providers of email marketing
products for small to medium size businesses such as Vertical
Response, Inc., CoolerEmail Inc., Broadwick Corporation
(iContact, formerly Intellicontact), Emma, Inc., Got Corporation
(Campaigner®),
Lyris Technologies, Inc. and Topica Inc., as well as the
in-house information technology capabilities of prospective
customers. Competition could result in reduced sales, reduced
margins or the failure of our email marketing product to achieve
or maintain more widespread market acceptance, any of which
could harm our business. In addition, there are a number of
other vendors that are focused on providing email marketing
products for larger organizations, including Acxiom Digital (a
division of Acxiom Corporation), Alterian Inc., Epsilon Data
Management LLC (a subsidiary of Alliance Data Systems
Corporation), ExactTarget, Inc., Responsys Inc., Silverpop
Systems Inc. and CheetahMail, Inc. (a subsidiary of Experian
Group Limited). While we do not compete currently with vendors
serving larger customers, we may face future competition from
these providers if they determine that our target market
presents an opportunity for them. Finally, in the future, we may
experience competition from Internet service providers, or ISPs,
advertising and direct marketing agencies and other large
established businesses, such as Microsoft Corporation, Google
Inc. or Yahoo! Inc., possessing large, existing customer bases,
substantial financial resources and established distribution
channels. If these companies decide to develop, market or resell
competitive email marketing products, acquire one of our
existing competitors or form a strategic alliance with one of
our competitors, our ability to compete effectively could be
significantly compromised and our operating results could be
harmed. In addition, one or more of these ISPs or other
businesses could decide to offer a competitive email marketing
product at no cost or low cost in order to generate revenue as
part of a larger product offering.
Our current and potential competitors may have significantly
more financial, technical, marketing and other resources than we
do and may be able to devote greater resources to the
development, promotion, sale and support of their products. Our
potential competitors may have more extensive customer bases and
broader customer relationships than we have. In addition, these
companies may have longer operating histories and greater name
recognition than we have. These competitors may be better able
to respond quickly to new technologies and to undertake more
extensive marketing campaigns. If we are unable to compete with
such companies, the demand for our services could substantially
decline.
9
If the
delivery of our customers’ emails is limited or blocked,
the fees we may be able to charge for our email marketing
product may not be accepted by the market and customers may
cancel their accounts.
ISPs can block emails from reaching their users. Recent releases
of ISP software and the implementation of stringent new policies
by ISPs make it more difficult to deliver our customers’
emails. We continually improve our own technology and work
closely with ISPs to maintain our deliverability rates. If ISPs
materially limit or halt the delivery of our customers’
emails, or if we fail to deliver our customers’ emails in a
manner compatible with ISPs’ email handling or
authentication technologies, then the fees we charge for our
email marketing product may not be accepted by the market, and
customers may cancel their accounts.
Competition
for our employees is intense, and we may not be able to attract
and retain the highly skilled employees whom we need to support
our business.
Competition for highly skilled technical and marketing personnel
is extremely intense, and we continue to face difficulty
identifying and hiring qualified personnel in many areas of our
business. We may not be able to hire and retain such personnel
at compensation levels consistent with our existing compensation
and salary structure. Many of the companies with which we
compete for experienced employees have greater resources than we
have and may be able to offer more attractive terms of
employment. In particular, candidates making employment
decisions, particularly in high-technology industries, often
consider the value of any equity they may receive in connection
with their employment. Any significant volatility in the price
of our stock after this offering may adversely affect our
ability to attract or retain highly skilled technical and
marketing personnel.
In addition, we invest significant time and expense in training
our employees, which increases their value to competitors who
may seek to recruit them. If we fail to retain our employees, we
could incur significant expenses in hiring and training their
replacements and the quality of our services and our ability to
serve our customers could diminish, resulting in a material
adverse effect on our business.
If
economic or other factors negatively affect the small business
sector, our customers may become unwilling or unable to maintain
accounts with us, which could cause our revenue to decline and
impair our ability to operate profitably.
Our email marketing and survey products are designed
specifically for small organizations, including small
businesses, associations and non-profits that frequently have
limited budgets and are more likely to be significantly affected
by economic downturns than their larger, more established
counterparts. Small organizations may choose to spend the
limited funds that they have on items other than our products.
Moreover, if small organizations experience economic hardship,
they may be unwilling or unable to expend resources on
marketing, which would negatively affect the overall demand for
our products and could cause our revenue to decline.
If we
fail to promote and maintain our brand in a cost-effective
manner, we may lose market share and our revenue may
decrease.
We believe that developing and maintaining awareness of the
Constant Contact brand in a cost-effective manner is critical to
achieving widespread acceptance of our existing and future
products and attracting new customers. Furthermore, we believe
that the importance of brand recognition will increase as
competition in our industry increases. Successful promotion of
our brand will depend largely on the effectiveness of our
marketing efforts and the effectiveness and affordability of our
products for our target customer demographic. Historically, our
efforts to build our brand have involved significant expense,
and it is likely that our future marketing efforts will require
us to incur additional significant expenses. Such brand
promotion activities may not yield increased revenue and, even
if they do, any revenue increases may not offset the expenses we
incur to promote our brand. If we fail to successfully promote
and maintain our brand, or if we incur substantial expenses in
an unsuccessful attempt to promote and maintain our brand, we
may lose our existing customers to our competitors or be unable
to attract new customers, which would cause our revenue to
decrease.
10
We depend
on search engines to attract a significant percentage of our
customers, and if those search engines change their listings or
our relationship with them deteriorates or terminates, we may be
unable to attract new customers, which would adversely affect
our business and results of operations.
Many of our customers located our website by clicking through on
search results displayed by search engines such as Google and
Yahoo!. Search engines typically provide two types of search
results, algorithmic and purchased listings. Algorithmic
listings cannot be purchased, and instead are determined and
displayed solely by a set of formulas designed by the search
engine. Purchased listings can be purchased by advertisers in
order to attract users to their websites. We rely on both
algorithmic and purchased listings to attract a significant
percentage of the customers we serve to our website. Search
engines revise their algorithms from time to time in an attempt
to optimize their search result listings. If search engines on
which we rely for algorithmic listings modify their algorithms,
this could result in fewer customers clicking through to our
website, requiring us to resort to other costly resources to
replace this traffic, which, in turn, could reduce our operating
and net income or our revenue, harming our business. If one or
more search engines on which we rely for purchased listings
modifies or terminates its relationship with us, our expenses
could rise, or our revenue could decline and our business may
suffer. The cost of purchased search listing advertising is
rapidly increasing as demand for these channels continues to
grow quickly, and further increases could have negative effects
on our financial results.
The
success of our business depends on the continued growth and
acceptance of email as a communications tool, and the related
expansion and reliability of the Internet infrastructure. If
consumers do not continue to use email, demand for our email
marketing products may decline.
The future success of our business depends on the continued and
widespread adoption of email as a primary means of
communication. Security problems such as “viruses,”
“worms” and other malicious programs or reliability
issues arising from outages and damage to the Internet
infrastructure could create the perception that email is not a
safe and reliable means of communication, which would discourage
consumers from using email. Consumers’ use of email also
depends on the ability of ISPs to prevent unsolicited bulk
email, or “spam,” from overwhelming consumers’
inboxes. In recent years, ISPs have developed new technologies
to filter unwanted messages before they reach users’
inboxes. In response, spammers have employed more sophisticated
techniques to reach consumers’ inboxes. Although companies
in the anti-spam industry have started to address the techniques
used by spammers, if security problems become widespread or
frequent or if ISPs cannot effectively control spam, the use of
email as a means of communication may decline as consumers find
alternative ways to communicate. Any decrease in the use of
email would reduce demand for our email marketing product and
harm our business.
Various
private spam blacklists have in the past interfered with, and
may in the future interfere with, the effectiveness of our
products and our ability to conduct business.
We depend on email to market to and communicate with our
customers, and our customers rely on email to communicate with
their constituents. Various private entities attempt to regulate
the use of email for commercial solicitation. These entities
often advocate standards of conduct or practice that
significantly exceed current legal requirements and classify
certain email solicitations that comply with current legal
requirements as spam. Some of these entities maintain
“blacklists” of companies and individuals, and the
websites, ISPs and Internet protocol addresses associated with
those entities or individuals, that do not adhere to those
standards of conduct or practices for commercial email
solicitations that the blacklisting entity believes are
appropriate. If a company’s Internet protocol addresses are
listed by a blacklisting entity, emails sent from those
addresses may be blocked if they are sent to any Internet domain
or Internet address that subscribes to the blacklisting
entity’s service or purchases its blacklist.
Some of our Internet protocol addresses currently are listed
with one or more blacklisting entities and, in the future, our
Internet protocol addresses may also be listed with these and
other blacklisting entities. There can be no guarantee that we
will not continue to be blacklisted or that we will be able to
successfully remove
11
ourselves from those lists. Blacklisting of this type could
interfere with our ability to market our products and services
and communicate with our customers and could undermine the
effectiveness of our customers’ email marketing campaigns,
all of which could have a material negative impact on our
business and results of operations.
Any
efforts we may make in the future to promote our services to
market segments other than small organizations or to expand our
product offerings beyond email marketing may not
succeed.
To date, we have focused our business on providing our email
marketing product for small organizations, but we may in the
future seek to serve other market segments and expand our
service offerings. We recently introduced our new survey
product, which enables customers to create and send online
surveys and analyze responses, and we are currently developing
an add-on archiving service that will enable our customers to
archive their past email campaigns. Any efforts to expand beyond
the small organization market or to introduce new products
beyond our email marketing product, including our survey
product, may not result in significant revenue growth, may
divert management resources from our existing operations and
require us to commit significant financial resources to an
unproven business, which may harm our financial performance.
Our
customers’ use of our products to transmit negative
messages or website links to harmful applications could damage
our reputation, and we may face liability for unauthorized,
inaccurate or fraudulent information distributed via our
products.
Our customers could use our email marketing product to transmit
negative messages or website links to harmful applications,
reproduce and distribute copyrighted material without
permission, or report inaccurate or fraudulent data. Any such
use of our products could damage our reputation and we could
face claims for damages, copyright or trademark infringement,
defamation, negligence or fraud. Moreover, our customers’
promotion of their products and services through our email
marketing product may not comply with federal, state and foreign
laws. We cannot predict whether our role in facilitating these
activities would expose us to liability under these laws.
Even if claims asserted against us do not result in liability,
we may incur substantial costs in investigating and defending
such claims. If we are found liable for our customers’
activities, we could be required to pay fines or penalties,
redesign business methods or otherwise expend resources to
remedy any damages caused by such actions and to avoid future
liability.
Our existing general liability insurance may not cover all
potential claims to which we are exposed or may not be adequate
to indemnify us for all liabilities that may be imposed. Any
imposition of liability that is not covered by insurance or is
in excess of insurance coverage would increase our operating
losses and reduce our net worth and working capital.
If we
fail to enhance our existing products or develop new features,
our products may become obsolete or less competitive and we
could lose customers.
If we are unable to enhance our existing products or develop new
products that keep pace with rapid technological developments
and meet our customers’ needs, our business will be harmed.
Creating and designing such enhancements and new products entail
significant technical and business risks and require substantial
expenditures and lead-time, and there is no guarantee that such
enhancements and new products will be completed in a timely
fashion or accepted by the market. If we cannot enhance our
existing services or develop new products or if we are not
successful in selling such enhancements and new products to our
customers, we could lose customers or have difficulty attracting
new customers, which would adversely impact our financial
performance.
12
Our
relationships with our channel partners may be terminated or may
not continue to be beneficial in generating new email marketing
customers, which could adversely affect our ability to increase
our customer base.
We maintain a network of over 1,700 active channel partners,
which include national small business service providers such as
Network Solutions, LLC, American Express Company and VistaPrint
Limited as well as local small business service providers such
as local web developers and marketing agencies, who refer
customers to us through links on their websites and outbound
promotion to their customers. Approximately 15% of our new email
marketing customers in the first half of 2007 were generated
from our channel partners. If we are unable to maintain our
contractual relationships with existing channel partners or
establish new contractual relationships with potential channel
partners, we may experience delays and increased costs in adding
customers, which could have a material adverse effect on us. The
number of customers we are able to add through these marketing
relationships is dependent on the marketing efforts of our
partners, and a significant decrease in the number of gross
customer additions generated through these relationships could
adversely affect the size of our customer base and revenue.
Our
growth could strain our personnel resources and infrastructure,
and if we are unable to implement appropriate controls and
procedures to manage our growth, we may not be able to
successfully implement our business plan.
We are currently experiencing a period of rapid growth in our
headcount and operations, which has placed, and will continue to
place, to the extent that we are able to sustain such growth, a
significant strain on our management and our administrative,
operational and financial reporting infrastructure.
Our success will depend in part on the ability of our senior
management to manage this growth effectively. To do so, we must
continue to hire, train and manage new employees as needed. If
our new hires perform poorly, or if we are unsuccessful in
hiring, training, managing and integrating these new employees,
or if we are not successful in retaining our existing employees,
our business may be harmed. To manage the expected growth of our
operations and personnel, we will need to continue to improve
our operational and financial controls and update our reporting
procedures and systems, which may include installing a new
billing system. The addition of new employees and the capital
investments that we anticipate will be necessary to manage our
growth will increase our cost base, which will make it more
difficult for us to offset any future revenue shortfalls by
reducing expenses in the short term. If we fail to successfully
manage our growth, we will be unable to execute our business
plan.
If we
fail to retain our key personnel, we may not be able to achieve
our anticipated level of growth and our business could
suffer.
Our future depends, in part, on our ability to attract and
retain key personnel. Our future also depends on the continued
contributions of our executive officers and other key technical
personnel, each of whom would be difficult to replace. In
particular, Gail F. Goodman, our Chairman, President and Chief
Executive Officer, is critical to the management of our business
and operations and the development of our strategic direction.
The loss of the services of Ms. Goodman or other executive
officers or key personnel and the process to replace any of our
key personnel would involve significant time and expense and may
significantly delay or prevent the achievement of our business
objectives.
Any
significant disruption in service on our website or in our
computer systems, or in our customer support services, could
reduce the attractiveness of our products and result in a loss
of customers.
The satisfactory performance, reliability and availability of
our technology and our underlying network infrastructure are
critical to our operations, level of customer service,
reputation and ability to attract new customers and retain
existing customers. Our system hardware is collocated in a
hosting facility located in Somerville, Massachusetts, owned and
operated by Internap Network Services Corporation. Internap does
not
13
guarantee that our customers’ access to our products will
be uninterrupted, error-free or secure. Our operations depend on
Internap’s ability to protect their and our systems in
their facilities against damage or interruption from natural
disasters, power or telecommunications failures, air quality,
temperature, humidity and other environmental concerns, computer
viruses or other attempts to harm our systems, criminal acts and
similar events. In the event that our arrangement with Internap
is terminated, or there is a lapse of service or damage to the
Internap facility, we could experience interruptions in our
service as well as delays and additional expense in arranging
new facilities. In addition our customer support services, which
are located at our headquarters, would experience interruptions
as a result of any disruption of electrical, phone or any other
similar facility support services. Any interruptions or delays
in access to our products or customer support, whether as a
result of Internap or other third-party error, our own error,
natural disasters or security breaches, whether accidental or
willful, could harm our relationships with customers and our
reputation. Also, in the event of damage or interruption, our
insurance policies may not adequately compensate us for any
losses that we may incur. These factors could damage our brand
and reputation, divert our employees’ attention, reduce our
revenue, subject us to liability and cause customers to cancel
their accounts, any of which could adversely affect our
business, financial condition and results of operations.
Our disaster recovery system located at our headquarters in
Waltham, Massachusetts does not provide real time backup, has
not been tested under actual disaster conditions and may not
have sufficient capacity to recover all data and services in the
event of an outage at the Internap facility. In the event of a
disaster in which the Internap facility is irreparably damaged
or destroyed, we would experience interruptions in access to our
products. Moreover, our disaster recovery system is located
approximately 12 miles from the Internap facility and may
be equally or more affected by any regional disaster affecting
the Internap facility. Any or all of these events could cause
our customers to lose access to our products.
If the
security of our customers’ confidential information stored
in our systems is breached or otherwise subjected to
unauthorized access, our reputation may be harmed, we may be
exposed to liability and we may lose the ability to offer our
customers a credit card payment option.
Our system stores our customers’ proprietary email
distribution lists, credit card information and other critical
data. Any accidental or willful security breaches or other
unauthorized access could expose us to liability for the loss of
such information, time-consuming and expensive litigation and
other possible liabilities as well as negative publicity. If
security measures are breached because of third-party action,
employee error, malfeasance or otherwise, or if design flaws in
our software are exposed and exploited, and, as a result, a
third party obtains unauthorized access to any of our
customers’ data, our relationships with our customers will
be severely damaged, and we could incur significant liability.
Because techniques used to obtain unauthorized access or to
sabotage systems change frequently and generally are not
recognized until they are launched against a target, we and our
third-party hosting facilities may be unable to anticipate these
techniques or to implement adequate preventative measures. In
addition, many states have enacted laws requiring companies to
notify individuals of data security breaches involving their
personal data. These mandatory disclosures regarding a security
breach often lead to widespread negative publicity, which may
cause our customers to lose confidence in the effectiveness of
our data security measures. Any security breach, whether actual
or perceived, would harm our reputation, and we could lose
customers.
While we believe that we are now in compliance with certain of
the data protection policy documentation standards adopted by
the major credit card issuers, if we fail to maintain our
compliance with such data protection policy documentation
standards, we could lose our ability to offer our customers a
credit card payment option. Although this has not occurred to
date, any loss of our ability to offer our customers a credit
card payment option would make our products less attractive to
many small organizations by negatively impacting our customer
experience and significantly increasing our administrative costs
related to customer payment processing.
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We rely
on third-party computer hardware and software that may be
difficult to replace or that could cause errors or failures of
our service.
We rely on computer hardware purchased and software licensed
from third parties in order to offer our products, including
hardware from such large vendors as Oracle Corporation,
International Business Machines Corporation, Dell Computer
Corporation, Sun Microsystems, Inc. and EMC Corporation. This
hardware and software may not continue to be available on
commercially reasonable terms, or at all. If we lose the right
to use any of this hardware or software or such hardware or
software malfunctions, our customers could experience delays or
be unable to access our services until we can obtain and
integrate equivalent technology or repair the cause of the
malfunctioning hardware or software. Any delays or failures
associated with our services could upset our customers and harm
our business.
If we are
unable to protect the confidentiality of our unpatented
proprietary information, processes and know-how and our trade
secrets, the value of our technology and products could be
adversely affected.
We rely upon unpatented proprietary technology, processes and
know-how and trade secrets. Although we try to protect this
information in part by executing confidentiality agreements with
our employees, consultants and third parties, such agreements
may be breached. Any unauthorized disclosure or dissemination of
our proprietary technology, processes and know-how or our trade
secrets, whether by breach of a confidentiality agreement or
otherwise, may cause irreparable harm to our business, and we
may not have adequate remedies for any such breach. In addition,
our trade secrets may otherwise be independently developed by
our competitors or other third parties. If we are unable to
protect the confidentiality of our proprietary information,
processes and know-how or our trade secrets are disclosed, the
value of our technology and services could be adversely
affected, which could negatively impact our business, financial
condition and results of operations.
Our use
of open source could impose limitations on our ability to
commercialize our products.
We incorporate open source software into our products. Although
we monitor our use of open source software closely, the terms of
many open source licenses to which we are subject have not been
interpreted by United States or foreign courts, and there is a
risk that such licenses could be construed in a manner that
imposes unanticipated conditions or restrictions on our ability
to commercialize our products. In such event, we could be
required to seek licenses from third parties in order to
continue offering our products, to re-engineer our products or
to discontinue sales of our products, or to release our software
code under the terms of an open source license, any of which
could materially adversely affect our business.
Given the nature of open source software, there is also a risk
that third parties may assert copyright and other intellectual
property infringement claims against us based on our use of
certain open source software programs. The risks associated with
intellectual property infringement claims are discussed
immediately below.
If a
third party asserts that we are infringing its intellectual
property, whether successful or not, it could subject us to
costly and time-consuming litigation or require us to obtain
expensive licenses, and our business may be adversely
affected.
The software and Internet industries are characterized by the
existence of a large number of patents, trademarks and
copyrights and by frequent litigation based on allegations of
infringement or other violations of intellectual property
rights. Third parties may assert patent and other intellectual
property infringement claims against us in the form of lawsuits,
letters or other forms of communication. These claims, whether
or not successful, could:
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divert management’s attention;
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result in costly and time-consuming litigation;
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require us to enter into royalty or licensing agreements, which
may not be available on acceptable terms, or at all;
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in the case of open source software-related claims, require us
to release our software code under the terms of an open source
license; or
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require us to redesign our software and services to avoid
infringement.
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As a result, any third-party intellectual property claims
against us could increase our expenses and adversely affect our
business. In addition, many of our agreements with our channel
partners require us to indemnify them for third-party
intellectual property infringement claims, which would increase
the cost to us resulting from an adverse ruling on any such
claim. Even if we have not infringed any third parties’
intellectual property rights, we cannot be sure our legal
defenses will be successful, and even if we are successful in
defending against such claims, our legal defense could require
significant financial resources and management time. Finally, if
a third party successfully asserts a claim that our products
infringe their proprietary rights, royalty or licensing
agreements might not be available on terms we find acceptable or
at all.
Providing
our products to customers outside the United States exposes us
to risks inherent in international business.
Customers in more than 110 countries and territories
currently use our email marketing product, and we expect to
expand our international operations in the future. Accordingly,
we are subject to risks and challenges that we would otherwise
not face if we conducted our business only in the United States.
The risks and challenges associated with providing our products
to customers outside the United States include:
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localization of our products, including translation into foreign
languages and associated expenses;
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laws and business practices favoring local competitors;
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compliance with multiple, conflicting and changing governmental
laws and regulations, including tax, email marketing, privacy
and data protection laws and regulations;
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foreign currency fluctuations;
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different pricing environments;
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difficulties in staffing and maintaining foreign
operations; and
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regional economic and political conditions.
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We have
incurred net losses in the past and expect to incur net losses
in the future.
We have incurred net losses in the past and we expect to incur
net losses in the future. As of June 30, 2007, our
accumulated deficit was $40.0 million. Our recent net
losses were $1.3 million for the year ended
December 31, 2005, $7.8 million for the year ended
December 31, 2006 and $5.5 million for the six months
ended June 30, 2007. Our net losses have increased over
recent periods because we have increased our sales and marketing
expense to promote the Constant Contact brand and encourage new
customers to try our products. We have not been profitable since
our inception, and we may not become profitable. In addition, we
expect our operating expenses to increase in the future as we
expand our operations. If our operating expenses exceed our
expectations, our financial performance could be adversely
affected. If our revenue does not grow to offset these increased
expenses, we may never become profitable. You should not
consider recent revenue growth as indicative of our future
performance. In future periods, we may not have any revenue
growth, or our revenue could decline.
We will
incur significant increased costs as a result of operating as a
public company, and our management will be required to devote
substantial time to new compliance initiatives.
As a public company, we will incur significant legal, accounting
and other expenses that we did not incur as a private company.
The Sarbanes-Oxley Act of 2002, and rules subsequently
implemented by the Securities and Exchange Commission, or SEC,
and the Nasdaq Stock Market, require public companies to meet
certain corporate governance standards. Our management and other
personnel will need to devote a substantial amount of time to
these compliance initiatives. Moreover, these rules and
regulations will increase our legal
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and financial compliance costs and will make some activities
more time-consuming and costly. For example, these rules and
regulations may make it more expensive for us to obtain director
and officer liability insurance coverage and more difficult for
us to attract and retain qualified persons to serve as directors
or executive officers. We estimate that our direct and
incremental public company costs will be between
$1.7 million and $2.2 million in 2008.
In addition, the Sarbanes-Oxley Act requires, among other
things, that we maintain effective internal control over
financial reporting and disclosure controls and procedures. In
particular, for the year ending December 31, 2008, we must
perform system and process evaluation and testing of our
internal control over financial reporting to allow management
and our independent registered public accounting firm to report
on the effectiveness of our internal controls over financial
reporting, as required by Section 404 of the Sarbanes-Oxley
Act. Our testing, or the subsequent testing by our independent
registered public accounting firm, may reveal deficiencies in
our internal control over financial reporting that are deemed to
be material weaknesses. In order to comply with
Section 404, we may incur substantial accounting expense,
expend significant management time on compliance-related issues,
and hire additional accounting and financial staff with
appropriate public company experience and technical accounting
knowledge. Moreover, if we are not able to comply with the
requirements of Section 404 in a timely manner, or if we or
our independent registered public accounting firm identify
deficiencies in our internal control over financial reporting
that are deemed to be material weaknesses, the market price of
our stock would likely decline and we could be subject to
sanctions or investigations by the Nasdaq Stock Market, the SEC
or other regulatory authorities, which would require additional
financial and management resources.
We do not
have significant experience with our new accounting system and
any errors in using the system or delays in preparing our
quarterly or annual financial statements may result in our
inability to accurately or timely prepare and file financial
reports.
Prior to April 2007, our accounting system was not sufficient to
permit compliance with our financial reporting requirements as a
public company and the Sarbanes-Oxley Act. As a result, in April
2007, we purchased and migrated to a new accounting system,
which we believe provides us with the ability to expand our
accounting capabilities as our business grows while providing
the necessary accounting controls needed for compliance with the
Sarbanes-Oxley Act. As of the date of this prospectus, we have
only used the new accounting system to prepare monthly financial
reports for four monthly periods, April, May, June and July 2007
and for the quarter ended June 30, 2007. We have not yet
used the new accounting system to prepare annual financial
reports and our first audited financial statements utilizing our
new accounting system will not be until the year ending
December 31, 2007. Any errors or delays we experience in
using the new system could adversely affect our ability to file
our quarterly, annual or other reports with the SEC on a timely
and accurate basis.
Our
ability to use net operating loss carryforwards in the United
States may be limited.
As of December 31, 2006, we had net operating loss
carryforwards of $29.1 million for U.S. federal tax
purposes and $22.5 million for state tax purposes. These
loss carryforwards expire between 2007 and 2026. To the extent
available, we intend to use these net operating loss
carryforwards to reduce the corporate income tax liability
associated with our operations. Section 382 of the Internal
Revenue Code generally imposes an annual limitation on the
amount of net operating loss carryforwards that may be used to
offset taxable income when a corporation has undergone
significant changes in stock ownership. This offering may result
in, and prior financings may have resulted in, ownership changes
that could limit our ability to utilize net operating loss
carryforwards. To the extent our use of net operating loss
carryforwards is significantly limited, our income could be
subject to corporate income tax earlier than it would if we were
able to use net operating loss carryforwards, which could have a
negative effect on our financial results.
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Our
quarterly results may fluctuate and if we fail to meet the
expectations of analysts or investors, our stock price and the
value of your investment could decline substantially.
Our quarterly operating results may fluctuate, and if we fail to
meet or exceed the expectations of securities analysts or
investors, the trading price of our common stock could decline.
Some of the important factors that could cause our revenue and
operating results to fluctuate from quarter to quarter include:
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our ability to retain existing customers, attract new customers
and satisfy our customers’ requirements;
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changes in our pricing policies;
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our ability to expand our business;
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the effectiveness of our personnel;
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new product and service introductions;
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technical difficulties or interruptions in our services;
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general economic conditions;
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the timing of additional investments in our hardware and
software systems;
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regulatory compliance costs;
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costs associated with future acquisitions of technologies and
businesses; and
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extraordinary expenses such as litigation or other
dispute-related settlement payments.
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Some of these factors are not within our control, and the
occurrence of one or more of them may cause our operating
results to vary widely. As such, we believe that
quarter-to-quarter comparisons of our revenue and operating
results may not be meaningful and should not be relied upon as
an indication of future performance.
We may
need additional capital in the future, which may not be
available to us on favorable terms, or at all, and may dilute
your ownership of our common stock.
We have historically relied on outside financing and cash from
operations to fund our operations, capital expenditures and
expansion. We may require additional capital from equity or debt
financing in the future to:
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fund our operations;
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respond to competitive pressures;
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take advantage of strategic opportunities, including more rapid
expansion of our business or the acquisition of complementary
products, technologies or businesses; and
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develop new products or enhancements to existing products.
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We may not be able to secure timely additional financing on
favorable terms, or at all. The terms of any additional
financing may place limits on our financial and operating
flexibility. If we raise additional funds through further
issuances of equity, convertible debt securities or other
securities convertible into equity, our existing stockholders
could suffer significant dilution in their percentage ownership
of our company, and any new securities we issue could have
rights, preferences and privileges senior to those of our common
stock, including shares of common stock sold in this offering.
If we are unable to obtain adequate financing or financing on
terms satisfactory to us, if and when we require it, our ability
to grow or support our business and to respond to business
challenges could be significantly limited.
We may
engage in future acquisitions that could disrupt our business,
dilute stockholder value and harm our business, operating
results or financial condition.
Although we currently do not have any acquisitions pending or
planned, we have, from time to time, evaluated acquisition
opportunities and may pursue acquisition opportunities in the
future. We have not made any
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acquisitions to date and, therefore, our ability as an
organization to make and integrate acquisitions is unproven.
Moreover, acquisitions involve numerous risks, including:
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an inability to locate a suitable acquisition candidate or
technology or acquire a desirable candidate or technology on
favorable terms, if at all;
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difficulties in integrating personnel and operations from the
acquired business or acquired technology with our existing
technology and products and in retaining and motivating key
personnel from the business;
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disruptions in our ongoing operations and the diversion of our
management’s attention from their day-to-day
responsibilities associated with operating our business;
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increases in our expenses that adversely impact our business,
operating results and financial condition;
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potential write-offs of acquired assets and increased
amortization expense related to identifiable assets
acquired; and
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potentially dilutive issuances of equity securities or the
incurrence of debt.
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If we do complete an acquisition, we may not ultimately
strengthen our competitive position or achieve our goals, or
such an acquisition may be viewed negatively by our customers,
stockholders or the financial markets.
RISKS
RELATED TO THIS OFFERING AND OWNERSHIP OF OUR COMMON
STOCK
As a new
investor, you will experience substantial dilution as a result
of this offering and future equity issuances.
The initial public offering price per share is substantially
higher than the pro forma net tangible book value per share of
our common stock outstanding prior to this offering. As a
result, investors purchasing common stock in this offering will
experience immediate substantial dilution of
$ per share. This dilution is due
in large part to the fact that our earlier investors paid
substantially less than the initial public offering price when
they purchased their shares of common stock. In addition, we
have issued options to acquire common stock at prices
significantly below the initial public offering price. To the
extent outstanding options are ultimately exercised, there will
be further dilution to investors in this offering. In addition,
if the underwriters exercise their over-allotment option or if
we issue additional equity securities, you will experience
additional dilution.
Insiders
will continue to have substantial control over us after this
offering and will be able to influence corporate
matters.
Upon completion of this offering, our directors and executive
officers and their affiliates will beneficially own, in the
aggregate, approximately % of our
outstanding common stock, or %,
assuming entities affiliated with Commonwealth Capital Ventures
purchase an aggregate
of million
shares of our common stock in this offering, assuming no
exercise of the underwriters’ over-allotment option,
compared to % represented by the
shares sold in this offering, assuming no exercise of the
underwriters’ over-allotment option. As a result, these
stockholders will be able to exercise significant influence over
all matters requiring stockholder approval, including the
election of directors and approval of significant corporate
transactions, such as a merger or other sale of our company or
its assets. This concentration of ownership could limit your
ability to influence corporate matters and may have the effect
of delaying or preventing a third party from acquiring control
over us. For information regarding the beneficial ownership of
our outstanding stock by our directors and executive officers,
see “Principal and Selling Stockholders.”
Our
management will have broad discretion over the use of the
proceeds we receive in this offering and might not apply the
proceeds in ways that increase the value of your
investment.
Although we have not allocated the net proceeds we will receive
from this offering for any specific purposes other than the
repayment of certain debt, we expect to use our net proceeds for
general corporate purposes,
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including capital expenditures, which may in the future include
investments in, or acquisitions of, complementary businesses,
services or technologies. Our management will have broad
discretion concerning how we use our net proceeds from this
offering, and you will not have the opportunity to influence our
decisions on how to use our net proceeds from this offering. You
will be relying on the judgment of our management regarding the
application of these proceeds, and our management may not apply
our net proceeds of this offering in ways that increase the
value of your investment.
We do not
currently intend to pay dividends on our common stock and,
consequently, your ability to achieve a return on your
investment will depend on appreciation in the price of our
common stock.
We do not expect to pay cash dividends on our common stock,
including the common stock issued in this offering. Any future
dividend payments are within the absolute discretion of our
board of directors and will depend on, among other things, our
results of operations, working capital requirements, capital
expenditure requirements, financial condition, contractual
restrictions, business opportunities, anticipated cash needs,
provisions of applicable law and other factors that our board of
directors may deem relevant. We may not generate sufficient cash
from operations in the future to pay dividends on our common
stock. See “Dividend Policy.”
If
securities or industry analysts do not publish research or
publish inaccurate or unfavorable research about our business,
our stock price and trading volume could decline.
The trading market for our common stock will depend in part on
the research and reports that securities or industry analysts
publish about us or our business. We do not currently have and
may never obtain research coverage by securities and industry
analysts. If no securities or industry analysts commence
coverage of our company, the trading price for our stock would
be negatively impacted. In the event we obtain securities or
industry analyst coverage, if one or more of the analysts who
covers us downgrades our stock or publishes inaccurate or
unfavorable research about our business, our stock price would
likely decline. If one or more of these analysts ceases coverage
of our company or fails to publish reports on us regularly,
demand for our stock could decrease, which could cause our stock
price and trading volume to decline.
The
market price of our common stock may be volatile, and you may
not be able to resell shares of our common stock at or above the
price you paid.
Prior to this offering there has been no public market for
shares of our common stock, and an active public market for
these shares may not develop or be sustained after this
offering. The initial public offering price for our common stock
will be determined through negotiations with the representatives
of the underwriters. This price will not necessarily reflect the
price at which investors in the market will be willing to buy
and sell our shares following this offering. In addition, the
trading price of our common stock is likely to be highly
volatile and could be subject to wide fluctuations in response
to various factors. Some of the factors that may cause the
market price of our common stock to fluctuate include:
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fluctuations in our quarterly financial results or the quarterly
financial results of companies perceived to be similar to us;
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changes in estimates of our financial results or recommendations
by securities analysts;
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failure of any of our products to achieve or maintain market
acceptance;
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changes in market valuations of similar companies;
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success of competitive products;
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changes in our capital structure, such as future issuances of
securities or the incurrence of additional debt;
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announcements by us or our competitors of significant products,
contracts, acquisitions or strategic alliances;
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regulatory developments in the United States, foreign countries
or both;
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litigation involving our company, our general industry or both;
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additions or departures of key personnel;
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investors’ general perception of us; and
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changes in general economic, industry and market conditions.
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In addition, if the market for technology stocks or the stock
market in general experiences a loss of investor confidence, the
trading price of our common stock could decline for reasons
unrelated to our business, financial condition or results of
operations. If any of the foregoing occurs, it could cause our
stock price to fall and may expose us to class action lawsuits
that, even if unsuccessful, could be costly to defend and a
distraction to management.
Future
sales of shares by existing stockholders could cause our stock
price to decline.
If our existing stockholders sell, or indicate their intention
to sell, substantial amounts of our common stock in the public
market after certain contractual
lock-up
agreements (as described below) expire, and other restrictions
on resale lapse, the trading price of our common stock could
decline below the initial public offering price. Based on shares
outstanding as
of ,
2007, upon completion of this offering, we will have
outstanding shares
of common stock. Of these
shares, shares
of common stock will be subject to a
180-day
contractual
lock-up with
the underwriters. CIBC World Markets Corp. and Thomas Weisel
Partners LLC, acting as representatives of the underwriters, may
permit our officers, directors and other stockholders who are
subject to the contractual
lock-up to
sell shares prior to the expiration of the
lock-up
agreements.
If we announce earnings results or other material news or a
material event occurs during the last 17 days of the
180-day
contractual
lock-up
period, or if prior to the expiration of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period, the
180-day
lock-up
period will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or event.
In addition, there will also
be shares
of common stock subject to a
90-day
contractual
lock-up with
us. We may release these shares from these restrictions at our
discretion without the prior written consent of CIBC World
Markets Corp. and Thomas Weisel Partners LLC.
After each of the
lock-up
agreements pertaining to this offering expire 180 days from
the date of this prospectus, or such longer period described
above, up to an
additional shares
will be eligible for sale in the public
market, of
which are held by directors, executive officers and other
affiliates and will be subject to volume limitations under
Rule 144 under the Securities Act and, in certain cases,
various vesting agreements. Entities affiliated with
Commonwealth Capital Ventures, which are existing stockholders,
have indicated an interest in purchasing up to an aggregate
of million
shares of our common stock in this offering at the initial
public offering price. These shares, if purchased, would be
subject to the 180-day lock-up agreement and would be eligible
for sale in the public market upon expiration of the
lock-up
period. However, because indications of interest are not binding
agreements or commitments to purchase, these stockholders might
not purchase any common stock in this offering. In addition,
after this offering, we intend to register
approximately shares
of our common stock that we have issued or may issue under our
equity incentive plans. Once we register these shares, they can
be freely sold in the public market upon issuance, subject to
lock-up
agreements, applicable vesting schedules and, for directors,
executive officers, and other affiliates, volume limitations
under Rule 144. If these additional shares are sold, or if
it is perceived that they will be sold, in the public market,
the trading price of our common stock could decline.
21
Some of our existing stockholders have demand and incidental
registration rights to require us to register with the SEC up
to shares
of our common stock. If we register these shares of common
stock, the stockholders would be able to sell those shares
freely in the public market.
See “Shares Eligible for Future Sale” for a discussion
of the
lock-up
agreements and other transfer restrictions.
Anti-takeover
provisions in our charter documents and Delaware law could
discourage, delay or prevent a change of control of our company
and may affect the trading price of our common stock.
We are a Delaware corporation and the anti-takeover provisions
of the Delaware General Corporation Law may discourage, delay or
prevent a change of control by prohibiting us from engaging in a
business combination with an interested stockholder for a period
of three years after the person becomes an interested
stockholder, even if a change of control would be beneficial to
our existing stockholders. In addition, our restated certificate
of incorporation and second amended and restated bylaws may
discourage, delay or prevent a change in our management or
control over us that stockholders may consider favorable. Our
restated certificate of incorporation and second amended and
restated bylaws, which will be in effect upon the closing of
this offering:
|
|
|
|
•
|
authorize the issuance of “blank check” preferred
stock that could be issued by our board of directors to thwart a
takeover attempt;
|
|
|
•
|
establish a classified board of directors, as a result of which
the successors to the directors whose terms have expired will be
elected to serve from the time of election and qualification
until the third annual meeting following their election;
|
|
|
•
|
require that directors only be removed from office for cause and
only upon a supermajority stockholder vote;
|
|
|
•
|
provide that vacancies on our board of directors, including
newly created directorships, may be filled only by a majority
vote of directors then in office;
|
|
|
•
|
limit who may call special meetings of stockholders;
|
|
|
•
|
prohibit stockholder action by written consent, requiring all
actions to be taken at a meeting of the stockholders; and
|
|
|
•
|
require supermajority stockholder voting to effect certain
amendments to our restated certificate of incorporation and
second amended and restated bylaws.
|
For more information regarding these and other provisions, see
“Description of Capital Stock—Anti-Takeover Effects of
Delaware Law and Our Certificate of Incorporation.”
22
Forward-Looking
Statements
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. All statements, other than
statements of historical facts, included in this prospectus
regarding our strategy, future operations, future financial
position, future revenue, projected costs, prospects, plans,
objectives of management and expected market growth are
forward-looking statements. The words “anticipate,”
“believe,” “estimate,” “expect,”
“intend,” “may,” “plan,”
“predict,” “project,” “will,”
“would” and similar expressions are intended to
identify forward-looking statements, although not all
forward-looking statements contain these identifying words.
These forward-looking statements include, among other things,
statements about:
|
|
|
|
•
|
our ability to attract and retain customers;
|
|
|
•
|
our financial performance;
|
|
|
•
|
the advantages of our products as compared to those of others;
|
|
|
•
|
our ability to retain and hire necessary employees and
appropriately staff our operations;
|
|
|
•
|
regulatory developments;
|
|
|
•
|
our intellectual property; and
|
|
|
•
|
our estimates regarding future expenses, revenue, capital
requirements and needs for additional financing.
|
We may not actually achieve the plans, intentions or
expectations disclosed in our forward-looking statements, and
you should not place undue reliance on our forward-looking
statements. Actual results or events could differ materially
from the plans, intentions and expectations disclosed in the
forward-looking statements we make. We have included important
factors in the cautionary statements included in this
prospectus, particularly in the “Risk Factors”
section, that could cause actual results or events to differ
materially from the forward-looking statements that we make. Our
forward-looking statements do not reflect the potential impact
of any future acquisitions, mergers, dispositions, joint
ventures or investments we may make.
You should read this prospectus and the documents that we have
filed as exhibits to the registration statement, of which this
prospectus is a part, completely and with the understanding that
our actual future results may be materially different from what
we expect. We do not assume any obligation to update any
forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by
law.
23
We estimate that the net proceeds from the sale of the shares of
common stock we are offering will be approximately
$ million, or approximately
$ million if the
underwriters exercise their over-allotment option in full.
“Net proceeds” is what we expect to receive after
paying the underwriting discount and other expenses of the
offering. For the purpose of estimating net proceeds, we are
assuming that the public offering price will be
$ per share. A $1.00 increase
(decrease) in the assumed initial public offering price of
$ would increase (decrease) the
net proceeds to us from this offering by
$ million, assuming the
number of shares offered by us, as set forth on the cover of
this prospectus, remains the same. We will not receive any
proceeds from the sale of shares by the selling stockholders.
We intend to use our net proceeds from this offering for general
corporate purposes, including financing our growth, developing
new products, acquiring new customers, funding capital
expenditures, and potentially acquisitions and investments. We
also intend to use a portion of our net proceeds to repay all of
the outstanding debt under our term loan facility with Silicon
Valley Bank. As of June 30, 2007, we had $3.1 million
outstanding under the term loan facility. Under the terms of the
facility, each advance we draw under the facility bears interest
at the prime rate plus 2% but may be decreased to the prime rate
plus 1.5% upon the occurrence of certain profitability events.
Each advance is payable in monthly installments over three years
from the date of the advance. The advances may be prepaid in
whole or in part at any time without penalty. At June 30,
2007, the interest rate was 10.25%.
In addition, the other principal purposes for this offering are
to:
|
|
|
|
•
|
create a public market for our common stock;
|
|
|
•
|
facilitate our future access to the public capital markets;
|
|
|
•
|
increase our visibility in our markets;
|
|
|
•
|
provide liquidity for our existing stockholders;
|
|
|
•
|
improve the effectiveness of our equity compensation plans in
attracting and retaining key employees; and
|
|
|
•
|
enhance our ability to acquire other businesses, products or
technologies.
|
We have not yet determined with any certainty the manner in
which we will allocate our net proceeds. Management will retain
broad discretion in the allocation and use of our net proceeds
from this offering. The amounts and timing of these expenditures
will vary depending on a number of factors, including the amount
of cash generated by our operations, competitive and
technological developments, and the rate of growth, if any, of
our business. For example, if we were to expand our operations
more rapidly than anticipated by our current plans, a greater
portion of our proceeds would likely be used for the
construction and expansion of facilities, working capital and
other capital expenditures. Alternatively, if we were to engage
in an acquisition that contained a significant cash component,
some or all of our proceeds might be used for that purpose.
Although we may use a portion of our proceeds for the
acquisition of, or investment in, businesses, technologies,
products or assets that complement our business, we have no
present understandings, commitments or agreements to enter into
any acquisitions or make any investments.
Pending specific utilization of our net proceeds as described
above, we intend to invest our net proceeds of the offering in
short-term investment grade and U.S. government securities.
We have never paid or declared any cash dividends on our common
stock. We currently intend to retain earnings, if any, to
finance the growth and development of our business, and we do
not expect to pay any cash dividends on our common stock in the
foreseeable future. Payment of future dividends, if any, will be
at the discretion of our board of directors and will depend on
our financial condition, results of operations, capital
requirements, restrictions contained in current or future
financing instruments, and other factors our board of directors
deems relevant.
24
The following table sets forth our capitalization as of
June 30, 2007:
|
|
|
|
•
|
on a pro forma basis to give effect to (i) the automatic
conversion of all of our outstanding redeemable convertible
preferred stock upon the closing of this offering; (ii) the
filing of our certificate of amendment to our existing restated
certificate of incorporation to increase the number of
authorized shares of common stock and (iii) the assumed
exercise of the warrant to purchase 120,000 shares of redeemable
convertible preferred stock and subsequent automatic conversion
of those preferred shares into 156,000 shares of common stock;
and
|
|
|
|
|
•
|
on a pro forma as adjusted basis to give effect to the issuance
and sale by us
of shares
of common stock at an initial offering price of
$ per share, the mid-point of the
estimated price range shown on the cover page of this
prospectus, after deducting the estimated underwriting discount
and offering expenses payable by us, and the payment by us of
$3.1 million to repay our outstanding indebtedness as
described under “Use of Proceeds.”
|
You should read the following table together with our financial
statements and the related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” appearing elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007
|
|
|
|
|
|
|
|
|
|
Pro Forma as
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
Adjusted
|
|
|
|
(in thousands, except share data)
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Redeemable convertible preferred
stock warrant
|
|
$
|
1,465
|
|
|
$
|
–
|
|
|
$
|
|
|
Notes payable
|
|
|
3,083
|
|
|
|
3,083
|
|
|
|
|
|
Redeemable convertible preferred
stock
|
|
|
35,840
|
|
|
|
–
|
|
|
|
|
|
Stockholders’ equity
(deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock; $0.01 par
value; 20,000,000 shares authorized and
3,952,848 shares issued and outstanding, actual;
40,000,000 shares authorized and 21,255,523 shares
issued and outstanding, pro
forma; shares
authorized
and shares
issued and outstanding, pro forma as adjusted
|
|
|
40
|
|
|
|
213
|
|
|
|
|
|
Additional paid-in capital
|
|
|
5,579
|
|
|
|
42,771
|
|
|
|
|
|
Accumulated other comprehensive
loss
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
|
|
Accumulated deficit
|
|
|
(39,996
|
)
|
|
|
(39,996
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
(deficit)
|
|
|
(34,379
|
)
|
|
|
2,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
6,009
|
|
|
$
|
6,069
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above does not include:
|
|
|
|
•
|
96,844 shares of common stock issuable upon the exercise of
warrants outstanding as of June 30, 2007 at a weighted
average exercise price of $1.20 per share;
|
25
|
|
|
|
•
|
1,854,641 shares of common stock issuable upon the exercise
of stock options outstanding as of June 30, 2007 at a
weighted average exercise price of $2.63 per share, of which
options to purchase 489,064 shares were exercisable as of
June 30, 2007 at a weighted average exercise price of $2.12
per share; and
|
|
|
|
|
•
|
831,124 shares of common stock available for future
issuance under our equity compensation plans as of June 30,
2007.
|
A $1.00 increase (decrease) in the assumed initial public
offering price of
$
would increase (decrease) each of additional paid-in capital and
total stockholders’ equity in the pro forma as adjusted
column by $ million, assuming
the number of shares offered by us, as set forth on the cover of
this prospectus, remains the same and after deducting the
estimated underwriting discount and offering expenses payable by
us.
26
If you invest in our common stock, your interest will be diluted
immediately to the extent of the difference between the initial
public offering price per share you will pay in this offering
and the pro forma as adjusted net tangible book value per share
of our common stock after this offering.
Our pro forma net tangible book value on June 30, 2007 was
$1.0 million, or $0.05 per share of common stock.
“Pro forma net tangible book value” is total assets
minus the sum of liabilities and intangible assets and assumes
the exercise of the redeemable convertible preferred stock
warrant immediately prior to the closing of this offering, which
results in an increase to assets of $60,000 and a reduction to
liabilities of $1.5 million. “Pro forma net tangible
book value per share” is pro forma net tangible book value
divided by the total number of shares outstanding and assumes
the conversion of all of our outstanding preferred stock into
shares of our common stock immediately upon the closing of this
offering.
After giving effect to adjustments relating to this offering,
our pro forma as adjusted net tangible book value on
June 30, 2007 would have been
$ ,
or $ per share. The adjustments
made to determine pro forma as adjusted net tangible book value
per share are the following:
|
|
|
|
•
|
an increase in total assets to reflect our net proceeds of the
offering as described under “Use of Proceeds”
(assuming that the initial public offering price will be
$ per share); and
|
|
|
•
|
the addition of the number of shares offered by us pursuant to
this prospectus to the number of shares outstanding.
|
The initial public offering price per share will significantly
exceed the pro forma net tangible book value per share.
Accordingly, new investors who purchase shares of common stock
in this offering will suffer an immediate dilution of their
investment of $ per share. The
following table illustrates the pro forma as adjusted increase
in pro forma net tangible book value of
$ per share and the dilution (the
difference between the initial public offering price per share
and pro forma net tangible book value per share) to new
investors:
|
|
|
|
|
|
|
|
|
Assumed initial public offering
price per share
|
|
|
|
|
|
$
|
|
|
Pro forma net tangible book value
per share as of June 30, 2007
|
|
$
|
0.05
|
|
|
|
|
|
Increase per share attributable to
sale of shares of common stock in this offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible
book value per share after giving effect to the offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new
investors in the offering
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
If the underwriters exercise their over-allotment option in
full, the pro forma as adjusted net tangible book value will
increase to $ per share,
representing an immediate dilution of
$ per share to new investors.
