UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2008
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 000-50658
Marchex, Inc.
(Exact name of Registrant as specified in its charter)
Delaware | 35-2194038 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
413 Pine Street, Suite 500
Seattle, Washington 98101
(Address of principal executive offices)
Registrants telephone number, including area code: (206) 331-3300
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer ¨ |
Accelerated filer x | |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) |
Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable date.
Class |
Outstanding at August 8, 2008 | |
Class A common stock, par value $.01 per share |
10,959,216 | |
Class B common stock, par value $.01 per share |
28,369,123 |
Marchex, Inc.
Form 10-Q
Page | ||||
Part IFinancial Information | ||||
Item 1. |
Condensed Consolidated Financial Statements (unaudited) | 3 | ||
Condensed Consolidated Balance Sheets | 3 | |||
Condensed Consolidated Statements of Operations | 4 | |||
Condensed Consolidated Statements of Cash Flows | 5 | |||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 15 | ||
Item 3. |
Quantitative and Qualitative Disclosures about Market Risk | 32 | ||
Item 4. |
Controls and Procedures | 32 | ||
Part IIOther Information | ||||
Item 1. |
Legal Proceedings | 32 | ||
Item 1A. |
Risk Factors | 33 | ||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 49 | ||
Item 4. |
Submission of Matters to a Vote of Security Holders | 50 | ||
Item 6. |
Exhibits | 50 | ||
51 |
2
Part IFinancial Information
Item 1. | Condensed Consolidated Financial Statements (unaudited) |
MARCHEX, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
December 31, 2007 |
June 30, 2008 |
|||||||
Assets | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 36,456,307 | $ | 28,978,958 | ||||
Accounts receivable, net |
18,307,386 | 22,407,461 | ||||||
Prepaid expenses and other current assets |
2,118,390 | 3,553,256 | ||||||
Refundable taxes |
1,693,695 | 1,538,255 | ||||||
Deferred tax assets |
867,465 | 1,213,561 | ||||||
Total current assets |
59,443,243 | 57,691,491 | ||||||
Property and equipment, net |
7,357,903 | 6,727,401 | ||||||
Deferred tax assets |
7,447,315 | 9,395,438 | ||||||
Intangible and other assets, net |
17,381,827 | 14,832,251 | ||||||
Goodwill |
204,766,826 | 204,777,254 | ||||||
Intangible assets from acquisitions, net |
23,797,231 | 16,071,848 | ||||||
Total assets |
$ | 320,194,345 | $ | 309,495,683 | ||||
Liabilities and Stockholders Equity | ||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 11,625,779 | $ | 13,525,119 | ||||
Accrued expenses and other current liabilities |
3,668,342 | 4,887,395 | ||||||
Deferred revenue |
2,906,379 | 2,616,993 | ||||||
Total current liabilities |
18,200,500 | 21,029,507 | ||||||
Other non-current liabilities |
105,370 | 68,213 | ||||||
Total liabilities |
18,305,870 | 21,097,720 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Convertible preferred stock |
1,446,649 | 964,689 | ||||||
Class A common stock |
113,717 | 112,217 | ||||||
Class B common stock |
321,061 | 286,419 | ||||||
Treasury stock |
(22,116,275 | ) | (134,460 | ) | ||||
Additional paid-in capital |
329,835,529 | 295,683,672 | ||||||
Accumulated deficit |
(7,712,206 | ) | (8,514,574 | ) | ||||
Total stockholders equity |
301,888,475 | 288,397,963 | ||||||
Total liabilities and stockholders equity |
$ | 320,194,345 | $ | 309,495,683 | ||||
See accompanying notes to condensed consolidated financial statements.
3
MARCHEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
Six months ended June 30, | Three months ended June 30, | |||||||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||||||
Revenue |
$ | 68,889,038 | $ | 74,406,214 | $ | 34,665,637 | $ | 37,363,887 | ||||||||
Expenses: |
||||||||||||||||
Service costs (1), (2) |
32,005,816 | 36,301,616 | 16,764,588 | 17,414,301 | ||||||||||||
Sales and marketing (1), (2) |
14,622,850 | 14,867,783 | 7,112,929 | 7,896,035 | ||||||||||||
Product development (1), (2) |
5,260,435 | 8,439,573 | 2,662,779 | 4,252,469 | ||||||||||||
General and administrative (1), (2) |
8,238,418 | 10,033,984 | 4,057,643 | 5,074,875 | ||||||||||||
Amortization of intangible assets from acquisitions (3) |
8,597,388 | 7,713,637 | 4,074,254 | 3,661,275 | ||||||||||||
Facility relocation |
121,124 | | 121,124 | | ||||||||||||
Total operating expenses |
68,846,031 | 77,356,593 | 34,793,317 | 38,298,955 | ||||||||||||
Gain on sales and disposals of intangible assets, net |
155,510 | 2,155,267 | 123,246 | 2,010,576 | ||||||||||||
Income (loss) from operations |
198,517 | (795,112 | ) | (4,434 | ) | 1,075,508 | ||||||||||
Other income (expense): |
||||||||||||||||
Interest income |
1,466,921 | 449,782 | 758,426 | 162,633 | ||||||||||||
Interest and line of credit expense |
(3,377 | ) | (34,231 | ) | (1,585 | ) | (30,907 | ) | ||||||||
Other |
(3,243 | ) | 1,855 | (8,527 | ) | 1,354 | ||||||||||
Total other income, net |
1,460,301 | 417,406 | 748,314 | 133,080 | ||||||||||||
Income (loss) before provision for income taxes |
1,658,818 | (377,706 | ) | 743,880 | 1,208,588 | |||||||||||
Income tax expense |
886,766 | 393,276 | 412,978 | 733,229 | ||||||||||||
Net income (loss) |
772,052 | (770,982 | ) | 330,902 | 475,359 | |||||||||||
Convertible preferred stock dividends and discount on preferred stock redemption, net |
(130,030 | ) | (44,585 | ) | (23,482 | ) | (33,697 | ) | ||||||||
Net income (loss) applicable to common stockholders |
$ | 902,082 | $ | (726,397 | ) | $ | 354,384 | $ | 509,056 | |||||||
Basic and diluted net income (loss) applicable to common stockholders |
$ | 0.02 | $ | (0.02 | ) | $ | 0.01 | $ | 0.01 | |||||||
Shares used to calculate basic net income (loss) per share applicable to common stockholders |
39,382,979 | 37,121,849 | 39,597,600 | 36,580,610 | ||||||||||||
Shares used to calculate diluted net income (loss) per share applicable to common stockholders |
40,371,282 | 37,130,260 | 40,534,319 | 37,504,686 | ||||||||||||
(1) Excludes amortization of intangible assets from acquisitions |
||||||||||||||||
(2) Includes stock-based compensation as follows: |
||||||||||||||||
Service costs |
$ | 150,276 | $ | 225,658 | $ | 31,741 | $ | 86,087 | ||||||||
Sales and marketing |
462,158 | 856,714 | 89,800 | 326,004 | ||||||||||||
Product development |
939,944 | 806,998 | 450,692 | 396,289 | ||||||||||||
General and administrative |
3,677,557 | 3,847,338 | 1,770,488 | 1,860,856 | ||||||||||||
Total |
$ | 5,229,935 | $ | 5,736,708 | $ | 2,342,721 | $ | 2,669,236 | ||||||||
(3) Components of amortization of intangible assets from acquisitions: |
||||||||||||||||
Service costs |
$ | 6,344,620 | $ | 6,558,715 | $ | 3,121,754 | $ | 3,179,686 | ||||||||
Sales and marketing |
1,430,000 | 954,444 | 715,000 | 406,111 | ||||||||||||
General and administrative |
822,768 | 200,478 | 237,500 | 75,478 | ||||||||||||
Total |
$ | 8,597,388 | $ | 7,713,637 | $ | 4,074,254 | $ | 3,661,275 | ||||||||
See accompanying notes to condensed consolidated financial statements.
4
MARCHEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
Six months ended June 30, | ||||||||
2007 | 2008 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 772,052 | $ | (770,982 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
Amortization and depreciation |
12,694,635 | 12,937,704 | ||||||
Facility relocation costs |
104,018 | 2,972 | ||||||
Loss (gain) on sales of fixed assets, net |
3,243 | (1,855 | ) | |||||
Gain on sales and disposals of intangible assets, net |
(155,510 | ) | (2,155,267 | ) | ||||
Allowance for doubtful accounts and advertiser credits |
428,301 | 1,578,076 | ||||||
Stock-based compensation |
5,229,935 | 5,736,708 | ||||||
Deferred income taxes |
(1,894,643 | ) | (2,294,219 | ) | ||||
Excess tax benefit related to stock options |
(2,446,764 | ) | (53,541 | ) | ||||
Change in certain assets and liabilities, net of acquisitions: |
||||||||
Trade accounts receivable, net |
1,402,600 | (5,678,151 | ) | |||||
Refundable taxes |
99,374 | 315,299 | ||||||
Prepaid expenses, other current assets and restricted cash |
555,395 | (1,296,458 | ) | |||||
Accounts payable |
(37,324 | ) | 1,962,988 | |||||
Accrued expenses and other current liabilities |
(126,633 | ) | 1,228,830 | |||||
Deferred revenue |
140,931 | (290,940 | ) | |||||
Other non-current liabilities |
(8,927 | ) | (11,637 | ) | ||||
Net cash provided by operating activities |
16,760,683 | 11,209,527 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(2,482,768 | ) | (1,749,203 | ) | ||||
Cash paid, net of recoveries, for acquisitions |
(375 | ) | (127,522 | ) | ||||
Proceeds from sales of property and equipment |
8,115 | 37,024 | ||||||
Proceeds from sales of intangible assets |
280,006 | 1,945,520 | ||||||
Purchases of intangibles and changes in other non-current assets |
(10,154,861 | ) | (188,862 | ) | ||||
Net cash used in investing activities |
(12,349,883 | ) | (83,043 | ) | ||||
Cash flows from financing activities: |
||||||||
Deferred financing costs paid |
| (71,150 | ) | |||||
Capital lease obligation principal payments |
(11,415 | ) | (21,939 | ) | ||||
Excess tax benefit related to stock options |
2,446,764 | 53,541 | ||||||
Preferred stock dividends payments |
(38,482 | ) | (31,387 | ) | ||||
Repurchase of convertible preferred stock |
(732,368 | ) | (408,964 | ) | ||||
Repurchase of Class B common stock for treasury stock |
| (17,195,150 | ) | |||||
Common stock dividends payments |
(1,655,288 | ) | (1,625,339 | ) | ||||
Proceeds from exercises of stock options |
3,321,502 | 674,433 | ||||||
Proceeds from employee stock purchase plan |
44,923 | 22,122 | ||||||
Net cash provided by (used in) financing activities |
3,375,636 | (18,603,833 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
7,786,436 | (7,477,349 | ) | |||||
Cash and cash equivalents at beginning of period |
46,105,827 | 36,456,307 | ||||||
Cash and cash equivalents at end of period |
$ | 53,892,263 | $ | 28,978,958 | ||||
See accompanying notes to condensed consolidated financial statements.
5
Marchex, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) | Description of Business and Basis of Presentation |
Marchex, Inc. (the Company) was incorporated in the state of Delaware on January 17, 2003. The Company is a local search and advertising company and a leading publisher of local content. The Companys search- and call-based advertising solutions enable tens of thousands of local and national advertisers to reach consumers searching for products and services through a mix of search and shopping engines, search- and call-based marketing services, publisher Web sites and the Companys own Web sites.
The accompanying unaudited condensed consolidated financial statements of Marchex, Inc. and its wholly-owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008, or for any other period. The balance sheet at December 31, 2007 has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. These condensed consolidated financial statements and notes should be read in conjunction with the Companys audited consolidated financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2007 filed with the SEC.
The condensed consolidated financial statements include the accounts of Marchex and its wholly-owned subsidiaries. Acquisitions are included in the Companys consolidated financial statements as of and from the date of acquisition. The Companys purchase accounting resulted in all assets and liabilities of acquired businesses being recorded at their estimated fair values on the acquisition dates. All significant inter-company transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to the condensed consolidated financial statements in the prior year to conform to the current year presentation.
The Companys condensed consolidated financial statements presented include the condensed consolidated balance sheets as of December 31, 2007 and June 30, 2008, the condensed consolidated statements of operations for the three and six months ended June 30, 2007 and 2008 and the condensed consolidated statements of cash flows for the six months ended June 30, 2007 and 2008.
(2) | Significant Accounting Policies |
The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These judgments are difficult as matters that are inherently uncertain directly impact their valuation and accounting. Actual results may vary from managements estimates and assumptions.
There have been no changes to the Companys significant accounting policies as disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2007 filed with the SEC.
Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157), which clarifies the definition of fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. In February 2008, the FASB issued a FASB Staff Position (FSP) SFAS 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Accordingly, the Company adopted the required provisions of SFAS 157 on January 1, 2008 and the remaining provisions will be adopted by the Company at the beginning of fiscal year 2009. The 2008 fiscal year adoption of the required provisions did not result in a material impact to the Companys financial statements. The remaining aspects of SFAS 157 for which the effective date was deferred under FSP SFAS 157-2 are currently being evaluated by the Company.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS 141R), which replaces SFAS 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed and any resulting goodwill in the acquiree. The pronouncement also provides for disclosures to enable uses of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R will be effective for the Company on January 1, 2009. The Company is in the process of evaluating the effect that SFAS 141R will have on its financial statements.
6
In April 2008, the FASB issued FSP SFAS 142-3, Determination of the Useful Life of Intangible Assets (FSP SFAS 142-3), which amends the factors that should be considered in developing renewal or extension assumptions used in determining the useful life of a recognized intangible asset. FSP SFAS 142-3 also adds additional disclosures to be included in financial statements. FSP SFAS 142-3 is effective for fiscal years beginning after December 15, 2008 and interim periods within those years. The Company is currently evaluating the impact, if any, that FSP SFAS 142-3 will have on its financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1), which addresses whether instruments granted in share-based payment transaction are participating securities prior to vesting and would need to be included in the earnings allocation in computing earnings per share under the two-class method of SFAS No. 128, Earnings per Share. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 and interim periods within those years. The Company is currently evaluating the impact, if any, that FSP EITF 03-6-1 will have on its financial statements.
Revenues
The following table presents the Companys revenues, by revenue source, for the periods presented:
Six months ended June 30, | Three months ended June 30, | |||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||
Proprietary Traffic Sources |
$ | 28,639,626 | $ | 31,266,435 | $ | 13,523,702 | $ | 16,599,077 | ||||
Partner and Other Revenue Sources |
40,249,412 | 43,139,779 | 21,141,935 | 20,764,810 | ||||||||
Total Revenue |
$ | 68,889,038 | $ | 74,406,214 | $ | 34,665,637 | $ | 37,363,887 | ||||
The Companys proprietary traffic revenues are generated from the Companys portfolio of owned Web sites which are monetized with pay-per-click, cost-per-action listings and graphical ad units that are relevant to the Web sites. When an online user navigates to one of the Companys owned and operated Web sites and clicks on a particular listing or completes the specified action, the Company receives a fee.
The Companys partner network revenues are primarily generated using third-party distribution networks to deliver the advertisers listings. The distribution network includes search engines, shopping engines, directories, destination sites, third-party Internet domains or Web sites and other targeted Web-based content. The Company generates revenue upon delivery of qualified and reported click-throughs or phone calls to the Companys advertisers or to advertising services providers listings. The Company pays a revenue share to the distribution partners to access their online user traffic. Other revenues include the Companys pay-per-phone-call and call-tracking services, bid management services, natural search optimization services and outsourced search marketing platforms.
(3) | Stock-based Compensation Plans |
Under SFAS 123R, Share-Based Payment, the Company recognizes stock-based compensation expense using the straight-line method for all stock awards issued after January 1, 2006.
The per share fair value of stock options granted during the three and six months ended June 30, 2007 and 2008 was determined on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions:
Six months ended June 30, | Three months ended June 30, | |||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||
Expected life (in years) |
4.0 | 4.0 | 4.0 | 4.0 | ||||||||
Risk-free interest rate |
4.74 | % | 2.26 | % | 4.91 | % | 3.13 | % | ||||
Expected volatility |
52 | % | 53.7 | % | 52 | % | 52 | % | ||||
Expected dividend yield |
0.6 | % | 0.6 | % | 0.6 | % | 0.6 | % |
7
Stock option activity during the six months ended June 30, 2008 is summarized as follows:
Shares | Weighted average exercise price |
Weighted average remaining contractual term (in years) |
Aggregate intrinsic value | ||||||||
Balance at December 31, 2007 |
4,872,788 | $ | 12.94 | 7.61 | $ | 5,881,886 | |||||
Options granted |
955,950 | 10.06 | |||||||||
Options exercised |
(129,453 | ) | 5.19 | ||||||||
Options canceled |
(321,514 | ) | 14.00 | ||||||||
Options forfeited |
(188,629 | ) | 15.82 | ||||||||
Balance at June 30, 2008 |
5,189,142 | $ | 12.43 | 6.69 | $ | 9,505,434 | |||||
Restricted stock activity during the six months ended June 30, 2008 is summarized as follows:
Shares | Weighted average grant date fair value | |||||
Unvested at December 31, 2007 |
3,240,266 | $ | 12.44 | |||
Granted |
163,600 | 10.43 | ||||
Vested |
(214,944 | ) | 12.26 | |||
Forfeited |
(200,000 | ) | 9.46 | |||
Unvested at June 30, 2008 |
2,988,922 | $ | 12.54 | |||
The following table summarizes stock-based compensation expense related to all stock-based awards under SFAS 123R during the three and six months ended June 30, 2007 and 2008:
Six months ended June 30, | Three months ended June 30, | |||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||
Total stock-based compensation included in net income (loss) |
$ | 5,230,000 | $ | 5,737,000 | $ | 2,343,000 | $ | 2,669,000 | ||||
Income tax benefit related to stock-based compensation included in net income (loss) |
$ | 1,393,000 | $ | 1,520,000 | $ | 648,000 | $ | 666,000 |
(4) | Net Income (Loss) Per Share |
Basic net income (loss) per share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the year. Diluted net income (loss) per share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive net income (loss) per share excludes convertible stock dividends and discount on redemption of preferred stock and includes shares that the preferred stock is convertible into if the result is dilutive.
The following table reconciles the Companys reported net income (loss) to net income (loss) applicable to common stockholders used to compute basic net income (loss) per share for the periods ended:
Six months ended June 30, | Three months ended June 30, | |||||||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||||||
Numerator: |
||||||||||||||||
Net income (loss) |
$ | 772,052 | $ | (770,982 | ) | $ | 330,902 | $ | 475,359 | |||||||
Convertible preferred stock dividends |
(33,837 | ) | (28,405 | ) | (17,441 | ) | (13,187 | ) | ||||||||
Discount on redemption of preferred stock |
163,867 | 72,990 | 40,923 | 46,884 | ||||||||||||
Net income (loss) applicable to common stockholders |
$ | 902,082 | $ | (726,397 | ) | $ | 354,384 | $ | 509,056 | |||||||
Denominator: |
||||||||||||||||
Weighted average number of shares outstanding used to calculate basic net income (loss) per share |
39,382,979 | 37,121,849 | 39,597,600 | 36,580,610 | ||||||||||||
Basic net income (loss) per share applicable to common stockholders |
$ | 0.02 | $ | (0.02 | ) | $ | 0.01 | $ | 0.01 |
8
The following table reconciles the Companys reported net income (loss) to diluted net income (loss) applicable to common stockholders used to compute diluted net income (loss) per share for the periods ended:
Six months ended June 30, | Three months ended June 30, | |||||||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||||||
Numerator: |
||||||||||||||||
Net income (loss) |
$ | 772,052 | $ | (770,982 | ) | $ | 330,902 | $ | 475,359 | |||||||
Convertible preferred stock dividends |
(33,837 | ) | (28,405 | ) | (17,441 | ) | (13,187 | ) | ||||||||
Convertible preferred stock dividends on redeemed preferred stock |
1,350 | 6,421 | | 2,239 | ||||||||||||
Net income (loss) applicable to common stockholders |
$ | 739,565 | $ | (792,966 | ) | $ | 313,461 | $ | 464,411 | |||||||
Denominator: |
||||||||||||||||
Weighted average number of shares outstanding used to calculate basic net income (loss) per share |
39,382,979 | 37,121,849 | 39,597,600 | 36,580,610 | ||||||||||||
Weighted average stock options and warrants and common shares subject to repurchase or cancellation |
981,245 | | 933,453 | 915,749 | ||||||||||||
Weighted average number of shares from assumed conversion of preferred stock redeemed |
7,058 | 8,411 | 3,266 | 8,327 | ||||||||||||
Weighted average number of shares outstanding used to calculate diluted net income (loss) per share |
40,371,282 | 37,130,260 | 40,534,319 | 37,504,686 | ||||||||||||
Diluted net income (loss) per share applicable to common stockholders |
$ | 0.02 | $ | (0.02 | ) | $ | 0.01 | $ | 0.01 |
For the three and six months ended June 30, 2007, respectively, the net income applicable to common stockholders used in computing basic net income per share applicable to common stockholders included the preferred stock dividends and the discount on the redemption of 909 and 3,734 shares of the Companys 4.75% convertible exchangeable preferred stock of approximately $41,000 and $164,000. The diluted net income applicable to common stockholders excluded the discount on the preferred stock redemption and any convertible stock dividends paid during the period on the redeemed shares. The discount on the preferred stock redemption is the difference between the carrying value per share of the redeemed preferred shares and the $195 per share (plus commissions) paid by the Company to the preferred stockholders. Total cash consideration paid to the preferred stockholders was approximately $177,000 and $732,000, respectively, for the three and six months ended June 30, 2007. The weighted average number of shares used to calculate the diluted net income per share includes the weighted average number of shares from the assumed conversion of the redeemed preferred stock.
For the three and six months ended June 30, 2008, respectively, the net income (loss) applicable to common stockholders used in computing basic net income (loss) per share applicable to common stockholders included the preferred stock dividends and the discount on the redemption of 1,408 and 2,008 shares of the Companys 4.75% convertible exchangeable preferred stock of approximately $47,000 and $73,000. The diluted net loss applicable to common stockholders excluded the discount on the preferred stock redemption and any convertible stock dividends paid during the period on the redeemed shares. The discount on the preferred stock redemption is the difference between the carrying value per share of the redeemed preferred shares and the $206.72 per share (plus commissions) paid by the Company to the preferred stockholders. Total cash consideration paid to the preferred stockholders was approximately $291,000 and $409,000, respectively, for the three and six months ended June 30, 2008. The weighted average number of shares used to calculate the diluted net income (loss) per share includes the weighted average number of shares from the assumed conversion of the redeemed preferred stock.
The computation of diluted net income (loss) per share excludes the following because their effect would be anti-dilutive:
| For the three and six months ended June 30, 2007 and 2008, respectively, 68,473 shares and 53,285 shares issuable upon conversion of the 4.75% convertible preferred stock issued in connection with the February 2005 follow-on public offering. |
| For the three and six months ended June 30, 2007, outstanding options to acquire 3,455,995 shares of Class B common stock with a weighted average exercise price of $16.61 per share. For the three months ended June 30, 2008, outstanding options to acquire 4,457,195 shares of Class B common stock with a weighted average exercise price of $13.80 per share. For the six months ended June 30, 2008, outstanding options to acquire 5,189,142 shares of Class B common stock with a weighted average exercise price of $12.43 per share. |
| For the six months ended June 30, 2008, warrants to acquire 6,500 shares of Class B common stock at an exercise price of $8.45. |
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| For the three and six months ended June 30, 2007, 104,149 shares of unvested Class B restricted common shares at June 30, 2007 issued to employees and in connection with acquisitions. For the three months ended June 30, 2008, 17,354 shares of unvested Class B restricted common shares at June 30, 2008 issued to employees and in connection with acquisitions. For the six months ended June 30, 2008, 2,988,924 shares of unvested Class B restricted common shares at June 30, 2008 issued to employees and in connection with acquisitions. Unvested shares were excluded from the computation of basic net loss per share. |
(5) | Concentrations |
The Company maintains substantially all of their cash and cash equivalents with one financial institution.
A majority of the Companys revenue earned from advertisers is generated through arrangements with distribution partners. The Company may not be successful in renewing any of these agreements, or if they are renewed, they may not be on terms as favorable as current agreements. The Company may not be successful in entering into agreements with new distribution partners or advertisers on commercially acceptable terms. In addition, several of these distribution partners or advertisers may be considered potential competitors.
There were no distribution partners representing more than 10% of consolidated revenue for the three and six months ended June 30, 2007 and 2008.
The advertisers representing more than 10% of consolidated revenue are as follows:
Six months ended June 30, | Three months ended June 30, | |||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||
Advertiser A |
38 | % | 14 | % | 37 | % | 11 | % | ||||
Advertiser B |
* | 14 | % | * | 14 | % | ||||||
Advertiser C |
* | 10 | % | * | 15 | % | ||||||
Advertiser D |
* | 10 | % | * | 11 | % |
* | Less than 10% of revenue. |
Advertiser A is also a distribution partner.
The outstanding receivable balance for each advertiser representing more than 10% of accounts receivable is as follows:
At December 31, 2007 | At June 30, 2008 | |||||
Advertiser A |
24 | % | 12 | % | ||
Advertiser B |
21 | % | 20 | % | ||
Advertiser C |
* | 19 | % | |||
Advertiser D |
* | 11 | % |
* | Less than 10% of accounts receivable. |
(6) | Segment Reporting and Geographic Information |
Operating segments are revenue-producing components of the enterprise for which separate financial information is produced internally for the Companys management. For all periods presented the Company operated as a single segment. The Company operates in a single operating segment principally in domestic markets providing Internet advertiser transaction services to enterprises.
Revenues from advertisers by geographical areas are tracked on the basis of the location of the advertiser. The vast majority of the Companys revenue and accounts receivable are derived from domestic sales to advertisers engaged in various activities involving the Internet.
Revenues by geographic region are as follows (in percentages):
Six months ended June 30, | Three months ended June 30, | |||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||
United States |
96 | % | 97 | % | 96 | % | 97 | % | ||||
Canada |
1 | % | 1 | % | 1 | % | 1 | % | ||||
Other countries |
3 | % | 2 | % | 3 | % | 2 | % | ||||
100 | % | 100 | % | 100 | % | 100 | % | |||||
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(7) | Property and Equipment |
Property and equipment consisted of the following:
December 31, 2007 |
June 30, 2008 |
|||||||
Computer and other related equipment |
$ | 5,914,195 | $ | 7,192,433 | ||||
Purchased and internally developed software |
7,359,058 | 7,400,532 | ||||||
Furniture and fixtures |
371,777 | 491,542 | ||||||
Leasehold improvements |
222,545 | 295,318 | ||||||
13,867,575 | 15,379,825 | |||||||
Less: accumulated depreciation and amortization |
(6,509,672 | ) | (8,652,424 | ) | ||||
Property and equipment, net |
$ | 7,357,903 | $ | 6,727,401 | ||||
The Company has capitalized certain costs of internally developed software for internal use. The estimated useful life of costs capitalized is evaluated for each specific project. Amortization begins in the period in which the software is ready for its intended use. The Company had $192,000 and $102,000 of internally developed software costs that had not commenced amortization as of December 31, 2007 and June 30, 2008, respectively.
Depreciation and amortization expense related to property and equipment incurred by the Company was approximately $848,000 and $1.1 million for the three months ended June 30, 2007 and 2008, respectively, and $1.6 million and $2.1 million for the six months ended June 30, 2007 and 2008, respectively.
(8) | Commitments |
The Company has commitments for future payments related to office facilities leases, equipment and furniture leases, and other contractual obligations. The Company leases its office facilities under operating lease agreements expiring through 2011. The equipment and furniture leases are financed through capital lease arrangements and are included in property and equipment and the related depreciation is recorded as depreciation expense. The Company also has other contractual obligations expiring over varying time periods through 2012. Other contractual obligations primarily relate to minimum contractual payments due to distribution partners and other service providers. Future minimum payments are as follows:
Equipment and furniture capital leases |
Facilities operating leases |
Other contractual obligations |
Total | ||||||||||
2008 |
$ | 27,487 | $ | 816,918 | $ | 1,135,645 | $ | 1,980,050 | |||||
2009 |
45,125 | 1,565,850 | 580,052 | 2,191,027 | |||||||||
2010 |
7,695 | 220,874 | 40,428 | 268,997 | |||||||||
2011 |
| 12,973 | 29,028 | 42,001 | |||||||||
2012 |
| | 14,514 | 14,514 | |||||||||
Total minimum payments |
$ | 80,307 | $ | 2,616,615 | $ | 1,799,667 | $ | 4,496,589 | |||||
Less: amounts representing interest |
(9,363 | ) | |||||||||||
Present value of lease obligation |
70,944 | ||||||||||||
Less: current portion |
(45,851 | ) | |||||||||||
Long-term portion |
$ | 25,093 | |||||||||||
Rent expense incurred by the Company was approximately $293,000 and $402,000 for the three months ended June 30, 2007 and 2008, respectively, and $612,000 and $732,000 for the six months ended June 30, 2007 and 2008, respectively.
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(9) | Credit Agreement |
In April 2008, the Company entered into a credit agreement providing for a senior secured $30 million revolving credit facility (Credit Agreement). The Credit Agreement matures and all outstanding borrowings are due in April 2011. Interest on outstanding balances under the Credit Agreement will accrue at LIBOR plus an applicable margin rate, as determined under the agreement and has an unused commitment fee. The Credit Agreement contains certain customary representations and warranties, financial covenants, events of default and is secured by substantially all of assets of the Company. As of June 30, 2008, the Company had $30 million of availability under the Credit Agreement.
(10) | Contingencies and Taxes |
(a) Contingencies
The Company is involved in legal and administrative proceedings and claims of various types from time to time. While any litigation contains an element of uncertainty, the Company is not aware of any legal proceedings or claims which are pending that the Company believes, based on current knowledge, will have, individually or taken together, a material adverse effect on the Companys financial condition or results of operations.
(b) Taxes
From time to time, various state, federal and other jurisdictional tax authorities undertake reviews of the Company and its tax filings. In evaluating the exposure associated with various tax filing positions, the Company on occasion accrues charges for probable exposures. The Company believes any adjustments that may ultimately be required as a result of any of these reviews will not be material to the financial statements.
The Company did not have any material amounts of unrecognized tax benefits as of December 31, 2007 and June 30, 2008. Also, the Company did not have any material amounts of unrecognized tax benefits that, if recognized, would affect the Companys effective tax rate.
The Company files U.S. federal, certain U.S. states, and certain foreign tax returns. Generally, U.S. federal, U.S. state, and foreign tax returns filed for years after 2003 are within the statue of limitations and remain subject to examination.
(11) | Intangible Assets from Acquisitions |
Intangible assets from acquisitions consisted of the following:
December 31, 2007 | ||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net | ||||||||
Advertiser relationships |
$ | 11,340,000 | $ | (8,071,418 | ) | $ | 3,268,582 | |||
Distribution partner relationships |
3,100,000 | (2,929,032 | ) | 170,968 | ||||||
Non-compete agreements |
10,360,000 | (9,652,939 | ) | 707,061 | ||||||
Trademarks/domains |
42,783,611 | (27,031,313 | ) | 15,752,298 | ||||||
Acquired technology |
16,900,000 | (13,001,678 | ) | 3,898,322 | ||||||
$ | 84,483,611 | $ | (60,686,380 | ) | $ | 23,797,231 | ||||
June 30, 2008 | ||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net | ||||||||
Advertiser relationships |
$ | 11,340,000 | $ | (9,635,863 | ) | $ | 1,704,137 | |||
Distribution partner relationships |
3,100,000 | (3,079,032 | ) | 20,968 | ||||||
Non-compete agreements |
10,360,000 | (9,968,417 | ) | 391,583 | ||||||
Trademarks/domains |
42,676,690 | (31,138,213 | ) | 11,538,477 | ||||||
Acquired technology |
16,900,000 | (14,483,317 | ) | 2,416,683 | ||||||
$ | 84,376,690 | $ | (68,304,842 | ) | $ | 16,071,848 | ||||
Amortizable intangible assets are amortized on a straight-line basis over their useful lives. Amortization expense incurred by the Company for the three months ended June 30, 2007 and 2008, was approximately $4.1 million and $3.7 million, respectively, and for the six months ended June 30, 2007 and 2008 was approximately $8.6 million and $7.7 million, respectively. Based upon the current amount of intangible assets subject to amortization, the estimated amortization expense for the next five years is as follows: $6.2 million for the remainder of 2008, $5.6 million in 2009, $2.8 million in 2010, $1.3 million in 2011, and $171,000 in 2012 and thereafter.
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(12) | Goodwill |
Changes in the carrying amount of goodwill for the six months ended June 30, 2008 are as follows:
Balance as of December 31, 2007 |
$ | 204,766,826 | ||
Marchex Voice Services acquisition adjustment |
30,000 | |||
Other |
(19,572 | ) | ||
Balance as of June 30, 2008 |
$ | 204,777,254 | ||
(13) | Intangible and other assets, net |
Intangible and other assets, net consisted of the following:
December 31, 2007 |
June 30, 2008 |
|||||||
Internet domain names |
$ | 25,285,136 | $ | 25,470,815 | ||||
Less accumulated amortization |
(8,980,143 | ) | (11,180,044 | ) | ||||
Other intangible assets, net |
16,304,993 | 14,290,771 | ||||||
Other assets: |
||||||||
License fee |
4,500,000 | 4,500,000 | ||||||
Less accumulated amortization |
(3,700,255 | ) | (4,343,112 | ) | ||||
License fee, net |
799,745 | 156,888 | ||||||
Restricted cash |
75,000 | 75,000 | ||||||
Other |
202,089 | 309,592 | ||||||
Total intangibles and other assets, net |
$ | 17,381,827 | $ | 14,832,251 | ||||
The Company capitalizes costs incurred to acquire domain names or URLs, which include the initial registration fees, to other intangible assets which excludes intangible assets acquired through business combinations. The capitalized costs are amortized over the expected useful life of the domain names on a straight-line basis.
Amortization expense for internet domain names for the three months ended June 30, 2007 and 2008, was approximately $910,000 and $1.1 million, respectively, and for the six months ended June 30, 2007 and 2008, was approximately $1.6 million and $2.2 million, respectively. Based upon the current amount of domains subject to amortization, the estimated expense for the next five years is as follows: $1.9 million for the remainder of 2008, $3.4 million in 2009, $2.9 million in 2010, $2.4 million in 2011, and $3.7 million in 2012 and thereafter.
(14) | Convertible Preferred Stock and Common Stock |
During the six months ended June 30, 2008, the Company repurchased 2,008 shares of preferred stock for a total cash expenditure of approximately $409,000. The Company recorded a discount on the preferred stock redemption of approximately $47,000 and $73,000, during the three and six months ended June 30, 2008, respectively, which is the difference between the carrying value per share of the redeemed preferred shares and the $206.72 per share (plus commissions) paid by the Company to the preferred stockholders. The $47,000 and $73,000 were reflected as convertible preferred stock dividends and discount on preferred stock redemption, net in the Companys consolidated statements of operations during the three and six months ended June 30, 2008, respectively. Approximately 4,016 shares of preferred stock remain outstanding as of June 30, 2008.
In April 2008, the Companys board of directors declared a quarterly dividend in the amount of $0.02 per share on the Companys Class A common stock and Class B common stock and $2.97 per share on the Companys 4.75% convertible exchangeable preferred stock which was paid on May 15, 2008 to the holders of record as of the close of business on May 4, 2008. The aggregate quarterly dividend paid was approximately $819,000, of which $804,000 was for the common stock dividend.
In November 2006, the Companys board of directors authorized a share repurchase program for the Company to repurchase up to 3 million shares of the Companys Class B common stock as well as the initiation of a quarterly cash dividend for the holders of the Class A and Class B common stock. In February 2008, the Companys board of directors authorized an increase in the share repurchase program for the Company to repurchase up to 5 million shares in the aggregate (less shares previously repurchased under the share repurchase program) of the Companys Class B common stock. In August 2008, the Companys board of directors authorized an increase in the share repurchase program for the Company to repurchase up to 6 million shares in the aggregate (less shares previously repurchased under the share repurchase program) of the Companys Class B common stock. Under the share repurchase program, repurchases may take place in the open market and in privately negotiated transactions and at times and in such amounts as the Company deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability, and other market conditions. This stock repurchase program does not have an expiration date and may be limited or terminated at any time without prior notice. During the year ended December 31, 2007, the Company repurchased approximately 2.2 million shares of Class B common stock for $22.1 million under this repurchase program and was recorded as treasury stock in the consolidated balance sheet.
13
During the six months ended June 30, 2008, the Company repurchased 1.8 million shares of Class B common stock for approximately $17.2 million at an average stock price of $10.80 per share. Of the 1.8 million shares, 210,600 shares have been recorded as treasury stock in the condensed consolidated balance sheet as of June 30, 2008.
During the six months ended June 30, 2008, the Companys board of directors approved the retirement of approximately 3.9 million shares of treasury stock. The excess of purchase price over par value of $39.2 million was recorded as a deduction to additional paid in capital on the condensed consolidated balance sheet.
(15) | Subsequent Events |
In July 2008, the Companys board of directors declared a regular quarterly dividend in the amount $0.02 per share on the Companys Class A and Class B common stock and $2.97 per share on the Companys 4.75% convertible exchangeable preferred stock. The Company will pay these dividends on August 15, 2008 to the holders of record as of the close of business on August 4, 2008. The Company expects to pay approximately $800,000 for these quarterly dividends.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as believes, intends, expects, anticipates, plans, may, will and similar expressions to identify forward-looking statements. All forward-looking statements, including, but not limited to, statements regarding our future operating results, financial position, and business strategy, expectations regarding our growth and the growth of the industry in which we operate, and plans and objectives of management for future operations, are inherently uncertain as they are based on our expectations and assumptions concerning future events. Any or all of our forward-looking statements in this report may turn out to be inaccurate. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. They may be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including but not limited to the risks, uncertainties and assumptions described in this report, in Part II, Item 1A. under the caption Risk Factors and elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2007 and those described from time to time in our future reports filed with the SEC. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur as contemplated, and actual results could differ materially from those anticipated or implied by the forward-looking statements. All forward-looking statements in this report are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement.
The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operation and financial condition. You should read this analysis in conjunction with the attached condensed consolidated financial statements and related notes thereto, and with our audited consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2007.
Overview
We are a local search and advertising company and a leading publisher of local content. Our search- and call-based advertising solutions enable tens of thousands of local and national advertisers to efficiently reach consumers searching for products and services through our exclusive mix of high quality distribution points, including: (1) our proprietary Local Content Network, which we believe helps millions of consumers each month make better, more informed local decisions, (2) leading search engines such as Google, MSN, and Yahoo!, and (3) vertical publisher Web sites.