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would increase (decrease) the pro forma net tangible book value
by $ million, the pro forma
net tangible book value per share after this offering by
$ per share and the dilution in
pro forma net tangible book value per share to investors in this
offering by $ per share, assuming
that the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting the estimated underwriting discount and offering
expenses payable by us.
If shares are issued in connection with the exercise of all of
the outstanding options and warrants for common stock, you will
experience further dilution of $ .
27
The following table summarizes, on a pro forma basis as of
June 30, 2007, giving effect to the conversion of all
outstanding redeemable convertible preferred stock into shares
of common stock, the differences between the number of shares of
common stock purchased from us, the total consideration paid to
us, and the average price per share paid by existing
stockholders and by new investors purchasing shares of common
stock in this offering. The calculation below is based on an
assumed initial public offering price of
$ per share, the mid-point of the
estimated price range shown on the cover of this prospectus,
before the deduction of the estimated underwriting discount and
offering expenses payable by us:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Per Share
|
|
|
Existing stockholders
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
New investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
$
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tables above assume no exercise of warrants or options to
purchase shares of common stock outstanding as of June 30,
2007. At June 30, 2007, there were 1,951,485 shares of
common stock issuable upon exercise of outstanding warrants and
options with a weighted average exercise price of $2.56 per
share. The tables above also exclude 831,124 shares of
common stock available for future issuance under our option
plans at June 30, 2007.
If the underwriters exercise their over-allotment option in
full, the number of shares held by new investors will increase
to ,
or % of the total number of shares
of common stock outstanding after this offering.
28
The selected statement of operations data for the year ended
December 31, 2006 and the balance sheet data as of
December 31, 2006 have been derived from our audited
financial statements, which have been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, and are included elsewhere in this prospectus.
The selected statements of operations data for each of the years
ended December 31, 2004 and 2005, and the balance sheet
data as of December 31, 2005 have been derived from our
audited financial statements, which have been audited by Vitale,
Caturano & Company Ltd., an independent registered
public accounting firm, and are included elsewhere in this
prospectus. The selected statements of operations data for each
of the years ended December 31, 2002 and 2003 and the
balance sheet data as of December 31, 2002, 2003 and 2004
have been derived from our audited financial statements, which
have been audited by Vitale, Caturano & Company, Ltd.,
an independent registered public accounting firm, and are not
included in this prospectus. The selected statements of
operations data for the six months ended June 30, 2006 and
2007 and the balance sheet data as of June 30, 2007 have
been derived from our unaudited financial statements and related
notes, which are included in this prospectus. These unaudited
financial statements include, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) that
management considers necessary for the fair statement of the
financial information set forth in those statements. The
selected financial data set forth below should be read in
conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and our
financial statements and related notes included elsewhere in
this prospectus. The historical results are not necessarily
indicative of the results to be expected in any future period
and the results for the six months ended June 30, 2007
should not be considered indicative of results expected for the
full year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Year Ended December 31,
|
|
|
Ended June 30,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands, except per share and customer data)
|
|
|
Statements of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,934
|
|
|
$
|
4,465
|
|
|
$
|
8,071
|
|
|
$
|
14,658
|
|
|
$
|
27,552
|
|
|
$
|
11,829
|
|
|
$
|
21,111
|
|
Cost of revenue(1)
|
|
|
1,633
|
|
|
|
1,899
|
|
|
|
2,211
|
|
|
|
3,747
|
|
|
|
7,801
|
|
|
|
3,354
|
|
|
|
5,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
301
|
|
|
|
2,566
|
|
|
|
5,860
|
|
|
|
10,911
|
|
|
|
19,751
|
|
|
|
8,475
|
|
|
|
15,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,694
|
|
|
|
1,653
|
|
|
|
2,140
|
|
|
|
3,355
|
|
|
|
6,172
|
|
|
|
2,774
|
|
|
|
4,971
|
|
Sales and marketing
|
|
|
1,815
|
|
|
|
2,549
|
|
|
|
3,385
|
|
|
|
7,460
|
|
|
|
18,592
|
|
|
|
7,084
|
|
|
|
12,795
|
|
General and administrative
|
|
|
601
|
|
|
|
640
|
|
|
|
856
|
|
|
|
1,326
|
|
|
|
2,623
|
|
|
|
1,079
|
|
|
|
2,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,110
|
|
|
|
4,842
|
|
|
|
6,381
|
|
|
|
12,141
|
|
|
|
27,387
|
|
|
|
10,937
|
|
|
|
20,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,809
|
)
|
|
|
(2,276
|
)
|
|
|
(521
|
)
|
|
|
(1,230
|
)
|
|
|
(7,636
|
)
|
|
|
(2,462
|
)
|
|
|
(4,863
|
)
|
Interest and other income
(expense), net
|
|
|
(43
|
)
|
|
|
(39
|
)
|
|
|
(34
|
)
|
|
|
(24
|
)
|
|
|
(203
|
)
|
|
|
(306
|
)
|
|
|
(631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(3,852
|
)
|
|
|
(2,315
|
)
|
|
|
(555
|
)
|
|
|
(1,254
|
)
|
|
|
(7,839
|
)
|
|
|
(2,768
|
)
|
|
|
(5,494
|
)
|
Accretion of redeemable
convertible preferred stock
|
|
|
(220
|
)
|
|
|
(2,471
|
)
|
|
|
(3,701
|
)
|
|
|
(5,743
|
)
|
|
|
(3,788
|
)
|
|
|
(3,270
|
)
|
|
|
(518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders
|
|
$
|
(4,072
|
)
|
|
$
|
(4,786
|
)
|
|
$
|
(4,256
|
)
|
|
$
|
(6,997
|
)
|
|
$
|
(11,627
|
)
|
|
$
|
(6,038
|
)
|
|
$
|
(6,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(33.86
|
)
|
|
$
|
(5.75
|
)
|
|
$
|
(4.37
|
)
|
|
$
|
(2.49
|
)
|
|
$
|
(3.38
|
)
|
|
$
|
(1.82
|
)
|
|
$
|
(1.59
|
)
|
Weighted average shares
outstanding used in computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
120
|
|
|
|
832
|
|
|
|
974
|
|
|
|
2,813
|
|
|
|
3,438
|
|
|
|
3,312
|
|
|
|
3,770
|
|
Other Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period number of
customers(2)
|
|
|
6,934
|
|
|
|
14,431
|
|
|
|
25,229
|
|
|
|
47,730
|
|
|
|
89,323
|
|
|
|
67,061
|
|
|
|
123,868
|
|
29
|
|
|
(1)
|
|
Amounts include stock-based
compensation expense, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Year Ended December 31,
|
|
|
Ended June 30,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Cost of revenue
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
25
|
|
|
$
|
5
|
|
|
$
|
32
|
|
Research and development
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
27
|
|
|
|
4
|
|
|
|
50
|
|
Sales and marketing
|
|
|
7
|
|
|
|
6
|
|
|
|
6
|
|
|
|
–
|
|
|
|
19
|
|
|
|
4
|
|
|
|
29
|
|
General and administrative
|
|
|
22
|
|
|
|
17
|
|
|
|
17
|
|
|
|
17
|
|
|
|
12
|
|
|
|
2
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29
|
|
|
$
|
23
|
|
|
$
|
23
|
|
|
$
|
17
|
|
|
$
|
83
|
|
|
$
|
15
|
|
|
$
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
We define our end of period number
of customers as email marketing customers that we billed
directly during the last month of the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
As of December 31,
|
|
|
June 30,
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
short-term marketable securities
|
|
$
|
3,482
|
|
|
$
|
2,114
|
|
|
$
|
2,115
|
|
|
$
|
2,784
|
|
|
$
|
12,790
|
|
|
$
|
11,192
|
|
|
|
|
|
Total assets
|
|
|
4,677
|
|
|
|
3,236
|
|
|
|
3,222
|
|
|
|
5,545
|
|
|
|
18,481
|
|
|
|
19,345
|
|
|
|
|
|
Deferred revenue
|
|
|
254
|
|
|
|
615
|
|
|
|
1,270
|
|
|
|
2,827
|
|
|
|
5,476
|
|
|
|
8,047
|
|
|
|
|
|
Redeemable convertible preferred
stock warrant
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
628
|
|
|
|
1,465
|
|
|
|
|
|
Notes payable and capital lease
obligation
|
|
|
544
|
|
|
|
612
|
|
|
|
844
|
|
|
|
1,326
|
|
|
|
702
|
|
|
|
3,083
|
|
|
|
|
|
Redeemable convertible preferred
stock
|
|
|
4,742
|
|
|
|
7,213
|
|
|
|
10,914
|
|
|
|
16,657
|
|
|
|
35,322
|
|
|
|
35,840
|
|
|
|
|
|
Total stockholders’ deficit
|
|
|
(1,366
|
)
|
|
|
(6,129
|
)
|
|
|
(10,287
|
)
|
|
|
(17,237
|
)
|
|
|
(28,629
|
)
|
|
|
(34,379
|
)
|
|
|
|
|
30
Management’s
Discussion and Analysis of
Financial Condition and Results of Operations
You should read the following discussion and analysis of our
financial condition and results of operations together with our
financial statements and the related notes and other financial
information included elsewhere in this prospectus. Some of the
information contained in this discussion and analysis or set
forth elsewhere in this prospectus, including information with
respect to our plans and strategy for our business and related
financing, includes forward-looking statements that involve
risks and uncertainties. You should review the “Risk
Factors” section of this prospectus for a discussion of
important factors that could cause actual results to differ
materially from the results described in or implied by the
forward-looking statements contained in the following discussion
and analysis.
Overview
Constant Contact is the leading provider of on-demand email
marketing solutions for small organizations, including small
businesses, associations and non-profits, as determined by the
size of our customer base. Our customers use our email marketing
product to effectively and efficiently create, send and track
professional and affordable permission-based email marketing
campaigns. Our customers use these campaigns to build stronger
relationships with their customers, clients and members,
increase sales and expand membership. Our email marketing
product incorporates a wide range of customizable templates to
assist in campaign creation, user-friendly tools to import and
manage contact lists and intuitive reporting to track campaign
effectiveness. In June 2007, we introduced an online survey
product that complements our email marketing product and enables
small organizations to easily create and send surveys and
effectively analyze responses. We provide our customers with a
high level of support delivered via phone, chat, email and our
website.
We provide our products on an on-demand basis through a standard
web browser. This model enables us to deploy and maintain a
secure and scalable application that is easy for our customers
to implement at compelling prices. Our email marketing customers
pay a monthly subscription fee that generally ranges between $15
per month and $150 per month based on the size of the
customers’ contact lists and, in some cases, volume of
mailings. Our survey product is similarly priced. During the
first half of 2007, our average monthly revenue per email
marketing customer was approximately $33. We believe that the
simplicity of on-demand deployment combined with our affordable
subscription fees and functionality facilitate adoption of our
products by our target customers while generating significant
recurring revenue. From January 2005 through July 2007, at least
97.4% of our customers in a given month have continued to
utilize our email marketing product in the following month.
Our success is principally driven by our ability to grow our
customer base. Our email marketing customer base has steadily
increased from approximately 25,000 at the end of 2004 to over
130,000 as of July 31, 2007. We measure our customer base
as the number of email marketing customers that we bill directly
in the last month of a period. These customers include all types
of small organizations including retailers, restaurants, day
spas, law firms, consultants, non-profits, religious
organizations, alumni associations and other small businesses
and organizations. We add these customers through a variety of
paid and unpaid sources. Our paid sources include online
marketing through search engines, advertising networks and other
sites; offline marketing through radio advertising, local
seminars and other marketing efforts; and contractual
relationships with over 1,700 active channel partners. Our
unpaid sources of customer acquisition include referrals from
our growing customer base, general brand awareness and the
inclusion of a link to our website in the footer of more than
500 million emails currently sent by our customers each
month. In 2006, our cost of customer acquisition, which we
define as our total sales and marketing expense divided by the
gross number of email marketing customers added in this period,
was approximately $300 per email marketing customer, implying
payback on a revenue basis in less than a year. This implied
payback is calculated by dividing the $300 acquisition cost per
email marketing customer by the average monthly revenue per
email marketing customer, which implies a 9.1 month payback
period.
31
We were incorporated in Massachusetts in August 1995 under the
name Roving Software Incorporated. We reincorporated in Delaware
in July 2000 and changed our name to Constant Contact, Inc. in
December 2006. Our on-demand product was first offered
commercially in 2000. In 2006, our revenue was
$27.6 million and our net loss was $7.8 million and,
in the six months ended June 30, 2007, our revenue was
$21.1 million and our net loss was $5.5 million.
Sources
of Revenue
We derive our revenue principally from subscription fees from
our email marketing customers. Our revenue is driven primarily
by the number of paying customers and the subscription fees for
our products and is not concentrated within any one customer or
group of customers. In the first half of 2007, our top 50 email
marketing customers accounted for approximately 1% of our gross
email marketing revenue. We do not require our customers to
commit to a contractual term; however, our customers are
required to prepay for subscriptions on a monthly, semi-annual,
or annual basis by providing a credit card or check for payment.
Fees are recorded initially as deferred revenue and then
recognized as earned revenue on a daily basis over the prepaid
subscription period.
We also generate a small amount of revenue from professional
services which primarily consist of the creation of customized
templates for our customers. Revenue generated from professional
services accounted for less than 3% of gross revenue for each of
the years ended December 31, 2004, 2005 and 2006 and the
six months ended June 30, 2006 and 2007.
Cost of
Revenue and Operating Expenses
We allocate certain overhead expenses, such as rent, utilities,
office supplies and depreciation of general office assets to
cost of revenue and operating expense categories based on
headcount. As a result, an overhead expense allocation is
reflected in cost of revenue and each operating expense category.
Cost of Revenue. Cost of revenue consists primarily of
wages and benefits for software operations and customer support
personnel, credit card processing fees, and depreciation,
maintenance and hosting of our software applications underlying
our product offerings. We allocate a portion of customer support
costs relating to assisting trial customers to sales and
marketing expense.
The expenses related to our hosted software applications are
affected by the number of customers who subscribe to our
products and the complexity and redundancy of our software
applications and hosting infrastructure. We expect these
expenses to increase in absolute dollars as we continue to
increase our number of customers over time.
Research and Development. Research and development
expenses consist primarily of wages and benefits for product
strategy and development personnel. We have focused our research
and development efforts on both improving ease of use and
functionality of our existing products as well as developing new
offerings. We primarily expense research and development costs.
The small percentage of direct development costs related to
software enhancements which add functionality are capitalized
and depreciated as a component of cost of revenue. We expect
that research and development expenses will increase in absolute
dollars but decrease as a percentage of revenue as we continue
to enhance and expand our product offerings.
Sales and Marketing. Sales and marketing expenses consist
primarily of advertising and promotional costs, wages and
benefits for sales and marketing personnel, partner referral
fees, and the portion of customer support costs that relate to
assisting trial customers. Advertising costs consist primarily
of
pay-per-click
payments to search engines, other online and offline advertising
media, including radio and print advertisements, as well as the
costs to create and produce these advertisements. Advertising
costs are expensed as incurred. Promotional costs consist
primarily of public relations, memberships, and event costs. Our
advertising and promotional expenditures have historically been
highest in the fourth quarter of each year as this reflects a
period of increased sales and marketing activity for many small
organizations. In order to continue to grow our business and
brand and category awareness, we expect that we will continue to
commit
32
substantial resources to our sales and marketing efforts. As a
result, we expect that sales and marketing expense will increase
in absolute dollars but decrease as a percentage of revenue as
we continue to grow.
General and Administrative. General and administrative
expenses consist primarily of wages and benefits for
administrative, human resources, internal information technology
support, finance and accounting personnel, professional fees,
other taxes and other corporate expenses. We expect that general
and administrative expenses will increase as we continue to add
personnel in connection with the growth of our business. In
addition, we anticipate that we will also incur additional
personnel expense, professional service fees, including auditing
and legal, and insurance costs related to operating as a public
company. Therefore, we expect that our general and
administrative expenses, in total, will increase in both
absolute dollars and as a percentage of revenue as we continue
to grow and operate as a public company.
During the six months ended June 30, 2007, we incurred
approximately $700,000 of expenses related to our planned
initial public offering, including professional fees and filing
fees. We have capitalized most of these expenses. In addition,
we have purchased and migrated to a new general ledger system at
a capitalized cost of approximately $100,000, which better
supports our implementation of the necessary accounting controls
needed for compliance with Section 404 of the
Sarbanes-Oxley Act. We have also engaged a professional services
firm to help us prepare for the 2008 internal controls testing
related to Section 404 of the Sarbanes-Oxley Act and we
expect to incur approximately $300,000 of expense with this firm
between July 2007 and December 2008 relating to the assessment,
documentation and testing of our internal controls.
Critical
Accounting Policies
Our financial statements are prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of our financial statements and related
disclosures requires us to make estimates, assumptions and
judgments that affect the reported amount of assets,
liabilities, revenue, costs and expenses, and related
disclosures. We believe that the estimates, assumptions and
judgments involved in the accounting policies described below
have the greatest potential impact on our financial statements
and, therefore, consider these to be our critical accounting
policies. Accordingly, we evaluate our estimates and assumptions
on an ongoing basis. Our actual results may differ from these
estimates under different assumptions and conditions. See
Note 2 to our financial statements included elsewhere in
this prospectus for information about these critical accounting
policies, as well as a description of our other significant
accounting policies.
Revenue Recognition. We provide access to our products
through subscription arrangements whereby a customer is charged
a fee to access our solutions. Subscription arrangements include
use of our software and access to our customer and support
services, such as telephone support. We follow the guidance of
the SEC Staff Accounting Bulletin, or SAB, No. 104,
Revenue Recognition in Financial Statements, and Emerging
Issues Task Force, or EITF, Issue
No. 00-03,
Application of AICPA Statement of Position
97-2 to
Arrangements that Include the Right to Use Software Stored on
Another Entity’s Hardware, which applies when customers
do not have the right to take possession of the software and use
it on another entity’s hardware. When there is evidence of
an arrangement, the fee is fixed or determinable and
collectibility is deemed probable, we recognize revenue on a
daily basis over the subscription period as the services are
delivered.
We also offer professional services to our customers primarily
for the design of custom email templates and training.
Professional services revenue is accounted for separately from
subscription revenue based on the guidance of
EITF 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables, as those services have value on a standalone
basis and do not involve a significant degree of risk or unique
acceptance criteria and as the fair value of our subscription
services is evidenced by their availability on a standalone
basis. Professional services revenue is recognized as the
services are performed.
Income Taxes. Income taxes are provided for tax effects
of transactions reported in the financial statements and consist
of income taxes currently due plus deferred income taxes related
to timing differences between the basis of certain assets and
liabilities for financial statements and income tax reporting.
Deferred taxes are determined based on the difference between
the financial statement and tax basis of assets and liabilities
using enacted tax rates in effect in the years in which the
differences are expected to reverse. A valuation allowance
33
for the net deferred tax assets is provided if, based upon the
weight of available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized.
Software and Website Development Costs. We follow the
guidance of the American Institute of Certified Public
Accountants Statement of Position
No. 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, in accounting for the development
costs of our on-demand products and website development costs
whereby costs to develop functionality are capitalized. The
costs incurred in the preliminary stages of development are
expensed as incurred. Once an application has reached the
development stage, internal and external costs, if direct and
incremental, are capitalized until the software is substantially
complete and ready for its intended use. Costs associated with
the development of internal use software capitalized during the
year ended December 31, 2006 and the six months ended
June 30, 2007 were $516,000 and $224,000, respectively.
Development costs eligible for capitalization for the years
ended December 31, 2005 and 2004 were not material.
Redeemable Convertible Preferred Stock Warrant. We
account for freestanding warrants and other similar instruments
related to shares that are redeemable in accordance with
Statement of Financial Accounting Standards, or SFAS,
No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. Under
SFAS No. 150, the freestanding warrant that is related
to our redeemable convertible preferred stock is classified as a
liability on the balance sheet. The warrant is subject to
re-measurement at each balance sheet date and any change in fair
value (as determined using the Black-Scholes option-pricing
model) is recognized as a component of other income (expense),
net. We will continue to adjust the liability for changes in
fair value until the earlier of the exercise or expiration of
the warrant. Determining the appropriate fair value model and
calculating the fair value of the warrant require the use of
subjective estimates and assumptions. The most significant input
into the Black-Scholes option pricing model is the fair value of
the Series B redeemable convertible preferred stock as of
each measurement date. For example, if the estimate of the fair
value of the Series B redeemable convertible preferred
stock were increased by $1 as of a measurement date there would
be a corresponding increase to the liability of $120,000 that
would be included in the Statement of Operations as Other
Expense.
Stock-Based Compensation. Effective January 1, 2006,
we adopted SFAS No. 123R, or SFAS 123R,
Share-Based Payment, a revision of
SFAS No. 123, Accounting for Stock-Based
Compensation, and related interpretations. SFAS 123R
supersedes Accounting Principles Board, or APB, Opinion
No. 25, Accounting for Stock Issued to Employees,
and related interpretations. SFAS 123R requires all
share-based compensation to employees, including grants of
employee stock options, to be valued at fair value on the date
of grant, and to be expensed over the applicable service period.
We adopted this statement using the “Prospective”
transition method which does not result in restatement of our
previously issued financial statements and requires only new
awards or awards that are modified, repurchased or canceled
after the effective date to be accounted for under the
provisions of SFAS 123R. Prior to January 1, 2006, we
accounted for stock-based compensation arrangements according to
the provisions of APB 25 and related interpretations. Pursuant
to the income tax provisions included in SFAS 123R, we have
elected the “short cut method” of computing the
hypothetical pool of additional paid-in capital that is
available to absorb future tax benefit shortfalls.
Determining the appropriate fair value model and calculating the
fair value of stock-based payment awards require the use of
highly subjective estimates and assumptions, including the
estimated fair value of common stock, expected life of the
stock-based payment awards and stock price volatility. During
2006, we used the Black-Scholes option-pricing model to value
our option grants and determine the related compensation
expense. The assumptions used in calculating the fair value in
2006 were a weighted average risk free interest rate of 4.82%,
expected term of 6.1 years, expected volatility of 64.9%
and no expected dividends. The assumptions used in calculating
the fair value in the first six months of 2007 were a weighted
average risk free interest rate of 4.81%, expected term of
6.1 years, weighted average expected volatility of 63.8%
and no expected dividends. The fair value of our common stock
was determined by our board of directors, taking into account
our most recently available valuations. These assumptions
represent management’s best estimates, but the estimates
involve inherent uncertainties and the application of management
judgment. As a result, if factors change and we use
significantly different assumptions or estimates, our
stock-based compensation could be materially different. The most
significant input into the Black-Scholes option-pricing model
used to value our option grants is the fair
34
value of common stock. If the estimate of fair value of common
stock were increased by $1 as of the date of each stock grant
the resulting total fair value of the options granted in 2006
and the first six months of 2007 would have increased by $1.0
million, resulting in an increase to stock based compensation of
$66,000 in 2006 and $97,000 for the first six months of 2007.
We have historically been a private company and lack
company-specific historical and implied volatility information.
Therefore, we estimate our expected volatility based on the
historical volatility of our publicly traded peer companies and
expect to continue to do so until such time as we have adequate
historical data regarding the volatility of our traded stock
price. The expected term of options has been determined
utilizing the “simplified” method as prescribed by
SAB No. 107, Share-Based Payment. The risk-free
interest rate used for each grant is based on a
U.S. Treasury instrument with a term similar to the
expected term of the option. SFAS 123R requires that we
recognize compensation expense for only the portion of options
that are expected to vest. We have estimated expected
forfeitures of stock options with the adoption of SFAS 123R
to be zero. In developing a forfeiture rate estimate, we have
considered our historical experience and determined our
forfeitures to be de minimis. If there are forfeitures of
unvested options, additional adjustments to compensation expense
may be required in future periods.
The following table summarizes by grant date the number of
shares subject to options granted between January 1, 2004
and June 30, 2007, the per share exercise price of the
options and the per share estimated fair value of the options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Per Share
|
|
Per Share
|
|
|
Subject to Options
|
|
Exercise Price
|
|
Estimated Fair
|
Grant Date
|
|
Granted
|
|
of Option(1)
|
|
Value of Option(2)
|
|
Year ended December 31, 2004
|
|
|
203,775
|
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
Year ended December 31, 2005
|
|
|
737,091
|
|
|
$
|
0.06
|
|
|
$
|
0.02
|
|
Three months ended March 31,
2006
|
|
|
230,741
|
|
|
$
|
1.09
|
|
|
$
|
0.70
|
|
Three months ended June 30,
2006
|
|
|
90,183
|
|
|
$
|
2.90
|
|
|
$
|
1.86
|
|
Three months ended
September 30, 2006
|
|
|
151,941
|
|
|
$
|
2.68
|
|
|
$
|
1.70
|
|
Three months ended
December 31, 2006
|
|
|
276,412
|
|
|
$
|
3.05
|
|
|
$
|
1.94
|
|
January 18, 2007
|
|
|
39,000
|
|
|
$
|
3.05
|
|
|
$
|
1.94
|
|
March 2, 2007
|
|
|
168,025
|
|
|
$
|
4.12
|
|
|
$
|
2.62
|
|
Three months ended June 30,
2007
|
|
|
211,204
|
|
|
$
|
6.89
|
|
|
$
|
4.32
|
|
|
|
|
(1)
|
|
The Per Share Exercise Price of
Option represents the determination by our board of directors of
the fair market value of our common stock on the date of grant,
as determined taking into account our most recently available
valuation of common stock.
|
|
(2)
|
|
As described above, the Per Share
Estimated Fair Value of Option was estimated for the date of
grant using the Black-Scholes option-pricing model. This model
estimates the fair value by applying a series of factors
including the exercise price of the option, a risk free interest
rate, the expected term of the option, expected share price
volatility of the underlying common stock and expected dividends
on the underlying common stock. Additional information regarding
our valuation of common stock and option awards is set forth in
Note 6 to our financial statements included elsewhere in
this prospectus.
|
We have historically granted stock options at exercise prices
equivalent to the fair value of our common stock as of the date
of grant, as determined taking into account our most recently
available valuation of common stock. Prior to 2006, our board of
directors had estimated the fair value of our common stock on an
annual basis, with input from management, as of the date of
grant. Because there has been no public market for our common
stock, our board of directors determined the fair value of our
common stock by considering a number of objective and subjective
factors, including peer group trading multiples, the amount of
preferred stock liquidation preferences, the illiquid nature of
our common stock and our size and lack of historical
profitability. We believe our estimates of the fair value of our
common stock were reasonable.
Commencing in 2006, we moved to quarterly contemporaneous common
stock valuations so that the fair value of our common stock
would reflect the impact of our progressive quarterly revenue
growth. In the first quarter of 2006, our board of directors
determined the fair value of our common stock by using the
“guideline public company” method. The valuation
considered numerous factors, including peer group trading
multiples, the amount of preferred stock liquidation
preferences, the illiquid nature of our common stock, our small
size, our
35
lack of historical profitability, our short-term cash
requirements and the redemption rights of our redeemable
convertible preferred stockholders. The companies used for
comparison under the guideline public company method were
selected based on a number of factors, including but not limited
to, the similarity of their industry, business models and
financial risk to those of ours.
Beginning in the second quarter of 2006, the quarterly common
stock valuations were prepared using the
“probability-weighted expected return” method. Under
this methodology, the fair market value of our common stock is
estimated based upon an analysis of future values assuming
various outcomes. The share value is based on the
probability-weighted present value of expected future investment
returns considering each of the possible outcomes available to
us as well as the rights of each share class. The possible
outcomes considered were a sale of the company, an initial
public offering, a dissolution and continued operation as a
private company.
The private company scenario and sale scenario analyses utilized
averages of the guideline public company method and the
discounted future cash flow method. We estimated our enterprise
value under the guideline public company method by comparing our
company to publicly traded companies in our industry group. The
companies used for comparison under the guideline public company
method were selected based on a number of factors, including but
not limited to, the similarity of their industry, business
model, and financial risk to those of ours. We also estimated
our enterprise value under the discounted future cash flow
method, which involves applying appropriate discount rates to
estimated cash flows that are based on forecasts of revenue,
costs and capital requirements. Our assumptions underlying the
estimates were consistent with the plans and estimates that we
use to manage the business. The risks associated with achieving
our forecasts were assessed in selecting the appropriate
discount rates.
The initial public offering scenario analyses utilized the
guideline public company method. We estimated our enterprise
value under the guideline public company method by comparing our
company to publicly traded companies in our industry group. The
companies used for comparison under the guideline public company
method were selected based on a number of factors, including,
but not limited to, the similarity of their industry, business
model, and financial risk to those of ours.
The dissolution scenario analyses assumed that our common stock
had no value.
Finally, the present values calculated for our common stock
under each scenario were weighted based on our management’s
estimates of the probability of each scenario occurring. The
resulting values represented the estimated fair market value of
our common stock at each valuation date.
As discussed more fully in Note 6 to the financial
statements included elsewhere in this prospectus, we granted
stock options with a weighted average exercise price of $2.35
per share during 2006 and a weighted average exercise price of
$5.42 for the six months ended June 30, 2007. We determined
that the fair value of our common stock increased from $1.09 per
share in the first quarter of 2006 to $9.60 on July 1,
2007. The following discussion describes the reasons for the
difference between the fair value of our common stock during
this period and an estimated mid-point of the price range set
forth on the front cover of this prospectus of
$ per share.
During the quarter ended March 31, 2006, we continued to
operate our business in the ordinary course. We experienced
increases in our number of customers and subscription revenue as
well as increases in our operating expenses in support of
growing the business, primarily due to increased marketing
expenditures and the hiring of additional personnel. We also
commenced development of a second product offering. Our business
continued to operate at a loss. During this quarter we had no
plans for an initial public offering in the near term because we
did not believe that an initial public offering would be
beneficial for a company of our small size. In May 2006, we
calculated the fair value of our common stock as the per share
value of each of the four scenarios multiplied by the estimated
probabilities of each of the four scenarios. Based on this
calculation the fair value of our common stock increased from
$1.09 to $2.90 per share as of April 1, 2006.
During the quarters ended June 30, 2006 and
September 30, 2006, we continued to operate our business in
the ordinary course. Although we continued to experience
increases in our number of customers and subscription revenue,
we also increased our operating expenses in support of growing
the business, primarily through
36
increased marketing expenditures and by hiring additional
personnel. We continued to focus research and development
efforts on developing a second product offering and our business
continued to operate at a loss. We raised additional capital
with a $14.9 million placement of Series C redeemable
convertible preferred stock to existing and new investors at a
per share price of $5.95. We continued to believe that our small
size, combined with our operating losses, did not put us in a
position to complete an initial public offering in the near
term. However, based on the successful placement of our
preferred stock and our continued month over month revenue
growth, we believed that the probability of an initial public
offering increased and adjusted the scenario probabilities
accordingly. Based on this calculation we determined in
September 2006 that the fair value of our common stock decreased
from $2.90 to $2.68 per share as of July 1, 2006 and we
determined in November 2006 that the fair value of our common
stock increased to $3.05 as of October 1, 2006.
During the quarter ended December 31, 2006, we continued to
operate our business in the ordinary course. Both our customer
and subscription revenue continued to grow while we continued to
operate at a loss primarily due to increases in operating
expenses to support the business and fund new marketing
programs. We continued to expend resources on developing our
second product. While reviewing our performance we determined
that we may be approaching the size that would permit us to
successfully launch an initial public offering. As a result,
management and our board of directors began to consider the
possibility of a potential initial public offering, although
there were not yet discussions with any third parties regarding
an offering. In calculating the fair value of our common stock
we adjusted the scenario probabilities accordingly. In February
2007, based on this calculation the fair value of our common
stock increased to $4.12 as of January 1, 2007 from $3.05
as of October 1, 2006.
During the quarter ended March 31, 2007, we initiated
discussions with investment banks about a possible initial
public offering. Again we adjusted the scenario probabilities
accordingly. In May 2007, based on this calculation, we
determined the fair value of our common stock to be $6.89 as of
April 1, 2007.
During the quarter ended June 30, 2007, we engaged
investment bankers, lawyers and accountants to start the process
of preparing for an initial public offering and held our initial
organizational meeting as well as launched the initial release
of our survey product. We adjusted the scenario probabilities
accordingly and, in August 2007, based on this calculation, we
determined the fair value of our common stock to be $9.60 as of
July 1, 2007.
Since July 1, 2007, we have filed a registration statement
with the SEC for an initial public offering of our common stock.
Results
of Operations
The following table sets forth selected statements of operations
data for each of the periods indicated as a percentage of total
revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
Revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenue
|
|
|
27
|
|
|
|
26
|
|
|
|
28
|
|
|
|
28
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
73
|
|
|
|
74
|
|
|
|
72
|
|
|
|
72
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
27
|
|
|
|
23
|
|
|
|
22
|
|
|
|
23
|
|
|
|
23
|
|
Sales and marketing
|
|
|
42
|
|
|
|
51
|
|
|
|
67
|
|
|
|
60
|
|
|
|
61
|
|
General and administrative
|
|
|
11
|
|
|
|
9
|
|
|
|
10
|
|
|
|
9
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
80
|
|
|
|
83
|
|
|
|
99
|
|
|
|
92
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7
|
)
|
|
|
(9
|
)
|
|
|
(27
|
)
|
|
|
(20
|
)
|
|
|
(23
|
)
|
Interest and other income
(expense), net
|
|
|
(0
|
)
|
|
|
(0
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(7
|
)%
|
|
|
(9
|
)%
|
|
|
(28
|
)%
|
|
|
(23
|
)%
|
|
|
(26
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
Comparison
of Six Months Ended June 30, 2007 and 2006
Revenue. Revenue for the six months ended June 30,
2007 was $21.1 million, an increase of $9.3 million,
or 78%, over revenue of $11.8 million for the six months
ended June 30, 2006. The increase in revenue resulted
primarily from an 84% increase in the number of average monthly
email marketing customers offset by a slight decrease in average
revenue per customer. Average monthly email marketing customers
increased to 105,221 in the six months ended June 30, 2007
from 57,216 in the six months ended June 30, 2006, while
average revenue per customer in the six months ended
June 30, 2007 decreased to $33.44 from $34.46 in the six
months ended June 30, 2006. We calculate our monthly
average revenue per email marketing customer by first averaging
the beginning and ending number of email marketing customers in
a given month and then dividing this average customer number
into the monthly revenue of that same month. We calculate our
average revenue per email marketing customer per fiscal period
by first averaging the beginning and ending number of email
marketing customers for each month in the applicable fiscal
period, then taking an average of these average customers and
dividing this average of the averages into our revenue for the
applicable fiscal period.
Cost of Revenue. Cost of revenue for the six months ended
June 30, 2007 was $5.8 million, an increase of
$2.4 million, or 74%, over cost of revenue of
$3.4 million for the six months ended June 30, 2006.
As a percentage of revenue, cost of revenue was 28% for the six
months ended June 30, 2007 and 2006. The increase in
absolute dollars primarily resulted from an 84% increase in the
number of average monthly email marketing customers which
resulted in increased hosting and operations expense and
customer support costs. Of the increase in cost of revenue,
$1.3 million resulted from increased personnel costs
attributable to additional employees in our customer support and
operations groups to support customer growth and to increase the
quality and range of support options available to customers.
Additionally, $550,000 resulted from increased depreciation,
hosting and maintenance costs as we scaled and added capacity to
our hosting infrastructure, and $390,000 related to increased
credit card fees due to a higher volume of billing transactions.
Research and Development Expenses. Research and
development expenses for the six months ended June 30, 2007
were $5.0 million, an increase of $2.2 million or 79%,
over research and development expenses of $2.8 million for
the six months ended June 30, 2006. The increase was
primarily due to additional personnel related costs of
$1.7 million as we increased the number of research and
development employees to further enhance our products.
Additional consulting and contractor fees of $370,000 also
contributed to the increase due to the use of these resources to
supplement our own personnel.
Sales and Marketing Expenses. Sales and marketing
expenses for the six months ended June 30, 2007 were
$12.8 million, an increase of $5.7 million, or 81%,
over sales and marketing expenses of $7.1 million for the
six months ended June 30, 2006. The increase was primarily
due to increased advertising and promotional expenditures of
$2.9 million as we expanded our multi-channel marketing
strategy in order to increase awareness of our brand and
products and to add new customers. Additional personnel related
costs of $1.4 million also contributed to the increase as
we added employees to accommodate the growth in sales leads and
to staff our expanded marketing efforts.
General and Administrative Expenses. General and
administrative expenses for the six months ended June 30,
2007 were $2.4 million, an increase of $1.3 million,
or 120%, over general and administrative expenses of
$1.1 million for the six months ended June 30, 2006.
The increase was due primarily to additional personnel related
costs of $655,000 as we increased the number of general and
administrative employees to support our overall growth, as well
as an increase in legal, insurance, accounting and other
administrative costs, which reflected the increased scale and
complexity of supporting our business.
Interest and Other Income (Expense), Net. Interest and
other income (expense), net for the six months ended
June 30, 2007 was $(631,000), an increase of $325,000, or
106%, from interest and other income (expense), net of
$(306,000) for the six months ended June 30, 2006. The
increase was due to a $471,000 increase in the expense related
to the change in the fair value of the redeemable convertible
preferred stock warrant primarily offset by a $166,000 increase
in interest income from investments in marketable securities and
cash equivalents. We account for an outstanding redeemable
convertible preferred stock warrant as a liability held
38
at fair market with changes in value recorded as a component of
other expense. The increase in interest income was primarily due
to an increase in the balance of investments and cash
equivalents as a result of an equity funding which was completed
in the second and third quarters of 2006.
Comparison
of Years Ended December 31, 2006 and 2005
Revenue. Revenue for 2006 was $27.6 million, an
increase of $12.9 million, or 88%, over revenue of
$14.7 million for 2005. The increase in revenue resulted
primarily from a 93% increase in the number of average monthly
email marketing customers partially offset by a slight decrease
in average revenue per customer. Average monthly email marketing
customers in 2006 increased to 67,336 from 34,909 for 2005,
while average revenue per customer for 2006 decreased to $34.10
from $34.99 in 2005.
Cost of Revenue. Cost of revenue in 2006 was
$7.8 million, an increase of $4.1 million, or 108%,
over cost of revenue of $3.7 million in 2005. As a
percentage of total revenue, cost of revenue increased slightly
to 28% from 26% in 2005. The increase primarily resulted from a
93% increase in the number of average monthly email marketing
customers which resulted in increased hosting and operations
expense and customer support costs. Of the increase in cost of
revenue, $2.0 million related to increased personnel costs
attributable to additional employees in our customer support and
operations groups required to support customer growth and to
increase the quality and range of support options available to
customers. Additionally, $1.0 million resulted from
increased depreciation, hosting and maintenance costs as we
scaled and added capacity to our hosting infrastructure and
$559,000 related to increased credit card fees due to a higher
volume of billing transactions.
Research and Development Expenses. Research and
development expenses in 2006 were $6.2 million, an increase
of $2.8 million, or 84%, over research and development
expenses of $3.4 million in 2005. The increase was
primarily due to additional personnel related costs of
$2.2 million as we increased the number of research and
development employees to further enhance our products.
Sales and Marketing Expenses. Sales and marketing
expenses in 2006 were $18.6 million, an increase of
$11.1 million, or 149%, over sales and marketing expenses
of $7.5 million in 2005. The increase was primarily due to
increased advertising and promotional expenditures of
$7.6 million as we expanded our multi-channel marketing
strategy in order to increase awareness of our brand and
products and to add new customers. Additional personnel related
costs of $2.2 million also contributed to the increase as
we added personnel to accommodate the growth in sales leads and
to staff our expanded marketing efforts.
General and Administrative Expenses. General and
administrative expenses in 2006 were $2.6 million, an
increase of $1.3 million, or 98%, over general and
administrative expenses of $1.3 million in 2005. The
increase was primarily due to additional personnel related costs
of $811,000 as we increased the number of general and
administrative employees to support our overall growth and an
increase in legal, accounting and insurance costs of $261,000,
which reflected the increased scale and complexity of our
professional service needs.
Interest and Other Income (Expense), Net. Interest and
other income (expense), net in 2006 was $(203,000), an increase
of $179,000 from interest and other income (expense), net of
$(24,000) in 2005. The increase was due to a $588,000 increase
in other expense related to the change in value of the
redeemable convertible preferred stock warrant primarily offset
by a $432,000 increase in interest income from investments in
marketable securities and cash equivalents. We account for the
redeemable convertible preferred stock warrant as a liability
held at fair market value with changes in value recorded as a
component of other expense. Interest income increased primarily
due to an increase in investments and cash equivalents as a
result of an equity funding that took place during the year.
Comparison
of Years Ended December 31, 2005 and 2004
Revenue. Revenue for 2005 was $14.7 million, an
increase of $6.6 million, or 82%, over revenue of
$8.1 million for 2004. The increase in revenue resulted
primarily from an 80% increase in the number of average monthly
email marketing customers. Average monthly email marketing
customers in 2005 increased to
39
34,909 from 19,345 in 2004. The average revenue per email
marketing customer was consistent from period to period.
Cost of Revenue. Cost of revenue in 2005 was
$3.7 million, an increase of $1.5 million, or 69%,
over cost of revenue of $2.2 million in 2004. As a
percentage of total revenue, cost of revenue declined slightly
to 26% in 2005 from 27% in 2004. The increase in absolute
dollars primarily resulted from an 80% increase in the number of
average monthly email marketing customers, which resulted in
increased hosting and operations expense and higher customer
support costs. Of the increase in cost of revenue, $667,000
related to increased personnel costs related to additional
employees in our customer support and operations groups in order
to support customer growth and to increase the quality and range
of support options available to customers. Additionally,
$402,000 resulted from increased depreciation, hosting and
maintenance costs as we scaled and added to our hosting
infrastructure and $257,000 related to increased credit card
fees due to a higher volume of billing transactions.
Research and Development Expenses. Research and
development expenses in 2005 were $3.4 million, an increase
of $1.3 million, or 57%, over research and development
expenses of $2.1 million in 2004. The increase was
primarily due to additional personnel related costs of $955,000
as we increased the number of research and development employees
to further enhance our products.
Sales and Marketing Expenses. Sales and marketing
expenses in 2005 were $7.5 million, an increase of
$4.1 million, or 120%, over sales and marketing expenses of
$3.4 million in 2004. The increase was primarily due to
increased advertising and promotional expenditure of
$2.6 million as we introduced a multi-channel marketing
program. The marketing program employed radio, online and print
advertising concentrated in a few major metropolitan regions of
the United States in an effort to increase awareness of email
marketing and our brand within our targeted market of small
organizations and add new customers. Personnel related costs of
$1.1 million also contributed to the increase as we added
employees to support the growth in sales leads and to staff our
expanded marketing efforts.
General and Administrative Expenses. General and
administrative expenses in 2005 were $1.3 million, an
increase of $470,000, or 55%, over general and administrative
expenses of $856,000 in 2004. The increase was due primarily to
additional personnel related costs of $391,000 as we increased
the number of general and administrative employees.
Interest and Other Income (Expense), Net. Interest and
other income (expense), net in 2005 was $(24,000), a decrease of
$10,000 from interest and other income (expense), net of
$(34,000) in 2004. The decrease was due to lower interest
expense resulting from principal reductions in our debt facility.
40
Quarterly
Results of Operations
The following table sets forth our unaudited operating results
for each of the ten quarters in the period ended June 30,
2007. This information is derived from our unaudited financial
statements, which in the opinion of management contain all
adjustments necessary for a fair statement of such financial
data. Historical results are not necessarily indicative of the
results to be expected in future periods. You should read this
data together with our financial statements and the related
notes included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
(in thousands, except per share and customer data)
|
|
|
Statements of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,812
|
|
|
$
|
3,318
|
|
|
$
|
3,900
|
|
|
$
|
4,628
|
|
|
$
|
5,429
|
|
|
$
|
6,400
|
|
|
$
|
7,239
|
|
|
$
|
8,484
|
|
|
$
|
9,713
|
|
|
$
|
11,398
|
|
Cost of revenue(1)
|
|
|
781
|
|
|
|
848
|
|
|
|
931
|
|
|
|
1,187
|
|
|
|
1,543
|
|
|
|
1,811
|
|
|
|
2,038
|
|
|
|
2,409
|
|
|
|
2,731
|
|
|
|
3,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
2,031
|
|
|
|
2,470
|
|
|
|
2,969
|
|
|
|
3,441
|
|
|
|
3,886
|
|
|
|
4,589
|
|
|
|
5,201
|
|
|
|
6,075
|
|
|
|
6,982
|
|
|
|
8,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
660
|
|
|
|
821
|
|
|
|
741
|
|
|
|
1,133
|
|
|
|
1,363
|
|
|
|
1,411
|
|
|
|
1,530
|
|
|
|
1,868
|
|
|
|
2,169
|
|
|
|
2,802
|
|
Sales and marketing
|
|
|
1,223
|
|
|
|
1,413
|
|
|
|
2,079
|
|
|
|
2,745
|
|
|
|
2,837
|
|
|
|
4,247
|
|
|
|
4,664
|
|
|
|
6,844
|
|
|
|
6,121
|
|
|
|
6,674
|
|
General and administrative
|
|
|
263
|
|
|
|
261
|
|
|
|
385
|
|
|
|
417
|
|
|
|
493
|
|
|
|
586
|
|
|
|
633
|
|
|
|
911
|
|
|
|
1,082
|
|
|
|
1,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,146
|
|
|
|
2,495
|
|
|
|
3,205
|
|
|
|
4,295
|
|
|
|
4,693
|
|
|
|
6,244
|
|
|
|
6,827
|
|
|
|
9,623
|
|
|
|
9,372
|
|
|
|
10,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(115
|
)
|
|
|
(25
|
)
|
|
|
(236
|
)
|
|
|
(854
|
)
|
|
|
(807
|
)
|
|
|
(1,655
|
)
|
|
|
(1,626
|
)
|
|
|
(3,548
|
)
|
|
|
(2,390
|
)
|
|
|
(2,473
|
)
|
Interest and other income
(expense), net
|
|
|
(8
|
)
|
|
|
(4
|
)
|
|
|
(5
|
)
|
|
|
(7
|
)
|
|
|
(150
|
)
|
|
|
(156
|
)
|
|
|
105
|
|
|
|
(2
|
)
|
|
|
(291
|
)
|
|
|
(340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(123
|
)
|
|
|
(29
|
)
|
|
|
(241
|
)
|
|
|
(861
|
)
|
|
|
(957
|
)
|
|
|
(1,811
|
)
|
|
|
(1,521
|
)
|
|
|
(3,550
|
)
|
|
|
(2,681
|
)
|
|
|
(2,813
|
)
|
Accretion of redeemable convertible
preferred stock
|
|
|
(1,342
|
)
|
|
|
(1,357
|
)
|
|
|
(1,372
|
)
|
|
|
(1,672
|
)
|
|
|
(2,136
|
)
|
|
|
(1,134
|
)
|
|
|
(259
|
)
|
|
|
(259
|
)
|
|
|
(253
|
)
|
|
|
(265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders
|
|
$
|
(1,465
|
)
|
|
$
|
(1,386
|
)
|
|
$
|
(1,613
|
)
|
|
$
|
(2,533
|
)
|
|
$
|
(3,093
|
)
|
|
$
|
(2,945
|
)
|
|
$
|
(1,780
|
)
|
|
$
|
(3,809
|
)
|
|
$
|
(2,934
|
)
|
|
$
|
(3,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted(2)
|
|
$
|
(0.52
|
)
|
|
$
|
(0.50
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(0.89
|
)
|
|
$
|
(0.94
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(1.06
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(0.81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period number of customers(3)
|
|
|
29,356
|
|
|
|
34,179
|
|
|
|
39,878
|
|
|
|
47,730
|
|
|
|
57,195
|
|
|
|
67,061
|
|
|
|
76,861
|
|
|
|
89,323
|
|
|
|
104,265
|
|
|
|
123,865
|
|
|
|
|
(1)
|
|
Amounts include stock-based
compensation expense, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
9
|
|
|
$
|
11
|
|
|
$
|
15
|
|
|
$
|
17
|
|
Research and development
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1
|
|
|
|
3
|
|
|
|
6
|
|
|
|
17
|
|
|
|
21
|
|
|
|
29
|
|
Sales and marketing
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1
|
|
|
|
3
|
|
|
|
6
|
|
|
|
9
|
|
|
|
11
|
|
|
|
18
|
|
General and administrative
|
|
|
7
|
|
|
|
5
|
|
|
|
5
|
|
|
|
–
|
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
8
|
|
|
|
36
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
–
|
|
|
$
|
5
|
|
|
$
|
10
|
|
|
$
|
23
|
|
|
$
|
45
|
|
|
$
|
83
|
|
|
$
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
Quarterly amounts may not add to
full year amounts due to rounding.
|
|
(3)
|
|
We define our end of period
customers as email marketing customers that we billed directly
during the last month of the period.
|
41
As a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenue
|
|
|
28
|
|
|
|
26
|
|
|
|
24
|
|
|
|
26
|
|
|
|
28
|
|
|
|
28
|
|
|
|
28
|
|
|
|
28
|
|
|
|
28
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
72
|
|
|
|
74
|
|
|
|
76
|
|
|
|
74
|
|
|
|
72
|
|
|
|
72
|
|
|
|
72
|
|
|
|
72
|
|
|
|
72
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
23
|
|
|
|
25
|
|
|
|
19
|
|
|
|
25
|
|
|
|
25
|
|
|
|
22
|
|
|
|
21
|
|
|
|
22
|
|
|
|
23
|
|
|
|
22
|
|
Sales and marketing
|
|
|
44
|
|
|
|
42
|
|
|
|
53
|
|
|
|
59
|
|
|
|
53
|
|
|
|
67
|
|
|
|
64
|
|
|
|
81
|
|
|
|
63
|
|
|
|
67
|
|
General and administrative
|
|
|
9
|
|
|
|
8
|
|
|
|
10
|
|
|
|
9
|
|
|
|
9
|
|
|
|
9
|
|
|
|
9
|
|
|
|
11
|
|
|
|
11
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
76
|
|
|
|
75
|
|
|
|
82
|
|
|
|
93
|
|
|
|
87
|
|
|
|
98
|
|
|
|
94
|
|
|
|
114
|
|
|
|
97
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
(6
|
)
|
|
|
(19
|
)
|
|
|
(15
|
)
|
|
|
(26
|
)
|
|
|
(22
|
)
|
|
|
(42
|
)
|
|
|
(25
|
)
|
|
|
(27
|
)
|
Interest and other income
(expense), net
|
|
|
(0
|
)
|
|
|
(0
|
)
|
|
|
(0
|
)
|
|
|
(0
|
)
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
(0
|
)
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4
|
)%
|
|
|
(1
|
)%
|
|
|
(6
|
)%
|
|
|
(19
|
)%
|
|
|
(18
|
)%
|
|
|
(28
|
)%
|
|
|
(21
|
)%
|
|
|
(42
|
)%
|
|
|
(28
|
)%
|
|
|
(28
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue increased sequentially in each of the quarters presented
primarily due to increases in the number of total customers.