We have a suite of technology-based products and services that facilitate and support the efficient and cost-effective marketing and selling of goods and services for local and national advertisers who want to sell their products online; and a proprietary, locally-focused Web site network where we help consumers find local information, as well as fulfill our advertiser marketing campaigns:
| Local Content Network. We believe that our Local Content Network is a significant source of local information online. It includes more than 200,000 of our owned and operated Web sites focused on helping users find and make informed decisions about where to get local products and services. It features listings from more than 15 million local businesses in the U.S and more than 2.9 million expert and user-generated reviews on local businesses across more than 20,000 categories. The more than 200,000 Web sites in our network include more than 75,000 U.S. ZIP code sites, such as 98102.com and 90210.com, covering ZIP code areas nationwide, as well as tens of thousands of other locally-focused sites such as Yellow.com, OpenList.com and geo-targeted sites such as bostonmortgage.com, chicagodoctors.com, seattleautorepairs.com, and others. Traffic to our Local Content Network is primarily monetized with pay-per-click listings that are relevant to the Web sites, as well as other forms of advertising, including call-based ad units, banner advertising and sponsorships. |
| Private-Label Local Online Advertising Platform. Marchex Connect, our private-label local online advertising platform enables aggregators of local advertisers, such as Yellow Pages providers and locally-focused vertical media companies, to sell search marketing and/or call advertising packages through their existing sales channels, which are then fulfilled by us across our distribution network, including leading search engines and our own Local Content Network. By creating a solution for aggregators who have relationships with local advertisers, it makes it easy for local businesses to participate in online advertising. The search marketing services we offer to local advertisers through Marchex Connect include services typically available only to national advertisers, including ad creation, keyword selection, geo-targeting, call tracking, click-to-call services, campaign optimization, and reporting. Marchex Connect has the capacity to support tens of thousands of advertiser accounts. In addition, we offer a private-label platform for publishers, separate and distinct from Marchex Connect, which enables them to monetize their Web sites with contextual advertising from their own customers or from our advertising relationships. Aggregators and publishers generally pay us an agency fee for our platform and services in the form of a percentage of the cost of every click delivered to their advertisers. |
15
| Pay-Per-Click Advertising. We deliver pay-per-click advertisements to online users in response to their keyword search queries or on pages they visit throughout our distribution network of search engines, shopping engines, certain third party Web sites and our own Local Content Network. In addition to distributing their ads, we offer account management services to help our advertisers optimize their pay-per-click campaigns, including editorial and keyword selection recommendations and report analysis. The pay-per-click advertisements are generally ordered based on the amount our advertisers choose to pay for a placement. Advertisers pay us when a user clicks on their advertisements in our pay-per-click network and we pay publishers or distribution partners a percentage of the revenue generated by the click-throughs on their site(s). In addition, we generate revenue from cost-per-action events that take place on our distribution network. Cost-per-action revenue occurs when the user is redirected from one of our Web sites or a third-party Web site in our distribution network to an advertisers Web site and completes a specified action. Additionally, we sell pay-per-click contextual advertising placements on specialized vertical and branded partner or publisher Web sites on a pay-per-click basis. Advertisers can target the placements by category, site- or page-specific basis. We believe our site- and page-specific approach provides publishers with an opportunity to generate revenue from their traffic while protecting their brand. Our approach gives advertisers greater transparency into the source of the traffic and relevancy for their ads and enables them to optimize the return on investment from their advertising campaign. The contextual advertisement placements are prioritized for users by the amount the advertiser is willing to pay each time a user clicks on the advertisement and the relevance of the advertisement, based on historic click-through rates. Advertisers pay us when a user clicks on their advertisements in our network and we pay publishers a percentage of the revenue generated by the click-throughs on their site. |
| Call-Based Advertising Services. We deliver a variety of call-based advertising services for local advertiser aggregators as well as national advertisers. These services include phone number provisioning, call tracking, call analytics, click-to-call, Web site proxying and other phone call-based services that enable aggregators and advertisers to utilize online advertising to drive calls into their businesses as well as clicks and to use call tracking to measure the effectiveness of both their online and offline advertising campaigns. Advertisers pay us a flat fee for each phone number provisioned, and a pre-negotiated rate per minute for each call they receive from call-based ads we distribute on our distribution network. |
| Search Engine Optimization Consulting Services (SEO). We offer consulting services to help advertisers optimize their Web sites for the greatest opportunity for proper indexing and ranking in the organic, or editorial, results of algorithmic search engines. By leveraging our experience in the search industry and our relationships with search engine distribution partners, we have built a unique system for evaluating the opportunity to improve a particular Web sites ranking in organic search results. We provide specific tactics, either on a consultative or a hands-on basis, to maximize that opportunity, while meeting the major search engines ever changing technical standards, and drive increased targeted traffic to their Web sites. Our SEO consulting clients are primarily companies with a large number of products who want to increase their online sales and achieve targeted return on investment metrics. Advertisers pay us consulting fees for SEO services, which are based on the number of Web pages in their sites and the number of products they want indexed. |
| Feed Management Services. We use our proprietary technology to crawl and extract relevant product content from advertisers databases and Web sites to create automated and highly-targeted product and service listings, which we deliver into a network of search and shopping engines. When an advertisers Web site is crawled by a search engine (usually every 7 to 14 days), many product and service listings can be excluded or quickly become outdated due to the nature of most advertisers product databases, which contain complex structures and are dynamically updated. Because we have feed relationships with our distribution partners, we are able to deliver our advertisers product listings directly into our partners distribution and provide updated content in frequent intervals. This is a significant benefit for our advertisers as it maximizes the number of selling opportunities and for our distribution partners as it increases the accuracy and relevance of their search results. Advertisers generally pay us a fixed price for each click they receive on an advertisement or listing included in the feed. |
| Bid Management Services. We offer advertising campaign management services, commonly known as bid management services. Our bid management services enable our advertisers to consolidate the purchasing, management, optimization and reporting from their search and contextual advertising campaigns across a large number of search engines and pay-per-click networks into one centralized place. Through our partnerships with leading search and product shopping engines, we are able to place and manage our clients paid listings directly within their account management systems and provide detailed reporting and conversion tracking that enables advertisers to track the effectiveness of their online advertising campaigns across the different channels. With our bid management services, we may suggest additional channels, search engines or pay-per-click networks as well as editorial guidance that may broaden the reach and improve the effectiveness of our advertisers campaigns. Advertisers pay us a pre-negotiated rate for each click they receive on their advertisement placed or managed as part of our bid management services. |
16
We were incorporated in Delaware on January 17, 2003. Acquisition initiatives have played an important part in our corporate history to date. We have completed the following acquisitions since our inception:
| On February 28, 2003, we acquired eFamily together with its direct wholly-owned subsidiary Enhance Interactive. eFamily was incorporated in Utah on November 29, 1999 under the name FocusFilter.com, Inc. Enhance Interactive was recently renamed Marchex Adhere PPC. |
| On October 24, 2003, we acquired TrafficLeader which was incorporated in Oregon on January 24, 2000 under the name Sitewise Marketing, Inc. Traffic Leader was recently renamed Marchex Connect NA. |
| On July 27, 2004, we acquired goClick which was incorporated in Connecticut on October 25, 2000. |
| On February 14, 2005, we acquired certain assets of Name Development which was incorporated in the British Virgin Islands in July 2000. |
| On April 26, 2005, we acquired certain assets of Pike Street Industries, which was incorporated in Washington on March 6, 2002. |
| On July 27, 2005, we acquired IndustryBrains, which was incorporated in New York on January 31, 2002 and which was recently renamed Marchex Adhere SSC. |
| On May 1, 2006, we acquired certain assets of AreaConnect, which was formed in Delaware on June 5, 2002. |
| On May 26, 2006, we acquired certain assets of Open List, which was incorporated in Delaware on November 18, 2003. |
| On September 19, 2007, we acquired VoiceStar, which was incorporated in Pennsylvania on March 21, 1999 under the name TL Solutions, Inc. VoiceStar was recently renamed Marchex Voice Services. |
We currently have offices in Seattle, Washington; Eugene, Oregon; Las Vegas, Nevada; Philadelphia, Pennsylvania; New York, New York; and Highlands Ranch, Colorado.
Acquisitions
We have completed the following acquisition since January 1, 2007 which has been accounted for as business combination.
VoiceStar
In September 2007, the Company acquired VoiceStar, Inc. which was recently renamed Marchex Voice Services (Marchex Voice Services), a provider of call-based advertising services for local advertisers. The purchase price consideration consisted of:
| $13.6 million in cash and acquisition costs; plus |
| 634,963 shares of restricted Class B common stock that vest over a period of two and one-half years. |
The shares of restricted Class B common stock were issued to certain employees of Marchex Voice Services who became employees of the Company and were valued at approximately $5.9 million, which is recorded as compensation expense over the associated employment period during which these shares vest.
Consolidated Statements of Operations
The assets, liabilities and operations of our acquisitions are included in our consolidated financial statements as of and from the date of the respective acquisitions.
All significant inter-company transactions and balances within Marchex have been eliminated in consolidation. Our purchase accounting resulted in all assets and liabilities from our acquisitions being recorded at their estimated fair values on the respective acquisition dates. All goodwill, intangible assets and liabilities resulting from the acquisitions have been recorded in our financial statements.
Presentation of Financial Reporting Periods
The comparative periods presented are for the three and six months ended June 30, 2007 and 2008.
Revenue
We currently generate revenue through our suite of services, including our Local Content Network, private-label local online advertising platform, pay-per-click advertising and related services, call-based advertising, search engine optimization consulting, feed management and bid management.
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Our primary sources of revenue are the performance-based advertising services, which include pay-per-click services, pay-per-phone-call services, cost-per-action services and feed management services. These primary sources amounted to greater than 85% of our revenues in all periods presented. Our secondary sources of revenue are our bid campaign management services, natural search optimization services and outsourced search marketing platforms. These secondary sources amounted to less than 15% of our revenues in all periods presented. We have no barter transactions.
We recognize revenue upon the completion of our performance obligation, provided that: (1) evidence of an arrangement exists; (2) the arrangement fee is fixed and determinable; and (3) collection is reasonably assured.
In certain cases, we record revenue based on available and reported preliminary information from third parties. Collection on the related receivables may vary from reported information based upon third-party refinement of the estimated and reported amounts owing that occurs subsequent to period ends.
Performance-Based Advertising Services
In providing pay-per-click and pay-per-phone-call advertising services, we generate revenue upon our delivery of qualified and reported click-throughs or phone calls to our advertisers or advertising service providers listings. These advertisers and advertising service providers pay us a designated transaction fee for each click-through or phone call, which occurs when an online user clicks or makes a phone call on any of their advertisement listings after it has been placed by us or by our distribution partners. Each click-through on an advertisement listing represents a completed transaction. The advertisement listings are displayed within our distribution network, which includes search engines, directories, destination sites, third-party Internet domains or Web sites, our portfolio of owned Web sites and other targeted Web-based content. We also generate revenue from cost-per-action services, which occurs when the online user is redirected from one of our Web sites or a third-party Web site in our distribution network to a advertiser Web site and completes the specified action, such as when a phone number is provisioned or a call is placed.
In providing pay-per-click contextual based advertising, advertisers purchase keywords or keyword strings, based on an amount they choose for a targeted placement on vertically-focused Web sites or specific pages of a Web site that are specific to their products or services and their marketing objectives. The contextual results distributed by our services are prioritized for users by the amount the advertiser is willing to pay each time a user clicks on the advertisement and the relevance of the advertisement, which is dictated by historical click-through rates. Advertisers pay us when a click-through occurs on their advertisement.
In providing feed management services, advertisers pay for their Web pages and product databases to be crawled, or searched, and included in search engine, directory and product shopping engine results within our distribution network. Generally, the feed management listings are presented in a different section of the Web page than the pay-per-click listings. For this service, revenue is generated when an online user clicks on a feed management listing from search engine, directory or product shopping engine results. Each click-through on an advertisement listing represents a completed transaction for which the advertiser pays on a per-click basis. The placement of a feed management result is largely determined by its relevancy, as determined by the distribution partner.
Search Marketing Services
Advertisers pay us additional fees for services such as bid management and natural search engine optimization. Advertisers generally pay us on a click-through basis, although in certain cases we receive a fixed fee for delivery of these services. In some cases we also deliver banner campaigns for select advertisers. We may also charge initial set-up, account, service or inclusion fees as part of our services.
Banner advertising revenue may be based on a fixed fee per click and is generated and recognized on click-through activity. In other cases, banner payment terms are volume-based with revenue generated and recognized when impressions are delivered.
Non-refundable account set-up fees are paid by advertisers and are recognized ratably over the longer of the term of the contract or the average expected advertiser relationship period, which generally ranges from twelve months to more than two years. Other account and service fees are recognized in the month or period the account fee or services relate to.
Other inclusion fees are generally associated with monthly or annual subscription-based services where an advertiser pays a fixed amount to be included in our index of listings or our distribution partners index of listings. Revenues from these subscription arrangements are recognized ratably over the service period.
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Outsourced Search Marketing Platforms
We generate revenue from super-aggregator partners and publishers utilizing our Web-based technologies. We are paid a management or agency fee based on the total amount of the purchase made by the advertiser. The partners or publishers engage the advertisers and are the primary obligor, and we, in certain instances, are only financially liable to the publishers in our capacity as a collection agency for the amount collected from the advertisers. We recognize revenue for these fees under the net revenue recognition method.
Industry and Market Factors
We enter into agreements with various distribution partners to provide distribution for the URL strings and advertisement listings of our advertisers. We generally pay distribution partners based on a percentage of revenue or a fixed amount per click-through on these listings. The level of click-throughs contributed by our distribution partners has varied, and we expect it will continue to vary, from quarter-to-quarter and year-to-year, sometimes significantly. Our current growth will be impacted by our ability to increase our distribution, which impacts the number of Internet users who have access to our advertisers listings and the rate at which our advertisers are able to convert clicks from these Internet users into completed transactions, such as a purchase or sign up. Our current growth also depends on our ability to continue to increase the number of advertisers who use our services and the amount these advertisers spend on our services.
We anticipate that these variables will fluctuate in the future, affecting our growth rate and our financial results. In particular, it is difficult to project the number of click-throughs we will deliver to our advertisers and how much advertisers will spend with us, and it is even more difficult to anticipate the average revenue per click-through.
In addition, we believe we will experience seasonality. Our quarterly results have fluctuated in the past and may fluctuate in the future due to seasonal fluctuations in levels of Internet usage and seasonal purchasing cycles of many advertisers. It is generally understood that during the spring and summer months, Internet usage is lower than during other times of the year, especially in comparison to the fourth quarter of the calendar year. The extent to which usage may decrease during these off-peak periods is difficult to predict. Prolonged or severe decreases in usage during these periods may adversely affect our growth rate and results.
Service Costs
Our service costs represent the cost of providing our performance-based advertising services and our search marketing services. The service costs that we have incurred in the periods presented primarily include:
| user acquisition costs; |
| amortization and impairment of intangible assets; |
| license and content fees; |
| credit card processing fees; |
| network operations; |
| telecommunication costs, including provisioning of telephone numbers; |
| serving our search results; |
| maintaining our Web sites; |
| domain name registration renewal fees; |
| network fees; |
| fees paid to outside service providers; |
| delivering customer service; |
| depreciation of our Web sites, network equipment and internally developed software; |
| colocation service charges of our Web site equipment; |
| bandwidth and software license fees; |
| payroll and related expenses of related personnel; and |
| stock-based compensation of related personnel. |
User Acquisition Costs
For the periods presented the largest component of our service costs consists of user acquisition costs that relate primarily to payments made to distribution partners for access to their online user traffic. We enter into agreements of varying durations with distribution partners that integrate our services into their Web sites and indexes. The primary payment structure of the distribution partner agreements is a variable payment based on a specified percentage of revenue.
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These variable payments are often subject to minimum payment amounts per click-through. Other payment structures that we may use to a lesser degree include:
| fixed payments, based on a guaranteed minimum amount of usage delivered; |
| variable payments based on a specified metric, such as number of paid click-throughs; and |
| a combination arrangement with both fixed and variable amounts that may be paid in advance. |
We expense user acquisition costs based on whether the agreement provides for fixed or variable payments. Agreements with fixed payments are generally expensed at the greater of: (1) pro-rata over the term the fixed payment covers; or (2) usage delivered to date divided by the guaranteed minimum amount of usage delivered. Agreements with variable payments based on a percentage of revenue, number of paid click-throughs or other metrics are expensed as incurred based on the volume of the underlying activity or revenue multiplied by the agreed-upon price or rate.
Sales and Marketing
Sales and marketing expenses consist primarily of:
| payroll and related expenses for personnel engaged in marketing and sales functions; |
| advertising and promotional expenditures including online and outside marketing activities; |
| cost of systems used to sell to and serve advertisers; and |
| stock-based compensation of related personnel. |
Product Development
Product development costs consist primarily of expenses incurred in the research and development, creation and enhancement of our Web sites and services.
Our research and development expenses include:
| payroll and related expenses for personnel; |
| costs of computer hardware and software; |
| costs incurred in developing features and functionality of the services we offer; and |
| stock-based compensation of related personnel. |
For the periods presented, substantially all of our product development expenses are research and development.
Product development costs are expensed as incurred or capitalized into property and equipment in accordance with the American Institute of Certified Public Accountants Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This statement requires that costs incurred in the preliminary project and post-implementation stages of an internal use software project be expensed as incurred and that certain costs incurred in the application development stage of a project be capitalized.
General and Administrative
General and administrative expenses consist primarily of:
| payroll and related expenses for executive and administrative personnel; |
| professional services, including accounting, legal and insurance; |
| bad debt provisions; |
| facilities costs; |
| other general corporate expenses; and |
| stock-based compensation of related personnel. |
Stock-Based Compensation
As of January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment (SFAS 123R) and account for stock-based compensation under the fair value method. As a result, stock-based compensation consists of the following:
| all share-based compensation arrangements granted after January 1, 2006 and for any such arrangements that are modified, cancelled, or repurchased after that date; and |
| the portion of previous share-based awards for which the requisite service was not rendered as of the adoption date, based on the grant-date estimated fair value of those awards estimated in accordance with the pro forma provisions of SFAS No. 123, Accounting for Stock-Based Compensation. |
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Stock-based compensation expense has been included in the same lines as compensation paid to the same employees in the consolidated statement of operations in accordance with SEC Accounting Bulletin No. 107, Share-based Payment.
Amortization of Intangible Assets from Acquisitions
Amortization of intangible assets excluding goodwill relates to intangible assets acquired in connection with our business acquisitions.
The intangible assets have been identified as:
| non-competition agreements; |
| trade and Internet domain names; |
| distributor partner relationships; |
| advertising relationships; |
| patents; and |
| acquired technology. |
These assets are amortized over useful lives ranging from 12 to 84 months.
Provision for Income Taxes
For income tax purposes, we utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in results of operations in the period that includes the enactment date. A valuation allowance is recorded for deferred tax assets when it is more likely than not that such deferred tax assets will not be realized. Although realization is not assured, we believe it is more likely than not, based on operating performance and projections of future taxable income, that our net deferred tax assets, excluding certain state net operating loss carryforwards, will be realized. In determining that it is more likely than not that we will realize the deferred tax assets, factors considered include: historical taxable income, historical trends related to advertiser usage rates and projected revenues and expenses. The amount of the net deferred tax assets considered realizable, however, could be reduced in the near term if our projections of future taxable income are reduced or if we do not perform at the levels we are projecting. This could result in increases to the valuation allowance for deferred tax assets and a corresponding increase to income tax expense of up to the entire net amount of deferred tax assets. From time to time, various state, federal, and other jurisdictional tax authorities undertake reviews of us and our filings. We believe any adjustments that may ultimately be required as a result of any of these reviews will not be material to the financial statements.
As of June 30, 2008, we had federal net operating loss (NOL) carryforwards of $1.7 million, which will begin to expire in 2019. The Tax Reform Act of 1986 limits the use of NOL and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. We believe that such a change has occurred, and that the utilization of the approximately $1.7 million of NOL carryforwards is limited such that substantially all of these federal NOL carryforwards will never be utilized.
As of June 30, 2008, we had certain tax effected state NOL carryforwards of approximately $2.5 million. We do not have a history of taxable income in the relevant state and the state NOL carryforwards will more likely than not expire unutilized. Therefore, we have recorded a 100% valuation allowance on the state NOL carryforwards as of June 30, 2008.
Convertible Preferred Stock
Holders of the preferred stock are entitled to receive cumulative dividends from the date of original issue at the annual rate of 4.75% of the liquidation preference of the preferred stock, payable quarterly on the 15th day of February, May, August and November, commencing May 15, 2005. Any dividends must be declared by our board of directors and must come from funds which are legally available for dividend payments.
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The Companys board of directors declared the following quarterly dividends in 2007 and 2008 on the Companys 4.75% convertible exchangeable preferred stock:
Approval Date |
Per share dividend |
Date of record | Total amount (in thousands) |
Payment date | ||||||
January 2007 |
$ | 2.97 | February 2, 2007 | $ | 21 | February 15, 2007 | ||||
April 2007 |
$ | 2.97 | May 4, 2007 | $ | 18 | May 15, 2007 | ||||
July 2007 |
$ | 2.97 | August 3, 2007 | $ | 18 | August 15, 2007 | ||||
October 2007 |
$ | 2.97 | November 2, 2007 | $ | 18 | November 15, 2007 | ||||
January 2008 |
$ | 2.97 | February 4, 2008 | $ | 16 | February 15, 2008 | ||||
April 2008 |
$ | 2.97 | May 2, 2008 | $ | 15 | May 15, 2008 |
In July 2008, the Companys board of directors declared a quarterly dividend in the amount of $2.97 per share on its 4.75% convertible exchangeable preferred stock which will be paid on August 15, 2008 to the holders of record as of the close of business on August 4, 2008. We expect to pay approximately $12,000 for this quarterly dividend.
The preferred stock is convertible at the option of the holder at any time into shares of Class B common stock at a conversion rate of approximately 10.2041 shares of Class B common stock for each share of preferred stock, based on an initial conversion price of $24.50. The initial conversion price is subject to adjustment in certain events, including a non-stock fundamental change or a common stock fundamental change. In 2007, the Company repurchased 3,734 shares of preferred stock for a total cash expenditure of approximately $732,000. To date in 2008, the Company has repurchased an additional 2,008 shares of preferred stock for a total cash expenditure of approximately $409,000. Approximately 4,016 shares of preferred stock remain outstanding at June 30, 2008.
We may elect to automatically convert some or all of the preferred stock into shares of Class B common stock if the closing price of our Class B common stock exceeds $36.75, which is 150% of the conversion price for at least 20 of the 30 consecutive trading days ending within 5 trading days prior to the notice of automatic conversion.
We may elect to redeem the preferred stock, in whole or in part, at declining redemption prices on or after February 20, 2008.
The terms of the preferred stock contain an exchange right, at our option, to convert the preferred stock, in whole but not in part, on any dividend payment date beginning on February 15, 2006 into our 4.75% convertible subordinated debentures (Debentures) at the rate of $250 principal amount of Debentures for each share of preferred stock. This embedded derivative will be reflected as an asset, if there is any value ascribed to it, and is subject to variable accounting. The right will be marked to market at each reporting date until such time as the right is exercised or expires. Based on a variety of factors including the assessed probability of exercise, no value has been ascribed to this right as of June 30, 2008. The Debentures, if issued, will mature 25 years after the exchange date.
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Results of Operations
The following table presents certain financial data, derived from our unaudited statements of operations, as a percentage of total revenue for the periods indicated. The operating results for the three and six months ended June 30, 2007 and 2008 and are not necessarily indicative of the results that may be expected for the full year or any future period.
Six months ended June 30, |
Three months ended June 30, |
|||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||
Revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Expenses: |
||||||||||||
Service costs |
46.5 | % | 48.8 | % | 48.4 | % | 46.6 | % | ||||
Sales and marketing |
21.2 | % | 20.0 | % | 20.5 | % | 21.1 | % | ||||
Product development |
7.6 | % | 11.3 | % | 7.7 | % | 11.4 | % | ||||
General and administrative |
12.0 | % | 13.5 | % | 11.7 | % | 13.6 | % | ||||
Amortization of intangible assets from acquisitions |
12.5 | % | 10.4 | % | 11.8 | % | 9.8 | % | ||||
Facility relocation |
0.2 | % | 0.0 | % | 0.3 | % | 0.0 | % | ||||
Total operating expenses |
100.0 | % | 104.0 | % | 100.4 | % | 102.5 | % | ||||
Gain on sales and disposals of intangible assets, net |
0.2 | % | 2.9 | % | 0.4 | % | 5.4 | % | ||||
Income (loss) from operations |
0.2 | % | (1.1 | %) | 0.0 | % | 2.9 | % | ||||
Other income (expense): |
||||||||||||
Interest income |
2.1 | % | 0.6 | % | 2.2 | % | 0.4 | % | ||||
Interest expense |
0.0 | % | 0.0 | % | 0.0 | % | (0.1 | %) | ||||
Other |
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||
Total other income, net |
2.1 | % | 0.6 | % | 2.2 | % | 0.3 | % | ||||
Income (loss) before provision for income taxes |
2.3 | % | (0.5 | %) | 2.2 | % | 3.2 | % | ||||
Income tax expense |
1.3 | % | 0.5 | % | 1.2 | % | 2.0 | % | ||||
Net income (loss) |
1.0 | % | (1.0 | %) | 1.0 | % | 1.2 | % | ||||
Convertible preferred stock dividend and discount on preferred stock redemption, net |
(0.2 | %) | (0.1 | %) | (0.1 | %) | (0.1 | %) | ||||
Net income (loss) applicable to common stockholders |
1.2 | % | (0.9 | %) | 1.1 | % | 1.3 | % | ||||
Comparison of the Three months ended June 30, 2007 to the Three months ended June 30, 2008 and of the Six months ended June 30, 2007 to the Six months ended June 30, 2008
Revenue
The following table presents our revenues, by revenue source, for the periods presented:
Six months ended June 30, | Three months ended June 30, | |||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||
Proprietary Traffic Revenues |
$ | 28,639,626 | $ | 31,266,435 | $ | 13,523,702 | $ | 16,599,077 | ||||
Partner Network and Other Revenues |
40,249,412 | 43,139,779 | 21,141,935 | 20,764,810 | ||||||||
Total Revenues |
$ | 68,889,038 | $ | 74,406,214 | $ | 34,665,637 | $ | 37,363,887 | ||||
Our proprietary traffic revenues are generated from our portfolio of Web sites which are monetized with pay-per-click and cost-per-action listings and graphical ad units that are relevant to the Web sites. When an online user navigates to one of our owned and operated Web sites and clicks on a particular listing or completes the specified action, we receive a fee. Our partner network revenues are primarily generated using third-party distribution networks to deliver the advertisers listings. The distribution network includes search engines, shopping engines, directories, destination sites, third-party Internet domains or Web sites, and other targeted Web-based content. We generate revenue upon delivery of qualified and reported
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click-throughs or phone calls to our advertisers or to advertising services providers listings. We pay a revenue share to the distribution partners to access their online user traffic. Other revenues include our call-tracking services, bid management services, natural search optimization services and outsourced search marketing platforms.
Revenue increased 8%, from $34.7 million for the three months ended June 30, 2007 to $37.4 million in the same period in 2008. The increase in revenues was primarily attributable to proprietary traffic sources, including our portfolio of more than 200,000 Web sites. The majority of the revenues from our proprietary traffic sources are attributable to the Name Development, Pike Street and the AreaConnect portfolios of Web sites. We believe the increase in proprietary revenues is in part attributable to updates and enhancements for certain of the Web sites as well as increased sales, marketing and optimization efforts and expenditures.
Revenue increased 8%, from $68.9 million for the six months ended June 30, 2007 to $74.4 million in the same period in 2008. The increase in revenues was primarily attributable to increases in the revenues we generated from super-aggregator partners related to our local online advertising platform and call-based advertising services. In addition, $2.6 million of the increase in revenues was attributable to proprietary traffic sources, including our portfolio of more than 200,000 Web sites.
Our ability to maintain and grow our revenues will depend in part on maintaining and increasing the number of click-throughs and calls performed by users of our service through our distribution partners and proprietary traffic sources and maintaining and increasing the number and volume of transactions and favorable variable payment terms with advertisers and advertising services providers, which we believe is dependent in part on marketing our Web sites and delivering high quality traffic that ultimately results in purchases or conversions for our advertisers and advertising services providers. We may increase our direct monetization of our proprietary traffic sources which may not be at the same rate levels as other advertising providers and could adversely affect our revenues and results of operations. If we do not add new distribution partners, renew our current distribution partner agreements or replace traffic lost from terminated distribution agreements with other sources or if our distribution partners search businesses do not grow or are adversely affected, our revenue and results of operations may be materially and adversely affected. Additionally, we use a limited number of communication providers for our call-based services. Furthermore, if any of these significant communication providers are unable to provide the levels of service and dedicated resources over time that we require in our business, we may not be able to replace certain of these communication providers in a manner that is efficient, cost-effective or satisfactory to our customers, and as a result our business could be materially and adversely affected. As revenue grows and the volume of transactions and traffic increases, we will need to expand our network infrastructure. Inefficiencies in our network infrastructure to scale and adapt to higher traffic volumes could materially and adversely affect our revenue and results of operations.
The Company anticipates that these variables will fluctuate in the future, affecting our growth rate and our financial results. In particular, it is difficult to project the number of click-throughs we will deliver to our advertisers and how much advertisers will spend with us, and it is even more difficult to anticipate the average revenue per click-through.
In addition, we believe we will experience seasonality. Our quarterly results have fluctuated in the past and may fluctuate in the future due to seasonal fluctuations in levels of Internet usage and seasonal purchasing cycles of many advertisers. It is generally understood that during the spring and summer months, Internet usage is lower than during other times of the year, especially in comparison to the fourth quarter of the calendar year. The extent to which usage may decrease during these off-peak periods is difficult to predict. Prolonged or severe decreases in usage during these periods may adversely affect our growth rate and results.
Expenses
Expenses were as follows:
Six months ended June 30, | Three months ended June 30, | |||||||||||||||||||
2007 | % of revenue |
2008 | % of revenue |
2007 | % of revenue |
2008 | % of revenue |
|||||||||||||
Service costs |
32,005,816 | 46 | % | 36,301,616 | 49 | % | 16,764,588 | 48 | % | 17,414,301 | 47 | % | ||||||||
Sales and marketing |
14,622,850 | 21 | % | 14,867,783 | 20 | % | 7,112,929 | 21 | % | 7,896,035 | 21 | % | ||||||||
Product development |
5,260,435 | 8 | % | 8,439,573 | 11 | % | 2,662,779 | 8 | % | 4,252,469 | 11 | % | ||||||||
General and administrative |
8,238,418 | 12 | % | 10,033,984 | 14 | % | 4,057,643 | 12 | % | 5,074,875 | 14 | % | ||||||||
Amortization of intangible assets from acquisitions |
8,597,388 | 12 | % | 7,713,637 | 10 | % | 4,074,254 | 12 | % | 3,661,275 | 10 | % | ||||||||
Facility relocation |
121,124 | 0 | % | | 0 | % | 121,124 | 0 | % | | 0 | % |
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Stock-based compensation expense was included in the following operating expense categories as follows:
Six months ended June 30, | Three months ended June 30, | |||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||
Service costs |
$ | 150,276 | $ | 225,658 | $ | 31,741 | $ | 86,087 | ||||
Sales and marketing |
462,158 | 856,714 | 89,800 | 326,004 | ||||||||
Product development |
939,944 | 806,998 | 450,692 | 396,289 | ||||||||
General and administrative |
3,677,557 | 3,847,338 | 1,770,488 | 1,860,856 | ||||||||
Total stock-based compensation |
$ | 5,229,935 | $ | 5,736,708 | $ | 2,342,721 | $ | 2,669,236 | ||||
See Note 3Stock-based Compensation Plans of the condensed consolidated statements as well as our Critical Accounting Policies for additional information about stock-based compensation.
Service Costs. Service costs increased 4% from $16.8 million in the three months ended June 30, 2007 to $17.4 million in the same period in 2008. The increase was primarily attributable to an increase in facility, co-location, depreciation and amortization, personnel costs, stock compensation and other costs of $2.3 million, and an increase in Internet domain amortization of $186,000, partially offset by decreases in distribution partner payments, royalty and credit card processing fees of $1.8 million. This total increase in the cost amounts resulted primarily from the VoiceStar acquisition, a greater number of searches and platform advertiser accounts, an increase in database and hardware capacity requirements, an increase in the number of personnel required to support our services and an increase in fees paid to outside service providers.
Service costs represented 48% of revenue in the three months ended June 30, 2007 as compared to 47% in 2008. The 2008 decrease as a percentage of revenue in service costs as compared to 2007 was primarily a result of an increase in the proportion of revenue attributable to proprietary traffic revenue as compared to our partner and other revenue sources for which there are related distribution partner payments. Payments to feed management and pay-per-click distribution partners account for higher user acquisition costs as a percentage of revenue relative to our overall service cost percentage.
Service costs increased 13% from $32.0 million in the six months ended June 30, 2007 to $36.3 million in the same period in 2008. The increase was primarily attributable to an increase in facility, co-location, depreciation and amortization, personnel and other costs of $4.1 million, and an increase in Internet domain amortization of $664,000, partially offset by decreases in distribution partner payments, royalty and credit card processing fees of $484,000. Service costs represented 46% of revenue in the six months ended June 30, 2007 as compared to 49% in 2008. The 2008 increase as a percentage of revenue in service costs as compared to the same period in 2007 was primarily a result of additional amounts for our network, infrastructure and communication and personnel costs.
We expect that user acquisition costs and revenue shares to distribution partners are likely to increase prospectively given the competitive landscape for distribution partners. To the extent that payments to feed management and pay-per-click services distribution partners make up a larger percentage of future operations, or the addition or renewal of existing distribution partner agreements are on terms less favorable to us, we expect that service costs will increase as a percentage of revenue. Our proprietary traffic sources have a lower service cost as a percentage of revenue relative to our overall service cost percentage. Our proprietary traffic sources have no corresponding distribution partner payments. To the extent our proprietary traffic sources make up a larger percentage of our future operations, we expect that service costs will decrease as a percentage of revenue. We also expect that service costs will increase in absolute dollars as a result of costs associated with the expansion of our operations and network infrastructure as we scale and adapt to increases in the volume of transactions and traffic and invest in our platforms. We also expect stock-based compensation to increase in absolute dollars.
Sales and Marketing. Sales and marketing expenses increased 11%, from $7.1 million for the three months ended June 30, 2007 to $7.9 million in the same period in 2008. As a percentage of revenue, sales and marketing expenses was 21% for both the three months ended June 30, 2007 and 2008. The net increase in dollars was related primarily to an increase in personnel costs and amounts for branding related efforts. We expect that sales and marketing expenses will increase in absolute dollars in connection with any revenue increase, to the extent that we also increase our marketing activities and correspondingly could increase as a percentage of revenue and as a result of additional stock-based compensation expense. We also expect fluctuations in marketing expenditures as we redirect our online marketing efforts towards more of our recently updated Web sites and direct monetization of our proprietary traffic sources but expect expenditures related to these efforts to increase in absolute dollars in the long term.
Sales and marketing expenses increased 2%, from $14.6 million for the six months ended June 30, 2007 to $14.9 million in the same period in 2008. As a percentage of revenue, sales and marketing expenses were 21% and 20% for the six months ended June 30, 2007 and 2008, respectively. The increase in dollars was related primarily to an increase in personnel costs and amounts for branding related efforts, partially offset by a decrease in online and outside marketing efforts.
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Product Development. Product development expenses increased 60%, from $2.7 million in the three months ended June 30, 2007 to $4.3 million in the same period in 2008. As a percentage of revenue, product development expenses were 8% and 11% for the three months ended June 30, 2007 and 2008, respectively. The increase in dollars was primarily due to an increase in personnel and consulting costs of $1.5 million. We expect that product development expenses will increase in absolute dollars as we increase the number of personnel and consultants to enhance our service offerings and as a result of additional stock-based compensation expense.
Product development expenses increased 60%, from $5.3 million in the six months ended June 30, 2007 to $8.4 million in the same period in 2008. As a percentage of revenue, product development expenses were 8% and 11% for the six months ended June 30, 2007 and 2008, respectively. The increase in dollars was primarily due to an increase in personnel and consulting costs, depreciation and other operating costs of $3.2 million.
General and Administrative. General and administrative expenses increased 25%, from $4.1 million in the three months ended June 30, 2007 to $5.1 million in the same period in 2008. The increase in dollars was primarily due to an increase in personnel and stock-based compensation costs of $545,000 and an increase in professional fees, facility costs, depreciation and other costs of $472,000. As a percentage of revenue, general and administrative expenses was 12% and 14% for the three months ended June 30, 2007 and 2008, respectively. We expect that our general and administrative expenses will increase in absolute dollars as a result of additional stock-based compensation expense and to the extent that we expand our operations and incur additional costs in connection with being a public company, including expenses related to professional fees and insurance.
General and administrative expenses increased 22%, from $8.2 million in the six months ended June 30, 2007 to $10.0 million in the same period in 2008. The increase in dollars was primarily due to an increase in personnel and stock-based compensation costs of $965,000 and an increase in professional fees, facility costs, depreciation, bad debt and other costs of $831,000. As a percentage of revenue, general and administrative expenses were 12% and 14% for the six months ended June 30, 2007 and 2008, respectively.
Amortization of Intangible Assets from Acquisitions. Intangible amortization expense decreased 10%, from $4.1 million in the three months ended June 30, 2007 to $3.7 million in the same period in 2008. The decrease was associated with certain intangible assets from acquisitions being fully amortized in 2007 and 2008. During the three months ended June 30, 2008, the components of amortization of intangibles were service costs of $3.2 million, sales and marketing of $406,000 and general and administrative of $75,000.
Intangible amortization expense decreased 10%, from $8.6 million in the six months ended June 30, 2007 to $7.7 million in the same period in 2008. The decrease was associated with certain intangible assets from acquisitions being fully amortized in 2007 and 2008. During the six months ended June 30, 2008, the components of amortization of intangibles were service costs of $6.6 million, sales and marketing of $954,000 and general and administrative of $200,000.
Our purchase accounting resulted in all assets and liabilities from our acquisitions being recorded at their estimated fair values on their respective acquisition dates. All goodwill, identifiable intangible assets and liabilities resulting from our acquisitions have been recorded in our financial statements. The identified intangibles amounted to $84.4 million and are being amortized over a range of useful lives of 12 to 84 months. We may acquire identifiable intangible assets as part of future acquisitions, and if so, we expect that our intangible amortization will increase in absolute dollars.
Facility relocation. The facility relocation was $121,000 for the three and six months ended June 30, 2007. In April 2007, the Company subleased one of its office locations. In connection with the sublease, the Company recognized approximately $121,000 for the estimated future obligations of non-cancelable lease and other costs related to the office. The portion related to the non-cancelable lease is based on estimates of vacancy period and sublease income. The remaining lease accrual is based on estimates of vacancy period and sublease income. The actual vacancy periods may differ from these estimates, and sublease income, if any, may not materialize. Accordingly, these estimates may be adjusted in future periods.
Gain on sales and disposals of intangible assets, net. The gain on sales and disposals of intangible assets, net was $123,000 and $156,000 for the three and six months ended June 30, 2007, respectively, as compared to $2.0 million and $2.2 million for the three and six months ended June 30, 2008, respectively, and was primarily attributable to the sales and disposals of Internet domain name and other intangible assets.
Other Income, net. Other income, net was $748,000 in the three months ended June 30, 2007 and $133,000 in the same period in 2008. Other income, net was $1.5 million in the six months ended June 30, 2007 and $417,000 in the same period in 2008. The decrease in other income, net during the three and six months ended June 30, 2008 was primarily a result of the lower average cash balances, resulting from the Class B common stock repurchases, and lower interest rates.
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Income Taxes. The income tax expense in the three months ended June 30, 2007 was $413,000 as compared to $733,000 in the same period in 2008. In the six months ended June 30, 2007, income tax expense was $887,000 as compared to $393,000 in the same period in 2008.
In the three and six months ended June 30, 2008, the effective tax rate of 61% and (104%), respectively, differed from the expected effective tax rate of 35% due to state income taxes, non-deductible stock-based compensation related to restricted stock and incentive stock options recorded under the fair-value method as prescribed by SFAS 123R and other amounts. The effective tax rate of 56% and 54% in the three and six months ended June 30, 2007, respectively, differed from the expected tax rate of 35% due to state income taxes, non-deductible stock-based compensation related to restricted stock and incentive stock options recorded under the fair-value method as prescribed by SFAS 123R and other amounts.
During the three months ended June 30, 2007 and 2008, as a result of tax deductions from stock option exercises, we recognized tax-effected benefits of approximately $1.0 million and $81,000, respectively, which were recorded as credits to additional paid in capital. During the six months ended June 30, 2007 and 2008, as a result of tax deductions from stock option exercises, we recognized tax-effected benefits of approximately $2.8 million and $140,000, respectively, which were recorded as credits to additional paid in capital.
Convertible Preferred Stock Dividends and Discount on Preferred Stock Redemption, net. The convertible preferred stock dividends and discount on preferred stock redemption, net, increased from $(23,000) in the three months ended June 30, 2007 to $(34,000) in the same period in 2008. The increase was primarily attributable to a decrease in the discount on preferred stock redemption in connection with our repurchase of 909 shares of preferred stock in 2007 as compared to our repurchase of 1,408 shares of preferred stock in 2008. The convertible preferred stock dividends, conversion payment and discount on preferred stock redemption, net, decreased from ($130,000) in the six months ended June 30, 2007 to ($45,000) in the same period in 2008. The decrease was primarily attributable to preferred dividends of $34,000 in 2007 compared to $28,000 in the same period in 2008, and a $164,000 discount on preferred stock redemption in connection with our repurchase of 3,734 shares of preferred stock outstanding at a price of $195.00 per share (plus commissions) in 2007 as compared to a discount of $73,000 for the same period in 2008. Additionally, preferred stock dividends decreased in 2008 as a result of a reduction in preferred stock outstanding compared to the same period in 2007. Preferred stock dividends are based upon a dividend rate of 4.75%.
Net Income (Loss) Applicable to Common Stockholders. Net income applicable to common stockholders for the three months ended June 30, 2007 was $354,000 compared to $509,000 in the same period in 2008 as a result of the aforementioned factors. Net income (loss) applicable to common stockholders decreased from net income of $902,000 for the six months ended June 30, 2007 to net loss of $726,000 in the same period in 2008.
Liquidity and Capital Resources
As of June 30, 2008, we had cash and cash equivalents of $29.0 million and we had contractual obligations of $4.5 million, of which $2.6 million is for rent under our facility leases.
Cash provided by operating activities primarily consists of net income (loss) adjusted for certain non-cash items such as depreciation and amortization, deferred income taxes, stock-based compensation, excess tax benefit related to stock options, facility relocation and changes in working capital. Cash provided by operating activities for the six months ended June 30, 2008 of approximately $11.2 million consisted primarily of net loss of $771,000 adjusted for non-cash items of $17.9 million, including depreciation, amortization of intangible assets, allowance for doubtful accounts and advertiser credits, stock-based compensation, deferred income taxes, and excess tax benefit related to stock options, facility relocation and approximately $5.9 million used for working capital and other activities. Cash provided by operating activities for the six months ended June 30, 2007 of approximately $16.8 million consisted primarily of net income of $772,000 adjusted for non-cash items of $14.1 million, including depreciation, amortization of intangible assets, allowance for doubtful accounts and merchant advertiser credits, stock-based compensation, deferred income taxes, and excess tax benefit related to stock options, facility relocation and approximately $1.9 million provided by working capital and other activities.
With respect to a significant portion of our pay-per-click advertising services, we have no corresponding payments to distribution partners related to our proprietary revenues or we receive payment from advertisers prior to our delivery of related click-throughs with the corresponding payments to the distribution partners who provide placement for the listings made only after delivery of related click-through. In most cases, the amount payable to the distribution partner will be calculated at the end of a calendar month, with a payment period following the delivery of the click-throughs. This payment structure results in a lag period between the earlier receipt of the cash from the advertisers and the later payment to the distribution partners. These services constituted the majority of revenue in the six months ended June 30, 2007 and 2008. In certain cases, payments to distribution partners are paid in advance or are fixed in advance based on a guaranteed minimum amount of usage delivered.
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Nearly all of the feed management services and advertising services provider arrangements are billed on a monthly basis following the month of our click-through delivery. This payment structure results in our advancement of monies to the distribution partners who have provided the corresponding placements of the listings. For these services, advertisers payments are generally received one to three weeks following payment to the distribution partners. We expect that in the future periods, if the feed management services or amounts from our advertising services provider arrangements account for a greater percentage of our operating activity, working capital requirements will increase as a result.
Cash used in investing activities for the six months ended June 30, 2008 of approximately $83,000 was primarily attributable to net purchases for property and equipment of $1.7 million, payments for the Marchex Voice Services acquisition totaling approximately $128,000, and purchases for Internet domain names or Web sites of approximately $189,000, offset by proceeds from the sales of intangible assets of approximately $1.9 million. Cash used in investing activities for the six months ended June 30, 2007 of approximately $12.3 million was primarily attributable to purchases for Internet domain names or Web sites of approximately $10.2 million and net purchases for property and equipment of $2.5 million, offset by proceeds from the sales of intangible assets of approximately $280,000. As a result of our acquisitions, we increased our property and equipment purchases for items such as network equipment and software, furniture, software and equipment for our personnel, and systems used to sell to and serve advertisers. As our operations increase, we expect property and equipment purchases will increase as we continue to invest in equipment and software for our systems and personnel. Additionally, we have expended amounts for product development initiatives as well as amounts recorded as part of property and equipment for internally developed software. We expect our expenditures for product development initiatives and internally developed software will increase in absolute dollars as our development activities accelerate and we increase the number of personnel and consultants to enhance our service offerings.
Cash used in financing activities for the six months ended June 30, 2008 of approximately $18.6 million was primarily attributable to the repurchase of 1.8 million shares of Class B common stock for treasury stock and 2,008 shares of preferred stock totaling approximately $17.2 million and $409,000, respectively, and common stock and preferred stock dividend payments of $1.7 million, partially offset by net proceeds of approximately $697,000 from the sale of stock through employee stock options and employee stock plan purchases and $54,000 of excess tax benefit related to stock options. Cash provided by financing activities for the six months ended June 30, 2007 of approximately $3.4 million was primarily attributable to net proceeds of approximately $3.4 million from the sale of stock through employee stock options and employee stock purchases and $2.4 million of excess tax benefit related to stock options offset by common and preferred stock dividend payments of $1.7 million and the repurchase of 3,734 shares of preferred stock outstanding at a price of $195.00 per share (plus commissions) totaling approximately $732,000. The following table summarizes our contractual obligations as of June 30, 2008, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
Total | Less than 1 year |
1-3 years | 4-5 years | |||||||||
Contractual Obligations: |
||||||||||||
Operating leases |
$ | 2,616,615 | $ | 816,918 | $ | 1,786,724 | $ | 12,973 | ||||
Capital leases |
80,307 | 27,487 | 52,820 | | ||||||||
Other contractual obligations |
1,799,667 | 1,135,645 | 620,480 | 43,542 | ||||||||
Total contractual obligations (1), (2) |
$ | 4,496,589 | $ | 1,980,050 | $ | 2,460,024 | $ | 56,515 | ||||
(1) | In February 2005 we entered into (i) a master agreement with an advertising partner with respect to our advertising business, and (ii) a license agreement with the same partner with respect to certain of the partners patents, including but not limited to U.S. Patent No. 6,269,361, pursuant to which we paid $4.5 million (and an additional $674,000 in certain circumstances), in an upfront payment and a contingent royalty based on a discounted rate of 3% (3.75% under certain circumstances) of certain of our gross revenues payable on a quarterly basis through December 2016. The upfront license fee has been capitalized and is being amortized ratably over 42 months. The royalty payment is recognized as incurred in service costs. The royalty payments are not included in the above schedule. In August 2007, we entered into a new master agreement with the same partner which expires June 2009 and terminates and supersedes the February 2005 master agreement, except for the royalty provisions which are still in effect. |
(2) | Under the terms of the preferred stock offering in February 2005, we have a quarterly dividend payment obligation. Dividends are cumulative and payable quarterly on the 15th day of February, May, August and November, commencing May 15, 2005 at an annual rate of $11.875 per preferred share. Any dividends must be declared by our board of directors and must come from funds which are legally available for dividend payments. |
During the six months ended June 30, 2008, we paid approximately $190,000 for the purchase of additional Internet domains. We expect to continue acquiring Internet domains or Web sites in the normal course of business as we grow our proprietary network of Web sites.
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We anticipate that we will need to invest working capital towards the development and expansion of our overall operations. We may also make a significant number of acquisitions, which could result in the reduction of our cash balances or the incurrence of debt. On April 1, 2008, we entered into a three year credit agreement which provides us with a $30 million senior secured revolving credit line, which may be used to finance permitted acquisitions. As of June 30, 2008, we had $30 million of availability under the credit agreement. Furthermore, we expect that capital expenditures may increase in future periods, particularly if our operating activity increases.
We will have an annual dividend payment obligation under the terms of the preferred stock of $48,000 based upon approximately 4,016 convertible preferred shares outstanding as of June 30, 2008. Dividends are cumulative and payable quarterly on the 15th day of February, May, August and November, commencing May 15, 2005 at an annual rate of $11.875 per preferred share.
Under Delaware law, dividends to stockholders may be made only from the surplus of a company, or, in certain situations, from the net profits for the current fiscal year before the dividend is declared by the board of directors. If we were to exchange the preferred stock for debentures, we would assume the principal and interest payment obligations under the terms of the debentures. Our ability to pay dividends under the preferred stock, to make payments of principal and interest under the debentures and to pay dividends on our common stock in the future will depend on our financial results, liquidity and financial condition.
In November 2006, our Board of Directors authorized a share repurchase program to repurchase up to 3 million shares of our Class B common stock as well as the initiation of a quarterly cash dividend for the holders of the Class A common stock and Class B common stock. In February 2008, our Board of Directors authorized an increase in the share repurchase program to provide for the repurchase up to 5 million shares in the aggregate (less shares previously repurchased under the share repurchase program) of our Class B common stock. In August 2008, the Companys board of directors authorized an increase in the share repurchase program for the Company to repurchase up to 6 million shares in the aggregate (less shares previously repurchased under the share repurchase program) of the Companys Class B common stock. Under the revised share repurchase program, repurchases may take place in the open market and in privately negotiated transactions and at times and in such amounts as we deem appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability, and other market conditions. This stock repurchase program does not have an expiration date and may be limited or terminated at any time without prior notice. During the six months ended June 30, 2008, approximately 1.8 million shares of Class B common stock were repurchased.
The quarterly cash dividend was initiated at $0.02 per share of Class A common stock and Class B common stock. For 2008, quarterly dividends were paid on February 15 and May 15 to Class A and Class B common stockholders of record as of the close of business on February 2 and May 4, respectively. The aggregate quarterly dividend paid in May 2008 was approximately $804,000.
In July 2008, our Board of Directors declared a regular quarterly dividend of $0.02 per share on our Class A common stock and Class B common stock and $2.97 per share on our 4.75% convertible exchangeable preferred stock. Marchex will pay these dividends on August 15, 2008 to the holders of record as of the close of business on August 4, 2008.
Although we expect that the annual cash dividend, subject to capital availability, will be $0.08 per common share or approximately $3.2 million for the foreseeable future, there can be no assurance that we will continue to pay dividends at such a rate or at all.
Based on our operating plans we believe that our existing credit availability, resources and cash flow provided by ongoing operations, will be sufficient to fund our operations for at least twelve months. Additional equity and debt financing may be needed to support our acquisition strategy, our long-term obligations and our Companys needs. If additional financing is necessary, it may not be available; and if it is available, it may not be possible for us to obtain financing on satisfactory terms. Failure to generate sufficient revenue or raise additional capital could have a material adverse effect on our ability to continue as a going concern and to achieve our intended business objectives.
Critical Accounting Policies
The policies below are critical to our business operations and the understanding of our results of operations. In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of our results.
Our consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
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Our critical accounting policies relate to the following matters and are described below:
| Revenue; |
| Goodwill and intangible assets; |
| Stock-based compensation; and |
| Allowance for doubtful accounts, advertiser and incentive program credits. |
Revenue
We currently generate revenue through our operating businesses by delivering performance-based and search marketing services to advertisers and advertising service providers. The primary revenue driver has been performance-based advertising, which includes pay-per-click listings, pay-per-phone-call services, feed management services, and other cost-per-action services and feed management services. For pay-per-click listing and feed management services, revenue is recognized upon our delivery of qualified and reported click-throughs to our advertisers or advertising service providers listing which occurs when an online user clicks on any of their advertisements after it has been placed by us or by our distribution partners. Each click-through on an advertisement listing represents a completed transaction. For cost-per-action services, revenue is recognized when the online user is redirected from one of our Web sites or a third-party Web site in our distribution network to an advertiser Web site and completes the specified action, such as when a phone number is provisioned or call is placed. In certain cases, we record revenue based on available and reported preliminary information from third parties. Collection on the related receivables may vary from reported information based upon third-party refinement of the estimated and reported amounts owing that occurs subsequent to period ends.
We have entered into agreements with various distribution partners in order to expand our distribution network, which includes search engines, directories, product shopping engines, certain third-party Web sites and our portfolio of Web sites, on which we include our advertisers listings. We generally pay distribution partners based on a specified percentage of revenue or a fixed amount per click-through on these listings. We act as the primary obligor in these transactions, and we are responsible for providing customer and administrative services to the advertiser. In accordance with Emerging Issues Task Force Issue (EITF) No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, the revenue derived from advertisers who receive paid introductions through us as supplied by distribution partners is reported gross based upon the amounts received from the advertiser. We also recognize revenue for certain agency contracts with advertisers under the net revenue recognition method. Under these specific agreements, we purchase listings on behalf of advertisers from search engines and directories. We are paid an agency fee based on the total amount of the purchase made on behalf of these advertisers. Under these agreements, our advertisers are primarily responsible for choosing the publisher and determining pricing, and the Company, in certain instances, is only financially liable to the publisher for the amount collected from our advertisers. This creates a sequential liability for media purchases made on behalf of advertisers. In certain instances, the Web publishers engage the advertisers directly and we are paid an agency fee based on the total amount of the purchase made by the advertiser.
We apply EITF Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables (EITF 00-21), to account for revenue arrangements with multiple deliverables. EITF 00-21 addresses certain aspects of accounting by a vendor for arrangements under which the vendor will perform multiple revenue-generating activities. When an arrangement involves multiple elements, the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when revenue recognition criteria for each element are met. Fair value for each element is established based on the sales price charged when the same element is sold separately.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed in business combinations accounted for under the purchase method.
We apply the provisions of the Financial Accounting Standards Boards (FASB) SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Asset (SFAS 144).
Goodwill is tested annually for impairment and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the assets fair value. To date, no impairment charge has been taken for the goodwill related to our acquisitions. If the fair value is lower than the carrying value, a material impairment charge may be reported in our financial results. We exercise judgment in the assessment of the related useful lives of intangible assets, the fair values and the recoverability. In certain instances, the fair value is determined in part based on cash flow forecasts and discount rate estimates. We review our long-lived assets for impairment in accordance with SFAS 144 whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If such
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asset group is considered to be impaired, the impairment is to be recognized by the amount by which the carrying amount of the assets exceeds fair value. Assets to be disposed of are separately presented on the balance sheet and reported at the lower of their carrying amount or fair value less costs to sell, and are no longer depreciated.
No impairment of significance of our intangible assets has been indicated to date. To the extent such evaluation indicates that the useful lives of intangible assets are different than originally estimated, the amortization period is reduced or extended and, accordingly, the quarterly amortization expense is increased or decreased.
As a result of the significance of the goodwill and intangible asset carrying values, any impairment charges or changes to the estimated amortization periods could have a material adverse effect on our financial results.
Stock-Based Compensation
On January 1, 2006, we adopted SFAS 123R using the modified prospective transition method and therefore have not restated prior periods results. SFAS 123R requires the measurement and recognition of compensation for all stock-based awards made to employees and directors including stock options and restricted stock issuances based on estimated fair values. Under the fair value recognition provisions of SFAS 123R, we recognize stock-based compensation net of an estimated forfeiture rate and therefore only recognize compensation cost for those shares expected to vest over the service period of the award. Prior to SFAS 123R, we accounted for share-based payments under Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees (APB 25) and accordingly, generally recognized compensation expense related to restricted stock awards and stock options with intrinsic value and accounted for forfeitures as they occurred.
Under SFAS 123R, we use the Black-Scholes option pricing model as our method of valuation for stock-based awards. Our determination of the fair value of stock-based awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the expected life of the award, our expected stock price, volatility over the term of the award and actual and projected exercise behaviors. Although the fair value of stock-based awards is determined in accordance with SFAS 123R, the assumptions used in calculating fair value of stock-based awards and the Black-Scholes option pricing model are highly subjective, and other reasonable assumptions could provide differing results. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience of our stock-based awards that are granted, exercised and cancelled. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. See Note 3Stock-based Compensation Plans in the condensed consolidated financial statements for additional information.
Allowance for Doubtful Accounts and Advertiser and Incentive Program Credits
Accounts receivable balances are presented net of allowance for doubtful accounts and advertiser credits. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our accounts receivable. We determine our allowance based on analysis of historical bad debts, advertiser concentrations, advertiser creditworthiness and current economic trends. We review the allowance for collectibility on a quarterly basis. Account balances are written off against the allowance after all reasonable means of collection have been exhausted and the potential recovery is considered remote. If the financial condition of our advertisers were to deteriorate, resulting in an impairment of their ability to make payments, or if we underestimated the allowances required, additional allowances may be required which would result in increased general and administrative expenses in the period such determination was made.
We determine our allowance for advertiser credits and adjustments based upon our analysis of historical credits. Under the advertiser incentive program, we grant advertisers credits depending upon the individual amounts of prepayments made. The incentive program allowance is determined based on the historical rate of incentives earned and used by advertisers compared to the related revenues recognized by us. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments and estimates.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (SFAS 157), which clarifies the definition of fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. In February 2008, the FASB issued a FASB Staff Position FSP SFAS 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The FSP defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008. Accordingly, we adopted the required provisions of SFAS 157 on January 1, 2008 and the remaining provisions will be adopted by us at the beginning of fiscal year 2009. The 2008 fiscal year adoption of the required provisions did not result in a material impact to our financial statements. The remaining aspects of SFAS 157 for which the effective date was deferred under FSP SFAS 157-2 are currently being evaluated by us.
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In December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS 141R), which replaces SFAS 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed and any resulting goodwill in the acquiree. The pronouncement also provides for disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R will be effective for us on January 1, 2009. We are in the process of evaluating the effect that SFAS 141R will have on our financial statements.
In April 2008, the FASB issued FSP SFAS 142-3, Determination of the Useful Life of Intangible Assets (FSP SFAS 142-3), which amends the factors that should be considered in developing renewal or extension assumptions used in determining the useful life of a recognized intangible asset. FSP SFAS 142-3 also adds additional disclosures to be included in financial statements. FSP SFAS 142-3 is effective for fiscal years beginning after December 15, 2008 and interim periods within those years. We are currently evaluating the impact, if any, that FSP SFAS 142-3 will have on our financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1), which addresses whether instruments granted in share-based payment transaction are participating securities prior to vesting and would need to be included in the earnings allocation in computing earnings per share under the two-class method of SFAS No. 128, Earnings per Share. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 and interim periods within those years. The Company is currently evaluating the impact, if any, that FSP EITF 03-6-1 will have on its financial statements.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Our exposure to market risk is limited to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short-term, money market funds. We place our investments with high-quality financial institutions. Due to the nature of our short-term investments, we believe that we are not subject to any material market risk exposure. We do not have any material foreign currency or other derivative financial instruments.
Our existing credit facility bears interest at a rate which will be, at our option, either: (i) the applicable margin rate (depending on our leverage) plus the one-month LIBOR rate reset daily, or (b) the applicable margin rate plus the 1, 2, 3, or 6-month LIBOR rate. This facility is exposed to market rate fluctuations and may impact the interest paid on any borrowings under the credit facility. Currently, we have no borrowings under this facility; however, an increase in interest rates would impact interest expense on future borrowings.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and our chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, our chief executive officer and our chief financial officer have concluded that, as of the date of the evaluation, our disclosure controls and procedures were effective.
Changes in Internal Controls
During the quarter ended June 30, 2008, no change was made to our internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can not provide absolute assurance of achieving the desired control objectives.
In addition, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Part IIOther Information
Item 1. | Legal Proceedings |
We are not a party to any material legal proceedings. From time to time, however, we may be subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of intellectual property rights, and a variety of claims arising in connection with our services.
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Item 1A. | Risk Factors |
We have updated the risk factors previously disclosed in Part I, Item 1A. under the caption Risk Factors of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, which was filed with the SEC on May 8, 2008, as set forth below. We do not believe any of the changes constitute material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007.
An investment in our Class B common stock or preferred stock involves various risks, including those mentioned below and those that are discussed from time to time in our other periodic filings with the SEC. Investors should carefully consider these risks, along with the other information contained in this report, before making an investment decision regarding our stock. There may be additional risks of which we are currently unaware, or which we currently consider immaterial. All of these risks could have a material adverse effect on our financial condition, our results of operations, and the value of our stock.
Risks Relating to Our Company
Our limited operating history makes evaluation of our business difficult.
We were formally incorporated in January 2003. We acquired Enhance Interactive in February 2003, which was recently renamed Marchex Adhere PPC, TrafficLeader in October 2003, which was recently renamed Marchex Connect NA, and goClick in July 2004. In February and April 2005, we completed the acquisitions of certain assets of Name Development and Pike Street Industries, respectively. In July 2005 we completed the acquisition of IndustryBrains, which was recently renamed Marchex Adhere SSC. In May 2006 we completed the acquisition of certain assets of AreaConnect and Open List. In September 2007, we completed the acquisition of VoiceStar, which was recently renamed Marchex Voice Services.
We have limited historical financial data upon which to base planned operating expenses or forecast accurately our future operating results. Further, our limited operating history will make it difficult for investors and securities analysts to evaluate our business and prospects. Our failure to address these risks and difficulties successfully could seriously harm us.
We have largely incurred net losses since our inception, and we may incur net losses in the foreseeable future.
We had an accumulated deficit of $8.5 million as of June 30, 2008. Our net expenses may increase based on the initiatives we undertake which for instance, may include increasing our sales and marketing activities, hiring additional personnel, incurring additional costs as a result of being a public company, and acquiring additional businesses. In addition, commencing January 1, 2006, we began expensing the fair value of stock options granted in connection with our adoption of the provisions of Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R).
We may continue to increase our direct monetization of our proprietary traffic sources, which could adversely affect our revenues.
Our strategic plan has been to increase our direct monetization of our proprietary traffic sources by using more of the advertising listings on our Local Content Network to display the advertisements of advertisers who are on our direct technology platform and those with whom we have direct relationships, as opposed to advertisers from third parties. This monetization may not be of the same rate levels as other advertising providers and as a result could adversely affect our revenues.
We are dependent on certain distribution partners, including Yahoo! and its subsidiaries, for distribution of our services, and we derive a significant portion of our total revenue through these distribution partners. A loss of distribution partners or a decrease in revenue from certain distribution partners could adversely affect our business. Yahoo! is also a significant customer.
A relatively small number of distribution partners currently deliver a significant percentage of traffic to our advertiser listings. Yahoo! is our largest distribution partner and delivers traffic to our advertiser listings which collectively represents approximately 7% of our total revenue for the six months ended June 30, 2008. Separately, Yahoo! was responsible for 14% of our total revenue during the same period principally in respect of the revenues associated with our portfolio of domains.
Our existing agreements with many of our other larger distribution partners permit either company to terminate without penalty on short notice and are primarily structured on a variable-payment basis, under which we make payments based on a specified percentage of revenue or based on the number of paid click-throughs. We intend to continue devoting resources in support of our larger distribution partners, but there are no guarantees that these relationships will remain in place over the short- or long-term. In addition, we cannot be assured that any of these distribution partners will continue to generate current levels of revenue for us or that we will be able to maintain the applicable variable payment terms at their current levels. A loss of any of these distribution partners or a decrease in revenue due to lower traffic or less favorable variable payment terms from any one of these distribution relationships could have an adverse effect on our revenue, and the loss of Yahoo! or any other large distribution partner could have a material adverse effect on our business, financial condition and results of operations.
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Companies distributing advertising on the Internet have experienced, and will likely continue to experience, consolidation. This consolidation has reduced the number of partners that control the online advertising outlets with the most user traffic. According to the comScore Media Metrix qSearch report for December 2007, Yahoo! Search accounted for 23% of the online searches in the United States and Google accounted for 58%. As a result, the larger distribution partners have greater control over determining the market terms of distribution, including placement of advertisements and cost of placement. In addition, many participants in the performance-based advertising and search marketing industries control significant portions of the traffic that they deliver to advertisers. We do not believe, for example, that Yahoo! and Google are as reliant as we are on a third-party distribution network to deliver their services. This gives these companies a significant advantage over us in delivering their services, and with a lesser degree of risk.
We rely on certain advertiser aggregators, resellers and agencies, including AT&T, R.H. Donnelley Corporation, Idearc Media Corp., Yellowbook USA Inc., The Cobalt Group and Intelius, Inc., for the purchase of various advertising and marketing services, as well as to provide us with a large number of advertisers. A loss of certain advertiser aggregators, resellers and agencies or a decrease in revenue from these aggregator partners could adversely affect our business. Such advertisers are subject to varying terms and conditions which may result in claims or credit risks to us.
We benefit from the established relationships and national sales teams that certain of our aggregator partners, who are leading aggregators of advertisers and advertising agencies, have in place throughout the country and in local markets. These advertiser aggregators and agencies refer or bring advertisers to us for the purchase of various advertising products and services. We derive a sizeable portion of our total revenue through these advertiser aggregators, resellers and agencies. A loss of certain advertiser aggregators, resellers and agencies or a decrease in revenue from these aggregator partners could adversely affect our business.
Advertisers provided to us by these aggregators partners may in certain cases be subject to negotiated terms and conditions separate from those applied to online clients accepted and processed through our automated advertiser management platform. In some cases, the applicable contract terms may be the result of legacy or industry association documentation or simply customized advertising solutions for large aggregators and agencies. In any case, as a consequence of such varying terms and conditions, we may be subject to claims or credit risks that we may otherwise mitigate more efficiently across our automated advertiser management platform.
These claims and risks may vary depending on the nature of the aggregated client base. Among other claims, we may be subject to disputes based on third party tracking information or analysis. We may also be subject to differing credit profiles and risks based on the agency relationship associated with these advertisers. For such advertisers, payment may be made on an invoice basis, unlike our retail platform which in many instances is paid in advance of the service. In some limited circumstances we may also have accepted individual advertiser payment liability in place of liability of the advertising agency or media advisor.
We may incur liabilities for the activities of our advertisers, distribution partners and other users of our services, which could adversely affect our business.
Many of our advertisement generation and distribution processes are automated. In most cases, advertisers use our online tools and account management systems to create and submit advertiser listings. These advertiser listings are submitted in a bulk data feed to our distribution partners. Although we monitor our distribution partners on an ongoing basis primarily for traffic quality, these partners control the distribution of the advertiser listings provided in the data feed.
As a result, we do not conduct a manual editorial review of a substantial number of the advertiser listings directly submitted by advertisers online, nor do we manually review the display of the vast majority of the advertiser listings by our distribution partners submitted to us by XML data feeds or data dumps. In cases where we provide editorial or value-added services for our large aggregator clients or agencies, such as ad creation and optimization for local advertisers or landing pages and micro-sites for pay-per-phone call customers, we may rely on the content and information provided to us by these agents on behalf of their individual advertisers. We may not investigate the individual business activities of these advertisers other than the information provided to us or in some cases review of advertiser Web sites. We may not successfully avoid liability for unlawful activities carried out by our advertisers and other users of our services or unpermitted uses of our advertiser listings by distribution partners and their affiliates.
Our potential liability for unlawful activities of our advertisers and other users of our services or unpermitted uses of our advertiser listings and advertising services and platform by distribution partners and advertiser aggregators and agencies could require us to implement measures to reduce our exposure to such liability, which may require us, among other things,
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to spend substantial resources, to discontinue certain service offerings or to terminate certain distribution partner relationships. For example, as a result of the actions of advertisers in our network, we may be subject to private or governmental actions relating to a wide variety of issues, such as privacy, gambling, promotions, and intellectual property ownership and infringement. Under agreements with certain of our larger distribution partners, we may be required to indemnify these distribution partners against liabilities or losses resulting from the content of our advertiser listings. Although our advertisers indemnify us with respect to claims arising from these listings, we may not be able to recover all or any of the liabilities or losses incurred by us as a result of the activities of our advertisers.
We have a large number of distribution partners who display our advertiser listings on their networks. Our advertiser listings are predominantly delivered to our distribution partners in an automated fashion through an XML data feed or data dump. Our distribution partners are contractually required to use the advertiser listings that we provide in accordance with applicable laws and regulations and in conformity with the publication restrictions included in our agreements, which are intended to promote the quality and validity of the traffic provided to our advertisers. Nonetheless, we do not operationally control or manage these distribution partners and any breach of these agreements on the part of any distribution partner or its affiliates could result in liability for our business. These agreements include indemnification obligations on the part of our distribution partners, but there is no assurance that we would be able to collect against offending distribution partners or their affiliates in the event of a claim under these indemnification provisions.
Our insurance policies may not provide coverage for liability arising out of activities of users of our services. In addition, our reliance on some content and information provided to us by our large advertiser aggregators and agencies may expose us to liability not covered by our insurance policies. Furthermore, we may not be able to obtain or maintain adequate insurance coverage to reduce or limit the liabilities associated with our businesses. Any costs incurred as a result of such liability or asserted liability could have a material adverse effect on our business, operating results and financial condition.
If we do not maintain and grow a critical mass of advertisers and distribution partners, the value of our services could be adversely affected.
Our success depends, in large part, on the maintenance and growth of a critical mass of advertisers and distribution partners and a continued interest in our performance-based advertising and search marketing services. Advertisers will generally seek the most competitive return on investment from advertising and marketing services. Distribution partners will also seek the most favorable payment terms available in the market. Advertisers and distribution partners may change providers or the volume of business with a provider, unless the product and terms are competitive. In this environment, we must compete to acquire and maintain our network of advertisers and distribution partners.
If our business is unable to maintain and grow our base of advertisers, our current distribution partners may be discouraged from continuing to work with us, and this may create obstacles for us to enter into agreements with new distribution partners. Our business also in part depends on certain of our large advertiser aggregators and agencies to grow their base of advertisers, as these advertisers become increasingly important to our business and our ability to attract additional distribution partners and opportunities. Similarly, if our distribution network does not grow and does not continue to improve over time, current and prospective advertisers and large aggregators and agencies may reduce or terminate this portion of their business with us. Any decline in the number of advertisers and distribution partners could adversely affect the value of our services.
We are dependent upon the quality of traffic in our network to provide value to our advertisers and the advertisers of our partners, and any failure in our quality control could have a material adverse effect on the value of our services to our advertisers and adversely affect our revenues.
We utilize certain monitoring processes with respect to the quality of the traffic that we deliver to our advertisers. Among the factors we seek to monitor are sources and causes of low quality clicks such as non-human processes, including robots, spiders or other software, the mechanical automation of clicking, and other types of invalid clicks, click fraud, or click spam, the purpose of which is something other than to view the underlying content. Additionally, we also seek to identify other indicators which may suggest that a user may not be targeted by or desirable to our advertisers. Even with such monitoring in place, there is a risk that a certain amount of low-quality traffic or traffic that is deemed to be less valuable by our advertisers will be delivered to such advertisers, which may be detrimental to those relationships. We have regularly refunded fees that our advertisers had paid to us which were attributed to low quality traffic. If we are unable to stop or reduce low quality traffic, these refunds may increase. Low-quality traffic may further prevent us from growing our base of advertisers and cause us to lose relationships with existing advertisers, or become the target of litigation, both of which would adversely affect our revenues.
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We may be subject to intellectual property claims, which could adversely affect our financial condition and ability to use certain critical technologies, divert our resources and management attention from our business operations and create uncertainty about ownership of technology essential to our business.
Our success depends, in part, on our ability to protect our intellectual property and to operate without infringing on the intellectual property rights of others in the process. There can be no guarantee that any of our intellectual property will be adequately safeguarded, or that it will not be challenged by third parties. We may be subject to patent infringement claims or other intellectual property infringement claims, including claims of trademark infringement in connection with our acquisition of previously-owned Internet domain names and claims of copyright infringement with respect to certain of our proprietary Web sites that would be costly to defend and could limit our ability to use certain critical technologies.
Any patent or other intellectual property litigation could negatively impact our business by diverting resources and management attention from other aspects of the business and adding uncertainty as to the ownership of technology, services and property that we view as proprietary and essential to our business. In addition, a successful claim of patent infringement against us and our failure or inability to license the infringed or similar technology on reasonable terms, or at all, could prevent us from using critical technologies which could have a material adverse effect on our business.
We may need additional funding to meet our obligations and to pursue our business strategy. Additional funding may not be available to us and our financial condition could therefore be adversely affected.
We may require additional funding to meet our ongoing obligations and to pursue our business strategy, which may include the selective acquisition of businesses and technologies. In addition, we have incurred and we may incur certain obligations in the future, including:
| In February 2005, we entered into agreements with Yahoo! (formerly, Overture), pursuant to which we paid $4.5 million in an upfront payment (and an additional $674,000 in certain circumstances) and a contingent royalty based on 3.0% (3.75% under certain circumstances) of certain of our gross revenues payable on a quarterly basis through December 2016. |
| We are obligated to pay quarterly dividends to the holders of preferred stock at an annual rate of $11.875 per preferred share. There are currently approximately 4,016 shares of preferred stock outstanding following the conversions into shares of Class B common stock or cash repurchases that have occurred to date. |
| In November 2006, our board of directors authorized the repurchase of up to 3.0 million shares of our Class B common stock and the initiation of a quarterly cash dividend to the holders of common stock at an annual rate of $0.08 per common share. In February 2008, our board of directors authorized the repurchase of up to an additional 2.0 million shares of our Class B common stock. In August 2008, our board of directors authorized the repurchase of up to an additional 1.0 million shares of our Class B common stock. To date, we have repurchased approximately 3.9 million of our Class B common shares under the repurchase program. |
| If debentures are issued upon exchange of the preferred stock, we will become obligated to make interest payments to the holders of the debentures. |
There can be no assurance that if we were to need additional funds to meet these obligations that additional financing arrangements would be available in amounts or on terms acceptable to us, if at all. Furthermore, if adequate additional funds are not available, we will be required to delay, reduce the scope of, or eliminate material parts of the implementation of our business strategy, including potential additional acquisitions or internally-developed businesses.
Our acquisitions could divert managements attention, cause ownership dilution to our stockholders, cause our earnings to decrease and be difficult to integrate.
Our business strategy includes identifying, structuring, completing and integrating acquisitions. Acquisitions in the technology and Internet sectors involve a high degree of risk. We may also be unable to find a sufficient number of attractive opportunities to meet our objectives which include revenue growth, profitability and competitive market share. Our acquired companies may have histories of net losses and may expect net losses for the foreseeable future.
Acquisitions are accompanied by a number of risks that could harm our business, operating results and financial condition:
| We could experience a substantial strain on our resources, including time and money, and we may not be successful; |
| Our managements attention could be diverted from our ongoing business concerns; |
| While integrating new companies, we may lose key executives or other employees of these companies; |
| We may issue shares of our Class B common stock as consideration for acquisitions which may result in ownership dilution to our stockholders; |
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| We could fail to successfully integrate our financial and management controls, technology, reporting systems and procedures, or adequately expand, train and manage our workforce; |
| We could experience customer dissatisfaction or performance problems with an acquired company or technology; |
| We could become subject to unknown or underestimated liabilities of an acquired entity or incur unexpected expenses or losses from such acquisitions; |
| We could incur possible impairment charges related to goodwill or other intangible assets or other unanticipated events or circumstances, any of which could harm our business; and |
| We may be exposed to investigations and/or audits by federal, state or other taxing authorities. |
Consequently, we might not be successful in integrating any acquired businesses, products or technologies, and might not achieve anticipated revenue and cost benefits.
The loss of our senior management, including our founding executive officers, could harm our current and future operations and prospects.
We are heavily dependent upon the continued services of Russell C. Horowitz, our chairman and chief executive officer, and John Keister, our president and chief operating officer, and the other members of our senior management team. Each member of our senior management team is an at-will employee and may voluntarily terminate his employment with us at any time with minimal notice. Russell C. Horowitz, Ethan A. Caldwell, Peter Christothoulou and John Keister, our founding executive officers, each own shares of fully vested Class A common stock. Following any termination of employment, each of these employees would only be subject to a twelve-month non-competition and non-solicitation obligation with respect to our customers and employees under our standard confidentiality agreement.
Further, as of June 30, 2008, Russell C. Horowitz, Ethan A. Caldwell, Peter Christothoulou and John Keister together controlled 92% of the combined voting power of our outstanding capital stock, excluding shares of Class B common stock issuable upon conversion of preferred stock. Their collective voting control is not tied to their continued employment with Marchex. The loss of the services of any member of our senior management, including our founding executive officers, for any reason, or any conflict among our founding executive officers, could harm our current and future operations and prospects.
We may have difficulty retaining current personnel as well as attracting and retaining additional qualified, experienced, highly skilled personnel, which could adversely affect the implementation of our business plan.
Our performance is largely dependent upon the talents and efforts of highly skilled individuals. In order to fully implement our business plan, we will need to retain our current qualified personnel, as well as attract and retain additional qualified personnel. Thus, our success will in significant part depend upon our retention of current personnel as well as the efforts of personnel not yet identified and upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing personnel. We are also dependent on managerial and technical personnel to the extent they may have knowledge or information about our businesses and technical systems that may not be known by our other personnel. There can be no assurance that we will be able to attract and retain necessary personnel. The failure to hire and retain such personnel could adversely affect the implementation of our business plan.
If we are unable to obtain and maintain adequate insurance, our financial condition could be adversely affected in the event of uninsured or inadequately insured loss or damage. Our ability to effectively recruit and retain qualified officers and directors may also be adversely affected if we experience difficulty in maintaining adequate directors and officers liability insurance.