Gross profit, in absolute dollars, also increased sequentially
for the quarters presented primarily due to revenue growth.
Total operating expenses, in absolute dollars, increased
sequentially for most of the quarters presented primarily due to
increased sales and marketing expenses which resulted from
increased marketing efforts and increased number of personnel.
The decrease in operating expenses for the first quarter of 2007
was due to the decrease in marketing expenses from the fourth
quarter of 2006 to the first quarter of 2007. This decrease was
the result of the seasonality of our marketing expenses, which
have been highest in the fourth quarter.
Liquidity
and Capital Resources
Since our inception we have financed our operations primarily
through the sale of redeemable convertible preferred stock,
issuance of convertible promissory notes, borrowings under
credit facilities and, to a lesser extent, cash flow from
operations. At June 30, 2007, our principal sources of
liquidity were cash and cash equivalents and short term
marketable securities totaling $11.2 million and a
$5.0 million term loan facility for the acquisition of
property and equipment of which $2.2 million remained
available for borrowing at June 30, 2007.
In February 2003, we entered into a term loan facility with
Silicon Valley Bank that provided for a $350,000 term loan for
the acquisition of property and equipment. During the period
from August 2003 to September 2005, the facility was amended
five times increasing the borrowing availability to
$2.2 million. At December 31, 2006, there was no
available borrowing capacity under the facility and, in March
2007, the facility was amended to establish additional borrowing
availability of $5.0 million and to modify certain terms
and covenants. As of June 30, 2007, $2.2 million
remained available for borrowing. Each advance under the
facility is payable in monthly installments over three years
from the date of the advance. The advances bear interest at a
rate of prime plus 2% (10.25% at June 30, 2007). The
interest rate decreases to prime plus 1.5% upon the occurrence
of a profitability event (defined as three consecutive months
with a net profit of at least $1.00). The facility requires that
we maintain financial covenants with respect to minimum net
revenue and a total funded debt ratio. Borrowings are
collateralized by substantially all of our assets and the
advances may be prepaid in whole or in part at any time without
penalty.
Our operating activities used cash of $1.1 million during
the six months ended June 30, 2007 and $748,000 during the
year ended December 31, 2006. Net cash provided by
operating activities was $2.4 million and $189,000 during
the years ended December 31, 2005 and 2004, respectively.
Net cash outflows for the six
42
months ended June 30, 2007 and year ended December 31,
2006 resulted primarily from operating losses and increases in
current assets partially offset by increases in current
liability accounts and non-cash charges for depreciation and
amortization, changes in fair value of the warrant for
redeemable convertible preferred stock and stock based
compensation charges. Net cash inflows during 2005 and 2004
resulted primarily from operating losses offset by increases in
current liability accounts and non-cash charges for depreciation
and amortization. Operating losses were primarily due to
increased sales and marketing efforts and additional employees
company wide.
Changes in current assets consisted primarily of the increase in
prepaid expenses and other current assets. Prepaid expenses and
other current assets increased $588,000 for the six months ended
June 30, 2007 primarily due to a prepaid software term
license. Prepaid expenses and other current assets increased
$255,000 in 2006 primarily due to increased volume of business.
The increases in current liability accounts consisted primarily
of the following:
Changes in deferred revenue were as follows:
|
|
|
|
•
|
during the six months ended June 30, 2007, deferred revenue
increased $2.5 million from $5.5 million to
$8.0 million;
|
|
|
•
|
during 2006, deferred revenue increased $2.7 million from
$2.8 million to $5.5 million;
|
|
|
•
|
during 2005, deferred revenue increased $1.5 million from
$1.3 million to $2.8 million; and
|
|
|
•
|
during 2004, deferred revenue increased $655,000 from $615,000
to $1.3 million.
|
The increases in deferred revenue were due to continued growth
in unearned prepaid subscriptions. The growth in subscriptions
was primarily due to new customer growth.
Changes in accrued expenses and other current liabilities were
as follows:
|
|
|
|
•
|
during the six months ended June 30, 2007, accrued expenses
increased $266,000 from $2.4 million to $2.7 million;
|
|
|
|
|
•
|
during 2006, accrued expenses increased $1.9 million from
$494,000 to $2.4 million primarily due to increased
marketing efforts during the year, increased employee related
costs due to personnel additions and increased costs directly
attributable to revenue growth partially offset by the receipt
of invoices and timing of payments;
|
|
|
•
|
during 2005, accrued expenses increased $188,000 from $306,000
to $494,000; and
|
|
|
•
|
during 2004, accrued expenses decreased $337,000 from $643,000
to $306,000.
|
Changes in accounts payable were as follows:
|
|
|
|
•
|
during the six months ended June 30, 2007, accounts payable
remained significantly unchanged at $2.6 million as of both
December 31, 2006 and June 30, 2007;
|
|
|
•
|
during 2006, accounts payable increased $1.1 million from
$1.5 million to $2.6 million;
|
|
|
•
|
during 2005, accounts payable increased $1.3 million from
$176,000 to $1.5 million; and
|
|
|
•
|
during 2004, accounts payable decreased $105,000 from $281,000
to $176,000.
|
The changes in accounts payable were due to increased expense
levels, net of the impact of the timing of payments to vendors.
The following non-cash charges are added back as adjustments to
reconcile net loss to net cash used in or provided by operating
activities:
|
|
|
|
•
|
change in fair value of warrant of $837,000 for the six months
ended June 30, 2007 and $588,000 for the year ended
December 31, 2006;
|
|
|
|
|
•
|
depreciation and amortization expense of $1.1 million for
the six months ended June 30, 2007 and $1.5 million,
$591,000 and $447,000 for the years ended December 31,
2006, 2005 and 2004, respectively; and
|
43
|
|
|
|
•
|
stock-based compensation expense of $203,000 for the six months
ended June 30, 2007 and $83,000, $17,000 and $23,000 for
the years ended December 31, 2006, 2005 and 2004,
respectively.
|
The change in fair value of the warrant to purchase
Series B redeemable convertible preferred stock was due to
the increase in the value of the underlying common stock into
which this warrant is ultimately convertible. The warrant is
subject to re-measurement at each balance sheet date and any
change in fair value is recognized as a component of other
expense until such time as the warrant is exercised or expires
unexercised. The warrant expires on the earliest to occur of
November 27, 2007 or immediately prior to the closing of a
merger, sale of assets, or consolidation of us by another
entity, or immediately prior to the closing date of an initial
public offering of our common stock.
The increase in depreciation and amortization expense was due to
increased purchases of property and equipment required to
support the continued growth of the business.
The increase in stock based compensation was due to the adoption
of SFAS 123R in January 2006.
As of December 31, 2006, we had federal and state net
operating loss carry-forwards of $29.1 million and
$22.5 million, respectively, which may be available to
offset potential payments of future federal and state income tax
liabilities which expire at various dates through 2026 for
federal income tax purposes and through 2011 for state income
tax purposes.
Net cash used in investing activities was $3.5 million for
the six months ended June 30, 2007 and $7.7 million,
$2.2 million and $494,000 for the years ended
December 31, 2006, 2005 and 2004, respectively. Net cash
used in investing activities during the six months ended
June 30, 2007 and the year ended December 31, 2006
consisted primarily of net cash paid to purchase marketable
securities and property and equipment. Net cash used in
investing activities during the years ended December 31,
2005 and 2004 consisted primarily of cash paid for the purchase
of property and equipment. Property and equipment purchases
consist of infrastructure for our products, capitalization of
certain software development costs, computer equipment for our
employees and equipment and leasehold improvements related to
additional office space.
Net cash provided by financing activities was $1.8 million
for the six months ended June 30, 2007. Net cash provided
by financing activities was $14.4 million, $512,000 and
$306,000 for the years ended December 31, 2006, 2005 and
2004, respectively. Net cash provided by financing activities
for the six months ended June 30, 2007 consisted primarily
of additional borrowings under the term loan facility partially
offset by repayment of outstanding borrowings as well as
payments of issuance costs of $630,000 for our contemplated
initial public offering of common stock. These issuance costs
have been capitalized and are included in prepaid expenses and
other current assets as of June 30, 2007. Net cash provided
by financing activities for the year ended December 31,
2006 consisted primarily of proceeds from the issuance of our
Series C redeemable convertible preferred stock and, to a
lesser extent, proceeds from the exercise of stock options and
warrants, partially offset by repayment of outstanding
borrowings under the term loan facility. Net cash provided by
financing activities for the years ended December 31, 2005
and 2004 consisted primarily of new borrowings under the term
loan facility partially offset by repayment of the borrowings
and other capital lease obligations.
Our future capital requirements may vary materially from those
now planned and will depend on many factors, including, but not
limited to, development of new products, market acceptance of
our products, the levels of advertising and promotion required
to launch additional products and improve our competitive
position in the marketplace, the expansion of our sales, support
and marketing organizations, the establishment of additional
offices in the United States and worldwide and the building of
infrastructure necessary to support our growth, the response of
competitors to our products and our relationships with suppliers
and clients. Since the introduction of our on-demand email
marketing product in 2000, we have experienced increases in our
expenditures consistent with the growth in our operations and
personnel, and we anticipate that our expenditures will continue
to increase in the future.
We believe that our current cash and cash equivalents,
marketable securities and funds available under our term loan
facility will be sufficient to meet our working capital and
capital expenditure requirements for at least the next twelve
months. Thereafter, we may need to raise additional funds
through public or private financings or increased borrowings to
develop or enhance products, to fund expansion, to respond to
competitive pressures or to acquire complementary products,
businesses or technologies. If required, additional
44
financing may not be available on terms that are favorable to
us, if at all. If we raise additional funds through the issuance
of equity or convertible debt securities, the percentage
ownership of our stockholders will be reduced and these
securities might have rights, preferences and privileges senior
to those of our current stockholders. No assurance can be given
that additional financing will be available or that, if
available, such financing can be obtained on terms favorable to
our stockholders and us.
During the last three years, inflation and changing prices have
not had a material effect on our business and we do not expect
that inflation or changing prices will materially affect our
business in the foreseeable future.
Off-Balance
Sheet Arrangements
We do not engage in any off-balance sheet financing activities.
We do not have any interest in entities referred to as variable
interest entities, which include special purpose entities and
other structured finance entities.
Contractual
Obligations
The following table summarizes our contractual obligations at
December 31, 2006 and the effect such obligations are
expected to have on our liquidity and cash flow in future
periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(in thousands)
|
|
|
Notes payable
|
|
$
|
702
|
|
|
$
|
449
|
|
|
$
|
253
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Operating lease obligations
|
|
|
3,387
|
|
|
|
836
|
|
|
|
1,846
|
|
|
|
705
|
|
|
|
–
|
|
Contractual commitments
|
|
|
900
|
|
|
|
561
|
|
|
|
339
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,989
|
|
|
$
|
1,846
|
|
|
$
|
2,438
|
|
|
$
|
705
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In February 2007, we entered into the third amendment to our
headquarters office lease to expand our existing premises. As a
result, our future operating lease obligations will increase by
$183,000, $372,000, $385,000 and $294,000 for 2007, 2008, 2009
and 2010, respectively. In July 2007, we entered into an
agreement with a vendor to provide specialized space and related
services in a second co-location hosting facility. As a result,
our future contractual commitments will increase by
approximately $34,000, $311,000, $845,000, $866,000, $888,000
and $755,000 for 2007, 2008, 2009, 2010, 2011 and 2012,
respectively.
Changes
in Accountants
On or about September 20, 2006, we dismissed Vitale,
Caturano & Company Ltd., or Vitale, as our independent
registered public accounting firm. Our audit committee
participated in and approved the decision to change our
independent registered public accounting firm. The reports of
Vitale on the financial statements for the years ended
December 31, 2004 and 2005 contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principle. During the
years ended December 31, 2004 and 2005 and through
September 20, 2006, there were no disagreements with Vitale
on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Vitale
would have caused them to make reference thereto in their
reports on the financial statements for such years. We requested
that Vitale furnish us with a letter addressed to the SEC
stating whether or not it agrees with the above statements. A
copy of such letter, dated July 6, 2007, is filed as
Exhibit 16.1 to the registration statement, of which this
prospectus forms a part.
We engaged PricewaterhouseCoopers LLP as our new independent
registered public accounting firm as of December 26, 2006.
45
Quantitative
and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk. We bill our customers in
U.S. dollars and receive payment predominantly in
U.S. dollars. Accordingly, our results of operations and
cash flows are not subject to fluctuations due to changes in
foreign currency exchange rates.
Interest Rate Sensitivity. Interest income and expense
are sensitive to changes in the general level of
U.S. interest rates. However, based on the nature and
current level of our marketable securities, which are primarily
short-term investment grade and government securities, and our
notes payable, we believe that there is no material risk of
exposure.
46
Overview
Constant Contact is the leading provider of on-demand email
marketing solutions for small organizations, including small
businesses, associations and non-profits, as determined by the
size of our customer base. As of July 31, 2007, we had over
130,000 customers. Our customers use our email marketing product
to more effectively and efficiently create, send and track
professional and affordable permission-based email marketing
campaigns. With these campaigns, our customers can build
stronger relationships with their customers, clients and
members, increase sales and expand membership. Our email
marketing product incorporates a wide range of customizable
templates to assist in campaign creation, user-friendly tools to
import and manage contact lists and intuitive reporting to track
campaign effectiveness. In June 2007, we introduced an online
survey product that complements our email marketing product and
enables small organizations to easily create and send surveys
and effectively analyze responses. We are committed to providing
our customers with a high level of support, which we deliver via
phone, chat, email and our website.
We provide our products on an on-demand basis through a standard
web browser. This model enables us to deploy and maintain a
secure and scalable application that is easy for our customers
to implement at compelling prices. Our email marketing customers
pay a monthly subscription fee that generally ranges between $15
per month and $150 per month based on the size of their contact
lists and, in some cases, volume of mailings. Our survey product
is similarly priced. For the first half of 2007, our average
monthly revenue per email marketing customer was approximately
$33. We believe that the simplicity of on-demand deployment
combined with our affordable subscription fees and functionality
facilitate adoption of our products by our target customers
while generating significant recurring revenue. Since the first
quarter of 2002, we have achieved 22 consecutive quarters of
growth in customers and revenue.
Our email marketing customer base has grown steadily from
approximately 25,000 at the end of 2004 to over 130,000 as of
July 31, 2007. These customers include all types of small
organizations including retailers, restaurants, day spas, law
firms, consultants, non-profits, religious organizations, alumni
associations and other small businesses and organizations.
Customers in more than 110 countries and territories currently
use our email marketing product. We estimate that approximately
two-thirds of our customers have fewer than ten employees and in
the first half of 2007, our top 50 email marketing customers
accounted for approximately 1% of our gross email marketing
revenue. Our customers have displayed a high degree of loyalty.
From January 2005 through July 2007, at least 97.4% of our
customers in a given month have continued to utilize our email
marketing product in the following month.
We acquire our customers through a variety of paid and unpaid
sources. Our paid sources include online marketing through
search engines, advertising networks and other sites; offline
marketing through radio advertising, local seminars and other
marketing efforts; and contractual relationships with over 1,700
active channel partners, which include national small business
service providers such as Network Solutions, American Express
and VistaPrint as well as local small business service providers
such as local web developers and marketing agencies, who refer
customers to us through links on their websites and outbound
promotions to their customers. Our unpaid sources of customer
acquisition include referrals from our growing customer base,
general brand awareness and the inclusion of a link to our
website in the footer of more than 500 million emails
currently sent by our customers each month. During the first
half of 2007, approximately 56% of our new email marketing
customers were generated through marketing programs and channel
partners or were located in geographies where we do offline
marketing. Accordingly, we believe that during the first half of
2007 approximately 44% of our new email marketing customers were
generated through unpaid sources.
47
Industry
Background
Benefits
of Email Marketing
Organizations are increasingly turning to email marketing as a
means to communicate with their customers, clients and members.
According to an October 2006 report entitled “The Email
Marketing Vendor Landscape” by Forrester, a leading
research provider, 94% of marketers currently use or were
planning to use email marketing by the end of 2006, with 58% of
those marketers outsourcing to a third party provider. Key
benefits that drive adoption of email marketing include the
following:
|
|
|
|
•
|
Targeted. Email marketing enables organizations to tailor
messages to specific audiences and enables recipients to respond
through links to websites.
|
|
|
•
|
Timely. The cycle from concept through design and
execution for email marketing is much shorter than direct mail
because there is no need to print and mail. Reducing cycle time
allows organizations to rapidly respond to market conditions and
opportunities.
|
|
|
•
|
Efficient. Email marketing combines low cost with
measurable responses leading to an attractive return on
investment.
|
Constant
Contact Market Opportunity
We believe email marketing is an excellent fit for small
organizations. Small businesses and non-profits tend to rely
heavily on repeat sales and referrals to grow their businesses
and expand their membership bases, and email marketing is a cost
effective way to reach these audiences.
Small organizations also represent a large market opportunity.
The U.S. Small Business Administration estimated that there
were 25.8 million small businesses in the United States in
2005, and in 2006 the National Center of Charitable Statistics
estimated that there were approximately 1.5 million
non-profits in the United States. Other small organizations that
use email marketing include online auction sellers, independent
musicians, community organizations, school districts,
parent/teacher associations and sports leagues. Based on these
estimates, we believe our email marketing product could
potentially address the needs of more than 27.3 million
small organizations domestically. We believe that all small
organizations could benefit by communicating regularly with
their constituents and, further, that email marketing with our
product is an effective and affordable method to facilitate this
type of communication. As of June 2007, we had customers in at
least 856 of the 1,004 of the standard industrial
classification, or SIC, codes, which is a method the
U.S. government uses to classify industries in the U.S.
At the same time, small organizations have generally been slower
than larger organizations to adopt email marketing as part of
their marketing mix. We believe they face unique challenges when
adopting email marketing including:
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Unfamiliar with Email Marketing. Many small organizations
are not familiar with the benefits of email marketing and do not
understand how to effectively build a permission-based contact
list, develop an effective email marketing campaign and measure
its effectiveness.
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Lack of Technical Expertise. Small organizations often do
not have the technical expertise to implement email marketing
software or to design and execute effective email marketing
campaigns. For example, many small organizations do not have the
marketing, graphic design or HTML coding skills to develop
professionally formatted emails; may not follow or comprehend
the evolving industry standards for sending bulk email; or may
not understand how spam filtering technology may impact the
delivery of their email communications.
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Limited Budgets. Small organizations typically have small
marketing budgets. They generally cannot afford to hire in-house
staff or engage an outside marketing agency to develop, execute
and evaluate an email marketing campaign.
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We also believe most existing alternatives for email marketing
are poorly suited to meet the needs of small organizations. Some
of these existing alternatives include:
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General Email Applications. General email applications
and services such as Microsoft Outlook, America Online or
Hotmail are designed for one-to-one emails. They do not easily
incorporate the formatting, graphics, and links necessary to
produce professional-looking email marketing campaigns. They
also limit the number of recipients per email and do not have
the reporting capabilities to allow users to evaluate the
effectiveness of their email marketing campaigns. Finally, they
do not provide regulatory compliance tools to assist the sender
in complying with anti-spam requirements.
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Enterprise Service Providers. These service providers,
such as Epsilon Data Management LLC (a subsidiary of Alliance
Data Systems Corporation), ExactTarget, Inc., Responsys Inc. and
Silverpop Systems Inc. focus on large organizations with
sizeable marketing budgets. While these providers offer
sophisticated, Internet-based marketing services and tools with
professional and customized execution and reporting, they
deliver services at a price and scale that is far beyond the
scope of most small organizations.
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As a result, we believe there is an opportunity for an email
marketing solution tailored to the needs of small organizations.
These users seek an affordable, easy-to-use email marketing
solution with a professional appearance and reliable performance.
Our
Solution
We provide small organizations with a convenient, effective and
affordable way to communicate with their constituents via email.
Our email marketing solution delivers the following benefits to
small organizations:
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Easy. We enable customers to easily create great looking
email marketing campaigns without prior expertise in marketing,
graphic design or HTML. Our product includes over 200
customizable templates intelligently organized to streamline
creation of a professional-looking message. We also provide
customers with tools that make it easy for them to import, build
and manage contact lists and to monitor delivery and response.
We further enhance our product with unlimited free customer
support and daily webinars covering topics ranging from a
general product tour to email marketing best practices.
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Fast. Because our product is accessed through the web,
customers only need access to a PC and the Internet to begin
using it to create and send their first email campaign. A
customer can typically create and send their first campaign in
less than one hour. Once a customer has loaded their contact
list, created and sent their first campaign, our product becomes
even faster to use as this information is stored and can be
easily accessed for future use.
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Affordable. We offer our email marketing product on a
subscription basis, eliminating the significant up-front license
fee associated with traditional software. Instead, we encourage
potential customers to try our product without charge for a
60-day
period. After the free trial, customers can use our product for
a subscription fee of as low as $15 per month with the amount of
the fee increasing based on the number of unique contacts or
email addresses in a customer’s contact list. We provide
discounted pricing for both prepayments and non-profits. For the
first half of 2007, our average monthly revenue per email
marketing customer was approximately $33.
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Effective. Our product provides our customers with a
highly effective way to reach their customers, clients and
members. According to data measured by ReturnPath, Inc. for
United States email addresses, approximately 97% of our
customers’ emails were delivered past any spam filters or
controls to their target email inboxes over the first seven
months of 2007. We have made significant investments in systems
and processes to reduce the number of our customers’ emails
that are blocked as possible spam. In addition, to help ensure
that customers’ emails are delivered, we have developed
relationships with leading ISPs.
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Measurable. Our email marketing campaign reports provide
customers with information and data regarding each campaign. In
addition to receiving aggregate data on email receipt, open
rates and click-through rates per campaign, our customers can
identify on an individual basis which contacts received and
opened an email and which links in the email they clicked on. We
also provide comparable metrics for our overall customer base.
This feedback permits customers to alter the content or timing
of their campaigns to capitalize on aspects of prior campaigns
that were positively received by their constituents.
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Business
Strengths
We believe that the following business strengths differentiate
us from competitors and are key to our success:
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Focus on Small Organizations. We have maintained a
consistent and exclusive focus on small organizations, which has
enabled us to design a full customer experience tuned to their
unique needs. Through the website experience, product usability,
affordable price point and personal touch of our communications
consultants and support representatives, we work to ensure that
small organizations feel that we are committed to their success.
We continually invest in primary research to understand this
market including usability studies, satisfaction surveys, focus
groups and other research initiatives.
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Efficient Customer Acquisition Model. We believe that we
have developed an efficient customer acquisition model that
generates an attractive return on our sales and marketing
expenditures. We utilize a variety of marketing channels to
acquire new customers including online advertising, partner
relationships, radio advertising, and online and in-person
seminars and brand awareness. A Constant Contact “Try It
Free” link is included in the footer of more than
500 million emails currently sent by our customers each
month. In 2006, our cost of email marketing customer
acquisition, which we define as our total sales and marketing
expense divided by the gross number of email marketing customers
added in the period, was approximately $300 per email marketing
customer. For the first half of 2007, our average monthly
revenue per email marketing customer was approximately $33,
implying payback on a revenue basis in less than one year. This
implied payback is calculated by dividing the $300 acquisition
cost per email marketing customer by the $33 average
monthly revenue per email marketing customer, which implies a
9.1 month payback period.
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High Degree of Recurring Revenue. We benefit from a high
level of customer loyalty. From January 2005 through July 2007,
at least 97.4% of customers in a given month have continued to
use our email marketing product in the following month. We
believe this represents a high level of retention, particularly
given the transient nature of many small organizations. These
customers provide us with a significant base of recurring
revenue and generate new customer referrals.
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Consistent Commitment to Customer Service. We seek to
provide our customers with a high level of support in order to
encourage trials and ongoing usage of our product. We conduct
online webinars and in-person events to educate potential
customers about the benefits of email marketing. In addition,
our communications consultants seek to contact all new
U.S. and Canadian based customers to help them launch an
initial campaign and address any questions or concerns. As a
result, we believe we have a highly satisfied customer base.
Since August 2003, our customer surveys indicate that more than
80% of our customers rate their overall experience with Constant
Contact as above average or excellent.
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Software-as-a-Service Delivery. We provide our product on
an on-demand basis, meaning that our customers can access and
use our product through a standard web browser. This enables our
customers to rapidly begin using our product with few up-front
costs and limited technical expertise. It also enables us to
serve additional customers with little incremental expense and
to deploy new applications and upgrades quickly and efficiently
to our existing customers.
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Growth
Strategy
Our objective is to increase our market leadership through the
following strategies:
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Acquire New Customers. We aggressively seek to continue
to attract new customers by promoting the Constant Contact brand
and encouraging small organizations to try our products. We have
increased the number of customers acquired in each of the past
12 quarters. We acquire new customers through multiple
acquisition channels including online advertising, partner
relationships, radio advertising online and in person seminars
and other marketing efforts as well as through referrals from
existing customers and the Constant Contact link included in the
footer of customer email campaigns. We consistently monitor the
return on our advertising spending in terms of new customers
generated and adjust our sales and marketing mix as appropriate.
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Increase Revenue Per Customer. As of July 31, 2007,
we had an email marketing customer base in excess of 130,000. We
seek to increase revenue from each customer through add-on
services that enhance our products such as the hosting of our
customers’ images and logos on our system. We are currently
developing an add-on service that will enable our customers to
archive their past email campaigns and make them available to
their constituents.
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Provide Additional Products. We plan to continue to
invest in research and development to maintain our leadership
position in email marketing and to develop and provide our
customers with complementary products that are easy-to-use,
effective and affordable. Based on strong interest from our
existing customers, we recently introduced our survey product,
which enables customers to create and send online surveys and
analyze responses. We believe that we have a significant
opportunity to sell our newly launched survey product to our
email marketing customers as a means for them to better
understand the needs of their constituents. As new customers
adopt our survey product, we will also have the opportunity to
cross-sell our email marketing product.
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Expand Internationally. We currently sell our email
marketing product to customers in over 110 countries and
territories, despite limited marketing efforts outside of the
United States. We believe that opportunities exist to more
aggressively market our products in English-speaking countries,
including Canada, the United Kingdom, Ireland, Australia and New
Zealand. In addition, eventually we intend to offer our products
in different languages, which will allow us to market our
products in additional countries.
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Pursue Complementary Acquisitions. We follow industry
developments and technology advancements and intend to evaluate
and acquire technologies or businesses to cost-effectively
enhance our products, access new customers or markets or both.
We have no present understandings or agreements to acquire any
of these technologies or businesses.
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Our
Products and Services
Email
Marketing
Our email marketing product allows customers to easily create,
send and track professional-looking email campaigns. Our product
provides customers with the following features:
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Campaign Creation Wizard. This comprehensive, easy-to-use
interface enables our customers to create and edit email
campaigns. Through intuitive controls, customers can readily
change colors, fonts, borders and backgrounds and insert images
and logos to help ensure that their emails appear polished and
professional. The wizard operates on a
“what-you-see-is-what-you-get” basis whereby a
customer can move paragraphs and blocks of content within the
draft email quickly and view the message from the perspective of
intended recipients.
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Professionally Developed Templates. These pre-designed
email message forms help customers quickly create attractive and
professional campaigns. Over 200 templates provide ideas as to
the kinds of
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emails customers can send, including newsletters, event
invitations, business letters, promotions and announcements, and
demonstrate, through the use of color and format, the creativity
and professionalism of a potential campaign. Our advanced
editing functionality enables customers to easily modify the
templates. We also provide templates designed to appeal to
specific vertical markets. For example, we offer a restaurant
template that includes a pre-formatted menu section.
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Contact List Management. These tools help customers build
and manage their email contact lists. Our contact list building
tools include file and spreadsheet import functionality as well
as a software plug-in to import contact lists maintained in
Microsoft’s
Outlook®
and Outlook
Express®.
We also provide HTML programming code for a “Join My
Mailing List” box that can be included on the
customer’s web site and used to gather new contacts. Our
list management tools enable a customer to target or segment
contacts for all or specific campaigns and monitor email
addresses to which previous campaigns could not be delivered. In
addition to their constituents’ names and email addresses,
several additional customizable fields are available for the
purposes of personalizing email messages. Unsubscribe requests
are automatically processed to help ensure ongoing compliance
with government regulations and email marketing best practices.
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Email Tracking and Reporting. These features enable our
customers to review and analyze the overall effectiveness of a
campaign by tracking and reporting aggregate information
including how many emails were delivered, how many were opened,
and which links were clicked on. These features also enable our
customers to identify on an individual basis which contacts
received an email, opened an email and clicked on particular
links within the message.
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Email Delivery Management. These tools are incorporated
throughout our product and are designed to maintain our high
deliverability rates. Some of these tools are readily apparent
to our customers, such as in-depth delivery tracking. Others are
delivered through back-office processes, such as a spam content
check and address validation. To further improve the percentage
of emails delivered, we work closely with ISPs on spam
prevention issues. We also include processes and verifications
that greatly increase compliance with anti-spam standards.
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Image Hosting. We enable customers to store up to five
images for free, view and edit these images and resize them as
necessary for use in their email campaigns. Up to approximately
1,200 images (25 megabytes) can be stored for an
additional $5.00 per month. By adding images to an email
message, a customer can make the campaign more compelling or
visually appealing.
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Security and Privacy. We protect our customers’ data
at a higher level than we believe many of our customers do
themselves. We do not use our customers’ confidential
information, including their contact lists, except to provide
our product, nor do we share, sell or rent this information. In
addition, we require that our customers adopt a privacy policy
to assist them in complying with government regulations and
email marketing best practices.
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Survey
Our recently launched online survey product enables customers to
survey their customers, clients or members and analyze the
responses. By selecting one of our customizable templates and
editing or entering their own questions, our customers can
easily create a professionally formatted survey. Similar to our
email marketing product, our survey product includes a survey
creation wizard, over 40 different preformatted and customizable
survey templates, list management capabilities and live customer
support.
Our survey product incorporates a real-time and comprehensive
reporting function that enables our customers to analyze overall
survey results and specific answers submitted by individual
respondents. The survey product includes powerful analytic
features that enable our customers to segment results based on
survey responses, easily edit filters for “what if”
analysis and view the results in intuitive, easy-to-understand
graphical and detailed data formats. Results can be exported to
an Excel file for additional analysis. Our customers can
identify the respondents associated with filtered results and
create a unique contact list of these respondents who can then
be targeted with a specific message or
follow-up
campaign.
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Customer
Support
We provide extensive free customer support to all customers.
Communication consultants seek to contact U.S. and Canadian
based trial customers by phone to answer any questions and to
help them launch their first campaign. Additional assistance is
available via phone, chat or email. Our customer support
employees answer approximately 1,300 calls per day with an
average wait time of less than two minutes. Our phone and chat
support team is located at our headquarters in Waltham,
Massachusetts while we outsource our email support to a third
party based in Bangalore, India. We complement our customer
support with free daily product tours offered via our website,
an archive of frequently asked questions (FAQs) and webinars
that explain the benefits of email marketing.
Our customer service and support group is responsible for
enforcing our permission and prohibited content policies. We
work closely with customers who have higher than average spam
complaint rates or bounced emails, and with customers whose
emails are flagged by our system as possibly including
prohibited content or spam, to assist them in complying with our
policies. If we cannot resolve outstanding concerns, we
terminate our agreement with the customer. From January 2005
through July 2007, involuntary terminations have averaged less
than 0.5% of our customer base each month.
As of July 31, 2007, we had 100 employees working in
customer service and support.
Professional
Services
Although the majority of our customers select the
“do-it-yourself” approach, we also offer professional
services to customers who would like their email campaigns and
surveys prepared for them. Our service offerings range from a
low-cost, getting started service to full-service email and
survey campaign creation.
Pricing
We price our email marketing product based upon the number of
unique email addresses in a customer’s account. Set forth
below are the first several pricing tiers:
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Number of Unique Email Addresses
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Monthly Fixed Pricing
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Up to 500
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$
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15.00
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501-2,500
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$
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30.00
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2,501-5,000
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$
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50.00
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5,001-10,000
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$
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75.00
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10,001-25,000
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150.00
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Customers in these pricing tiers may send an unlimited number of
emails per month. During the first half of 2007, approximately
80% of our email marketing customers were in our two lowest
pricing tiers, $15.00 and $30.00 per month. We offer
additional pricing tiers for large list customers. These large
list customers are limited as to the number of emails they can
send per month for a fixed monthly fee, with overage charges
assessed on emails exceeding the monthly limit.
Our survey product is similarly priced based on tiers of unique
email addresses with customers allowed an unlimited number of
surveys a month. However, if a customer receives survey
responses in a given month that exceed the number of unique
email addresses in their account, they will incur additional
charges. In addition, customers may purchase a bundle of both
our email marketing and survey products at a discount of 50% off
the list price of the second product.
We offer our premium image hosting services for $5.00 per month
for customers with less than 350,000 unique email addresses. We
offer discounted rates to non-profits and for six- and
twelve-month prepayment options.
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The
Constant Contact Customer Experience
We are committed to helping small organizations use the power of
email marketing to reach their constituencies. When our
customers first connect with us, they may be experienced email
marketers or, more likely, thinking about using email campaigns
for the first time. The Constant Contact customer experience is
designed to first make sure that every customer is successful in
sending their initial email campaign and then to retain
customers and generate referrals. We have designed our email
marketing product to be easy to learn and have added a wide
variety of tools designed to assist customers in using our
product.
Getting
Started
Every customer experience starts with a free
60-day
trial. The only requirement for the free trial is that the
potential customer must enter a valid email address that we
verify before they can send their initial campaign. We do not
require credit card information during the
60-day
trial. The trial is a fully-featured experience that is limited
to 100 email contacts. Immediately after signing up, the
customer receives a welcome email with helpful information on
getting started and an invitation to participate in a free
online tour, which we host daily. Within the next few days, one
of our communications consultants seeks to call U.S. and
Canadian based customers to answer questions and discuss how to
use email marketing effectively for the organization. All of our
customer support resources are available during the free trial
period. At the conclusion of the
60-day trial
(or earlier if the customer’s contact list exceeds 100
contacts), we ask the customer to provide credit card
information in order to begin billing for their continued use of
our product.
Designing
an Email Campaign
Our email campaign creation wizard guides our customers through
an intuitive workflow process to set up an email campaign. There
are more than 200 customizable templates that provide for an
assortment of different campaigns, including newsletters, event
invitations, promotions, announcements, business letters and
more. For a more targeted audience, we provide special template
packages for restaurants, associations, religious organizations,
retailers and holidays. Our product creates email campaigns in
HTML and text formats simultaneously and allows reviewing and
editing in each mode. Creation of HTML and text emails is
necessary so that recipient is able to display the email message
in the best format supported by the recipient’s email
program or device.
Our customizable templates assist the customer to define the
layout and format of an email campaign. They are designed and
tested to appear professional. Default content and intelligent
pre-population of content, such as customer name, logo, and
website links, start the customer off with a basic email
campaign. Within the template, a customer can easily:
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edit, delete or format content;
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change the color and fonts;
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add clickable and trackable links to websites;
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upload, resize and store images and logos;
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reposition sections of the campaign using a drag and drop
interface; and
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add additional blocks of content—articles, products and
events.
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At any time, a customer can preview the email campaign (in both
HTML and text formats) and send a test version to themselves and
a small group of others for review. We also provide spell check
capability and a spam content test to identify content that
might reduce deliverability.
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Uploading
and Building an Email Contact List
The next step in executing an email marketing campaign is to
build an email contact list. Our customers can upload a contact
list they have in an email program address book or manually
enter a contact list directly into our product. Customers are
given explicit and easy to follow instructions to get their
contact lists into our product. If customers do not have a
contact list or if they want to build upon an existing contact
list, they can add our “Join My Mailing List”
sign-up box
to their websites. Customers can keep their contacts in multiple
lists for targeting their campaigns. We charge customers only
for the number of unique email contacts in their account.
As a customer is adding or uploading a list, they are clearly
notified of our permission policies and educated as to the types
of lists that are acceptable under our standard terms and
conditions.
Sending
and Monitoring an Email Campaign
Once a customer designs a campaign and selects the contact list
to receive it, they may send the campaign immediately or choose
a future date and time for it to be sent automatically. When a
campaign is sent, we notify the customer by email. The customer
can then track the results of the campaign, including how many
of the emails were delivered, how many recipients opened the
email and which links in the email were clicked. In the case of
undeliverable emails, the customer can review why the email was
not delivered and take appropriate steps. Finally, the customer
can monitor if any recipients unsubscribed from their mailing
list.
Once a customer has sent their first email campaign, our product
becomes even easier to use because prior campaigns are available
as a starting point for use in future campaigns.
Paying
for Constant Contact
Once the free trial is over (after 60 days or earlier if
the trial customer enters more than 100 email contacts), trial
customers are prompted to enter credit card information and pick
a payment plan in order to continue to use our email marketing
product. Customers can pay month-to-month, or pre-pay 6 or
12 months to receive a discount of 10% or 15%,
respectively. Customers may also choose and pay for add-on
services, such as our premium image hosting. Customers may pay
by check if they prepay for 6 or 12 months. If a customer
is not ready to sign up for a payment plan after the trial
period, they may continue to use their account after the trial
period to build their contact list; however, they cannot send
another email campaign until they select a payment plan.
Customer
Service Experience
We are committed to providing a high level of customer service.
We offer phone, chat and email support for customers from
9 AM to 9 PM (eastern time) weekdays and email-only
support on weekends. We also have an extensive self-service
knowledgebase located on our website. The majority of our
customers use our toll-free phone number as their preferred
support channel. Our goal is to have a live support
representative on the phone with the customer in less than 2
minutes, a target we generally achieve. Our customer support
representatives are well-trained, knowledgeable and committed to
helping our customers.
Customers that want additional assistance in getting started or
designing a unique email template can utilize our professional
services team for an incremental fee.
In 2006, we launched an online community for both trial and
paying customers where they can share their experiences and ask
questions of other customers. As of July 31, 2007, we had
in excess of 12,000 members of the community with numerous
forums that include “members networking with members”
and “dos and don’ts for email marketing.”
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We offer our customers a variety of ongoing forums to learn more
about the benefits of email marketing and Constant Contact. We
offer training seminars both online and in-person within eight
geographic regions across the United States and distribute a
monthly Email Marketing Hints & Tips newsletter.
Customers
We have maintained a consistent and exclusive focus on small
organizations. In this market, as of July 31, 2007, we
served a large and diverse group of over 130,000 email marketing
customers. This customer base is primarily comprised of
business-to-business users, business-to-consumer users and
non-profits and associations. We serve a wide range of
business-to-business customers including law firms, accountants,
marketing and public relations firms, recruiters and independent
consultants. They typically use our product to illustrate their
subject matter knowledge by communicating their recent
activities and to educate their audiences by sending
informational newsletters and announcements about their company
or industry. We also serve a diverse base of
business-to-consumer customers including on- and off-line
retailers, restaurants, realtors, travel and tourism businesses
and day spas. These customers typically use our product to
promote their offerings with the goal of generating regular,
repeat business from their customers and prospects. Finally, we
serve a variety of non-profits and associations, including
religious organizations, alumni associations, and other
non-profits. They typically use our product to maintain regular
communications with their members and inform them about news and
events pertaining to their groups, as well as to drive event
attendance, volunteer participation and fundraising efforts.
We estimate that approximately two-thirds of our customers have
fewer than ten employees. For the first half of 2007, our
average monthly revenue per email marketing customer was
approximately $33, including email marketing revenue, image
hosting revenue, survey revenue, and professional services
revenue. We have low customer concentration as our top 50
customers in email marketing revenue in the first half of 2007
accounted for approximately 1% of our gross email marketing
revenue.
We measure customer satisfaction on a monthly basis by surveying
our customers. Based on these surveys, we believe that our
overall customer satisfaction is strong. Another indication of
our strong customer satisfaction is our low attrition rate. From
January 2005 through July 2007, at least 97.4% of our customers
in a given month have continued to utilize our email marketing
product in the following month.
Sales and
Marketing
Our sales and marketing efforts are designed to attract
potential customers to our website, to enroll them in a free
trial, to convert them to paying customers and to retain them as
ongoing paying customers. We believe there are significant
opportunities to increase the number of customers who try our
products through additional sales and marketing initiatives. We
employ sophisticated strategies to acquire our customers by
using a combination of paid and unpaid sources and sales and
marketing conversion resources. We also invest in public
relations and thought leadership to build our overall brand and
visibility. We are constantly seeking new methods to reach and
convert more customers.
Paid
Sources
Online Advertising. We advertise online through
pay-per-click
spending with search engines (including Google and Yahoo!) and
banner advertising with online advertising networks and other
websites likely to be frequented by small organizations. We are
able to identify customers generated through these efforts
because they click on our advertisements before visiting our
site, and we measure effectiveness based on the number of
customers acquired. Approximately 31% of our new email marketing
customers in the first half of 2007 were generated from online
advertising.
Channel Partners. We have contractual relationships with
over 1,700 active online channel partners who refer customers to
us through links on their websites and outbound promotions to
their customers. These channel partners include large companies
with broad reach including Network Solutions, LLC, American
Express Company and VistaPrint Limited as well as smaller
companies with narrow reach but high influence such as
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local web designers and marketing agencies. Most of our channel
partners either share a percentage of the cash received by us or
receive a one-time referral fee. Two website design and hosting
companies, Web.com, Inc. and Website Pros, Inc., bundle our
services and provide them directly to their customers. These
channel partners pay us monthly royalties, which contributed
less than one percent of our total revenue during the first half
of 2007. Approximately 15% of our new email marketing customers
in the first half of 2007 were generated from our channel
partners.
Offline Advertising. We advertise offline in print and
radio. Our radio advertising is designed to build awareness of
the Constant Contact brand and drive market awareness. Our print
advertising is comprised of national publications such as
Entrepreneur as well as local business publications in
our geographically targeted metro regions. We currently
advertise offline in eight metro regions and measure our new
customer acquisition in these markets by comparing our
performance in similar markets where we do not advertise.
Unpaid
Sources
Word-of-Mouth Referrals. We frequently hear from new
customers that they heard about us from a current customer. In
our regular customer surveys, we ask our customers how likely
they are to refer Constant Contact to a friend or colleague.
Throughout 2006 and in the first half of 2007, 46% or more of
our email marketing customers responding to this question gave
us a 10 on a 10 point scale. We also offer our paying customers
a referral incentive consisting of a $30 credit for them and for
the customer they referred. Even though we offer this incentive,
the majority of referral customers do not use the incentive
program.
Footer Click-Throughs. Customers also come to us by
clicking on the Constant Contact link included in the footer of
more than 500 million emails currently sent by our
customers each month. In the first half of 2007, approximately
4,000, or 8%, of our new email marketing customers came from a
footer click-through.
Sales
Efforts
Communications Consultants. We employed a team of 38
phone-based sales professionals as of July 31, 2007 who
seek to call U.S. and Canadian based trial customers to
assist them in their initial use of Constant Contact and
encourage conversion.
Local Evangelism. As of July 31, 2007, we employed a
team of eight regional development directors who are focused on
educating small organizations as to the benefits of email
marketing in their local markets. These employees are located
across the United States and typically provide free local
seminars to chambers of commerce and other small business groups
about email marketing and related topics.
Distance Learning. We offer free online webinars to
prospects and customers on a wide variety of topics designed to
educate them about the benefits of email marketing, teach them
how to be great email marketers and guide them in the use of our
products.
Other
Marketing Initiatives
Press Relations and Thought Leadership. We leverage our
broad customer base as a survey panel to assess small business
expectations around major press cycles such as Mother’s Day
and Valentine’s Day. We publish the results and seek to get
print and radio coverage of our results. We also publish email
marketing best practices and advice through our Email
Marketing Hints & Tips newsletter and a monthly
column in Entrepreneur.com. These efforts enhance our brand
awareness and industry leadership.
Website Marketing. We continuously measure both website
visitor-to-trial conversion and trial-to-paying conversion. We
test messaging, graphics and layout alternatives in order to
improve website conversion. We also seek to customize the
website with vertical or usage-specific messaging whenever
possible. We carefully analyze trial customer usage to
understand and overcome barriers to conversion.
Vertical Marketing. Our vertical marketing group develops
marketing programs for certain markets that have demonstrated an
affinity for our products. These programs are currently focused
on restaurants and food services, franchises, religious
organizations, and travel and tourism.
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Community. In August of 2006, we launched a user
community with discussion boards, a resource center, member
spotlights and other features. As of July 31, 2007, the
user community had more than 12,000 participants and more than
5,000 posts on the discussion boards.
In the year ended December 31, 2006, we spent
$18.6 million on sales and marketing. Our cost of customer
acquisition during this period was approximately $300 per email
marketing customer, defined as our total sales and marketing
expense divided by the gross number of email marketing customers
added in the period.
Technology
Our on-demand products use a central application and a single
software code base with unique accounts for each customer. As a
result, we are able to spread the cost of providing our products
across our entire customer base. In addition, because we have
one central application, we believe we can scale our business
faster than traditional software vendors. Scalability is
achieved through advanced use of application partitioning to
allow for horizontal scaling across multiple sets of
applications. This enables individual application subsystems to
scale independently as required by volume and usage.
Our system hardware is co-located in a hosting facility located
in Somerville, Massachusetts, owned and operated by InterNAP
Network Services Corporation under an agreement that expires in
January 2009. The facility provides around-the-clock security
personnel, video surveillance and biometric access screening,
and is serviced by onsite electrical generators, fire detection
and suppression systems. The facility has multiple Tier 1
interconnects to the Internet. We have entered into an agreement
with Sentinel Properties-Bedford, LLC to operate a second
co-location hosting facility located in Bedford, Massachusetts.
We expect the second hosting facility to be operational in the
fourth quarter of 2007.
We own all of the hardware deployed in support of our platform.
We continuously monitor the performance and availability of our
products. We have a highly available, scalable infrastructure
that utilizes load-balanced web server pools, redundant
interconnected network switches and firewalls, replicated
databases, and fault-tolerant storage devices. Production data
is backed up on a daily basis and stored in multiple locations
to ensure transactional integrity and restoration capability.
Changes to our production environment are tracked and managed
through a formal maintenance request process. Production
baseline changes are handled much the same as software product
releases and are first tested on a quality system, then verified
in the staging environment, and finally deployed to the
production system.
Research
and Development
We have made substantial investments in research and
development, and expect to continue to do so as a part of our
strategy to continually improve the ease of use of our existing
products as well as develop new offerings. As of July 31,
2007, we had 101 employees working in engineering and
product strategy. Our product management and strategy team,
which directs our research and development efforts, includes a
market analyst, product managers, and website and user interface
designers. This group also performs competitive and market
analysis as well as systematic product usability testing. Our
research and development expense totaled $2.1 million for
2004, $3.4 million for 2005 and $6.2 million for 2006.
Competition
The market for email marketing vendors is fragmented,
competitive and evolving. We believe the following are the
principal competitive factors in the email marketing market:
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product functionality, performance and reliability;
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integrated solutions;
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customer support and education;
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deliverability rates;
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product scalability;
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ease of use; and
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cost.
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The email marketing market is divided into two
segments—vendors who are focused on the small to medium
size business, or SMB, market and vendors who are focused on the
enterprise market. We primarily compete with vendors focused on
the SMB market and, based on customer count, we are the market
leader. Some of the vendors who are focused on the SMB market,
together with the customer counts of such vendors as most
recently made available by such vendors, include: Vertical
Response, Inc. (30,000 customers), Broadwick Corporation
(iContact, formerly Intellicontact) (approximately 13,000
customers), CoolerEmail Inc. (10,000 customers), Got
Corporation (Campaigner) (10,000 customers), Emma, Inc. (6,000
customers), Lyris Technologies, Inc. (5,000 customers) and
Topica Inc. (4,000 customers). These vendors typically charge a
low monthly entry fee or a low fee per number of emails sent.
Vendors that are focused on the enterprise market include Acxiom
Digital (a division of Acxiom Corporation), Alterian Inc.,
Epsilon Data Management LLC (a subsidiary of Alliance Data
Systems Corporation), ExactTarget, Inc., Responsys Inc.,
Silverpop Systems Inc. and CheetahMail, Inc. (a subsidiary of
Experian Group Limited). We believe enterprise email marketing
vendors can charge their customers $25,000 or more per
month and provide a full-service model, which generally includes
an account executive and creative team who often assist with
content development. While we currently do not generally compete
with vendors focusing on enterprise customers, we may face
competition from them in the future.
We may also face future competition in the email marketing
market from new companies entering our market, which may include
large, established companies, such as Microsoft Corporation,
Google Inc. or Yahoo! Inc. Barriers to entry into our market are
relatively low, which allows new entrants to enter the market
without significant impediments and large, established companies
to develop their own competitive products or acquire or
establish cooperative relationships with our competitors.
In addition, these companies may have significantly greater
financial, technical, marketing and other resources than we do
and may be able to devote greater resources to the development,
promotion, sale and support of their products. These potential
competitors may be in a stronger position to respond quickly to
new technologies and may be able to undertake more extensive
marketing campaigns. These competitors may have more extensive
customer bases and broader customer relationships than we do. In
addition, these competitors may have longer operating histories
and greater name recognition than we do. Moreover, if one or
more of our competitors were to merge or partner with another of
our competitors or a new market entrant, the change in
competitive landscape could adversely affect our ability to
compete effectively.
Government
Regulation
The Controlling the Assault of Non-Solicited Pornography and
Marketing Act of 2003, or CAN-SPAM Act, establishes requirements
for commercial email and specifies penalties for commercial
email that violates the Act. In addition, the CAN-SPAM Act gives
consumers the right to require emailers to stop sending them
commercial email.
The CAN-SPAM Act, which became effective January 1, 2004,
covers email sent for the primary purpose of advertising or
promoting a commercial product, service, or Internet web site.
The Federal Trade Commission, a federal consumer protection
agency, is primarily responsible for enforcing the CAN-SPAM Act,
and the Department of Justice, other federal agencies, State
Attorneys General, and Internet Service Providers also have
authority to enforce certain of its provisions.
The CAN-SPAM Act’s main provisions include:
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prohibiting false or misleading email header information;
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prohibiting the use of deceptive subject lines;
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ensuring that recipients may, for at least 30 days after an
email is sent, opt out of receiving future commercial email
messages from the sender, with the opt-out effective within
10 days of the request;
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requiring that commercial email be identified as a solicitation
or advertisement unless the recipient affirmatively permitted
the message; and
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requiring that the sender include a valid postal address in the
email message.
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The CAN-SPAM Act also prohibits unlawful acquisition of email
addresses, such as through directory harvesting, and
transmission of commercial emails by unauthorized means, such as
through relaying messages with the intent to deceive recipients
as to the origin of such messages.
Violations of the CAN-SPAM Act’s provisions can result in
criminal and civil penalties, including statutory penalties that
can be based in part upon the number of emails sent, with
enhanced penalties for commercial emailers who harvest email
addresses, use dictionary attack patterns to generate email
addresses,
and/or relay
emails through a network without permission.
The CAN-SPAM Act acknowledges that the Internet offers unique
opportunities for the development and growth of frictionless
commerce, and the CAN-SPAM Act was passed, in part, to enhance
the likelihood that wanted commercial email messages would be
received. We believe we are a leader in developing policies and
practices affecting our industry and that our permission-based
email marketing model and our anti-spam policy are compatible
with current CAN-SPAM Act regulatory requirements. We are a
founding member of the Email Sender and Provider Coalition, or
ESPC
(http://www.espcoalition.org),
a cooperative industry organization founded to develop and
implement industry-wide improvements in spam protection and
solutions to prevent inadvertent blocking of legitimate
commercial email. We maintain high standards that apply to all
of our customers, including non-profits and political
organizations, whether or not they are covered by the CAN-SPAM
Act.
The CAN-SPAM Act preempts, or blocks, most state restrictions
specific to email, except for rules against falsity or deception
in commercial email, fraud and computer crime. The scope of
these exceptions, however, is not settled, and some states have
adopted email regulations that, if upheld, could impose
liabilities and compliance burdens in addition to those imposed
by the CAN-SPAM Act.
Moreover, some foreign countries, including the countries of the
European Union, have regulated the distribution of commercial
email and the online collection and disclosure of personal
information. Foreign governments may attempt to apply their laws
extraterritorially or through treaties or other arrangements
with U.S. governmental entities.
Our customers may be subject to the requirements of the CAN-SPAM
Act, and/or
other applicable state or foreign laws and regulations affecting
email marketing. If our customers’ email campaigns are
alleged to violate applicable email laws or regulations and we
are deemed to be responsible for such violations, or if we were
deemed to be directly subject to and in violation of these
requirements, we could be exposed to liability.
Our standard terms and conditions require our customers to
comply with laws and regulations applicable to their email
marketing campaigns and to implement any required regulatory
safeguards. We take additional steps to facilitate our
customers’ compliance with the CAN-SPAM Act, including the
following:
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new customers signing up for our services must agree that they
will send email through our service only to persons who have
given their permission;
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when an email contact list is uploaded, the customer must
certify that it has permission to email each of the addressees;
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when an individual indicates that they want to be added to a
mailing list, they may receive a confirmation email and may be
required to confirm their intent to be added to the contact
list, through a process called double opt-in;
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we electronically inspect all of our customers’ email
contact lists to check for spam traps, dictionary attack
patterns and lists that fail to meet our permission standards;
and
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for customers with large email address lists, we conduct list
review interviews to verify that the list is properly acquired
and permission-based and that the proposed messages meet our
content standards.
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Campaigns using such lists are conducted in stages, so that we
can terminate the campaign early if the list generates an
unusually high number of complaints.
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Intellectual
Property
Our intellectual property rights are important to our business.
We rely on a combination of copyright, trade secret, trademark,
patent and other rights in the United States and other
jurisdictions, as well as confidentiality procedures and
contractual provisions to protect our proprietary technology,
processes and other intellectual property. We have filed a
patent application and are in the process of filing a second
application.
Although the protection afforded by copyright, trade secret,
trademark and patent law, written agreements and common law may
provide some advantages, we believe that the following factors
help us to maintain a competitive advantage:
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the technological skills of our research and development
personnel;
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frequent enhancements to our products;
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continued expansion of our proprietary content; and
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high levels of customer service.
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Others may develop products that are similar to our technology.
We enter into confidentiality and other written agreements with
our employees, consultants and partners, and through these and
other written agreements, we attempt to control access to and
distribution of our software, documentation and other
proprietary technology and other information. Despite our
efforts to protect our proprietary rights, third parties may, in
an unauthorized manner, attempt to use, copy or otherwise obtain
and market or distribute our intellectual property rights or
technology or otherwise develop a product with the same
functionality as our product. Policing unauthorized use of our
products and intellectual property rights is difficult and
nearly impossible on a worldwide basis. Therefore, we cannot be
certain that the steps we have taken or will take in the future
will prevent misappropriations of our technology or intellectual
property rights.
“Constant
Contact®”
is a registered trademark in the United States and in the
European Union. We also hold trademarks and service marks
identifying certain of our products or features of our products.
Employees
As of July 31, 2007, we employed a total of
296 employees. None of our employees is represented by a
labor union. We have not experienced any work stoppages and
believe that our relations with our employees are good.
Facilities
Our corporate headquarters, including our principal
administrative, marketing, technical support and research and
development departments, is located in Waltham, Massachusetts.
We lease approximately 50,000 square feet under an
agreement that expires in September, 2010. As of July 31,
2007, all of our employees were based in this location with the
exception of 10 employees who work out of their homes. If
we require additional space, we believe that we will be able to
obtain such space on acceptable, commercially reasonable terms.
Legal
Proceedings
We are not currently subject to any legal proceedings. From time
to time, we have been party to litigation matters arising in
connection with the normal course of our business, none of which
has or is expected to have a material adverse effect on us.
61
Our executive officers and directors and their ages and
positions as of July 31, 2007 are set forth below:
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Name
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Age
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Position(s)
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Gail F. Goodman
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Chairman, President and Chief
Executive Officer
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Ellen Brezniak
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Vice President, Product Strategy
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Nancie Freitas
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Vice President and Chief Marketing
Officer
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Eric S. Groves
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Senior Vice President, Sales and
Business Development
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Thomas C. Howd
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Vice President, Services
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Robert P. Nault
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Vice President and General Counsel
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Daniel A. Richards
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Vice President, Engineering
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Steven R. Wasserman
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Vice President and Chief Financial
Officer
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Thomas Anderson(3)
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Director
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Robert P. Badavas(1)
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Director
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John Campbell(2)
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Director
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Michael T. Fitzgerald(1)(2)
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Director
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Patrick Gallagher(2)(3)
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Director
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William S. Kaiser(1)(3)
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Director
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(1)
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Member of the audit committee.
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(2)
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Member of the compensation
committee.
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(3)
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Member of the nominating and
corporate governance committee.
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Gail F. Goodman. Ms. Goodman has served as our Chief
Executive Officer since April 1999, as a member of our board of
directors since May 1999 and as Chairman of our board of
directors since November 1999. Prior to joining us,
Ms. Goodman served as Vice President, Commerce Products
Group of Open Market, a provider of Internet commerce
application software, from 1996 until 1998, as Vice President,
Marketing of Progress Software Corporation, a developer and
provider of application development tools and database software,
from 1994 until 1996, as Director of Product Management of
Dun & Bradstreet Software, a provider of enterprise
resource planning software, from 1991 until 1994 and as Manager
of Bain & Company, a business consulting firm, from
1987 until 1991. She holds a B.A. from the University of
Pennsylvania and an M.B.A. from the Amos Tuck School of
Dartmouth University.
Ellen Brezniak. Ms. Brezniak has served as Vice
President, Product Strategy since September 2006. From September
2004 until September 2006, she served as Senior Vice President
of Marketing and Product Management of GetConnected, Inc., a
provider of transaction processing platforms for enabling the
sale of digital services. From January 2001 until August 2004,
Ms. Brezniak served as Vice President of Marketing of
OutStart, Inc., an
e-learning
software company. Ms. Brezniak has also held leadership
positions at Be Free, Inc., Open Market, and Progress Software,
Inc. Ms. Brezniak holds a B.S. from Rensselaer Polytechnic
Institute.
Nancie Freitas. Ms. Freitas joined us in November
2005 and has served as Vice President and Chief Marketing
Officer since December 2006. In February 2005, Ms. Freitas
founded The Freitas Group, a direct marketing and media firm,
which she operated until joining us. From April 2000 until
January 2005, she led the direct marketing services of Carat
Business & Technology, a worldwide media agency.
Ms. Freitas has also held leadership roles at CFO Magazine,
Earthwatch Institute and Games Magazine. Ms. Freitas holds
a B.A. from the University of Massachusetts.
Eric S. Groves. Mr. Groves has served as Senior Vice
President, Sales and Business Development since January 2001.
From October 1999 until December 2000, Mr. Groves served as
Executive Director of Worldwide Sales & Business
Development of Alta Vista Corporation, a provider of search
services and technology. Mr. Groves has also held
leadership positions at iAtlas Corp., InfoUSA Inc., MFS
Communications Company, Inc., SBC Communications Inc. and
Citigroup Inc. Mr. Groves holds a B.A. from Grinnell
College and an M.B.A. from the University of Iowa.
62
Thomas C. Howd. Mr. Howd has served as Vice
President, Services since 2001. From 1999 until 2000, he served
as Director, Production Engineering, of Direct Hit Technologies
Inc., a provider of search technologies that was later acquired
by Ask Jeeves, Inc. From 1998 until 1999, Mr. Howd served
as Director of Support and Quality Assurance of Workgroup
Technology Corporation, a product data management software
provider. Mr. Howd also held leadership positions in
engineering and professional services during his 11 year
tenure at Marcam Corporation, a provider of software
applications for manufacturing. Mr. Howd holds a B.S. from
Williams College.
Robert P. Nault. Mr. Nault has served as Vice
President and General Counsel since March 2007. Prior to joining
us, Mr. Nault served as Senior Vice President, General
Counsel and Secretary of RSA Security Inc., a provider of
e-security
technology solutions, from November 2005 until November 2006
after it was acquired by EMC Corporation in September 2006.
Mr. Nault was Vice President and General Counsel of
Med-i-Bank, Inc., a provider of software and services for
electronic benefit payments from October 2004 to July 2005;
Legal Consultant and Vice President and General Counsel of ON
Technology Corporation, an enterprise software company, from
March 2001 to May 2004; and Senior Vice President and General
Counsel of The Pioneer Group, Inc., a financial services and
alternative investments company, from 1995 to 2000. Before
joining Pioneer, Mr. Nault was a member of the corporate
department of Hale and Dorr LLP (now Wilmer Cutler Pickering
Hale and Dorr LLP). Mr. Nault is a director of Vanderbilt
Financial, LLC, an institutional investment fund. Mr. Nault
holds a B.A. from the University of Rhode Island and a J.D. from
Boston University School of Law.
Daniel A. Richards. Mr. Richards joined us in 1999
and has served as Vice President, Engineering since 2000. Prior
to joining us, from 1995 to 1999, he served as a principal
developer and as Vice President Engineering of Segue Software
Inc., a software company specializing in automated testing
applications. Mr. Richards has held a variety of developer
and leadership positions at Mercury Computer Systems,
Hewlett-Packard and Apollo Computer, Inc. Mr. Richards
holds a B.S. from the State University of New York at Binghamton.
Steven R. Wasserman. Mr. Wasserman has served as
Vice President and Chief Financial Officer since December 2005.
Prior to joining us, he served as Vice President and Chief
Financial Officer of Med-i-Bank, Inc., a provider of software
and services for electronic benefit payments, from March 2004
until it was acquired by Metavante Corp. in July 2005. From
January 2001 until March 2004, Mr. Wasserman served as Vice
President and Chief Financial Officer of ON Technology
Corporation, an enterprise software company that was acquired by
Symantec Corporation. Mr. Wasserman has held leadership
positions at The Pioneer Group, GTECH Holdings Corporation and
EG&G, Inc. Mr. Wasserman holds a B.B.A. from the
University of Michigan and an M.B.A. from Babson College.
Thomas Anderson. Mr. Anderson has served as one of
our directors since January 2007. Mr. Anderson is the
Senior Vice President, Direct to Consumer Channel of SLM
Corporation. From January 2005 until January 2007,
Mr Anderson was the President, Chief Executive Officer and
a member of the board of directors of Upromise, Inc., which was
acquired by SLM Corporation. From January 2003 until January
2005, he served as Chief Executive Officer of AmeriFee, LLC, a
medical finance company owned by Capital One Financial
Corporation. From 2001 until 2003, he served as a Senior Vice
President of Capital One. Mr. Anderson holds a B.A. from
Dartmouth College and a M.S. from the MIT Sloan School of
Management.
Robert P. Badavas. Mr. Badavas has served as one of
our directors since May 2007. He is the President and Chief
Executive Officer of TAC Worldwide, a technical staffing and
workforce solutions company owned by Goodwill Group of Japan.
From November 2003 until becoming President and Chief Executive
Officer in December 2005, he was the Executive Vice President
and Chief Financial Officer of TAC Worldwide. From September
2001 to September 2003, Mr. Badavas served as Senior
Principal and Chief Operating Officer of Atlas Venture, a
venture capital firm. Mr. Badavas is a member of the board
of directors of Hercules Technology Growth Capital, Inc., a
publicly-traded specialty finance company, and Airvana, Inc, a
provider of network infrastructure products. Mr. Badavas
holds a B.S. in Accounting and Finance from Bentley College.
John Campbell. Mr. Campbell has served as one of our
directors since March 1999 and is a private investor. From
December 2005 until June 2006, he served as interim Chief
Operating Officer of DFA Capital Management Inc., a risk
management software company. He is a director of WAM Systems and
DFA Capital
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Management, both privately held software companies.
Mr. Campbell co-founded Marcam Corporation, a leading
developer of ERP software, in 1980.
Michael T. Fitzgerald. Mr. Fitzgerald has served as
one of our directors since July 2000. He is Managing General
Partner and Founder of Commonwealth Capital Ventures. Prior to
founding Commonwealth in 1995, he was a General Partner at
Palmer Partners, the manager of four early stage venture funds,
where he served since 1981. Mr. Fitzgerald holds a B.A.
from Amherst College and an M.B.A. from the Harvard Business
School.
Patrick Gallagher. Mr. Gallagher has served as one
of our directors since June 2003. He is a Vice President of
Morgan Stanley Venture Partners (MSVP) and Morgan Stanley and
joined the firm in 1995. He has spent time in the Debt Capital
Markets Group, Technology Corporate Finance Department, and
MSVP. Prior to joining Morgan Stanley, Mr. Gallagher spent
two years working in Toyota’s Corporate Treasury
Department. In 2003, Mr. Gallagher rejoined MSVP after
working in various business development roles at RealNames, a
former MSVP portfolio company. Mr. Gallagher is a member of
the board of directors of Core Security Technologies, a provider
of information security software and services. He holds a B.A.
in Economics and Literature from Claremont McKenna College.
William S. Kaiser. Mr. Kaiser has served as one of
our directors since May 2006. Mr. Kaiser has been employed
by Greylock Management Corporation, a venture capital firm,
since May 1986 and has been one of the general partners of the
Greylock Limited Partnerships since January 1988.
Mr. Kaiser is a member of the board of directors of Red
Hat, Inc., an open source solutions provider, and several
private companies. Mr. Kaiser holds a B.S. from MIT and an
M.B.A. from the Harvard Business School.
Board
Composition
Our board of directors currently consists of seven members, all
of whom were elected as directors pursuant to the terms of an
investor rights agreement. The board composition provisions of
our investor rights agreements will terminate upon the closing
of this offering and there will be no further contractual
obligations regarding the election of our directors. There are
no family relationships among any of our directors or executive
officers.
In accordance with the terms of our restated certificate of
incorporation and second amended and restated bylaws that will
become effective upon the closing of this offering, our board of
directors will be divided into three classes, each of which
shall consist, as nearly as possible, of one-third of the total
number of directors constituting our entire board of directors
and each of whose members will serve for staggered three year
terms. As a result, only one class of our board of directors
will be elected each year from and after the closing of this
offering. Upon the closing of this offering, the members of the
classes will be divided as follows:
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the class I directors will be Messrs. Anderson and
Fitzgerald, and their term will expire at the annual meeting of
stockholders to be held in 2008;
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the class II directors will be Messrs. Campbell and
Gallagher, and their term will expire at the annual meeting of
stockholders to be held in 2009; and
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the class III directors will be Ms. Goodman and
Messrs. Badavas and Kaiser, and their term will expire at
the annual meeting of stockholders to be held in 2010.
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Our restated certificate of incorporation and second amended and
restated bylaws that will become effective upon the closing of
this offering provide that our directors may be removed only for
cause by the affirmative vote of the holders of at least
two-thirds of the votes that all of our stockholders would be
entitled to cast in an annual election of directors. Upon the
expiration of the term of a class of directors, directors in
that class will be eligible to be elected for a new three-year
term at the annual meeting of stockholders in the year in which
their term expires. This classification of our board of
directors may have the effect of delaying or preventing changes
in control or management of our company.
64
Director
Independence
Under Rule 4350 of the Nasdaq Marketplace Rules, a majority
of a listed company’s board of directors must be comprised
of independent directors within one year of listing. In
addition, Nasdaq Marketplace Rules require that, subject to
specified exceptions, each member of a listed company’s
audit, compensation and nominating and governance committees be
independent and that audit committee members also satisfy
independence criteria set forth in
Rule 10A-3
under the Securities Exchange Act of 1934, as amended. Under
Rule 4200(a)(15) of the Nasdaq Marketplace Rules, a
director will only qualify as an “independent
director” if, in the opinion of that company’s board
of directors, that person does not have a relationship that
would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director. In order to be
considered to be independent for purposes of
Rule 10A-3,
a member of an audit committee of a listed company may not,
other than in his or her capacity as a member of the audit
committee, the board of directors, or any other board committee:
(1) accept, directly or indirectly, any consulting,
advisory, or other compensatory fee from the listed company or
any of its subsidiaries; or (2) be an affiliated person of
the listed company or any of its subsidiaries.
In May 2007, our board of directors undertook a review of the
composition of our board of directors and its committees and the
independence of each director. Based upon information requested
from and provided by each director concerning their background,
employment and affiliations, including family relationships, our
board of directors has determined that none of
Messrs. Anderson, Badavas, Campbell, Fitzgerald, Gallagher
and Kaiser, representing six of our seven directors, has a
relationship that would interfere with the exercise of
independent judgment in carrying out the responsibilities of a
director and that each of these directors is
“independent” as that term is defined under
Rule 4200(a)(15) of the Nasdaq Marketplace Rules.
Our board of directors also determined that
Messrs. Badavas, Fitzgerald and Kaiser, who comprise our
audit committee, Messrs. Campbell, Fitzgerald and
Gallagher, who comprise our compensation committee, and
Messrs. Anderson, Gallagher and Kaiser, who comprise our
nominating and governance committee, satisfy the independence
standards for those committees established by applicable SEC
rules and the Nasdaq Marketplace Rules. In making this
determination, our board of directors considered the
relationships that each non-employee director has with our
company and all other facts and circumstances our board of
directors deemed relevant in determining their independence,
including the beneficial ownership of our capital stock by each
non-employee director. In particular, our board of directors has
determined that, although Mr. Fitzgerald falls outside the
safe harbor provisions of
Rule 10A-3(e)(1)(ii)
under the Securities Exchange Act of 1934, as amended,
Mr. Fitzgerald nevertheless meets the independence
requirements contemplated by
Rule 10A-3
under the Exchange Act. The safe harbor provisions of
Rule 10A-3(e)(1)(ii)
exempt holders of 10% or less of any class of voting securities
of an issuer from being deemed to be in control of, or an
affiliate of, that issuer. After this offering,
Mr. Fitzgerald will beneficially own
approximately %,
or % assuming entities affiliated
with Commonwealth Capital Ventures purchase an aggregate
of million
shares of our common stock in this offering, of our outstanding
common stock as result of his affiliation with entities
affiliated with Commonwealth Capital Ventures. The existence of
the safe harbor set forth in
Rule 10A-3(e)(1)(ii),
however, does not create a presumption in any way that a person
exceeding the 10% threshold controls or is otherwise an
affiliate of an issuer, and our board of directors, after
considering Mr. Fitzgerald’s individual ownership in
our outstanding common stock and his service to us solely in the
capacity as a director, has determined that Mr. Fitzgerald
satisfies the audit committee membership requirements
established by the SEC and under the Nasdaq Marketplace Rules.
Board
Committees
Our board of directors has an audit committee, a compensation
committee and a nominating and corporate governance committee.
Each of these committees will operate under a charter that has
been approved by our board of directors to be effective upon
completion of this offering. The composition and functioning of
all of our committees comply with all applicable requirements of
the Sarbanes-Oxley Act of 2002, the Nasdaq Marketplace Rules and
SEC rules and regulations.
65
Audit
Committee
The members of our audit committee are Messrs. Badavas,
Fitzgerald and Kaiser. Our board of directors has determined
that each of the members of our audit committee satisfies the
requirements for financial literacy under the current
requirements of the Nasdaq Marketplace Rules. Mr. Badavas
is the chairman of the audit committee and is also an
“audit committee financial expert,” as defined by SEC
rules and satisfies the financial sophistication requirements of
the Nasdaq Global Market. Our audit committee assists our board
of directors in its oversight of our accounting and financial
reporting process and the audits of our financial statements.
The audit committee’s responsibilities include:
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appointing, retaining, approving the compensation of, and
assessing the independence of our independent registered public
accounting firm;
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overseeing the work of our independent registered public
accounting firm, including the receipt and consideration of
reports from the firm;
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overseeing our internal control over financial reporting,
disclosure controls and procedures and code of business conduct
and ethics;
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establishing procedures for the receipt and retention of
accounting related complaints and concerns;
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reviewing and discussing with management and the independent
registered public accounting firm our annual and quarterly
financial statements and related disclosures;
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reviewing our policies and procedures for approving and
ratifying related person transactions, including our related
person transaction policy;
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meeting independently with our independent registered public
accounting firm and management; and
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preparing the audit committee report required by SEC rules.
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All audit services to be provided to us and all non-audit
services, other than de minimus non-audit services, to be
provided to us by our independent registered public accounting
firm must be approved in advance by our audit committee.
Compensation
Committee
The members of our compensation committee are
Messrs. Campbell, Fitzgerald and Gallagher.
Mr. Campbell is the chairman of the committee. Our
compensation committee assists our board of directors in the
discharge of its responsibilities relating to the compensation
of our executive officers. The compensation committee’s
responsibilities include:
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reviewing and approving, or making recommendations to our board
of directors with respect to, our chief executive officer’s
compensation;
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evaluating the performance of our executive officers and
reviewing and approving, or making recommendations to the board
of directors with respect to, the compensation of our other
executive officers;
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overseeing and administering, and making recommendations to our
board of directors with respect to, our cash and equity
incentive plans;
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•
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granting equity awards pursuant to authority delegated by our
board of directors;
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reviewing, and making recommendations to our board of directors
with respect to, director compensation; and
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preparing the compensation committee reports required by SEC
rules.
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66
Nominating
and Corporate Governance Committee
The members of our nominating and corporate governance committee
are Messrs. Anderson, Gallagher and Kaiser.
Mr. Anderson is the chairman of the committee. The
nominating and corporate governance committee’s
responsibilities include:
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recommending to our board of directors the persons to be
nominated for election as directors or to fill vacancies on our
board of directors, and to be appointed to each of the
board’s committees;
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overseeing an annual review by our board of directors with
respect to management succession planning;
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developing and recommending to our board of directors corporate
governance principles and guidelines; and
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overseeing periodic evaluations of our board of directors.
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Compensation
Committee Interlocks and Insider Participation
None of our executive officers serves, or served during the year
ended December 31, 2006, as a member of the board of directors
or compensation committee, or other committee serving an
equivalent function, of any entity that has one or more
executive officers who serve as members of our board of
directors or our compensation committee. None of the members of
our compensation committee is an officer or employee of our
company, nor have they ever been an officer or employee of our
company.
Code of
Business Conduct and Ethics
We will adopt a code of business conduct and ethics that applies
to all of our employees, officers and directors, including those
officers responsible for financial reporting. The code of
business conduct and ethics will be available on our website at
www.constantcontact.com. Any amendments to the code, or any
waivers of its requirements, will be disclosed on our website.
Director
Compensation
During the year ended December 31, 2006, none of our directors
received any compensation for service as a member of our board
of directors or board committees. Non-employee directors are
reimbursed reasonable travel and other expenses incurred in
connection with attending our board and committee meetings.
The following table sets forth information regarding
compensation earned by each non-employee director during the
year ended December 31, 2006.
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Option Awards
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Total
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Name
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($)
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($)
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John Campbell
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–
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–
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Michael T. Fitzgerald
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–
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–
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Patrick Gallagher
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–
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–
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William S. Kaiser
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–
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–
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Nataly Kogan(1)
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–
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–
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James Savage(1)
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–
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–
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Paul L. Schaut(2)
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$
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311
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(3)
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$
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311
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(1)
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Ms. Kogan and Mr. Savage each
resigned from our board of directors on May 12, 2006.
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(2)
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Mr. Schaut resigned from our board
of directors on May 6, 2007. As of December 31, 2006,
Mr. Schaut held options to purchase an aggregate of
49,757 shares of our common stock. In January 2007, he
exercised options to purchase 49,172 shares of our common
stock.
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(3)
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Valuation of these option awards is
based on the dollar amount of share based compensation that
would have been recognized for financial statement reporting
purposes in 2006 computed in accordance with SFAS 123R,
excluding the impact of estimated forfeitures related to
service-based vesting conditions (which in our case were none),
had we used the modified prospective transition method pursuant
to SFAS 123R. Under the modified prospective transition
method, a portion of the grant date fair value determined under
SFAS 123 of equity awards that are outstanding on
January 1, 2006, the date we adopted SFAS 123R, is
recognized over the awards’ remaining vesting periods. This
amount would have been $311 for Mr. Schaut. The assumptions
used by us with respect to the valuation of option awards are
the same as those set forth in Note 6 to our financial
statements included elsewhere in this prospectus.
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In January 2007, in connection with his initial appointment to
our board of directors, we granted Mr. Anderson an option
to purchase 39,000 shares of our common stock, at an
exercise price of $3.05 per share, which was the fair market
value of our common stock on the date of grant as determined by
our board of directors. These options will vest over a two-year
period, with 12.5% of the shares underlying the option vesting
on the three-month anniversary of the date of grant and an
additional 12.5% of the shares underlying the option vesting
each three months thereafter, subject to
Mr. Anderson’s continued service as a director and, in
the event of a change of control of us, the vesting schedule of
these options will accelerate in full.
In June 2007, in connection with his initial appointment to our
board of directors, we granted Mr. Badavas an option to
purchase 39,000 shares of our common stock, at an exercise
price of $6.89 per share, which was the fair market value of our
common stock on the date of grant as determined by our board of
directors. These options will vest over a two-year period, with
12.5% of the shares underlying the option vesting on the
three-month anniversary of the date of grant and an additional
12.5% of the shares underlying the option vesting each three
months thereafter, subject to Mr. Badavas’s continued
service as a director and, in the event of a change of control
of us, the vesting schedule of these options will accelerate in
full.
In August 2007, our board of directors approved a
compensation program, which will become effective upon the
closing of this offering, pursuant to which we will pay each
non-employee director an annual retainer of $20,000 for service
as a director. Each non-employee director other than committee
chairpersons will receive an additional annual fee of $5,000 for
service on the audit committee, $3,750 for service on the
compensation committee and $2,500 for service on the nominating
and corporate governance committee. The chairman of the audit
committee will receive an additional annual retainer of $10,000,
the chairman of the compensation committee will receive an
additional annual retainer of $7,500 and the chairman of the
nominating and corporate governance committee will receive an
additional annual retainer of $5,000. We will reimburse each
non-employee member of our board of directors for out-of-pocket
expenses incurred in connection with attending our board and
committee meetings.
In addition, pursuant to our 2007 stock incentive plan each
non-employee director will receive an option to purchase
25,000 shares of our common stock upon his or her initial
appointment to our board of directors. Each non-employee
director will also receive an annual option grant to purchase
10,000 shares of our common stock at each annual meeting
after which he or she continues to serve as a director, provided
each such non-employee director has served on our board of
directors for at least six months. All of these options will
vest over a three-year period, with 33.33% of the shares
underlying the option vesting on the first anniversary of the
date of grant, or in the case of annual option grants one
business day prior to the next annual meeting, if earlier, and
an additional 8.33% of the shares underlying the option vesting
each three months thereafter, subject to the non-employee
director’s continued service as a director. The exercise
price of these options will equal the fair market value of our
common stock on the date of grant. In the event of a change of
control of us, the vesting schedule of these options will
accelerate in full.
Executive
Compensation
Compensation
Discussion and Analysis
Overview
Our historical executive compensation programs were developed
and implemented by our board of directors and compensation
committee while we were a private company. Prior to 2005, our
compensation programs,
68
and the process by which they were developed, were less formal
than that typically employed by a public company. During this
time, our board of directors generally benchmarked our executive
compensation on an informal basis by comparing the compensation
of our executives to the compensation of executives employed in
the portfolio companies of certain of our board members’
venture capital firms. Over the last two years, however, the
board of directors and the compensation committee began to
formalize their approach to the development of our executive
compensation programs. The process became more formalized for
three primary reasons. First, our size and the growth and
sophistication of our executive team required that the board of
directors become more rigorous in its review of executive
compensation. Second, as we grew, the compensation of the
executives employed in the portfolio companies of some of our
board members’ venture capital firms became less meaningful
for benchmarking purposes because many of the companies were
smaller than us and were in earlier stages of their development.
Finally, while in late 2005 we were not yet contemplating a
public offering, the board of directors recognized that if we
wished to conduct a public offering in the future our executive
compensation programs would need to meet the standards typically
associated with the compensation programs of public companies.
In establishing executive compensation levels for 2006, the
compensation committee reviewed published market surveys to
provide current information regarding the competitiveness of our
total cash compensation, which included base salaries and target
bonuses. The compensation committee used these market surveys to
compare the total cash compensation of the survey group in the
50th percentile to total cash compensation of our positions
that matched positions in the survey group. Based on these
surveys, three of our named executive officers (Mr. Groves
(-4%), Mr. Howd (-14%) and Mr. Turcott (-3%)) were
below the median, one of our named executive officers
(Mr. Richards) was at the median, and two of our named
executive officers (Ms. Goodman (3%) and Mr. Wasserman
(5%)) were above the median. The compensation committee reviewed
this information and determined that the target total cash
compensation for the following executive officers be set as
follows: Ms. Goodman, $325,000, Mr. Howd, $200,000,
Mr. Richards, $200,000, and Mr. Turcott $225,000.
These increases represented an increase in target total cash
compensation to these officers of 12%. Due to
Mr. Wasserman’s recent commencement of employment with
us in December of 2005 and Mr. Groves’ high target
incentive, the compensation committee decided that no cash
compensation increases were warranted for these executive
officers.
For 2007 executive compensation determinations, the compensation
committee engaged an independent compensation consultant,
DolmatConnell & Partners, to review and evaluate the
elements of our executive compensation program, including base
salaries, target bonus percentages and equity ownership. As part
of this evaluation, DolmatConnell developed a specific peer
group of private and public software and technology companies
with annual revenue less than $60 million to provide a
comparative basis for our compensation practices and established
base salary, bonus and long-term equity guidelines for our
executives. DolmatConnell then compared the total cash
compensation of the peer group in the 50th percentile to
total cash compensation of our positions that matched positions
in the survey group. Based on this analysis, four of our named
executive officers (Ms. Goodman (-26%), Mr. Groves
(-9%), Mr. Richards (-15%) and Mr. Wasserman (-26%))
were below the median, and one of our named executive officers
(Mr. Howd (1%)) was above the median. The compensation
committee reviewed this information and determined that the
target total cash compensation for the following executive
officers be set as follows: Ms. Goodman, $400,000,
Mr. Groves, $280,000, Mr. Howd, $230,000,
Mr. Richards, $218,750, and Mr. Wasserman $250,000.
These increases represented an increase in target total cash
compensation to these officers of 16%.
Other than our retention of DolmatConnell in late 2006, we have
not retained any other compensation consultant to review our
policies and procedures relating to executive compensation. In
the future, we expect that our compensation committee will
continue to engage a compensation consulting firm to provide
advice and resources.
Objectives
and Philosophy of Our Executive Compensation Programs
Our compensation committee’s primary objectives with
respect to executive compensation are to:
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attract, retain and motivate the best possible executive talent;
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ensure executive compensation is aligned with our corporate
strategies and business objectives;
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promote the achievement of key financial and strategic
performance measures by linking short- and long-term cash and
equity incentives to the achievement of measurable corporate
and, in some cases, individual performance goals; and
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align the incentives of our executives with the creation of
value for our stockholders.
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Our compensation committee expects to continue to implement and
maintain compensation plans to achieve these objectives. Our
compensation plans and policies currently, and we expect will
continue to, compensate executive officers with a combination of
base salary, quarterly cash incentive bonuses, equity incentives
and customary employee benefits. Historically, quarterly cash
incentive bonuses have been tied to key financial metrics such
as average monthly revenue growth, cash flow and earnings before
interest, taxes, depreciation and amortization, or EBITDA, and,
in the case of certain of our executive officers, the
achievement of individual quarterly performance objectives. We
have provided, and expect to continue providing, a portion of
our executive compensation in the form of equity incentive
awards that vest over time, which we believe helps to retain our
executives and aligns their interests with those of our
stockholders by allowing them to participate in the longer term
success of our company as reflected in stock price appreciation.
We intend to implement compensation packages for our executive
officers generally in line with the median competitive levels of
comparable public companies, with potential upside for better
than planned performance.
Components
of Our Executive Compensation Program
The primary elements of our executive compensation program are:
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base salary;
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quarterly cash incentive bonuses;
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equity incentive awards; and
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benefits and other compensation.
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We have not had any formal or informal policy or target for
allocating compensation between long-term and short-term
compensation, between cash and non-cash compensation or among
the different forms of non-cash compensation. Instead, our
compensation committee has established these allocations for
each executive officer on an annual basis. Our compensation
committee establishes cash compensation targets based primarily
upon benchmarking data as well as the performance of the
individual executive. Our compensation committee establishes
non-cash compensation based upon benchmarking data, the
performance of the individual executive, the executives’
equity ownership percentage and the amount of their equity
ownership that is vested equity. In the future, we expect that
our compensation committee will continue to use benchmarking
data for cash compensation as well as provide the executives
with annual equity grants. We believe that the long-term
performance of our business is improved through the grant of
stock-based awards so that the interests of our executives are
aligned with the creation of value for our stockholders.
Base Salaries. Base salaries are used to recognize the
experience, skills, knowledge and responsibilities required of
all our employees, including our executive officers. Base
salaries for our executives have sometimes been set in our offer
letter to the executive at the outset of employment, which is
the case with Ms. Goodman and Mr. Wasserman. None of
our executives is currently party to an employment agreement
that provides for automatic or scheduled increases in base
salary. However, from time to time in the discretion of our
compensation committee, and consistent with our incentive
compensation program objectives, base salaries for our
executives, together with other components of compensation, are
evaluated for adjustment based on an assessment of an
executive’s performance and general compensation trends in
our industry.
In establishing base salaries for our named executive officers
for 2006, our compensation committee took into account a number
of factors, including each named executive’s position and
functional role, seniority, job performance and overall level of
responsibility and the benchmarking data. In 2006, the base
salaries of Mr. Howd and Mr. Turcott were increased by
11% and 6%, respectively. Our compensation committee determined
that Mr. Howd had performed well over several years, ran
his organization efficiently and
70
effectively, and that the performance of his organization was
contributing to our high level of customer satisfaction. Our
compensation committee also determined that the size of
Mr. Howd’s organization added significant complexity
to his role. Our compensation committee determined to increase
Mr. Howd’s base salary to $150,000, which placed him
6% below the median of the benchmarked group. Our compensation
committee determined that Mr. Turcott had performed well in
his first year and had employed marketing programs that
increased our revenue. Our compensation committee determined to
increase Mr. Turcott’s base salary to $165,000, which
placed him 3% below the median of the benchmarked group. Our
compensation committee also reviewed the performance of
Ms. Goodman and Mr. Groves. Although our compensation
committee determined that Ms. Goodman and Mr. Groves
had performed well, it did not increase their base salaries.
This decision was made, in part, because each executive’s
base salary was above the median of the benchmarked group.
Mr. Wasserman’s performance was not reviewed because
his employment commenced in December 2005.
In establishing base salaries for our named executive officers
for 2007, our compensation committee reviewed a number of
factors, including each named executive’s position and
functional role, seniority, job performance and overall level of
responsibility and the benchmarking data and information
provided by DolmatConnell. In 2007, the base salaries of
Ms. Goodman, Mr. Howd and Mr. Richards and
Mr. Wasserman were increased by 10%, 18%, 17% and 17%,
respectively. Our compensation committee determined that
Ms. Goodman had performed well as she continued to drive
the strategy that expanded the company’s market leadership
position. Our compensation committee determined to increase
Ms. Goodman’s base salary to $275,900, which placed
her 2% below the median of the benchmarked group. Our
compensation committee determined that Mr. Howd had
performed well in 2006, effectively scaling his organization to
serve our large growth in the number of customers and at the
same time helping to maintain our high level of customer
satisfaction. Our compensation committee determined to increase
Mr. Howd’s base salary to $176,900, which placed him
11% above the median of the benchmarked group. Our compensation
committee believed that the scope and breadth of
Mr. Howd’s role was broader and more strategic than a
typical executive in his role and, as a result, increased his
base salary substantially close to the 75th percentile of the
benchmarked group. Our compensation committee determined that
Mr. Richards had performed well in 2006. His organization
added significant functionality to our software and kept the
availability of our software product at very high levels, while
we continued to add a large number of customers. Our
compensation committee determined to increase
Mr. Richards’ base salary to $175,000, which placed
him 6% below the median of the benchmarked group. Our
compensation committee determined that Mr. Wasserman had
performed well in his first year, building his organization,
raising capital on favorable terms and helping to prepare the
company, from a systems and processes perspective, for rapid
growth and a possible future initial public offering. Our
compensation committee increased Mr. Wasserman’s base
salary to $192,300, which placed him 6% below the median of the
benchmarked group. Our compensation committee also reviewed the
performance of Mr. Groves. While our compensation committee
determined that Mr. Groves had performed well, it did not
increase his base salary, in part, because his base salary was
already 1% above the median of the benchmarked group. Our
compensation committee, however, increased Mr. Groves’
target incentive percentage from 30% to 40%. The increase in
Mr. Groves’ target incentive provided Mr. Groves
with cash compensation upside but only if we achieved our
financial targets. Our compensation committee felt that this
better aligned the interests of Mr. Groves with those of
our stockholders.
Cash Incentive Bonuses. Each year, including the years
2006 and 2007, we have established a cash incentive bonus plan
for our executives, which provides for quarterly cash incentive
bonus payments. The cash incentive bonuses are intended to
compensate for the achievement of both company strategic and
financial targets and, in the case of some executive officers,
individual performance goals. Amounts payable under the cash
incentive bonus plan are calculated as a percentage of the
applicable executive’s base salary. The corporate financial
targets are weighted 70% and the individual objectives are
weighted 30% in the bonus analysis, except that the corporate
financial targets were weighted 100% for Ms. Goodman and
Messrs. Groves and Turcott in 2006, and are weighted 100%
for Ms. Goodman in 2007. The corporate financial targets
generally conform to the financial metrics contained in the
internal business plan adopted by our board of directors. In
2006, the financial metrics were average monthly revenue growth
and cash flow. The actual average monthly revenue growth targets
for each quarter of 2006 were as follows: $84,487 for the first
quarter, $124,595 for
71
the second quarter, $103,500 for the third quarter and $172,200
for the fourth quarter. The actual quarterly cash flow targets
for 2006 were as follows: $(1,191,604) for the first quarter,
$(1,355,479) for the second quarter, $(739,200) for the third
quarter and $(3,630,300) for the fourth quarter. In 2007, the
financial metrics are average monthly revenue growth and EBITDA.
In both 2006 and 2007, 90% of the portion of the bonus payout
related to corporate financial targets is based on the average
monthly revenue growth metric. In 2006, bonus payments based on
average monthly revenue growth were paid out based on achieving
a minimum target of at least 80% or 90% depending on the quarter
with accelerators for achievement beginning at 115% or 120%
depending on the quarter. In 2007, the minimum threshold for
achievement is identical to 2006 levels with similar
accelerators. Bonus payments based on cash flow and EBITDA
targets are paid out only if the target metric is achieved.
Individual objectives are necessarily tied to the particular
area of expertise of the employee and his or her performance in
attaining those objectives relative to external forces, internal
resources utilized and overall individual effort. The
compensation committee approves the corporate financial targets,
the weighting of various goals for each executive and the
formula for determining potential bonus amounts based on
achievement of those goals. Ms. Goodman sets the individual
performance goals for the executives. The compensation committee
works with the chief executive officer to develop corporate
financial targets and individual performance goals. The targets
and goals are generally designed to be difficult to fully
achieve and, as was the case in 2006, we do not expect that all
of the goals will be achieved in all periods.
The target bonus awards, as a percentage of base salary, for
2006 were 30% for Ms. Goodman and Mr. Groves, 33% for
Mr. Howd and Mr. Richards, 36% for Mr. Turcott, and
24% for Mr. Wasserman. The target cash incentive bonuses
awarded with respect to 2006 and set forth in the 2006 Summary
Compensation Table below were split 15%, 25%, 25% and 35% for
each of the four quarters respectively.
The table below reflects for each named executive officer
(i) the 2006 quarterly target incentive for each
performance based compensation element, (ii) the 2006 total
quarterly target incentives, (iii) the actual 2006
quarterly incentive payments for each performance based
compensation element based on achievement levels, and
(iv) the actual 2006 total quarterly incentive payments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
|
Target
|
|
|
Target
|
|
|
Total
|
|
|
Actual
|
|
|
Actual
|
|
|
Actual
|
|
|
Total
|
|
|
|
AMRG (1)
|
|
|
Cash Flow
|
|
|
MBO (2)
|
|
|
Target
|
|
|
AMRG (1)
|
|
|
Cash Flow
|
|
|
MBO (2)
|
|
|
Actual
|
|
|
|
Incentive
|
|
|
Incentive
|
|
|
Incentive
|
|
|
Incentive
|
|
|
Incentive
|
|
|
Incentive
|
|
|
Incentive
|
|
|
Incentive
|
|
|
Ms. Goodman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 2006
|
|
$
|
10,125
|
|
|
$
|
1,125
|
|
|
$
|
–
|
|
|
$
|
11,250
|
|
|
$
|
10,733
|
|
|
$
|
1,193
|
|
|
$
|
–
|
|
|
$
|
11,926
|
|
Q2 2006
|
|
$
|
16,875
|
|
|
$
|
1,875
|
|
|
$
|
–
|
|
|
$
|
18,750
|
|
|
$
|
14,850
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
14,850
|
|
Q3 2006
|
|
$
|
16,875
|
|
|
$
|
1,875
|
|
|
$
|
–
|
|
|
$
|
18,750
|
|
|
$
|
16,538
|
|
|
$
|
1,838
|
|
|
$
|
–
|
|
|
$
|
18,376
|
|
Q4 2006
|
|
$
|
23,625
|
|
|
$
|
2,625
|
|
|
$
|
–
|
|
|
$
|
26,250
|
|
|
$
|
21,971
|
|
|
$
|
2,625
|
|
|
$
|
–
|
|
|
$
|
24,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Groves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 2006
|
|
$
|
8,100
|
|
|
$
|
900
|
|
|
$
|
–
|
|
|
$
|
9,000
|
|
|
$
|
8,586
|
|
|
$
|
954
|
|
|
$
|
–
|
|
|
$
|
9,540
|
|
Q2 2006
|
|
$
|
13,500
|
|
|
$
|
1,500
|
|
|
$
|
–
|
|
|
$
|
15,000
|
|
|
$
|
11,880
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
11,880
|
|
Q3 2006
|
|
$
|
13,500
|
|
|
$
|
1,500
|
|
|
$
|
–
|
|
|
$
|
15,000
|
|
|
$
|
13,230
|
|
|
$
|
1,470
|
|
|
$
|
–
|
|
|
$
|
14,700
|
|
Q4 2006
|
|
$
|
18,900
|
|
|
$
|
2,100
|
|
|
$
|
–
|
|
|
$
|
21,000
|
|
|
$
|
17,577
|
|
|
$
|
2,100
|
|
|
$
|
–
|
|
|
$
|
19,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Howd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 2006
|
|
$
|
4,725
|
|
|
$
|
525
|
|
|
$
|
2,250
|
|
|
$
|
7,500
|
|
|
$
|
5,009
|
|
|
$
|
557
|
|
|
$
|
2,385
|
|
|
$
|
7,951
|
|
Q2 2006
|
|
$
|
7,875
|
|
|
$
|
875
|
|
|
$
|
3,750
|
|
|
$
|
12,500
|
|
|
$
|
6,930
|
|
|
$
|
–
|
|
|
$
|
3,750
|
|
|
$
|
10,680
|
|
Q3 2006
|
|
$
|
7,875
|
|
|
$
|
875
|
|
|
$
|
3,750
|
|
|
$
|
12,500
|
|
|
$
|
7,718
|
|
|
$
|
875
|
|
|
$
|
3,750
|
|
|
$
|
12,343
|
|
Q4 2006
|
|
$
|
11,025
|
|
|
$
|
1,225
|
|
|
$
|
5,250
|
|
|
$
|
17,500
|
|
|
$
|
10,253
|
|
|
$
|
1,225
|
|
|
$
|
5,250
|
|
|
$
|
16,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Richards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 2006
|
|
$
|
4,725
|
|
|
$
|
525
|
|
|
$
|
2,250
|
|
|
$
|
7,500
|
|
|
$
|
5,009
|
|
|
$
|
557
|
|
|
$
|
2,027
|
|
|
$
|
7,593
|
|
Q2 2006
|
|
$
|
7,875
|
|
|
$
|
875
|
|
|
$
|
3,750
|
|
|
$
|
12,500
|
|
|
$
|
6,930
|
|
|
$
|
–
|
|
|
$
|
3,750
|
|
|
$
|
10,680
|
|
Q3 2006
|
|
$
|
7,875
|
|
|
$
|
875
|
|
|
$
|
3,750
|
|
|
$
|
12,500
|
|
|
$
|
7,718
|
|
|
$
|
875
|
|
|
$
|
2,625
|
|
|
$
|
11,218
|
|
Q4 2006
|
|
$
|
11,025
|
|
|
$
|
1,225
|
|
|
$
|
5,250
|
|
|
$
|
17,500
|
|
|
$
|
10,253
|
|
|
$
|
1,225
|
|
|
$
|
4,594
|
|
|
$
|
16,072
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
|
Target
|
|
|
Target
|
|
|
Total
|
|
|
Actual
|
|
|
Actual
|
|
|
Actual
|
|
|
Total
|
|
|
|
AMRG (1)
|
|
|
Cash Flow
|
|
|
MBO (2)
|
|
|
Target
|
|
|
AMRG (1)
|
|
|
Cash Flow
|
|
|
MBO (2)
|
|
|
Actual
|
|
|
|
Incentive
|
|
|
Incentive
|
|
|
Incentive
|
|
|
Incentive
|
|
|
Incentive
|
|
|
Incentive
|
|
|
Incentive
|
|
|
Incentive
|
|
|
Mr. Turcott
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 2006
|
|
$
|
8,100
|
|
|
$
|
900
|
|
|
$
|
–
|
|
|
$
|
9,000
|
|
|
$
|
8,586
|
|
|
$
|
954
|
|
|
$
|
–
|
|
|
$
|
9,540
|
|
Q2 2006
|
|
$
|
13,500
|
|
|
$
|
1,500
|
|
|
$
|
–
|
|
|
$
|
15,000
|
|
|
$
|
11,880
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
11,880
|
|
Q3 2006
|
|
$
|
13,500
|
|
|
$
|
1,500
|
|
|
$
|
–
|
|
|
$
|
15,000
|
|
|
$
|
13,230
|
|
|
$
|
1,470
|
|
|
$
|
–
|
|
|
$
|
14,700
|
|
Q4 2006
|
|
$
|
18,900
|
|
|
$
|
2,100
|
|
|
$
|
–
|
|
|
$
|
21,000
|
|
|
$
|
17,577
|
|
|
$
|
2,100
|
|
|
$
|
–
|
|
|
$
|
19,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Wasserman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 2006
|
|
$
|
3,780
|
|
|
$
|
420
|
|
|
$
|
1,800
|
|
|
$
|
6,000
|
|
|
$
|
4,007
|
|
|
$
|
445
|
|
|
$
|
1,908
|
|
|
$
|
6,360
|
|
Q2 2006
|
|
$
|
6,300
|
|
|
$
|
700
|
|
|
$
|
3,000
|
|
|
$
|
10,000
|
|
|
$
|
5,544
|
|
|
|
|
|
|
$
|
3,000
|
|
|
$
|
8,544
|
|
Q3 2006
|
|
$
|
6,300
|
|
|
$
|
700
|
|
|
$
|
3,000
|
|
|
$
|
10,000
|
|
|
$
|
6,174
|
|
|
$
|
700
|
|
|
$
|
3,000
|
|
|
$
|
9,874
|
|
Q4 2006
|
|
$
|
8,820
|
|
|
$
|
980
|
|
|
$
|
4,200
|
|
|
$
|
14,000
|
|
|
$
|
8,203
|
|
|
$
|
980
|
|
|
$
|
4,200
|
|
|
$
|
13,383
|
|
|
|
|
(1) |
|
AMRG = Average Monthly Revenue Growth |
|
|
|
(2) |
|
MBOs = Individual Performance goals |
In 2006, the total annual bonus payment as a percentage of the
total annual target bonus and the total annual bonus payment as
a percentage of annual salary for each named executive officer
were as follows: Ms. Goodman (93% and 28%); Mr. Groves
(93% and 28%); Mr. Howd (95% and 32%); Mr. Richards
(91% and 30%); Mr. Turcott (93% and 34%); and
Mr. Wasserman (95% and 23%).