We may not be able to obtain and maintain insurance policies on terms affordable to us that would adequately insure our business and property against damage, loss or claims by third parties. To the extent our business or property suffers any damages, losses or claims by third parties that are not covered or adequately covered by insurance, our financial condition may be materially adversely affected.
We currently have directors and officers liability insurance. If we are unable to maintain sufficient insurance as a public company to cover liability claims made against our officers and directors, we may not be able to retain or recruit qualified officers and directors to manage our company, which could have a material adverse effect on our operations.
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New rules, including those contained in and issued under the Sarbanes-Oxley Act of 2002, may make it difficult for us to retain or attract qualified officers and directors, which could adversely affect our business and our ability to maintain the listing of our Class B common stock and preferred stock on the Nasdaq Global Market.
We may be unable to attract and retain qualified officers, directors and members of board committees required to provide for our effective management as a result of the recent and currently proposed changes in the rules and regulations which govern publicly-held companies, including, but not limited to, certifications from executive officers and requirements for financial experts on boards of directors. The perceived increased personal risk associated with these recent changes may deter qualified individuals from accepting these roles. The enactment of the Sarbanes-Oxley Act of 2002 has resulted in the issuance of a series of new rules and regulations and the strengthening of existing rules and regulations by the SEC, as well as the adoption of new and more stringent rules by the Nasdaq Stock Market.
Further, certain of these recent and proposed changes heighten the requirements for board or committee membership, particularly with respect to an individuals independence from the corporation and level of experience in finance and accounting matters. We may have difficulty attracting and retaining directors with the requisite qualifications. If we are unable to attract and retain qualified officers and directors, our business and our ability to maintain the listing of our shares of Class B common stock and preferred stock on the Nasdaq Global Market could be adversely affected.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud, which could harm our brand and operating results.
Effective internal controls are necessary for us to provide reliable and accurate financial reports and effectively prevent fraud. We have devoted significant resources and time to comply with the new internal control over financial reporting requirements of the Sarbanes-Oxley Act of 2002. In addition, Section 404 under the Sarbanes-Oxley Act of 2002 requires that we assess and our auditors attest to the design and operating effectiveness of our controls over financial reporting. Our current and future compliance with the annual internal control report requirement will depend on the effectiveness of our financial reporting and data systems and controls across our operating subsidiaries. We expect these systems and controls to become increasingly complex to the extent that we integrate acquisitions and our business grows. To effectively manage this growth, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. We cannot be certain that these measures will ensure that we design, implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation or operation, could harm our operating results or cause us to fail to meet our financial reporting obligations. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock and our access to capital.
Accounting for employee stock options using the fair value method has significantly reduced and will likely continue to significantly reduce our net income.
We adopted the provisions of SFAS 123R on January 1, 2006. Thus, our consolidated financial statements for 2007 and 2008 will reflect the fair value of stock options granted to employees as a compensation expense, which has had, and will in the future likely continue to have, a significant adverse impact on our results of operations and net income per share. We rely heavily on stock options to compensate existing employees and to attract new employees. If we reduce or alter our use of stock-based compensation to minimize the recognition of these expenses, our ability to recruit, motivate and retain employees may be impaired, which could put us at a competitive disadvantage in the employee marketplace. In order to prevent any net decrease in their overall compensation packages, we may choose to make corresponding increases in the cash compensation or other incentives we pay to existing and new employees. Any increases in employee wages and salaries would diminish our cash available for marketing, product development and other uses and might cause our GAAP profits to decline. Any of these effects might cause the market price of our Class B common stock and preferred stock to decline.
Impairment of goodwill and other intangible assets would result in a decrease in earnings.
Current accounting rules require that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. These rules also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. To the extent such evaluation indicates that the useful lives of intangible assets are different than originally estimated, the amortization period is reduced or extended and, accordingly, the quarterly amortization expense is increased or decreased.
We have substantial goodwill and other intangible assets, and we may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined. Any impairment charges or changes to the estimated amortization periods could have a material adverse effect on our financial results.
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We may not be able to realize the intended and anticipated benefits from our acquisitions of Internet domain names, which could affect the value of these acquisitions to our business and our ability to meet our financial obligations and targets.
We may not be able to realize the intended and anticipated benefits that we currently expect from our acquisitions of Internet domain names. These intended and anticipated benefits include increasing our cash flow from operations, broadening our distribution offerings and delivering services that strengthen our advertiser relationships.
Factors that could affect our ability to achieve these benefits include:
| A significant amount of revenue attributed to our network of Web sites comes through our agreement with Yahoo! and its subsidiaries. Under our agreement, Yahoo! has certain limited exclusive and preferential rights with respect to the commercialization of many of these Web sites through paid listings. Yahoo! controls the delivery of a portion of the paid listings to many of these Web sites. As a result, the monetization of these Web sites is presently largely dependent on the revenue from the paid listings allocated by Yahoo! and its subsidiaries to these Web sites. This allocation may depend on Yahoo!s advertiser base, internal policies in effect from time to time, perceived quality of traffic, origin of traffic, history of performance and conversion, technical and network changes made by Yahoo!, among many factors and determinations which may or may not be controlled by us or known to us. In addition to the aforementioned factors, if our business relationship with Yahoo! is terminated we may not be able to replace it with another large-scale provider of paid listings under terms which allow us to increase or maintain the amount of revenue attributable to our network of Web sites. |
| In the ordinary course of business we have been subject to and in the future it is likely that we will continue to be subject to intellectual property infringement claims, including claims of trademark infringement with respect to Internet domain names acquired by us. As a result of these claims, we have lost and in the future it is likely that we will continue to lose domain names from which we derive revenue. We may not be able to recoup any resulting financial losses from the prior domain name owners. |
| Our revenue will also depend on the levels of traffic that our network of Web sites is able to achieve in any period. Traffic levels will increase and decrease based upon a number of factors not entirely within our control, including the extent of indexing of our Web sites within search engines and directories, placement within search results and success of marketing efforts. Traffic levels may also be affected by service interruptions or other technical outages. Our ability to meet the traffic demands of our network of Web sites is also dependent on a number of third party vendors and our technical teams to manage the operations effectively. Any downtime of our servers or other outages will negatively impact the revenue sourced from our Local Content Network. |
| We will need to continue to acquire commercially valuable Internet domain names to grow our proprietary network of Web sites. We will need to continuously improve our technologies to acquire valuable Internet domain names as competition in the marketplace for appropriate Internet domain names intensifies. Our domain name acquisition efforts are subject to rules and guidelines established by registries which maintain Internet domain name registrations and the registrars which process and facilitate Internet domain name registrations. The registries and registrars may change the rules and guidelines for acquiring Internet domains in ways that may prove detrimental to our domain acquisition efforts. |
| Some of our existing distribution partners may perceive our Local Content Network as a competitive threat and therefore may decide to terminate their agreements with us. |
| We intend to apply our technology and expertise to geography-specific Web sites that we believe are under-commercialized and not yet mature from a monetization perspective. However, if the current disparities in traffic and monetization of such search terms do not narrow in a favorable way, we may expend significant company resources on business efforts that do not realize the results we anticipate. |
If the acquired assets are not integrated into our business as we anticipate, we may not be able to achieve these benefits or realize the value paid for our acquisitions of Internet domain names, which could materially harm our business, financial condition and results of operations.
We do not control the means by which users access our Web sites, and material changes to current navigation practices or technologies or marketing practices or significant increases in our marketing costs could result in a material adverse effect on our business.
The success of our Local Content Network depends in large part upon consumer access to our Web sites. Consumers access our Web sites primarily through the following methods: directly accessing our Web sites by typing descriptive keywords or keyword strings into the uniform resource locator (URL) address box of an Internet browser; accessing our Web sites by clicking on bookmarked Web sites; and accessing our Web sites through search engines and directories.
Each of these methods requires the use of a third party product or service, such as an Internet browser or search engine or directory. Internet browsers may provide alternatives to the URL address box to locate Web sites, and search engines may from time to time change and establish rules regarding the indexing and optimization of Web sites. We also market certain Web sites through search engines. Historically, we have limited our search engine marketing to less than five leading search engines.
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Product developments and market practices for these means of access to our Web sites are not within our control. We may experience a decline in traffic to our Web sites if third party browser technologies or search engine methodologies and rules are changed to our disadvantage. We have experienced abrupt search engine algorithm and policy changes in the past. We expect the search engines we utilize to market and drive users to our Web sites to continue to periodically change their algorithms, policies and technologies. These changes may result in an interruption or decline in our ability to maintain and grow the number of users who visit our Web sites. We may also be forced to significantly increase marketing expenditures in the event that market prices for online advertising and paid-listings escalate. Any of these changes could have a material adverse effect on our business.
We may experience unforeseen liabilities in connection with our acquisitions of Internet domain names or arising out of third party domain names included in our distribution network, which could negatively impact our financial results.
The Name Development, Pike Street and AreaConnect asset acquisitions involve the acquisition of a large number of previously-owned Internet domain names. Furthermore, we have separately acquired and intend to continue to acquire in the future additional previously-owned Internet domain names. In some cases, these acquired names may have trademark significance that is not readily apparent to us or is not identified by us in the bulk purchasing process. As a result we may face demands by third party trademark owners asserting infringement or dilution of their rights and seeking transfer of acquired Internet domain names under the Uniform Domain Name Dispute Resolution Policy administered by ICANN or actions under the U.S. Anti-Cybersquatting Consumer Protection Act. Additionally, we display paid listings on third party domain names and third party Web sites that are part of our distribution network, which also could subject us to a wide variety of civil claims including intellectual property ownership and infringement.
We intend to review each claim or demand which may arise from time to time on its merits on a case-by-case basis with the assistance of counsel and we intend to transfer any rights acquired by us to any party that has demonstrated a valid prior right or claim. We cannot, however, guarantee that we will be able to resolve these disputes without litigation. The potential violation of third party intellectual property rights and potential causes of action under consumer protection laws may subject us to unforeseen liabilities including injunctions and judgments for money damages.
Regulation could reduce the value of the Internet domain names acquired or negatively impact the Internet domain acquisition process, which could significantly impair the value attributable to our acquisitions of Internet domain names.
The Name Development business includes the registrations of thousands of Internet domain names both in the United States and internationally. Name Development acquired previously-owned Internet domain names that had expired and had been offered for sale by Internet domain name registrars following the period of permitted reclamation by their prior owners. Furthermore, we have separately acquired and intend to continue to acquire in the future additional previously-owned Internet domain names, including in connection with the Pike Street and AreaConnect asset acquisitions.
The acquisition of Internet domain names generally is governed by regulatory bodies. The regulation of Internet domain names in the United States and in foreign countries is subject to change. Regulatory bodies could establish additional requirements for previously-owned Internet domain names or modify the requirements for holding Internet domain names. As a result, we might not acquire or maintain names that contribute to our financial results in the same manner as reflected in the historical financial results of Name Development, Pike Street and AreaConnect. Because certain Internet domain names are important assets, a failure to acquire or maintain such Internet domain names could adversely affect our financial results and our growth. Any impairment in the value of these important assets could cause our stock price to decline.
Risks Relating to Our Business and Our Industry
If we are unable to compete in the highly competitive performance-based advertising and search marketing industries, we may experience reduced demand for our products and services.
We operate in a highly competitive and changing environment. We principally compete with other companies which offer services in the following areas:
| sales to advertisers of pay-per-click services; |
| sales to advertisers of feed management services; |
| aggregation or optimization of online advertising for distribution through search engines, product shopping engines, directories, Web sites or other outlets; |
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| provision of local and vertical Web sites containing information and user feedback designed to attract users and help consumers make better, more informed local decisions, while providing targeted advertising inventory for advertisers; |
| delivery of online advertising to end users or customers of advertisers through destination Web sites or other distribution outlets; |
| delivery of pay-per-phone call advertising to end users or customers of advertisers through destination Web sites or other distribution outlets; |
| local search sales training; |
| services and outsourcing of technologies that allow advertisers to manage their advertising campaigns across multiple networks and track the success of these campaigns; and |
| third party domain monetization. |
Although we currently pursue a strategy that allows us to potentially partner with all relevant companies in the industry, there are certain companies in the industry that may not wish to partner with us. Despite the fact that we currently work with several of our potential competitors, there are no guarantees that these companies will continue to work with us in the future.
We currently or potentially compete with a variety of companies, including Google, IAC/InterActiveCorp, Microsoft, Miva and Yahoo! Many of these actual or perceived competitors also currently or may in the future have business relationships with us, particularly in distribution. However, such companies may terminate their relationships with us. Furthermore, our competitors may be able to secure agreements with us on more favorable terms, which could reduce the usage of our services, increase the amount payable to our distribution partners, reduce total revenue and thereby have a material adverse effect on our business, operating results and financial condition.
We expect competition to intensify in the future because current and new competitors can enter our market with little difficulty. The barriers to entering our market are relatively low. In fact, many current Internet and media companies presently have the technical capabilities and advertiser bases to enter the search marketing services industry. Further, if the consolidation trend continues among the larger media and search engine companies with greater brand recognition, the share of the market remaining for smaller search marketing services providers could decrease, even though the number of smaller providers could continue to increase. These factors could adversely affect our competitive position in the search marketing services industry.
Some of our competitors, as well as potential entrants into our market, may be better positioned to succeed in this market. They may have:
| longer operating histories; |
| more management experience; |
| an employee base with more extensive experience; |
| better geographic coverage; |
| larger customer bases; |
| greater brand recognition; and |
| significantly greater financial, marketing and other resources. |
Currently, and in the future, as the use of the Internet and other online services increases, there will likely be larger, more well-established and well-financed entities that acquire companies and/or invest in or form joint ventures in categories or countries of interest to us, all of which could adversely impact our business. Any of these trends could increase competition and reduce the demand for any of our services.
We face competition from traditional media companies, and we may not be included in the advertising budgets of large advertisers, which could harm our operating results.
In addition to Internet companies, we face competition from companies that offer traditional media advertising opportunities. Most large advertisers have set advertising budgets, a very small portion of which is allocated to Internet advertising. We expect that large advertisers will continue to focus most of their advertising efforts on traditional media. If we fail to convince these companies to spend a portion of their advertising budgets with us, or if our existing advertisers reduce the amount they spend on our programs, our operating results would be harmed.
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If we are not able to respond to the rapid technological change characteristic of our industry, our products and services may cease to be competitive.
The market for our products and services is characterized by rapid change in business models and technological infrastructure, and we will need to constantly adapt to changing markets and technologies to provide new and competitive products and services. If we are unable to ensure that our users, advertisers, and distribution partners have a high-quality experience with our products and services, then they may become dissatisfied and move to competitors products and services. Accordingly, our future success will depend, in part, upon our ability to develop and offer competitive products and services for both our target market and for applications in new markets. We may not, however, be able to successfully do so, and our competitors may develop innovations that render our products and services obsolete or uncompetitive.
Our technical systems are vulnerable to interruption and damage that may be costly and time-consuming to resolve and may harm our business and reputation.
A disaster could interrupt our services for an indeterminate length of time and severely damage our business, prospects, financial condition and results of operations. Our systems and operations are vulnerable to damage or interruption from:
| fire; |
| floods; |
| network failure; |
| hardware failure; |
| software failure; |
| power loss; |
| telecommunications failures; |
| break-ins; |
| terrorism, war or sabotage; |
| computer viruses; |
| denial of service attacks; |
| penetration of our network by unauthorized computer users and hackers and other similar events; |
| natural disaster; and |
| other unanticipated problems. |
We may not have developed or implemented adequate protections or safeguards to overcome any of these events. We also may not have anticipated or addressed many of the potential events that could threaten or undermine our technology network. Any of these occurrences could cause material interruptions or delays in our business, result in the loss of data or render us unable to provide services to our customers. In addition, if a person is able to circumvent our security measures, he or she could destroy or misappropriate valuable information or disrupt our operations. We have deployed firewall hardware intended to thwart hacker attacks. Although we maintain property insurance and business interruption insurance, our insurance may not be adequate to compensate us for all losses that may occur as a result of a catastrophic system failure or other loss, and our insurers may not be able or may decline to do so for a variety of reasons.
If we fail to address these issues in a timely manner, we may lose the confidence of our advertisers and distribution partners, our revenue may decline and our business could suffer. In addition, as we expand our service offerings and enter into new business areas, we may be required to significantly modify and expand our software and technology platform. If we fail to accomplish these tasks in a timely manner, our business and reputation will likely suffer.
We rely on third party technology, platforms, carriers, communications providers, and server and hardware providers, and a failure of service by these providers could adversely affect our business and reputation.
We rely upon third party colocation providers to host our main servers. If these providers are unable to handle current or higher volumes of use, experience any interruption in operations or cease operations for any reason or if we are unable to agree on satisfactory terms for continued hosting relationships, we would be forced to enter into a relationship with other service providers or assume hosting responsibilities ourselves. If we are forced to switch hosting facilities, we may not be successful in finding an alternative service provider on acceptable terms or in hosting the computer servers ourselves. We may also be limited in our remedies against these providers in the event of a failure of service. In the past, we have experienced short-term outages in the service maintained by one of our colocation providers.
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We also rely on a select group of third party providers for components of our technology platform and support for our advertising and call-based services, such as hardware and software providers, telephone carriers and communications providers, credit card processors and domain name registrars. As a result, key operational resources of our business are concentrated with a limited number of third party providers. A failure or limitation of service or available capacity by any of these third party providers could adversely affect our business and reputation. Furthermore, if any of these significant providers are unable to provide the levels of service and dedicated resources over time that we required in our business, we may not be able to replace certain of these providers in a manner that is efficient, cost-effective or satisfactory to our customers, and as a result our business could be materially and adversely affected.
We may not be able to protect our intellectual property rights, which could result in our competitors marketing competing products and services utilizing our intellectual property and could adversely affect our competitive position.
Our success and ability to compete effectively are substantially dependent upon our internally developed and acquired technology and data resources, which we protect through a combination of copyright, trade secret, and patent and trademark law. To date, we acquired U.S. Patent No. 6,822,663 titled Transform Rule Generator for Web-Based Markup Languages through our VoiceStar transaction. We also own nonprovisional U.S. Patent Application Number 10/947,384 titled Performance-Based Online Advertising System and Method, nonprovisional U.S. Patent Application Number 10/992,366 titled Online Advertising System and Method, nonprovisional U.S. Patent Application Number 11/498,217 titled Method and System for Populating Resources Using Web Feeds and corresponding PCT Application Number PCT/US2007/075005, nonprovisional U.S. Patent Application Number 11/868,398 titled System and Method for Classifying Search Queries and nonprovisional U.S. Patent Application Number 11/985,188 titled Method and System for Tracking Telephone Calls. In the future, additional patents may be filed with respect to internally developed or acquired technologies. Our industry is highly competitive and many individuals and companies have sought to patent processes in the industry. We may decide not to protect certain intellectual properties or business methods which may later turn out to be significant to us. In addition, the patent process takes several years and involves considerable expense. Further, patent applications and patent positions in our industry are highly uncertain and involve complex legal and factual questions due in part to the number of competing technologies. As a result, we may not be able to successfully prosecute these patents, in whole or in part, or any additional patent filings that we may make in the future. We also depend on our trademarks, trade names and domain names. We may not be able to adequately protect our technology and data resources. In addition, intellectual property laws vary from country to country, and it may be more difficult to protect our intellectual property in some foreign jurisdictions in which we may plan to enter. If we fail to obtain and maintain patent or other intellectual property protection for our technology, our competitors could market competing products and services utilizing our technology.
Despite our efforts to protect our proprietary rights, unauthorized parties domestically and internationally may attempt to copy or otherwise obtain and use our services, technology and other intellectual property. We cannot be certain that the steps we have taken will prevent any misappropriation or confusion among consumers and advertisers. If we are unable to protect our intellectual property rights from unauthorized use, our competitive position could be adversely affected.
We may be involved in lawsuits to protect or enforce our patents, which could be expensive and time consuming.
We may initiate patent litigation against third parties to protect or enforce our patent rights, and we may be similarly sued by others. We may also become subject to interference proceedings conducted in the patent and trademark offices of various countries to determine the priority of inventions. The defense and prosecution, if necessary, of intellectual property suits, interference proceedings and related legal and administrative proceedings is costly and may divert our technical and management personnel from their normal responsibilities. We may not prevail in any of these suits. An adverse determination of any litigation or defense proceedings could put our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not being issued.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments in the litigation. If securities analysts or investors perceive these results to be negative, it could have an adverse effect on the trading price of our Class B common stock and the trading price of our preferred stock.
Our quarterly results of operations might fluctuate due to seasonality, which could adversely affect our growth rate and in turn the market price of our securities.
Our quarterly results have fluctuated in the past and may fluctuate in the future due to seasonal fluctuations in the level of Internet usage. As is typical in our industry, the second and third quarters of the calendar year generally experience relatively lower usage than the first and fourth quarters. It is generally understood that during the spring and summer months of the year, Internet usage is lower than during other times of the year, especially in comparison to the fourth quarter of the calendar year. The extent to which usage may decrease during these off-peak periods is difficult to predict. Prolonged or severe decreases in usage during these periods may adversely affect our growth rate and in turn the market price of our securities.
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We are susceptible to general economic conditions, and a downturn in advertising and marketing spending by advertisers could adversely affect our operating results.
Our operating results will be subject to fluctuations based on general economic conditions, in particular those conditions that impact advertiser-consumer transactions. If there were to be a general economic downturn that affected consumer activity in particular, however slight, then we would expect that business entities, including our advertisers and potential advertisers, could substantially and immediately reduce their advertising and marketing budgets. We believe that during periods of lower consumer activity, advertiser spending on advertising and marketing is more likely to be reduced, and more quickly, than many other types of business expenses. These factors could cause a material adverse effect on our operating results.
We depend on the growth of the Internet and Internet infrastructure for our future growth and any decrease in growth or anticipated growth in Internet usage could adversely affect our business prospects.
Our future revenue and profits, if any, depend upon the continued widespread use of the Internet as an effective commercial and business medium. Factors which could reduce the widespread use of the Internet include:
| possible disruptions or other damage to the Internet or telecommunications infrastructure; |
| failure of the individual networking infrastructures of our advertisers and distribution partners to alleviate potential overloading and delayed response times; |
| a decision by advertisers and consumers to spend more of their marketing dollars on offline programs; |
| increased governmental regulation and taxation; and |
| actual or perceived lack of security or privacy protection. |
In particular, concerns over the security of transactions conducted on the Internet and the privacy of users, including the risk of identity theft, may inhibit the growth of Internet usage, especially online commercial transactions. In order for the online commerce market to develop successfully, we and other market participants must be able to transmit confidential information, including credit card information, securely over public networks. Any decrease in anticipated Internet growth and usage could have a material adverse effect on our business prospects.
We are exposed to risks associated with credit card fraud and credit payment, and we may continue to suffer losses as a result of fraudulent data or payment failure by advertisers.
We have suffered losses and may continue to suffer losses as a result of payments made with fraudulent credit card data. Our failure to control fraudulent credit card transactions adequately could reduce our net revenue and gross margin and negatively impact our standing with applicable credit card authorization agencies. In addition, under limited circumstances, we extend credit to advertisers who may default on their accounts payable to us or fraudulently charge-back amounts on their credit cards for services that have already been delivered by us.
Government regulation of the Internet may adversely affect our business and operating results.
Online search, e-commerce and related businesses face uncertainty related to future government regulation of the Internet through the application of new or existing federal, state and international laws. Due to the rapid growth and widespread use of the Internet, legislatures at the federal and state level have enacted and may continue to enact various laws and regulations relating to the Internet. Individual states may also enact consumer protection laws that are more restrictive than the ones that already exist.
Furthermore, the application of existing laws and regulations to Internet companies remains somewhat unclear. For example, as a result of the actions of advertisers in our network, we may be subject to existing laws and regulations relating to a wide variety of issues such as consumer privacy, gambling, sweepstakes, advertising, promotions, defamation, pricing, taxation, financial market regulation, quality of products and services, computer trespass, spyware, adware, child protection and intellectual property ownership and infringement. In addition, it is not clear whether existing laws that require licenses or permits for certain of our advertisers lines of business apply to us, including those related to insurance and securities brokerage, law offices and pharmacies. Existing federal and state laws that may impact the growth and profitability of our business include, among others:
| the Digital Millennium Copyright Act (DMCA) provides protection from copyright liability for online service providers that list or link to third party Web sites. We currently qualify for the safe harbor under the DMCA, however, if it were determined that we did not meet the safe harbor requirements, we could be exposed to copyright infringement litigation, which could be costly and time-consuming. |
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| the Childrens Online Privacy Protection Act (COPPA) restricts the distribution of certain materials deemed harmful to children and impose limitations on the Web sites ability to collect personal information from minors. COPPA allows the Federal Trade Commission (FTC) to impose fines and penalties upon Web site operators whose sites do not fully comply with the laws requirements. Another child protection law, the Child Online Protection Act (COPA), was intended to restrict the distribution of certain materials deemed harmful to children. This law was struck down as unconstitutional, but a similar federal or state law might be reintroduced in the future. |
| the Protection of Children from Sexual Predators Act requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances. |
| the Controlling the Assault of Non-Solicited Pornography and Marketing (CAN SPAM) Act of 2003 establishes requirements for those who send commercial e-mail, spells out penalties for entities that transmit noncompliant commercial e-mail and/or whose products are advertised in noncompliant commercial e-mail and gives consumers the right to opt-out of receiving commercial e-mails. The FTC is authorized to enforce the CAN SPAM Act. This law also gives the Department of Justice the authority to enforce its criminal sanctions. Other federal and state agencies can enforce the law against organizations under their jurisdiction, and companies that provide Internet access may sue violators as well. |
| the Electronic Communications Privacy Act prevents private entities from disclosing Internet subscriber records and the contents of electronic communications, subject to certain exceptions. |
| the Computer Fraud and Abuse Act and other federal and state laws protect computer users from unauthorized computer access/hacking, and other actions by third parties which may be viewed as a violation of privacy. Michigan and Utah child protection laws, designed to protect children under the age of 18 from receiving adult content via e-mail and other electronic forms of communication (e.g., cell phones and IM). Both Michigan and Utah have developed lists of minors e-mail addresses based on parents and guardians submissions. Once an address has been on a list for 30 days, Web publishers are prohibited from sending the address anything containing, or even linking to, advertising for a product or service that a minor is legally prohibited from purchasing or using, even if the owner of that address previously requested to receive the information. In addition, senders need to match their own mailing lists against the state registries on at least a monthly basis, for which they must pay both Michigan and Utah a per-address fee. |
Courts may apply each of these laws in unintended and unexpected ways. As a company that provides services over the Internet, we may be subject to an action brought under any of these or future laws governing online services. Among the types of legislation currently being considered at the federal and state levels are consumer laws regulating for the use of certain types of software applications or downloads and the use of cookies. These proposed laws are intended to target specific types of software applications often referred to as spyware, invasiveware or adware, although they may also cover certain applications currently used in the online advertising industry to serve and distribute advertisements. Thus, if passed, these laws would impose new obligations for companies that use such software applications or technologies.
Many Internet services are automated, and companies such as ours may be unknowing conduits for illegal or prohibited materials. It is possible that some courts may impose a strict liability standard or require such companies to monitor their customers conduct. Although we would not be responsible or involved in any way in such illegal conduct, it is possible that we would somehow be held responsible for the actions of our advertisers or distribution partners.
We may also be subject to costs and liabilities with respect to privacy issues. Several Internet companies have incurred penalties for failing to abide by the representations made in their privacy policies. In addition, several states have adopted legislation that requires businesses to implement and maintain reasonable security procedures and practices to protect sensitive personal information and to provide notice to consumers in the event of a security breach. Further, it is anticipated that additional federal and state privacy-related legislation will be enacted. Such legislation could negatively affect our business.
In addition, foreign governments may pass laws which could negatively impact our business and/or may prosecute us for violating existing laws. Such laws might include EU member country conforming legislation under applicable EU Privacy and Data Protection Directives. Any costs incurred in addressing foreign laws could negatively affect the viability of our business.
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Federal and state regulation of telecommunications may adversely affect our business and operating results.
Subsidiaries of the Company provide information and analytics services to certain advertisers and aggregators that may include the enhanced transmission of voice services. In connection therewith, the Company, through its subsidiaries, obtains certain telecommunications products and services from carriers in order to deliver these packages of information and analytic services.
Although the Company believes that these information and analytics services in the form provided by the Company are not currently subject to federal and state telecommunications laws and regulations, those laws and regulations (and interpretations thereof) are evolving in response to rapid changes in the telecommunications industry. Nonetheless, if our carrier vendors were to be subject to any changes in applicable law or regulation (or interpretations thereof), then we in turn may be subject to increased costs for their products and services or receive products and services that may be of less value to our customers, which in turn could adversely affect our business and operating results. Furthermore, in the event that any federal or state regulators were to expand the scope of the applicable law and regulation or their application to include the businesses or certain endusers and information service providers, then our business and operating results could also be adversely affected.
The following existing federal and state laws could impact the growth and profitability of our business if changed or interpreted to be applicable to our business:
| The Communications Act of 1934, as amended by the Telecommunications Act of 1996 (the Act), and the regulations promulgated by the Federal Communications Commission under Title II of the Act, may impose federal licensing, reporting and other regulatory obligations on the Company. |
| The Communications Assistance for Law Enforcement Act may require that the Company undertake material modifications to its platforms and processes to permit wiretapping and other access for law enforcement personnel. |
| Under various Orders of the Federal Communications Commission, including its Report and Order and Further Notice of Proposed Rulemaking in Docket Number WC 04-36, dated June 27, 2006, the Company may be required to make material retroactive and prospective contributions to funds intended to support Universal Service, Telecommunications Relay Service, Local Number Portability, the North American Numbering Plan and the budget of the Federal Communications Commission. |
| Laws in most states of the United States of America may require registration or licensing of one or more subsidiaries of the Company, and may impose additional taxes, fees or telecommunications surcharges on the provision of the Companys services which the Company may not be able to pass through to customers. |
Future regulation of search engines may adversely affect the commercial utility of our search marketing services.
The FTC has reviewed the way in which search engines disclose paid placements or paid inclusion practices to Internet users. In 2002, the FTC issued guidance recommending that all search engine companies ensure that all paid search results are clearly distinguished from non-paid results, that the use of paid inclusion is clearly and conspicuously explained and disclosed and that other disclosures are made to avoid misleading users about the possible effects of paid placement or paid inclusion listings on search results. Such disclosures if ultimately mandated by the FTC or voluntarily made by us may reduce the desirability of our paid placement and paid inclusion services. We believe that some users will conclude that paid search results are not subject to the same relevancy requirements as non-paid search results, and will view paid search results less favorably. If such FTC disclosure reduces the desirability of our paid placement and paid inclusion services, and click-throughs of our paid search results decrease, our business could be adversely affected.
State and local governments may in the future be permitted to levy additional taxes on Internet access and electronic commerce transactions, which could result in a decrease in the level of usage of our services. In addition, we may be required to pay additional income, sales, or other taxes.
On November 19, 2004, the federal government passed legislation placing a three-year ban on state and local governments imposition of new taxes on Internet access or electronic commerce transactions. On October 31, 2007, this ban was extended for another seven years. Unless the ban is further extended, state and local governments may begin to levy additional taxes on Internet access and electronic commerce transactions upon the legislations expiration in November 2014. An increase in taxes may make electronic commerce transactions less attractive for advertisers and businesses, which could result in a decrease in the level of usage of our services. Additionally, from time to time, various state, federal and other jurisdictional tax authorities undertake reviews of the Company and the Companys filings. In evaluating the exposure associated with various tax filing positions, the Company on occasion accrues charges for probable exposures. We cannot predict the outcome of any of these reviews.
Risks Relating to Ownership of our Common Stock and Preferred Stock
Our Class B common stock and preferred stock prices have been and are likely to continue to be highly volatile.
The trading prices of our Class B common stock and preferred stock have been and are likely to continue to be highly volatile and subject to wide fluctuations. Since our initial public offering, the closing sale price of our Class B common stock on the Nasdaq Global Market (formerly, the Nasdaq National Market) ranged from $7.51 to $26.14 per share through June 30, 2008. Since our February 2005 follow-on offering, the closing sale price of our preferred stock on the Nasdaq Global Market (formerly, the Nasdaq National Market) ranged from $150.71 to $267.00 per share through June 30, 2008. Our stock prices may fluctuate in response to a number of events and factors, which may be the result of our business strategy or events beyond our control, including:
| developments concerning proprietary rights, including patents, by us or a competitor; |
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| announcements by us or our competitors of significant contracts, acquisitions, financings, commercial relationships, joint ventures or capital commitments; |
| registration of additional shares of Class B common stock in connection with acquisitions; |
| actual or anticipated fluctuations in our operating results; |
| developments concerning our various strategic collaborations; |
| lawsuits initiated against us or lawsuits initiated by us; |
| announcements of acquisitions or technical innovations; |
| potential loss or reduced contributions from distribution partners or advertisers; |
| changes in earnings estimates or recommendations by analysts; |
| changes in the market valuations of similar companies; |
| changes in our industry and the overall economic environment; |
| volume of shares of Class B common stock available for public sale, including upon conversion of Class A common stock and preferred stock or upon exercise of stock options; |
| Class B common stock repurchases under our previously announced share repurchase program; |
| sales and purchases of stock by us or by our stockholders, including sales by certain of our executive officers and directors pursuant to written pre-determined selling and purchase plans under Rule 10b5-1 of the Securities Exchange Act of 1934; and |
| short sales, hedging and other derivative transactions on shares of our Class B common stock and preferred stock. |
In addition, the stock market in general, and the Nasdaq Global Market and the market for online commerce companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the listed companies. These broad market and industry factors may seriously harm the market price of our Class B common stock and preferred stock, regardless of our operating performance. In the past, following periods of volatility in the market, securities class action litigation has often been instituted against these companies. Litigation against us, whether or not judgment is entered against us, could result in substantial costs and potentially economic loss, and a diversion of our managements attention and resources, any of which could seriously harm our financial condition. Additionally, there can be no assurance that an active trading market of our Class B common stock and preferred stock will be sustained.
Because our shares of the preferred stock are convertible into shares of Class B common stock, volatility or depressed prices for our Class B common stock could have a similar effect on the value of the preferred stock. Holders who receive Class B common stock upon conversion also will be subject to the risk of volatility and depressed prices of our Class B common stock.
Our founding executive officers control the outcome of stockholder voting, and there may be an adverse effect on the price of our Class B common stock due to the disparate voting rights of our Class A common stock and our Class B common stock.
As of June 30, 2008, Russell C. Horowitz, Ethan A. Caldwell, Peter Christothoulou and John Keister, our founding executive officers, beneficially owned 100% of the outstanding shares of our Class A common stock, which shares represented 91% of the combined voting power of all outstanding shares of our capital stock. These founding executive officers together control 92% of the combined voting power of all outstanding shares of our capital stock excluding shares of Class B common stock issuable upon conversion of the preferred stock. The holders of our Class A common stock and Class B common stock have identical rights except that the holders of our Class B common stock are entitled to one vote per share, while holders of our Class A common stock are entitled to twenty-five votes per share on all matters to be voted on by stockholders. This concentration of control could be disadvantageous to our other stockholders with interests different from those of these founding executive officers. This difference in the voting rights of our Class A common stock and Class B common stock could adversely affect the price of our Class B common stock to the extent that investors or any potential future purchaser of our shares of Class B common stock give greater value to the superior voting rights of our Class A common stock.
Further, as long as these founding executive officers have a controlling interest, they will continue to be able to elect all or a majority of our board of directors and generally be able to determine the outcome of all corporate actions requiring stockholder approval. As a result, these founding executive officers will be in a position to continue to control all fundamental matters affecting our company, including any merger involving, sale of substantially all of the assets of, or change in control of, our company. The ability of these founding executive officers to control our company may result in our
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Class B common stock and preferred stock trading at a price lower than the price at which such stock would trade if these founding executive officers did not have a controlling interest in us. This control may deter or prevent a third party from acquiring us which could adversely affect the market price of our Class B common stock and preferred stock.
Anti-takeover provisions may limit the ability of another party to acquire us, which could cause our stock price to decline.
Our certificate of incorporation, as amended, our by-laws and Delaware law contain provisions that could discourage, delay or prevent a third party from acquiring us, even if doing so may be beneficial to our stockholders. In addition, these provisions could limit the price investors would be willing to pay in the future for shares of our Class B common stock and preferred stock. The following are examples of such provisions in our certificate of incorporation, as amended, or our by-laws:
| the authorized number of our directors can be changed only by a resolution of our board of directors; |
| advance notice is required for proposals that can be acted upon at stockholder meetings; |
| there are limitations on who may call stockholder meetings; and |
| our board of directors is authorized, without prior stockholder approval, to create and issue blank check preferred stock. |
We are also subject to Section 203 of the Delaware General Corporation Law, which provides, subject to enumerated exceptions, that if a person acquires 15% or more of our voting stock, the person is an interested stockholder and may not engage in business combinations with us for a period of three years from the time the person acquired 15% or more of our voting stock. The application of Section 203 of the Delaware General Corporation Law could have the effect of delaying or preventing a change of control of our company.
Conversion of our convertible preferred stock has and will dilute the interests of our existing Class B common stockholders.
The conversion of some or all of the preferred stock has and will dilute the interests of our existing Class B common stockholders. Sales in the public market of shares of Class B common stock issued upon conversion may apply downward pressure on the prevailing market price. In addition, the mere issuance of the preferred stock represents a future issuance, and perhaps a future sale, of our Class B common stock to be acquired upon conversion, which could depress trading prices for our Class B common stock.
We may not be able to continue to pay dividends on our preferred stock or common stock in the future which could impair the value of such stock.
Under Delaware law, dividends to stockholders may be made only from the surplus of a company, or, in certain situations, from the net profits for the current fiscal year or the fiscal year before which the dividend is declared. We have paid a quarterly dividend on our preferred stock since May 2005. We have initiated and paid a quarterly dividend on our common stock since November 2006. However, there is no assurance that we will be able to pay dividends in the future. Our ability to pay dividends in the future will depend on our financial results, liquidity and financial condition.
The market price of the preferred stock may decline.
An active trading market for the preferred stock has not fully developed and as a result, the market price and liquidity of the preferred stock will be adversely affected. Even if an active trading market for the preferred stock were to develop, the preferred stock could trade for less than the public offering price, depending on many factors, including prevailing interest rates, our operating results and the markets for similar securities, and such active trading market could cease to continue at any time. In addition, if the preferred stock is exchanged for debentures, we are not obligated to list the debentures and cannot assure you that a market for the debentures will develop.
There may be tax consequences to the holders if we exchange preferred stock for debentures.
An exchange of the preferred stock for debentures will be a taxable event for federal income tax purposes which may result in tax liability to the holders without any corresponding receipt of cash by the holder. Such an exchange may be taxable as a dividend distribution to the extent of our current and accumulated earnings and profits, and may be subject to withholding tax if the exchanging stockholder is a Non-U.S. Holder.
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Our current and future payment obligations or indebtedness will have priority over a preferred stock liquidation preference and accrued dividend payment obligation in the event of our liquidation, dissolution or winding-up.