In December 2006, our compensation committee approved the target
bonus awards for 2007 for our named executive officers. The
target bonus awards, as a percentage of base salary, for 2007
are 45% for Ms. Goodman, 40% for Mr. Groves, 30% for
Mr. Howd, 25% for Mr. Richards and 30% for
Mr. Wasserman. As described in the “Overview”
section above, the compensation committee determined the target
total cash compensation of each named executive officer after
reviewing and considering the evaluation prepared by our
independent compensation consultant, DolmatConnell. Once the
compensation committee established 2007 base salaries for each
named executive officer, the target bonus awards, as a
percentage of base salary, were set to bring each named
executive officer’s total target cash compensation to the
approved level. Target bonus awards for 2007 are paid out
quarterly at the rate of 15%, 25%, 25% and 35% for each of the
four quarters respectively.
Equity Incentive Awards. Our equity award program is the
primary vehicle for offering long-term incentives to our
executives. Prior to this offering, our employees, including our
executives, were eligible to participate in our 1999 Stock
Option/Stock Issuance Plan. Following the completion of this
offering, we will continue to grant our employees, including our
executives, stock-based awards pursuant to the 2007 Stock
Incentive Plan, which will become effective upon the completion
of this offering. Under the 2007 Stock Incentive Plan, our
employees, including our executives, will be eligible to receive
grants of stock options, restricted stock awards, and other
stock-based equity awards at the discretion of our compensation
committee.
Although we do not have any formal equity ownership guidelines
for our executives, we believe that equity grants provide our
executives with a strong link to our long-term performance,
create an ownership culture and help to align the interests of
our executives and our stockholders. In addition, we believe the
vesting feature of our equity grants furthers our goal of
executive retention because this feature provides an incentive
to our executives to remain in our employment during the vesting
period. In determining the size of equity grants to our
executives, our compensation committee considers comparative
share ownership of executives in our compensation peer group,
our company-level performance, the applicable executive’s
performance, the amount of equity previously awarded to the
executive, the vesting of such awards and the recommendations of
management.
We typically make an initial equity award of stock options or
restricted stock to new executives in connection with the start
of their employment. Grants of equity awards, including those to
executives, are all approved by our board of directors or our
compensation committee and are granted based on the fair market
value of our common stock. Historically, the equity awards we
have granted to our executives have vested as to 25% of such
73
awards at the end of the first year and in equal quarterly
installments over the succeeding three years. This vesting
schedule is consistent with the vesting of stock options granted
to other employees. In 2006, following the recommendation of our
compensation committee, our board of directors approved new
equity awards to reestablish or bolster incentives to retain
employees, including executives who had been with us for a
significant time. In determining the equity awards for each of
the executives set forth on the 2006 Grants of Plan-Based Awards
table below, our board of directors took into account company
performance, the applicable executive’s performance and,
for the December 2006 grant, the equity guidelines recommended
by DolmatConnell. In February 2006, our board of directors
determined that overall company performance had been strong in
2005 and that Ms. Goodman, Mr. Groves, Mr. Howd,
Mr. Richards and Mr. Turcott had performed well. In
making these grants, our board of directors also considered the
portion of the prior equity grants that had not yet vested, and
their value as a retention tool. In the case of
Ms. Goodman, Mr. Groves, Mr. Howd and
Mr. Richards, a large portion of their prior option grants
had already vested. As a result, in February 2006, our board of
directors granted options to Ms. Goodman, Mr. Groves,
Mr. Howd and Mr. Richards to purchase 13,000, 13,000,
45,500 and 19,500 shares of common stock, respectively. The
exercise price of these options is $1.09 per share, which was
the fair market value of our common stock on the date of grant.
In December 2006, our board of directors determined that the
overall 2006 company performance had been strong. Our board of
directors also determined that Mr. Groves, Mr. Howd,
Mr. Richards and Mr. Wasserman had performed well and
in particular, Ms. Goodman had performed particularly well.
While reviewing the equity guidelines recommended by
DolmatConnell, our board of directors noted that
Mr. Wasserman’s equity ownership position was below
the 50th percentile for financial executives at the peer
companies. As a result, in December 2006, our board of directors
granted options to Ms. Goodman, Mr. Groves,
Mr. Howd, Mr. Richards and Mr. Wasserman to
purchase 117,000, 19,500, 26,000, 19,500 and 39,000 shares of
common stock, respectively. The exercise price of these options
is $3.05 per share, which was the fair market value of our
common stock on the date of grant. The increase in options
granted to Ms. Goodman in December as compared to the grant
in February was to reward her for her very strong performance
throughout 2006. The 39,000 share grant to
Mr. Wasserman was made to reward his performance and bring
him closer to the 50th percentile for financial executives at
the peer companies. At the discretion of our compensation
committee, we expect to continue to approve annually new equity
awards to certain of our employees and executives consistent
with our overall incentive compensation program objectives.
We do not currently have a program, plan or practice of
selecting grant dates for equity compensation to our executive
officers in coordination with the release of material non-public
information. Equity award grants are made from time to time in
the discretion of our board of directors or compensation
committee consistent with our incentive compensation program
objectives. It is anticipated that following the completion of
this offering, our board of directors will consider implementing
a grant date policy for our executive officers.
Benefits and Other Compensation. We maintain broad-based
benefits that are provided to all employees, including health
and dental insurance, life and disability insurance, a 401(k)
plan, an employee assistance program, maternity and paternity
leave plans and standard company holidays. Our executive
officers are eligible to participate in all of our employee
benefit plans, in each case on the same basis as other
employees, except that we pay for parking for our executive
officers.
Tax
Considerations
Section 162(m) of the Internal Revenue Code of 1986, as
amended, generally disallows a tax deduction for compensation in
excess of $1.0 million paid to our chief executive officer
and our four other most highly paid executive officers.
Qualifying performance-based compensation is not subject to the
deduction limitation if specified requirements are met. We
periodically review the potential consequences of
Section 162(m) and we generally intend to structure the
performance-based portion of our executive compensation, where
feasible, to comply with exemptions in Section 162(m) so
that the compensation remains tax deductible to us. However, the
compensation committee may, in its judgment, authorize
compensation payments that do not comply with the exemptions in
Section 162(m) when it believes that such payments are
appropriate to attract and retain executive talent.
74
2006
Summary Compensation Table
The following table sets forth information regarding
compensation earned by our president and chief executive
officer, our vice president and chief financial officer, each of
our three other most highly compensated executive officers and a
former executive officer during the year ended December 31,
2006. We refer to these executive officers as our “named
executive officers” elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
Option
|
|
Incentive Plan
|
|
All Other
|
|
|
|
|
Salary
|
|
Awards
|
|
Compensation
|
|
Compensation
|
|
Total
|
Name and Principal Position
|
|
($)
|
|
($)(1)
|
|
($)(2)
|
|
($)(3)
|
|
($)
|
|
Gail F. Goodman
|
|
$
|
250,000
|
|
|
$
|
13,352
|
|
|
$
|
69,748
|
|
|
$
|
840
|
|
|
$
|
333,940
|
|
President and Chief Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven R. Wasserman
|
|
$
|
165,000
|
|
|
$
|
1,295
|
|
|
$
|
38,161
|
|
|
$
|
840
|
|
|
$
|
205,296
|
|
Vice President and Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eric S. Groves
|
|
$
|
200,000
|
|
|
$
|
5,191
|
|
|
$
|
55,797
|
|
|
$
|
840
|
|
|
$
|
261,828
|
|
Senior Vice President, Sales
and Business Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas C. Howd
|
|
$
|
150,000
|
|
|
$
|
9,235
|
|
|
$
|
47,702
|
|
|
$
|
840
|
|
|
$
|
207,777
|
|
Vice President,
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel A. Richards
|
|
$
|
150,000
|
|
|
$
|
5,256
|
|
|
$
|
45,563
|
|
|
$
|
840
|
|
|
$
|
201,659
|
|
Vice President,
Engineering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard H. Turcott(4)
|
|
$
|
165,000
|
|
|
$
|
3,297
|
|
|
$
|
55,797
|
|
|
$
|
88,310
|
(5)
|
|
$
|
312,404
|
|
Former Chief Marketing
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Valuation of these stock and option
awards is based, in part, on the dollar amount of share based
compensation recognized for financial statement reporting
purposes in 2006 computed in accordance with SFAS 123R,
excluding the impact of estimated forfeitures related to
service-based vesting conditions (which in our case were none).
We arrive at these amounts by taking the compensation cost for
these awards calculated under SFAS 123R on the date of
grant, and recognize this cost over the period in which the
named executive officer must provide services in order to earn
the award, typically four years. The reported amounts include
additional amounts that were not recognized for financial
statement reporting purposes in 2006, resulting from
requirements of the SEC to report in this summary compensation
table awards made prior to 2006 using the modified prospective
transition method pursuant to SFAS 123R. Under the modified
prospective transition method, a portion of the grant date fair
value determined under SFAS 123R of equity awards that are
outstanding on January 1, 2006, the date we adopted
SFAS 123R, is recognized over those awards’ remaining
vesting periods. This additional amount is $7,445 for
Ms. Goodman, $2,522 for Mr. Groves, $1,304 for
Mr. Howd, $1,577 for Mr. Richards and $1,275 for
Mr. Turcott. The assumptions used by us with respect to the
valuation of stock and option awards are the same as those set
forth in Note 6 to our financial statements included
elsewhere in this prospectus. The individual awards reflected in
the summary compensation table are further described below in
the table “2006 Grants of Plan-Based Awards.”
|
|
(2)
|
|
The amounts shown were paid during
2006 and in January 2007 to each of the named executive officers
for the achievement in 2006 of specified performance objectives
under our 2006 Executive Incentive Plan.
|
|
(3)
|
|
The amounts shown reflect life
insurance premiums and parking costs paid by us in 2006 on
behalf of each of the named executive officers.
|
|
(4)
|
|
Mr. Turcott resigned as our
Chief Marketing Officer in December 2006.
|
|
(5)
|
|
This amount includes a severance
payment of $82,500 paid to Mr. Turcott in January 2007 and
$4,970 for the costs of providing medical and dental benefits
for six months in connection with his resignation.
|
75
2006
Grants of Plan-Based Awards
The following table sets forth information regarding grants of
awards made to our named executive officers during the year
ended December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
|
Grant Date
|
|
|
|
|
Estimated Future Payouts Under
|
|
Number of
|
|
Exercise or
|
|
Fair Value
|
|
|
|
|
Non-Equity Incentive Plan Awards
|
|
Securities
|
|
Base Price of
|
|
of Option
|
|
|
Grant
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Underlying
|
|
Option Awards
|
|
Awards
|
Name
|
|
Date
|
|
($)
|
|
($)(1)
|
|
($)
|
|
Options (#)
|
|
($/share)(2)
|
|
($)(3)
|
|
Gail F. Goodman
|
|
|
–
|
|
|
|
–
|
|
|
$
|
75,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
2/9/06
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
13,000
|
|
|
$
|
1.09
|
|
|
$
|
9,100
|
|
|
|
|
12/7/06
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
117,000
|
|
|
$
|
3.05
|
|
|
$
|
226,880
|
|
Steven R. Wasserman
|
|
|
–
|
|
|
|
–
|
|
|
$
|
40,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
12/7/06
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
39,000
|
|
|
$
|
3.05
|
|
|
$
|
75,600
|
|
Eric S. Groves
|
|
|
–
|
|
|
|
–
|
|
|
$
|
60,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
2/9/06
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
13,000
|
|
|
$
|
1.09
|
|
|
$
|
9,100
|
|
|
|
|
12/7/06
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
19,500
|
|
|
$
|
3.05
|
|
|
$
|
37,800
|
|
Thomas C. Howd
|
|
|
–
|
|
|
|
–
|
|
|
$
|
50,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
2/9/06
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
45,500
|
|
|
$
|
1.09
|
|
|
$
|
31,850
|
|
|
|
|
12/7/06
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
26,000
|
|
|
$
|
3.05
|
|
|
$
|
50,400
|
|
Daniel A. Richards
|
|
|
–
|
|
|
|
–
|
|
|
$
|
50,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
2/9/06
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
19,500
|
|
|
$
|
1.09
|
|
|
$
|
13,650
|
|
|
|
|
12/7/06
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
19,500
|
|
|
$
|
3.05
|
|
|
$
|
37,800
|
|
Richard H. Turcott
|
|
|
–
|
|
|
|
–
|
|
|
$
|
60,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
2/9/06
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
13,000
|
|
|
$
|
1.09
|
|
|
$
|
9,100
|
|
|
|
|
(1)
|
|
Our 2006 Executive Incentive Plan
was approved by the compensation committee of the board of
directors on February 9, 2006 (with respect to the first
two quarters of 2006) and August 28, 2006 (with
respect to the final two quarters of 2006). For 2006, payouts
under the 2006 Executive Incentive Plan were contingent upon the
achievement of certain quarterly financial performance goals,
including average monthly revenue growth targets and cash flow
targets, and, with the exception of Ms. Goodman and
Messrs. Grove and Turcott, individual objectives. Thirty
percent of the potential payouts to Messrs. Howd, Richards
and Wasserman were contingent upon their ability to achieve
individual quarterly objectives determined in advance by
Ms. Goodman. There was no maximum payout under the 2006
Executive Incentive Plan.
|
|
|
|
(2)
|
|
In determining the exercise price
for the options granted to each of the named executive officers,
for option grants in the first quarter of 2006 our board of
directors utilized the guideline public company method and
considered a number of factors including peer group trading
multiples, the amount of preferred stock liquidation
preferences, the illiquid nature of our common stock, our small
size, our lack of historical profitability, our short-term cash
requirements and the redemption rights of our preferred
stockholders. For grants during the remainder of 2006, our board
of directors utilized the guideline public company method and
the discounted future cash flow method, which involves applying
appropriate discount rates to estimated cash flows that are
based on our forecasts of revenue, costs and capital. These
methodologies are then used to calculate four different
valuation outcomes, which were then probability weighted. The
possible outcomes considered were a sale of the company, an
initial public offering, dissolution and continuing operations
as a private company. For additional discussion of our
methodology for determining the fair value of our common stock,
see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Critical Accounting
Policies.”
|
|
|
|
(3)
|
|
Valuation of these options is based
on the aggregate dollar amount of share based compensation
recognized for financial statement reporting purposes computed
in accordance with SFAS 123R over the term of these
options, excluding the impact of estimated forfeitures related
to service-based vesting conditions (which in our case were
none). The assumptions used by us with respect to the valuation
of stock and option awards are set forth in Note 6 to our
financial statements included elsewhere in this prospectus.
|
76
2006
Outstanding Equity Awards at Fiscal Year End
The following table sets forth information regarding outstanding
option awards held by our named executive officers at
December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
Number of
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
Securities
|
|
|
|
|
|
Number of
|
|
Market Value
|
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
Shares or Units
|
|
of Shares or
|
|
|
Unexercised
|
|
Unexercised
|
|
Option
|
|
|
|
of Stock That
|
|
Units of Stock
|
|
|
Options
|
|
Options
|
|
Exercise
|
|
Option
|
|
Have Not
|
|
That Have Not
|
|
|
Exercisable
|
|
Unexercisable
|
|
Price
|
|
Expiration
|
|
Vested
|
|
Vested
|
Name
|
|
(#)
|
|
(#)
|
|
($)
|
|
Date
|
|
(#)
|
|
($)
|
|
Gail F. Goodman
|
|
|
5,200
|
(1)
|
|
|
–
|
|
|
$
|
36.15
|
|
|
|
6/7/2010
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
11,247
|
|
|
|
22,492
|
(2)
|
|
$
|
0.04
|
|
|
|
10/23/2013
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
19,243
|
|
|
|
86,591
|
(3)
|
|
$
|
0.06
|
|
|
|
2/10/2015
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
–
|
|
|
|
13,000
|
(4)
|
|
$
|
1.09
|
|
|
|
2/9/2016
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
–
|
|
|
|
117,000
|
(5)
|
|
$
|
3.05
|
|
|
|
12/7/2016
|
|
|
|
–
|
|
|
|
–
|
|
Steven R. Wasserman
|
|
|
–
|
|
|
|
39,000
|
(6)
|
|
$
|
3.05
|
|
|
|
12/7/2016
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
144,008
|
(7)
|
|
$
|
438,669
|
(8)
|
Eric S. Groves
|
|
|
2,925
|
(9)
|
|
|
–
|
|
|
$
|
41.54
|
|
|
|
12/7/2011
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
11,247
|
|
|
|
22,492
|
(10)
|
|
$
|
0.04
|
|
|
|
10/23/2013
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
6,483
|
|
|
|
29,171
|
(11)
|
|
$
|
0.06
|
|
|
|
2/10/2015
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
–
|
|
|
|
13,000
|
(12)
|
|
$
|
1.09
|
|
|
|
2/9/2016
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
–
|
|
|
|
19,500
|
(13)
|
|
$
|
3.05
|
|
|
|
12/7/2016
|
|
|
|
–
|
|
|
|
–
|
|
Thomas C. Howd
|
|
|
1,300
|
(14)
|
|
|
–
|
|
|
$
|
41.54
|
|
|
|
6/12/2011
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
4,459
|
(15)
|
|
|
–
|
|
|
$
|
1.54
|
|
|
|
9/7/2011
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
5,623
|
|
|
|
22,492
|
(16)
|
|
$
|
0.04
|
|
|
|
10/23/2013
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
1,688
|
|
|
|
15,182
|
(17)
|
|
$
|
0.06
|
|
|
|
2/10/2015
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
–
|
|
|
|
45,500
|
(18)
|
|
$
|
1.09
|
|
|
|
2/9/2016
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
–
|
|
|
|
26,000
|
(19)
|
|
$
|
3.05
|
|
|
|
12/7/2016
|
|
|
|
–
|
|
|
|
–
|
|
Daniel A. Richards
|
|
|
650
|
(20)
|
|
|
–
|
|
|
$
|
20.77
|
|
|
|
9/16/2009
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
650
|
(21)
|
|
|
–
|
|
|
$
|
20.77
|
|
|
|
1/12/2010
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
975
|
(22)
|
|
|
–
|
|
|
$
|
36.15
|
|
|
|
6/7/2010
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
9,924
|
(23)
|
|
|
–
|
|
|
$
|
1.54
|
|
|
|
9/7/2011
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
11,246
|
|
|
|
11,246
|
(24)
|
|
$
|
0.04
|
|
|
|
10/23/2013
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
14,759
|
|
|
|
18,978
|
(25)
|
|
$
|
0.06
|
|
|
|
2/10/2015
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
–
|
|
|
|
19,500
|
(26)
|
|
$
|
1.09
|
|
|
|
2/9/2016
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
–
|
|
|
|
19,500
|
(27)
|
|
$
|
3.05
|
|
|
|
12/7/2016
|
|
|
|
–
|
|
|
|
–
|
|
Richard H. Turcott
|
|
|
56,875
|
|
|
|
73,125
|
(28)
|
|
$
|
0.06
|
|
|
|
2/10/2015
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
–
|
|
|
|
13,000
|
(29)
|
|
$
|
1.09
|
|
|
|
2/9/2016
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
(1)
|
|
Our board of directors granted this
option to Ms. Goodman on December 7, 2000 and the
shares underlying such option were fully vested by
December 7, 2004.
|
|
|
|
(2)
|
|
Our board of directors granted this
option to Ms. Goodman on October 23, 2003. Twenty-five
percent of the shares underlying this option vested on
October 23, 2004 and the remaining 75% of the shares
underlying this option vest in 12 equal quarterly installments
beginning on January 23, 2005, subject to continued
employment. As of December 31, 2006, Ms. Goodman had
exercised a portion of this option to purchase
56,228 shares of common stock.
|
|
|
|
(3)
|
|
Our board of directors granted this
option to Ms. Goodman on February 10, 2005.
Twenty-five percent of the shares underlying this option vested
on February 10, 2006 and the remaining 75% of the shares
underlying this option vest in 12 equal quarterly installments
beginning on May 10, 2006, subject to continued employment.
As of December 31, 2006, Ms. Goodman had exercised a
portion of this option to purchase 48,105 shares of common
stock.
|
|
|
|
(4)
|
|
Our board of directors granted this
option to Ms. Goodman on February 9, 2006. Twenty-five
percent of the shares underlying this option vest on
February 9, 2007 and the remaining 75% of the shares
underlying this option vest in 12 equal quarterly installments
beginning on May 9, 2007, subject to continued employment.
|
|
(5)
|
|
Our board of directors granted this
option to Ms. Goodman on December 7, 2006. Twenty-five
percent of the shares underlying this option vest on
December 7, 2007 and the remaining 75% of the shares
underlying this option vest in 12 equal quarterly installments
beginning on March 7, 2008, subject to continued employment.
|
77
|
|
|
(6)
|
|
Our board of directors granted this
option to Mr. Wasserman on December 7, 2006.
Twenty-five percent of the shares underlying this option vest on
December 7, 2007 and the remaining 75% of the shares
underlying this option vest in 12 equal quarterly installments
beginning on March 7, 2008, subject to continued employment.
|
|
|
|
(7)
|
|
On December 8, 2005, our board
of directors granted to Mr. Wasserman the right to purchase
192,010 shares of restricted common stock for a purchase
price of $0.06 per share, which shares Mr. Wasserman
purchased. The restrictions on the shares lapsed as to 25% of
the shares on December 8, 2006 and the restrictions on the
remaining 75% of the shares lapse in 12 equal quarterly
installments beginning on March 8, 2007, subject to
continued employment.
|
|
|
|
(8)
|
|
There was no public market for our
common stock on December 31, 2006. This value was
determined by multiplying the number of restricted shares for
which the restrictions had not lapsed by the fair market value
of our common stock on December 31, 2006, or $3.05 per
share, as determined by our board of directors. For discussion
of our methodology for determining the fair value of our common
stock, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Critical
Accounting Policies.”
|
|
|
|
(9)
|
|
Our board of directors granted this
option to Mr. Groves on December 7, 2001 and the
shares underlying such option were fully vested by
December 7, 2005.
|
|
|
|
(10)
|
|
Our board of directors granted this
option to Mr. Groves on October 23, 2003. Twenty-five
percent of the shares underlying this option vested on
October 23, 2004 and the remaining 75% of the shares
underlying this option vest in 12 equal quarterly installments
beginning on January 23, 2005, subject to continued
employment. As of December 31, 2006, Mr. Groves had
exercised a portion of this option to purchase
56,227 shares of common stock.
|
|
|
|
(11)
|
|
Our board of directors granted this
option to Mr. Groves on February 10, 2005. Twenty-five
percent of the shares underlying this option vested on
February 10, 2006 and the remaining 75% of the shares
underlying this option vest in 12 equal quarterly installments
beginning on May 10, 2006, subject to continued employment.
As of December 31, 2006, Mr. Groves had exercised a
portion of this option to purchase 16,203 shares of common
stock.
|
|
|
|
(12)
|
|
Our board of directors granted this
option to Mr. Groves on February 9, 2006. Twenty-five
percent of the shares underlying this option vest on
February 9, 2007 and the remaining 75% of the shares
underlying this option vest in 12 equal quarterly installments
beginning on May 9, 2007, subject to continued employment.
|
|
(13)
|
|
Our board of directors granted this
option to Mr. Groves on December 7, 2006. Twenty-five
percent of the shares underlying this option vest on
December 7, 2007 and the remaining 75% of the shares
underlying this option vest in 12 equal quarterly installments
beginning on March 7, 2008, subject to continued employment.
|
|
(14)
|
|
Our board of directors granted this
option to Mr. Howd on June 12, 2001 and the shares
underlying such option were fully vested by June 12, 2005.
|
|
(15)
|
|
Our board of directors granted this
option to Mr. Howd on September 7, 2001 and the shares
underlying such option were fully vested by September 7,
2005.
|
|
|
|
(16)
|
|
Our board of directors granted this
option to Mr. Howd on October 23, 2003. Twenty-five
percent of the shares underlying this option vested on
October 23, 2004 and the remaining 75% of the shares
underlying this option vest in 12 equal quarterly installments
beginning on January 23, 2005, subject to continued
employment. As of December 31, 2006, Mr. Howd had
exercised a portion of this option to purchase
61,851 shares of common stock.
|
|
|
|
(17)
|
|
Our board of directors granted this
option to Mr. Howd on February 10, 2005. Twenty-five
percent of the shares underlying this option vested on
February 10, 2006 and the remaining 75% of the shares
underlying this option vest in 12 equal quarterly installments
beginning on May 10, 2006, subject to continued employment.
As of December 31, 2006, Mr. Howd had exercised a
portion of this option to purchase 10,120 shares of common
stock.
|
|
|
|
(18)
|
|
Our board of directors granted this
option to Mr. Howd on February 9, 2006. Twenty-five
percent of the shares underlying this option vest on
February 9, 2007 and the remaining 75% of the shares
underlying this option vest in 12 equal quarterly installments
beginning on May 9, 2007, subject to continued employment.
|
|
(19)
|
|
Our board of directors granted this
option to Mr. Howd on December 7, 2006. Twenty-five
percent of the shares underlying this option vest on
December 7, 2007 and the remaining 75% of the shares
underlying this option vest in 12 equal quarterly installments
beginning on March 7, 2008, subject to continued employment.
|
|
(20)
|
|
Our board of directors granted this
option to Mr. Richards on September 16, 1999 and the
shares underlying such option were fully vested by
September 16, 2003.
|
|
(21)
|
|
Our board of directors granted this
option to Mr. Richards on January 12, 2000 and the
shares underlying such option were fully vested by
January 12, 2004.
|
|
(22)
|
|
Our board of directors granted this
option to Mr. Richards on June 7, 2000 and the shares
underlying such option were fully vested by June 7, 2004.
|
|
(23)
|
|
Our board of directors granted this
option to Mr. Richards on September 7, 2001 and the
shares underlying such option were fully vested by
September 7, 2005.
|
|
|
|
(24)
|
|
Our board of directors granted this
option to Mr. Richards on October 23, 2003.
Twenty-five percent of the shares underlying this option vested
on October 23, 2004 and the remaining 75% of the shares
underlying this option vest in 12 equal quarterly installments
beginning on January 23, 2005, subject to continued
employment. As of December 31, 2006, Mr. Richards had
exercised a portion of this option to purchase
22,491 shares of common stock.
|
78
|
|
|
(25)
|
|
Our board of directors granted this
option to Mr. Richards on February 10, 2005.
Twenty-five percent of the shares underlying this option vested
on February 10, 2006 and the remaining 75% of the shares
underlying this option vest in 12 equal quarterly installments
beginning on May 10, 2006, subject to continued employment.
|
|
(26)
|
|
Our board of directors granted this
option to Mr. Richards on February 9, 2006.
Twenty-five percent of the shares underlying this option vest on
February 9, 2007 and the remaining 75% of the shares
underlying this option vest in 12 equal quarterly installments
beginning on May 9, 2007, subject to continued employment.
|
|
(27)
|
|
Our board of directors granted this
option to Mr. Richards on December 7, 2006.
Twenty-five percent of the shares underlying this option vest on
December 7, 2007 and the remaining 75% of the shares
underlying this option vest in 12 equal quarterly installments
beginning on March 7, 2008, subject to continued employment.
|
|
(28)
|
|
Our board of directors granted this
option to Mr. Turcott on February 10, 2005.
Twenty-five percent of the shares underlying this option vested
on February 10, 2006 and the remaining 75% of the shares
underlying this option vest in 12 equal quarterly installments
beginning on May 10, 2006. The unvested shares were
forfeited by Mr. Turcott following his resignation from the
company.
|
|
(29)
|
|
Our board of directors granted this
option to Mr. Turcott on February 9, 2006. Twenty-five
percent of the shares underlying this option were scheduled to
vest on February 10, 2006 and the remaining 75% of the
shares underlying this option were scheduled to vest in 12 equal
quarterly installments beginning on May 10, 2006. This
option was forfeited by Mr. Turcott following his
resignation from the company.
|
2006
Option Exercises and Stock Vested
The following table sets forth information regarding options
exercised by our named executive officers during the year ended
December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
Number of Shares
|
|
|
|
|
Acquired on
|
|
Value Realized on
|
|
Acquired on Vesting
|
|
Value Realized on
|
Name
|
|
Exercise (#)
|
|
Exercise ($)
|
|
(#)
|
|
Vesting ($)(1)
|
|
Gail F. Goodman
|
|
|
59,350
|
(2)
|
|
$
|
168,723
|
|
|
|
–
|
|
|
|
–
|
|
Steven R. Wasserman
|
|
|
–
|
|
|
|
–
|
|
|
|
48,002
|
(3)
|
|
$
|
146,223(3
|
)
|
Eric S. Groves
|
|
|
27,447
|
(4)
|
|
$
|
44,576
|
|
|
|
–
|
|
|
|
–
|
|
Thomas C. Howd
|
|
|
26,988
|
(5)
|
|
$
|
51,377
|
|
|
|
–
|
|
|
|
–
|
|
Daniel A. Richards
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Richard H. Turcott
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
(1)
|
|
For a description of our
methodology for determining the fair value of our common stock,
see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Critical Accounting
Policies.”
|
|
|
|
(2)
|
|
Ms. Goodman exercised these
options, which were granted pursuant to two separate option
grants, in June 2006. At that time, there was no public market
for our common stock. The value realized has been calculated by
taking the fair market value of our common stock in June 2006 as
determined by our board of directors, or $2.90 per share, less
the per share exercise price of each option multiplied by the
number of stock options exercised.
|
|
|
|
(3)
|
|
These shares of restricted stock
vested on December 7, 2006. At that time, there was no
public market for our common stock. The value realized has been
calculated by taking the fair market value of our common stock
in December 2006, as determined by our board of directors, or
$3.05 per share, multiplied by the number of vested shares.
|
|
|
|
(4)
|
|
Mr. Groves exercised these
options, which were granted under two separate option grants, in
March 2006 and June 2006. At that time, there was no public
market for our common stock. The value realized for the March
2006 exercise date has been calculated by taking the fair market
value of our common stock in March 2006 as determined by our
board of directors, or $1.09 per share, less the per share
exercise price multiplied by the number of stock options
exercised. The value realized for the June 2006 exercise date
has been calculated by taking the fair market value of our
common stock in June 2006 as determined by our board of
directors, or $2.90 per share, less the per share exercise price
of each option multiplied by the number of stock options
exercised.
|
|
|
|
(5)
|
|
Mr. Howd exercised these
options, which were granted under two separate option grants, in
March 2006 and September 2006. At that time, there was no public
market for our common stock. The value realized for the March
2006 exercise date has been calculated by taking the fair market
value of our common stock in March 2006 as determined by our
board of directors, or $1.09 per share, less the per share
exercise price multiplied by the number of stock options
exercised. The value realized for the September 2006 exercise
date has been calculated by taking the fair market value of our
common stock in September 2006 as determined by our board of
directors, or $2.68 per share, less the per share exercise price
of each option multiplied by the number of stock options
exercised.
|
79
Employment
Agreements
We do not have formal employment agreements with any of our
named executive officers. As a condition to their employment,
each named executive officer entered into a non-competition,
non-disclosure and non-solicitation agreement. Pursuant to these
agreements, each named executive officer has agreed not to
compete with us or to solicit our employees during their
employment and for a period of one year after their termination,
to protect our confidential and proprietary information and to
assign to us all intellectual property conceived of or developed
during the term of their employment.
We entered into an offer letter with Ms. Goodman on
April 14, 1999 that sets forth the terms of her employment
as our chief executive officer. Ms. Goodman’s initial
annual base salary was $100,000 and she was eligible to earn an
annual bonus of $30,000. Ms. Goodman’s base salary has
been adjusted by our board of directors and is currently
$275,900 and she is eligible to earn an annual bonus for 2007 of
$124,100. Pursuant to the offer letter, our board of directors
granted Ms. Goodman the right to purchase 7,150 shares
of restricted common stock at a purchase price of $20.77 per
share. The restricted shares vested as to 12.5% on
October 5, 1999 and as to 6.25% each quarter thereafter. In
the event Ms. Goodman’s employment is terminated by us
without cause, the offer letter provides that she will be
entitled to receive six months base salary and health insurance
benefits.
We entered into an offer letter with Mr. Wasserman on
December 1, 2005 that sets forth the terms of his
employment as our vice president and chief financial officer.
Mr. Wasserman’s initial annual base salary under the
offer letter was $165,000. Mr. Wasserman’s base salary
has been adjusted by our board of directors and is currently
$192,300. Pursuant to the offer letter, our board of directors
granted Mr. Wasserman the right to purchase
192,010 shares of restricted common stock at a purchase
price of $0.06 per share. The grant was effective on
December 8, 2005, with 25% of the restricted shares vesting
at the end of Mr. Wasserman’s first year of
employment, and 6.25% of the restricted shares vesting each
quarter thereafter. In the event of a change of control of our
company, 50% of the unvested restricted shares will become
vested. In addition, if Mr. Wasserman is terminated within
the first year after the change of control, the offer letter
provides that the remaining unvested restricted shares will
vest. If Mr. Wasserman’s employment is terminated by
us without cause, or if there is a significant change in his
responsibilities or location that is unacceptable to him, he
will be entitled to receive six months salary and medical
coverage for himself and his dependents for six months from the
date of his termination.
We entered into a letter agreement with Mr. Turcott on
December 6, 2006 regarding his resignation from the
company. Under the terms of the letter agreement, the final date
of Mr. Turcott’s employment with us was
January 1, 2007, and he received a lump sum severance
payment of $82,500, accrued unused vacation time and a fourth
quarter 2006 bonus of $19,677. We agreed to pay the cost of his
and his eligible dependent’s health and dental benefits
through June 30, 2007 (or until the date he becomes
eligible for similar benefits of another employer, if earlier)
and he was eligible to receive three months of outplacement
services. Mr. Turcott would only be entitled to the
severance payment if he agreed to abide by the terms of the
non-competition, nondisclosure and non-solicitation agreement.
Potential
Payments Upon Termination or Change of Control
In addition to the offer letters with Ms. Goodman and
Mr. Wasserman described above, the option agreements with
each of our executive officers and the restricted stock
agreement with Mr. Wasserman provide that in the event of a
change of control, 50% of then unvested shares or options
subject to such agreements shall become vested. In addition,
under these agreements, if the executive officer’s
employment is terminated within 12 months after the change
of control, any remaining unvested shares or options subject to
these agreements shall become vested. For these purposes,
“change of control” generally means the consummation
of the following: (a) the sale, transfer or other
disposition of substantially all of our assets to a third party
entity, (b) a merger or consolidation of our company with a
third party entity, or (c) a transfer of more than 50% of
the outstanding voting equity of our company to a third party
entity (other than in a financing transaction involving the
additional issuance of our securities).
80
The table below shows the benefits potentially payable to each
of our named executive officers if he or she was terminated
without cause, if there was a change of control of our company,
and if he or she was terminated within 12 months after a
change of control. These amounts are calculated on the
assumption that the employment termination and change of control
both took place on December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Benefits Payable Upon
|
|
|
Benefits Payable Upon
|
|
Benefits Payable Upon a
|
|
Termination Within 12 Months of a
|
|
|
Termination Without Cause
|
|
Change of Control
|
|
Change of Control
|
|
|
Severance
|
|
Medical/
|
|
|
|
|
Name
|
|
Payments
|
|
Dental(1)
|
|
Equity Benefits(2)
|
|
Equity Benefits(2)
|
|
Gail F. Goodman
|
|
$
|
137,950
|
|
|
$
|
5,835
|
|
|
$
|
175,748
|
|
|
$
|
175,745
|
|
Steven R. Wasserman
|
|
$
|
96,150
|
|
|
$
|
5,835
|
|
|
$
|
219,336
|
|
|
$
|
219,333
|
|
Eric S. Groves
|
|
|
–
|
|
|
|
–
|
|
|
$
|
90,059
|
|
|
$
|
90,016
|
|
Thomas C. Howd
|
|
|
–
|
|
|
|
–
|
|
|
$
|
100,934
|
|
|
$
|
100,930
|
|
Daniel A. Richards
|
|
|
–
|
|
|
|
–
|
|
|
$
|
64,285
|
|
|
$
|
64,281
|
|
|
|
|
(1)
|
|
Calculated based on the estimated
cost to us of providing these benefits.
|
|
|
|
(2)
|
|
This amount is equal to
(a) the number of option shares or restricted shares that
would vest, assuming a December 31, 2006 change of control
and employment termination, multiplied by (b) in the case
of options, the excess of $3.05 over the exercise price of the
option or, in the case of restricted stock, $3.05. $3.05
represents the fair market value of our common stock in December
2006 as determined by our board of directors.
|
Stock
Option and Other Compensation Plans
1999
Stock Option/Stock Issuance Plan
Our 1999 Stock Option/Stock Issuance Plan, as amended, which we
refer to as the 1999 stock plan, was adopted by our board of
directors and approved by our stockholders in March 1999. A
maximum of 5,604,353 shares of common stock are authorized
for issuance under the 1999 stock plan.
The 1999 stock plan provides for the grant of incentive stock
options, nonstatutory stock options, restricted stock and other
stock-based awards. Our employees, officers, directors,
consultants and advisors are eligible to receive awards under
the 1999 stock plan; however, incentive stock options may only
be granted to our employees. In accordance with the terms of the
1999 stock plan, our board of directors, or a committee
appointed by our board of directors, administers the 1999 stock
plan and, subject to any limitations in the 1999 stock plan,
selects the recipients of awards and determines:
|
|
|
|
•
|
the number of shares of common stock covered by options and the
dates upon which those options become exercisable;
|
|
|
•
|
the exercise price of options;
|
|
|
•
|
the duration of options;
|
|
|
•
|
the methods of payment of the exercise price of options; and
|
|
|
|
|
•
|
the number of shares of common stock subject to any restricted
stock or other stock-based awards and the terms and conditions
of those awards, including the conditions for vesting as
repurchase, issue price and repurchase price.
|
Unless otherwise provided in any individual option agreement, in
the event of our merger or consolidation with or into another
entity or the sale of all or substantially all of our assets as
a result of which our common stock is converted into the right
to receive securities, cash or other property, or in the event
of our liquidation, our board of directors or the board of
directors of any corporation assuming our obligations shall, in
its discretion, provide that all outstanding options under the
1999 stock plan be assumed or substituted for by the successor
corporation. Alternatively, our board of directors may provide
written notice to option holders that all unexercised options
will become exercisable in full prior to completion of the
reorganization event, and
81
will terminate if not exercised prior to that time. If under the
terms of the reorganization event holders of our common stock
receive cash for their surrendered shares, our board of
directors may instead provide for a cash-out of the value of any
outstanding options based on the surrender value less the
applicable exercise price. Our board of directors may also
provide that each outstanding option shall terminate in exchange
for a cash payment equal to the fair market value of our common
stock less the applicable exercise price.
Our board of directors may at any time modify or amend the 1999
stock plan in any respect, except that stockholder approval will
be required for any revision that is required to comply with
applicable law, and provided further that optionholder approval
will be required for any modification that affects the
optionholder’s rights under any outstanding options.
As of June 30, 2007, there were options to purchase
1,854,641 shares of common stock outstanding under the 1999
stock plan at a weighted average exercise price of $2.63 per
share, and 2,918,534 shares of common stock were issued
pursuant to the exercise of options granted under the 1999 stock
plan. After the effective date of the 2007 stock incentive plan
described below, we will grant no further stock options or other
awards under the 1999 stock plan. However, any shares of common
stock reserved for issuance under the 1999 stock plan that
remain available for issuance at the time of the discontinuance
and any shares of common stock subject to awards under the 1999
stock plan that expire, terminate, or are otherwise surrendered,
canceled, forfeited or repurchased by us will be added to the
number of shares available under the 2007 stock incentive plan
up to a specified number of shares.
2007
Stock Incentive Plan
Our 2007 stock incentive plan, which will become effective upon
the completion of this offering, was adopted by our board of
directors
on ,
2007 and approved by our stockholders
on ,
2007. The 2007 stock incentive plan provides for the grant of
incentive stock options, non-statutory stock options, restricted
stock, restricted stock units, stock appreciation rights and
other stock-based awards. Upon effectiveness of the plan, the
number of shares of common stock reserved for issuance under the
2007 stock incentive plan will be 1,500,000 shares plus the
number of shares of common stock then available for issuance
under the 1999 stock plan and the number of shares of common
stock subject to awards granted under the 1999 stock plan which
expire, terminate or are otherwise surrendered, cancelled,
forfeited or repurchased by us at their original issuance price
pursuant to a contractual repurchase right, up to a maximum of
700,000 shares.
In addition, our 2007 stock incentive plan contains an
“evergreen provision” that allows for an annual
increase in the number of shares available for issuance under
our 2007 stock incentive plan on the first day of each year
beginning in 2008 and ending on the second day of 2017. The
annual increase in the number of shares shall be equal to the
lowest of:
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•
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700,000 shares of common stock;
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•
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5% of the aggregate number of shares of common stock outstanding
on the first day of the applicable year; and
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•
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an amount determined by our board of directors.
|
Our employees, officers, directors, consultants and advisors are
eligible to receive awards under our 2007 stock incentive plan;
however, incentive stock options may only be granted to our
employees. The maximum number of shares of common stock with
respect to which awards may be granted to any participant under
the plan is 500,000 per fiscal year.
Our 2007 stock incentive plan provides for the automatic grant
of options to members of our board of directors who are not our
employees. Each non-employee director will receive an option to
purchase 25,000 shares of our common stock upon his or her
initial appointment to our board of directors. Each non-employee
director will also receive an annual option grant to purchase
10,000 shares of our common stock at each annual meeting of
stockholders after which he or she continues to serve as a
director, provided each such non-employee director has served on
our board of directors for at least six months. All of these
options will vest over a 3-year period, with 33.33% of the
shares underlying the option vesting on the first anniversary of
82
the date of grant, or in the case of annual option grants one
business day prior to the next annual meeting, if earlier, and
an additional 8.33% of the shares underlying the option vesting
each three months thereafter, subject to the non-employee
director’s continued service as a director. The exercise
price of these options will equal the fair market value of our
common stock on the date of grant. Our board of directors can
increase or decrease the number of shares subject to options
granted to non-employee directors and can issue restricted stock
or other stock-based awards in addition to some or all of the
options otherwise issuable. In addition, our board of directors
may provide for accelerated vesting of any such options upon
death, disability, change in control, attainment of mandatory
retirement age or retirement following at least 10 years of
service and may include any such other terms and conditions as
our board of directors determines.
Our 2007 stock incentive plan is administered by our board of
directors. Pursuant to the terms of the 2007 stock incentive
plan and to the extent permitted by law, our board of directors
may delegate authority under the 2007 stock incentive plan to
one or more committees or subcommittees of our board of
directors or to our executive officers. Our board of directors
or any committee to whom our board of directors delegates
authority selects the recipients of awards and determines:
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•
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the number of shares of common stock covered by options and the
dates upon which the options become exercisable;
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•
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the exercise price of options;
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•
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the duration of the options;
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•
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the methods of payment of the exercise price of options; and
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•
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the number of shares of common stock subject to any restricted
stock or other stock-based awards and the terms and conditions
of such awards, including conditions for vesting or repurchase,
issue price and repurchase price.
|
If our board of directors delegates authority to an executive
officer to grant awards under the 2007 stock incentive plan, the
executive officer has the power to make awards to all of our
employees, except executive officers. Our board of directors
will fix the terms of the awards to be granted by such executive
officer, including the exercise price of such awards, and the
maximum number of shares subject to awards that such executive
officer may make.
Upon a merger or other reorganization event, our board of
directors may, in its sole discretion, take any one or more of
the following actions pursuant to our 2007 stock incentive plan,
as to some or all outstanding awards:
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• |
provide that all outstanding awards shall be assumed or
substituted by the acquiring or successor corporation;
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• |
upon written notice to a participant, provide that the
participant’s unexercised options or awards will terminate
immediately prior to the consummation of such transaction unless
exercised by the participant within a specific period following
such notice;
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•
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provide that outstanding awards will become exercisable,
realizable or deliverable, or restrictions applicable to an
award will lapse, in whole or in part, prior to or upon the
reorganization event;
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•
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in the event of a reorganization event pursuant to which holders
of our common stock will receive a cash payment for each share
surrendered in the reorganization event, make or provide for a
cash payment to the participants equal to the excess, if any, of
the acquisition price times the number of shares of our common
stock subject to such outstanding awards (to the extent then
exercisable at prices not in excess of the acquisition price),
over the aggregate exercise price of all such outstanding awards
and any applicable tax withholdings, in exchange for the
termination of such awards; and/or
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• |
provide that, in connection with our liquidation or dissolution,
awards convert into the right to receive liquidation proceeds
net of the exercise price thereof and any applicable tax
withholdings.
|
Upon the occurrence of a reorganization event other than our
liquidation or dissolution, the repurchase and other rights
under each outstanding restricted stock award will continue for
the benefit of the successor
83
company and will, unless the board of directors may otherwise
determine, apply to the cash, securities or other property into
which our common stock is converted pursuant to the
reorganization event. Upon the occurrence of a reorganization
event involving our liquidation or dissolution, all conditions
on each outstanding restricted stock award will automatically be
deemed terminated or satisfied, unless otherwise provided in the
agreement evidencing the restricted stock award.
No award may be granted under the 2007 stock incentive plan
after ,
2017, but the vesting and effectiveness of awards granted before
that date may extend beyond that date. Our board of directors
may amend, suspend or terminate the 2007 stock incentive plan at
any time, except that stockholder approval will be required for
any revision that would materially increase the number of shares
reserved for issuance, expand the types of awards available
under the plan, materially modify plan eligibility requirements,
extend the term of the plan or materially modify the method of
determining the exercise price of options granted under the
plan, or otherwise as required to comply with applicable law or
stock market requirements.
2007
Employee Stock Purchase Plan
Our 2007 employee stock purchase plan, which we refer to as
the purchase plan, was adopted by our board of directors and
approved by our stockholders
in 2007
and will become effective upon the completion of this offering.
We have reserved a total of 350,000 shares of our common
stock for issuance to participating employees under the purchase
plan. The purchase plan will be administered by our board of
directors or by a committee appointed by our board of directors.
All of our employees, including our directors who are employees
and all employees of any of our participating subsidiaries, who
have been employed by us for at least three months prior to
enrolling in the purchase plan, who are employees on the first
day of the purchase plan period, and whose customary employment
is for more than 30 hours a week and more than five months
in any calendar year, will be eligible to participate in the
purchase plan. Employees who would, immediately after being
granted an option to purchase shares under the purchase plan,
own 5% or more of the total combined voting power or value of
our common stock will not be eligible to participate in the
purchase plan.
We will make one or more offerings to our employees to purchase
stock under the purchase plan. Offerings will begin on each of
January 1 and July 1, or the first business day
thereafter, provided that our first offering commencement date
will begin on January 1, 2008. Each offering commencement
date will begin a six-month purchase plan period during which
payroll deductions will be made and held for the purchase of the
common stock at the end of such purchase plan period. Our board
of directors or the committee may, at its discretion, choose a
different purchase plan period of 12 months or less.
On the first day of a designated payroll deduction period, or
offering period, we will grant to each eligible employee who has
elected to participate in the purchase plan an option to
purchase shares of our common stock. The employee may authorize
up to 10% of his or her compensation to be deducted by us during
the offering period. On the last day of the offering period, the
employee will be deemed to have exercised the option, at the
option exercise price, to the extent of accumulated payroll
deductions. Under the terms of the purchase plan, the option
exercise price shall be determined by our board of directors or
the committee, based on the lesser of the closing price of our
common stock on the first business day of the plan period or the
exercise date, as defined in the purchase plan, or shall be
based solely on the closing price of our common stock on the
exercise date, provided that the option exercise price shall be
at least 85% of the applicable closing price. In the absence of
a determination by our board of directors or the committee, the
option exercise price will be 85% of the closing price of our
common stock on the exercise date. Our board of directors has
determined that the current option exercise price will be 85% of
the closing price of our common stock on the exercise date.
An employee who is not a participant on the last day of the
offering period will not be entitled to exercise any option, and
the employee’s accumulated payroll deductions will be
refunded. An employee’s rights under the purchase plan will
terminate upon voluntary withdrawal from the purchase plan at
any time, or when the
84
employee ceases employment for any reason, except that upon
termination of employment because of death, the balance in the
employee’s account will be paid to the employee’s
beneficiary.
401(k)
Retirement Plan
We maintain a 401(k) retirement plan that is intended to be a
tax-qualified defined contribution plan under
Section 401(k) of the Internal Revenue Code. In general,
all of our employees are eligible to participate in the 401(k)
plan, subject to a
90-day
waiting period. The 401(k) plan includes a salary deferral
arrangement pursuant to which participants may elect to reduce
their current compensation on a pre-tax basis by up to the
statutorily prescribed limit, equal to $15,500 in 2007, and have
the amount of the reduction contributed to the 401(k) plan. We
are permitted to match employees’ 401(k) plan
contributions; however, we do not do so currently.
Limitations
on Officers’ and Directors’ Liability and
Indemnification Agreements
As permitted by Delaware law, our restated certificate of
incorporation, which will become effective upon the closing of
this offering, contains provisions that limit or eliminate the
personal liability of our directors for breach of fiduciary duty
of care as a director. Our restated certificate of incorporation
limits the liability of directors to the maximum extent
permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary
damages for breaches of their fiduciary duties as directors,
except liability for:
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•
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any breach of the director’s duty of loyalty to us or our
stockholders;
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•
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any act or omission not in good faith or that involves
intentional misconduct or knowing violation of law;
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•
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any unlawful payments of dividends or other
distributions; or
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•
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any transaction from which the director derived an improper
personal benefit.
|
These limitations do not apply to liabilities arising under
federal securities laws and do not affect the availability of
equitable remedies, including injunctive relief or rescission.
If Delaware law is amended to authorize the further elimination
or limitation of liability of a director, then the liability of
our directors will be eliminated or limited to the fullest
extent permitted by Delaware law as so amended.
As permitted by Delaware law, our restated certificate of
incorporation also provides that:
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•
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we will indemnify our directors and officers to the fullest
extent permitted by law;
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•
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we may indemnify our other employees and other agents to the
same extent that we indemnify our officers and directors, unless
otherwise determined by our board of directors; and
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•
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we will advance expenses to our directors and officers in
connection with a legal proceeding to the fullest extent
permitted by law.
|
The indemnification provisions contained in our restated
certificate of incorporation are not exclusive.
In addition to the indemnification provided for in our restated
certificate of incorporation prior to completion of this
offering we intend to enter into indemnification agreements with
each of our directors and officers. Each indemnification
agreement will provide that we will indemnify the director or
officer to the fullest extent permitted by law for claims
arising in his or her capacity as our director, officer,
employee or agent, provided that he or she acted in good faith
and in a manner that he or she reasonably believed to be in, or
not opposed to, our best interests and, with respect to any
criminal proceeding, had no reasonable cause to believe that his
or her conduct was unlawful. In the event that we do not assume
the defense of a claim against a director or officer, we are
required to advance his or her expenses in connection with his
or her defense, provided that he or she undertakes to repay all
amounts advanced if it is ultimately determined that he or she
is not entitled to be indemnified by us.
85
We believe that these provisions and agreements are necessary to
attract and retain qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted for directors, officers or
persons controlling our company pursuant to the foregoing
provisions, the opinion of the SEC is that such indemnification
is against public policy as expressed in the Securities Act and
is therefore unenforceable.
In addition, we maintain a general liability insurance policy
that covers certain liabilities of directors and officers of our
corporation arising out of claims based on acts or omissions in
their capacities as directors or officers.
Rule 10b5-1
Sales Plans
Our directors and executive officers may adopt written plans,
known as
Rule 10b5-1
plans, in which they will contract with a broker to buy or sell
shares of our common stock on a periodic basis. Under a
Rule 10b5-1
plan, a broker executes trades pursuant to parameters
established by the director or officer when entering into the
plan, without further direction from them. The director or
officer may amend or terminate the plan in some circumstances.
Our directors and executive officers may also buy or sell
additional shares outside of a
Rule 10b5-1
plan when they are not in possession of material, nonpublic
information.
86
Principal
and Selling Stockholders
The following table sets forth information regarding the
beneficial ownership of our common stock as of July 31,
2007, by:
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•
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each of our directors;
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•
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each of our named executive officers;
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•
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each person, or group of affiliated persons, who is known by us
to beneficially own more than 5% of our common stock;
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•
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all of our directors and executive officers as a group; and
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•
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each selling stockholder.
|
Beneficial ownership is determined in accordance with the rules
of the SEC. These rules generally attribute beneficial ownership
of securities to persons who possess sole or shared voting power
or investment power with respect to those securities and include
shares of common stock issuable upon the exercise of stock
options that are immediately exercisable or exercisable within
60 days after July 31, 2007. Except as otherwise
indicated in the footnotes to the table below, all of the shares
reflected in the table are shares of common stock and all
persons listed below have sole voting and investment power with
respect to the shares beneficially owned by them, subject to
applicable community property laws. The information is not
necessarily indicative of beneficial ownership for any other
purpose.
Percentage ownership calculations for beneficial ownership prior
to this offering are based on 21,283,452 shares outstanding
as of July 31, 2007, assuming the exercise of the warrant
for redeemable convertible preferred stock and the conversion of
all of our outstanding redeemable convertible preferred stock.
Percentage ownership calculations for beneficial ownership after
this offering also include the shares we are offering hereby.
In computing the number of shares of common stock beneficially
owned by a person and the percentage ownership of that person,
we deemed outstanding shares of common stock subject to options
held by that person that are currently exercisable or
exercisable within 60 days of July 31, 2007. We did
not deem these shares outstanding, however, for the purpose of
computing the percentage ownership of any other person.
Beneficial ownership representing less than 1% is denoted with
an asterisk (*). Except as otherwise indicated in the footnotes
to the table below, addresses of named beneficial owners are in
care of Constant Contact, Inc., Reservoir Place, 1601 Trapelo
Road, Suite 329, Waltham, Massachusetts 02451.
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Number of
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Shares
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Being
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Shares Beneficially
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Offered
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Owned Assuming Full
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Pursuant to
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Exercise of an Option
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Shares Beneficially Owned
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Shares Beneficially Owned
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an Option
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Granted to the
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Prior to Offering
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Shares
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After Offering
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Granted to the
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Underwriters
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Name of Beneficial Owner
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Number
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Percentage
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Offered
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Number
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Percentage
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Underwriters
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Number
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Percentage
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Officers and
Directors
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Gail F. Goodman(1)
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1,175,073
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5.50
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%
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–
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–
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Eric S. Groves(2)
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391,531
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1.84
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–
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–
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Thomas C. Howd(3)
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208,240
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*
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–
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–
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Daniel A. Richards(4)
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250,503
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1.17
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–
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–
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Richard H. Turcott(5)
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32,305
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*
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14,300
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–
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Steven R. Wasserman
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192,010
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*
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–
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–
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Thomas Anderson(6)
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9,750
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*
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–
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–
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Robert P. Badavas(7)
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2,437
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*
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–
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–
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John Campbell(8)
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306,160
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1.44
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130,000
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–
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Michael T. Fitzgerald(9)
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3,267,203
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15.35
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–
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–
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Patrick Gallagher(10)
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4,653,879
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21.87
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–
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–
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William S. Kaiser(11)
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2,189,019
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10.28
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–
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–
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All current executive officers and
directors as a group (14 persons)
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12,690,070
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58.80
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130,000
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–
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87
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Number of
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Shares
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Being
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Shares Beneficially
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Offered
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Owned Assuming Full
|
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Pursuant to
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Exercise of an Option
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Shares Beneficially Owned
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Shares Beneficially Owned
|
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an Option
|
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Granted to the
|
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Prior to Offering
|
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Shares
|
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After Offering
|
|
Granted to the
|
|
Underwriters
|
Name of Beneficial Owner
|
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Number
|
|
Percentage
|
|
Offered
|
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Number
|
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Percentage
|
|
Underwriters
|
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Number
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Percentage
|
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5%
Stockholders
|
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|
|
|
|
Entities affiliated with Morgan
Stanley Dean Witter Venture Partners(10)
|
|
|
4,653,879
|
|
|
|
21.87
|
%
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Entities affiliated with
Commonwealth Capital Ventures(9)
|
|
|
3,267,203
|
|
|
|
15.35
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Hudson Venture Partners II,
L.P.(12)
|
|
|
3,013,885
|
|
|
|
14.16
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
218,208
|
|
|
|
|
|
|
|
|
|
Entities affiliated with Greylock
Partners(11)
|
|
|
2,189,019
|
|
|
|
10.29
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Longworth Venture Partners,
L.P.(13)
|
|
|
2,083,933
|
|
|
|
9.79
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
416,786
|
|
|
|
|
|
|
|
|
|
Other Selling
Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bantam Group, Inc.(14)
|
|
|
50,964
|
|
|
|
*
|
|
|
|
26,000
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
John Beard
|
|
|
84,064
|
|
|
|
*
|
|
|
|
20,800
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Matthew Campbell
|
|
|
4,377
|
|
|
|
*
|
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Gina Kilby Conaway
|
|
|
19,532
|
|
|
|
*
|
|
|
|
2,600
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Kathleen DeBlasio
|
|
|
83,097
|
|
|
|
*
|
|
|
|
46,800
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Devin Golden
|
|
|
17,385
|
|
|
|
*
|
|
|
|
17,385
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
David Holbrook
|
|
|
285,038
|
|
|
|
1.34
|
|
|
|
143,000
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Michelle Keegan
|
|
|
17,338
|
|
|
|
*
|
|
|
|
5,200
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Northstar Global Partners, LLC(15)
|
|
|
156,000
|
|
|
|
*
|
|
|
|
156,000
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
S. Margaret Olson
|
|
|
134,685
|
|
|
|
*
|
|
|
|
17,686
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
One & Co.(16)
|
|
|
356,709
|
|
|
|
1.68
|
|
|
|
80,141
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
G. Randolph Parker
|
|
|
32,500
|
|
|
|
*
|
|
|
|
8,125
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Alison and Gerardo Spagnuolo
|
|
|
5,471
|
|
|
|
*
|
|
|
|
2,600
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Kermit Stofer
|
|
|
57,878
|
|
|
|
*
|
|
|
|
19,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VeriSign Capital Management,
Inc.(17)
|
|
|
152,942
|
|
|
|
*
|
|
|
|
152,942
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes 86,297 shares subject
to options exercisable within 60 days of July 31, 2007.
|
|
|
|
(2)
|
|
Includes 52,123 shares subject
to options exercisable within 60 days of July 31, 2007.
|
|
|
|
(3)
|
|
Includes 52,061 shares subject
to options exercisable within 60 days of July 31, 2007.
|
|
|
|
(4)
|
|
Includes 60,276 shares subject
to options exercisable within 60 days of July 31, 2007.
|
|
|
|
(5)
|
|
Mr. Turcott resigned as our
Chief Marketing Officer in December 2006.
|
|
|
|
(6)
|
|
Consists of 9,750 shares
subject to options exercisable within 60 days of
July 31, 2007.
|
|
|
|
(7)
|
|
Consists of 2,437 shares
subject to options exercisable within 60 days of
July 31, 2007.
|
|
|
|
(8)
|
|
Includes 292,267 shares held
jointly with Mr. Campbell’s wife, Mrs. Jean
Campbell.
|
|
|
|
(9)
|
|
Consists of 3,113,288 shares
held by Commonwealth Capital Ventures II L.P. and
153,915 shares held by CCV II Associates L.P. The
information in the table excludes any shares that entities
affiliated with Commonwealth Capital Ventures may purchase in
this offering. In the event that entities affiliated with
Commonwealth Capital Ventures were to purchase an aggregate
of million shares in this
offering, the number of shares beneficially owned after the
offering would be million,
or %, and the number of shares
beneficially owned assuming full exercise of an option granted
to the underwriters would
be million,
or %. The general partner of
Commonwealth Capital Ventures II L.P. and CCV II Associates
L.P. is Commonwealth Venture Partners II L.P. Michael T.
Fitzgerald, a member of our board of directors, Jeffrey M.
Hurst, R. Stephen
|
88
|
|
|
|
|
McCormack and Justin J. Perreault
are the general partners of Commonwealth Venture
Partners II L.P. Accordingly, they may be deemed to share
beneficial ownership of the shares beneficially owned by
Commonwealth Capital Ventures II L.P. and CCV II Associates
L.P., although each of them disclaims beneficial ownership of
such shares, except to the extent of his pecuniary interest
therein. The address of Commonwealth Venture Partners II
L.P. is 950 Winter Street, Suite 4100, Waltham, Massachusetts
02451.
|
|
|
|
(10)
|
|
Consists of 4,029,230 shares
held by Morgan Stanley Dean Witter Venture Partners IV, L.P.,
467,454 shares held by Morgan Stanley Dean Witter Venture
Investors IV, L.P. and 120,921 shares held by Morgan
Stanley Dean Witter Venture Offshore Investors IV, L.P. MSDW
Venture Partners IV, LLC is the general partner of each of
Morgan Stanley Dean Witter Venture Partners IV, L.P., Morgan
Stanley Dean Witter Venture Investors IV, L.P. and Morgan
Stanley Dean Witter Venture Offshore Investors IV, L.P. MSDW
Venture Partners IV, Inc. is the member of the general partner
and a wholly-owned subsidiary of Morgan Stanley. Patrick
Gallagher, a member of our board of directors, disclaims
beneficial ownership of the securities except to the extent of
his pecuniary interest therein. The address of the entities
affiliated with Morgan Stanley Dean Witter Venture Partners is
1221 Avenue of the Americas, 39th Floor, New York, New York
10020.
|
|
|
|
(11)
|
|
Consists of 1,871,613 shares
held by Greylock XII Limited Partnership, 207,956 shares
held by Greylock XII-A Limited Partnership and
109,450 shares held by Greylock XII Principals LLC. The
general partner of Greylock XII Limited Partnership and Greylock
XII-A Limited Partnership is Greylock XII GP LLC. The members of
Greylock XII GP LLC and Greylock XII Principals LLC are: Aneel
Bhusri, Thomas Bogan, Asheem Chandna, Charles Chi, Roger Evans,
William Helman, William Kaiser, a member of our board of
directors, Donald Sullivan and David Sze. Each of these
individuals exercises shared voting and investment power over
the shares held of record by Greylock XII Limited Partnership,
Greylock XII-A Limited Partnership and Greylock XII Principals
LLC and disclaims beneficial ownership of such shares except to
the extent of his pecuniary interest therein. The address of the
entities affiliated with Greylock Partners is 880 Winter Street,
Waltham, Massachusetts 02451.
|
|
|
|
(12)
|
|
The general partner of Hudson
Venture Partners II, L.P. is Hudson Ventures II, LLC. The
members of Hudson Ventures II, LLC are Glen Lewy, Jay Goldberg,
Kim Goh and Dr. Lawrence Howard. Each of these individuals
exercises shared voting and investment power over the shares
held of record by Hudson Venture Partners II, L.P. and disclaims
beneficial ownership of such shares except to the extent of his
pecuniary interest therein. The address of Hudson Venture
Partners II, L.P. is 535 Fifth Avenue, 14th Floor, New
York, New York 10021.
|
|
(13)
|
|
The general partner of Longworth
Venture Partners, L.P. is Longworth Venture Management, LLC. The
members of Longworth Venture Management, LLC are Paul Margolis
and James Savage, a former member of our board of directors.
Each of these individuals exercises shared voting and investment
power over the shares held of record by Longworth Venture
Partners, L.P. and disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest therein. The
address of Longworth Venture Partners, L.P. is 1050 Winter
Street, Suite 2600, Waltham, Massachusetts 02451.
|
|
|
|
(14)
|
|
Joe Caruso, president of Bantam
Group, Inc., has voting and dispositive power over the shares
held of record by Bantam Group, Inc.
|
|
|
|
(15)
|
|
Consists of warrants to purchase
120,000 shares of redeemable convertible preferred stock
exercisable within 60 days of July 31, 2007, which shares are
convertible into 156,000 shares of common stock. The manager of
Northstar Global Partners, LLC is Joe Bradley. Joe Bradley
exercises voting and investment power over the shares held of
record by Northstar Global Partners, LLC.
|
|
|
|
(16)
|
|
One & Co is the nominee
(or “street”) name used by Welch & Forbes
LLC for investments purchased on behalf of its clients. The
members of Welch & Forbes LLC sharing voting and
investment power over such investments are Richard F.
Young, John H. Emmons, Jr., Charles T. Haydock,
James E. Russell, Adrienne G. Silbermann, and
Benjamin J. Williams, Jr. Each individual disclaims
beneficial ownership of such shares except to the extent of his
or her pecuniary interest therein.
|
|
|
|
(17)
|
|
VeriSign Capital Management, Inc.
is a wholly owned subsidiary of VeriSign, Inc., a publicly
traded company.
|
89
Since January 1, 2004, we have engaged in the following
transactions with our directors, executive officers and holders
of more than 5% of our voting securities, and affiliates and
immediate family members of our directors, executive officers
and 5% stockholders. We believe that all of the transactions
described below were made on terms no less favorable to us than
could have been obtained from unaffiliated third parties:
Logoworks
Mr. Groves, our Senior Vice President, Sales and Business
Development, served as a director of Logoworks from
December 2003 until Hewlett-Packard Company acquired
Logoworks’ corporate parent, Arteis, Inc., in May 2007.
Logoworks is one of our channel partners and we pay Logoworks
fees based on the volume of paying customers referred to us. We
have also used the design services of Logoworks in creating some
of the templates used in our email marketing product. In 2006,
2005 and 2004, our aggregate payments to Logoworks were
approximately $163,758, $107,483 and $36,798, respectively.
During the seven months ended July 31, 2007, our aggregate
payments to Logoworks were approximately $18,500.
RightNow
Technologies
We utilize customer support software licensed to us by RightNow
Technologies, Inc., a publicly traded customer relationship
service provider. In 2006, 2005 and 2004 and during the seven
months ended July 31, 2007, our aggregate payments to
RightNow Technologies were approximately $253,000, $33,000,
$123,000 and $496,000, respectively. Investment entities
affiliated with Greylock Partners owned, as of March 31,
2007, approximately 13% of the outstanding common stock of
RightNow Technologies. Roger L. Evans, a general partner of
Greylock Partners, serves on the board of directors of RightNow
Technologies. William S. Kaiser, a member of our board of
directors, is a general partner of Greylock Partners.
CIBC
World Markets Corp.
Mark Goodman, Managing Director, Head of Consumer and Business
Services Group of CIBC World Markets Corp., a co-managing
underwriter of this offering, is the brother of Gail F. Goodman.
Ms. Goodman is our Chairman, President, Chief Executive
Officer and the beneficial holder of more than 5% of our voting
securities. We have entered into an underwriting agreement with
CIBC World Markets Corp. and the other underwriters of this
offering. For more information with respect to the terms of the
underwriting agreement, see “Underwriting.”
Stock
Issuances
In May 2006 and July 2006, we issued and sold an aggregate of
2,521,432 shares of our Series C redeemable
convertible preferred stock at a price of $5.949 per share to
individual investors for an aggregate purchase price of
$14,999,998.98. Upon the closing of this offering, these shares
will automatically convert into 3,277,851 shares of common
stock. The table below sets forth the number of shares of our
Series C redeemable convertible preferred stock sold to our
directors and 5% stockholders and their affiliates:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
|
of Series C Redeemable
|
|
|
|
|
Convertible
|
|
Aggregate
|
Name
|
|
Preferred Stock
|
|
Purchase Price ($)
|
|
Entities affiliated with Morgan
Stanley Dean Witter Venture Partners
|
|
|
272,532
|
|
|
|
1,621,292.87
|
|
Entities affiliated with
Commonwealth Capital Ventures
|
|
|
191,640
|
|
|
|
1,140,066.36
|
|
Hudson Venture Partners II,
L.P.
|
|
|
164,107
|
|
|
|
976,272.54
|
|
Entities affiliated with Greylock
Partners
|
|
|
1,681,143
|
|
|
|
10,001,119.71
|
|
Longworth Venture Partners,
L.P.
|
|
|
122,256
|
|
|
|
727,300.94
|
|
John Campbell
|
|
|
18,263
|
|
|
|
108,646.59
|
|
90
Purchases
of Shares in this Offering
Entities affiliated with Commonwealth Capital Ventures, which
are existing stockholders, have indicated an interest in
purchasing up to an aggregate
of million
shares of our common stock in this offering at the initial
public offering price. Michael T. Fitzgerald, a member of our
board of directors, is a general partner of Commonwealth Capital
Ventures II L.P., the general partner of the entities
affiliated with Commonwealth Capital Ventures. Assuming an
initial public offering price of $
per share, the mid-point of the estimated price range shown on
the cover page of this prospectus, the entities affiliated with
Commonwealth Capital Ventures would purchase up to
$ million of our common stock
in this offering. However, because indications of interest are
not binding agreements or commitments to purchase, these
stockholders might not purchase any common stock in this
offering. These shares, if purchased, will be subject to the
180-day
lock-up
agreement that the entities affiliated with Commonwealth Capital
Ventures have signed with the underwriters in connection with
this offering.
Registration
Rights
The holders of our redeemable convertible preferred stock and
certain holders of our common stock have the right to demand
that we file a registration statement or request that their
shares be covered by a registration statement that we are
otherwise filing. These rights are provided under the terms of
amended and restated investor rights agreements we entered into
in 2001 and 2006 with these holders, which include some of our
directors, executive officers and holders of more than 5% of our
voting securities and their affiliates. For a more detailed
description of these registration rights, see “Description
of Capital Stock—Registration Rights.”
Indemnification
Agreements
Our restated certificate of incorporation that will be in effect
upon the closing of this offering provides that we will
indemnify our directors and officers to the fullest extent
permitted by Delaware law. In addition, we expect to enter into
indemnification agreements with each of our directors and
officers that may be broader in scope that the specific
indemnification provisions contained in the Delaware General
Corporation Law. For more information regarding these
agreements, see “Management—Limitations on
Officers’ and Directors’ Liability and Indemnification
Agreements.”
Policies
and Procedures for Related Party Transactions
In August 2007, our board of directors adopted a written related
person transaction policy to set forth the policies and
procedures for the review and approval or ratification of
related person transactions. This policy covers any transaction,
arrangement or relationship, or any series of similar
transactions, arrangements or relationships in which we were or
are to be a participant, the amount involved exceeds $120,000,
and a related person had or will have a direct or indirect
material interest, including, without limitation, purchases of
goods or services by or from the related person or entities in
which the related person has a material interest, indebtedness,
guarantees of indebtedness, and employment by us of a related
person.
Any related person transaction proposed to be entered into by us
must be reported to our general counsel and will be reviewed and
approved by the audit committee in accordance with the terms of
the policy, prior to effectiveness or consummation of the
transaction, whenever practicable. If our general counsel
determines that advance approval of a related person transaction
is not practicable under the circumstances, the audit committee
will review and, in its discretion, may ratify the related
person transaction at the next meeting of the audit committee,
or at the next meeting following the date that the related
person transaction comes to the attention of our general
counsel. Our general counsel, however, may present a related
person transaction arising in the time period between meetings
of the audit committee to the chairman of the audit committee,
91
who will review and may approve the related person transaction,
subject to ratification by the audit committee at the next
meeting of the audit committee.
In addition, any related person transaction previously approved
by the audit committee or otherwise already existing that is
ongoing in nature will be reviewed by the audit committee
annually to ensure that such related person transaction has been
conducted in accordance with the previous approval granted by
the audit committee, if any, and that all required disclosures
regarding the related person transaction are made.
Transactions involving compensation of executive officers will
be reviewed and approved by the compensation committee in the
manner specified in the charter of the compensation committee.
A related person transaction reviewed under this policy will be
considered approved or ratified if it is authorized by the audit
committee in accordance with the standards set forth in this
policy after full disclosure of the related person’s
interests in the transaction. As appropriate for the
circumstances, the audit committee will review and consider:
|
|
|
|
•
|
the related person’s interest in the related person
transaction;
|
|
|
•
|
the approximate dollar value of the amount involved in the
related person transaction;
|
|
|
•
|
the approximate dollar value of the amount of the related
person’s interest in the transaction without regard to the
amount of any profit or loss;
|
|
|
•
|
whether the transaction was undertaken in the ordinary course of
business;
|
|
|
•
|
whether the transaction with the related person is proposed to
be, or was, entered into on terms no less favorable to us than
terms that could have been reached with an unrelated third party;
|
|
|
•
|
the purpose of, and the potential benefits to us of, the
transaction; and
|
|
|
•
|
any other information regarding the related person transaction
or the related person in the context of the proposed transaction
that would be material to investors in light of the
circumstances of the particular transaction.
|
The audit committee will review all relevant information
available to it about the related person transaction. The audit
committee may approve or ratify the related person transaction
only if the audit committee determines that, under all of the
circumstances, the transaction is in or is not inconsistent with
our best interests. The audit committee may, in its sole
discretion, impose conditions as it deems appropriate on us or
the related person in connection with approval of the related
person transaction.
92
Description
of Capital Stock
General
Following the closing of this offering, our authorized capital
stock will consist of 100,000,000 shares of common stock,
par value $0.01 per share, and 5,000,000 shares of
preferred stock, par value $0.01 per share, all of which
preferred stock will be undesignated.
The following description of our capital stock and provisions of
our restated certificate of incorporation and second amended and
restated bylaws are summaries and are qualified by reference to
the restated certificate of incorporation and the second amended
and restated bylaws that will become effective upon the closing
of this offering. Copies of these documents have been filed with
the SEC as exhibits to our registration statement, of which this
prospectus forms a part. The descriptions of our common stock
and preferred stock reflect changes to our capital structure
that will occur upon the closing of this offering.
Common
Stock
As of July 31, 2007, there were 21,283,453 shares of
our common stock outstanding, held of record by
140 stockholders, assuming the exercise of the warrant for
redeemable preferred stock and the conversion of all outstanding
shares of our redeemable convertible preferred stock.
Under the terms of our restated certificate of incorporation
that will become effective upon the closing of this offering,
the holders of our common stock are generally entitled to one
vote for each share held on all matters submitted to a vote of
the stockholders and do not have any cumulative voting rights.
Holders of our common stock are entitled to receive
proportionally any dividends declared by our board of directors
out of funds legally available therefor, subject to any
preferential dividend or other rights of any then outstanding
preferred stock.
In the event of our liquidation or dissolution, holders of our
common stock are entitled to share ratably in all assets
remaining after payment of all debts and other liabilities,
subject to the prior rights of any then outstanding preferred
stock. Holders of our common stock have no preemptive,
subscription, redemption or conversion rights. All outstanding
shares of our common stock are validly issued, fully paid and
nonassessable. The shares to be issued by us in this offering
will be, when issued and paid for, validly issued, fully paid
and nonassessable.
The rights, preferences and privileges of holders of our common
stock are subject to, and may be adversely affected by, the
rights of holders of shares of any series of preferred stock
that we may designate and issue in the future.
Preferred
Stock
Under the terms of our restated certificate of incorporation
that will become effective upon the closing of this offering,
our board of directors is authorized to designate and issue up
to 5,000,000 shares of preferred stock in one or more
series without stockholder approval. Our board of directors has
the discretion to determine the rights, preferences, privileges
and restrictions, including voting rights, dividend rights,
conversion rights, redemption privileges and liquidation
preferences, of each series of preferred stock, any or all of
which may be greater than or senior to the rights of the common
stock. The issuance of preferred stock could adversely affect
the voting power of holders of common stock and reduce the
likelihood that such holders will receive dividend payments or
payments on liquidation. In certain circumstances, an issuance
of preferred stock could have the effect of decreasing the
market price of our common stock.
Authorizing our board of directors to issue preferred stock and
determine its rights and preferences has the effect of
eliminating delays associated with a stockholder vote on
specific issuances. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions,
future financings and other corporate purposes, could have the
effect of making it more difficult for a third party to acquire,
or could
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discourage a third party from seeking to acquire, a majority of
our outstanding voting stock. Upon completion of this offering,
there will be no shares of preferred stock outstanding, and we
have no present plans to issue any shares of preferred stock.
Options
As of July 31, 2007, options to purchase
1,822,932 shares of common stock at a weighted average
exercise price of $2.66 per share were outstanding.
Warrants
As of July 31, 2007, we had outstanding a warrant to
purchase 120,000 shares of Series B redeemable
convertible preferred stock with an exercise price of $0.50 per
share, which shares are convertible into 156,000 shares of
common stock. If not exercised, this warrant will expire
immediately prior to the closing of this offering, provided that
we provide the holder of the warrant with at least 10 days
advance notice of the closing. As of July 31, 2007, we also
had outstanding a warrant to purchase 96,324 shares of
common stock with an exercise price of $1.21 per share, which
expires on October 10, 2008, and a warrant to purchase
520 shares of common stock with an exercise price of $0.38
per share, which expires on November 27, 2014.
Registration
Rights
We are a party to an amended and restated investors’ rights
agreement, or the 2001 investors’ rights agreement, with
certain holders of our common stock, an amended and restated
preferred investors’ rights agreement, or the 2006
investors’ rights agreement, with certain holders of our
redeemable convertible preferred stock, our chief executive
officer, chief financial officer and our senior vice president,
sales and business development and a registration rights
agreement with the holder of a warrant to purchase
520 shares of our common stock. After the completion of
this offering and the sale by the selling stockholders of the
shares offered by them hereby, holders of a total
of shares
of our common stock
and shares
of our common stock issuable upon the exercise of warrants will
have the right to require us to register these shares under the
Securities Act under specific circumstances. After registration
pursuant to these rights, these shares will become freely
tradable without restriction under the Securities Act. The
following description of the terms of the 2001 investors’
rights agreement and the 2006 investors’ rights agreement
is intended as a summary only and is qualified in its entirety
by reference to the agreements filed as exhibits to the
registration statement of which this prospectus forms a part.
Demand Registration Rights. Beginning 181 days after
the effective date of the registration statement of which this
prospectus is a part, the holders of at least 50% of our shares
of common stock having registration rights under the 2001
investors’ rights agreement may demand that we register
under the Securities Act all or a portion of their shares
subject to certain limitations. We are required to effect no
more than two registration statements pursuant to this
agreement. In addition, the holders will have the right to make
up to four requests that we register on
Form S-3
all or a portion of the registrable shares held by them having
an aggregate offering price of at least $1,000,000.
Beginning 181 days after the effective date of the
registration statement of which this prospectus is a part, the
holders of at least 50% of our shares of common stock having
registration rights under the 2006 investors’ rights
agreement may demand that we register under the Securities Act
all or a portion of their shares subject to certain limitations.
We are required to effect no more than two registration
statements pursuant to this agreement. In addition, the holders
will have the right to make up to four requests that we register
on
Form S-3
all or a portion of the registrable shares held by them having
an aggregate offering price of at least $1,000,000.
Incidental Registration Rights. If at any time we propose
to register shares of our common stock under the Securities Act,
other than on a registration statement on
Form S-4
or S-8, for
our own account or for the account of any other holder, the
holders of registrable shares under the 2001 investors’
rights agreement, the
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2006 investors’ rights agreement or the warrant
holder’s registration rights agreement will be entitled to
notice of the registration and, subject to certain exceptions,
have the right to require us to register all or a portion of the
registrable shares then held by them.
Limitations and Exceptions. In the event that any
registration in which the holders of registrable shares
participate is an underwritten public offering, the number of
registrable shares to be included may, in specified
circumstances, be limited due to market conditions.
We are required to pay all registration expenses, including the
reasonable fees and expenses of one legal counsel to the
registering security holders, but excluding underwriting
discounts and commissions. We are also required to indemnify
each participating holder with respect to each registration of
registrable shares that is effected.
Anti-Takeover
Effects of Delaware Law and Our Certificate of
Incorporation
Delaware law, our restated certificate of incorporation and our
second amended and restated bylaws contain provisions that could
have the effect of delaying, deferring or discouraging another
party from acquiring control of us. These provisions, which are
summarized below, are expected to discourage coercive takeover
practices and inadequate takeover bids. These provisions are
also designed to encourage persons seeking to acquire control of
us to first negotiate with our board of directors.
Staggered
Board; Removal of Directors
Our restated certificate of incorporation and our second amended
and restated bylaws divide our board of directors into three
classes with staggered three-year terms. In addition, a director
may be removed only for cause and only by the affirmative vote
of the holders of at least two-thirds of the voting power of our
outstanding common stock. Any vacancy on our board of directors,
including a vacancy resulting from an enlargement of our board
of directors, may be filled only by vote of a majority of our
directors then in office.
The classification of our board of directors and the limitations
on the removal of directors and filling of vacancies could make
it more difficult for a third party to acquire, or discourage a
third party from seeking to acquire, control of our company.
Stockholder
Action by Written Consent; Special Meetings
Our restated certificate of incorporation provides that any
action required or permitted to be taken by our stockholders
must be effected at a duly called annual or special meeting of
such holders and may not be effected by any consent in writing
by such holders. Our restated certificate of incorporation and
our second amended and restated bylaws also provide that, except
as otherwise required by law, special meetings of our
stockholders can only be called by our chairman of the board of
directors, our chief executive officer or our board of directors.
Advance
Notice Requirements for Stockholder Proposals
Our second amended and restated bylaws establish an advance
notice procedure for stockholder proposals to be brought before
an annual meeting of stockholders, including proposed
nominations of persons for election to the board of directors.
Stockholders at an annual meeting may only consider proposals or
nominations specified in the notice of meeting or brought before
the meeting by or at the direction of the board of directors or
by a stockholder, who is entitled to vote at the meeting, has
delivered timely written notice in proper form to our secretary
of the stockholder’s intention to bring such business
before the meeting and is a stockholder of record on both the
date such notice is given to the secretary and on the record
date for the meeting. These provisions could have the effect of
delaying until the next stockholder meeting stockholder actions
that are favored by the holders of a majority of our outstanding
voting securities.
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Delaware
Business Combination Statute
We are subject to Section 203 of the Delaware General
Corporation Law. Subject to certain exceptions, Section 203
prevents a publicly held Delaware corporation from engaging in a
“business combination” with any “interested
stockholder” for three years following the date that the
person became an interested stockholder, unless the interested
stockholder attained such status with the approval of our board
of directors or unless the business combination is approved in a
prescribed manner. A “business combination” includes,
among other things, a merger or consolidation involving us and
the “interested stockholder” and the sale of more than
10% of our assets. In general, an “interested
stockholder” is any entity or person beneficially owning
15% or more of our outstanding voting stock and any entity or
person affiliated with or controlling or controlled by such
entity or person.
Amendment
of Certificate of Incorporation and Bylaws
The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on
any matter is required to amend a corporation’s certificate
of incorporation or bylaws, unless a corporation’s
certificate of incorporation or bylaws, as the case may be,
requires a greater percentage. Our second amended and restated
bylaws may be amended or repealed by a majority vote of our
board of directors or by the affirmative vote of the holders of
at least two-thirds of the votes which all our stockholders
would be entitled to cast in any election of directors. In
addition, the affirmative vote of the holders of at least
two-thirds of the votes which all our stockholders would be
entitled to cast in any election of directors is required to
amend or repeal or to adopt any provisions inconsistent with any
of the provisions of our restated certificate of incorporation
described above under “—Staggered Board; Removal of
Directors” and “—Stockholder Action by Written
Consent; Special Meetings.”
Limitation
of Liability and Indemnification of Officers and
Directors
Our restated certificate of incorporation limits the personal
liability of directors for breach of fiduciary duty to the
maximum extent permitted by the Delaware General Corporation
Law. Our restated certificate of incorporation provides that no
director will have personal liability to us or to our
stockholders for monetary damages for breach of fiduciary duty
as a director. However, these provisions do not eliminate or
limit the liability of any of our directors:
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for any breach of their duty of loyalty to us or our
stockholders;
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for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
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for voting or assenting to unlawful payments of dividends or
other distributions; or
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for any transaction from which the director derived an improper
personal benefit.
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Any amendment to or repeal of these provisions will not
eliminate or reduce the effect of these provisions in respect of
any act or failure to act, or any cause of action, suit or claim
that would accrue or arise prior to any amendment or repeal or
adoption of an inconsistent provision. If the Delaware General
Corporation Law is amended to provide for further limitations on
the personal liability of directors of corporations, then the
personal liability of our directors will be further limited to
the greatest extent permitted by the Delaware General
Corporation Law.
In addition, our restated certificate of incorporation provides
that we must indemnify our directors and officers and we must
advance expenses, including attorneys’ fees, to our
directors and officers in connection with legal proceedings,
subject to limited exceptions.
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Authorized
but Unissued Shares
The authorized but unissued shares of common stock and preferred
stock are available for future issuance without stockholder
approval, subject to any limitations imposed by the listing
standards of the Nasdaq Global Market. These additional shares
may be used for a variety of corporate finance transactions,
acquisitions and employee benefit plans. The existence of
authorized but unissued and unreserved common stock and
preferred stock could make it more difficult or discourage an
attempt to obtain control of us by means of a proxy contest,
tender offer, merger or otherwise.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is
American Stock Transfer & Trust Company.
Nasdaq
Global Market
We have applied to have our common stock listed on the Nasdaq
Global Market under the symbol “CTCT.”
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Shares
Eligible for Future Sale
Prior to this offering, there has been no public market for our
common stock, and a liquid public trading market for our common
stock may not develop or be sustained after this offering.
Future sales of significant amounts of our common stock,
including shares issued upon exercise of outstanding options or
in the public market after this offering, or the anticipation of
those sales, could adversely affect public market prices
prevailing from time to time and could impair our ability to
raise capital through sales of our equity securities. We have
applied to have our common stock listed on the Nasdaq Global
Market under the symbol “CTCT.”
Upon completion of this offering, we will have
outstanding shares of common
stock, assuming no exercise of the underwriters’
over-allotment option and no exercise of outstanding options
after July 30, 2007. Of these shares, the shares of common
stock to be sold in this offering will be freely tradable
without restriction or further registration under the Securities
Act, except for any shares purchased by our
“affiliates,” as that term is defined in Rule 144
under the Securities Act. All remaining shares of common stock
held by existing stockholders will be “restricted
securities” as that term is defined in Rule 144 under
the Securities Act. Substantially all of these restricted
securities will be subject to the
lock-up
agreements described below. After the expiration of the
lock-up
agreements, these restricted securities may be sold in the
public market only if registered or if they qualify for an
exemption from registration under Rule 144 or 701 under the
Securities Act.
Rule 144
In general and subject to the
lock-up
agreements described below, under Rule 144 of the
Securities Act, beginning 90 days after the date of this
prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell
within any three-month period a number of shares that does not
exceed:
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1% of the number of shares of our common stock then outstanding,
which will equal
approximately shares
immediately after this offering, and
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the average weekly trading volume in our common stock on the
Nasdaq Global Market during the four calendar weeks preceding
the sale.
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Sales under Rule 144 are also subject to manner of sale
provisions and notice requirements and to the availability of
current public information about us. Upon expiration of the
180-day
lock-up
period described below, shares of our common stock will be
eligible for sale under Rule 144, excluding shares eligible
for resale under Rule 144(k) described below. We cannot
estimate the number of shares of common stock that our existing
stockholders will elect to sell under Rule 144.
Rule 144(k)
Subject to the
lock-up
agreements described below, shares of our common stock eligible
for sale under Rule 144(k) may be sold immediately upon
completion of this offering. In general, under Rule 144(k),
a person may sell shares of common stock acquired from us
immediately upon completion of this offering, without regard to
manner of sale, the availability of public information about us
or volume, if:
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the person is not our affiliate and has not been our affiliate
at any time during the three months preceding the sale; and
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the person has beneficially owned the shares proposed to be sold
for at least two years, including the holding period of any
prior owner other than an affiliate.
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Upon the expiration of the
180-day
lock-up
period described below,
approximately shares
of common stock will be eligible for sale under Rule 144(k).
98
Rule 701
In general, under Rule 701 of the Securities Act, any of
our employees, consultants or advisors who purchased shares from
us in connection with a qualified compensatory stock plan or
other written agreement is eligible to resell those shares
90 days after the effective date of this offering in
reliance on Rule 144, but without compliance with the
various restrictions, including the holding period, contained in
Rule 144. Subject to the
180-day
lock-up
period described below,
approximately shares
of our common stock will be eligible for sale in accordance with
Rule 701.
Lock-up
Agreements
Our officers, directors and other stockholders
representing shares of our
common stock have agreed that, subject to certain exceptions,
without the prior written consent of CIBC World Markets Corp.
and Thomas Weisel Partners LLC, as representatives of the
underwriters, they will not during the period ending
180 days after the date of this prospectus (subject to
extension in specified circumstances), directly or indirectly:
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offer, pledge, assign, encumber, announce the intention to sell,
sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right
or warrant to purchase, lend, or otherwise transfer or dispose
of, any shares of our common stock or any securities directly or
indirectly convertible into or exercisable or exchangeable for
shares of our common stock, whether now owned or hereafter
acquired; or
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enter into any swap or other agreement or arrangement that
transfers, in whole or in part, any of the economic consequences
of ownership of shares of our common stock.
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The 180-day
restricted period will be automatically extended in the
following circumstances: (1) during the last 17 days
of the
180-day
restricted period, if we issue an earnings release or material
news or a material event occurs, the restrictions described in
the preceding paragraph will continue to apply until the
expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event; or
(2) prior to the expiration of the
180-day
restricted period, if we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
180-day
period, the restrictions described in the preceding paragraph
will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release.
CIBC World Markets Corp. and Thomas Weisel Partners LLC
currently do not anticipate shortening or waiving any of the
lock-up
agreements and do not have any pre-established conditions for
such modifications or waivers. CIBC World Markets Corp. and
Thomas Weisel Partners LLC may, however, release for sale in the
public market all or any portion of the shares subject to the
lock-up
agreements.
Stock
Plans
As of June 30, 2007, we had outstanding options to purchase
1,854,641 shares of common stock, of which options to
purchase 489,064 shares of common stock were exercisable as
of June 30, 2007. Following this offering, we intend to
file registration statements on
Form S-8
under the Securities Act to register all of the shares of common
stock subject to outstanding options and options and other
awards issuable pursuant to our equity plans.
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We and the selling stockholders have entered into an
underwriting agreement with the underwriters named below. CIBC
World Markets Corp., Thomas Weisel Partners LLC, William
Blair & Company, L.L.C., Cowen and Company, LLC and
Needham & Company, LLC are acting as representatives
of the underwriters.
The underwriting agreement provides for the purchase of a
specific number of shares of our common stock by each of the
underwriters. The underwriters’ obligations are several,
which means that each underwriter is required to purchase a
specified number of shares, but is not responsible for the
commitment of any other underwriter to purchase shares. Subject
to the terms and conditions of the underwriting agreement, each
underwriter has severally agreed to purchase the number of
shares of our common stock set forth opposite its name below:
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Underwriter
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Number of Shares
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CIBC World Markets Corp.
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Thomas Weisel Partners LLC
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William Blair & Company,
L.L.C.
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Cowen and Company, LLC
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Needham & Company, LLC
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Total
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The underwriters have agreed to purchase all of the shares of
our common stock offered by this prospectus (other than those
covered by the over-allotment option described below) if any are
purchased. Under the underwriting agreement, if an underwriter
defaults in its commitment to purchase shares of our common
stock, the commitments of non-defaulting underwriters may be
increased or the underwriting agreement may be terminated,
depending on the circumstances.
Entities affiliated with Commonwealth Capital Ventures, which
are existing stockholders, have indicated an interest in
purchasing up to an aggregate
of million
shares of our common stock in this offering at the initial
public offering price. Assuming an initial public offering price
of $ per share, the mid-point of
the estimated price range shown on the cover page of this
prospectus, these stockholders would purchase up to
$ million of our common stock
in this offering. However, because indications of interest are
not binding agreements or commitments to purchase, these
stockholders might not purchase any common stock in this
offering.
The shares of our common stock should be ready for delivery on
or
about ,
2007 against payment in immediately available funds. The
underwriters are offering the shares subject to various
conditions and may reject all or part of any order. The
representatives have advised us and the selling stockholders
that the underwriters propose to offer the shares directly to
the public at the public offering price that appears on the
cover page of this prospectus. In addition, the representatives
may offer some of the shares to other securities dealers at such
price less a concession of $ per
share. The underwriters may also allow, and such dealers may
reallow, a concession not in excess of
$ per share to other dealers.
After the shares are released for sale to the public, the
representatives may change the offering price and other selling
terms at various times.
We and the selling stockholders have granted the underwriters an
over-allotment option. This option, which is exercisable for up
to 30 days after the date of this prospectus, permits the
underwriters to purchase a maximum
of additional shares of our common
stock ( from us
and from the selling stockholders)
to cover over-allotments. If the underwriters exercise all or
part of this option, they will purchase shares covered by the
option at the initial public offering price that appears on the
cover page of this prospectus, less the underwriting discount.
If this option is exercised in full, the total price to the
public will be
$ ,
the total proceeds to us will be
$
and the total proceeds to the selling stockholders will be
$ .
The underwriters have severally agreed that, to the extent the
over-allotment option is exercised, they will each purchase a
number of additional shares proportionate to the
underwriter’s initial amount reflected in the foregoing
table.
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The following table provides information regarding the amount of
the discount to be paid to the underwriters by us and the
selling stockholders:
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Total With Full
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Total Without Exercise of
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Exercise of
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Per Share
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Over-Allotment Option
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Over-Allotment Option
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Constant Contact
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$
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$
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$
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Selling Stockholders
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Total
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$
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$
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We estimate that our total expenses of this offering, excluding
the underwriting discount, will be approximately
$ million.
We and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act of 1933.
We, our officers and directors and substantially all other
stockholders have agreed to a
180-day
“lock up” with respect to shares of our common stock
and other of our securities that they beneficially own,
including securities that are convertible into shares of common
stock and securities that are exchangeable or exercisable for
shares of common stock. This means that, without the prior
written consent of CIBC World Markets Corp. and Thomas Weisel
Partners LLC, for a period of 180 days following the date
of this prospectus, we and such persons may not (x) offer,
pledge, assign, encumber, announce the intention to sell, sell,
contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right
or warrant to purchase, lend, or otherwise transfer or dispose
of these securities, or (y) enter into any swap or other
agreement or arrangement that transfers, in whole or in part,
any of the economic consequences of ownership of shares of
common stock, whether any such transaction is to be settled by
delivery of shares of our common stock or such other securities.
In addition, the
lock-up
period may be extended in the event that we issue an release
earnings or announce certain material news or a material event
with respect to us occurs during the last 17 days of the
lock-up
period, or prior to the expiration of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period.
The restrictions in these
lock-up
agreements will not apply, subject to certain conditions, to
transactions relating to: (i) shares of our common stock
acquired from the underwriters as part of this offering in
connection with any directed share program;
(ii) transactions relating to shares of our common stock
acquired in open market transactions after the completion of
this offering; (iii) the sale of shares of our common stock
pursuant to the underwriting agreement; (iv) transfers of
shares of our common stock or such other securities as a bona
fide gift or in connection with estate planning or by intestacy,
provided that the recipient agrees to be bound by such
restrictions; or (v) distributions of shares of our common
stock or such other securities to their limited partners,
members, stockholders or affiliates, provided that the recipient
agrees to be bound by such restrictions.
The representatives have informed us that they do not expect
discretionary sales by the underwriters to exceed five percent
of the shares offered by this prospectus.
While we have applied to have our common stock listed on the
Nasdaq Global Market under the symbol CTCT, prior to this
offering there has been no established trading market for the
shares. The offering price for the shares will be determined by
us, the selling stockholders and the representatives, based on
the following factors:
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the history and prospects for the industry in which we compete;
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our past and present operations;
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our historical results of operations;
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our prospects for future business and earning potential;
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our management;
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the general condition of the securities markets at the time of
this offering;
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the recent market prices of securities of generally comparable
companies;
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the market capitalization and stages of development of other
companies which we and the representatives believe to be
comparable to us; and
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other factors deemed to be relevant.
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Rules of the SEC may limit the ability of the underwriters to
bid for or purchase shares before the distribution of the shares
is completed. However, the underwriters may engage in the
following activities in accordance with the rules:
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Stabilizing transactions—The representatives may make bids
or purchases for the purpose of pegging, fixing or maintaining
the price of the shares, so long as stabilizing bids do not
exceed a specified maximum.
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Over-allotments and syndicate covering transactions—The
underwriters may sell more shares of our common stock in
connection with this offering than the number of shares than
they have committed to purchase. This over-allotment creates a
short position for the underwriters. This short sales position
may involve either “covered” short sales or
“naked” short sales. Covered short sales are short
sales made in an amount not greater than the underwriters’
over-allotment option to purchase additional shares in this
offering described above. The underwriters may close out any
covered short position either by exercising their over-allotment
option or by purchasing shares in the open market. To determine
how they will close the covered short position, the underwriters
will consider, among other things, the price of shares available
for purchase in the open market, as compared to the price at
which they may purchase shares through the over-allotment
option. Naked short sales are short sales in excess of the
over-allotment option. The underwriters must close out any naked
short position by purchasing shares in the open market. A naked
short position is more likely to be created if the underwriters
are concerned that, in the open market after pricing, there may
be downward pressure on the price of the shares that could
adversely affect investors who purchase shares in this offering.
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Penalty bids—If the representatives purchase shares in the
open market in a stabilizing transaction or syndicate covering
transaction, they may reclaim a selling concession from the
underwriters and selling group members who sold those shares as
part of this offering.