The terms of the preferred stock do not contain any financial or operating covenants that would prohibit or limit us or our subsidiaries from incurring indebtedness or other liabilities, pledging assets to secure such indebtedness and liabilities, paying dividends, or issuing securities or repurchasing securities issued by us or any of our subsidiaries. The incurrence of indebtedness by us or our subsidiaries and, in particular, the granting of a security interest to secure the indebtedness could adversely affect our ability to pay accrued dividends under the terms of the preferred stock.
If we incur indebtedness, the holders of that debt will have prior rights with respect to any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us. This may have the effect of reducing the amount of proceeds in connection with any insolvency, liquidation, reorganization or other winding-up of us paid to holders of the preferred stock.
The rights of holders of the Class B common stock will be junior to the rights of holders of the preferred stock in the event of our liquidation, dissolution or winding-up.
The terms of the preferred stock provide that holders will receive a preference over the other equity securities of the company upon its liquidation, dissolution or winding-up. This liquidation preference is equal to $250 per share of preferred stock plus all accrued and unpaid dividends through the distribution date. These rights of payment are senior to the liquidation rights of the holders of the Class B common stock. This may have the effect of reducing the amount of proceeds in connection with any insolvency, liquidation, reorganization or other winding-up of us paid to holders of the Class B common stock.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
During the second quarter of 2008, share repurchase activity was as follows:
Period |
Total number of shares purchased |
Average price paid per share |
Total number of shares purchased as part of publicly announced plans or programs |
Maximum number of shares (or approximate dollar value) that may yet be purchased under the plans or programs (1) | ||||||
April 1, 2008 April 30, 2008 |
195,861 | $ | 10.32 | 195,861 | 1,821,787 | |||||
May 1, 2008 May 31, 2008 |
810,412 | (2) | $ | 10.99 | 610,412 | 1,211,375 | ||||
June 1, 2008 June 30, 2008 |
38,300 | $ | 12.71 | 38,300 | 1,173,075 | |||||
Total Class B Common Shares |
1,044,573 | $ | 11.05 | 844,573 | 1,173,075 | |||||
April 1, 2008 April 30, 2008 |
654 | $ |
195.00 (plus |
|||||||
May 1, 2008 May 31, 2008 |
| | ||||||||
June 1, 2008 June 30, 2008 |
754 | $ |
216.92 (plus |
|||||||
Total Preferred Shares (3) |
1,408 | $
|
206.72 (plus commission) |
(1) | On November 15, 2006, we announced that our Board of Directors authorized a share repurchase program to repurchase up to 3 million shares of our Class B common stock through open market and privately negotiated transactions, at times and in such amounts as we deem appropriate. In February 2008, the Companys board of directors authorized an increase in the share repurchase program to allow the Company to repurchase up to 5 million shares in the aggregate (less shares previously repurchased under the share repurchase program) of the Companys Class B common stock. In August 2008, the Companys board of directors authorized an increase in the share repurchase program for the Company to repurchase up to 6 million shares in the aggregate (less shares previously repurchased under the share repurchase program) of the Companys Class B common stock. No shares will be knowingly purchased from company insiders or their affiliates. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability, and other market conditions. This stock repurchase program does not have an expiration date and may be limited or terminated at any time without prior notice. This table does not reflect the August 2008 share increase to the share repurchase program. |
(2) | Includes 200,000 shares of restricted equity subject to vesting which were issued to a certain employee. We repurchased the shares which were not already vested upon termination of employment. |
(3) | The preferred shares were repurchased pursuant to privately negotiated transactions. |
49
Item 4. | Submission of Matters to a Vote of Security Holders |
On May 9, 2008, the Company held its Annual Meeting of Stockholders. At the meeting, the stockholders elected as directors Russell C. Horowitz (with shares representing 299,598,758 votes voting for and 1,796,034 votes withheld), Dennis Cline (with shares representing 294,889,071 votes voting for and 6,505,721 votes withheld), Anne Devereux (with shares representing 301,301,876 votes voting for and 92,916 votes withheld), Jonathan Fram (with shares representing 294,888,969 votes voting for and 6,505,823 withheld), Nicolas Hanauer (with shares representing 294,860,838 votes voting for and 6,533,954 withheld) and John Keister (with shares representing 301,302,347 votes voting for and 92,445 votes withheld).
The stockholders also ratified the appointment of KPMG LLP as the independent registered public accounting firm for the Company for the fiscal year ending December 31, 2008 (with shares representing 301,342,585 votes voting for 36,462 votes against and 15,745 votes abstaining).
Item 6. | Exhibits |
Exhibits are incorporated herein by reference or filed with this report as indicated below (numbered in accordance with Item 601 of Registration S-K).
Exhibits:
Exhibit |
Description of Document | |
2.1 | Agreement and Plan of Merger, dated as of February 19, 2003, by and among the Registrant, Marchex Acquisition Corporation, eFamily.com, Inc., the Shareholders of eFamily.com, Inc., ah-ha.com, Inc. and Paul J. Brockbank, as Stockholder Representative (Filed with the Registrants Registration Statement on Form SB-2 (No. 333-111096) filed with the SEC on December 11, 2003 and incorporated herein by reference). | |
2.2 | Agreement and Plan of Merger, dated as of October 1, 2003, by and among the Registrant, Sitewise Acquisition Corporation, TrafficLeader, Inc., the Shareholders of TrafficLeader, Inc. and Gerald Wiant, as Shareholder Representative (Filed with the Registrants Registration Statement on Form SB-2 (No. 333-111096) filed with the SEC on December 11, 2003 and incorporated herein by reference). | |
2.3 | Agreement and Plan of Merger, dated as of July 21, 2004, by and among the Registrant, Project TPS, Inc., goClick.com, Inc and the Sole Stockholder of goClick.com, Inc. (Filed with the Registrants Current Report on Form 8-K filed with the SEC on August 10, 2004 and incorporated herein by reference). | |
2.4 | Asset Purchase Agreement, dated as of November 19, 2004, by and among the Registrant, Name Development Ltd. and the Sole Stockholder of Name Development Ltd. (Filed with the Registrants Registration Statement on Form SB-2 (No. 333-121213) filed with the SEC on December 13, 2004 and incorporated herein by reference). | |
2.5 | Asset Purchase Agreement, dated as of April 26, 2005, by and among the Registrant, Pike Street Industries, Inc. and the holders of all the issued and outstanding capital stock of Pike Street Industries, Inc. (Filed with the Registrants Current Report on Form 8-K filed with the SEC on May 2, 2005 and incorporated herein by reference). | |
2.6 | Agreement and Plan of Merger, dated as of July 27, 2005, by and among the Registrant, Einstein Holdings I, Inc., Einstein Holdings 2, LLC, IndustryBrains, Inc., the primary shareholders of IndustryBrains, Inc. and with respect to Articles II, VII and XII only, Eric Matlick as shareholder representative (Filed with the Registrants Current Report on Form 8-K filed with the SEC on August 2, 2005 and incorporated herein by reference). | |
2.7 | Asset Purchase Agreement, dated as of May 1, 2006, by and among the Registrant, MDNH, Inc., AreaConnect LLC and the holder of all of the issued and outstanding ownership interests of AreaConnect LLC (Filed with the Registrants Current Report on Form 8-K filed with the SEC on May 5, 2006 and incorporated herein by reference). | |
2.8 | Asset Purchase Agreement, dated as of May 26, 2006, by and among the Registrant, MDNH, Inc., OpenList, Inc., Brian Harriman, the stockholders of OpenList, Inc., and with respect to the Articles VI and XI only, Brad Gerstner as stockholder representative (Filed with the Registrants Current Report on Form 8-K filed with the SEC on June 2, 2006 and incorporated herein by reference). | |
2.9 | Cash Repurchase Agreement, dated as of December 5, 2006, by and between the Registrant and Piper Jaffray & Co (Filed with the Registrants Annual Report on Form 10-K filed with the SEC on March 16, 2007 and incorporated herein by reference). | |
2.10 | Agreement and Plan of Merger, dated as of August 9, 2007, by and among Marchex, Inc., VoiceStar, Inc., and the Shareholders of VoiceStar, Inc (Filed with the Registrants Current Report on Form 8-K filed with the SEC on September 24, 2007 and incorporated herein by reference). | |
3.1 | Certificate of Incorporation of the Registrant (Filed with the Registrants Registration Statement on Form SB-2 (No. 333-111096) filed with the SEC on December 11, 2003 and incorporated herein by reference). |
50
Exhibit |
Description of Document | |
3.2 | Amended and Restated Certificate of Incorporation of the Registrant (Filed with Registrants Amendment No. 2 to the Registration Statement on Form SB-2 (No. 333-111096) filed with the SEC on March 19, 2004 and incorporated herein by reference). | |
3.3 | Preferred Stock Certificate of Designations (Filed with the Registrants Current Report on Form 8-K filed with the SEC on February 15, 2005 and incorporated herein by reference; provided, however, that the Registrant does not incorporate by reference any information contained in, or exhibits submitted on, a Form 8-K that was expressly furnished and not filed). | |
3.4 | By-laws of the Registrant (Filed with the Registrants Registration Statement on Form SB-2 (No. 333-111096) filed with the SEC on December 11, 2003 and incorporated herein by reference). | |
4.1 | Specimen stock certificate representing shares of Class B Common Stock of the Registrant (Filed with the Registrants Amendment No. 3 to the Registration Statement on Form SB-2 (No. 333-111096) filed with the SEC on March 30, 2004 and incorporated herein by reference). | |
4.2 | Specimen stock certificate representing shares of 4.75% Convertible Exchangeable Preferred Stock of the Registrant (Filed with the Registrants Amendment No. 2 to the Registration Statement on Form SB-2 (No. 333-121213) filed with the SEC on February 4, 2005 and incorporated herein by reference). | |
4.3 | Representatives Warrant Agreement for Sanders Morris Harris Inc. (Filed with the Registrants Amendment No. 2 to the Registration Statement on Form SB-2 (No. 333-111096) filed with the SEC on March 19, 2004 and incorporated herein by reference). | |
4.4 | Representatives Warrant Agreement for National Securities Corporation (Filed with the Registrants Amendment No. 2 to the Registration Statement on Form SB-2 (No. 333-111096) filed with the SEC on March 19, 2004 and incorporated herein by reference). | |
4.5 | Indenture (Filed with the Registrants Amendment No. 2 to the Registration Statement on Form SB-2 (No. 333-121213) filed with the SEC on February 4, 2005 and incorporated herein by reference). | |
*10.1 | Amended and Restated 2003 Stock Incentive Plan (Filed with the Registrants Amendment No. 2 to the Registration Statement on Form SB-2 (No. 333-111096) filed with the SEC on March 19, 2004 and incorporated herein by reference). | |
10.2 | Sublease Assignment and Assumption Agreement, dated as of January 18, 2003, by and between Marrch Holdings, LLC, the Registrant and Ecology and Environment, Inc. (Filed with the Registrants Registration Statement on Form SB-2 (No. 333-111096) filed with the SEC on December 11, 2003 and incorporated herein by reference). | |
10.3 | Office Lease, dated as of September 5, 2003, by and between the Registrant and Selig Real Estate Holdings Five (Filed with the Registrants Registration Statement on Form SB-2 (No. 333-111096) filed with the SEC on December 11, 2003 and incorporated herein by reference). | |
10.4 | Sublease, dated as of March 13, 2000, by and between MyFamily.com, Inc. and ah-ha.com, Inc. (Filed with the Registrants Registration Statement on Form SB-2 (No. 333-111096) filed with the SEC on December 11, 2003 and incorporated herein by reference). | |
10.5 | Indenture of Lease, dated as of August 31, 2001, by and between A&A Properties, N.W., L.L.C. and Sitewise Marketing, Inc. (Filed with the Registrants Registration Statement on Form SB-2 (No. 333-111096) filed with the SEC on December 11, 2003 and incorporated herein by reference). | |
10.6 | Sublease, dated as of June 1, 2003, by and between Radiant Marketing Solutions, Inc., as sublessor, and Sitewise Marketing, Inc., as sublessee, and Jerry Wiant and Bruce Fabbri, as guarantors (Filed with the Registrants Registration Statement on Form SB-2 (No. 333-111096) filed with the SEC on December 11, 2003 and incorporated herein by reference). | |
*10.7 | Executive Employment Agreement, dated as of January 17, 2003, by and between Russell C. Horowitz and the Registrant (Filed with the Registrants Registration Statement on Form SB-2 (No. 333-111096) filed with the SEC on December 11, 2003 and incorporated herein by reference). | |
*10.8 | Executive Employment Agreement, dated as of May 1, 2003, by and between Michael A. Arends and the Registrant (Filed with the Registrants Amendment No. 1 to the Registration Statement on Form SB-2 (No. 333-111096) filed with the SEC on February 19, 2004 and incorporated herein by reference). |
51
Exhibit |
Description of Document | |
*10.9 | 2004 Employee Stock Purchase Plan (Filed with the Registrants Amendment No. 1 to the Registration Statement on Form SB-2 (No. 333-111096) filed with the SEC on February 19, 2004 and incorporated herein by reference). | |
10.10 | Letter of Intent, dated as of February 11, 2004, by and between Seattles Best Coffee, LLC and the Registrant (Filed with the Registrants Amendment No. 1 to the Registration Statement on Form SB-2 (No. 333-111096) filed with the SEC on February 19, 2004 and incorporated herein by reference). | |
10.11 | Sublease, dated as of March 1, 2004, by and between Seattles Best Coffee, LLC and the Registrant (Filed with the Registrants Amendment No. 2 to the Registration Statement on Form SB-2 (No. 333-111096) filed with the SEC on March 19, 2004 and incorporated herein by reference). | |
10.12 | Representative Director and Officer Indemnification Agreement, dated as of February 4, 2004, by and between Russell C. Horowitz and the Registrant (Filed with the Registrants Amendment No. 2 to the Registration Statement on Form SB-2 (No. 333-111096) filed with the SEC on March 19, 2004 and incorporated herein by reference). | |
10.13 | Sublease Agreement, dated September 9, 2004, by and between Registrant and G. Russell Knobel and Associates, Inc. (Filed with the Registrants Quarterly Report on Form 10-QSB filed with the SEC on November 15, 2004 and incorporated herein by reference). | |
10.14 | Commercial Lease, entered into as of September 14, 2004, by and between Registrant and TrafficLeader, Inc. and A&A Properties Northwest (Filed with the Registrants Quarterly Report on Form 10-QSB filed with the SEC on November 15, 2004 and incorporated herein by reference). | |
10.15 | License Agreement, effective February 14, 2005, by and between Overture Services, Inc. and Registrant (Filed with the Registrants Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004 filed with the SEC on March 31, 2005 and incorporated herein by reference). | |
10.16 | Overture Master Agreement, effective February 14, 2005, by and between Overture Services, Inc., Overture Search Services (Ireland) Limited and MDNH, Inc. (Filed with the Registrants Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004 filed with the SEC on March 31, 2005 and incorporated herein by reference). | |
10.17 | Master Services Terms and Conditions for Agencies and Resellers, dated effective as of September 14, 2004, by and between Overture Services, Inc. and Marchex, Inc. (d.b.a TrafficLeader) (Filed with the Registrants Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004 filed with the SEC on March 31, 2005 and incorporated herein by reference). | |
10.18 | Amendment to the Master Services Terms and Conditions for Agencies and Resellers, dated as of November 23, 2004, by and between Overture Services, Inc. and Marchex, Inc. (d.b.a TrafficLeader) (Filed with the Registrants Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004 filed with the SEC on March 31, 2005 and incorporated herein by reference). | |
*10.19 | 2004 Employee Stock Purchase Plan, as amended on December 8, 2005 (Filed with the Registrants Current Report on Form 8-K filed with the SEC on December 9, 2005 and incorporated herein by reference). | |
*10.20 | Marchex, Inc. Annual Incentive Plan (Filed with the Registrants Current Report on Form 8-K filed with the SEC on October 3, 2006 and incorporated herein by reference). | |
*10.21 | Form of Restricted Stock Agreement (Filed with the Registrants Current Report on Form 8-K filed with the SEC on October 3, 2006 and incorporated herein by reference). | |
*10.22 | Form of Retention Agreement (Filed with the Registrants Current Report on Form 8-K filed with the SEC on October 3, 2006 and incorporated herein by reference). | |
+10.23 | YAHOO! Publisher Network Agreement # 1-8196149, effective July 1, 2007, by and between Overture Services, Inc. d/b/a YAHOO! Search Marketing, Overture Search Services (Ireland) Limited, MDNH, Inc., and MDNH International Ltd (Filed with the Registrants Quarterly Report on Form 10-Q filed with the SEC on November 9, 2007 and incorporated herein by reference). | |
*10.24 | Executive Employment Agreement effective as of August 1, 2007, by and between IndustryBrains, LLC, Marchex, Inc. and William Day (Filed with the Registrants Quarterly Report on Form 10-Q filed with the SEC on November 9, 2007 and incorporated herein by reference). |
52
Exhibit |
Description of Document | |
+10.25 | Master Services and License Agreement dated as of October 1, 2007, by and between MDNH, Inc. and YellowPages.com LLC. (Filed with the Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the SEC on March 11, 2007 and incorporated herein by reference). | |
++10.26 | Credit Agreement dated as of April 1, 2008, by and between Marchex, Inc., the several banks and other financial institutions or entities from time to time parties to the Agreement, and U.S. Bank National Association, as administrative agent. | |
31(i) | Certification of CEO pursuant to Rule 13a-14(a)/15d-14(a). | |
31(ii) | Certification of CFO pursuant to Rule 13a-14(a)/15d-14(a). | |
32.1 | Certification of CEO pursuant to Section 1350. | |
32.2 | Certification of CFO pursuant to Section 1350. |
* | Management contract or compensatory plan or arrangement. |
(+) | Certain information in this agreement has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been granted with respect to the omitted portions. |
(++) | Certain information in this agreement has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. |
| Filed herewith. |
| Furnished herewith. |
53
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MARCHEX, INC. | ||
By: | /s/ MICHAEL A. ARENDS | |
Name: | Michael A. Arends | |
Title: | Chief Financial Officer (Principal Accounting Officer) |
August 11, 2008
54
Exhibit 10.26
$30,000,000
CREDIT AGREEMENT
among
MARCHEX, INC.,
as Borrower,
The Several Lenders from Time to Time Parties Hereto,
and
U.S. BANK NATIONAL ASSOCIATION,
as Administrative Agent and Issuing Lender
Dated as of April 1, 2008
[* * *] Certain information in this agreement has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
TABLE OF CONTENTS
ARTICLE I. DEFINITIONS |
1 | |||
1.1 |
Defined Terms | 1 | ||
1.2 |
Other Definitional Provisions; Rules of Construction | 15 | ||
1.3 |
Incorporation of Exhibits | 16 | ||
ARTICLE II. REVOLVING COMMITMENTS |
16 | |||
2.1 |
Revolving Commitments | 16 | ||
2.2 |
Use of Proceeds | 16 | ||
2.3 |
Revolving Notes | 17 | ||
2.4 |
Interest Rate | 17 | ||
2.5 |
Repayment | 18 | ||
2.6 |
Procedure for Revolving Loan Borrowing | 18 | ||
2.7 |
Commitment Fees | 18 | ||
2.8 |
Termination or Reduction of Revolving Commitments | 19 | ||
ARTICLE III. LETTERS OF CREDIT |
19 | |||
3.1 |
L/C Commitment | 19 | ||
3.2 |
Procedure for Issuance of Letter of Credit | 19 | ||
3.3 |
Fees and Other Charges | 20 | ||
3.4 |
L/C Participations | 20 | ||
3.5 |
Reimbursement Obligation of Borrower | 21 | ||
3.6 |
Obligations Absolute | 21 | ||
3.7 |
Letter of Credit Payments | 22 | ||
3.8 |
Applications | 22 | ||
ARTICLE IV. GENERAL PROVISIONS RELATING TO REVOLVING LOANS |
22 | |||
4.1 |
Manner of Payment | 22 | ||
4.2 |
Statements | 22 | ||
4.3 |
Book Entry Loan Account | 23 | ||
4.4 |
Computations of Interest | 23 | ||
4.5 |
Default Interest | 23 | ||
4.6 |
Maximum Interest Rate | 23 | ||
4.7 |
Late Charge | 23 | ||
4.8 |
Optional Prepayments | 24 | ||
4.9 |
Pro Rata Treatment and Payments | 24 | ||
4.10 |
Requirements of Law | 25 | ||
4.11 |
Taxes | 26 | ||
4.12 |
Change of Lending Office | 28 | ||
4.13 |
Replacement of Lenders | 28 |
i
ARTICLE V. CONDITIONS PRECEDENT |
29 | |||
5.1 |
Conditions to Initial Extension of Credit | 29 | ||
5.2 |
Conditions to Each Extension of Credit | 30 | ||
ARTICLE VI. AFFIRMATIVE COVENANTS |
31 | |||
6.1 |
Financial Statements | 31 | ||
6.2 |
Certificates; Other Information | 32 | ||
6.3 |
Payment of Obligations | 32 | ||
6.4 |
Maintenance of Existence; Compliance | 32 | ||
6.5 |
Maintenance of Property; Insurance | 33 | ||
6.6 |
Inspection of Property; Books and Records; Discussions | 33 | ||
6.7 |
Notices | 33 | ||
6.8 |
Environmental Laws | 34 | ||
6.9 |
Additional Collateral, etc. | 34 | ||
6.10 |
Bank Accounts | 35 | ||
6.11 |
Disposition of Intangible Assets | 36 | ||
6.12 |
Further Assurances | 37 | ||
ARTICLE VII. NEGATIVE COVENANTS |
37 | |||
7.1 |
Financial Condition Covenants | 37 | ||
7.2 |
Indebtedness | 37 | ||
7.3 |
Liens | 38 | ||
7.4 |
Fundamental Changes | 39 | ||
7.5 |
Disposition of Property | 40 | ||
7.6 |
Restricted Payments | 40 | ||
7.7 |
Investments | 41 | ||
7.8 |
Transactions with Affiliates | 42 | ||
7.9 |
Swap Agreements | 42 | ||
7.10 |
Changes in Fiscal Periods | 43 | ||
7.11 |
Negative Pledge Clauses | 43 | ||
7.12 |
Clauses Restricting Subsidiary Distributions | 43 | ||
7.13 |
Lines of Business | 43 | ||
ARTICLE VIII. REPRESENTATIONS AND WARRANTIES |
43 | |||
8.1 |
Financial Condition | 43 | ||
8.2 |
No Material Adverse Effect | 44 | ||
8.3 |
Existence; Compliance with Law | 44 | ||
8.4 |
Power; Authorization; Enforceable Obligations | 44 | ||
8.5 |
No Legal Bar | 45 | ||
8.6 |
Litigation | 45 | ||
8.7 |
No Default | 45 | ||
8.8 |
Ownership of Property; Liens | 45 | ||
8.9 |
Intellectual Property | 45 | ||
8.10 |
Taxes | 46 | ||
8.11 |
Federal Regulations | 46 | ||
8.12 |
Labor Matters | 46 | ||
8.13 |
ERISA | 46 |
ii
8.14 |
Investment Company Act; Other Regulations | 47 | ||
8.15 |
Subsidiaries | 47 | ||
8.16 |
Environmental Matters | 47 | ||
8.17 |
Accuracy of Information, etc. | 48 | ||
8.18 |
Security Documents | 48 | ||
8.19 |
Solvency | 49 | ||
ARTICLE IX. EVENTS OF DEFAULT |
49 | |||
ARTICLE X. THE AGENT |
52 | |||
10.1 |
Appointment | 52 | ||
10.2 |
Delegation of Duties | 52 | ||
10.3 |
Exculpatory Provisions | 52 | ||
10.4 |
Reliance by Administrative Agent | 53 | ||
10.5 |
Notice of Default | 53 | ||
10.6 |
Non-Reliance on Administrative Agent and Other Lenders | 54 | ||
10.7 |
Indemnification | 54 | ||
10.8 |
Administrative Agent in Its Individual Capacity | 55 | ||
10.9 |
Successor Administrative Agent | 55 | ||
ARTICLE XI. MISCELLANEOUS |
55 | |||
11.1 |
Amendments and Waivers | 55 | ||
11.2 |
Notices | 56 | ||
11.3 |
No Waiver; Cumulative Remedies | 57 | ||
11.4 |
Survival of Representations and Warranties | 57 | ||
11.5 |
Payment of Expenses and Taxes | 57 | ||
11.6 |
Successors and Assigns; Participations and Assignments | 58 | ||
11.7 |
Adjustments; Set-off | 61 | ||
11.8 |
Counterparts | 62 | ||
11.9 |
Severability | 62 | ||
11.10 |
Integration | 62 | ||
11.11 |
Governing Law | 62 | ||
11.12 |
Submission To Jurisdiction; Waivers | 62 | ||
11.13 |
Acknowledgements | 63 | ||
11.14 |
Releases of Guarantees and Liens | 63 | ||
11.15 |
Confidentiality | 63 | ||
11.16 |
WAIVERS OF JURY TRIAL | 64 | ||
11.17 |
Statutory Notice | 64 |
iii
The exhibits and schedules to this agreement have been omitted. Borrower will furnish supplementally a copy of any exhibit or schedule to the Securities and Exchange Commission upon request.
SCHEDULES
Schedule 1.1 |
Revolving Commitments | |
Schedule 7.2(d) |
Existing Indebtedness | |
Schedule 7.3(f) |
Existing Liens | |
Schedule 7.7(b) |
Investment Policy | |
Schedule 8.1 |
Existing Guarantee Obligations | |
Schedule 8.4 |
Consents, Authorizations, Filings and Notices | |
Schedule 8.15 |
Subsidiaries | |
Schedule 8.18 |
UCC Filing Jurisdictions | |
EXHIBITS | ||
Exhibit A |
Form of Assignment and Assumption Agreement, Section 1.1 | |
Exhibit B |
Form of Compliance Certificate, Section 1.1 | |
Exhibit C |
Form of Guarantee and Collateral Agreement, Section 1.1 | |
Exhibit D |
Form of Revolving Note, Section 2.3 | |
Exhibit E |
Form of Exemption Certificate, Section 4.11(d) | |
Exhibit F |
Form of Borrower Officers Certificate, Section 5.1(f) | |
Exhibit G |
Form of Loan Party Closing Certificate, Section 5.1(g) | |
Exhibit H |
Form of Solvency Certificate, Section 5.1(h) | |
Exhibit I |
Certificate of Subsidiary, Section 6.9(b) |
iv
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of April 1, 2008 (this Agreement), is made and entered into among MARCHEX, INC., a Delaware corporation (Borrower), the several banks and other financial institutions or entities from time to time parties to this Agreement (Lenders), and U.S. BANK NATIONAL ASSOCIATION, as administrative agent (Administrative Agent).
The parties agree as follows:
ARTICLE I. DEFINITIONS
1.1 | Defined Terms |
As used in this Agreement, the terms listed in this Section 1.1 shall have the respective meanings set forth in this Section 1.1.
Adjustment Date has the meaning set forth in the definition of Applicable Margin.
Administrative Agent means U.S. Bank National Association, together with its affiliates, as the arranger of the Revolving Commitments and as Administrative Agent for Lenders under this Agreement and the other Loan Documents, together with any of its successors.
Affiliate means, as to any Person, any other Person that, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, control of a Person means the power, directly or indirectly, either to (a) vote 10 percent or more of the securities having ordinary voting power for the election of directors (or persons performing similar functions) of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise.
Aggregate Exposure means, with respect to any Lender at any time, an amount equal to (a) until the Closing Date, the amount of such Lenders Revolving Commitment at such time and (b) thereafter, the amount of such Lenders Revolving Commitment then in effect or, if the Revolving Commitment has been terminated, the amount of such Lenders Revolving Extensions of Credit then outstanding.
Aggregate Exposure Percentage means, with respect to any Lender at any time, the ratio (expressed as a percentage) of such Lenders Aggregate Exposure at such time to the Aggregate Exposure of all Lenders at such time.
Agreement has the meaning set forth in the preamble to this Agreement.
Applicable Margin means the rates per annum set forth below based upon the Consolidated Leverage Ratio:
Pricing Level |
Consolidated Leverage Ratio | Applicable Margin | Unused Commitment Fee Rate | |||||
1 |
£ 2.00:1.00 | 1.00 | % | 0.25 | % | |||
2 |
> 2.00:1.00 and £ 2.50:1.00 | 1.25 | % | 0.30 | % | |||
3 |
> 2.50:1.00 | 1.50 | % | 0.35 | % |
1
Changes in the Pricing Levels resulting from changes in the Consolidated Leverage Ratio shall become effective on the date (the Adjustment Date) that is three Business Days after the date on which financial statements are delivered to Lenders pursuant to Section 6.1 and shall remain in effect until the next change to be effected pursuant to this paragraph; provided that, Pricing Level 1 shall apply from the Closing Date until the initial first Adjustment Date after the date of this Agreement; provided, further, that in the event that the financial statements for Borrowers fourth fiscal quarter are not delivered until after the delivery of the financial statements for Borrowers first fiscal quarter for the following fiscal year, the financial statements for Borrowers first fiscal quarter for the following fiscal year shall govern the Pricing Level until the financial statements for Borrowers second fiscal quarter are delivered. If any financial statements referred to above are not delivered within the time periods specified in Section 6.1, then, until the date that is three Business Days after the date on which such financial statements are delivered, Pricing Level 3 and the provisions of Section 4.5 shall apply. In addition, at all times while an Event of Default shall have occurred and be continuing, Pricing Level 3 shall apply. Each determination of the Consolidated Leverage Ratio pursuant to the above shall be made in a manner consistent with the determination thereof pursuant to Section 7.1.
Application means an application, in such form as Issuing Lender may specify from time to time, requesting Issuing Lender to issue a Letter of Credit.
Approved Fund means any Person (other than a natural person) that is engaged in making, purchasing, holding or investing in bank loans and similar extensions of credit in the ordinary course of its business and that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.
Assignee has the meaning set forth in Section 11.6(b).
Assignment and Assumption means an Assignment and Assumption Agreement, substantially in the form of Exhibit A.
Available Revolving Commitment means, as to any Lender at any time, an amount equal to the excess, if any, of (a) such Lenders Revolving Commitment then in effect over (b) such Lenders Revolving Extensions of Credit then outstanding.
Benefited Lender has the meaning set forth in Section 11.7(a).
Board means the Board of Governors of the Federal Reserve System of the United States (or any successor).
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Borrower has the meaning set forth in the preamble hereto.
Borrowing Date means any Business Day specified by Borrower as a date on which Borrower requests the Lenders to make Revolving Loans hereunder.
Business has the meaning set forth in Section 8.16(b).
Business Day means any day other than a Saturday, Sunday or other day that commercial banks in Seattle, Washington or New York City are authorized or required by law to close.
Capital Lease Obligations means, as to any Person, the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP.
Capital Stock means any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person other than a corporation and any and all warrants, rights or options to acquire any of the foregoing.
Cash Equivalents means (a) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition; (b) certificates of deposit, time deposits, eurodollar time deposits or overnight bank deposits having maturities of 12 months or less from the date of acquisition issued by any Lender or by any commercial bank organized under the laws of the United States or any state thereof having combined capital and surplus of not less than $500,000,000; (c) commercial paper of an issuer rated at least A-1 by Standard & Poors Ratings Services (S&P) or P-1 by Moodys Investors Service, Inc. (Moodys), or carrying an equivalent rating by a nationally recognized rating agency, if both of the two named rating agencies cease publishing ratings of commercial paper issuers generally, and maturing within six months from the date of acquisition; (d) repurchase obligations of any Lender or of any commercial bank satisfying the requirements of clause (b) of this definition, having a term of not more than 30 days, with respect to securities issued or fully guaranteed or insured by the United States government; (e) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States, by any political subdivision or taxing authority of any such state, commonwealth or territory or by any foreign government, the securities of which state, commonwealth, territory, political subdivision, taxing authority or foreign government (as the case may be) are rated at least A by S&P or A by Moodys; (f) securities with maturities of six months or less from the date of acquisition backed by standby letters of credit issued by any Lender or any commercial bank satisfying the requirements of clause (b) of this definition; (g) money market mutual or similar funds that invest exclusively in assets satisfying the requirements of clauses (a) through (f) of this definition; or (h) money market funds that (i) comply with the criteria set forth in Rule 2a-7 of the SEC under the Investment Company Act of 1940, as amended, (ii) are rated AAA by S&P and Aaa by Moodys and (iii) have portfolio assets of at least $5,000,000,000.
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Change of Control means an event or series of events by which (a) any person or group (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding the Permitted Holders, any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person or group shall be deemed to have beneficial ownership of all securities that such person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time (such right, an option right)), directly or indirectly, of equity securities of Borrower representing more than 40 percent of the total voting power of the Capital Stock of Borrower entitled to vote for the election of members of the board of directors or equivalent governing body of Borrower on a fully-diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right); or (b) during any period of 24 consecutive months, a majority of the members of the board of directors or other equivalent governing body of Borrower cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved or ratified by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body was approved or ratified by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body.
Closing Date means the date on which the conditions precedent set forth in Section 5.1 shall have been satisfied, which date is April 1, 2008.
Code means the Internal Revenue Code of 1986, as amended from time to time.
Collateral means all property of the Loan Parties, now owned or hereafter acquired, upon which a Lien is purported to be created by any Security Document; provided, however, the Collateral shall not include, and the Administrative Agents Lien shall not extend to: (a) more than 66 percent of the issued and outstanding Capital Stock entitled to vote owned or held of record by Borrower in any Excluded Foreign Subsidiary, (c) specific equipment and related software subject to the Permitted Liens of lenders or lessors providing financing for the acquisition of such property and (d) any contract, instrument or chattel paper in which Borrower has any right, title or interest if and to the extent such contract, instrument or chattel paper includes a provision containing a restriction on assignment such that the creation of a security interest in the right, title or interest of Borrower therein would be prohibited and would, in and of itself, cause or result in a default thereunder enabling another person party to such contract, instrument or chattel paper to enforce any remedy with respect thereto; provided, however, that the foregoing exclusion shall not apply if (i) such prohibition has been waived or such other person has otherwise consented to the creation hereunder of a security interest in such contract, instrument or chattel paper, or (ii) such prohibition would be rendered ineffective pursuant to Sections 9-407(a) or 9-408(a) of the Uniform Commercial
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Code, as applicable and as then in effect in any relevant jurisdiction, or any other applicable law (including the bankruptcy code) or principles of equity); provided further that immediately upon the ineffectiveness, lapse or termination of any such provision, the term Collateral shall include, and Borrower shall be deemed to have granted a security interest in, all its rights, title and interests in and to such contract, instrument or chattel paper as if such provision had never been in effect; and provided further that the foregoing exclusion shall in no way be construed so as to limit, impair or otherwise affect Lenders unconditional continuing security interest in and to all rights, title and interests of Borrower in or to any payment obligations or other rights to receive monies due or to become due under any such contract, instrument or chattel paper and in any such monies and other proceeds of such contract, instrument or chattel paper.
Commonly Controlled Entity means an entity, whether or not incorporated, that is under common control with Borrower within the meaning of Section 4001 of ERISA or is part of a group that includes Borrower and that is treated as a single employer under Section 414 of the Code.
Compliance Certificate means a certificate duly executed by a Responsible Officer substantially in the form of Exhibit B.
Consolidated EBITDA means, for the relevant period, Borrowers net income (or net loss), excluding any extraordinary gains or losses and taxes associated therewith, plus interest expense (net of interest income), income tax expense, depreciation, amortization and non-cash stock compensation that constitutes a charge against income and other non-cash charges to income for the relevant period, all determined on a consolidated basis in accordance with GAAP. If during the relevant period Borrower or any Subsidiary shall have made a Permitted Acquisition, Consolidated EBITDA for such period shall be calculated after giving pro forma effect thereto as if such Permitted Acquisition occurred on the first day of such period.
Consolidated EBITDAR means, for the relevant period, Borrowers net income (or net loss), excluding any extraordinary gains or losses and taxes associated therewith, plus (a) interest expense (net of interest income), income tax expense, depreciation, amortization, rent expense and non-cash stock compensation that constitutes a charge against income and other non-cash charges to income for the relevant period, less (b) cash taxes paid during the relevant period, and cash dividends paid during the relevant period and maintenance capital expenditures (which shall be deemed to be an amount equal to 50 percent of depreciation expense related to fixed assets), all determined on a consolidated basis in accordance with GAAP. If during the relevant period Borrower or any Subsidiary shall have made a Permitted Acquisition, Consolidated EBITDAR for such period shall be calculated after giving pro forma effect thereto as if such Permitted Acquisition occurred on the first day of such period.
Consolidated Fixed Charge Coverage Ratio means the ratio of Consolidated EBITDAR to Consolidated Fixed Charges.
Consolidated Fixed Charges means, for the relevant period, the sum of Borrowers cash interest expense and rent expense determined on a consolidated basis in accordance with GAAP, plus Consolidated Synthetic Debt Amortization.
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Consolidated Leverage Ratio means the ratio of Consolidated Total Funded Debt to Consolidated EBITDA.
Consolidated Synthetic Debt Amortization means an amount equal to the sum of (a) 20 percent of the amount of the Total Revolving Commitments as of the last day of the relevant period, (b) principal reduction payments for a one-year period on Borrowers consolidated Indebtedness for borrowed money (other than the Revolving Loans) that was outstanding as of the last day of the relevant period, based upon, for each component of such Indebtedness, the actual amortization schedule provided for in the documents evidencing each component of such Indebtedness and (c) the principal component of payments for a one-year period on Borrowers consolidated Capital Lease Obligations outstanding as of the last day of the relevant period, based upon, for each component of such Capital Lease Obligations, the actual amortization schedule provided for in the documents evidencing each component of such Capital Lease Obligations.
Consolidated Total Funded Debt means, as of the date of determination, the aggregate principal amount of all Indebtedness of Borrower, determined on a consolidated basis in accordance with GAAP, but in any event, excluding obligations for undrawn amounts under outstanding letters of credit and contingent reimbursement obligations under surety bonds.
Contractual Obligation means, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound.
Daily Reset LIBOR Rate Loan has the meaning set forth in Section 2.4(a).
Default means any of the events specified in Article IX, whether or not any requirement for the giving of notice, the lapse of time, or both, has been satisfied.
Disposition means, with respect to any property, any sale, lease, sale and leaseback, assignment, conveyance, transfer or other disposition thereof. The terms Dispose and Disposed of shall have correlative meanings.
Dollars and $ mean dollars in lawful currency of the United States.
Domain Name means a sequence of alphanumeric characters that specifies a group of online resources and forms part of the corresponding Internet address used to, among other functions, identify one or more internet protocol addresses. Domain Name shall include all generic top level domain (gTLD) and country code top-level domain (ccTLD) now existing or hereafter created and all rights, priorities and privileges relating to such Domain Name, Domain Name registration, license and all rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom.
Domestic Subsidiary means any Subsidiary of Borrower organized under the laws of any jurisdiction within the United States.
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Environmental Laws means any and all foreign, Federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other Requirements of Law (including common law) regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or may at any time hereafter be in effect.
ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time.
Event of Default means any of the events specified in Article IX, provided that any requirement for the giving of notice, the lapse of time, or both, has been satisfied.