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Similar to other purchase transactions, the underwriters’
purchases to cover the syndicate short sales or to stabilize the
market price of our common stock may have the effect of raising
or maintaining the market price of our common stock or
preventing or mitigating a decline in the market price of our
common stock. As a result, the price of the shares of our common
stock may be higher than the price that might otherwise exist in
the open market. The imposition of a penalty bid might also have
an effect on the price of the shares if it discourages resales
of the shares.
Neither we nor the underwriters makes any representation or
prediction as to the effect that the transactions described
above may have on the price of the shares. These transactions
may occur on the Nasdaq Global Market or otherwise. If such
transactions are commenced, they may be discontinued without
notice at any time.
A prospectus in electronic format may be made available on
websites or through other online services maintained by one or
more of the underwriters or by their affiliates. In those cases,
prospective investors may view offering terms online and,
depending upon the particular underwriter, prospective investors
may be allowed to place orders online. The underwriters may
agree to allocate a specific number of shares to online
brokerage account holders. Any such allocation for online
distributions will be made by the representative on the same
basis as other allocations.
Other than the prospectus in electronic format, the information
on any underwriter’s website and any information on any
other website maintained by an underwriter is not part of the
prospectus in electronic format or the registration statement of
which the prospectus in electronic format forms a part, has not
been
102
approved
and/or
endorsed by us or any underwriter or selling stockholder in its
capacity as underwriter or selling stockholder and should not be
relied upon by investors.
Mark Goodman, Managing Director, Head of Consumer and Business
Services Group of CIBC World Markets Corp., a co-managing
underwriter of this offering, is the brother of Gail F. Goodman.
Ms. Goodman is our Chairman, President, Chief Executive Officer
and the beneficial holder of more than 5% of our voting
securities.
Certain of the underwriters or their affiliates may provide
investment and commercial banking and advisory services to us in
the ordinary course of business, for which they may receive
customary fees and commissions.
Belgium
In Belgium, the offering is exclusively conducted under
applicable private placement exemptions of the Belgium
securities laws and therefore it has not been and will not be
notified to, and this document or any other offering material
relating to the securities has not been and will not be approved
by, the Belgian Banking, Finance and Insurance Commission
(“Commission bancaire, financière et des
assurances/Commissie voor het Bank, Financie en
Assurantiewezen”). Any representation to the contrary is
unlawful.
Each underwriter has undertaken not to offer sell, resell,
transfer or deliver directly or indirectly, any securities, or
to take any steps relating/ancillary thereto, and not to
distribute or publish this document or any other material
relating to the securities or to the offering in a manner which
would be construed as: (a) a public offering under the
Belgian Royal Decree of 7 July 1999 on the public character
of financial transactions; or (b) an offering of securities
to the public under Directive 2003/71/EC which triggers an
obligation to publish a prospectus in Belgium. Any action
contrary to these restrictions will cause the recipient and us
to be in violation of the Belgian securities laws.
France
Neither this prospectus nor any other offering material relating
to the securities has been submitted to the clearance procedures
of the Autorité des marchés financiers in
France. The securities have not been offered or sold and will
not be offered or sold, directly or indirectly, to the public in
France. Neither this prospectus nor any other offering material
relating to the securities has been or will be:
(a) released, issued, distributed or caused to be released,
issued or distributed to the public in France; or (b) used
in connection with any offer for subscription or sale of the
securities to the public in France. Such offers, sales and
distributions will be made in France only: (i) to qualified
investors (investisseurs qualifiés)
and/or to a
restricted circle of investors (cercle restreint
d’investisseurs), in each case investing for their own
account, all as defined in and in accordance with
Articles L.411-2,
D.411-1, D.411-2, D.734-1, D.744-1, D.754-1 and D.764-1 of the
French Code monétaire et financier; (ii) to
investment services providers authorised to engage in portfolio
management on behalf of third parties; or (iii) in a
transaction that, in accordance with
article L.411-2-II-1°-or-2°-or
3° of the French Code monétaire et financier
and
article 211-2
of the General Regulations (Règlement
Général) of the Autorité des marchés
financiers, does not constitute a public offer (appel
public à l’épargne). Such securities may be
resold only in compliance with
Articles L.411-1,
L.411-2, L.412-1 and L.621-8 through L.621-8-3 of the French
Code monétaire et financier.
United
Kingdom/Germany/Norway/The Netherlands
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a
“Relevant Member State”) an offer to the public of any
securities which are the subject of the offering contemplated by
this prospectus may not be made in that Relevant Member State
other than the offers contemplated in this prospectus in the
United Kingdom, Germany, Norway and the Netherlands where
prospectus will be approved or passported for the purposes of a
non-exempt offer once this prospectus has been approved by the
competent authority in such Member State and published and
passported in accordance with the Prospectus Directive as
implemented in the United Kingdom, Germany, Norway and the
Netherlands
103
except that an offer to the public in that Relevant Member State
of any securities may be made at any time under the following
exemptions under the Prospectus Directive, if they have been
implemented in that Relevant Member State:
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•
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to legal entities which are authorised or regulated to operate
in the financial markets or, if not so authorised or regulated,
whose corporate purpose is solely to invest in securities;
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•
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to any legal entity which has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than €43,000,000 and
(3) an annual net turnover of more than €50,000,000,
as shown in its last annual or consolidated accounts;
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•
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by the managers to fewer than 100 natural or legal persons
(other than qualified investors as defined in the Prospectus
Directive) subject to obtaining the prior consent of CIBC World
Market Corp. and Thomas Weisel Partners LLC for any such
offer; or
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•
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in any other circumstances falling within Article 3(2) of
the Prospectus Directive, provided that no such offer of
securities shall result in a requirement for the publication by
us or any manager of a prospectus pursuant to Article 3 of
the Prospectus Directive.
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For the purposes of this provision, the expression an
“offer to the public” in relation to any securities in
any Relevant Member State means the communication in any form
and by any means of sufficient information on the terms of the
offer and any securities to be offered so as to enable an
investor to decide to purchase any securities, as the same may
be varied in that Member State by any measure implementing the
Prospectus Directive in that Member State and the expression
“Prospectus Directive” means Directive 2003/71/EC and
includes any relevant implementing measure in each Relevant
Member State.
Each underwriter has represented, warranted and agreed that:
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•
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it has only communicated or caused to be communicated and will
only communicate or cause to be communicated any invitation or
inducement to engage in investment activity (within the meaning
of Section 21 of the Financial Services and Markets Act
2000 (the FSMA)) received by it in connection with the issue or
sale of any securities in circumstances in which
Section 21(1) of the FSMA does not apply to us; and
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•
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it has complied with and will comply with all applicable
provisions of the FSMA with respect to anything done by it in
relation to the securities in, from or otherwise involving the
United Kingdom.
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Israel
In the State of Israel, the securities offered hereby may not be
offered to any person or entity other than the following:
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•
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a fund for joint investments in trust (i.e., mutual fund), as
such term is defined in the Law for Joint Investments in Trust,
5754 1994, or a management company of such a fund;
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•
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a provident fund as defined in Section 47(a)(2) of the
Income Tax Ordinance of the State of Israel, or a management
company of such a fund;
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•
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an insurer, as defined in the Law for Oversight of Insurance
Transactions, 5741 1981, (d) a banking entity or satellite
entity, as such terms are defined in the Banking Law
(Licensing), 5741 1981, other than a joint services company,
acting for their own account or fro the account of investors of
the type listed in Section 15A(b) of the Securities Law
1968;
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•
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a company that is licensed as a portfolio manager, as such term
is defined in Section 8(b) of the Law for the Regulation of
Investment Advisors and Portfolio Managers,
5755-1995,
acting on its own account or for the account of investors of the
type listed in Section 15A(b) of the Securities Law 1968;
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104
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•
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a company that is licensed as an investment advisor, as such
term is defined in Section 7(c) of the Law for the
Regulation of Investment Advisors and Portfolio Managers,
5755-1995,
acting on its own account;
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•
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a company that is a member of the Tel Aviv Stock Exchange,
acting on its own account or for the account of investors of the
type listed in Section 15A(b) of the Securities Law 1968;
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•
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an underwriter fulfilling the conditions of Section 56(c)
of the Securities Law,
5728-1968;
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•
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a venture capital fund (defined as an entity primarily involved
in investments in companies which, at the time of investment,
(i) are primarily engaged in research and development or
manufacture of new technological products or processes and
(ii) involve above-average risk);
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•
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an entity primarily engaged in capital markets activities in
which all of the equity owners meet one or more of the above
criteria; and
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•
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an entity, other than an entity formed for the purpose of
purchasing securities in this offering, in which the
shareholders equity (including pursuant to foreign accounting
rules, international accounting regulations and
U.S. generally accepted accounting rules, as defined in the
Securities Law Regulations (Preparation of Annual Financial
Statements), 1993) is in excess of NIS 250 million.
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Any offeree of the securities offered hereby in the State of
Israel shall be required to submit written confirmation that it
falls within the scope of one of the above criteria. This
prospectus will not be distributed or directed to investors in
the State of Israel who do not fall within one of the above
criteria.
Italy
The offering of the securities offered hereby in Italy has not
been registered with the Commissione Nazionale per la
Società e la Borsa (“CONSOB”) pursuant to Italian
securities legislation and, accordingly, the securities offered
hereby cannot be offered, sold or delivered in the Republic of
Italy (“Italy”) nor may any copy of this prospectus or
any other document relating to the securities offered hereby be
distributed in Italy other than to professional investors
(operatori qualificati) as defined in Article 31, second
paragraph, of CONSOB Regulation No. 11522 of
1 July, 1998 as subsequently amended. Any offer, sale or
delivery of the securities offered hereby or distribution of
copies of this prospectus or any other document relating to the
securities offered hereby in Italy must be made:
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•
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by an investment firm, bank or intermediary permitted to conduct
such activities in Italy in accordance with Legislative Decree
No. 58 of 24 February 1998 and Legislative Decree
No. 385 of 1 September 1993 (the “Banking
Act”);
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•
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in compliance with Article 129 of the Banking Act and the
implementing guidelines of the Bank of Italy; and
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•
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in compliance with any other applicable laws and regulations and
other possible requirements or limitations which may be imposed
by Italian authorities.
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Sweden
This prospectus has not been nor will it be registered with or
approved by Finansinspektionen (the Swedish Financial
Supervisory Authority). Accordingly, this prospectus may not be
made available, nor may the securities offered hereunder be
marketed and offered for sale in Sweden, other than under
circumstances which are deemed not to require a prospectus under
the Financial Instruments Trading Act (1991: 980). This offering
will only be made to qualified investors in Sweden. This
offering will be made to no more than 100 persons or
entities in Sweden.
105
Switzerland
The securities offered pursuant to this prospectus will not be
offered, directly or indirectly, to the public in Switzerland
and this prospectus does not constitute a public offering
prospectus as that term is understood pursuant to art. 652a or
art. 1156 of the Swiss Federal Code of Obligations. We have not
applied for a listing of the securities being offered pursuant
to this prospectus on the SWX Swiss Exchange or on any other
regulated securities market, and consequently, the information
presented in this prospectus does not necessarily comply with
the information standards set out in the relevant listing rules.
The securities being offered pursuant to this prospectus have
not been registered with the Swiss Federal Banking Commission as
foreign investment funds, and the investor protection afforded
to acquirers of investment fund certificates does not extend to
acquirers of securities.
Investors are advised to contact their legal, financial or tax
advisers to obtain an independent assessment of the financial
and tax consequences of an investment in securities.
The validity of the common stock we are offering will be passed
upon by Wilmer Cutler Pickering Hale and Dorr LLP, Boston,
Massachusetts. Bingham McCutchen LLP, Boston, Massachusetts, is
counsel for the underwriters in connection with this offering.
The financial statements as of December 31, 2006 and for
the year ended December 31, 2006 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, given on the authority of said firm as experts
in auditing and accounting.
The financial statements as of December 31, 2005 and for
each of the two years in the two year period ended
December 31, 2005 included herein, have been audited by
Vitale, Caturano & Company, Ltd., an independent
registered public accounting firm, as indicated in their report
with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in giving said reports.
Where
You Can Find More Information
We have filed a registration statement on
Form S-1
with the SEC in connection with this offering. In addition, upon
completion of the offering, we will be required to file annual,
quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy the registration
statement and any other documents we have filed at the
SEC’s Public Reference Room at 100 F Street,
N.E., Room 1580, Washington, D.C. 20549. Please call
the SEC at
1-800-SEC-0330
for further information on the Public Reference Room. Our SEC
filings are also available to the public at the SEC’s
Internet site at
http://www.sec.gov.
This prospectus is part of the registration statement and does
not contain all of the information included in the registration
statement and the exhibits, schedules and amendments to the
registration statement. Some items are omitted in accordance
with the rules and regulations of the SEC. For further
information with respect to us and our common stock, we refer
you to the registration statement and to the exhibits and
schedules to the registration statement filed as part of the
registration statement. Whenever a reference is made in this
prospectus to any of our contracts or other documents, the
reference may not be complete and, for a copy of the contract or
document, you should refer to the exhibits that are a part of
the registration statement.
After the offering, we expect to provide annual reports to our
stockholders that include financial information examined and
reported on by our independent registered public accounting
firm. We also maintain a website at www.constantcontact.com. Our
website is not a part of this prospectus.
106
Constant
Contact, Inc.
Index to
Financial Statements
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Page(s)
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F-2
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F-4
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F-5
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F-6
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F-7
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F-8
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F-1
Report
of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Constant Contact, Inc.
The stock split described in Note 12 to the financial
statements has not been consummated at September 4, 2007.
When it has been consummated, we will be in a position to
furnish the following report:
“In our opinion, the accompanying balance sheet and the
related statements of operations, of changes in redeemable
convertible preferred stock and stockholder’s equity
(deficit) and comprehensive loss, and of cash flows present
fairly, in all material respects, the financial position of
Constant Contact, Inc. (the “Company”) at
December 31, 2006 and the results of its operations and its
cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, the
Company changed the manner in which it accounts for stock-based
compensation in 2006.”
/s/ PricewaterhouseCoopers
LLP
Boston, Massachusetts
July 6, 2007
F-2
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Constant Contact, Inc.
The stock split described in Note 12 to the financial
statements has not been consummated at September 4, 2007.
When it has been consummated, we will be in a position to
furnish the following report:
“We have audited the accompanying balance sheet of Constant
Contact, Inc. (the Company) as of December 31, 2005 and the
related statements of operations, of changes in redeemable
convertible preferred stock and stockholders’ equity
(deficit) and comprehensive loss, and of cash flows for each of
the two years in the two year period ended December 31,
2005. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal
controls over financial reporting. Our audit included
consideration of internal controls over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal controls
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Constant Contact Inc. as of December 31, 2005 and the
results of its operations and of its cash flows for each of the
two years in the two year period ended December 31, 2005 in
conformity with accounting principles generally accepted in the
United States of America.”
/s/ Vitale,
Caturano and Company, Ltd.
VITALE, CATURANO & COMPANY, LTD.
Boston, Massachusetts
March 10, 2006 (except with respect to the
Series C financing discussed in Note 5
as to which the date is May 12, 2006)
F-3
Constant
Contact, Inc.
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Pro Forma
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December 31,
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June 30,
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June 30,
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(In thousands, except share and per share data)
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2005
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2006
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2007
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2007
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(unaudited)
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(unaudited)
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Assets
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Current assets
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|
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|
|
|
|
|
|
|
|
|
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|
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|
Cash and cash equivalents
|
|
$
|
2,784
|
|
|
$
|
8,786
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|
|
$
|
6,059
|
|
|
$
|
6,119
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|
Short-term marketable securities
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|
|
–
|
|
|
|
4,004
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|
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|
5,133
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5,133
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Accounts receivable, net of
allowance for doubtful accounts of $18, $3 and $12 as of
December 31, 2005 and 2006 and June 30, 2007,
respectively
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47
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41
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28
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|
|
28
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Prepaid expenses and other current
assets
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|
|
156
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|
|
|
411
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|
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1,629
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|
1,629
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|
|
|
|
|
|
|
|
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|
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|
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Total current assets
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|
2,987
|
|
|
|
13,242
|
|
|
|
12,849
|
|
|
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12,909
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Property and equipment, net
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2,292
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4,957
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|
|
|
6,122
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6,122
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Restricted cash
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266
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|
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|
266
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358
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|
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358
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Other assets
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–
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16
|
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16
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16
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Total assets
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$
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5,545
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|
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$
|
18,481
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|
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$
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19,345
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$
|
19,405
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Liabilities, Redeemable
Convertible Preferred Stock and Stockholders’ Equity
(Deficit)
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Current liabilities
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|
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|
|
|
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|
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Accounts payable
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$
|
1,478
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|
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$
|
2,576
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|
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$
|
2,617
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|
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$
|
2,617
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Accrued expenses
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|
|
494
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|
|
|
2,406
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|
|
|
2,672
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|
|
|
2,672
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Deferred revenue
|
|
|
2,827
|
|
|
|
5,476
|
|
|
|
8,047
|
|
|
|
8,047
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Redeemable convertible preferred
stock warrant
|
|
|
–
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|
|
|
628
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|
|
|
1,465
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|
|
|
–
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Current portion of capital lease
obligation
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|
|
10
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|
|
|
–
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|
|
|
–
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|
|
|
–
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|
Current portion of notes payable
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|
|
614
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|
|
|
449
|
|
|
|
1,405
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|
|
|
1,405
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|
|
|
|
|
|
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|
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|
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|
|
|
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Total current liabilities
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|
5,423
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|
|
|
11,535
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|
|
|
16,206
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|
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14,741
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Notes payable, net of current
portion
|
|
|
702
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|
|
|
253
|
|
|
|
1,678
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|
|
|
1,678
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
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Total liabilities
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|
|
6,125
|
|
|
|
11,788
|
|
|
|
17,884
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|
|
|
16,419
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|
|
|
|
|
|
|
|
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|
|
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Commitments and contingencies
(Note 10)
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|
|
Redeemable convertible preferred
stock
|
|
|
|
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|
|
|
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|
Series A redeemable
convertible preferred stock, $0.01 par value;
1,026,680 shares authorized, issued and outstanding at
December 31, 2005 and 2006 and June 30, 2007 ($17,454
liquidation value as of December 31, 2006); no shares
issued or outstanding pro forma
|
|
|
10,835
|
|
|
|
14,049
|
|
|
|
14,504
|
|
|
|
–
|
|
Series B redeemable
convertible preferred stock, $0.01 par value;
9,761,666 shares authorized; 9,641,666 shares issued
and outstanding at December 31, 2005 and 2006 and
June 30, 2007, ($6,708 liquidation value as of
December 31, 2006); no shares issued or outstanding pro
forma
|
|
|
5,822
|
|
|
|
6,376
|
|
|
|
6,423
|
|
|
|
–
|
|
Series C redeemable
convertible preferred stock, $0.01 par value;
2,521,432 shares authorized, issued and outstanding at
December 31, 2006 and June 30, 2007 ($15,000
liquidation value as of December 31, 2006); no shares
issued or outstanding pro forma
|
|
|
–
|
|
|
|
14,897
|
|
|
|
14,913
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total redeemable convertible
preferred stock
|
|
|
16,657
|
|
|
|
35,322
|
|
|
|
35,840
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock,
20,000,000 shares authorized, $0.01 par value;
3,464,829, 3,788,944 and 3,952,848 shares issued and
outstanding as of December 31, 2005 and 2006 and
June 30, 2007, respectively; 40,000,000 shares authorized,
$0.01 par value; 21,255,523 shares issued and outstanding
pro forma
|
|
|
35
|
|
|
|
38
|
|
|
|
40
|
|
|
|
213
|
|
Additional paid-in capital
|
|
|
9,391
|
|
|
|
5,835
|
|
|
|
5,579
|
|
|
|
42,771
|
|
Accumulated other comprehensive loss
|
|
|
–
|
|
|
|
–
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Accumulated deficit
|
|
|
(26,663
|
)
|
|
|
(34,502
|
)
|
|
|
(39,996
|
)
|
|
|
(39,996
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
(deficit)
|
|
|
(17,237
|
)
|
|
|
(28,629
|
)
|
|
|
(34,379
|
)
|
|
|
2,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable
convertible preferred stock and stockholders’ equity
(deficit)
|
|
$
|
5,545
|
|
|
$
|
18,481
|
|
|
$
|
19,345
|
|
|
$
|
19,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-4
Constant
Contact, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Years Ended December 31,
|
|
|
June 30,
|
|
(In thousands, except share and per share data)
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Revenue
|
|
$
|
8,071
|
|
|
$
|
14,658
|
|
|
$
|
27,552
|
|
|
$
|
11,829
|
|
|
$
|
21,111
|
|
Cost of revenue
|
|
|
2,211
|
|
|
|
3,747
|
|
|
|
7,801
|
|
|
|
3,354
|
|
|
|
5,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,860
|
|
|
|
10,911
|
|
|
|
19,751
|
|
|
|
8,475
|
|
|
|
15,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,140
|
|
|
|
3,355
|
|
|
|
6,172
|
|
|
|
2,774
|
|
|
|
4,971
|
|
Sales and marketing
|
|
|
3,385
|
|
|
|
7,460
|
|
|
|
18,592
|
|
|
|
7,084
|
|
|
|
12,795
|
|
General and administrative
|
|
|
856
|
|
|
|
1,326
|
|
|
|
2,623
|
|
|
|
1,079
|
|
|
|
2,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
6,381
|
|
|
|
12,141
|
|
|
|
27,387
|
|
|
|
10,937
|
|
|
|
20,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(521
|
)
|
|
|
(1,230
|
)
|
|
|
(7,636
|
)
|
|
|
(2,462
|
)
|
|
|
(4,863
|
)
|
Interest income
|
|
|
17
|
|
|
|
47
|
|
|
|
479
|
|
|
|
114
|
|
|
|
280
|
|
Interest expense
|
|
|
(51
|
)
|
|
|
(71
|
)
|
|
|
(94
|
)
|
|
|
(53
|
)
|
|
|
(73
|
)
|
Other expense
|
|
|
–
|
|
|
|
–
|
|
|
|
(588
|
)
|
|
|
(367
|
)
|
|
|
(838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(555
|
)
|
|
|
(1,254
|
)
|
|
|
(7,839
|
)
|
|
|
(2,768
|
)
|
|
|
(5,494
|
)
|
Accretion of redeemable
convertible preferred stock
|
|
|
(3,701
|
)
|
|
|
(5,743
|
)
|
|
|
(3,788
|
)
|
|
|
(3,270
|
)
|
|
|
(518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders
|
|
$
|
(4,256
|
)
|
|
$
|
(6,997
|
)
|
|
$
|
(11,627
|
)
|
|
$
|
(6,038
|
)
|
|
$
|
(6,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders per share: basic and diluted
|
|
$
|
(4.37
|
)
|
|
$
|
(2.49
|
)
|
|
$
|
(3.38
|
)
|
|
$
|
(1.82
|
)
|
|
$
|
(1.59
|
)
|
Weighted average shares
outstanding used in computing per share amounts: basic and
diluted
|
|
|
973,568
|
|
|
|
2,813,320
|
|
|
|
3,437,984
|
|
|
|
3,312,405
|
|
|
|
3,769,759
|
|
Pro forma net loss per share:
basic and diluted (unaudited)
|
|
|
|
|
|
|
|
|
|
$
|
(0.35
|
)
|
|
|
|
|
|
$
|
(0.22
|
)
|
Pro forma weighted average common
shares outstanding (unaudited)
|
|
|
|
|
|
|
|
|
|
|
20,740,659
|
|
|
|
|
|
|
|
21,072,434
|
|
The accompanying notes are an integral part of these financial
statements.
F-5
Constant Contact, Inc.
Statements of Changes in Redeemable
Convertible Preferred Stock and Stockholders’ Equity
(Deficit) and Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
Series C
|
|
|
Total Redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Convertible
|
|
|
Redeemable Convertible
|
|
|
Redeemable Convertible
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
Comprehensive
|
|
(In thousands, except share data)
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Loss
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
|
Loss
|
|
Balance at December 31,
2003
|
|
|
1,026,680
|
|
|
$
|
3,668
|
|
|
|
9,641,666
|
|
|
$
|
3,545
|
|
|
|
–
|
|
|
$
|
–
|
|
|
|
10,668,346
|
|
|
$
|
7,213
|
|
|
|
|
880,965
|
|
|
$
|
9
|
|
|
$
|
18,757
|
|
|
$
|
(40
|
)
|
|
|
|
|
|
$
|
(24,854
|
)
|
|
$
|
(6,128
|
)
|
|
|
|
|
Issuance of common stock in
connection with stock option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
1,918,684
|
|
|
|
19
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
Amortization of deferred
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
Accretion of Series A and B
redeemable convertible preferred stock to redemption value
|
|
|
|
|
|
|
2,636
|
|
|
|
|
|
|
|
1,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,701
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,701
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(555
|
)
|
|
|
(555
|
)
|
|
$
|
(555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2004
|
|
|
1,026,680
|
|
|
|
6,304
|
|
|
|
9,641,666
|
|
|
|
4,610
|
|
|
|
–
|
|
|
|
–
|
|
|
|
10,668,346
|
|
|
|
10,914
|
|
|
|
|
2,799,649
|
|
|
|
28
|
|
|
|
15,111
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
(25,409
|
)
|
|
|
(10,287
|
)
|
|
|
|
|
Issuance of common stock in
connection with stock option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
473,170
|
|
|
|
5
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
Issuance of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
192,010
|
|
|
|
2
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
Amortization of deferred
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
Accretion of Series A and B
redeemable convertible preferred stock to redemption value
|
|
|
|
|
|
|
4,531
|
|
|
|
|
|
|
|
1,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,743
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,743
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,254
|
)
|
|
|
(1,254
|
)
|
|
$
|
(1,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2005
|
|
|
1,026,680
|
|
|
|
10,835
|
|
|
|
9,641,666
|
|
|
|
5,822
|
|
|
|
–
|
|
|
|
–
|
|
|
|
10,668,346
|
|
|
|
16,657
|
|
|
|
|
3,464,829
|
|
|
|
35
|
|
|
|
9,391
|
|
|
|
–
|
|
|
|
|
|
|
|
(26,663
|
)
|
|
|
(17,237
|
)
|
|
|
|
|
Issuance of common stock in
connection with stock option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
192,076
|
|
|
|
2
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
Issuance of common stock in
connection with warrant exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
132,039
|
|
|
|
1
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
Reclassification of redeemable
convertible preferred stock warrant to liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40
|
)
|
|
|
|
|
Issuance of Series C
redeemable convertible preferred stock, net of issuance costs of
$123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,521,432
|
|
|
|
14,877
|
|
|
|
2,521,432
|
|
|
|
14,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of Series A, B and C
redeemable convertible preferred stock to redemption value
|
|
|
|
|
|
|
3,214
|
|
|
|
|
|
|
|
554
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
3,788
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,788
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,839
|
)
|
|
|
(7,839
|
)
|
|
$
|
(7,839
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,839
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2006
|
|
|
1,026,680
|
|
|
|
14,049
|
|
|
|
9,641,666
|
|
|
|
6,376
|
|
|
|
2,521,432
|
|
|
|
14,897
|
|
|
|
13,189,778
|
|
|
|
35,322
|
|
|
|
|
3,788,944
|
|
|
|
38
|
|
|
|
5,835
|
|
|
|
–
|
|
|
|
|
|
|
|
(34,502
|
)
|
|
|
(28,629
|
)
|
|
|
|
|
Issuance of common stock in
connection with stock option exercises (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
134,524
|
|
|
|
1
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
Issuance of common stock in
connection with warrant exercises (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,380
|
|
|
|
1
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
Stock-based compensation expense
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203
|
|
|
|
|
|
Unrealized loss on
available-for-sale investments (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
$
|
(2
|
)
|
Accretion of Series A, B and C
redeemable convertible preferred stock to redemption value
(unaudited)
|
|
|
|
|
|
|
455
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
518
|
|
|
|
|
|
|
|
|
|
|
|
|
(518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(518
|
)
|
|
|
|
|
Net loss (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,494
|
)
|
|
|
(5,494
|
)
|
|
|
(5,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2007
(unaudited)
|
|
|
1,026,680
|
|
|
$
|
14,504
|
|
|
|
9,641,666
|
|
|
$
|
6,423
|
|
|
|
2,521,432
|
|
|
$
|
14,913
|
|
|
|
13,189,778
|
|
|
$
|
35,840
|
|
|
|
|
3,952,848
|
|
|
$
|
40
|
|
|
$
|
5,579
|
|
|
$
|
–
|
|
|
|
(2
|
)
|
|
$
|
(39,996
|
)
|
|
$
|
(34,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-6
Constant
Contact, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Years Ended December 31,
|
|
|
June 30,
|
|
(In thousands)
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(555
|
)
|
|
$
|
(1,254
|
)
|
|
$
|
(7,839
|
)
|
|
$
|
(2,768
|
)
|
|
$
|
(5,494
|
)
|
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
447
|
|
|
|
591
|
|
|
|
1,536
|
|
|
|
666
|
|
|
|
1,141
|
|
Amortization of discount on
investments
|
|
|
–
|
|
|
|
–
|
|
|
|
(10
|
)
|
|
|
–
|
|
|
|
(75
|
)
|
Stock-based compensation expense
|
|
|
23
|
|
|
|
17
|
|
|
|
83
|
|
|
|
15
|
|
|
|
203
|
|
Changes in fair value of
redeemable convertible preferred stock warrant
|
|
|
–
|
|
|
|
–
|
|
|
|
588
|
|
|
|
367
|
|
|
|
837
|
|
Provision for bad debts
|
|
|
76
|
|
|
|
21
|
|
|
|
5
|
|
|
|
26
|
|
|
|
8
|
|
Changes in operating assets and
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(107
|
)
|
|
|
(31
|
)
|
|
|
1
|
|
|
|
(32
|
)
|
|
|
5
|
|
Prepaid expenses and other current
assets
|
|
|
94
|
|
|
|
(26
|
)
|
|
|
(255
|
)
|
|
|
(196
|
)
|
|
|
(588
|
)
|
Other assets
|
|
|
–
|
|
|
|
–
|
|
|
|
(16
|
)
|
|
|
(16
|
)
|
|
|
–
|
|
Accounts payable
|
|
|
(107
|
)
|
|
|
1,304
|
|
|
|
1,098
|
|
|
|
(435
|
)
|
|
|
41
|
|
Accrued expenses
|
|
|
(337
|
)
|
|
|
187
|
|
|
|
1,412
|
|
|
|
559
|
|
|
|
266
|
|
Deferred revenue
|
|
|
655
|
|
|
|
1,557
|
|
|
|
2,649
|
|
|
|
1,333
|
|
|
|
2,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
189
|
|
|
|
2,366
|
|
|
|
(748
|
)
|
|
|
(481
|
)
|
|
|
(1,085
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term marketable
securities
|
|
|
–
|
|
|
|
–
|
|
|
|
(3,994
|
)
|
|
|
–
|
|
|
|
(6,206
|
)
|
Proceeds from maturities of
short-term marketable securities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
5,150
|
|
Decrease (increase) in restricted
cash
|
|
|
95
|
|
|
|
(112
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
(92
|
)
|
Purchases of property and equipment
|
|
|
(589
|
)
|
|
|
(2,097
|
)
|
|
|
(3,701
|
)
|
|
|
(1,567
|
)
|
|
|
(2,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(494
|
)
|
|
|
(2,209
|
)
|
|
|
(7,695
|
)
|
|
|
(1,567
|
)
|
|
|
(3,454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
718
|
|
|
|
1,007
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,785
|
|
Proceeds from issuance of
Series C redeemable convertible preferred stock, net of
issuance costs of $123
|
|
|
–
|
|
|
|
–
|
|
|
|
14,877
|
|
|
|
14,104
|
|
|
|
–
|
|
Proceeds from issuance of common
stock pursuant to the exercise of stock options and warrants
|
|
|
74
|
|
|
|
18
|
|
|
|
192
|
|
|
|
101
|
|
|
|
61
|
|
Proceeds from sale of restricted
stock
|
|
|
–
|
|
|
|
12
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Repayments of capital lease
obligations
|
|
|
(119
|
)
|
|
|
(19
|
)
|
|
|
(10
|
)
|
|
|
(10
|
)
|
|
|
–
|
|
Repayments of notes payable
|
|
|
(367
|
)
|
|
|
(506
|
)
|
|
|
(614
|
)
|
|
|
(317
|
)
|
|
|
(404
|
)
|
Payments of issuance costs for
contemplated initial public offering of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
306
|
|
|
|
512
|
|
|
|
14,445
|
|
|
|
13,878
|
|
|
|
1,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
1
|
|
|
|
669
|
|
|
|
6,002
|
|
|
|
11,830
|
|
|
|
(2,727
|
)
|
Cash and cash equivalents,
beginning of period
|
|
|
2,114
|
|
|
|
2,115
|
|
|
|
2,784
|
|
|
|
2,784
|
|
|
|
8,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
2,115
|
|
|
$
|
2,784
|
|
|
$
|
8,786
|
|
|
$
|
14,614
|
|
|
$
|
6,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
47
|
|
|
$
|
65
|
|
|
$
|
97
|
|
|
$
|
54
|
|
|
$
|
57
|
|
Noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and
equipment included in accrued expenses
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
500
|
|
|
$
|
500
|
|
|
$
|
–
|
|
The accompanying notes are an integral part of these financial
statements.
F-7
Constant
Contact, Inc.
Notes to Financial Statements
(in
thousands, except share and per share amounts)
|
|
1.
|
Nature of
the Business
|
Constant Contact, Inc. (the “Company”) was
incorporated as a Massachusetts corporation on August 25,
1995. The Company reincorporated in the State of Delaware in
2000. The Company is a provider of on-demand email marketing
solutions to small organizations, including small businesses,
associations and nonprofits located primarily in the
U.S. The Company’s email marketing product allows
customers to create, send and track email marketing campaigns.
The product is designed and priced for small organizations and
is marketed directly by the Company and through a wide variety
of channel partners. The Company was originally incorporated
under the name Roving Software Incorporated and subsequently
began doing business under the trade name Constant Contact in
2004. In 2006, the Company changed its name to Constant Contact,
Inc.
Unaudited
Interim Financial Information
The accompanying unaudited balance sheet as of June 30,
2007, unaudited statements of operations and of cash flows for
the six months ended June 30, 2006 and 2007, and the
unaudited statements of changes in redeemable convertible
preferred stock and stockholders’ equity (deficit) for the
six months ended June 30, 2007 have been prepared in
accordance with generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring adjustments,
considered necessary for a fair statement have been included.
The information disclosed in the notes to the financial
statements for these periods is unaudited. Operating results for
the six months ended June 30, 2007 are not necessarily
indicative of the results of operations that may be expected for
the year ending December 31, 2007 or any future period.
Unaudited
Pro Forma Financial Information
The unaudited pro forma balance sheet as of June 30, 2007
reflects the automatic conversion of all outstanding shares of
Series A, Series B and Series C redeemable
convertible preferred stock into 17,146,675 shares of
common stock, which automatic conversion will occur upon the
closing of the Company’s proposed initial public offering
(Note 5), and the assumed exercise of the warrant to
purchase 120,000 shares of redeemable convertible preferred
stock and subsequent automatic conversion of those preferred
shares into 156,000 shares of common stock (Note 5).
|
|
2.
|
Summary
of Significant Accounting Policies
|
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the
reporting period. On an ongoing basis, management evaluates
these estimates and judgments, including those related to
revenue recognition, stock-based compensation and income taxes.
The Company bases these estimates on historical and anticipated
results and trends and on various other assumptions that the
Company believes are reasonable under the circumstances,
including assumptions as to future events. These estimates form
the basis for making judgments about the carrying values of
assets and liabilities and recorded revenue and expenses that
are not readily apparent from other sources. Actual results
could differ from these estimates.
F-8
Constant
Contact, Inc.
Notes to
Financial Statements
(in thousands, except share and per share amounts)
Cash and
Cash Equivalents
The Company considers all highly liquid investments with
original maturities of three months or less at the time of
acquisition to be cash equivalents. Cash equivalents are stated
at cost, which approximates fair value.
Accounts
Receivable
Management reviews accounts receivable on a periodic basis to
determine if any receivables will potentially be uncollectible.
The Company reserves for receivables that are determined to be
uncollectible, if any, in its allowance for doubtful accounts.
After the Company has exhausted all collection efforts, the
outstanding receivable is written off against the allowance.
Concentration
of Credit Risk and Significant Customers
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash, cash
equivalents and short-term marketable securities. At
December 31, 2005 and 2006, the Company had cash balances
at certain financial institutions in excess of federally insured
limits. The Company maintains its cash balances and custody of
its marketable securities with accredited financial institutions.
As of and for the years ended December 31, 2005 and 2006
and as of and for the six months ended June 30, 2007
(unaudited), there were no customers that accounted for more
than 10% of total accounts receivable or revenue.
Marketable
Securities
The Company follows the guidance provided in Statement of
Financial Accounting Standards (“SFAS”) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, in determining the classification and accounting
of its marketable securities. The Company’s marketable
securities are classified as available-for-sale and are carried
at fair value with the unrealized gains and losses, net of tax,
reported as a component of accumulated other comprehensive
income (loss), a component of stockholders’ equity.
Realized gains and losses and declines in value judged to be
other than temporary are included as a component of interest
income based on the specific identification method. Fair value
is determined based on quoted market prices.
At December 31, 2006, marketable securities consisted of
corporate notes and obligations with an aggregate fair value of
$4.0 million, and $0 unrealized gains and losses. All
marketable securities have remaining maturities of less than
180 days as of December 31, 2006.
Property
and Equipment
Property and equipment are recorded at cost and depreciated
using the straight-line method over the estimated useful life of
the assets or, where applicable and if shorter, over the lease
term. Upon retirement or sale, the cost of assets disposed of
and the related accumulated depreciation are eliminated from the
accounts and any resulting gain or loss is credited or charged
to income. Repairs and maintenance costs are expensed as
incurred.
Estimated useful lives of assets are as follows:
|
|
|
Computer equipment
|
|
3 years
|
Software
|
|
3 years
|
Furniture and fixtures
|
|
5 years
|
Leasehold improvements
|
|
Shorter of life of lease or
estimated useful life
|
F-9
Constant
Contact, Inc.
Notes to
Financial Statements
(in thousands, except share and per share amounts)
Long-Lived
Assets
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company
reviews the carrying values of its long-lived assets for
possible impairment whenever events or changes in circumstance
indicate that the related carrying amount may not be
recoverable. Undiscounted cash flows are compared to the
carrying value and when required, impairment losses on assets to
be held and used are recognized based on the excess of the
asset’s carrying amount over the fair value of the asset.
Long-lived assets to be disposed of are reported at the lower of
carrying amount or fair value less cost to sell.
Revenue
Recognition
The Company provides access to its solution through
month-to-month subscription arrangements whereby the customer is
charged a fee. Subscription arrangements include access to use
the Company’s software via the internet and support
services such as telephone support. The Company follows the
guidance of Securities and Exchange Commission Staff Accounting
Bulletin (“SAB”) No. 104, Revenue Recognition
in Financial Statements, and Emerging Issues Task Force
(“EITF”) Issue
No. 00-03,
Application of AICPA Statement of Position
97-2 to
Arrangements that include the Right to Use Software Stored on
Another Entity’s Hardware, which applies when customers
do not have the right to take possession of the software and use
it on another entity’s hardware. When there is evidence of
an arrangement, the fee is fixed or determinable and
collectibility is deemed probable, the Company recognizes
revenue on a daily basis over the subscription term as the
services are delivered.
The Company also offers professional services to its customers
primarily for the design of custom email templates and training.
Professional services revenue is accounted for separate from
subscription revenue based on the guidance of
EITF 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables, as those services have value on a standalone
basis and do not involve a significant degree of risk or unique
acceptance criteria and as the fair value of the Company’s
subscription services is evidenced by their availability on a
standalone basis. Professional services revenue is recognized as
the services are performed.
Deferred
Revenue
Deferred revenue primarily consists of payments received in
advance of revenue recognition of the Company’s solution
described above and is recognized as the revenue recognition
criteria are met. The Company’s customers pay for services
in advance on a monthly, semiannual or annual basis.
Software
and Web Site Development Costs
The Company follows the guidance of Statement of Position
(“SOP”)
No. 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, in accounting for the development
costs of its on-demand solution and web site development costs.
The costs incurred in the preliminary stages of development are
expensed as incurred. Once an application has reached the
development stage, internal and external costs, if direct and
incremental, are capitalized until the software is substantially
complete and ready for its intended use.
Costs associated with the development of internal use software
that were capitalized during the year ended December 31,
2006 were $516. Capitalized costs were $235 and $224 for the six
months ended June 30, 2006 and 2007 (each unaudited),
respectively. Development costs eligible for capitalization for
the years ended December 31, 2004 and 2005 were not
material.
F-10
Constant
Contact, Inc.
Notes to
Financial Statements
(in thousands, except share and per share amounts)
Redeemable
Convertible Preferred Stock Warrant (including Change in
Accounting Principle)
On June 29, 2005, the Financial Accounting Standards Board
(“FASB”) issued Staff Position
150-5,
Issuer’s Accounting under FASB Statement No. 150
for Freestanding Warrants and Other Similar Instruments on
Shares that are Redeemable
(“FSP 150-5”).
FSP 150-5
affirms that warrants of this type are subject to the
requirements in SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity (“SFAS 150”),
regardless of the redemption price or the timing of the
redemption feature. Therefore, under SFAS 150, the
freestanding warrants to purchase the Company’s redeemable
convertible preferred stock are liabilities that must be
recorded at fair value. The Company adopted
FSP 150-5
as of July 1, 2005. The effect of this adoption on the
financial statements between the date of adoption and
January 1, 2006 was immaterial. The warrant is subject to
remeasurement at each balance sheet date and any change in fair
value (determined using the Black-Scholes option pricing model)
is recognized as Other expense. The Company will continue to
adjust the liability for changes in fair value until the earlier
of the exercise or the expiration of the warrant.
Comprehensive
Income (Loss)
Comprehensive loss includes net loss, as well as other changes
in stockholders’ equity that result from transactions and
economic events other than those with stockholders. The
Company’s only element of other comprehensive loss is
unrealized gains and losses on available-for-sale securities.
The Company had no unrealized gains or losses as of
December 31, 2005 and 2006. As of June 30, 2007
(unaudited), the Company had gross unrealized losses of $2.
There were no realized gains or losses recorded to net loss for
the years ended December 31, 2004, 2005 and 2006 or the six
months ended June 30, 2007 (unaudited).
Fair
Value of Financial Instruments
The carrying value of the Company’s financial instruments,
including cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate their fair
value because of their short-term nature.
Segment
Data
The Company manages its operations as a single segment for
purposes of assessing performance and making operating
decisions. Revenue is generated predominately in the
U.S. and all significant assets are held in the U.S.
Net Loss
Attributable to Common Stockholders Per Share
Basic and diluted net loss attributable to common stockholders
per share is computed by dividing net loss attributable to
common stockholders by the weighted average number of
nonrestricted common shares outstanding for the period.
F-11
Constant
Contact, Inc.
Notes to
Financial Statements
(in thousands, except share and per share amounts)
The following common stock equivalents were excluded from the
computation of diluted net loss per share attributable to common
stockholders because they had an antidilutive impact:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Options to purchase common stock
|
|
|
1,036,305
|
|
|
|
1,217,766
|
|
|
|
1,702,007
|
|
|
|
1,355,649
|
|
|
|
1,854,641
|
|
Warrants to purchase common or
redeemable convertible preferred stock
|
|
|
432,002
|
|
|
|
414,262
|
|
|
|
282,223
|
|
|
|
346,623
|
|
|
|
252,844
|
|
Restricted shares
|
|
|
10,394
|
|
|
|
192,010
|
|
|
|
144,008
|
|
|
|
192,010
|
|
|
|
120,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred
stock
|
|
|
13,868,824
|
|
|
|
13,868,824
|
|
|
|
17,146,675
|
|
|
|
16,933,088
|
|
|
|
17,146,675
|
|
Total options, warrants,
restricted shares and redeemable convertible preferred stock
exercisable or convertible into common stock
|
|
|
15,347,525
|
|
|
|
15,692,862
|
|
|
|
19,274,913
|
|
|
|
18,827,370
|
|
|
|
19,374,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
Pro Forma Net Loss per Share
The unaudited pro forma basic and diluted net loss per share
have been computed to give effect to the conversion of the
Company’s redeemable convertible preferred stock (using the
if-converted method) into common stock and the assumed exercise
of the redeemable convertible preferred stock warrant and
subsequent automatic conversion into common stock (using the if
converted method) as though the exercise and conversion had
occurred on the original dates of issuance and to adjustments to
eliminate accretion of redeemable convertible preferred stock
and the expenses that were recorded for the remeasurement to
fair value of the redeemable convertible preferred stock warrant.
F-12
Constant
Contact, Inc.
Notes to
Financial Statements
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
|
|
|
|
Year Ended
|
|
|
Months Ended
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders
|
|
$
|
(11,627
|
)
|
|
$
|
(6,012
|
)
|
Add: Accretion of redeemable
convertible preferred stock
|
|
|
3,788
|
|
|
|
518
|
|
Add: Changes in fair value
associated with redeemable convertible preferred stock warrant
|
|
|
588
|
|
|
|
837
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(7,251
|
)
|
|
$
|
(4,657
|
)
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding used in computing per share amounts: basic and
diluted
|
|
|
3,437,984
|
|
|
|
3,769,759
|
|
Add: Adjustments to reflect
assumed weighted effect of exercise and subsequent conversion of
warrant for redeemable convertible preferred stock
|
|
|
156,000
|
|
|
|
156,000
|
|
Add: Adjustments to reflect
assumed weighted effect of conversion of redeemable convertible
preferred stock
|
|
|
17,146,675
|
|
|
|
17,146,675
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average shares
outstanding used in computing per share amounts: basic and
diluted
|
|
|
20,740,659
|
|
|
|
21,072,434
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss per share:
basic and diluted
|
|
$
|
(0.35
|
)
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
Advertising
Expense
The Company expenses advertising as incurred. Advertising
expense was $485, $2,618 and $9,778 during the years ended
December 31, 2004, 2005 and 2006, respectively.
Accounting
for Stock-Based Compensation (including Change in Accounting
Principle)
Effective January 1, 2006, the Company adopted
SFAS No. 123(R), Share-Based Payment
(“SFAS 123R”), a revision of
SFAS No. 123, Accounting for Stock-Based
Compensation (“SFAS 123”), and related
interpretations. SFAS 123R supersedes Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees (“APB 25”), and related
interpretations. SFAS 123R requires all share-based compensation
to employees, including grants of employee stock options, to be
valued at fair value on the date of grant, and to be expensed
over the applicable service period. The Company adopted the
prospective transition method which does not result in
restatement of previously issued financial statements and
requires only new awards or awards that are modified,
repurchased or canceled after the effective date to be accounted
for under the provisions of SFAS 123R. Prior to
January 1, 2006, the Company accounted for stock-based
compensation arrangements according to the provisions of APB 25
and related interpretations. Pursuant to the income tax
provisions included in SFAS 123R, the Company has elected
the “short-cut method” of computing its hypothetical
pool of additional paid-in capital that is available to absorb
future tax benefit shortfalls.
Income
Taxes
Income taxes are provided for tax effects of transactions
reported in the financial statements and consist of income taxes
currently due plus deferred income taxes related to timing
differences between the basis of certain assets and liabilities
for financial and income tax reporting. Deferred taxes are
determined based on
F-13
Constant
Contact, Inc.
Notes to
Financial Statements
(in thousands, except share and per share amounts)
the difference between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect in the
years in which the differences are expected to reverse. A
valuation allowance is provided if, based upon the weight of
available evidence, it is more likely than not that some or all
of the deferred tax assets will not be realized.
Reclassification
Certain prior year amounts have been reclassified to conform to
the current year presentation. These reclassifications had no
impact on the reported net loss.
Recent
Accounting Pronouncements
In September 2006, the Securities and Exchange Commission issued
SAB No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year
Financial Statements (“SAB 108”), to address
diversity in practice in quantifying financial statement
misstatements. SAB 108 requires that the Company quantify
misstatements based on their impact on financial statements and
related disclosures. SAB 108 is effective for the first
fiscal year ending after November 15, 2006. The Company has
adopted SAB 108 in 2006. The adoption of SAB 108 did
not have a material effect on the Company’s financial
statements.
On February 15, 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an amendment of FASB
Statement No. 115 (“SFAS 159”), which
permits companies to choose to measure many financial
instruments and certain other items at fair value. The objective
of SFAS 159 is to improve financial reporting by providing
companies with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge
accounting provisions. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. Management is
currently evaluating the effect that SFAS 159 may have on
the Company’s financial statements taken as a whole.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (“SFAS 157”),
which defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and
expands disclosures about fair value measurements. This
statement does not require any new fair value measurements;
rather, it applies under other accounting pronouncements that
require or permit fair value measurements. The provisions of
SFAS 157 are effective for fiscal years beginning after
November 15, 2007. The Company is currently assessing
SFAS 157 and has not yet determined the impact, if any,
that its adoption will have on its result of operations or
financial condition.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an Interpretation
of FASB Statement No. 109 (“FIN 48”).
FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in
accordance with SFAS No. 109, Accounting for Income
Taxes. FIN 48 prescribes a two-step process to
determine the amount of tax benefit to be recognized. First, the
tax position must be evaluated to determine the likelihood that
it will be sustained upon external examination. If the tax
position is deemed “more-likely-than-not” to be
sustained, the tax position is then assessed to determine the
amount of benefit to recognize in the financial statements. The
amount of the benefit that may be recognized is the largest
amount that has a greater than 50% likelihood of being realized
upon ultimate settlement. The Company adopted FIN 48 on
January 1, 2007 and the adoption did not have an effect on
its results of operations and financial condition.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections
(“SFAS 154”), which replaces APB No. 20,
Accounting Changes, and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements,
An Amendment of APB Opinion No. 28. SFAS 154
provides guidance on the accounting
F-14
Constant
Contact, Inc.