Excluded Foreign Subsidiary means any Foreign Subsidiary in respect of which either (a) the pledge of all of the Capital Stock of such Subsidiary as Collateral or (b) the guaranteeing by such Subsidiary of the Obligations could reasonably be expected to result in adverse tax consequences to Borrower.
Federal Funds Rate means, for any period, a fluctuating interest rate per annum equal, for each day during such period, to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day for such transactions received by Administrative Agent from three Federal funds brokers of recognized standing selected by it.
Fee Payment Date means (a) the 10th day following the last day of each March, June, September and December and (b) the last day of the Revolving Commitment Period.
Foreign Subsidiary means any Subsidiary of Borrower that is not a Domestic Subsidiary.
Funding Office means the office of Administrative Agent specified in Section 11.2 or such other office as may be specified from time to time by Administrative Agent as its funding office by written notice to Borrower and Lenders.
GAAP means generally accepted accounting principles in the United States as in effect from time to time. In the event that any Accounting Change (as defined below) shall occur and such change results in a change in the method of calculation of financial covenants, standards or terms in this Agreement, then Borrower and Administrative Agent agree to enter into negotiations in order to amend such provisions of this Agreement so as to reflect equitably such Accounting Changes with the desired result that the criteria for evaluating Borrowers financial condition shall be the same after such Accounting Changes as if such Accounting Changes had not been made. Until such time as such an amendment shall have been executed and delivered by Borrower, Administrative Agent and the Required Lenders, all financial covenants, standards and terms in this Agreement shall continue to be calculated or construed as if such Accounting Changes had not occurred. Accounting Changes refers to changes in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants or, if applicable, the SEC.
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Governmental Authority means any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any securities exchange and any self-regulatory organization (including the National Association of Insurance Commissioners).
Group Members means the collective reference to Borrower and its respective Subsidiaries.
Guarantee and Collateral Agreement means the Guarantee and Collateral Agreement to be executed and delivered by Borrower and each Subsidiary Guarantor, substantially in the form of Exhibit C.
Guarantee Obligation means, as to any Person (the guaranteeing person), any obligation, including a reimbursement, counter indemnity or similar obligation, of the guaranteeing person that guarantees or in effect guarantees, or which is given to induce the creation of a separate obligation by another Person (including any bank under any letter of credit) that guarantees or in effect guarantees, any Indebtedness, leases, dividends or other obligations (the primary obligations) of any other third Person (the primary obligor) in any manner, whether directly or indirectly, including any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made or (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing persons maximum reasonably anticipated liability in respect thereof as determined by Borrower in good faith.
Guarantors means the collective reference the Subsidiary Guarantors and any other guarantor of the Obligations.
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Indebtedness means, of any Person at any date, without duplication, (a) all indebtedness of such Person for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services (other than trade payables incurred in the ordinary course of such Persons business), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all Capital Lease Obligations of such Person, (f) all obligations of such Person, contingent or otherwise, as an account party or applicant under or in respect of acceptances, letters of credit, surety bonds or similar arrangements, (g) the liquidation value of all mandatorily redeemable preferred Capital Stock of such Person, (h) all Guarantee Obligations of such Person in respect of obligations of the kind referred to in clauses (a) through (g) above, (i) all obligations of the kind referred to in clauses (a) through (h) above secured by (or for which the holder of such obligation has an existing right, contingent or otherwise, to be secured by) any Lien on property (including accounts and contract rights) owned by such Person, whether or not such Person has assumed or become liable for the payment of such obligation, and (j) for the purposes of Article IX(e) only, all obligations of such Person in respect of Swap Agreements. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Persons ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness expressly provide that such Person is not liable therefor.
Insolvency means, with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA.
Insolvent pertains to a condition of Insolvency.
Intellectual Property means the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including copyrights, copyright licenses, patents, patent licenses, trademarks, trademark licenses, technology, know-how and processes, and all rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom.
Interest Differential means that sum equal to the greater of zero or the financial loss incurred by Lenders resulting from prepayment, calculated as the difference between the amount of interest Lenders would have earned (from like investments in the Money Markets as of the first day of the LIBOR Rate Loan had prepayment not occurred and the interest Lenders will actually earn (from like investments in the Money Markets as of the date of prepayment) as a result of the redeployment of funds from the prepayment.
Investments has the meaning set forth in Section 9.8.
Issuing Lender means U.S. Bank National Association or any affiliate thereof in its capacity as issuer of any Letter of Credit.
L/C Commitment means $30,000,000.
L/C Obligations means, at any time, an amount equal to the sum of (a) the aggregate then undrawn and unexpired amount of the then outstanding Letters of Credit and (b) the aggregate amount of drawings under Letters of Credit that have not then been reimbursed pursuant to Section 3.5.
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L/C Participants means, with respect to any Letter of Credit, the collective reference to all Lenders other than Issuing Lender of such Letter of Credit.
Lenders has the meaning set forth in the preamble hereto.
Letters of Credit has the meaning set forth in Section 3.1(a).
LIBOR Rate Loan has the meaning set forth in Section 2.4(a).
Lien means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement and any capital lease having substantially the same economic effect as any of the foregoing).
Loan Documents means this Agreement, the Security Documents, the Notes and any amendment, waiver, supplement or other modification to any of the foregoing.
Loan Parties means each Group Member that is a party to a Loan Document.
Loan Period means the period commencing on the advance date of the applicable LIBOR Rate Loan and ending on the numerically corresponding day 1, 2, 3 or 6 months thereafter matching the interest rate term selected by the Borrower; provided, however, (a) if any Loan Period would otherwise end on a day which is not a New York Banking Day, then the Loan Period shall end on the next succeeding New York Banking Day unless the next succeeding New York Banking Day falls in another calendar month, in which case the Loan Period shall end on the immediately preceding New York Banking Day; or (b) if any Loan Period begins on the last New York Banking Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of the Loan Period), then the Loan Period shall end on the last New York Banking Day of the calendar month at the end of such Loan Period.
Material Adverse Effect means a material adverse effect on (a) the business, property, operations or financial condition of Borrower and its Subsidiaries taken as a whole or (b) the validity or enforceability of this Agreement or any of the other Loan Documents or the rights or remedies of Administrative Agent or Lenders hereunder or thereunder.
Material Loan Party and Material Loan Parties means, individually or collectively, Borrower and each Material Subsidiary that is a party to a Loan Document.
Material Subsidiary means any Subsidiary, that as of any date of determination, that (a) represents more than 3 percent of the consolidated total assets, as determined in accordance with GAAP, (b) represents more than 3 percent of the consolidated total revenues of Borrower and its Subsidiaries, as determined in accordance with GAAP or (c) owns Domain Names with a fair market value (as determined in good faith by Borrower) in excess of $20,000,000.
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Materials of Environmental Concern means any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Law, including asbestos, polychlorinated biphenyls and urea-formaldehyde insulation.
Money Markets refers to one or more wholesale funding markets available to and selected by Administrative Agent, including negotiable certificates of deposit, commercial paper, eurodollar deposits, bank notes, federal funds, interest rate swaps or others.
Multiemployer Plan means a Plan that is a multiemployer plan as defined in Section 4001(a)(3) of ERISA.
Net Cash Proceeds means the cash proceeds received by Borrower and its Subsidiaries as consideration for a Disposition of intangible assets, net of reasonable and customary selling expenses, including reasonable commissions, legal, accounting and other professional and transactional fees, transfer and similar taxes and Borrowers good faith estimate of income taxes paid or payable in connection with such Disposition.
New York Banking Day means any day (other than a Saturday or Sunday) on which commercial banks are open for business in New York, New York.
Non-Excluded Taxes has the meaning set forth in Section 4.11(a).
Non-U.S. Lender has the meaning set forth in Section 4.11(d).
Notes means the collective reference to any promissory note evidencing any Revolving Loan and issued pursuant to the terms of this Agreement.
Obligations means the unpaid principal of and interest on (including interest accruing after the maturity of the Revolving Loans and Reimbursement Obligations and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Revolving Loans and all other obligations and liabilities of Borrower to Administrative Agent or to any Lender (or, in the case of Specified Swap Agreements, any affiliate of any Lender), whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, any other Loan Document, the Letters of Credit, any Specified Swap Agreement or any other document made, delivered or given in connection herewith or therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including all fees, charges and disbursements of counsel to Administrative Agent or to any Lender that are required to be paid by Borrower pursuant hereto) or otherwise.
Other Taxes means any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document.
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Participant has the meaning set forth in Section 11.6(c).
PBGC means the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA (or any successor).
Permitted Acquisition means an acquisition of all or substantially all of the assets or of the assets constituting a line of business or substantially all of the Capital Stock of any Person where (a) no Default or Event of Default shall have occurred and be continuing on the date such Permitted Acquisition is consummated, before or after giving effect thereto, (b) the business acquired (or Person acquired) is principally engaged in the same line of business (or a business reasonably incidental or complementary thereto) as Borrower, (c) [***] and (d) a Responsible Officer of Borrower shall have delivered to Administrative Agent a Pro Forma Compliance Certificate. Pro Forma Compliance Certificate means a certificate to Administrative Agent certifying as to the accuracy of clauses (a) through (e) above and providing a detailed computation of compliance with clause (c) above.
Permitted Holders means (i) Russell C. Horowitz, John Keister, Ethan A. Caldwell and Peter Christothoulou and members of their respective families, and (ii) trusts solely for the benefit of the foregoing, (iii) the guardian or conservator of any of the foregoing who is adjudged disabled or incompetent by a court of competent jurisdiction; and (iv) any limited partnership, limited liability partnership or limited liability company in which any of the foregoing holds all of the shares of capital stock of Borrower.
Permitted Liens has the meaning set forth in Section 7.3.
Person means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature.
Plan means, at a particular time, any employee benefit plan that is covered by ERISA and in respect of which Borrower or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an employer as defined in Section 3(5) of ERISA.
Properties has the meaning set forth in Section 8.16(a).
Register has the meaning set forth in Section 13.6(b).
Regulation U means Regulation U of the Board as in effect from time to time.
Reimbursement Obligation means the obligation of Borrower to reimburse Issuing Lender pursuant to Section 3.5 for amounts drawn under Letters of Credit.
[* * *] Certain information in this agreement has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
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Reorganization means, with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA.
Reportable Event means any of the events set forth in Section 4043(c) of ERISA.
Required Lenders means, at any time, the holders of more than 50 percent of (a) until the Closing Date, the Total Revolving Commitments then in effect and (b) if the Revolving Commitments have been terminated, the Total Revolving Extensions of Credit then outstanding. For purposes of this definition, the aggregate principal amount of Letters of Credit issued by Issuing Lender shall be considered to be owed to Lenders ratably in accordance with their respective Revolving Commitments.
Requirement of Law means, as to any Person, the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.
Responsible Officer means the chief executive officer, president, chief financial officer vice president-accounting, vice president-financial operations of the applicable Loan Party, but in any event, with respect to financial matters, the chief financial officer of the applicable Loan Party.
Restricted Payments has the meaning set forth in Section 9.6.
Revolving Commitment means, as to any Lender, the obligation of such Lender, if any, to make Revolving Loans and participate in Letters of Credit in an aggregate principal and/or face amount not to exceed the amount set forth under the heading Revolving Commitment opposite such Lenders name on Schedule 1.1 or in the Assignment and Assumption pursuant to which such Lender became a party hereto, as the same may be changed from time to time pursuant to the terms hereof.
Revolving Commitment Period means the period from and including the Closing Date to the Revolving Termination Date.
Revolving Extensions of Credit means, as to any Lender at any time, an amount equal to the sum of (a) the aggregate principal amount of all Revolving Loans held by such Lender then outstanding and (b) such Lenders Revolving Percentage of the L/C Obligations then outstanding.
Revolving Facility means the Revolving Commitments and the extensions of credit made thereunder.
Revolving Loans has the meaning set forth in Section 2.1.
Revolving Note has the meaning set forth in Section 2.3 hereof and includes all renewals, replacements and amendments thereof.
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Revolving Percentage means, as to any Lender at any time, the percentage which such Lenders Revolving Commitment then constitutes of the Total Revolving Commitments or, at any time after the Revolving Commitments shall have expired or terminated, the percentage that the aggregate principal amount of such Lenders Revolving Loans then outstanding constitutes of the aggregate principal amount of the Revolving Loans then outstanding, provided, that, in the event that the Revolving Loans are paid in full prior to the reduction to zero of the Total Revolving Extensions of Credit, the Revolving Percentages shall be determined in a manner designed to ensure that the other outstanding Revolving Extensions of Credit shall be held by Lenders on a comparable basis.
Revolving Termination Date means the earlier of (a) April 1, 2011 or (b) the date that all Obligations are paid in full and the Revolving Commitments are terminated.
SEC means the Securities and Exchange Commission, any successor thereto and any analogous Governmental Authority.
Security Documents means the collective reference to the Guarantee and Collateral Agreement and all other security documents hereafter delivered to Administrative Agent granting a Lien on any property of any Person to secure the obligations and liabilities of any Loan Party under any Loan Document.
Single Employer Plan means any Plan that is covered by Title IV of ERISA, but that is not a Multiemployer Plan.
Solvent or Solvency when used with respect to any Person, means that, as of any date of determination, (a) the amount of the present fair saleable value of the assets of such Person will, as of such date, exceed the amount of all liabilities of such Person, contingent or otherwise, as of such date, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (b) the present fair saleable value of the assets of such Person will, as of such date, be greater than the amount that will be required to pay the liability of such Person on its debts as such debts become absolute and matured, (c) such Person will not have, as of such date, an unreasonably small amount of capital with which to conduct its business, and (d) such Person will be able to pay its debts as they mature. For purposes of this definition, (i) debt means liability on a claim, and (ii) claim means any (x) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (y) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured or unmatured, disputed, undisputed, secured or unsecured.
Specified Swap Agreement means any Swap Agreement entered into by Borrower and any Lender or affiliate thereof in respect of interest rates or currency exchange rates.
Subsidiary means as to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time
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owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a Subsidiary or to Subsidiaries in this Agreement shall refer to a Subsidiary or Subsidiaries of Borrower.
Subsidiary Guarantor means each Material Subsidiary of Borrower other than any Excluded Foreign Subsidiary.
Swap Agreement means any agreement with respect to any swap, forward, future or derivative transaction or option, interest rate cap or collar, or similar agreement involving, or settled by reference to, one or more rates, currencies, commodities, equity or debt instruments or securities, or economic, financial or pricing indices or measures of economic, financial or pricing risk or value or any similar transaction or any combination of these transactions; provided that no phantom stock or similar plan providing for payments only on account of services provided by current or former directors, officers, employees or consultants of Borrower or any of its Subsidiaries shall be a Swap Agreement.
Total Revolving Commitments means, at any time, the aggregate amount of the Revolving Commitments then in effect. The original amount of the Total Revolving Commitments is $30,000,000.
Total Revolving Extensions of Credit means, at any time, the aggregate amount of the Revolving Extensions of Credit of the Lenders outstanding at such time.
Transferee means any Assignee or Participant.
United States means the United States of America.
Wholly-Owned Subsidiary means, as to any Person, any other Person all of the Capital Stock of which (other than directors qualifying shares required by law) is owned by such Person directly and/or through other Wholly-Owned Subsidiaries.
Wholly-Owned Subsidiary Guarantor means any Subsidiary Guarantor that is a Wholly-Owned Subsidiary of Borrower.
1.2 | Other Definitional Provisions; Rules of Construction |
(a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in the other Loan Documents or any certificate or other document made or delivered pursuant hereto or thereto.
(b) As used herein and in the other Loan Documents, and any certificate or other document made or delivered pursuant hereto or thereto, (i) accounting terms relating to any Group Member not defined in Section 1.1 and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP, (ii) the words include, includes and including shall be deemed to be followed by the phrase without limitation, (iii) the word incur shall be construed to mean incur, create, issue, assume, become liable in respect of or suffer to exist (and the words incurred and incurrence shall have correlative meanings), (iv) the words asset and property shall be
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construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, Capital Stock, securities, revenues, accounts, leasehold interests and contract rights, and (v) references to agreements or other Contractual Obligations shall, unless otherwise specified, be deemed to refer to such agreements or Contractual Obligations as amended, supplemented, restated or otherwise modified from time to time.
(c) The words hereof, herein and hereunder and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, Schedule and Exhibit references are to this Agreement unless otherwise specified.
(d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.
(e) Provisions of the Loan Documents apply to successive events and transactions.
(f) In the event of any inconsistency between the provisions of this Agreement and the provisions of any of the other Loan Documents, the provisions of this Agreement govern.
1.3 | Incorporation of Exhibits |
All references to Exhibits contained herein are references to exhibits attached hereto, the terms and conditions of which are made a part hereof for all purposes.
ARTICLE II. REVOLVING COMMITMENTS
2.1 | Revolving Commitments |
Subject to the terms and conditions hereof, each Lender severally agrees to make revolving credit loans (Revolving Loans) to Borrower from time to time during the Revolving Commitment Period in an aggregate principal amount at any one time outstanding which, when added to such Lenders Revolving Percentage of the L/C Obligations then outstanding, does not exceed the amount of such Lenders Revolving Commitment. During the Revolving Commitment Period Borrower may use the Revolving Commitments by borrowing, prepaying the Revolving Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof.
2.2 | Use of Proceeds |
The proceeds of the Revolving Loans shall be used by Borrower to finance Permitted Acquisitions, to repurchase Borrowers Capital Stock, to refinance existing Indebtedness and for general business purposes.
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2.3 | Revolving Notes |
Borrower agrees that upon notice by any Lender to Borrower (with a copy of such notice to Administrative Agent) to the effect that a promissory note or other evidence of indebtedness is required or appropriate in order for such Lender to evidence (whether for purposes of pledge, enforcement or otherwise) the Revolving Loans owing to, or to be made by, such Lender, Borrower shall promptly execute and deliver to such Lender, with a copy to Administrative Agent, a Revolving Note in substantially the form of Exhibit D hereto, payable to the order of such Lender in a principal amount equal to the Revolving Commitment of such Lender (each promissory note issued hereunder, as amended, endorsed or replaced, shall be a Revolving Note, and collectively, the Revolving Notes).
2.4 | Interest Rate |
(a) Interest on the outstanding principal balance of the Revolving Loans shall accrue at one of the following per annum rates selected by Borrower (i) upon notice to Administrative Agent, the Applicable Margin plus the one-month LIBOR rate quoted by Administrative Agent from Reuters Screen LIBOR01 Page or any successor thereto, which shall be that one-month LIBOR rate in effect and reset each New York Banking Day, adjusted for any reserve requirement and any subsequent costs arising from a change in government regulation (a Daily Reset LIBOR Rate Loan); or (ii) upon a minimum of two New York Banking Days prior notice, the Applicable Margin plus the 1, 2, 3 or 6-month LIBOR rate quoted by Administrative Agent from Reuters Screen LIBOR01 Page or any successor thereto (which shall be the LIBOR rate in effect two New York Banking Days prior to commencement of the advance), adjusted for any reserve requirement and any subsequent costs arising from a change in government regulation (a LIBOR Rate Loan). No LIBOR Rate Loan may extend beyond the Revolving Termination Date. In any event, if the Loan Period for a LIBOR Rate Loan should happen to extend beyond t the Revolving Termination Date, such LIBOR Rate Loan must be prepaid at the Revolving Termination Date. If a LIBOR Rate Loan is prepaid prior to the end of the Loan Period for such loan, whether voluntarily or because prepayment is required due to the Revolving Termination Date or due to acceleration of the upon default or otherwise, Borrower agrees to pay all of Lenders costs, expenses and Interest Differential (as determined by Administrative Agent) incurred as a result of such prepayment. Because of the short-term nature of this facility, Borrower agrees that the Interest Differential shall not be discounted to its present value. Any prepayment of a LIBOR Rate Loan shall be in an amount equal to the remaining entire principal balance of such LIBOR Rate Loan.
(b) In the event Borrower does not timely select another interest rate option at least two New York Banking Days before the end of the Loan Period for a LIBOR Rate Loan, Administrative Agent may at any time after the end of the Loan Period convert the LIBOR Rate Loan to a Daily Reset LIBOR Rate Loan, but until such conversion, the funds advanced under the LIBOR Rate Loan shall continue to accrue interest at the same rate as the interest rate in effect for such LIBOR Rate Loan prior to the end of the Loan Period; provided that in such event, a new Loan Period shall not be in effect.
(c) Administrative Agents internal records of applicable interest rates shall be determinative in the absence of manifest error.
(d) Each LIBOR Rate Loan shall be in a minimum principal amount of $1,000,000. The aggregate number of LIBOR Rate Loans in effect at any one time may not exceed five.
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(e) Subject to the provisions set forth in clauses (a) through (d) of this Section 2.4 in the event Borrower does not timely select another interest rate option at least two New York Banking Days before the end of the Loan Period for a LIBOR Rate Loan, Borrower may at any time after the end of the Loan Period request Administrative Agent to convert such LIBOR Rate Loan to a Daily Reset LIBOR Rate Loan or may, upon a minimum of two New York Banking Days prior notice, request a LIBOR Rate Loan and Administrative Agent shall promptly honor such request.
2.5 | Repayment |
(a) Interest on the Revolving Loans is payable to Administrative Agent for the ratable benefit of each Lender beginning April 1, 2008, and on the same date of each consecutive month thereafter, plus a final interest payment with the final payment of principal.
(b) Principal of the Revolving Loans is payable to Administrative Agent for the ratable benefit of each Lender on the Revolving Termination Date.
2.6 | Procedure for Revolving Loan Borrowing |
Borrower may borrow under the Revolving Commitments during the Revolving Commitment Period on any Business Day, provided that Borrower shall give Administrative Agent irrevocable written notice (including notices by facsimile and email), which notice must be received by Administrative Agent prior to 10:00 a.m., Seattle time, two Business Days prior to the requested Borrowing Date, specifying (a) the amount of Revolving Loans to be borrowed and (b) the requested Borrowing Date. Each borrowing under the Revolving Commitments shall be in a minimum amount of $1,000,000. Upon receipt of any such notice from Borrower, Administrative Agent shall promptly notify each Lender thereof. Each Lender will make the amount of its pro rata share of each borrowing available to Administrative Agent for the account of Borrower at the Funding Office prior to 12:00 Noon, Seattle time, on the Borrowing Date requested by Borrower in funds immediately available to Administrative Agent. Such borrowing will then be made available to Borrower by Administrative Agent crediting the account of Borrower on the books of such office with the aggregate of the amounts made available to Administrative Agent by Lenders and in like funds as received by Administrative Agent.
2.7 | Commitment Fees |
Borrower agrees to pay to Administrative Agent for the account of each Lender an unused commitment fee for the period from and including the Closing Date hereof to the last day of the Revolving Commitment Period (or, if earlier, the Revolving Termination Date) computed at the Unused Commitment Fee Rate set forth in the definition of Applicable Margin on the average daily amount of the Available Revolving Commitment of such Lender during the period for which payment is made, payable quarterly in arrears on each Fee Payment Date, commencing on the first such date to occur after the date hereof. The unused commitment fee shall be calculated on a 360-day year for the actual number of days elapsed.
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2.8 | Termination or Reduction of Revolving Commitments |
Borrower shall have the right, upon not less than three Business Days notice to Administrative Agent, to terminate the Revolving Commitments or, from time to time, to reduce the amount of the Revolving Commitments; provided that no such termination or reduction of Revolving Commitments shall be permitted if, after giving effect thereto and to any prepayments of the Revolving Loans made on the effective date thereof, the Total Revolving Extensions of Credit would exceed the Total Revolving Commitments. Any such reduction shall be in an amount equal to $1,000,000, or a whole multiple thereof, and shall reduce permanently the Revolving Commitments then in effect.
ARTICLE III. LETTERS OF CREDIT
3.1 | L/C Commitment |
(a) Subject to the terms and conditions hereof, Issuing Lender, in reliance on the agreements of the other Lenders set forth in Section 3.4(a), agrees to issue letters of credit (Letters of Credit) for the account of Borrower on any Business Day during the Revolving Commitment Period in such form as may be approved from time to time by Issuing Lender; provided that Issuing Lender shall have no obligation to issue any Letter of Credit if, after giving effect to such issuance, (i) the L/C Obligations would exceed the L/C Commitment or (ii) the aggregate amount of the Available Revolving Commitments would be less than zero. Each Letter of Credit shall (i) be denominated in Dollars and (ii) expire no later than the earlier of (x) the one-year anniversary of its date of issuance and (y) the date that is five Business Days prior to the Revolving Termination Date, provided that any Letter of Credit with a one-year term may provide for the renewal thereof for additional one-year periods (which shall in no event extend beyond the date referred to in clause (y) above).
(b) Issuing Lender shall not at any time be obligated to issue any Letter of Credit if such issuance would conflict with, or cause Issuing Lender or any L/C Participant to exceed any limits imposed by, any applicable Requirement of Law.
3.2 | Procedure for Issuance of Letter of Credit |
Borrower may from time to time request that Issuing Lender issue a Letter of Credit by delivering to Issuing Lender at its address for notices specified herein an Application therefor, completed to the satisfaction of Issuing Lender, and such other certificates, documents and other papers and information as Issuing Lender may request. Upon receipt of any Application, Issuing Lender will process such Application and the certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall promptly issue the Letter of Credit requested thereby (but in no event shall Issuing Lender be required to issue any Letter of Credit earlier than three Business Days after its receipt of the Application therefor and all such other certificates, documents and other papers and information relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed to by Issuing Lender and Borrower. Issuing Lender shall furnish a copy of such Letter of Credit to Borrower promptly following the issuance thereof. Issuing Lender shall promptly furnish to Administrative Agent, which shall in turn promptly furnish to Lenders, notice of the issuance of each Letter of Credit (including the amount thereof).
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3.3 | Fees and Other Charges |
(a) Borrower will pay a fee for each Letter of Credit at a per annum rate equal to the Unused Commitment Fee Rate set forth in the definition of Applicable Margin then in effect under the Revolving Facility of the face amount of each Letter of Credit (provided that the minimum fee shall be $300), shared ratably among Lenders and payable quarterly in arrears on each Fee Payment Date after the issuance date. In addition, Borrower shall pay to Issuing Lender for its own account a fronting fee at a per annum rate .125 percent of the undrawn and unexpired amount of each Letter of Credit issued by Issuing Lender, payable quarterly in arrears on each Fee Payment Date after the issuance date.
(b) In addition to the foregoing fees, Borrower shall pay or reimburse Issuing Lender for such normal and customary costs and expenses as are incurred or charged by Issuing Lender in issuing, negotiating, effecting payment under, amending or otherwise administering any Letter of Credit.
3.4 | L/C Participations |
(a) Issuing Lender irrevocably agrees to grant and hereby grants to each L/C Participant, and, to induce Issuing Lender to issue Letters of Credit, each L/C Participant irrevocably agrees to accept and purchase and hereby accepts and purchases from Issuing Lender, on the terms and conditions set forth below, for such L/C Participants own account and risk an undivided interest equal to such L/C Participants Revolving Percentage in Issuing Lenders obligations and rights under and in respect of each Letter of Credit and the amount of each draft paid by Issuing Lender thereunder. Each L/C Participant agrees with Issuing Lender that, if a draft is paid under any Letter of Credit for which Issuing Lender is not reimbursed in full by Borrower in accordance with the terms of this Agreement, such L/C Participant shall pay to Issuing Lender upon demand at Issuing Lenders address for notices specified herein an amount equal to such L/C Participants Revolving Percentage of the amount of such draft, or any part thereof, that is not so reimbursed. Each L/C Participants obligation to pay such amount shall be absolute and unconditional and shall not be affected by any circumstance, including (i) any setoff, counterclaim, recoupment, defense or other right that such L/C Participant may have against Issuing Lender, Borrower or any other Person for any reason whatsoever, (ii) the occurrence or continuance of a Default or an Event of Default or the failure to satisfy any of the other conditions specified in Article V, (iii) any adverse change in the condition (financial or otherwise) of Borrower, (iv) any breach of this Agreement or any other Loan Document by Borrower, any other Loan Party or any other L/C Participant or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing.
(b) If any amount required to be paid by any L/C Participant to Issuing Lender pursuant to Section 3.4(a) in respect of any unreimbursed portion of any payment made by Issuing Lender under any Letter of Credit is paid to Issuing Lender within three Business Days after the date such payment is due, such L/C Participant shall pay to Issuing Lender on demand an amount equal to the product of (i) such amount, times (ii) the daily average Federal Funds Rate during the period from and including the date such payment is required to the date on which such payment is immediately available to Issuing Lender, times (iii) a fraction the numerator of which is the number of days that elapse during such period and the denominator of which is 360. If any such amount required to be paid by any L/C Participant
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pursuant to Section 3.4(a) is not made available to Issuing Lender by such L/C Participant within three Business Days after the date such payment is due, Issuing Lender shall be entitled to recover from such L/C Participant, on demand, such amount with interest thereon calculated from such due date at the rate per annum applicable to Revolving Loans under the Revolving Facility. A certificate of Issuing Lender submitted to any L/C Participant with respect to any amounts owing under this Section shall be conclusive in the absence of manifest error.
(c) Whenever, at any time after Issuing Lender has made payment under any Letter of Credit and has received from any L/C Participant its pro rata share of such payment in accordance with Section 3.4(a), Issuing Lender receives any payment related to such Letter of Credit (whether directly from Borrower or otherwise, including proceeds of collateral applied thereto by Issuing Lender), or any payment of interest on account thereof, Issuing Lender will distribute to such L/C Participant its pro rata share thereof; provided, however, that in the event that any such payment received by Issuing Lender shall be required to be returned by Issuing Lender, such L/C Participant shall return to Issuing Lender the portion thereof previously distributed by Issuing Lender to it.
3.5 | Reimbursement Obligation of Borrower |
If any draft is paid under any Letter of Credit, Borrower shall reimburse Issuing Lender for the amount of (a) the draft so paid and (b) any taxes, fees, charges or other costs or expenses incurred by Issuing Lender in connection with such payment, not later than 12:00 Noon, Seattle time, on (i) the Business Day that Borrower receives notice of such draft, if such notice is received on such day prior to 10:00 a.m., Seattle time, or (ii) if clause (i) above does not apply, the Business Day immediately following the day that Borrower receives such notice. Each such payment shall be made to Issuing Lender at its address for notices referred to herein in Dollars and in immediately available funds. Interest shall be payable on any such amounts from the date on which the relevant draft is paid until payment in full at the default rate set forth in Section 4.5.
3.6 | Obligations Absolute |
Borrowers obligations under this Article III shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment that Borrower may have or have had against Issuing Lender, any beneficiary of a Letter of Credit or any other Person. Borrower also agrees with Issuing Lender that Issuing Lender shall not be responsible for, and Borrowers Reimbursement Obligations under Section 3.5 shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, or any dispute between or among Borrower and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or any claims whatsoever of Borrower against any beneficiary of such Letter of Credit or any such transferee. Issuing Lender shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of Issuing Lender. Borrower agrees that any action taken or omitted by Issuing Lender under or in connection with any Letter of Credit or the related drafts or documents, if done in the absence of gross negligence or willful misconduct, shall be binding on Borrower and shall not result in any liability of Issuing Lender to Borrower.
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3.7 | Letter of Credit Payments |
If any draft shall be presented for payment under any Letter of Credit, Issuing Lender shall promptly notify Borrower of the date and amount thereof. The responsibility of Issuing Lender to Borrower in connection with any draft presented for payment under any Letter of Credit shall, in addition to any payment obligation expressly provided for in such Letter of Credit, be limited to determining that the documents (including each draft) delivered under such Letter of Credit in connection with such presentment are substantially in conformity with such Letter of Credit.
3.8 | Applications |
To the extent that any provision of any Application related to any Letter of Credit is inconsistent with the provisions of this Article III, the provisions of this Article III shall apply.
ARTICLE IV. GENERAL PROVISIONS RELATING TO REVOLVING LOANS
4.1 | Manner of Payment |
All payments (including prepayments) to be made by Borrower hereunder, whether on account of principal, interest, fees or otherwise, shall be made without setoff or counterclaim and shall be made prior to 12:00 Noon, Seattle time, on the due date thereof to Administrative Agent, for the account of Lenders, at the Funding Office, in Dollars and in immediately available funds. Borrower hereby authorizes Administrative Agent to charge any of its demand deposit accounts for all interest, principal and fee payments that Borrower is obligated to pay pursuant to this Agreement and pursuant to fee arrangements with Administrative Agent. Administrative Agent shall distribute such payments to Lenders promptly upon receipt in like funds as received. Whenever any payment to be made becomes due and payable on a day that is not a Business Day, such payment may be made on the next succeeding Business Day and such extension of time shall in such case be included in computing interest on such payment.
4.2 | Statements |
Administrative Agent shall send Borrower statements of all amounts due hereunder; the statements shall be considered correct and conclusively binding, absent manifest error, on Borrower unless Borrower notifies Administrative Agent to the contrary within 30 days of receipt of any statement that Borrower claims to be incorrect. Borrower agrees that accounting entries made by Administrative Agent with respect to Borrowers loan accounts shall constitute evidence of all Revolving Loans made under and payments made on any of the Revolving Facilities. Without limiting the methods by which Administrative Agent may otherwise be entitled by applicable law to make demand for payment of the Revolving Loans upon Borrower, Borrower agrees that any statement, invoice or payment notice from
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Administrative Agent to Borrower with respect to any principal or interest obligation of Borrower to Administrative Agent shall be deemed to be a demand for payment in accordance with the terms of such statement, invoice or payment notice. Under no circumstances shall a demand by Administrative Agent for partial payment of principal or interest or both be construed as a waiver by Administrative Agent of its right thereafter to demand and receive payment (in part or in full) of any remaining principal or interest obligation.
4.3 | Book Entry Loan Account |
Administrative Agent shall establish a book entry loan account for each of the Revolving Loans in which Administrative Agent will make debit entries of all Revolving Loans pursuant to the terms of this Agreement. Administrative Agent will also record in the applicable loan account, in accordance with customary banking practices, all interest and other charges, expenses and other items properly chargeable to Borrower, if any, together with all payments made by Borrower on account of the Indebtedness evidenced by Borrowers respective loan accounts and all other sums credited to the respective loan accounts. The debit balance of Borrowers respective loan accounts shall reflect the amount of Borrowers Indebtedness to Lenders from time to time by reason of advances, charges, payments or credits.
4.4 | Computations of Interest |
All computations of interest and fees that are computed on a per annum basis shall be based on a 360-day year for the actual number of days elapsed.
4.5 | Default Interest |
Upon the occurrence and during the continuance of any Event of Default, Administrative Agent may, at its option, raise the interest rate charged on the Revolving Loans to a rate of up to 2 percent per annum plus the interest rate that would otherwise be applicable thereto, from the date of the occurrence of the Event of Default until the Event of Default is cured or waived by pursuant to the terms of this Agreement or, absent cure or waiver, until the Revolving Loans are repaid in full.
4.6 | Maximum Interest Rate |
Notwithstanding any provision contained herein or in the Notes, the total liability of Borrower for payment of interest pursuant hereto, including late charges, shall not exceed the maximum amount of interest permitted by applicable law to be charged, collected or received from Borrower; and if any payments by Borrower include interest in excess of that maximum amount, Administrative Agent shall apply the excess first to reduce the unpaid balance of the Revolving Loans, then to reduce the balance of any other Indebtedness of Borrower to Lenders. If there is no such Indebtedness, the excess shall be returned to Borrower.
4.7 | Late Charge |
If any payment of principal or interest required under any of the Revolving Loans is 15 days or more past due, Borrower will be charged a late charge of 5 percent of the delinquent payment or $5, whichever is greater, for each such late payment. The 15-day period provided for herein shall not be construed as a waiver of any Default or Event of Default resulting from any late payment under any of the Revolving Loans.
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4.8 | Optional Prepayments |
Borrower shall have the right, at any time, to prepay the whole or portions of the Revolving Loans. In such event, (a) any prepayment of any Daily Reset LIBOR Rate Loan shall be without prepayment charges and (b) any prepayment of all or any portion of any LIBOR Rate Loan whether voluntarily, by acceleration or otherwise shall be accompanied by a payment to Lenders of the Interest Differential due in accordance with Section 2.4(a). All prepayments shall be applied first to accrued interest on the Revolving Loans and then to the outstanding principal balance of the Revolving Loans in the inverse order of maturity. Partial prepayments of Revolving Loans shall be in a minimum amount of $1,000,000.
4.9 | Pro Rata Treatment and Payments |
(a) Each borrowing by Borrower from Lenders hereunder, each payment by Borrower on account of any commitment fee and any reduction of the Revolving Commitments of Lenders shall be made pro rata according to the respective Revolving Percentages of Lenders.
(b) Each payment (including each prepayment) by Borrower on account of principal of and interest on the Revolving Loans shall be made pro rata according to the respective outstanding principal amounts of the Revolving Loans then held by Lenders.
(c) Unless Administrative Agent shall have been notified in writing by any Lender prior to a borrowing that such Lender will not make the amount that would constitute its share of such borrowing available to Administrative Agent, Administrative Agent may assume that such Lender is making such amount available to Administrative Agent, and Administrative Agent may, in reliance upon such assumption in its sole discretion, make available to Borrower a corresponding amount. If such amount is not made available to Administrative Agent by the required time on the Borrowing Date therefor, such Lender shall pay to Administrative Agent, on demand, such amount with interest thereon, at a rate equal to the greater of (i) the Federal Funds Rate and (ii) a rate determined by Administrative Agent in accordance with banking industry rules on interbank compensation, for the period until such Lender makes such amount immediately available to Administrative Agent. A certificate of Administrative Agent submitted to any Lender with respect to any amounts owing under this paragraph shall be conclusive in the absence of manifest error. If such Lenders share of such borrowing is not made available to Administrative Agent by such Lender within three Business Days after such Borrowing Date, Administrative Agent shall also be entitled to recover such amount with interest thereon at the rate per annum applicable to Revolving Loans, on demand, from Borrower.
(d) Unless Administrative Agent shall have been notified in writing by Borrower prior to the date of any payment due to be made by Borrower hereunder that Borrower will not make such payment to Administrative Agent, Administrative Agent may assume that Borrower is making such payment, and Administrative Agent may, but shall not be required to, in reliance upon such assumption in its sole discretion, make available to Lenders their
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respective pro rata shares of a corresponding amount. If such payment is not made to Administrative Agent by Borrower within three Business Days after such due date, Administrative Agent shall be entitled to recover, on demand, from each Lender to which any amount which was made available pursuant to the preceding sentence, such amount with interest thereon at the rate per annum equal to the daily average Federal Funds Rate. Nothing herein shall be deemed to limit the rights of Administrative Agent or any Lender against Borrower.
4.10 | Requirements of Law |
(a) If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof:
(i) shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement, any Letter of Credit, any Application or any Revolving Loans made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for Non-Excluded Taxes covered by Section 4.11 and changes in the rate of tax on the overall net income of such Lender);
(ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender that is not otherwise included in the determination of the LIBOR rate provided for in Section 2.4; or
(iii) shall impose on such Lender any other condition;
and the result of any of the foregoing is to increase the cost to such Lender, by an amount that such Lender deems to be material, of making, converting into, continuing or maintaining Revolving Loans or issuing or participating in Letters of Credit, or to reduce any amount receivable hereunder in respect thereof, then, in any such case, Borrower shall promptly pay such Lender, upon its demand, any additional amounts necessary to compensate such Lender for such increased cost or reduced amount receivable. If any Lender becomes entitled to claim any additional amounts pursuant to this paragraph, it shall promptly notify Borrower (with a copy to Administrative Agent) of the event by reason of which it has become so entitled.