Notes to
Financial Statements
(in thousands, except share and per share amounts)
for and reporting of accounting changes and error corrections.
It establishes retrospective application, or the latest
practicable date, as the required method for reporting a change
in accounting principle and the reporting of a correction of an
error. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005. The Company adopted SFAS 154 effective
January 1, 2006 and the adoption did not have an effect on
its results of operations and financial condition.
|
|
3.
|
Property
and Equipment
|
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Computer equipment
|
|
$
|
2,821
|
|
|
$
|
5,137
|
|
|
$
|
6,311
|
|
Software
|
|
|
947
|
|
|
|
2,754
|
|
|
|
3,244
|
|
Equipment under capital lease
|
|
|
398
|
|
|
|
–
|
|
|
|
|
|
Furniture and fixtures
|
|
|
699
|
|
|
|
1,015
|
|
|
|
1,305
|
|
Leasehold improvements
|
|
|
32
|
|
|
|
160
|
|
|
|
512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
4,897
|
|
|
|
9,066
|
|
|
|
11,372
|
|
Less: Accumulated depreciation and
amortization
|
|
|
2,605
|
|
|
|
4,109
|
|
|
|
5,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
2,292
|
|
|
$
|
4,957
|
|
|
$
|
6,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $447, $591 and $1,536
for the years ended December 31, 2004, 2005 and 2006,
respectively and $1,141 for the six months ended June 30,
2007 (unaudited).
The following is a summary of notes payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Notes payable to a financial
institution in monthly installments plus interest through June
2010
|
|
$
|
1,316
|
|
|
$
|
702
|
|
|
$
|
3,083
|
|
Less: Current portion
|
|
|
614
|
|
|
|
449
|
|
|
|
1,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
702
|
|
|
$
|
253
|
|
|
$
|
1,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006 and June 30, 2007 (unaudited)
aggregate maturities of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
(unaudited)
|
|
2007
|
|
$
|
449
|
|
|
$
|
703
|
|
2008
|
|
|
253
|
|
|
|
1,337
|
|
2009
|
|
|
–
|
|
|
|
938
|
|
2010
|
|
|
–
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
702
|
|
|
$
|
3,083
|
|
|
|
|
|
|
|
|
|
|
In February 2003, the Company entered into a Loan and Security
Agreement (the “Agreement”) with a financial
institution, which provided for a $350 term loan for the
acquisition of property and equipment. From the period of August
2003 through September 2005, the Company amended the Agreement
five times in order to increase the amount available to borrow
to $2,175 and to add and amend various terms and covenants. Each
advance under the Agreement is payable in monthly installments
and is due three years from the date of the advance. The
advances bear interest at a rate of prime plus 2% (10.25% at
December 31, 2006).
F-15
Constant
Contact, Inc.
Notes to
Financial Statements
(in thousands, except share and per share amounts)
The interest rate decreases to prime plus 1.5% upon the
occurrence of a profitability event (defined as three
consecutive months with a net profit of at least $1.00).
Borrowings under the Agreement are collateralized by
substantially all of the assets of the Company. The Agreement
requires the Company to maintain certain financial covenants
with which the Company was in compliance at December 31,
2005 and 2006. As of December 31, 2006, no amounts remained
available for borrowing under the Agreement.
In connection with the Agreement, the Company issued a warrant
to purchase 400 shares of the Company’s common stock
at an exercise price of $0.50. The warrant was due to expire in
November 2007. The value of the warrant, estimated using the
Black-Scholes pricing model, was not material.
In March 2007, the Company entered into the Sixth Loan
Modification Agreement (the “Loan Modification
Agreement”). The Loan Modification Agreement established
additional borrowing availability of $5,000 for the acquisition
of property and equipment and modified certain terms and
covenants. The new financial covenants are minimum net revenue
requirements and a funded debt ratio requirement. The Company
was in compliance with the covenants as of June 30, 2007
(unaudited). In connection with this Loan Modification
Agreement, the Company also agreed to extend the term of the
warrants held by the financial institution for a period of seven
years from the date of the modification. The Company estimated
the incremental fair value related to the modification of the
warrants using the Black-Scholes pricing model and determined it
to be immaterial.
|
|
5.
|
Redeemable
Convertible Preferred Stock and Stockholders’ Equity
(Deficit)
|
Preferred
Stock
During 2002, the Company authorized 1,026,680 shares and
9,761,666 shares of Series A redeemable convertible
preferred stock (“Series A”) and Series B
redeemable convertible preferred stock
(“Series B”), respectively. Also during 2002, the
Company issued 1,026,680 and 9,641,666 shares of
Series A and Series B, respectively, in exchange for
the conversion of bridge notes and accrued interest totaling
$739 and cash proceeds of $3,823, net of $259 of issuance costs.
The proceeds of the issuance were allocated between the
Series A and Series B based on their relative fair
values at the time of the transaction. Accordingly, the Company
allocated $2,000 of net proceeds to the Series A and the
remaining $2,561 to the Series B. The difference between
the amount initially recorded for each series and their
respective redemption values is being accreted to the redemption
value over the period from issuance to the earliest redemption
date.
During 2006, the Company authorized 2,521,432 shares of
Series C redeemable convertible preferred stock
(“Series C”). In May and July 2006, the Company
issued 2,357,130 and 164,302 shares, respectively, of
Series C for an aggregate purchase price of $15,000 or
$5.949 per share.
The holders of preferred stock have the following rights:
Voting
The holders of the preferred stock are entitled to vote,
together with the holders of common stock, on all matters
submitted to stockholders for a vote. Each preferred stockholder
is entitled to the number of votes equal to the number of shares
of common stock into which each preferred share is convertible
at the time of such vote. The holders of Series B and
Series C are entitled to other specific voting rights with
respect to the election of directors, as defined.
F-16
Constant
Contact, Inc.
Notes to
Financial Statements
(in thousands, except share and per share amounts)
Dividends
The holders of Series B shares were entitled to receive
cumulative dividends at the rate of 10% per annum through
May 12, 2006, payable in preference and priority to any
payment of any dividend on common stock, Series A or
Series C shares. No dividends shall accrue after
May 12, 2006. No dividends shall be made with respect to
the common stock unless the holders of Series B and
Series C first receive, or simultaneously receive, a
dividend in an amount equivalent to that of common stock on an
as converted basis. The holders of Series A shares are not
entitled to receive dividends.
Liquidation
Preference
In the event of any liquidation, dissolution or
winding-up
of the affairs of the Company, the holders of Series C are
entitled to receive an amount, to be paid first out of the
assets of the Company available for distribution to holders of
all classes of capital stock, equal to $11.898 per share
(subject to adjustment), plus any declared but unpaid dividends,
in the case of a specified liquidation event (defined as an
event in which the proceeds legally available for distribution
to the stockholders have value equal to or less than $100,000),
or $5.949 per share (subject to adjustment) plus any declared
but unpaid dividends in the case of other than a specified
liquidation event. If the assets of the Company are insufficient
to pay the full amount entitled to the holders of Series C,
then the entire assets of the Company shall be distributed
ratably among the holders of Series C.
After such payments have been made in full to the holders of
Series C, the holders of Series B are entitled to
receive an amount equal to $0.50 per share (subject to
adjustment), plus any accrued but unpaid dividends. If the
assets of the Company are insufficient to pay the full amount
entitled to the holders of Series B, then the remaining
assets of the Company shall be distributed ratably among the
holders of Series B.
After such payments have been made in full to the holders of
Series C and Series B, the holders of Series A
are entitled to receive an amount equal to approximately $17.00
per share (subject to adjustment). If the assets of the Company
are insufficient to pay the full amount entitled to the holders
of Series A, then the remaining assets available for such
distribution shall be distributed ratably among the holders of
Series A.
Upon completion of the distribution as described above, all of
the remaining proceeds available for distribution to
stockholders shall be distributed among the holders of
Series B and Series C and Common stock pro rata based
on number of shares of Common stock held by each (assuming full
conversion of all such preferred stock) provided that holders of
Series C shall receive no further distribution if such
holders are entitled to a distribution equal to twice the
original price as stated above.
Conversion
Each share of preferred stock, at the option of the holder, is
convertible into the number of fully paid shares of common stock
as determined by dividing the respective preferred stock issue
price by the conversion price in effect at the time. The initial
conversion prices of Series A, B and C shares are $17.00,
$0.50 and $5.949, respectively, and are subject to adjustment in
accordance with the antidilution provisions contained in the
Company’s Certificate of Incorporation, as amended. After
giving effect to the stock split described in Note 12
(unaudited) the conversion ratio of all outstanding preferred
stock will be 1.3 shares of common stock for each share of
preferred stock. Conversion is automatic immediately upon the
closing of the first underwritten public offering in which the
aggregate proceeds raised exceed $25,000 and pursuant to which
the initial price to the public was at least $9.152 per share
(after giving
F-17
Constant
Contact, Inc.
Notes to
Financial Statements
(in thousands, except share and per share amounts)
effect to the stock split). At December 31, 2006,
17,302,675 shares of the Company’s common stock have
been reserved for conversion of the preferred stock.
Redemption
The holders of at least a majority of the voting power of the
then outstanding Series B and Series C shares (voting
together as a single class), by written request at any time
after May 12, 2010 (the “Redemption Date”), may
require the Company to redeem the preferred stock by paying in
cash a sum equal to 100% of the original purchase price of the
Series A, Series B and Series C preferred stock
plus accrued but unpaid dividends on Series B and declared
but unpaid dividends on Series C, in three (3) annual
installments. If the Company does not have sufficient funds
legally available to redeem all shares of preferred stock to be
redeemed at the Redemption Date, then the Company shall
redeem first the maximum possible shares of Series C
ratably among the holders of Series C. Only after all
Series C shares to be redeemed at the Redemption Date
have been redeemed, the Company shall redeem the maximum number
of Series B shares ratably among the holders of
Series B. Only after all Series C and B shares to be
redeemed at the Redemption Date have been redeemed, the
Company shall redeem the maximum number of Series A shares
ratably among the holders of Series A. The Company recorded
dividends and accretion through a charge to stockholders’
equity (deficit) of $3,701, $5,743 and $3,788 in 2004, 2005 and
2006, respectively and $518 in the six months ended
June 30, 2007 (unaudited), in connection with these
redemption rights.
Warrants
In connection with certain equity financings, the Company
granted warrants to purchase 257,742 shares of common stock
at exercise prices ranging from $1.21-$1.38 per share. The
common stock warrants expire on varying dates through October
2008, or the effective date of a merger or consolidation of the
Company with another entity or the sale of all or substantially
all of the Company’s assets. Warrants to purchase
132,039 shares of common stock were exercised during 2006
and warrants to purchase 125,703 shares of common stock
were outstanding at December 31, 2006.
In connection with the Series B financing, the Company
granted to a consultant a warrant to purchase
120,000 shares of Series B at a price of $0.50 per
share. The warrant expires on the earliest to occur of
November 27, 2007, or immediately prior to the closing of a
merger, sale of assets, or consolidation of the Company by
another entity, or immediately prior to the closing date of an
initial public offering of the Company’s common stock. The
Company accounts for the Series B warrant in accordance
with the guidance in
FSP 150-5.
The guidance provides that warrants for shares that are
redeemable are within the scope of SFAS 150 and should be
accounted for as a liability and reported at fair value each
reporting period until exercised. At December 31, 2006, the
Company used the Black-Scholes option-pricing model to estimate
the fair value of the Series B warrant to be $628. During
2005 and 2006, the Company recorded a charge to other expense of
$0 and $588 relating to the change in carrying value of the
Series B warrant. During the six months ended June 30,
2007 (unaudited), the Company recorded a charge to other expense
of $837 relating to the change in carrying value of the
Series B warrant. At June 30, 2007 (unaudited), the
entire warrant remained outstanding.
Common
Stock
Each share of common stock is entitled to one vote. The holders
of common stock are also entitled to receive dividends whenever
funds are legally available and when declared by the Board of
Directors, subject to the prior rights of holders of all classes
of preferred stock outstanding.
F-18
Constant
Contact, Inc.
Notes to
Financial Statements
(in thousands, except share and per share amounts)
In 1999, the Company’s Board of Directors adopted the 1999
Stock Option/Stock Issuance Plan (the “Plan”). The
Plan provides for the granting of incentive and nonqualified
stock options with a maximum term of ten years, restricted stock
and other equity awards to employees, officers, directors,
consultants and advisors of the Company. Provisions such as
vesting, repurchase and exercise conditions and limitations are
determined by the Board of Directors on the grant date. The
maximum number of shares of common stock that may be issued
pursuant to the 1999 Stock Plan is 5,604,353. As of
December 31, 2006, 1,118,295 shares of common stock
are available for issuance under the Plan. As of June 30,
2007 (unaudited), 831,124 shares of common stock are
available for issuance under the Plan.
Prior to January 1, 2006, the Company accounted its
stock-based compensation plans under the intrinsic value
recognition and measurement provisions of APB 25 and related
interpretations, and adopted the disclosure-only provisions of
SFAS 123, as amended by SFAS No. 148.
Effective January 1, 2006, the Company adopted the fair
value recognition provisions of SFAS 123R. SFAS 123R
requires nonpublic companies that used the minimum value method
in SFAS 123 for either recognition or pro forma disclosures
to apply SFAS 123R using the prospective transition method.
Under the prospective transition method, compensation cost
recognized in the year ended December 31, 2006 included the
pro rata compensation cost for all share-based payments granted
on or subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the
provisions of SFAS 123R. The Company recognizes the
compensation cost of employee stock-based awards in the
statement of operations using the straight-line method over the
requisite service period of the award. The Company will continue
to apply APB 25 in future periods to equity awards outstanding
at the date of SFAS 123R’s adoption that were measured
using the minimum value method. In accordance with the
requirements of SFAS 123R, the Company will not present pro
forma disclosures for periods prior to the adoption of
SFAS 123R, as the estimated fair value of the
Company’s stock options granted through December 31,
2005 was determined using the minimum value method.
Stock
Options
During the years ended December 31, 2004, 2005 and 2006,
the Company granted 203,775, 737,091 and 749,277 stock options,
respectively, to certain employees. During the six months ended
June 30, 2007 (unaudited), the Company granted
418,229 stock options to certain employees. The vesting of
these awards is time-based and the restrictions typically lapse
25% after one year and quarterly thereafter for the next
36 months.
Stock options have historically been granted with exercise price
equal to the estimated fair value of the Company’s common
stock on the date of grant, taking into account our most
recently available valuation of common stock.
For the years ended December 31, 2004 and 2005 the fair
value of common stock was estimated by the Company on an annual
basis. Because there has been no public market for the
Company’s common stock, the fair value was estimated by
considering a number of objective and subjective factors,
including peer group trading multiples, the amount of preferred
stock liquidation preferences, the illiquid nature of common
stock and the size of the Company and its lack of historical
profitability.
Commencing in 2006, the Company began the process of quarterly
contemporaneous common stock valuations. In the first quarter of
2006, the fair value of common stock was estimated using the
guideline public company method. The valuation considered
numerous factors, including peer group trading multiples, the
amount of preferred stock liquidation preferences, the illiquid
nature of the Company’s common stock, the Company’s
small size, lack of historical profitability, short-term cash
requirements and the redemption rights of preferred
stockholders. The companies used for comparison under the
guideline public company method
F-19
Constant
Contact, Inc.
Notes to
Financial Statements
(in thousands, except share and per share amounts)
were selected based on a number of factors, including but not
limited to, the similarity of their industry, business models
and financial risk to those of the Company.
Beginning in the second quarter of 2006, the quarterly common
stock valuations were prepared using the probability-weighted
expected return method. Under this methodology, the fair market
value of common stock was estimated based upon an analysis of
future values for the Company assuming various outcomes. The
share value was based on the probability-weighted present value
of expected future investment returns considering each of the
possible outcomes available to the Company as well as the rights
of each share class. The possible outcomes considered were a
sale of the Company, an exit through an initial public offering,
a dissolution and continued operations as a private company. The
resulting values represent the Company’s estimate of fair
market value of common stock at each valuation date.
The following table summarizes by grant date the number of
shares of common stock subject to options granted between
January 1, 2006 and June 30, 2007, the per share
exercise price of the options and the per share estimated fair
value of the options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Per Share
|
|
Per Share
|
|
|
Subject to Options
|
|
Exercise Price
|
|
Estimated Fair
|
|
|
Granted
|
|
of Option(1)
|
|
Value of Option(2)
|
|
Three months ended March 31,
2006
|
|
|
230,741
|
|
|
$
|
1.09
|
|
|
$
|
0.70
|
|
Three months ended June 30,
2006
|
|
|
90,183
|
|
|
$
|
2.80
|
|
|
$
|
1.86
|
|
Three months ended
September 30, 2006
|
|
|
151,941
|
|
|
$
|
2.68
|
|
|
$
|
1.70
|
|
Three months ended
December 31, 2006
|
|
|
276,412
|
|
|
$
|
3.05
|
|
|
$
|
1.94
|
|
January 18, 2007 (unaudited)
|
|
|
39,000
|
|
|
$
|
3.05
|
|
|
$
|
1.94
|
|
March 2, 2007 (unaudited)
|
|
|
168,025
|
|
|
$
|
4.12
|
|
|
$
|
2.62
|
|
Three months ended June 30,
2007 (unaudited)
|
|
|
211,204
|
|
|
$
|
6.89
|
|
|
$
|
4.32
|
|
|
|
|
(1)
|
|
The Per Share Exercise Price of
Option represents the determination by our board of directors of
the fair market value of our common stock on the date of grant,
taking into account our most recently available valuation of
common stock.
|
|
(2)
|
|
The Per Share Estimated Fair Value
of Option was estimated for the date of grant using the
Black-Scholes option-pricing model.
|
The fair value of each stock option grant was estimated on the
date of grant using the Black-Scholes option-pricing model. The
expected term assumption is based on the simplified method for
estimating expected term for awards that qualify as
“plain-vanilla” options under SAB 107, Share
Based Payment. Expected volatility is based on historical
volatility of the publicly traded stock of a peer group of
companies analyzed by the Company. The risk-free interest rate
is determined by reference to U.S. Treasury yields at or
near the time of grant for time periods similar to the expected
term of the award. The relevant data used to determine the value
of the stock option grants is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
(unaudited)
|
|
|
Weighted average risk-free
interest rate
|
|
|
4.82
|
%
|
|
|
4.81
|
%
|
Expected term (in years)
|
|
|
6.1
|
|
|
|
6.1
|
|
Weighted average expected
volatility
|
|
|
64.9
|
%
|
|
|
63.8
|
%
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
F-20
Constant
Contact, Inc.
Notes to
Financial Statements
(in thousands, except share and per share amounts)
A summary of stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
(in years)
|
|
|
Value
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
2,790,828
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
203,775
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,918,684
|
)
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(39,614
|
)
|
|
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
1,036,305
|
|
|
|
0.99
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
737,091
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(473,170
|
)
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(82,460
|
)
|
|
|
1.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
1,217,766
|
|
|
|
0.79
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
749,277
|
|
|
|
2.35
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(192,076
|
)
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(72,960
|
)
|
|
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
1,702,007
|
|
|
|
1.57
|
|
|
|
8.4
|
|
|
$
|
2,505
|
|
Granted (unaudited)
|
|
|
418,229
|
|
|
|
5.42
|
|
|
|
|
|
|
|
|
|
Exercised (unaudited)
|
|
|
(134,524
|
)
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
Forfeited (unaudited)
|
|
|
(131,071
|
)
|
|
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2007
(unaudited)
|
|
|
1,854,641
|
|
|
|
2.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2006
|
|
|
408,582
|
|
|
$
|
2.22
|
|
|
|
6.9
|
|
|
$
|
338
|
|
Exercisable at June 30, 2007
(unaudited)
|
|
|
489,064
|
|
|
$
|
2.12
|
|
|
|
6.9
|
|
|
$
|
2,331
|
|
The aggregate intrinsic value was calculated based on the
positive difference between the estimated fair value of the
Company’s common stock on December 31, 2006 and
June 30, 2007 (unaudited) of $3.05 and $6.89 per share,
respectively, and the exercise price of the options.
The weighted average grant-date fair value of grants of stock
options was $1.50 per share for the year ended December 31,
2006, and $3.42 for the six months ended June 30, 2007
(unaudited).
The total intrinsic value of stock options exercised was $0, $11
and $430 for the years ended December 31, 2004, 2005 and
2006, respectively, and $415 for the six months ended
June 30, 2007 (unaudited).
Compensation cost of $23, $17 and $83 was recognized for
employee stock-based compensation for the years
December 31, 2004, 2005 and 2006, respectively.
Compensation cost of $203 was recognized for employee
stock-based compensation for the six months ended June, 2007
(unaudited).
F-21
Constant
Contact, Inc.
Notes to
Financial Statements
(in thousands, except share and per share amounts)
Under the provisions of SFAS 123R, the Company recognized
stock-based compensation expense on all employee awards in the
following categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
|
|
|
|
Year Ended
|
|
|
Months Ended
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
(unaudited)
|
|
|
Cost of revenue
|
|
$
|
25
|
|
|
$
|
32
|
|
Research and development
|
|
|
27
|
|
|
|
50
|
|
Sales and marketing
|
|
|
19
|
|
|
|
29
|
|
General and administrative
|
|
|
12
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
83
|
|
|
$
|
203
|
|
|
|
|
|
|
|
|
|
|
No stock based compensation expense was capitalized during the
years ended December 31, 2004, 2005 or 2006 or for the six
months ended June 30, 2007 (unaudited). The unrecognized
compensation expense associated with outstanding stock options
at December 31, 2006 and June 30, 2007 (unaudited) was
$1,030 and $2,230, respectively, which is expected to be
recognized over a weighted-average period of 3.7 years and
3.5 years as of December 31, 2006 and June 30,
2007 (unaudited), respectively.
Restricted
Stock
During the year ended December 31, 2005, the Company sold
192,010 shares of restricted stock to a certain employee.
The vesting of this award is time-based and restrictions lapse
over four years. The Company did not record compensation expense
as the shares were sold at fair value. At December 31,
2006, 144,008 shares remained unvested and no shares had
been forfeited during 2006. At June 30, 2007 (unaudited),
120,007 shares remained unvested.
As a result of losses incurred, the Company did not provide for
any income taxes in the years ended December 31, 2004, 2005
and 2006. A reconciliation of the Company’s effective tax
rate to the statutory federal income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
Increase in valuation allowance
|
|
|
(38
|
)
|
|
|
(55
|
)
|
|
|
(40
|
)
|
State taxes, net of federal benefit
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
Impact of permanent differences
|
|
|
(2
|
)
|
|
|
–
|
|
|
|
(1
|
)
|
Expiration of state net operation
losses
|
|
|
–
|
|
|
|
–
|
|
|
|
(5
|
)
|
Tax credits
|
|
|
9
|
|
|
|
14
|
|
|
|
7
|
|
Other
|
|
|
(9
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
Constant
Contact, Inc.
Notes to
Financial Statements
(in thousands, except share and per share amounts)
The Company has deferred tax assets related to temporary
differences and operating loss carryforwards as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
7,358
|
|
|
$
|
10,778
|
|
Capitalized research and
development
|
|
|
70
|
|
|
|
41
|
|
Research and development credit
carryforwards
|
|
|
660
|
|
|
|
1,584
|
|
Accrued expenses
|
|
|
1,208
|
|
|
|
176
|
|
Depreciation
|
|
|
257
|
|
|
|
–
|
|
Redeemable convertible preferred
stock warrant
|
|
|
–
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
9,553
|
|
|
|
12,816
|
|
Deferred tax asset valuation
allowance
|
|
|
(9,553
|
)
|
|
|
(12,688
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
–
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
–
|
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
–
|
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
The Company has provided a valuation allowance for the full
amount of its net deferred tax assets since at December 31,
2005 and 2006 it is not more likely than not that any future
benefit from deductible temporary differences and net operating
loss and tax credit carryforwards would be realized. The change
in valuation allowance for the year ended December 31, 2006
of $3,135 is attributable primarily to the increase in the net
operating loss and research and development credit carryforwards.
At December 31, 2006, the Company has federal and state net
operating loss carryforwards of approximately $29,100 and
$22,500, respectively, which expire at varying dates through
2026 for federal income tax purposes and through 2011 for state
income tax purposes. At December 31, 2006, $430 of federal
and state net operating loss carryforwards relate to deductions
for stock option compensation for which the associated tax
benefit will be credited to additional paid-in capital when
realized.
At December 31, 2006, the Company has federal and state
research and development credit carryforwards of $979 and $605,
respectively, which will expire at varying dates through 2026
for federal income tax purposes and through 2021 for state
income tax purposes.
Adoption
of FIN 48 (unaudited)
In June 2006, The FASB published FASB Interpretation
No. 48, Accounting for Uncertain Tax Positions,
(“FIN 48”). This interpretation seeks to
reduce the significant diversity in practice associated with
recognition and measurement in the accounting for income taxes.
It applies to all tax positions accounted for in accordance with
SFAS No. 109, Accounting for Income Taxes.
FIN 48 requires that a tax position meet “a more
likely than not” threshold for the benefit of the uncertain
tax position to be recognized in the financial statements. This
threshold is to be met assuming that the tax authorities will
examine the uncertain tax position. FIN 48 contains
guidance with respect to the measurement of the benefit that is
recognized for an uncertain tax position, when that benefit
should be derecognized, and other matters.
On January 1, 2007, the Company adopted the provisions of
FIN 48. The Company has no amounts recorded for any
unrecognized tax benefits as of January 1, 2007 or
June 30, 2007 (unaudited). In addition, the
F-23
Constant
Contact, Inc.
Notes to
Financial Statements
(in thousands, except share and per share amounts)
Company did not record any amount for the implementation of
FIN 48. The Company’s policy is to record estimated
interest and penalties related to the underpayment of income
taxes as a component of its income tax provision. As of
January 1, 2007 and June 30, 2007 (unaudited), the
Company had no accrued interest or tax penalties recorded. The
Company’s income tax return reporting periods since
December 31, 2003 are open to income tax audit examination
by the federal and state tax authorities. In addition, as the
Company has net operating loss carryforwards, the Internal
Revenue Service is permitted to audit earlier years and propose
adjustments up to the amount of net operating loss generated in
those years.
Utilization of net operating loss and research and development
credit carryforwards may be subject to a substantial annual
limitation due to ownership changes that have occurred
previously or that could occur in the future, as provided by
Section 382 of the Internal Revenue Code of 1986, as well
as similar state provisions. These ownership changes may limit
the amount of net operating loss and research and development
credit carryforwards that can be utilized annually to offset
future taxable income and tax, respectively. Any limitation may
result in expiration of a portion of the net operating loss or
research and development credit carryforwards before
utilization. In general, an ownership change, as defined by
Section 382, results from transactions increasing the
ownership of certain shareholders or public groups in the stock
of a corporation by more than 50 percentage points over a
three-year period. Since the Company’s formation, the
Company has raised capital through the issuance of common stock
and preferred stock, which, combined with the purchasing
shareholders’ subsequent disposition of those shares, may
have resulted in a change of control, as defined by
Section 382, or could result in a change of control in the
future upon subsequent disposition. The Company is in the
process of conducting a Section 382 study to determine
whether such an ownership change has occurred. Until the study
is completed and any adjustment is known, no amounts are being
presented as an uncertain tax position under FIN 48.
However, changes in the unrecognized tax position, if any, will
have no impact on the effective tax rate due to the existence of
the full valuation allowance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Payroll and payroll related
|
|
$
|
381
|
|
|
$
|
694
|
|
|
$
|
1,107
|
|
Licensed software and maintenance
|
|
|
–
|
|
|
|
562
|
|
|
|
600
|
|
Marketing programs
|
|
|
8
|
|
|
|
509
|
|
|
|
67
|
|
Other accrued expenses
|
|
|
105
|
|
|
|
641
|
|
|
|
898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
494
|
|
|
$
|
2,406
|
|
|
$
|
2,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has a defined contribution savings plan under
Section 401(k) of the Internal Revenue Code. This plan
covers substantially all employees who meet minimum age and
service requirements and allows participants to defer a portion
of their annual compensation on a pre-tax basis. Company
contributions to the plan may be made at the discretion of the
Board of Directors. There were no contributions made to the plan
by the Company during the years ended December 31, 2004,
2005 and 2006 or the six months ended June 30, 2007
(unaudited).
F-24
Constant
Contact, Inc.
Notes to
Financial Statements
(in thousands, except share and per share amounts)
|
|
10.
|
Commitments
and Contingencies
|
Capital
Leases
The Company leased equipment under capital leases that expired
in 2006 (Note 3). Accumulated amortization for assets under
capital leases was $374 and $398 at December 31, 2004 and
2005, respectively. Amortization of assets under capital leases
was $101, $19 and $0 for the years ended December 31, 2004,
2005 and 2006, respectively.
Operating
Leases
The Company leased its office space under a noncancelable
operating lease expiring in July 2005. In June 2005, the Company
and the landlord entered into the First Amendment to the
original lease agreement which effectively terminated the
original lease related to the existing office space and entered
into a new lease agreement for new office space with a lease
term of five years from the commencement of the First Amendment
in October 2005. In July 2006, the Company subleased an adjacent
office space within the same building. Simultaneous with the
execution of the sublease, the Company entered into the Second
Amendment of its primary office lease to incorporate the
additional space, upon the expiration of the sublease, into the
primary office lease for the period from May 1, 2008 to
September 2010. Total rent expense under operating leases was
$214, $351 and $745 for the years ended December 31, 2004,
2005 and 2006, respectively.
As of December 31, 2006, future minimum lease payments
under noncancelable operating leases for the years ending
December 31 are as follows:
|
|
|
|
|
2007
|
|
$
|
836
|
|
2008
|
|
|
907
|
|
2009
|
|
|
939
|
|
2010
|
|
|
705
|
|
|
|
|
|
|
|
|
$
|
3,387
|
|
|
|
|
|
|
In February 2007, the Company entered into the third amendment
of its office lease in order to expand its existing premises.
The modified lease arrangement required a $92 increase in the
security deposit. To satisfy the increased security deposit
requirement, the Company increased the letter of credit issued
for the benefit of the holder of the lease and the related
restricted cash arrangement securing the letter of credit. As a
result, the future lease commitments increased by $183, $372,
$385, and $294 for 2007, 2008, 2009 and 2010, respectively.
Hosting
Services
The Company has an agreement with a vendor to provide
specialized space and related services from which the Company
hosts its software application. As of December 31, 2006,
the agreement requires future minimum payments of $561 and $339
in 2007 and 2008, respectively.
In July 2007, the Company entered into an agreement with a
second vendor to provide space and related services in a second
co-location hosting facility. As a result, the future lease
commitments increased by $311, $845, $866, $888 and $755 for
2008, 2009, 2010, 2011, and 2012, respectively.
F-25
Constant
Contact, Inc.
Notes to
Financial Statements
(in thousands, except share and per share amounts)
Letters
of Credit
As of December 31, 2005, 2006, and June 30, 2007
(unaudited), the Company maintained a letter of credit totaling
$216, $216 and $308, respectively, for the benefit of the holder
of the Company’s facilities lease. The holder can draw
against the letter of credit in the event of default by the
Company. The Company is required to maintain a cash balance of
at least $266 as of December 31, 2005 and 2006 and $358 as
of June 30, 2007 (unaudited) to secure the letter of credit
and as collateral on customer credit card deposits. This amount
was classified as restricted cash in the balance sheet at
December 31, 2005 and 2006 and June 30, 2007 (unaudited).
Indemnification
Obligations
The Company enters into standard indemnification agreements with
the Company’s channel partners and certain other third
parties in the ordinary course of business. Pursuant to these
agreements, the Company indemnifies and agrees to reimburse the
indemnified party for losses incurred by the indemnified party
in connection with certain intellectual property infringement
claims by any third party with respect to the Company’s
business and technology. Based on historical information and
information known as of December 31, 2006, the Company does
not expect it will incur any significant liabilities under these
indemnification agreements.
An executive of the Company served as a director of a channel
partner and vendor to the Company from December 2003 through May
2007. In the years ended December 31, 2004, 2005 and 2006,
the Company’s aggregate payments to this channel partner
and vendor for customer referrals and template design services
were $37, $107 and $164, respectively. During the six months end
June 30, 2007 (unaudited), the Company’s aggregate
payments to this channel partner and vendor were $14.
One of the Company’s directors is a general partner of a
venture capital firm that owns, through affiliated investment
entities, approximately 13% of the outstanding common stock of
one of the Company’s vendors. Another of the general
partners of that venture capital firm is a member of the board
of directors of that same vendor. In the years ended
December 31, 2004, 2005 and 2006, the Company’s
aggregate payments to this vendor were $123, $33 and $253,
respectively. During the six months ended June 30, 2007
(unaudited), the Company’s aggregate payments to this
vendor were $97. The Company also made a payment to this vendor
of $398 in July 2007 (unaudited).
|
|
12.
|
Stock
Split (unaudited)
|
In August 2007, the pricing committee of the Company’s
board of directors, pursuant to delegated authority, approved a
1.3-for-1
stock split of the Company’s common stock (the “stock
split”), which will become effective in September 2007. All
references to shares in the financial statements and the
accompanying notes, including but not limited to the number of
shares and per share amounts, unless otherwise noted, have been
adjusted to reflect the stock split retroactively. Previously
awarded options and warrants to purchase shares of the
Company’s common stock and the shares of common stock
issuable upon the conversion of the redeemable convertible
preferred stock have also been retroactively adjusted to reflect
the stock split.
F-26
Over 120,000
customers. Here are just a few. Moms-for-Profit “ I absolutely value the day that I was referred
to Constant Contact.” Adams Jette Marketing + Communications Inc. “The reports are great—
apparently our open rates are phenomenal—and each issue makes the telephone ring.” Girls Learn To
Ride “Email marketing is only a fraction of the cost of print ads. It brings in a phenomenal ROI.”
American Autowire “Our web traffic reflects the Communities Foundation newsletter’s success! Our
hits of Oklahoma and “click-throughs” prove that “Constant Contact has been people WANT to
receive these the perfect solution allowing us newsletters.” to stay in touch with our VIP’s,
donors and fund holders on a Sojourn Bags regular basis.” “I love seeing all the increase in
people shopping my site directly Davio’s Restaurant following the emails.” “Constant
Contact is an easy and immediate way to reach our customers...” ConstantContact.com © 2007
Constant Contact. All rights reserved 07-0139 |
Shares
Common Stock
PROSPECTUS
,
2007
|
|
CIBC
World Markets |
Thomas
Weisel Partners LLC |
|
|
|
William
Blair & Company |
Cowen
and Company |
Needham &
Company, LLC |
You should rely only on the information contained in this
prospectus. No dealer, salesperson or other person is authorized
to give information that is not contained in this prospectus.
This prospectus is not an offer to sell nor is it seeking an
offer to buy these securities in any jurisdiction where the
offer or sale is not permitted. The information contained in
this prospectus is correct only as of the date of this
prospectus, regardless of the time of the delivery of this
prospectus or any sale of these securities.
Until ,
2007 (25 days after the commencement of the offering), all
dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers’ obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution
|
The following table indicates the expenses to be incurred in
connection with the offering described in this Registration
Statement, other than underwriting discounts and commissions,
all of which will be paid by the Registrant. All amounts are
estimated except the Securities and Exchange Commission
registration fee and the National Association of Securities
Dealers, Inc. filing fee.
|
|
|
|
|
|
|
Amount
|
|
|
Securities and Exchange Commission
registration fee
|
|
$
|
2,648
|
|
National Association of Securities
Dealers, Inc. fee
|
|
|
9,125
|
|
Nasdaq Global Market listing fee
|
|
|
*
|
|
Accountants’ fees and expenses
|
|
|
*
|
|
Legal fees and expenses
|
|
|
*
|
|
Blue Sky fees and expenses
|
|
|
*
|
|
Transfer Agent’s fees and
expenses
|
|
|
*
|
|
Printing and engraving expenses
|
|
|
*
|
|
Miscellaneous
|
|
|
*
|
|
|
|
|
|
|
Total Expenses
|
|
$
|
|
|
|
|
|
|
|
|
|
|
*
|
|
To be filed by Amendment.
|
|
|
Item 14.
|
Indemnification
of Directors and Officers
|
Section 102 of the General Corporation Law of the State of
Delaware permits a corporation to eliminate the personal
liability of directors of a corporation to the corporation or
its stockholders for monetary damages for a breach of fiduciary
duty as a director, except where the director breached his duty
of loyalty, failed to act in good faith, engaged in intentional
misconduct or knowingly violated a law, authorized the payment
of a dividend or approved a stock repurchase in violation of
Delaware corporate law or obtained an improper personal benefit.
Our restated certificate of incorporation provides that no
director of the Registrant shall be personally liable to it or
its stockholders for monetary damages for any breach of
fiduciary duty as a director, notwithstanding any provision of
law imposing such liability, except to the extent that the
General Corporation Law of the State of Delaware prohibits the
elimination or limitation of liability of directors for breaches
of fiduciary duty.
Section 145 of the General Corporation Law of the State of
Delaware provides that a corporation has the power to indemnify
a director, officer, employee, or agent of the corporation, or a
person serving at the request of the corporation for another
corporation, partnership, joint venture, trust or other
enterprise in related capacities against expenses (including
attorneys’ fees), judgments, fines and amounts paid in
settlements actually and reasonably incurred by the person in
connection with an action, suit or proceeding to which he was or
is a party or is threatened to be made a party to any
threatened, ending or completed action, suit or proceeding by
reason of such position, if such person acted in good faith and
in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, in any criminal
action or proceeding, had no reasonable cause to believe his
conduct was unlawful, except that, in the case of actions
brought by or in the right of the corporation, no
indemnification shall be made with respect to any claim, issue
or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the
Court of Chancery or other adjudicating court determines that,
despite the adjudication of liability but in view of all of the
circumstances of the case, such person is fairly and
II-1
reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
Our restated certificate of incorporation provides that we will
indemnify each person who was or is a party or threatened to be
made a party to any threatened, pending or completed action,
suit or proceeding (other than an action by or in the right of
Constant Contact) by reason of the fact that he or she is or
was, or has agreed to become, a director or officer of Constant
Contact, or is or was serving, or has agreed to serve, at our
request as a director, officer, partner, employee or trustee of,
or in a similar capacity with, another corporation, partnership,
joint venture, trust or other enterprise (all such persons being
referred to as an “Indemnitee”), or by reason of any
action alleged to have been taken or omitted in such capacity,
against all expenses (including attorneys’ fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with such action, suit or
proceeding and any appeal therefrom, if such Indemnitee acted in
good faith and in a manner he or she reasonably believed to be
in, or not opposed to, our best interests, and, with respect to
any criminal action or proceeding, he or she had no reasonable
cause to believe his or her conduct was unlawful. Our restated
certificate of incorporation provides that we will indemnify any
Indemnitee who was or is a party to an action or suit by or in
the right of Constant Contact to procure a judgment in our favor
by reason of the fact that the Indemnitee is or was, or has
agreed to become, a director or officer of Constant Contact, or
is or was serving, or has agreed to serve, at our request as a
director, officer, partner, employee or trustee of, or in a
similar capacity with, another corporation, partnership, joint
venture, trust or other enterprise, or by reason of any action
alleged to have been taken or omitted in such capacity, against
all expenses (including attorneys’ fees) and, to the extent
permitted by law, amounts paid in settlement actually and
reasonably incurred in connection with such action, suit or
proceeding, and any appeal therefrom, if the Indemnitee acted in
good faith and in a manner he or she reasonably believed to be
in, or not opposed to, the best interests of Constant Contact,
except that no indemnification shall be made with respect to any
claim, issue or matter as to which such person shall have been
adjudged to be liable to us, unless a court determines that,
despite such adjudication but in view of all of the
circumstances, he or she is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that any
Indemnitee has been successful, on the merits or otherwise, he
or she will be indemnified by us against all expenses (including
attorneys’ fees) actually and reasonably incurred in
connection therewith. Expenses must be advanced to an Indemnitee
under certain circumstances.
We intend to enter into indemnification agreements with each of
our directors and officers. These indemnification agreements may
require us, among other things, to indemnify our directors and
officers for some expenses, including attorneys’ fees,
judgments, fines and settlement amounts incurred by a director
or officer in any action or proceeding arising out of his or her
service as one of our directors or officers, or any of our
subsidiaries or any other company or enterprise to which the
person provides services at our request.
We maintain a general liability insurance policy that covers
certain liabilities of directors and officers of our corporation
arising out of claims based on acts or omissions in their
capacities as directors or officers.
In any underwriting agreement we enter into in connection with
the sale of common stock being registered hereby, the
underwriters will agree to indemnify, under certain conditions,
us, our directors, our officers and persons who control us
within the meaning of the Securities Act of 1933, as amended,
against certain liabilities.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities
|
Set forth below is information regarding shares of common stock
issued, and options granted, by us within the past three years.
Also included is the consideration, if any, received by us for
such shares and options and
II-2
information relating to the section of the Securities Act, or
rule of the Securities and Exchange Commission, under which
exemption from registration was claimed.
(a) Issuances
of Capital Stock
On May 12, 2006 and July 20, 2006, we issued and sold
an aggregate of 2,521,432 shares of our Series C
Convertible Preferred Stock to 10 venture capital funds and 15
other existing stockholders for an aggregate purchase price of
$14,999,998.98. Upon the closing of this offering, these shares
will automatically convert into 3,277,851 shares of common
stock.
On June 20, 2006, a holder of two warrants to purchase
shares of our common stock exercised its warrants for an
aggregate of 7,921 shares for an aggregate purchase price
of $10,909.17.
On June 19, 2006, a holder of a warrant to purchase shares
of our common stock exercised its warrant for an aggregate of
59,718 shares for an aggregate purchase price of $82,230.21.
On August 8, 2006, a holder of a warrant to purchase shares
of our common stock exercised its warrant for an aggregate of
64,400 shares for an aggregate purchase price of $88,676.27.
In April 2007, a holder of warrants to purchase shares of our
common stock exercised its warrant for 29,379 shares for an
aggregate purchase price of $42,454.
No underwriters were involved in the foregoing sales of
securities. The securities described in this paragraph
(a) of Item 15 were sold in reliance on the exemption
from the registration requirements of the Securities Act, as set
forth in Section 4(2) under the Securities Act and
Rule 506 of Regulation D promulgated thereunder
relative to sales by an issuer not involving any public
offering, to the extent an exemption from such registration was
required.
(b) Stock
Options and Restricted Stock
Since January 1, 2004, we have granted stock options to
purchase an aggregate of 2,108,372 shares of our common
stock with exercise prices ranging from $0.04 to $6.89 per
share, to employees, directors, and consultants pursuant to our
1999 Stock Option/Stock Issuance Plan. Since January 1,
2004, an aggregate of 2,718,508 shares have been issued
upon the exercise of stock options for an aggregate
consideration of $149,835. The shares of common stock issued
upon exercise of options are deemed restricted securities for
the purposes of the Securities Act.
On December 12, 2005, we issued 192,010 shares of our
common stock to Mr. Wasserman pursuant to a restricted
stock agreement for an aggregate purchase price of $11,816.
The issuances of stock options and the shares of common stock
issuable upon the exercise of the options and the shares of
restricted stock as described in this paragraph (b) of
Item 15 were issued pursuant to written compensatory plans
or arrangements with our employees, directors and consultants,
in reliance on the exemption provided by Section 3(b) of
the Securities Act and Rule 701 promulgated thereunder. All
recipients either received adequate information about us or had
access, through employment or other relationships, to such
information.
The exhibits to the registration statement are listed in the
Exhibit Index to this registration statement and are
incorporated by reference herein.
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
II-3
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that, in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under
the Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of the registration statement as
of the time it was declared effective.
(2) For purposes of determining any liability under
the Securities Act, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) For the purpose of determining liability under
the Securities Act to any purchaser, each prospectus filed
pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements
relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A, shall be deemed to be part of and
included in the registration statement as of the date it is
first used after effectiveness. Provided, however, that no
statement made in a registration statement or prospectus that is
part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify
any statement that was made in the registration statement or
prospectus that was part of the registration statement or made
in any such document immediately prior to such date of first use.
(4) For the purpose of determining liability of the
registrant under the Securities Act to any purchaser in the
initial distribution of the securities, in a primary offering of
securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method
used to sell the securities to the purchaser, if the securities
are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell
such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the
offering prepared by or on behalf of the undersigned registrant
or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing
prospectus relating to the offering containing material
information about the undersigned registrant or its securities
provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, the
Registrant has duly caused this Amendment No. 2 to
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Waltham,
Commonwealth of Massachusetts on the 4th day of September,
2007.
CONSTANT CONTACT, INC.
Gail F. Goodman
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this
Amendment No. 1 to Registration Statement has been signed
by the following persons in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Gail
F. Goodman
Gail
F. Goodman
|
|
Chairman, President and Chief
Executive Officer (Principal Executive Officer)
|
|
September 4, 2007
|
|
|
|
|
|
/s/ Steven
R. Wasserman
Steven
R. Wasserman
|
|
Vice President and Chief Financial
Officer (Principal Financial Officer and Principal Accounting
Officer)
|
|
September 4, 2007
|
|
|
|
|
|
*
Thomas
Anderson
|
|
Director
|
|
September 4, 2007
|
|
|
|
|
|
*
Robert
P. Badavas
|
|
Director
|
|
September 4, 2007
|
|
|
|
|
|
*
John
Campbell
|
|
Director
|
|
September 4, 2007
|
|
|
|
|
|
*
Michael
T. Fitzgerald
|
|
Director
|
|
September 4, 2007
|
|
|
|
|
|
*
Patrick
Gallagher
|
|
Director
|
|
September 4, 2007
|
|
|
|
|
|
*
William
S. Kaiser
|
|
Director
|
|
September 4, 2007
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Gail
F. Goodman
Gail
F. Goodman
Attorney-in-Fact
|
|
|
|
|
II-5
Exhibit Index
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement
|
|
3
|
.1**
|
|
Second Amended and Restated
Certificate of Incorporation of the Registrant, as amended, as
currently in effect
|
|
3
|
.2
|
|
Form of Restated Certificate of
Incorporation of the Registrant, to be effective upon the
closing of the offering
|
|
3
|
.3**
|
|
Amended and Restated Bylaws of the
Registrant, as currently in effect
|
|
3
|
.4
|
|
Form of Second Amended and
Restated Bylaws of the Registrant, to be effective upon the
closing of the offering
|
|
3
|
.5
|
|
Amendment to Second Amended and
Restated Certificate of Incorporation of the Registrant,
effective on August 29, 2007
|
|
4
|
.1
|
|
Specimen Certificate evidencing
shares of common stock
|
|
5
|
.1*
|
|
Opinion of Wilmer Cutler Pickering
Hale and Dorr LLP
|
|
10
|
.1**
|
|
1999 Stock Option/Stock Issuance
Plan, as amended
|
|
10
|
.2**
|
|
Form of Non-Qualified Stock Option
Agreement with Executive Officers under the 1999 Stock
Option/Stock Issuance Plan
|
|
10
|
.3**
|
|
Form of Non-Qualified Stock Option
Agreement under the 1999 Stock Option/Stock Issuance Plan
|
|
10
|
.4**
|
|
Restricted Stock Agreement, dated
December 12, 2005, between the Registrant and Steven R.
Wasserman
|
|
10
|
.5
|
|
2007 Stock Incentive Plan
|
|
10
|
.6
|
|
Forms of Incentive Stock Option
Agreement under the 2007 Stock Incentive Plan
|
|
10
|
.7
|
|
Forms of Non-Qualified Stock
Option Agreement under the 2007 Stock Incentive Plan
|
|
10
|
.8
|
|
2007 Employee Stock Purchase Plan
|
|
10
|
.9**
|
|
Letter Agreement, dated
April 14, 1999, between the Registrant and Gail F. Goodman
|
|
10
|
.10**
|
|
Letter Agreement, dated
December 1, 2005, between the Registrant and Steven R.
Wasserman
|
|
10
|
.11**
|
|
Letter Agreement, dated
December 6, 2006, between the Registrant and Richard H.
Turcott
|
|
10
|
.12**
|
|
2007 Executive Team Bonus Plan
|
|
10
|
.13
|
|
Form of Director and Executive
Officer Indemnification Agreement
|
|
10
|
.14**
|
|
Amended and Restated
Investors’ Rights Agreement, dated as of August 9,
2001, among the Registrant and the investors listed therein
|
|
10
|
.15**
|
|
Amended and Restated Preferred
Investors’ Rights Agreement, dated as of May 12, 2006,
among the Registrant and the parties listed therein
|
|
10
|
.16**
|
|
Lease Agreement, dated as of
July 9, 2002, as amended, between the Registrant and Boston
Properties Limited Partnership
|
|
10
|
.17
|
|
Loan and Security Agreement, dated
February 27, 2003, as amended, between the Registrant and
Silicon Valley Bank
|
|
16
|
.1**
|
|
Letter from Vitale,
Caturano & Company, Ltd. to the Securities and
Exchange Commission, dated July 6, 2007
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers
LLP
|
|
23
|
.2
|
|
Consent of Vitale,
Caturano & Company, Ltd.
|
|
23
|
.3*
|
|
Consent of Wilmer Cutler Pickering
Hale and Dorr LLP (included in Exhibit 5.1)
|
|
24
|
.1**
|
|
Powers of Attorney (included on
signature page)
|
|
|
|
*
|
|
To be filed by amendment.
|
|
**
|
|
Previously filed.
|
Financial Statement Schedules — No financial statement
schedules have been submitted because they are not required or
applicable or because the information required is included in
the financial statements or the notes thereto.