(b) If any Lender shall have determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on such Lenders or such corporations capital as a consequence of its obligations hereunder or under or in respect of any Letter of Credit to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lenders or such corporations policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, after submission by such Lender to Borrower (with a copy to Administrative Agent) of a written request therefor, Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or such corporation for such reduction.
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(c) A certificate as to any additional amounts payable pursuant to this Section submitted by any Lender to Borrower (with a copy to Administrative Agent) shall be conclusive in the absence of manifest error. Notwithstanding anything to the contrary in this Section, Borrower shall not be required to compensate a Lender pursuant to this Section for any amounts incurred more than nine months prior to the date that such Lender notifies Borrower of such Lenders intention to claim compensation therefor; provided that, if the circumstances giving rise to such claim have a retroactive effect, then such nine-month period shall be extended to include the period of such retroactive effect. The obligations of Borrower pursuant to this Section shall survive the termination of this Agreement and the payment of the Revolving Loans and all other amounts payable hereunder.
4.11 | Taxes |
(a) All payments made by Borrower under this Agreement shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on Administrative Agent or any Lender as a result of a present or former connection between Administrative Agent or such Lender and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from Administrative Agent or such Lender having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or any other Loan Document). If any such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or withholdings (Non-Excluded Taxes) or Other Taxes are required to be withheld from any amounts payable to Administrative Agent or any Lender hereunder, the amounts so payable to Administrative Agent or such Lender shall be increased to the extent necessary to yield to Administrative Agent or such Lender (after payment of all Non-Excluded Taxes and Other Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement, provided, however, that Borrower shall not be required to increase any such amounts payable to any Lender with respect to any Non-Excluded Taxes (i) that are attributable to such Lenders failure to comply with the requirements of paragraph (d) or (e) of this Section or (ii) that are United States withholding taxes imposed on amounts payable to such Lender at the time such Lender becomes a party to this Agreement, except to the extent that such Lenders assignor (if any) was entitled, at the time of assignment, to receive additional amounts from Borrower with respect to such Non-Excluded Taxes pursuant to this paragraph.
(b) In addition, Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law.
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(c) Whenever any Non-Excluded Taxes or Other Taxes are payable by Borrower, as promptly as possible thereafter Borrower shall send to Administrative Agent for its own account or for the account of the relevant Lender, as the case may be, a certified copy of an original official receipt received by Borrower showing payment thereof. If Borrower fails to pay any Non-Excluded Taxes or Other Taxes when due to the appropriate taxing authority or fails to remit to Administrative Agent the required receipts or other required documentary evidence, Borrower shall indemnify Administrative Agent and Lenders for any incremental taxes, interest or penalties that may become payable by Administrative Agent or any Lender as a result of any such failure.
(d) Each Lender (or Transferee) that is not a U.S. Person as defined in Section 7701(a)(30) of the Code (a Non-U.S. Lender) shall deliver to Borrower and Administrative Agent (or, in the case of a Participant, to Lender from which the related participation shall have been purchased) two copies of either U.S. Internal Revenue Service Form W-8BEN or Form W-8ECI, or, in the case of a Non-U.S. Lender claiming exemption from U.S. federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of portfolio interest, a statement substantially in the form of Exhibit E and a Form W-8BEN, or any subsequent versions thereof or successors thereto, properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or a reduced rate of, U.S. federal withholding tax on all payments by Borrower under this Agreement and the other Loan Documents. Such forms shall be delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement (or, in the case of any Participant, on or before the date such Participant purchases the related participation). In addition, each Non-U.S. Lender shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender. Each Non-U.S. Lender shall promptly notify Borrower at any time it determines that it is no longer in a position to provide any previously delivered certificate to Borrower (or any other form of certification adopted by the U.S. taxing authorities for such purpose). Notwithstanding any other provision of this paragraph, a Non-U.S. Lender shall not be required to deliver any form pursuant to this paragraph that such Non-U.S. Lender is not legally able to deliver.
(e) A Lender that is entitled to an exemption from or reduction of non-U.S. withholding tax under the law of the jurisdiction in which Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to Borrower (with a copy to Administrative Agent), at the time or times prescribed by applicable law or reasonably requested by Borrower, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate, provided that such Lender is legally entitled to complete, execute and deliver such documentation and in such Lenders judgment such completion, execution or submission would not materially prejudice the legal position of such Lender.
(f) If Administrative Agent or any Lender determines, in its sole discretion, that it has received a refund of any Non-Excluded Taxes or Other Taxes as to which it has been indemnified by Borrower or with respect to which Borrower has paid additional amounts pursuant to this Section 4.11, it shall pay over such refund to Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by Borrower under this Section 4.11 with respect to the Non-Excluded Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of Administrative Agent or such Lender and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund); provided, that Borrower, upon the request of Administrative Agent
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or such Lender, agrees to repay the amount paid over to Borrower (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to Administrative Agent or such Lender in the event Administrative Agent or such Lender is required to repay such refund to such Governmental Authority. This paragraph shall not be construed to require Administrative Agent or any Lender to make available its tax returns (or any other information relating to its taxes which it deems confidential) to Borrower or any other Person.
(g) The agreements in this Section shall survive the termination of this Agreement and the payment of the Revolving Loans and all other amounts payable hereunder.
4.12 | Change of Lending Office |
Each Lender agrees that, upon the occurrence of any event giving rise to the operation of Section 4.10 or 4.11(a) with respect to such Lender, it will, if requested by Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any Revolving Loans affected by such event with the object of avoiding the consequences of such event; provided, that such designation is made on terms that, in the sole judgment of such Lender, cause such Lender and its lending office(s) to suffer no economic, legal or regulatory disadvantage, and provided, further, that nothing in this Section shall affect or postpone any of the obligations of Borrower or the rights of any Lender pursuant to Sections 4.10 or 4.11(a).
4.13 | Replacement of Lenders |
Borrower shall be permitted to replace any Lender that (a) requests reimbursement for amounts owing pursuant to Sections 4.10 or 4.11(a) or (b) defaults in its obligation to make Revolving Loans hereunder, with a replacement financial institution; provided that (i) such replacement does not conflict with any Requirement of Law, (ii) no Event of Default shall have occurred and be continuing at the time of such replacement, (iii) prior to any such replacement, such Lender shall have taken no action under Section 4.12 so as to eliminate the continued need for payment of amounts owing pursuant to Sections 4.10 or 4.11(a), (iv) the replacement financial institution shall purchase, at par, all Revolving Loans and other amounts owing to such replaced Lender on or prior to the date of replacement, (v) the replacement financial institution, if not already a Lender, shall be reasonably satisfactory to Administrative Agent, (vi) the replaced Lender shall be obligated to make such replacement in accordance with the provisions of Section 11.6 (provided that Borrower shall be obligated to pay the registration and processing fee referred to therein), (vii) until such time as such replacement shall be consummated, Borrower shall pay all additional amounts (if any) required pursuant to Sections 4.10 and 4.11(a), as the case may be, and (viii) any such replacement shall not be deemed to be a waiver of any rights that Borrower, Administrative Agent or any other Lender shall have against the replaced Lender.
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ARTICLE V. CONDITIONS PRECEDENT
5.1 | Conditions to Initial Extension of Credit |
The agreement of each Lender to make the initial extension of credit requested to be made by it is subject to the satisfaction, prior to or concurrently with the making of such extension of credit on the Closing Date, of the following conditions precedent:
(a) Administrative Agent shall have received (i) this Agreement executed and delivered by Administrative Agent, Borrower and each Person listed on Schedule 1.1, (ii) the Guarantee and Collateral Agreement and the other Security Documents (provided, that no Loan Party shall be obligated to execute any agreements providing for control over deposit, investment, securities or similar accounts and provided further that there shall be no filings with the United States Patent and Trademark Office or United States Copyright Office so long as no such filings are required in order to perfect a security interest in Domain Names), executed and delivered by Borrower and each Subsidiary Guarantor, (iii) the other Security Documents, executed and delivered by Borrower and each Subsidiary Guarantor that is to be a party thereto and (iv) an Acknowledgement and Consent in the form attached to the Guarantee and Collateral Agreement, executed and delivered by each Issuer (as defined therein), if any, that is not a Loan Party.
(b) Administrative Agent shall have received, duly executed and delivered by Borrower, the Revolving Notes payable to the order of the applicable Lenders to the extent requested by any Lender pursuant to the terms of Section 2.3.
(c) Administrative Agent shall have received insurance certificates satisfying the requirements of the Guarantee and Collateral Agreement.
(d) Administrative Agent shall have received and approved financial projections for Borrower, prepared on a consolidated basis, through December 31, 2010.
(e) There shall not have occurred a development or event since September 30, 2007 that has had or could reasonably be expected to have a Material Adverse Effect.
(f) Administrative Agent shall have received a satisfactory executed certificate of a Responsible Officer of Borrower, dated the Closing Date, substantially the form of Exhibit F, certifying that (i) all governmental and third party approvals (including landlords and other consents, including shareholders approvals, if any) necessary in connection with the continuing operations of the Group Members and the transactions contemplated hereby shall have been obtained and be in full force and effect, and all applicable waiting periods shall have expired without any action being taken or threatened by any competent authority that would restrain, prevent or otherwise impose adverse conditions on the financing contemplated hereby, and (ii) there shall not exist any action, suit, investigation, litigation or proceeding pending or threatened in any court or before any arbitrator or governmental authority that have or could reasonably be expected to have a Material Adverse Effect on Borrower or any of the transactions contemplated by this Agreement.
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(g) Administrative Agent shall have received a satisfactory executed certificate of a Responsible Officer of each Loan Party, dated the Closing Date, substantially in the form of Exhibit G, with appropriate insertions and attachments, evidencing (i) that each Loan Party is duly organized or formed, is validly existing, and in good standing in its jurisdiction of organization, (ii) resolutions approving the Agreement and Loan Documents to which such a Loan Party is a party, and (iii) the identity, authority and capacity of each Responsible Officer thereof authorized to act as a Responsible Officer in connection with this Agreement and the other Loan Documents to which such Loan Party is a party.
(h) Administrative Agent shall have received a satisfactory executed solvency certificate from the chief financial officer of Borrower, dated the Closing Date, substantially in the form of Exhibit H, which shall document the solvency of Borrower and its subsidiaries after giving effect to the transactions contemplated by this Agreement.
(i) Administrative Agent shall have received the results of a recent lien search in each of the jurisdictions where assets of each the Loan Parties are located, and such search shall reveal no liens on any of the assets of the Loan Parties except for liens permitted by Section 7.3 or discharged on or prior to the Closing Date pursuant to documentation satisfactory to Administrative Agent.
(j) Lenders and Administrative Agent shall have received all fees required to be paid, and all expenses for which invoices have been presented (including the reasonable fees and expenses of legal counsel), on or before the Closing Date. All such amounts may be paid with proceeds of Revolving Loans made on the Closing Date and will be reflected in the funding instructions given by Borrower to Administrative Agent on or before the Closing Date.
(k) Administrative Agent shall have received (i) the certificates (if any) representing the shares of Capital Stock pledged pursuant to the Guarantee and Collateral Agreement, together with an undated stock power for each such certificate executed in blank by a duly authorized officer of the pledgor thereof and (ii) each promissory note (if any) pledged to Administrative Agent pursuant to the Guarantee and Collateral Agreement endorsed (without recourse) in blank (or accompanied by an executed transfer form in blank) by the pledgor thereof.
(l) Each document (including any Uniform Commercial Code financing statement) required by the Security Documents or under law or reasonably requested by Administrative Agent to be filed, registered or recorded in order to create in favor of Administrative Agent, for the benefit of Lenders, a perfected Lien on the Collateral described therein, prior and superior in right to any other Person (other than the holders of Permitted Liens), shall be in proper form for filing, registration or recordation.
5.2 | Conditions to Each Extension of Credit |
The agreement of each Lender to make any extension of credit requested to be made by it on any date (including its initial extension of credit) is subject to the satisfaction of the following conditions precedent:
(a) Each of the representations and warranties made by any Loan Party in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of such date as if made on and as of such date, provided, however, that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date.
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(b) No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the extensions of credit requested to be made on such date.
Each borrowing by and issuance of a Letter of Credit on behalf of Borrower hereunder shall constitute a representation and warranty by Borrower as of the date of such extension of credit that the conditions contained in this Section 5.2 have been satisfied.
ARTICLE VI. AFFIRMATIVE COVENANTS
Borrower hereby agrees that, so long as the Revolving Commitments remain in effect, any Letter of Credit remains outstanding or any Revolving Loan or other amount is owing to any Lender or Administrative Agent hereunder, Borrower shall and shall (other than Sections 6.1 and 6.2 below which shall apply only to Borrower) cause each of its Material Subsidiaries to:
6.1 | Financial Statements |
Furnish to Administrative Agent and each Lender:
(a) as soon as available, but in any event within the earlier of (i) 120 days after the end of each fiscal year of Borrower and (ii) the date following the end of each fiscal year of Borrower on which Borrower files its audited annual financial statements with the SEC, a copy of the audited consolidated balance sheet of Borrower and its consolidated Subsidiaries as at the end of such year and the related audited consolidated statements of income and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, reported on without a going concern or like qualification or exception, or qualification arising out of the scope of the audit, by Borrowers current certified public accountants or other independent certified public accountants of nationally recognized standing; and
(b) as soon as available, but in any event not later than the earlier of (i) 45 days after the end of each of Borrowers first three quarterly fiscal periods of each fiscal year of Borrower and (ii) the date following the end of each of the first three quarterly periods of each fiscal year of Borrower on which Borrower is required to file its unaudited interim financial statements with the SEC, the unaudited consolidated balance sheet of Borrower and its consolidated Subsidiaries as at the end of such quarter and the related unaudited consolidated statements of income and of cash flows for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects (subject to normal year-end audit adjustments).
All such financial statements shall be complete and correct in all material respects and shall be prepared in reasonable detail and in accordance with GAAP applied (except as approved by such accountants or officer, as the case may be, and disclosed in reasonable detail therein) consistently throughout the periods reflected therein and with prior periods.
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6.2 | Certificates; Other Information |
Furnish to Administrative Agent and each Lender:
(a) concurrently with the delivery of any financial statements pursuant to Section 6.1, (i) a certificate of a Responsible Officer stating that, to such Responsible Officers knowledge, except as set forth in such certificate, each Loan Party during such period has observed or performed all of its covenants and other agreements, and satisfied every condition contained in this Agreement and the other Loan Documents to which it is a party to be observed, performed or satisfied by it, and that, except as set forth in such certificate, such Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate and (ii) in the case of quarterly or annual financial statements, (x) a Compliance Certificate, in substantially the form of Exhibit B, containing all information and calculations reasonably necessary for determining compliance by Borrower with the provisions of this Agreement referred to therein as of the last day of the fiscal quarter or fiscal year of Borrower, as the case may be, and (y) to the extent not previously disclosed to Administrative Agent, a description of any change in the jurisdiction of organization of any Loan Party and, if requested by Administrative Agent (which requests shall not be more frequent than once every six months), a list of any Intellectual Property acquired by any Loan Party since the date of the most recent report delivered pursuant to this clause (y) (or, in the case of the first such report so delivered, since the Closing Date); and
(b) promptly, such additional financial and other information as any Lender may from time to time reasonably request.
6.3 | Payment of Obligations |
Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its material obligations of whatever nature, except where (a) the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the relevant Loan Party or (b) the failure to pay, discharge or satisfy such obligation could not reasonably be expected to result in a Material Adverse Effect.
6.4 | Maintenance of Existence; Compliance |
(a)(i) Preserve, renew and keep in full force and effect its organizational existence, and (ii) take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business, except, in each case, as otherwise permitted by Section 7.4 and except, in the case of clause (ii) above, to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect;
(b) Comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect.
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6.5 | Maintenance of Property; Insurance |
(a) Keep all inventory and equipment useful and necessary in its business in good working order and condition, ordinary wear and tear excepted; and
(b) Maintain with financially sound and reputable insurance companies insurance on all its property in at least such amounts and against at least such risks (but including in any event public liability, product liability and business interruption) as are usually insured against in the same general area by companies engaged in the same or a similar business.
6.6 | Inspection of Property; Books and Records; Discussions |
(a) Keep proper books and records in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and
(b) Permit representatives of any Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Group Members with officers and employees of the Group Members and with their independent certified public accountants.
6.7 | Notices |
Promptly give notice to Administrative Agent and each Lender of:
(a) the occurrence of any Default or Event of Default;
(b) any (i) default or event of default under any Contractual Obligation of any Group Member or (ii) litigation, investigation or proceeding that may exist at any time between any Group Member and any Governmental Authority, that in either case, if not cured or if adversely determined, as the case may be, could reasonably be expected to have a Material Adverse Effect;
(c) any litigation or proceeding affecting any Group Member (i) in which the amount involved is $5,000,000 or more and not covered by insurance or with respect to which insurance coverage may not exist, (ii) in which injunctive or similar relief is sought or (iii) which relates to any Loan Document;
(d) the following events, as soon as possible and in any event within 30 days after Borrower knows or has reason to know thereof: (i) the occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of the PBGC or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or Borrower or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the termination, Reorganization or Insolvency of, any Plan; and
(e) any development or event that has had or could reasonably be expected to have a Material Adverse Effect.
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Each notice pursuant to this Section 6.7 shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the relevant Group Member proposes to take with respect thereto.
6.8 | Environmental Laws |
(a) Comply in all material respects with, and ensure compliance in all material respects by all tenants and subtenants, if any, with, all applicable Environmental Laws, and obtain and comply in all material respects with and maintain, and ensure that all tenants and subtenants obtain and comply in all material respects with and maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws.
(b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws.
6.9 | Additional Collateral, etc |
(a) With respect to any property (other than real property) acquired after the Closing Date by any Group Member (other than (w) property that is not Collateral, (x) any property described in paragraph (b) or (c) below, (y) any property subject to a Permitted Lien and (z) property acquired by any Excluded Foreign Subsidiary) as to which Administrative Agent, for the benefit of Lenders, does not have a perfected Lien, promptly (i) execute and deliver to Administrative Agent such amendments to the Guarantee and Collateral Agreement or such other documents as Administrative Agent reasonably deems necessary or advisable to grant to Administrative Agent, for the benefit of Lenders, a security interest in such property and (ii) take all actions necessary or advisable to grant to Administrative Agent, for the benefit of Lenders, a perfected first priority security interest in such property, including the filing of Uniform Commercial Code financing statements in such jurisdictions as may be required by the Guarantee and Collateral Agreement or by law or as may be requested by Administrative Agent (but excluding (i) agreements providing for control over deposit, investment, securities and similar accounts and (ii) filings with the United States Patent and Trademark Office and United States Copyright Office so long as no such filings are required in order to perfect a security interest in Domain Names).
(b) With respect to any new Material Subsidiary (other than an Excluded Foreign Subsidiary) created or acquired after the Closing Date by any Group Member (which, for the purposes of this paragraph (b), shall include any existing Material Subsidiary that ceases to be an Excluded Foreign Subsidiary and any Subsidiary (other than an Excluded Foreign Subsidiary) that becomes a Material Subsidiary after the date of this Agreement), promptly (i) execute and deliver to Administrative Agent such amendments to the Guarantee and Collateral Agreement as Administrative Agent deems necessary or advisable to grant to Administrative Agent, for the benefit of Lenders, a perfected first priority security interest in the Capital Stock of such new Material Subsidiary that is owned by such Group Member, (ii) deliver to Administrative Agent the certificates, if any, representing such Capital Stock, together with undated stock powers, in blank, executed and delivered by a duly authorized officer of the relevant Group Member, and (iii) cause such new Material Subsidiary (A) to become a party to the Guarantee and Collateral Agreement, (B) to take such actions
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necessary or advisable to grant to Administrative Agent for the benefit of Lenders a perfected first priority security interest in the Collateral described in the Guarantee and Collateral Agreement (subject to Permitted Liens) with respect to such new Subsidiary, including the filing of Uniform Commercial Code financing statements in such jurisdictions as may be required by the Guarantee and Collateral Agreement or by law or as may be requested by Administrative Agent (but excluding agreements providing for control over deposit, investment, securities and similar accounts and filings with the United States Patent and Trademark Office and United States Copyright Office so long as no such filings are required in order to perfect a security interest in Domain Names) and (C) to deliver to Administrative Agent a certificate of such Material Subsidiary, substantially in the form of Exhibit I, with appropriate insertions and attachments.
(c) With respect to any new Excluded Foreign Subsidiary created or acquired after the Closing Date by any Group Member (other than by any Group Member that is an Excluded Foreign Subsidiary), promptly (i) execute and deliver to Administrative Agent such amendments to the Guarantee and Collateral Agreement as Administrative Agent deems necessary or advisable to grant to Administrative Agent, for the benefit of Lenders, a perfected first priority security interest in the Capital Stock of such new Excluded Foreign Subsidiary that is owned by any such Group Member (provided that in no event shall more than 66 percent of the total outstanding voting Capital Stock of any such new Excluded Subsidiary be required to be so pledged), and (ii) deliver to Administrative Agent the certificates, if any, representing such Capital Stock, together with undated stock powers, in blank, executed and delivered by a duly authorized officer of the relevant Group Member, and take such other action as may be necessary or, in the good faith credit judgment of Administrative Agent, desirable to perfect Administrative Agents security interest therein (but excluding agreements providing for control over deposit, investment, securities and similar accounts and filings with the United States Patent and Trademark Office and United States Copyright Office so long as no such filings are required in order to perfect a security interest in Domain Names).
(d) Notwithstanding any other provision of this Agreement or any other Loan Document to the contrary, in no event shall Borrower or any Loan Party be obligated to obtain, execute or deliver to Administrative Agent or any Lender any document, instrument or agreement providing for control over any deposit, investment, securities or similar accounts or filings with the United States Patent and Trademark Office and United States Copyright Office so long as no such filings are required in order to perfect a security interest in Domain Names.
6.10 | Bank Accounts |
Borrower acknowledges and agrees that the Applicable Margin was negotiated based upon the assumption that the Group Members primary domestic bank accounts shall be maintained at U.S. Bank National Association. In the event that Administrative Agent reasonably determines that such is not the case with respect to geographic areas where U.S. Bank National Association has branches and offices necessary to meet the needs of Borrower, and so long as the services, interest, fees and other charges are competitive, the Applicable Margin shall be increased by 0.125 percent until such time the Group Members primary domestic bank accounts in such geographic areas are maintained at U.S. Bank National Association.
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6.11 | Disposition of Intangible Assets |
(a) Borrower and its Subsidiaries may Dispose of intangible assets (including without limitation, Domain Names), provided that without the consent of the Required Lenders and except as provided in Section 6.11(b), (i) [***] and (ii) [***].
(b) Notwithstanding the provisions of Section 6.11(a), Borrower and its Subsidiaries may Dispose of intangible assets (including without limitation, Domain Names) without the consent of the Required Lender in excess of the limitations set forth in clauses (i) and (ii) of Section 6.11(a), provided that:
(i) each such sale is on an arms length basis for fair value and at least 80 percent of the purchase price is payable concurrently with the consummation thereof in cash or Cash Equivalents;
(ii) not fewer than five Business Days prior to the consummation of any such sale, Borrower shall provide Administrative Agent with written notice of such sale, which notice shall set forth an election to either (A) apply the Net Cash Proceeds from such sale to the prepayment of the Revolving Loans or (B) reinvest the Net Cash Proceeds in intangible assets of a similar type as those to be sold;
(iii) in the event that Borrower elects to prepay the Revolving Loans in accordance with clause (ii) above, then not later than five Business Days following the consummation of such sale, Borrower shall prepay the Revolving Loans in an amount equal to the Net Cash Proceeds from such sale in accordance with Section 4.8, and concurrently with such prepayments, the Total Revolving Commitments shall be reduced by the amount of such prepayment, with each Lenders Revolving Commitment reduced by such Lenders Revolving Percentage of the aggregate amount of the prepayment;
(iv) in the event that Borrower elects to reinvest the Net Cash Proceeds in accordance with clause (ii) above, then not later than five Business Days following the consummation of such sale, Borrower shall deposit an amount equal to the Net Cash Proceeds into an interest bearing deposit account with Administrative Agent (which Borrower hereby grants to Administrative Agent a security interest in for the benefit of Lenders to secure the Obligations). So long as there does not exist any Default or Event of Default, Borrower shall be entitled to withdraw funds from such account in order to complete any such reinvestment, provided that any funds not reinvested within 180 days of the Disposition shall be applied on the last day of such 180-day period to a mandatory prepayment of the Revolving Loans and reduction in Total Revolving Commitments in accordance with clause (iii) above.
[* * *] Certain information in this agreement has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
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6.12 | Further Assurances |
Within ten days of request by Administrative Agent, duly execute and deliver or cause to be duly executed and delivered to Administrative Agent such further instruments, agreements and documents and do or cause to be done such further acts as may be necessary or proper in the good faith credit judgment of Administrative Agent to carry out more effectively the provisions and purpose of this Agreement and the other Loan Documents.
ARTICLE VII. NEGATIVE COVENANTS
Borrower agrees that, so long as the Revolving Commitments remain in effect, any Letter of Credit remains outstanding or any Revolving Loan or other amount is owing to any Lender or Administrative Agent hereunder, Borrower shall not, and shall not permit any of its Material Subsidiaries to, directly or indirectly:
7.1 | Financial Condition Covenants |
(a) Permit the Consolidated Leverage Ratio as of the last day of any fiscal quarter of Borrower for the four fiscal quarter period then ended to exceed 3.50:1.00.
(b) Permit the Consolidated Fixed Charge Coverage Ratio as of the last day of any fiscal quarter of Borrower for the four fiscal quarter period then ended to be less than 1.20:1.00.
(c) Permit the sum of (i) unencumbered (other than encumbrances for the benefit of Administrative Agent on behalf of Lender), unrestricted cash and Cash Equivalents and (ii) the aggregate Available Revolving Commitments of all Lenders, to be less than $7,500,000 as of the last day of any fiscal quarter of Borrower.
7.2 | Indebtedness |
Create, issue, incur, assume, become liable in respect of or suffer to exist any Indebtedness for borrowed money, Capital Lease Obligations or Guarantee Obligations with respect to any of the foregoing, except: (a) Indebtedness of any Loan Party pursuant to any Loan Document; (b) Indebtedness of Borrower to any Subsidiary and of any Wholly-Owned Subsidiary Guarantor to Borrower or any other Subsidiary; (c) Guarantee Obligations incurred in the ordinary course of business by Borrower and its Subsidiaries of obligations of any Wholly-Owned Subsidiary Guarantor, which obligations are otherwise permitted; (d) Indebtedness outstanding on the date hereof and listed on Schedule 7.2(d) and any refinancings, refundings, renewals or extensions thereof (without increasing, or shortening the maturity of, the principal amount thereof); (e) Indebtedness (including, without limitation, Capital Lease Obligations) secured by Liens permitted by Section 7.3(g) and in an aggregate principal amount not to exceed $5,000,000 in any one transaction and not to exceed $10,000,000 in the aggregate in any fiscal year of Borrower; (f) [* * *]; and (g) [***].
[* * *] Certain information in this agreement has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
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7.3 | Liens |
Create, incur, assume or suffer to exist any Lien upon any of its property, whether now owned or hereafter acquired, except the following (each a Permitted Lien and collectively, the Permitted Liens): (a) Liens for taxes not yet due or that are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of Borrower or its Subsidiaries, as the case may be, in conformity with GAAP; (b) carriers, warehousemens, mechanics, materialmens, repairmens or other like Liens arising in the ordinary course of business that are not overdue for a period of more than 30 days or that are being contested in good faith by appropriate proceedings; (c) pledges or deposits in connection with workers compensation, unemployment insurance and other social security legislation; (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business that, in the aggregate, are not substantial in amount and that do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of Borrower or any of its Subsidiaries; (f) Liens in existence on the date hereof listed on Schedule 7.3(f), provided that no such Lien is spread to cover any additional property after the Closing Date and that the amount of Indebtedness secured thereby is not increased; (g) Liens securing Indebtedness of Borrower or any Subsidiary (and the interests of a lessor under Capital Lease of Borrower or its Subsidiaries) incurred to finance the acquisition of fixed or capital assets and related software, provided that (i) such Liens shall be created substantially simultaneously with the acquisition of such fixed or capital assets, and (ii) such Liens do not at any time encumber any property other than the property financed by such Indebtedness and the products and proceeds thereof; (h) Liens created
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pursuant to the Security Documents; (i) Liens on property or assets acquired pursuant to a Permitted Acquisition, or on property or assets of a Subsidiary of Borrower in existence at the time such Subsidiary is acquired pursuant to a Permitted Acquisition, and extensions and renewals thereof; provided that (i) any Indebtedness of a Subsidiary acquired pursuant to a Permitted Acquisition (or Indebtedness assumed by Borrower or any of its Wholly-Owned Subsidiaries pursuant to a Permitted Acquisition as a result of a merger or consolidation or the acquisition of an asset securing such Indebtedness, so long as such Indebtedness was not incurred in anticipation or contemplation of such Permitted Acquisition and (ii) such Liens are not incurred in connection with, or in contemplation or anticipation of, such Permitted Acquisition and do not attach to any asset of Borrower or any of its Subsidiaries; (j) any interest or title of a lessor under any lease entered into by Borrower or any other Subsidiary in the ordinary course of its business and covering only the assets so leased; (k) Liens on assets other than Collateral, securing judgments for the payment of money not constituting an Event of Default under Section IX(h); (l) interests of lessors under operating leases; (m) Liens consisting of licenses and sublicenses of intellectual property, and, with respect to any licenses where a Group Member is the licensee or sublicensee, any interest or title of a licensor or under any such license or sublicense; (n) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties that are not more than 30 days past due in connection with the importation of goods; (o) Liens on cash collateral securing reimbursement obligations that are not past due to issuing banks under letters of credit otherwise permitted hereunder; (p) Liens on assets other than Collateral acquired in any Investment not prohibited by this Agreement to the extent such Liens were in existence at the time of acquisition and not incurred in anticipation thereof; (q) Liens upon such accounts and the financial assets therein in favor of other financial institutions arising in connection with Borrowers or any Subsidiarys deposit or securities accounts held at such institutions and not securing Indebtedness for borrowed money; (r) Liens on earnest money deposits required under a letter of intent or purchase agreement in connection with acquisitions and other transactions otherwise permitted hereunder; (s) Liens on assets representing part of the proceeds of a sale or other disposition of property otherwise permitted hereunder, to secure post closing obligations to the buyer in connection with such sale or other disposition; (t) Liens on insurance proceeds securing the payment of financed insurance premiums; and (u) other Liens on assets securing Indebtedness not in excess of $10,000,000 in the aggregate at any time outstanding.
7.4 | Fundamental Changes |
Enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or Dispose of all or substantially all of its property or business, except that: (a) any Subsidiary of Borrower may be merged or consolidated with or into Borrower (provided that Borrower shall be the continuing or surviving corporation) or with or into any Subsidiary of Borrower (provided that when any Subsidiary Guarantor is merging with another Subsidiary, the Subsidiary Guarantor shall be the continuing or surviving corporation); (b) any Subsidiary of Borrower may Dispose of any or all of its assets (i) to Borrower or any Subsidiary (upon voluntary liquidation or otherwise); provided that a Subsidiary Guarantor may only dispose of all or substantially all of its assets under this clause (b) to another Subsidiary Guarantor; or (ii) pursuant to a Disposition permitted by Section 7.5; (c) any Investment expressly permitted by Section 7.7 may be structured as a merger, consolidation or amalgamation, (d) Subsidiaries of Borrower may merge or consolidate with or into any Person in connection with any Permitted Acquisition.
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7.5 | Disposition of Property |
Dispose of any of its property, whether now owned or hereafter acquired, or, in the case of any Subsidiary, issue or sell any shares of such Subsidiarys Capital Stock to any Person, except:
(a) the Disposition of obsolete or worn out property and surplus tangible property in the ordinary course of business;
(b) the sale of inventory in the ordinary course of business;
(c) Dispositions permitted by clause (i) of Section 7.4(b);
(d) sales or discounting of delinquent accounts in the ordinary course of business;
(e) the licensing of intellectual property in the ordinary course of business or in connection with joint ventures, strategic alliances and similar arrangements;
(f) the sale or issuance of any Subsidiarys Capital Stock to Borrower or any Wholly-Owned Subsidiary Guarantor;
(g) the Disposition of intangible assets in accordance with the provisions of Section 6.11; and
(h) the Disposition of tangible assets not otherwise permitted hereunder, provided that (i) no single Disposition or series of related Dispositions under this clause (h) may exceed $2,500,000 and (ii) such Dispositions shall not exceed $10,000,000 in the aggregate in any fiscal year of Borrower.
7.6 | Restricted Payments |
If an Event of Default shall have occurred and be continuing, Borrower shall not (i) Declare or pay any dividend (other than dividends payable solely in equity securities of the Person making such dividend) on, or make any payment on account of any Capital Stock of any Group Member, (ii) set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any Capital Stock of any Group Member, whether now or hereafter outstanding, or (iii) make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of any Group Member (other than those payable solely in equity securities) (collectively, Restricted Payments), except that:
(a) each Subsidiary may make Restricted Payments to the Borrower, the Subsidiary Guarantors and any other Person that owns an equity interest in such Subsidiary, ratably according to their respective holdings of the type of equity interest in respect of which such Restricted Payment is being made;
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(b) Borrower and each Subsidiary may declare and make dividend payments or other distributions payable solely in equity securities of such Person;
(c) Borrower and each Subsidiary may purchase, redeem or otherwise acquire equity interests issued by it with the proceeds received from the substantially concurrent issue of new shares of its common stock or other common Equity Interests;
(d) provided that the Total Revolving Extensions of Credit equal $0.00, Borrower may purchase, redeem or otherwise acquire for cash equity interests issued by Borrower pursuant to stock buy-back plans approved by the board of directors of Borrower and disclosed to the Administrative Agent from time to time;
(e) Group Members may convert Indebtedness into Capital Stock and may issue Capital Stock upon conversion of convertible promissory notes and other evidences of Indebtedness that constitute Capital Stock;
(f) provided that the Total Revolving Extensions of Credit equal $0.00, Borrower may declare or pay cash dividends to its stockholders and purchase, redeem or otherwise acquire for cash equity interests issued by Borrower; and
(g) at any time while the Total Revolving Extensions of Credit exceed $0.00, but are less than $15,000,000, Borrower may declare or pay cash dividends to its stockholders on the Capital Stock of Borrower, provided, that (i) Borrower is required to declare and pay such cash dividend pursuant to any instrument, agreement, document or certificate that exists as of the date of this Agreement and (ii) after giving effect to such declaration, payment, purchase, redemption or acquisition, the aggregate amount of all such transactions in any fiscal year does not exceed $3,500,000.
7.7 | Investments |
Make any advance, loan, extension of credit (by way of guaranty or otherwise) or capital contribution to, or purchase any Capital Stock, bonds, notes, debentures or other debt securities of, or any assets constituting a business unit of, or make any other investment in, any Person (all of the foregoing, Investments), except:
(a) extensions of trade credit in the ordinary course of business;
(b) investments in Cash Equivalents and other Investments permitted by Borrowers board-approved investment policy in effect from time to time, so long as such investment policy is not materially different than that attached as Schedule 7.7(b);
(c) Guarantee Obligations that are not precluded by Section 7.2;
(d) loans and advances to employees of any Group Member in the ordinary course of business (including for travel, entertainment and relocation expenses) in an aggregate amount for all Group Members not to exceed $3,000,000 at any one time outstanding;
(e) investments consisting of extensions of credit in the nature of accounts receivable, prepaid royalties or notes receivable arising from the grant of trade credit in the ordinary course of business, and Investments received in satisfaction or partial satisfaction thereof from financially troubled account debtors to the extent reasonably necessary in order to prevent or limit loss;
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(f) investments in assets useful in operation of the business of Borrower and its Subsidiaries made by Borrower or any of its Subsidiaries in the ordinary course of business;
(g) intercompany Investments by any Group Member in Borrower or any Person that, prior to such investment, is a Wholly-Owned Subsidiary Guarantor;
(j) intercompany Investments by any Group Member in any Group Member that is not a Wholly-Owned Subsidiary Guarantor, provided that such Investments do not exceed $10,000,000 in the aggregate in any fiscal year;
(i) Permitted Acquisitions (including any Investments owned by a Person acquired in a Permitted Acquisition);
(j) investments (including debt obligations) acquired in exchange for any other Investments in connection with or as a result of a bankruptcy, workout, reorganization or recapitalization;
(k) the licensing of technology, the development of technology or the providing of technical support to joint ventures or strategic alliances in which Borrower or its Material Subsidiaries in engaged; and
(l) in addition to Investments otherwise expressly permitted by this Section 7.7, Investments by Borrower or any of its Subsidiaries in an aggregate amount (valued at cost) not to exceed $10,000,000 during the term of this Agreement.
7.8 | Transactions with Affiliates |
Enter into any transaction, including any purchase, sale, lease or exchange of property, the rendering of any service or the payment of any management, advisory or similar fees, with any Affiliate (other than Borrower or any Wholly-Owned Subsidiary Guarantor) unless such transaction is (a) otherwise permitted under this Agreement, (b) in the ordinary course of business of the relevant Group Member, and (c) upon fair and reasonable terms no less favorable to the relevant Group Member than it would obtain in a comparable arms length transaction with a Person that is not an Affiliate.
7.9 | Swap Agreements |
Enter into any Swap Agreement, except (a) Swap Agreements entered into to hedge or mitigate risks to which Borrower or any Subsidiary has actual exposure (other than those in respect of Capital Stock) and (b) Swap Agreements entered into in order to effectively cap, collar or exchange interest rates (from fixed to floating rates, from one floating rate to another floating rate or otherwise) with respect to any interest-bearing liability or investment of Borrower or any Subsidiary.
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7.10 | Changes in Fiscal Periods |
Without prior written notice to Administrative Agent, permit the fiscal year of Borrower to end on a day other than December 31 or change Borrowers method of determining fiscal quarters.
7.11 | Negative Pledge Clauses |
Enter into or suffer to exist or become effective any agreement that prohibits or limits the ability of any Group Member to create, incur, assume or suffer to exist any Lien upon any of its property or revenues, whether now owned or hereafter acquired other than (a) this Agreement and the other Loan Documents, (b) any agreements governing any purchase money Liens or Capital Lease Obligations otherwise permitted hereby (in which case, any prohibition or limitation shall only be effective against the assets financed thereby and the proceeds thereof) and (c) customary restrictions on assignment in licenses and similar agreements relating to intellectual property.
7.12 | Clauses Restricting Subsidiary Distributions |
Enter into or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Subsidiary of Borrower to (a) make Restricted Payments in respect of any Capital Stock of such Subsidiary held by, or pay any Indebtedness owed to, Borrower or any other Subsidiary of Borrower, (b) make loans or advances to, or other Investments in, Borrower or any other Subsidiary of Borrower or (c) transfer any of its assets to Borrower or any other Subsidiary of Borrower, except for such encumbrances or restrictions existing under or by reason of (i) any restrictions existing under the Loan Documents and (ii) any restrictions with respect to a Subsidiary imposed pursuant to an agreement that has been entered into in connection with the Disposition of all or substantially all of the Capital Stock or assets of such Subsidiary.
7.13 | Lines of Business |
Enter into any business, either directly or through any Subsidiary, except for those businesses in which Borrower and its Subsidiaries are engaged on the date of this Agreement or that are reasonably related thereto.
ARTICLE VIII. REPRESENTATIONS AND WARRANTIES
To induce Administrative Agent and Lenders to enter into this Agreement and to make the Revolving Loans and issue or participate in the Letters of Credit, Borrower hereby represents and warrants to Administrative Agent and each Lender that:
8.1 | Financial Condition |
The audited consolidated balance sheets of Borrower as of December 31, 2006, and the related consolidated statements of income and of cash flows for the fiscal years ended on such dates, present fairly the consolidated financial condition of Borrower as of such date, and the consolidated results of its operations and its consolidated cash flows for the respective fiscal years then ended. The unaudited consolidated balance sheets of Borrower as
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of September 30, 2007, and the related unaudited consolidated statements of income and cash flows for the period ended on such date, present fairly the consolidated financial condition of Borrower as of such date, and the consolidated results of its operations and its consolidated cash flows for the period then ended (subject to normal year-end audit adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by the aforementioned firm of accountants and disclosed therein). Except as set forth on Schedule 8.1, no Group Member has any material Guarantee Obligations, contingent liabilities and liabilities for taxes, or any long-term leases or unusual forward or long-term commitments, including any interest rate or foreign currency swap or exchange transaction or other obligation in respect of derivatives, that are not reflected in the most recent financial statements referred to in this paragraph. During the period from September 30, 2007, to and including the date hereof there has been no Disposition by any Group Member of any material part of its business or property.
8.2 | No Material Adverse Effect |
Since September 30, 2007, there has been no development or event that has had or could reasonably be expected to have a Material Adverse Effect.
8.3 | Existence; Compliance with Law |
Borrower and each Material Subsidiary (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation or other organization and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect.
8.4 | Power; Authorization; Enforceable Obligations |
Each Loan Party has the power and authority, and the legal right, to make, deliver and perform the Loan Documents to which it is a party and, in the case of Borrower, to obtain extensions of credit hereunder. Each Loan Party has taken all necessary organizational action to authorize the execution, delivery and performance of the Loan Documents to which it is a party and, in the case of Borrower, to authorize the extensions of credit on the terms and conditions of this Agreement. No consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the extensions of credit hereunder or with the execution, delivery, performance, validity or enforceability of this Agreement or any of the Loan Documents, except (i) consents, authorizations, filings and notices described in Schedule 8.4, which consents, authorizations, filings and notices have been obtained or made and are in full force and effect and (ii) the filings referred to in Section 8.18. Each Loan Document has been duly executed and delivered on behalf of each Loan Party party thereto. This Agreement constitutes, and each other Loan Document upon execution will constitute, a legal, valid and binding obligation of each Loan Party thereto, enforceable against each such Loan Party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).
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8.5 | No Legal Bar |
The execution, delivery and performance of this Agreement and the other Loan Documents, the issuance of Letters of Credit, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or any Contractual Obligation of any Group Member and will not result in, or require, the creation or imposition of any Lien on any of their respective properties or revenues pursuant to any Requirement of Law or any such Contractual Obligation (other than the Liens created by the Security Documents). No Requirement of Law or Contractual Obligation applicable to Borrower or any of its Subsidiaries could reasonably be expected to have a Material Adverse Effect.
8.6 | Litigation |
No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of Borrower, threatened by or against any Group Member or against any of their respective properties or revenues (a) with respect to any of the Loan Documents or any of the transactions contemplated hereby or thereby, or (b) that could reasonably be expected to have a Material Adverse Effect.
8.7 | No Default |
No Group Member is in default under or with respect to any of its Contractual Obligations in any respect that could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing.
8.8 | Ownership of Property; Liens |
Each Group Member has title in fee simple to, or a valid leasehold interest in, all its real property, and good title to, or a valid leasehold interest in, all its other property, and none of such property is subject to any Lien except as permitted by Section 7.3.
8.9 | Intellectual Property |
Each Group Member owns, or is licensed to use, all Intellectual Property and Domain Names necessary for the conduct of its business as currently conducted except where a failure to own or be licensed such property could not reasonably be expected to have a Material Adverse Effect. No material claim has been asserted and is pending by any Person challenging or questioning the use of any Intellectual Property Domain Name or the validity or effectiveness of any Intellectual Property or Domain Name. To Borrowers knowledge, the use of Intellectual Property and Domain Names by each Group Member does not infringe on the rights of any Person in any material respect.
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8.10 | Taxes |
Each Group Member has filed or caused to be filed all Federal, material state and other material tax returns that are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the relevant Group Member); no tax Lien has been filed, and, to the knowledge of Borrower, no claim is being asserted, with respect to any such tax, fee or other charge.
8.11 | Federal Regulations |
Other than in connection with the repurchase of its Capital Stock pursuant to stock repurchases approved by Borrowers board of directors, no part of the proceeds of any Revolving Loans, and no other extensions of credit hereunder, will be used (a) for buying or carrying any margin stock within the respective meanings of each of the quoted terms under Regulation U as now and from time to time hereafter in effect for any purpose that violates the provisions of the Regulations of the Board or (b) for any purpose that violates the provisions of the Regulations of the Board. If requested by any Lender or Administrative Agent, Borrower will furnish to Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-1, as applicable, referred to in Regulation U.
8.12 | Labor Matters |
Except as, in the aggregate, could not reasonably be expected to have a Material Adverse Effect: (a) there are no strikes or other labor disputes against any Group Member pending or, to the knowledge of Borrower, threatened; (b) hours worked by and payment made to employees of each Group Member have not been in violation of the Fair Labor Standards Act or any other applicable Requirement of Law dealing with such matters; and (c) all payments due from any Group Member on account of employee health and welfare insurance have been paid or accrued as a liability on the books of the relevant Group Member.
8.13 | ERISA |
Neither a Reportable Event nor an accumulated funding deficiency (within the meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. No termination of a Single Employer Plan has occurred, and no Lien in favor of the PBGC or a Plan has arisen, during such five-year period. The present value of all accrued benefits under each Single Employer Plan (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits by a material amount. Neither Borrower nor any Commonly Controlled Entity has had a complete or partial withdrawal from any
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Multiemployer Plan that has resulted or could reasonably be expected to result in a material liability under ERISA, and neither Borrower nor any Commonly Controlled Entity would become subject to any material liability under ERISA if Borrower or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. No such Multiemployer Plan is in Reorganization or Insolvent.
8.14 | Investment Company Act; Other Regulations |
No Loan Party is an investment company, or a company controlled by an investment company, within the meaning of the Investment Company Act of 1940, as amended. No Loan Party is subject to regulation under any Requirement of Law (other than Regulation X of the Board) that limits its ability to incur Indebtedness.
8.15 | Subsidiaries |
Except as disclosed to Administrative Agent by Borrower in writing from time to time after the Closing Date, (a) Schedule 8.15 sets forth the name and jurisdiction of incorporation of each Subsidiary and, as to each such Subsidiary, the percentage of each class of Capital Stock owned by any Loan Party and (b) there are no outstanding subscriptions, options, warrants, calls, rights or other agreements or commitments (other than stock options granted to employees or directors and directors qualifying shares) of any nature relating to any Capital Stock of Borrower or any Subsidiary, except as created by the Loan Documents.
8.16 | Environmental Matters |
Except as, in the aggregate, could not reasonably be expected to have a Material Adverse Effect, to Borrowers knowledge:
(a) the facilities and properties owned, leased or operated by any Group Member (the Properties) do not contain, and have not previously contained, any Materials of Environmental Concern in amounts or concentrations or under circumstances that constitute or constituted a violation of, or could give rise to liability under, any Environmental Law;
(b) no Group Member has received or is aware of any notice of violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Properties or any material line of business of the Group Members taken as a whole (the Business), nor does Borrower have knowledge or reason to believe that any such notice will be received or is being threatened;
(c) Materials of Environmental Concern have not been transported or disposed of from the Properties in violation of, or in a manner or to a location that could give rise to liability under, any Environmental Law, nor have any Materials of Environmental Concern been generated, treated, stored or disposed of at, on or under any of the Properties in violation of, or in a manner that could give rise to liability under, any applicable Environmental Law;
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(d) no judicial proceeding or governmental or administrative action is pending or threatened in writing, under any Environmental Law to which any Group Member is or will be named as a party with respect to the Properties or the Business, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to the Properties or the Business;
(e) there has been no release or threat of release of Materials of Environmental Concern at or from the Properties, or arising from or related to the operations of any Group Member in connection with the Properties or otherwise in connection with the Business, in violation of or in amounts or in a manner that could give rise to liability under Environmental Laws; and
(f) the Properties and all operations at the Properties are in compliance, and have in the last five years been in compliance, with all applicable Environmental Laws, and there is no contamination at, under or about the Properties or violation of any Environmental Law with respect to the Properties or the Business.
8.17 | Accuracy of Information, etc |
No statement or information contained in this Agreement, any other Loan Document, or any other document, certificate or statement furnished by or on behalf of any Loan Party to Administrative Agent or Lenders, or any of them, for use in connection with the transactions contemplated by this Agreement or the other Loan Documents, contained as of the date such statement, information, document or certificate was so furnished, any untrue statement of a material fact or omitted to state a material fact necessary to make the statements contained herein or therein not misleading. The projections contained in the materials referenced above are based upon good faith estimates and assumptions believed by management of Borrower to be reasonable at the time made, it being recognized by Administrative Agent and Lenders that such financial information as it relates to future events is not to be viewed as fact and that actual results during the period or periods covered by such financial information may differ from the projected results set forth therein by a material amount. As of the Closing Date, there is no fact known to any Loan Party that could reasonably be expected to have a Material Adverse Effect that has not been expressly disclosed herein, in the other Loan Documents, or in any other documents, certificates and statements furnished to Administrative Agent and Lenders for use in connection with the transactions contemplated hereby and by the other Loan Documents.
8.18 | Security Documents |
(a) The Guarantee and Collateral Agreement is effective to create in favor of Administrative Agent, for the benefit of Lenders, a legal, valid and enforceable security interest in the Collateral described therein and proceeds thereof. In the case of the Pledged Stock described in the Guarantee and Collateral Agreement, when stock certificates representing such Pledged Stock are delivered to Administrative Agent, and in the case of the other Collateral described in the Guarantee and Collateral Agreement, when financing statements and other filings specified on Schedule 8.18 in appropriate form are filed in the offices specified on Schedule 8.18, the Guarantee and Collateral Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in such Collateral and the proceeds thereof, as security for the Obligations (as defined in the Guarantee and Collateral Agreement), in each case prior and superior in right to any other Person (except, in the case of Collateral other than Pledged Stock, Liens permitted by Section 7.3).
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8.19 | Solvency |
Each Loan Party is, and after giving effect to the incurrence of all Indebtedness and obligations being incurred in connection herewith will be and will continue to be, Solvent.
ARTICLE IX. EVENTS OF DEFAULT
If any of the following events shall occur and be continuing:
(a) Borrower shall fail to pay any principal of any Revolving Loan or Reimbursement Obligation when due in accordance with the terms hereof; or Borrower shall fail to pay any interest on any Revolving Loan or Reimbursement Obligation, or any other amount payable hereunder or under any other Loan Document, within five days after any such interest or other amount becomes due in accordance with the terms hereof; or
(b) any representation or warranty made or deemed made by any Loan Party herein or in any other Loan Document or that is contained in any certificate, document or financial or other statement furnished by it at any time under or in connection with this Agreement or any such other Loan Document shall prove to have been inaccurate in any material respect on or as of the date made or deemed made; or
(c)(i) any Loan Party shall default in the observance or performance of any agreement contained in Section 6.4(a)(i) or (ii), Article VII of this Agreement or Sections 5.5 or 5.7(b) of the Guarantee and Collateral Agreement; or
(d) any Loan Party shall default in the observance or performance of any other agreement contained in this Agreement or any other Loan Document (other than as provided in paragraphs (a) through (c) of this Section), and such default shall continue unremedied for a period of 30 days after the earlier of (i) the date any Loan Party receives notice from Administrative Agent of such default or (ii) the date any officer of any Loan Party has knowledge of such default; provided, however, that if the default cannot by its nature be cured within the 30-day period or cannot after diligent attempts by Borrower or such Material Loan Party be cured within such 30-day period, and such default is likely to be cured within a reasonable time, then the Loan Parties shall have an additional period (which shall not in any case exceed 20 days) to attempt to cure such default, and within such reasonable time period the failure to cure the default shall not be deemed an Event of Default; or
(e) any Group Member shall (i) default in making any payment of any principal of any Indebtedness (including any Guarantee Obligation, but excluding the Revolving Loans) on the scheduled or original due date with respect thereto; or (ii) default in making any payment of any interest on any such Indebtedness beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created; or (iii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or
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relating thereto, or any other event shall occur or condition exist, in each case, the effect of which default or other event or condition is to cause, or to permit the holder or beneficiary of such Indebtedness (or a trustee or agent on behalf of such holder or beneficiary) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or (in the case of any such Indebtedness constituting a Guarantee Obligation) to become payable; provided, that a default, event or condition described in clause (i), (ii) or (iii) of this paragraph (e) shall not at any time constitute an Event of Default unless, at such time, one or more defaults, events or conditions of the type described in clauses (i), (ii) and (iii) of this paragraph (e) shall have occurred and be continuing with respect to Indebtedness the outstanding principal amount of which exceeds in the aggregate $7,500,000; provided, further, that upon cure or waiver of all such defaults, events and conditions with respect to any such Indebtedness, the Event of Default under this clause (e) shall automatically terminate and be deemed cured unless, prior to the date of such cure, Administrative Agent or Lenders have accelerated the Obligations, exercised any other remedies as a result of such Event of Default or given Borrower notice of intent to accelerate or exercise remedies as a result of such Event of Default; or
(f)(i) any Material Loan Party shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or any Material Loan Party shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against any Material Loan Party any case, proceeding or other action of a nature referred to in clause (i) above that (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed or undischarged for a period of 60 days; or (iii) there shall be commenced against any Material Loan Party any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets that results in the entry of an order for any such relief that shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) any Material Loan Party shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) any Material Loan Party shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or
(g)(i) any Person shall engage in any prohibited transaction (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any accumulated funding deficiency (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of any Group Member or any Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan
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shall terminate for purposes of Title IV of ERISA, (v) any Group Member or any Commonly Controlled Entity shall, or in the reasonable opinion of the Required Lenders is likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could, in the sole judgment of the Required Lenders, reasonably be expected to have a Material Adverse Effect; or
(h) one or more judgments or decrees shall be entered against any Material Loan Party involving in the aggregate a liability (not paid, satisfied or fully covered by insurance as to which the relevant insurance company has acknowledged coverage) of $7,500,000 or more, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 30 days from the entry thereof; or
(i) any of the Security Documents shall cease, for any reason, to be in full force and effect, or any Loan Party shall so assert, or any Lien on any Collateral having, in the aggregate, a value in excess of $500,000, created by any of the Security Documents shall cease to be enforceable and of the same effect and priority purported to be created thereby, except (i) as a result of the sale or other disposition of the applicable Collateral in a transaction permitted under the Loan Documents or (ii) as a result of the Administrative Agents or any Lenders failure to maintain possession of any stock certificates, promissory notes or other instruments delivered to it under the Security Documents or to take any other action necessary to perfect or continue the perfection and priority of such Lien; or
(j) the guarantee contained in Section 2 of the Guarantee and Collateral Agreement shall cease, for any reason, to be in full force and effect or any Loan Party or any Affiliate of any Loan Party shall so assert; or
(k) a Change of Control shall occur;
then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (f) above with respect to Borrower, automatically the Revolving Commitments shall immediately terminate and the Revolving Loans (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents (including all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken unless such Event of Default has been cured and such cure has been accepted by Administrative Agent in writing: (i) with the consent of the Required Lenders, Administrative Agent may, or upon the request of the Required Lenders, Administrative Agent shall, by notice to Borrower declare the Revolving Commitments to be terminated forthwith, whereupon the Revolving Commitments shall immediately terminate; and (ii) with the consent of the Required Lenders, Administrative Agent may, or upon the request of the Required Lenders, Administrative Agent shall, by notice to Borrower, declare the Revolving Loans (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents (including all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) to be due and payable forthwith, whereupon the same shall immediately become due and payable. With respect to all Letters
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of Credit with respect to which presentment for honor shall not have occurred at the time of an acceleration pursuant to this paragraph, Borrower shall at such time deposit in a cash collateral account opened by Administrative Agent an amount equal to the aggregate then undrawn and unexpired amount of such Letters of Credit. Amounts held in such cash collateral account shall be applied by Administrative Agent to the payment of drafts drawn under such Letters of Credit, and the unused portion thereof after all such Letters of Credit shall have expired or been fully drawn upon, if any, shall be applied to repay other obligations of Borrower hereunder and under the other Loan Documents. After all such Letters of Credit shall have expired or been fully drawn upon, all Reimbursement Obligations shall have been satisfied and all other obligations of Borrower hereunder and under the other Loan Documents shall have been paid in full, the balance, if any, in such cash collateral account shall be returned to Borrower (or such other Person as may be lawfully entitled thereto). Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived by Borrower.
ARTICLE X. THE AGENT
10.1 | Appointment |
Each Lender hereby irrevocably designates and appoints Administrative Agent as the agent of such Lender under this Agreement and the other Loan Documents, and each such Lender irrevocably authorizes Administrative Agent, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to Administrative Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against Administrative Agent.
10.2 | Delegation of Duties |
Administrative Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys in-fact selected by it with reasonable care.
10.3 | Exculpatory Provisions |
Neither Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except to the extent that any of the foregoing are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from its or such Persons own gross negligence or willful misconduct) or (ii) responsible in any manner to any of Lenders for any recitals, statements, representations or warranties made by any Loan
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Party or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by Administrative Agent under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or for any failure of any Loan Party a party thereto to perform its obligations hereunder or thereunder. Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of any Loan Party.
10.4 | Reliance by Administrative Agent |
Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any instrument, writing, resolution, notice, consent, certificate, affidavit, letter, facsimile, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including counsel to Borrower), independent accountants and other experts selected by Administrative Agent. Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with Administrative Agent. Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders (or, if so specified by this Agreement, all Lenders) as it deems appropriate or it shall first be indemnified to its satisfaction by Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Required Lenders (or, if so specified by this Agreement, all Lenders), and such request and any action taken or failure to act pursuant thereto shall be binding upon all Lenders and all future holders of the Revolving Loans.
10.5 | Notice of Default |
Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default unless Administrative Agent has received notice from a Lender or Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a notice of default. In the event that Administrative Agent receives such a notice, Administrative Agent shall give notice thereof to Lenders. Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders (or, if so specified by this Agreement, all Lenders); provided that unless and until Administrative Agent shall have received such directions, Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of Lenders.
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10.6 | Non-Reliance on Administrative Agent and Other Lenders |
Each Lender expressly acknowledges that neither Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates have made any representations or warranties to it and that no act by Administrative Agent hereafter taken, including any review of the affairs of a Loan Party or any affiliate of a Loan Party, shall be deemed to constitute any representation or warranty by Administrative Agent to any Lender. Each Lender represents to Administrative Agent that it has, independently and without reliance upon Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Loan Parties and their affiliates and made its own decision to make its Revolving Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Loan Parties and their affiliates. Except for notices, reports and other documents expressly required to be furnished to Lenders by Administrative Agent hereunder, Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of any Loan Party or any affiliate of a Loan Party that may come into the possession of Administrative Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates.
10.7 | Indemnification |
Lenders agree to indemnify Administrative Agent in its capacity as such (to the extent not reimbursed by Borrower and without limiting the obligation of Borrower to do so), ratably according to their respective Aggregate Exposure Percentages in effect on the date on which indemnification is sought under this Section (or, if indemnification is sought after the date upon which the Revolving Commitments shall have terminated and the Revolving Loans shall have been paid in full, ratably in accordance with such Aggregate Exposure Percentages immediately prior to such date), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever that may at any time (whether before or after the payment of the Revolving Loans) be imposed on, incurred by or asserted against Administrative Agent in any way relating to or arising out of, the Revolving Commitments, this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by Administrative Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements that are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from Administrative Agents gross negligence or willful misconduct. The agreements in this Section 10.7 shall survive the payment of the Revolving Loans and all other amounts payable hereunder.
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10.8 | Administrative Agent in Its Individual Capacity |
Administrative Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with any Loan Party as though Administrative Agent were not Administrative Agent. With respect to its Revolving Loans made or renewed by it and with respect to any Letter of Credit issued or participated in by it, Administrative Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and may exercise the same as though it were not Administrative Agent, and the terms Lender and Lenders shall include Administrative Agent in its individual capacity.
10.9 | Successor Administrative Agent |
Administrative Agent may resign as Administrative Agent upon 10 days notice to Lenders and Borrower. If Administrative Agent shall resign as Administrative Agent under this Agreement and the other Loan Documents, then the Required Lenders shall appoint from among Lenders a successor agent for Lenders, which successor agent shall (unless an Event of Default under Section 9(a) or Section 9(f) with respect to Borrower shall have occurred and be continuing) be subject to approval by Borrower (which approval shall not be unreasonably withheld or delayed), whereupon such successor agent shall succeed to the rights, powers and duties of Administrative Agent, and the term Administrative Agent shall mean such successor agent effective upon such appointment and approval, and the former Administrative Agents rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement or any holders of the Revolving Loans. If no successor agent has accepted appointment as Administrative Agent by the date that is 10 days following a retiring Administrative Agents notice of resignation, the retiring Administrative Agents resignation shall nevertheless thereupon become effective, and Lenders shall assume and perform all of the duties of Administrative Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above. After any retiring Administrative Agents resignation as Administrative Agent, the provisions of this Section 10.9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement and the other Loan Documents.
ARTICLE XI. MISCELLANEOUS
11.1 | Amendments and Waivers |
Neither this Agreement, any other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this Section 11.1. The Required Lenders and each Loan Party to the relevant Loan Document may, or, with the written consent of the Required Lenders, Administrative Agent and each Loan Party to the relevant Loan Document may, from time to time, (a) enter into written amendments, supplements or modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of Lenders or of the Loan Parties hereunder or thereunder or (b) waive, on such terms and conditions as the Required Lenders or Administrative Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its
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consequences; provided, however, that no such waiver and no such amendment, supplement or modification shall (i) forgive or reduce the principal amount or extend the final scheduled date of maturity of any Revolving Loan, reduce the stated rate of any interest or fee payable hereunder (except in connection with the waiver of applicability of any post-default increase in interest rates (which waiver shall be effective with the consent of the Required Lenders)) or extend the scheduled date of any payment thereof, or increase the amount or extend the expiration date of any Lenders Revolving Commitment, in each case without the written consent of each Lender directly affected thereby; (ii) eliminate or reduce the voting rights of any Lender under this Section 11.1 without the written consent of such Lender; (iii) reduce any percentage specified in the definition of Required Lenders, consent to the assignment or transfer by Borrower of any of its rights and obligations under this Agreement and the other Loan Documents, release all or substantially all of the Collateral or release all or substantially all of the Subsidiary Guarantors from their obligations under the Guarantee and Collateral Agreement, in each case without the written consent of all Lenders; (iv) amend, modify or waive any provision of Section 4.9 without the written consent of the Required Lenders; (v) amend, modify or waive any provision of Article X without the written consent of Administrative Agent; (vi) amend, modify or waive any provision of Article III without the written consent of Issuing Lender. Any such waiver and any such amendment, supplement or modification shall apply equally to each of Lenders and shall be binding upon the Loan Parties, Lenders, Administrative Agent and all future holders of the Revolving Loans. In the case of any waiver, the Loan Parties, Lenders and Administrative Agent shall be restored to their former position and rights hereunder and under the other Loan Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon.
11.2 | Notices |
All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by facsimile), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered, or three Business Days after being deposited in the mail, postage prepaid, or, in the case of facsimile notice, when received, addressed as follows in the case of Borrower and Administrative Agent, and as set forth in an administrative questionnaire delivered to Administrative Agent in the case of Lenders, or to such other address as may be hereafter notified by the respective parties hereto:
Borrower: |
Marchex, Inc. 413 Pine Street, Suite 500 Seattle, WA 98101 | |
Attention: Michael A. Arends, Chief Financial Officer | ||
Facsimile: (206) 331-3695 | ||
Telephone: (206) 331-3540 | ||
With a copy to: |
DLA Piper US LLP 33 Arch Street, 26th Floor Boston, MA 02110-1447 | |
Attention: Francis J. Feeney, Jr. | ||
Facsimile: (617) 406-6163 | ||
Telephone: (617) 406-6063 |
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Administrative Agent: |
U.S. Bank National Association 1420 Fifth Avenue, 11th Floor Seattle, WA 98101 | |
Attention: Ms. Kathleen J. Johanson, Senior Vice President | ||
Facsimile: (206) 344-2887 | ||
Telephone: (206) 587-5223 |
provided that any notice, request or demand to or upon Administrative Agent or Lenders shall not be effective until received.
Notices and other communications to Lenders hereunder may be delivered or furnished by electronic communications pursuant to procedures approved by Administrative Agent; provided that the foregoing shall not apply to notices pursuant to Articles II or IV unless otherwise agreed by Administrative Agent and the applicable Lender. Administrative Agent or Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications.
11.3 | No Waiver; Cumulative Remedies |
No failure to exercise and no delay in exercising, on the part of Administrative Agent or any Lender, any right, remedy, power or privilege hereunder or under the other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.
11.4 | Survival of Representations and Warranties |
All representations and warranties made hereunder, in the other Loan Documents and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Revolving Loans and other extensions of credit hereunder.
11.5 | Payment of Expenses and Taxes |
Borrower agrees (a) to pay or reimburse Administrative Agent for all its out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including the reasonable fees and disbursements of counsel to Administrative Agent and filing and recording fees and expenses, with statements with respect to the
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foregoing to be submitted to Borrower prior to the Closing Date (in the case of amounts to be paid on the Closing Date) and from time to time thereafter on a quarterly basis or such other periodic basis as Administrative Agent shall deem appropriate, (b) to pay or reimburse each Lender and Administrative Agent for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Loan Documents and any such other documents, including the fees and disbursements of counsel (including the allocated fees and expenses of in-house counsel) to each Lender and of counsel to Administrative Agent, (c) to pay, indemnify, and hold each Lender and Administrative Agent harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, that may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Loan Documents and any such other documents, and (d) to pay, indemnify, and hold each Lender and Administrative Agent and their respective officers, directors, employees, affiliates, agents and controlling persons (each, an Indemnitee) harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the other Loan Documents and any such other documents, including any of the foregoing relating to the use of proceeds of the Revolving Loans or the violation of, noncompliance with or liability under, any Environmental Law applicable to the operations of any Group Member or any of the Properties and the reasonable fees and expenses of legal counsel in connection with claims, actions or proceedings by any Indemnitee against any Loan Party under any Loan Document (all the foregoing in this clause (d), collectively, the Indemnified Liabilities), provided, that Borrower shall have no obligation hereunder to any Indemnitee with respect to Indemnified Liabilities to the extent such Indemnified Liabilities are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Indemnitee. Without limiting the foregoing, and to the extent permitted by applicable law, Borrower agrees not to assert and to cause its Subsidiaries not to assert, and hereby waives and agrees to cause its Subsidiaries to waive, all rights for contribution or any other rights of recovery with respect to all claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature, under or related to Environmental Laws, that any of them might have by statute or otherwise against any Indemnitee. All amounts due under this Section 11.5 shall be payable not later than 10 days after written demand therefor. The agreements in this Section 11.5 shall survive repayment of the Revolving Loans and all other amounts payable hereunder.
11.6 | Successors and Assigns; Participations and Assignments |
(a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby (including any affiliate of Issuing Lender that issues any Letter of Credit), except that (i) Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by Borrower without such consent shall be null and void) and (ii) no Lender may assign or otherwise transfer its rights or obligations hereunder except in accordance with this Section 11.6.
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(b)(i) Subject to the conditions set forth in paragraph (b)(ii) below, any Lender may assign to one or more assignees (each, an Assignee) all or a portion of its rights and obligations under this Agreement (including all or a portion of its Revolving Commitments and the Revolving Loans at the time owing to it) with the prior written consent of:
(A) Borrower (such consent not to be unreasonably withheld), provided that no consent of Borrower shall be required for an assignment to a Lender, an affiliate of a Lender, an Approved Fund (as defined below) or, if an Event of Default has occurred and is continuing, any other Person;
(B) Administrative Agent; and
(C) the Issuing Lender.
(ii) Assignments shall be subject to the following additional conditions:
(A) except in the case of an assignment to a Lender, an affiliate of a Lender or an Approved Fund or an assignment of the entire remaining amount of the assigning Lenders Revolving Commitments and Revolving Loans, the amount of the Revolving Commitments or Revolving Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to Administrative Agent) shall not be less than $5,000,000 unless each of Borrower and Administrative Agent otherwise consent, provided that (1) no such consent of Borrower shall be required if an Event of Default has occurred and is continuing and (2) such amounts shall be aggregated in respect of each Lender and its affiliates or Approved Funds, if any;
(B) the parties to each assignment shall execute and deliver to Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500; and
(C) the Assignee, if it shall not be a Lender, shall deliver to Administrative Agent an administrative questionnaire.
(iii) Subject to acceptance and recording thereof pursuant to paragraph (b)(iv) below, from and after the effective date specified in each Assignment and Assumption the Assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lenders rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 4.10, 4.11 and 11.5). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section 11.6 shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (c) of this Section.
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(iv) Administrative Agent, acting for this purpose as an agent of Borrower, shall maintain at one of its offices a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of Lenders, and the Revolving Commitments of, and principal amount of the Revolving Loans and L/C Obligations owing to, each Lender pursuant to the terms hereof from time to time (the Register). The entries in the Register shall be conclusive, and Borrower, Administrative Agent, Issuing Lender and Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary.
(v) Upon its receipt of a duly completed Assignment and Assumption executed by an assigning Lender and an Assignee, the Assignees completed administrative questionnaire (unless the Assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, Administrative Agent shall accept such Assignment and Assumption and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph.
(c)(i) Any Lender may, without the consent of Borrower or Administrative Agent, sell participations to one or more banks or other entities (a Participant) in all or a portion of such Lenders rights and obligations under this Agreement (including all or a portion of its Revolving Commitments and the Revolving Loans owing to it); provided that (A) such Lenders obligations under this Agreement shall remain unchanged, (B) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (C) Borrower, Administrative Agent, Issuing Lender and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lenders rights and obligations under this Agreement. Any agreement pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver that (1) requires the consent of each Lender directly affected thereby pursuant to the proviso to the second sentence of Section 11.1 and (2) directly affects such Participant. Subject to paragraph (c)(ii) of this Section, Borrower agrees that each Participant shall be entitled to the benefits of Section 4.11 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 11.7(b) as though it were a Lender, provided such Participant shall be subject to Section 11.7(a) as though it were a Lender.
(ii) A Participant shall not be entitled to receive any greater payment under Sections 4.11 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with Borrowers prior written consent. Any Participant that is a Non- U.S. Lender shall not be entitled to the benefits of Section 4.11 unless such Participant complies with Section 4.11(d).
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(d) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or Assignee for such Lender as a party hereto.
(e) Borrower, upon receipt of written notice from the relevant Lender, agrees to issue Notes to any Lender requiring Notes to facilitate transactions of the type described in paragraph (d) above.
11.7 | Adjustments; Set-off |
(a) Except to the extent that this Agreement expressly provides for payments to be allocated to a particular Lender or to Lenders under the Revolving Facility, if any Lender (a Benefited Lender) shall, at any time after the Revolving Loans and other amounts payable hereunder shall immediately become due and payable pursuant to Article IX, receive any payment of all or part of the Obligations owing to it, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 9(f), or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of the Obligations owing to such other Lender, such Benefited Lender shall purchase for cash from the other Lenders a participating interest in such portion of the Obligations owing to each such other Lender, or shall provide such other Lenders with the benefits of any such collateral, as shall be necessary to cause such Benefited Lender to share the excess payment or benefits of such collateral ratably with each of Lenders; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such Benefited Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest.
(b) As additional security for the payment of the Obligations, Borrower hereby grants to Administrative Agent, each Lender, and any Participant, a security interest in, a lien on and an express contractual right to set off against all depository account balances, cash and any other property of Borrower now or hereafter in the possession of Administrative Agent, any Lender, or any Participant, and the right to refuse to allow withdrawals from any account (collectively Setoff). Administrative Agent, each Lender and any Participant may, at any time upon the occurrence of a Default or Event of Default (notwithstanding any notice requirements or grace/cure periods under this Agreement or the other Loan Documents) Setoff against the Obligations whether or not the Obligations (including future installments) are then due or have been accelerated, all without any advance or contemporaneous notice or demand of any kind to Borrower, such notice and demand being expressly waived.
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11.8 | Counterparts |
This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page of this Agreement by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. A set of the copies of this Agreement signed by all the parties shall be lodged with Borrower and Administrative Agent.
11.9 | Severability |
Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
11.10 | Integration |
This Agreement and the other Loan Documents represent the entire agreement of Borrower, Administrative Agent and Lenders with respect to the subject matter hereof and thereof, and there are no promises, undertakings, representations or warranties by Administrative Agent or any Lender relative to the subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents.
11.11 | Governing Law |
THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF WASHINGTON.
11.12 | Submission To Jurisdiction; Waivers |
Borrower hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of the State of Washington, the courts of the United States for the Western District of Washington, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to Borrower, as the case may be at its address set forth in Section 11.2 or at such other address of which Administrative Agent shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section 11.12 any special, exemplary, punitive or consequential damages.
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11.13 | Acknowledgements |
Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents; (b) neither Administrative Agent nor any Lender has any fiduciary relationship with or duty to Borrower arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between Administrative Agent and Lenders, on one hand, and Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among Lenders or among Borrower and Lenders.
11.14 | Releases of Guarantees and Liens |
(a) Notwithstanding anything to the contrary contained herein or in any other Loan Document, Administrative Agent is hereby irrevocably authorized by each Lender (without requirement of notice to or consent of any Lender except as expressly required by Section 11.1) to take any action requested by Borrower having the effect of releasing any Collateral or guarantee obligations (i) to the extent necessary to permit consummation of any transaction not prohibited by any Loan Document or that has been consented to in accordance with Section 11.1 or (ii) under the circumstances described in paragraph (b) below.
(b) At such time as the Revolving Loans, the Reimbursement Obligations and the other obligations under the Loan Documents (other than obligations under or in respect of Swap Agreements) shall have been paid in full, the Revolving Commitments have been terminated and no Letters of Credit shall be outstanding, the Collateral shall be released from the Liens created by the Security Documents, and the Security Documents and all obligations (other than those expressly stated to survive such termination) of Administrative Agent and each Loan Party under the Security Documents shall terminate, all without delivery of any instrument or performance of any act by any Person.
11.15 | Confidentiality |
(a) Each of Administrative Agent and each Lender agrees to keep confidential all non-public information provided to it by any Loan Party, Administrative Agent or any Lender pursuant to or in connection with the Loan Documents; provided that nothing herein shall prevent Administrative Agent or any Lender from disclosing any such information (a) to Administrative Agent, any other Lender or any affiliate thereof (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such information and the terms of this Section 11.15, and instructed to keep such information confidential), (b) subject to an agreement to comply with the provisions of this Section 11.15, to any actual or prospective Transferee or any direct or indirect counterparty to any Swap Agreement (or any professional advisor to such counterparty), (c) to its employees, directors, agents, attorneys, accountants and other professional advisors or those of any of its affiliates (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such information and the terms of this Section 11.15, and instructed to keep such information confidential), (d) upon the request or demand of any Governmental Authority, (e) in response to any order of any court or other
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Governmental Authority or as may otherwise be required pursuant to any Requirement of Law, (f) if requested or required to do so in connection with any litigation or similar proceeding, (g) that has been publicly disclosed through no fault of Administrative Agent, any Lender or any of their respective Affiliates, (h) to the National Association of Insurance Commissioners or any similar organization or any nationally recognized rating agency that requires access to information about a Lenders investment portfolio in connection with ratings issued with respect to such Lender, or (i) during the continuance of an Event of Default, in connection with the exercise of any remedy hereunder or under any other Loan Document; provided that, in the case of items (e) and (f) above, the Administrative Agent and the Lenders, as applicable, has given sufficient prior written notice of such required disclosure to Borrower, if possible, to enable Borrower to seek to protect such information from disclosure.
(b) Administrative Agent and Lenders hereby notify each Loan Party that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the Act), they are required to obtain, verify and record information that identifies the Loan Parties, which information includes the names and addresses of the Loan Parties and other information that will allow Administrative Agent and Lenders to identify the Loan Parties in accordance with the Act.
11.16 | WAIVERS OF JURY TRIAL |
BORROWER AND EACH LENDER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM ARISING OUT OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, WHETHER NOW OR HEREAFTER ARISING AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, AND HEREBY CONSENTS AND AGREES THAT ANY SUCH CLAIM MAY, AT ADMINISTRATIVE AGENTS ELECTION, BE DECIDED BY TRIAL WITHOUT A JURY AND THAT ADMINISTRATIVE AGENT MAY FILE AN ORIGINAL COUNTERPART OR COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE WAIVER AND AGREEMENT CONTAINED HEREIN.
11.17 | Statutory Notice |
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.
MARCHEX, INC. | ||||
By: | /s/ Russell C. Horowitz | |||
Name: | Russell C. Horowitz | |||
Title: | Chief Executive Officer | |||
U.S. BANK NATIONAL ASSOCIATION, as Administrative Agent and as a Lender | ||||
By: | /s/ Kathleen J. Johanson | |||
Kathleen J. Johanson, Senior Vice President |
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Exhibit 31(i)
CERTIFICATION PURSUANT TO RULES 13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Principal Executive Officer
I, Russell C. Horowitz, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Marchex, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 11, 2008 | /s/ RUSSELL C. HOROWITZ | |||
Russell C. Horowitz | ||||
Chief Executive Officer (Principal Executive Officer) |
Exhibit 31(ii)
CERTIFICATION PURSUANT TO RULES 13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Principal Financial Officer
I, Michael A. Arends, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Marchex, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 11, 2008 | /s/ MICHAEL A. ARENDS | |||
Michael A. Arends | ||||
Chief Financial Officer (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Russell C. Horowitz, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Marchex, Inc. for the quarter ended June 30, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Marchex, Inc.
Date: August 11, 2008 | By: | /s/ RUSSELL C. HOROWITZ | ||||||
Name: | Russell C. Horowitz | |||||||
Title: | Chief Executive Officer |
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael A. Arends, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Marchex, Inc. for the quarter ended June 30, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Marchex, Inc.
Date: August 11, 2008 | By: | /s/ MICHAEL A. ARENDS | ||||||
Name: | Michael A. Arends | |||||||
Title: | Chief Financial Officer |